<PAGE>
As filed with the Securities and Exchange Commission on August 31, 2000
File No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
PHONE.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 3661 94-3219054
(Primary Standard (I.R.S. Employer
(State or Other Industrial Identification Number)
Jurisdiction of Classification Code
Incorporation or Number)
Organization)
800 Chesapeake Drive
Redwood City, California 94063
(650) 562-0200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------
Alain Rossmann
Chairman and Chief Executive Officer
Phone.com, Inc.
800 Chesapeake Drive
Redwood City, California 94063
(650) 562-0200
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------
with copies to:
Kenton J. King, Esq. Elizabeth R. Flint, Esq.
Skadden, Arps, Slate, Meagher & Flom Steve L. Camahort, Esq.
LLP Wilson Sonsini Goodrich & Rosati,
525 University Avenue, Suite 220 Professional Corporation
Palo Alto, California 94301 650 Page Mill Road
(650) 470-4500 Palo Alto, California 94304
(650) 493-9300
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective and all other
conditions to the merger of a subsidiary of the Registrant with and into
Software.com pursuant to the Agreement and Plan of Merger, dated as of August
8, 2000, described in the enclosed joint proxy statement/prospectus, have been
satisfied or waived.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed Amount Of
Title of Each Class Of Amount To Maximum Offering Maximum Aggregate Registration
Securities To Be Registered Be Registered Price Per Unit Offering Price Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share...... 94,506,060 shares(1) N/A $7,700,072,663(2) $2,032,819
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</TABLE>
(1) Represents 48,866,633 outstanding shares of common stock of Software.com
on July 31, 2000 plus an additional 9,814,559 shares of Software.com
common stock reserved for issuance upon exercise of stock options and
warrants, multiplied by the exchange ratio of 1.6105.
(2) Reflects the market price of the common stock of Software.com computed in
accordance with Rule 457(f) and 457(c) under the Securities Act, based
upon the average of the high and low sale prices of the Software.com
common stock as quoted on the Nasdaq National Market on August 24, 2000.
The proposed maximum aggregate offering price is estimated solely to
determine the registration fee.
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
[PHONE.COM AND SOFTWARE.COM LOGOS]
, 2000
To the Stockholders of Phone.com and Software.com:
The boards of directors of Phone.com and Software.com have unanimously
approved a "merger of equals." In order to complete the merger, both companies
must obtain the approval of their stockholders. Phone.com and Software.com
believe that this merger will benefit the stockholders of both companies and
ask for your support in voting for the merger proposals at the companies'
respective special meetings.
Under the terms of the merger agreement, a wholly-owned subsidiary of
Phone.com, would merge with and into Software.com and Software.com would
become a wholly-owned subsidiary of Phone.com. In the merger, each share of
common stock of Software.com outstanding immediately prior to the effective
time of the merger would be converted into 1.6105 shares of Phone.com common
stock. In addition, outstanding Software.com stock options and warrants would
be assumed by Phone.com.
After careful consideration, the boards of directors of both Phone.com and
Software.com have determined that the merger and the transactions associated
with it, including the stock issuance, are fair to and in the best interests
of their respective stockholders and have approved the merger agreement. The
boards of directors of both companies recommend that their respective
stockholders vote "FOR" the proposals relating to the merger.
Phone.com stockholders will vote at Phone.com's special meeting on ,
2000 at , California at , Pacific time. Software.com stockholders will
vote at Software.com's special meeting on , 2000 at the Hotel Du Pont,
11th and Market Streets, Wilmington, Delaware at , Eastern time.
You should consider the matters discussed under "Risk Factors" commencing on
page 13 of the enclosed joint proxy statement/prospectus before voting. Please
carefully review the entire joint proxy statement/prospectus.
It is important that your shares be represented at the Phone.com or
Software.com special meeting, whether or not you plan to attend the special
meeting in person. Please complete, sign and date the enclosed proxy card and
return in the accompanying prepaid envelope to ensure that your shares will be
represented at the special meeting. You may also vote by telephone or over the
Internet by following the instructions on the enclosed proxy card.
We thank you for your support and interest.
Sincerely,
/s/ Alain Rossmann /s/ Frank Perna, Jr.
Alain Rossmann Frank Perna, Jr.
Chairman of the Board Chairman of the Board
Phone.com Software.com
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon
the adequacy or accuracy of this joint proxy statement/prospectus. Any
representation to the contrary is a criminal offense.
This joint proxy statement/prospectus is dated , 2000, and is first
being mailed to stockholders on or about , 2000.
<PAGE>
[PHONE.COM LOGO]
----------------
Notice of Special Meeting of Stockholders
----------------
We will hold a special meeting of stockholders of Phone.com, Inc.
("Phone.com") at , on , 2000, at , Pacific time, to consider
and vote upon the following:
1. A proposal to approve the issuance of shares of Phone.com common stock,
par value $0.001 per share, pursuant to the merger agreement between
Phone.com and Software.com, Inc. ("Software.com");
2. A proposal to amend Phone.com's certificate of incorporation to change
the name of Phone.com to at the effective time of the proposed
merger with Software.com;
3. A proposal to amend Phone.com's certificate of incorporation to
increase the number of authorized shares of Phone.com common stock from
250,000,000 to 1,000,000,000; and
4. Any other business that may properly come before the meeting and any
adjournment or postponement of the meeting.
The accompanying joint proxy statement/prospectus describes the proposed
merger and other proposals in more detail. You are encouraged to read the
entire document carefully. In particular, you should carefully consider the
discussion entitled "Risk Factors" which begins on page 13.
Only stockholders of record at the close of business on , 2000, which
has been fixed as the record date for notice of the meeting, are entitled to
receive notice of the meeting. All stockholders of record on the date of the
meeting are entitled to attend and vote at the meeting.
We urge you to attend the meeting in person or by proxy. If you do not
expect to attend the meeting, please vote by completing, signing and dating
the enclosed proxy card and returning it promptly in the reply envelope
provided. You may also vote by telephone or over the Internet by following the
instructions on the enclosed proxy card.
By Order of the Board of Directors of
Phone.com, Inc.
/s/ Alain Rossmann
Alain Rossmann
Secretary
Redwood City, California
, 2000
Important: Whether or not you plan to attend the meeting, please sign and
return the enclosed proxy card as promptly as possible in the enclosed
postage-prepaid envelope. You may also vote by telephone or over the Internet.
If a quorum is not reached, Phone.com will have the added expense of re-
issuing these proxy materials. If you attend the meeting and so desire, you
may withdraw your proxy and vote in person. Thank you for acting promptly.
<PAGE>
[SOFTWARE.COM, INC. LOGO]
----------------
Notice of Special Meeting of Stockholders
----------------
We will hold a special meeting of stockholders of Software.com, Inc.
("Software.com") at the Hotel Du Pont, 11th and Market Streets, Wilmington,
Delaware, on , 2000 at , Eastern time, for the following purposes:
1. To consider and vote on the proposed merger of Silver Merger Sub Inc.,
a wholly-owned subsidiary of Phone.com, Inc. ("Phone.com"), with and
into Software.com, as contemplated by the Agreement and Plan of Merger
dated as of August 8, 2000, by and among Software.com, Silver Merger
Sub Inc. and Phone.com. In the merger, Phone.com will issue 1.6105
share of its common stock in exchange for each outstanding share of
Software.com common stock.
2. To transact any other business that properly comes before the special
meeting or any adjournments or postponements thereof.
The accompanying joint proxy statement/prospectus describes the proposed
merger and other proposals in more detail. You are encouraged to read the
entire document carefully. In particular, you should carefully consider the
discussion entitled "Risk Factors" which begins on page 13.
Stockholders who held shares of Software.com at the close of business on
, 2000, are entitled to notice of, and to vote at, this meeting. You may
also vote by telephone or over the Internet by following the instructions on
the enclosed proxy card.
By Order of the Board of Directors of
Software.com, Inc.
/s/ Craig A. Shelburne
Craig A. Shelburne
Secretary
Santa Barbara, California
, 2000
Important: Whether or not you plan to attend the meeting, please sign and
return the enclosed proxy card as promptly as possible in the enclosed
postage-prepaid envelope. You may also vote by telephone or over the Internet.
If a quorum is not reached, Software.com will have the added expense of re-
issuing these proxy materials. If you attend the meeting and so desire, you
may withdraw your proxy and vote in person. Thank you for acting promptly.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
QUESTIONS & ANSWERS ABOUT THE MERGER....................................... 1
SUMMARY.................................................................... 3
The Companies............................................................ 3
What You Will Receive in the Merger...................................... 4
Ownership of Phone.com After the Merger.................................. 4
Record Date for Voting; Required Votes................................... 4
Conditions to the Completion of the Merger............................... 4
Termination of the Merger Agreement...................................... 5
Temination Fees and Stock Option Agreements.............................. 5
Our Reasons for the Merger............................................... 6
Board Recommendations.................................................... 6
Opinions of Financial Advisors........................................... 6
Certain United States Federal Income Tax Considerations.................. 6
Anticipated Accounting Treatment......................................... 6
Interests of Directors and Officers in the Merger........................ 7
Regulatory Clearances and Approvals...................................... 7
No Dissenter's or Appraisal Rights....................................... 7
Trading of Phone.com Common Stock........................................ 7
Phone.com Selected Historical Consolidated Financial Data................ 8
Software.com Selected Historical Consolidated Financial Data............. 9
Selected Unaudited Pro Forma Combined Condensed Financial Data........... 10
Comparative Per Share Data............................................... 11
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................. 12
RISK FACTORS............................................................... 13
Risks Relating to the Proposed Merger.................................... 13
Risks Relating to the Business and Operations of Phone.com .............. 17
Risks Relating to the Business and Operations of Software.com ........... 26
THE PHONE.COM SPECIAL MEETING.............................................. 36
Time and Place; Purpose.................................................. 36
Record Date and Outstanding Shares....................................... 36
Vote and Quorum Required................................................. 36
How Shares Will Be Voted at the Special Meeting.......................... 37
Methods of Voting........................................................ 37
How to Revoke a Proxy.................................................... 37
Solicitation of Proxies.................................................. 37
Recommendation of the Phone.com Board of Directors....................... 38
THE SOFTWARE.COM SPECIAL MEETING........................................... 39
Time and Place; Purpose.................................................. 39
Record Date and Outstanding Shares....................................... 39
Vote and Quorum Required................................................. 39
How Shares Will Be Voted at the Special Meeting.......................... 39
Methods of Voting........................................................ 40
How to Revoke a Proxy.................................................... 40
Solicitation of Proxies.................................................. 40
Dissenter's or Appraisal Rights.......................................... 40
Recommendation of the Software.com Board of Directors.................... 41
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
THE MERGER............................................................... 42
General................................................................ 42
Background of the Merger............................................... 42
Phone.com's Reasons for the Merger; Recommendation of the Phone.com
Board................................................................. 47
Software.com's Reasons for the Merger; Recommendation of the
Software.com Board.................................................... 49
Opinion of Phone.com's Financial Advisor............................... 51
Opinion of Software.com's Financial Advisor............................ 56
Certain United States Federal Income Tax Considerations................ 62
Anticipated Accounting Treatment....................................... 63
Interests of Directors and Officers in the Merger...................... 64
Regulatory Clearances and Approvals.................................... 65
No Dissenter's or Appraisal Rights..................................... 65
Quotation on the Nasdaq National Market................................ 65
Delisting and Deregistration of Software.com Common Stock.............. 65
Federal Securities Laws Consequences................................... 65
THE MERGER AGREEMENT..................................................... 66
The Merger............................................................. 66
The Exchange Ratio and Treatment of Software.com Securities............ 66
Exchange of Certificates............................................... 66
Corporate Organization and Governance.................................. 67
Representations and Warranties......................................... 67
Covenants.............................................................. 68
No Solicitation of Transactions........................................ 69
Board of Directors' Agreement to Recommend............................. 70
Pooling Letters........................................................ 70
Access to Information.................................................. 71
Commercially Reasonable Efforts........................................ 71
Indemnification, Exculpation and Insurance............................. 71
Affiliates............................................................. 71
Employee Benefits...................................................... 71
Post-Merger Operations; Phone.com Board of Directors and Officers...... 71
Conditions to the Consummation of the Merger........................... 72
Termination............................................................ 73
Termination Fee and Expenses........................................... 73
Amendment; Extension and Waiver........................................ 75
RELATED AGREEMENTS....................................................... 76
Phone.com Stock Option Agreement....................................... 76
Phone.com Voting Agreements............................................ 77
Phone.com Affiliate Agreements......................................... 78
Phone.com Rights Agreement............................................. 78
Memorandum of Understanding Between Phone.com and Software.com......... 79
Software.com Stock Option Agreement.................................... 79
Software.com Voting Agreements......................................... 81
Software.com Affiliate Agreements...................................... 81
Software.com Rights Agreement.......................................... 82
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION............. 83
PHONE.COM BUSINESS....................................................... 94
PHONE.COM'S MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 109
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
PHONE.COM MANAGEMENT..................................................... 122
Phone.com Directors and Executive Officers............................. 122
Phone.com Classified Board of Directors................................ 124
Phone.com Committees of the Board of Directors......................... 124
Phone.com Compensation Committee Interlocks and Insider Participation.. 124
Phone.com Executive Compensation....................................... 125
Phone.com Summary Compensation Table................................... 125
Phone.com Director Compensation........................................ 125
Phone.com Option Grants in Last Fiscal Year............................ 126
Phone.com Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values................................................ 127
Phone.com Employment Agreements and Change of Control Agreements....... 127
Phone.com Employee Benefit Plans....................................... 127
Phone.com Limitation of Liability and Indemnification.................. 131
STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS
OF PHONE.COM............................................................ 133
PHONE.COM TRANSACTIONS WITH RELATED PARTIES.............................. 135
SOFTWARE.COM BUSINESS.................................................... 136
SOFTWARE.COM'S MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 148
SOFTWARE.COM MANAGEMENT.................................................. 159
Software.com Directors and Executive Officers.......................... 159
Software.com Classified Board of Directors............................. 159
Software.com Committees of the Board of Directors...................... 160
Software.com Compensation Committee Interlocks and Insider
Participation......................................................... 160
Software.com Executive Compensation.................................... 160
Software.com Summary Compensation Table................................ 160
Software.com Director Compensation..................................... 161
Software.com Option Grants in Last Fiscal Year......................... 161
Software.com Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values................................................ 161
Software.com Employment Agreements and Change of Control Agreements.... 161
Software.com Employee Benefit Plans.................................... 162
Software.com Limitations of Liability and Indemnification.............. 164
STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS
OF SOFTWARE.COM......................................................... 165
SOFTWARE.COM TRANSACTIONS WITH RELATED PARTIES........................... 166
MARKET PRICE AND DIVIDEND INFORMATION.................................... 167
DESCRIPTION OF PHONE.COM CAPITAL STOCK................................... 168
COMPARISON OF RIGHTS OF HOLDERS OF PHONE.COM COMMON STOCK AND
SOFTWARE.COM COMMON STOCK............................................... 170
Size and Classification of the Board of Directors...................... 170
Removal of Directors; Vacancies........................................ 170
Meetings of Stockholders............................................... 170
Indemnification of Officers and Directors.............................. 171
Annual Statement to Stockholders....................................... 171
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
PROPOSALS TO PHONE.COM STOCKHOLDERS TO BE VOTED ON AT THE PHONE.COM
SPECIAL MEETING.......................................................... 171
Proposal One: Issuance of shares of Phone.com common stock in the merger
with Software.com...................................................... 171
Proposal Two: Amendment to amended and restated certificate of
incorporation to change name........................................... 171
Proposal Three: Amendment to certificate to increase authorized common
stock.................................................................. 172
LEGAL MATTERS............................................................. 173
EXPERTS................................................................... 173
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS................................ 175
WHERE YOU CAN FIND MORE INFORMATION....................................... 175
PHONE.COM, INC. AND SOFTWARE.COM, INC. INDEX TO FINANCIAL STATEMENTS...... F-1
ANNEX A Agreement and Plan of Merger
ANNEX B Phone.com Stock Option Agreement
ANNEX C Software.com Stock Option Agreement
ANNEX D Form of Phone.com Voting Agreement
ANNEX E Form of Software.com Voting Agreement
ANNEX F Form of Phone.com Affiliate Letter
ANNEX G Form of Software.com Affiliate Letter
ANNEX H Form of Software.com Special Affiliate Letter
ANNEX I Memorandum of Understanding
ANNEX J Opinion of Phone.com's Financial Advisor, Credit Suisse First
Boston Corporation
ANNEX K Opinion of Software.com's Financial Advisor, Morgan Stanley & Co.
Incorporated
</TABLE>
iv
<PAGE>
QUESTIONS & ANSWERS
ABOUT THE MERGER
Q: Why are the two companies proposing the merger?
A: The Internet and telecommunications industries continue to change
dramatically as a result of developments in technology, consumer needs and the
range of product offerings made possible by these changes. We believe that
companies that offer a full range of software products for communications
service providers will be the most effective competitors in a market created
by the rapid development and convergence of these two industries. We believe
that our merger will create a global leader that will provide a broad range of
carrier-class software to wireless and wireline carriers, portal operators and
Internet service providers. When the merger is completed, we expect the
combined company to 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.
To review the reasons for the merger in greater detail, see pages 47 through
50.
Q: What is the proposed merger?
A: In the proposed merger, Software.com will merge with a wholly-owned
subsidiary of Phone.com. Software.com will survive the merger as a wholly-
owned subsidiary of Phone.com. The merger agreement is attached to this joint
proxy statement/prospectus as Annex A. You are encouraged to read it
carefully.
Q: What will I receive in the merger?
A: Phone.com stockholders:
Following the merger, each share of Phone.com common stock and each option to
purchase Phone.com common stock will remain outstanding.
Software.com stockholders:
Following the merger:
. Software.com common stockholders will receive, in exchange for each of their
Software.com shares, 1.6105 shares of Phone.com common stock.
. Instead of fractional shares of Phone.com common stock, Software.com
stockholders will receive cash in an amount equal to such fraction
multiplied by the average of the closing prices reported on the Nasdaq
National Market for Phone.com common stock for the ten trading days
immediately preceding the effective date of the merger.
. Each option or warrant to purchase Software.com common stock outstanding
immediately before the completion of the merger will automatically become an
option or warrant to purchase shares of Phone.com common stock. The number
of shares of Phone.com common stock which may be purchased under such option
or warrant will be equal to the product of the number of Software.com shares
that were purchasable before the merger multiplied by 1.6105. The exercise
price per share will be the pre-merger exercise price divided by 1.6105.
Q: What are the United States federal income tax consequences of the merger?
A: We expect that, in general, Phone.com stockholders, Software.com and
Software.com stockholders will not recognize gain or loss for United States
federal income tax purposes as a result of the merger, except for gain or loss
attributable to cash received by Software.com stockholders instead of
fractional shares. It is a condition to the merger that both Phone.com and
Software.com receive legal opinions to the effect that the merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended.
The tax consequences of the merger to you will depend on your own situation.
You should consult your tax advisors for a full understanding of these tax
consequences.
Q: What do I need to do to get my Phone.com shares?
A: Phone.com stockholders will keep their existing certificates. After the
merger is completed Phone.com will send Software.com stockholders written
instructions for exchanging their stock certificates. Software.com
stockholders should not send in their stock certificates now.
1
<PAGE>
Q: When do you expect to complete the merger?
A: We expect to complete the merger in the fourth calendar quarter of 2000. We
are working toward completing the merger as quickly as possible and expect to
do so shortly after the stockholder meetings, provided that we have obtained
the regulatory clearances and approvals necessary for the merger.
Q: What do I need to do now?
A: First, carefully read this document. There are several ways your shares can
be represented at the special meeting. You can indicate on the enclosed proxy
card how you want to vote and then sign and mail the proxy card in the
enclosed return envelope as soon as possible. You can also cast your vote
electronically by telephone by calling the number on your proxy card or over
the Internet by going to the web site designated on your proxy card.
If you do not include instructions on how to vote your properly signed proxy
card, your common stock will be voted "FOR" approval of the proposals
discussed in this joint proxy statement/prospectus. If you do not send in your
signed proxy card, or fail to vote by telephone or the Internet, your common
stock will not be voted at the meetings and will not be counted for purposes
of establishing a quorum.
Your vote is important regardless of the number of shares that you own.
Q: If my broker holds my shares in "street name," will my broker vote my
shares?
A: Your broker will not vote your shares unless you follow the directions your
broker provides to you regarding how to vote your shares. For Software.com
stockholders, if you fail to provide your broker with instructions, it will
have the same effect as a vote against the merger. For Phone.com stockholders,
if you fail to provide your broker with instructions, it will have no effect
in determining the number of votes for or against the proposed share issuance
and will have the same effect as a vote against the other proposals to be
considered at the meeting of Phone.com's stockholders.
Q: What do I do if I want to change my vote?
A: You can change your vote by sending in a written notice of revocation or a
later-dated, signed proxy card to your company's secretary before your
stockholders meeting or by attending the meeting in person and voting. You
also can change your vote by voting by telephone or over the Internet at a
later time.
Q: Who should I call with questions?
A: Phone.com stockholders:
If you have any questions, please call Doug Solomon, Associate General
Counsel, at (650) 817-7161.
Software.com stockholders:
If you have any questions, please call Craig Shelburne, Senior Vice President
and General Counsel, at (805) 882-2470.
2
<PAGE>
SUMMARY
This summary highlights selected information from this document. It does not
contain all of the information that is important to you. We urge you to read
carefully the entire document and the other documents referred to in this
document to fully understand the merger. In particular, you should read the
documents attached to this joint proxy statement/prospectus, including the
merger agreement, which is attached as Annex A. More information on Phone.com
is included in this document beginning on page 94. More information on
Software.com is included in this document beginning on page 136. For a guide as
to where you can obtain more information on Phone.com and Software.com, see
"Where You Can Find More Information" on page 175.
The Companies
Phone.com, Inc.
800 Chesapeake Drive
Redwood City, California 94063
(650) 562-0200
Phone.com is a leading provider of software, applications and services that
enable the delivery of Internet-based information to mass-market wireless
telephones. Using its software, wireless subscribers 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. Phone.com is
headquartered in Redwood City, California and has offices throughout the United
States, Europe, Asia and Latin America.
Software.com, Inc.
525 Anacapa Street
Santa Barbara, California 93101
(805) 882-2470
Software.com is a leading supplier of carrier-scale Internet infrastructure
software for communication service providers worldwide. Software.com provides a
scalable platform that enables service providers to deploy next-generation
business and consumer Internet services, including e-mail, IP unified
messaging, mobile mail and mobile instant messaging. In addition, Software.com
has established strategic relationships with Cisco Systems, Hewlett-Packard,
IBM, Nortel Networks and Telcordia Technologies (formerly Bellcore). Founded in
1993, with headquarters in Santa Barbara, California, the company has offices
throughout the United States, Europe and Asia.
3
<PAGE>
What You Will Receive in the Merger (Page 66)
Phone.com stockholders:
After the merger, each share of Phone.com common stock will remain
outstanding and each option to purchase Phone.com common stock will also
remain outstanding.
Software.com stockholders:
In the merger, each Software.com share will be exchanged for 1.6105 shares
of Phone.com common stock.
Instead of fractional shares of Phone.com common stock, Software.com
stockholders will receive cash in an amount equal to such fraction multiplied
by the average of the closing prices reported on the Nasdaq National Market
for Phone.com common stock for the ten trading days immediately preceding the
effective date of the merger.
Each option or warrant to purchase Software.com common stock outstanding
immediately before the completion of the merger will automatically become an
option or warrant to purchase shares of Phone.com common stock. The number of
shares of Phone.com common stock which may be purchased under such option or
warrant will be equal to the product of the number of Software.com shares that
were purchasable before the merger multiplied by 1.6105. The exercise price
per share will be the pre-merger exercise price divided by 1.6105.
Ownership of Phone.com After the Merger
We estimate that the number of shares of Phone.com common stock issued to
Software.com stockholders in the merger will constitute approximately 50% of
the outstanding common stock of the combined company after the merger.
Record Date for Voting; Required Votes
Phone.com stockholders:
Each holder of record, as of , 2000, of Phone.com common stock is
entitled to cast one vote per share. The affirmative vote, in person or by
proxy, of at least a majority of the votes properly cast, is required to
approve the issuance of shares of Phone.com common stock in the merger. In
addition, the affirmative vote, in person or by proxy, of a majority of the
shares outstanding as of the record date is required to approve and adopt the
amendment to Phone.com's certificate of incorporation to change the name of
Phone.com to and to increase the number of authorized shares of Phone.com
common stock.
Stockholders representing approximately 13.0% of the voting power of
Phone.com, as of July 31, 2000, have entered into voting agreements with
Software.com in which they agreed to vote in favor of the share issuance and
the name change amendment. We have attached a copy of the form of Phone.com
voting agreement as Annex D to this document. You should read it in its
entirety.
Software.com stockholders:
Each holder of record, as of , 2000, of Software.com common stock is
entitled to cast one vote per share. The affirmative vote, in person or by
proxy, of at least a majority of the shares of Software.com common stock
outstanding as of the record date, is required to approve the merger and the
merger agreement.
Stockholders representing approximately 19.1% of the voting power of
Software.com, as of July 31, 2000, have entered into voting agreements with
Phone.com in which they agreed to vote in favor of the adoption of the merger
agreement. We have attached a copy of the form of Software.com voting
agreement as Annex E to this document. You should read it in its entirety.
Conditions to the Completion of the Merger (Page 72-73)
The completion of the merger depends on the satisfaction or waiver of a
number of conditions, including, but not limited to, the following:
. the approval of the stockholders of Phone.com of the issuance of shares
of Phone.com common stock and the amendment to
4
<PAGE>
Phone.com's certificate of incorporation to change the name of Phone.com;
. adoption of the merger agreement by the stockholders of Software.com;
. expiration or termination of the waiting period applicable to the merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which
waiting period terminated on August 30, 2000;
. absence of any legal prohibition or restraint that would prevent
consummation of the merger or would be likely to have a material adverse
effect on Phone.com or on the effective operation of the business of the
combined company after the effective time of the merger;
. absence of any stop order suspending the effectiveness of the
registration statement relating to the shares of Phone.com common stock
to be issued in the merger and approval of those shares for trading on
the Nasdaq National Market; and
. receipt of legal opinions that the merger will be treated as a
"reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended.
Termination of the Merger Agreement (Page 73)
1. Phone.com and Software.com may mutually agree to terminate the merger
agreement if the board of directors of each determines to do so by a vote of
a majority of the entire board of directors.
2. Either Phone.com or Software.com may terminate the merger agreement if:
. the merger is not completed by March 31, 2001, or June 30, 2001 under
certain circumstances, so long as the party seeking to terminate did not
prevent the consummation of the merger by failing to perform any of its
obligations under the merger agreement;
. Phone.com stockholders do not approve the issuance of shares of Phone.com
common stock in the merger and the amendment to Phone.com's certificate
of incorporation to change the name of Phone.com;
. Software.com stockholders do not approve the adoption of the merger
agreement and the transactions contemplated thereby;
. any governmental entity issues a nonappealable final order that has a
material adverse effect on Phone.com or the effective operation of the
combined company following the merger, or a required regulatory approval
is denied;
. the other party materially breaches or fails to perform any of its
representations, warranties, covenants or other agreements in the merger
agreement, which breach is incurable or is not cured within 15 business
days of written notice thereof; or
. prior to the Phone.com or Software.com special meeting, as the case may
be, the other party's board of directors withdraws, modifies, qualifies
or fails to reconfirm its recommendations discussed below under "Board
Recommendations," or the other party materially breaches its obligations
not to solicit alternative transactions.
Termination Fees and Stock Option Agreements (Pages 73-81)
If either Phone.com or Software.com terminates the merger agreement because
of a failure to obtain stockholder approval and there was a publicly announced
proposal for an alternative transaction involving acquisition of at least 50
percent of its stock, it will have to pay to the other party all of its
expenses incurred in connection with the merger agreement. In addition, in
certain cases in which the merger agreement is terminated, either party may
have to pay a termination fee of $195 million, less any expenses already paid.
Both Phone.com and Software.com have entered into stock option agreements
under which each has granted to the other party an option to purchase up to
19.9% of its shares. The exercise price of the option for Phone.com shares is
$78.0625 per share and the exercise price for the option for Software.com
shares is $125.7197 per share. The stock option agreements are attached as
Annexes B and C. The options are exercisable by a party when such party is
entitled to receive a termination fee upon the termination of the merger
agreement.
The termination fees and stock options could discourage other companies from
trying or proposing
5
<PAGE>
to combine with either Software.com or Phone.com. The total termination fees,
expenses and profit realizable under a stock option agreement by either
Phone.com or Software.com is limited to $230,454,545.
Our Reasons for the Merger (Pages 47-50)
Our boards of directors have unanimously approved the merger agreement and
the transactions associated with it, and have determined that the merger and
the transactions associated with it are in the best interests of our
respective stockholders. In reaching their respective decisions, our boards of
directors considered that the combination of the companies will likely offer
customers a broad range of carrier-class software.
Board Recommendations (Pages 47-50)
Phone.com stockholders:
The Phone.com board of directors believes that the merger is in your best
interests and unanimously recommends that Phone.com stockholders vote FOR
approval of the issuance of shares of Phone.com common stock pursuant to the
merger agreement and an amendment to Phone.com's certificate of incorporation
to change the name of Phone.com. In addition, the Phone.com board of directors
recommends a vote for the increase in share capital.
Software.com stockholders:
The Software.com board of directors believes that the merger is in your best
interests and unanimously recommends that Software.com stockholders vote "FOR"
adoption of the merger agreement.
Opinions of Financial Advisors (Pages 51-62)
In deciding to approve the merger, each of our boards of directors
considered opinions from our respective financial advisors.
Phone.com's financial advisor, Credit Suisse First Boston Corporation, has
delivered a written opinion to the Phone.com board of directors as to the
fairness, from a financial point of view, to Phone.com of the exchange ratio
provided for in the merger. The full text of Credit Suisse First Boston's
written opinion, dated August 8, 2000, is attached to this document as Annex
J. Phone.com encourages you to read this opinion carefully in its entirety for
a description of the procedures followed, assumptions made, matters considered
and limitations on the review undertaken. Credit Suisse First Boston's opinion
is directed to the Phone.com board of directors and does not constitute a
recommendation to any stockholder as to any matter relating to the merger.
In deciding to approve the merger, the Software.com board of directors
considered the opinion of its financial advisor, Morgan Stanley & Co.
Incorporated, that, as of the date of its opinion, and subject to and based on
the considerations referred to in its opinion, the exchange ratio pursuant to
the merger agreement was fair, from a financial point of view, to the holders
of shares of Software.com common stock. The full text of this opinion is
attached as Annex K. Software.com urges its stockholders to read the opinion
of Morgan Stanley carefully and in its entirety. Morgan Stanley's opinion is
directed to the Software.com board of directors and does not constitute a
recommendation to any stockholder as to any matter relating to the merger.
Certain United States Federal Income Tax Considerations (Pages 62-63)
The exchange of Software.com common stock for Phone.com common stock, other
than cash paid for fractional shares, is intended to be tax-free to
Software.com stockholders for United States federal income tax purposes. Tax
matters are very complicated and the tax consequences of the merger to you
will depend on your own personal circumstances. You should consult your tax
advisors for a full understanding of all of the tax consequences of the merger
to you.
Anticipated Accounting Treatment (Pages 63-64)
We expect that the merger will be accounted for as a pooling of interests.
However, pooling-of- interests accounting treatment is not a condition to the
consummation of the merger.
6
<PAGE>
Interests of Directors and Officers in the Merger (Pages 64-65)
When considering the recommendations of Software.com's and Phone.com's
boards of directors, you should be aware that certain Software.com and
Phone.com directors, officers and stockholders have interests in the merger
that are different from, or are in addition to, yours. These interests include
the potential acceleration of stock options held by some of Phone.com's and
Software.com's officers upon completion of the merger, the post-merger
membership of three current Software.com directors and three current Phone.com
directors on the board of directors of the combined company and the
indemnification of directors and officers of Software.com against certain
liabilities both before and after the merger. In addition, Donald J. Listwin,
currently a member of Software.com's board of directors, is expected to resign
from the Software.com board and join Phone.com as President and Chief
Executive Officer. Mr. Listwin has also been designated by both Phone.com and
Software.com to serve as President and Chief Executive Officer and as a member
of the board of directors of the combined company.
Regulatory Clearances and Approvals (Page 65)
The completion of the merger is subject to the expiration or termination of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976. On August 30, 2000, such waiting period was terminated.
No Dissenter's or Appraisal Rights (Page 65)
You are not entitled to dissenter's or appraisal rights in connection with
the merger.
Trading of Phone.com Common Stock (Page 65)
Phone.com's common stock is currently traded on the Nasdaq National Market
under the symbol "PHCM." The shares of Phone.com common stock issued in
connection with the merger will be listed on the Nasdaq National Market.
7
<PAGE>
Phone.com Selected Historical Consolidated Financial Data
The tables that follow present portions of Phone.com's consolidated financial
statements and are not complete. You should read the following selected
historical consolidated financial data in conjunction with Phone.com's
consolidated financial statements and related notes thereto and with
"Phone.com's Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this joint proxy
statement/prospectus. 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 joint proxy statement/prospectus. 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 joint proxy statement/prospectus. The historical results presented below
are not necessarily indicative of the results to be expected for any future
fiscal year. See "Phone.com's 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 amounts)
<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>
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>
8
<PAGE>
Software.com Selected Historical Consolidated Financial Data
In reading the following selected consolidated financial data, you should
refer to the Software.com consolidated financial statements and the notes
thereto and "Software.com's Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this joint proxy
statement/prospectus. The statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data at December 31,
1998 and 1999 are derived from consolidated financial statements, which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere herein. The balance sheet data at December 31, 1997 is derived from
financial statements audited by Ernst & Young LLP not included herein. The
statement of operations data for the year ended December 31, 1996 and the
balance sheet data at December 31, 1996 are derived from Software.com's
historical financial statements which have been audited by Ernst & Young LLP as
combined with unaudited financial statements of AtMobile for such periods. The
statement of operations data for the year ended December 31, 1995 and balance
sheet data as of December 31, 1995 are derived from unaudited consolidated
financial statements not included herein. The selected financial data as of
June 30, 2000, for the six months ended June 30, 1999 and 2000 are unaudited
but have been prepared on the same basis as the audited financial statements
and, in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for such periods.
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
--------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------ ------- -------- -------- -------- ------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Software licenses...... $3,185 $ 6,555 $ 7,859 $ 17,462 $ 26,847 $10,285 $ 33,620
Services............... 1,542 1,332 2,963 9,271 20,094 7,666 15,992
------ ------- -------- -------- -------- ------- --------
Total Revenues......... 4,727 7,887 10,822 26,733 46,941 17,951 49,612
Cost of Revenues:
Software licenses...... 58 218 689 1,568 2,677 1,142 1,328
Services............... -- 767 2,736 9,021 13,681 5,823 12,057
------ ------- -------- -------- -------- ------- --------
Total cost of
revenues.............. 58 985 3,425 10,589 16,358 6,965 13,385
------ ------- -------- -------- -------- ------- --------
Gross Profit........... 4,669 6,902 7,397 16,144 30,583 10,986 36,227
Operating Expenses:
Sales and Marketing.... 552 4,554 8,767 12,337 19,686 8,249 15,685
Research and
development........... 1,263 3,457 6,710 12,093 15,910 6,784 12,651
General and
administrative........ 811 2,139 3,505 5,891 8,055 3,076 5,778
Stock based
compensation--
acquisition related... -- -- -- -- 125 -- 3,646
Amortization of
goodwill and purchased
intangible assets..... -- -- -- -- 329 -- 1,716
Purchased in-process
research and
development........... -- -- -- -- 3,210 -- 2,000
Acquisition-related
costs................. -- -- -- -- -- -- 10,395
Legal matter........... -- -- 1,000 (400) (200) (200) --
------ ------- -------- -------- -------- ------- --------
Total operating
expenses.............. 2,626 10,150 19,982 29,921 47,115 17,909 51,871
------ ------- -------- -------- -------- ------- --------
Income (loss) from
operations............. 2,043 (3,248) (12,585) (13,777) (16,532) (6,923) (15,644)
Other income (expense):
Interest income........ -- 87 335 363 2,073 6 2,326
Interest expense....... -- -- (63) (815) (956) (427) (50)
Other.................. (4) -- -- (84) (91) (68) (157)
------ ------- -------- -------- -------- ------- --------
Total other income
(expense)............. (4) 87 272 (536) 1,026 (489) 2,119
------ ------- -------- -------- -------- ------- --------
Income (loss) before
income taxes........... 2,039 (3,161) (12,313) (14,313) (15,506) (7,412) (13,525)
Provision for income
taxes.................. 69 -- 1 446 212 146 356
------ ------- -------- -------- -------- ------- --------
Net Income (loss)....... 1,970 (3,161) (12,314) (14,759) (15,718) (7,558) (13,881)
Accretion on redeemable
convertible preferred
stock................. -- (180) (730) (825) (403) (403) --
------ ------- -------- -------- -------- ------- --------
Net income (loss)
applicable to common
stockholders.......... $1,970 $(3,341) $(13,044) $(15,584) $(16,121) $(7,961) $(13,881)
====== ======= ======== ======== ======== ======= ========
Basic and diluted net
income (loss) per
share................. $ 0.10 $ (0.13) $ (0.46) $ (0.54) $ (0.45) $ (0.27) $ (0.30)
====== ======= ======== ======== ======== ======= ========
Weighted average shares
outstanding used in
computing per share
amounts............... 20,080 25,501 28,119 28,671 35,754 29,740 45,633
====== ======= ======== ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
------ ------ ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.... $2,182 $3,168 $10,433 $ 6,262 $47,175 $ 41,712
Working capital
(deficiency)................ 2,271 4,451 4,004 (1,000) 76,979 88,363
Total assets................. 3,742 7,715 18,878 21,748 111,892 201,817
Long-term debt............... -- -- 552 3,115 5,500 28
Redeemable convertible
preferred stock............. -- 4,710 12,838 13,370 -- --
Total stockholders' equity
(deficit)................... 2,551 1,977 (5,590) (13,069) 85,164 169,013
</TABLE>
9
<PAGE>
Selected Unaudited Pro Forma Combined Condensed Financial Data
The following selected unaudited pro forma combined condensed financial data
is not complete and is derived from the "Unaudited Pro Forma Combined Condensed
Financial Information" included elsewhere in this joint proxy
statement/prospectus and should be read in conjunction with such unaudited pro
forma combined condensed financial information and the notes thereto. The pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that
would have occurred if the merger had been consummated at the beginning of the
periods indicated, nor is it necessarily indicative of future operating results
or financial position.
Phone.com's fiscal year ends on June 30. Software.com's fiscal year ends on
December 31. The selected unaudited pro forma combined condensed financial data
gives effect to the merger of Phone.com and Software.com as if such merger
occurred at the beginning of the earliest period presented. The unaudited pro
forma combined condensed statement of operations data for the year ended June
30, 1998, reflects the results of operations of Phone.com for the fiscal year
ended June 30, 1998, combined with the results of operations of Software.com
for the fiscal year ended December 31, 1998. The unaudited pro forma combined
condensed statement of operations data for the year ended June 30, 1999,
reflects the results of operations of Phone.com for the fiscal year ended June
30, 1999, combined with the results of operations of Software.com for the
fiscal year ended December 31, 1999. The unaudited pro forma combined condensed
statement of operations data for the year ended June 30, 2000, reflects the
results of operations of Phone.com for the fiscal year ended June 30, 2000,
with the results of operations of Software.com for the year ended June 30,
2000, in addition to the results of operations of the WAP Business of APiON,
AtMotion, Paragon, Onebox, Telarc, and bCandid for the period from July 1, 1999
through their respective dates of acquisition.
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------
1998 1999 2000
------------- ------------- --------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Pro forma Combined Statements of
Operations Data:
Revenues:
License......................... $ 17,984 $ 32,076 $ 99,121
Maintenance and support
services....................... 4,396 13,507 26,708
Consulting services............. 6,558 14,800 27,714
------------- ------------- --------------
Total revenues.................. 28,938 60,383 153,543
------------- ------------- --------------
Cost of revenues:
License......................... 1,663 3,046 13,356
Maintenance and support
services....................... 2,700 5,797 15,150
Consulting services............. 5,161 8,685 17,220
------------- ------------- --------------
Total cost of revenues.......... 9,524 17,528 45,726
------------- ------------- --------------
Gross profit.................... 19,414 42,855 107,817
------------- ------------- --------------
Operating expenses:
Research and development........ 17,822 28,934 68,742
Sales and marketing............. 19,541 33,597 79,318
General and administrative...... 7,677 12,299 32,411
Stock-based compensation........ 335 2,236 12,006
Amortization of goodwill and
other intangible assets........ -- 329 626,233
In-process research and
development.................... -- 3,210 27,700
Legal matter.................... (400) (200) --
Acquisition-related costs....... -- -- 10,395
------------- ------------- --------------
Total operating expenses........ 44,975 80,405 856,805
------------- ------------- --------------
Operating loss.................. (25,561) (37,550) (748,988)
Interest and other income, net... 446 2,829 13,826
------------- ------------- --------------
Loss before income taxes........ (25,115) (34,721) (735,162)
Income taxes..................... (446) (2,316) (2,093)
------------- ------------- --------------
Net loss........................ (25,561) (37,037) (737,255)
Accretion on redeemable
convertible preferred stock..... (825) (403) --
------------- ------------- --------------
Net loss attributable to common
stockholders................... $ (26,386) $ (37,440) $ (737,255)
============= ============= ==============
Basic and diluted net loss per
share........................... $ (0.47) $ (0.52) $ (4.92)
============= ============= ==============
Shares used in computing basic
and diluted net loss per share.. 56,617 71,514 149,948
============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000
--------------
(in thousands)
<S> <C>
Pro forma Combined Balance Sheet Data:
Cash, cash equivalents and short-term investments.............. $ 523,007
Total assets................................................... 2,358,052
Equipment loan and capital lease obligations, less current
portion....................................................... 3,319
Total stockholders' equity..................................... 2,089,203
</TABLE>
10
<PAGE>
Comparative Per Share Data
The following tables set forth certain historical per share data of Phone.com
and Software.com and combined per share data on an unaudited pro forma basis
after giving effect to the merger on a pooling of interests accounting basis
assuming the issuance of 1.6105 shares of Phone.com common stock in exchange
for each share of Software.com common stock. The data is derived from and
should be read in conjunction with "Phone.com Selected Historical Consolidated
Financial Data," "Software.com Selected Historical Consolidated Financial
Data," "Selected Unaudited Pro Forma Combined Condensed Financial Data" and the
historical consolidated financial statements of Phone.com and Software.com
included in this joint proxy statement/prospectus. The unaudited pro forma
combined financial data are not necessarily indicative of the operating results
that would have been achieved had the transaction been in effect as of the
beginning of the periods presented and should not be construed as
representative of future operations. Neither Phone.com nor Software.com
declared any cash dividends related to their respective common stock during the
periods presented.
The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of each
period. The pro forma combined net loss per share for the years ended June 30,
1998, 1999 and 2000 includes Phone.com's net loss per share for the years ended
June 30, 1998, 1999 and 2000, combined with Software.com's net loss per share
for the years ended December 31, 1998 and 1999 and the year ended June 30,
2000, respectively. The Software.com equivalent pro forma combined net loss per
share amounts are calculated by multiplying the pro forma combined per share
amounts by the exchange ratio of 1.6105 shares of Phone.com common stock for
each share of Software.com common stock. The pro forma combined book value per
share is computed by dividing pro forma stockholders' equity by the pro forma
number of shares of common stock outstanding at the end of the period. The
Software.com equivalent pro forma combined book value per share amount is
calculated by multiplying the pro forma combined per share amount by the
exchange rates of 1.6105 shares of Phone.com common stock for each share of
Software.com common stock.
<TABLE>
<CAPTION>
Years ended June 30,
----------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Historical--Phone.com
Net loss per share--basic and diluted.................. $(1.02) $(1.49) $(3.81)
Book value per share................................... $ 2.29 $ 1.48 $24.40
</TABLE>
<TABLE>
<CAPTION>
Six months
Years Ended December ended June
31, 30,
---------------------- --------------
1997 1998 1999 1999 2000
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Historical--Software.com
Net loss per share--basic and
diluted.............................. $(0.46) $(0.54) $(0.45) $(0.27) $(0.30)
Book value per share.................. $(0.20) $(0.45) $ 2.00 $ 1.87 $ 3.47
</TABLE>
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Pro forma combined net loss per share
Per Phone.com share--basic and diluted................. $(0.47) $(0.52) $(4.92)
Per equivalent Software.com share-basic and diluted.... $(0.76) $(0.84) $(7.92)
</TABLE>
<TABLE>
<CAPTION>
June 30,
2000
--------
<S> <C>
Pro forma combined book value per share
Per Phone.com share.................................................... $12.95
Per equivalent Software.com share...................................... $20.86
</TABLE>
11
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any statements in this document about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical
facts and are forward-looking statements. These statements are often, but not
always, made through the use of words or phrases such as "believe," "will
likely result," "expect," "will continue," "anticipate," "estimate," "intend,"
"plan," "projection," "would" and "outlook." Accordingly, these statements
involve estimates, assumptions and uncertainties which could cause actual
results to differ materially from those expressed in them. Any forward-looking
statements are qualified in their entirety by reference to the factors
discussed throughout this document. The following cautionary statements
identify important factors that could cause our actual results to differ
materially from those projected in the forward-looking statements made in this
document. Among the key factors that have a direct bearing on our results of
operations are:
. general economic and business conditions; the existence or absence of
adverse publicity; changes in marketing and technology; changes in
political, social and economic conditions;
. competition in the Internet and wireless and wireline telecommunications
sectors; general risks of the wireless and wireline telecommunications
and Internet sectors;
. success of acquisitions and operating initiatives; changes in business
strategy or development plans; management of growth;
. dependence on senior management; business abilities and judgment of
personnel; availability of qualified personnel; labor and employee
benefit costs;
. our ability to integrate effectively the two companies' technology,
operations and personnel in a timely and efficient manner;
. ability of the combined company to retain and hire key executives,
technical personnel and other employees;
. ability of the combined company to manage its growth and the difficulty
of successfully managing a larger, more geographically dispersed
organization;
. ability of the combined company to successfully manage its changing
relationships with customers, suppliers, value added resellers, and
strategic partners;
. ability of the combined company's customers to accept new product
offerings; and
. the timing of, and regulatory and other conditions associated with, the
completion of the merger and the ability of the combined company to
combine operations and obtain revenue enhancements following the merger.
These factors and the risk factors referred to below could cause actual
results or outcomes to differ materially from those expressed in any forward-
looking statements made by us, and you should not place undue reliance on any
such forward-looking statements. Further, any forward-looking statement speaks
only as of the date on which it is made and we undertake no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and
it is not possible for us to predict which will arise. In addition, we cannot
assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
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RISK FACTORS
Stockholders of Phone.com and Software.com should consider the following
factors, in addition to the other information contained in this document. By
voting in favor of the merger, current Software.com stockholders will be
choosing to invest in Phone.com common stock and current Phone.com
stockholders will face dilution of their ownership interest in Phone.com.
Risks Relating to the Proposed Merger
Phone.com and Software.com may not achieve the benefits they expect from the
merger which may have a material adverse effect on the combined company's
business, financial and operating results.
Phone.com and Software.com entered into the merger agreement with the
expectation that the merger will result in benefits to the combined company
arising out of the creation of a global provider of a broad range of carrier-
class software to wireless and wireline carriers, portal operators and
Internet service providers. To realize any benefits or synergies from the
merger, the combined company will face the following post merger challenges:
. combining product and service offerings effectively and quickly;
. retaining and assimilating the management and employees of each company;
. offering the existing products of each company to the other company's
customers;
. retaining existing customers, strategic partners and suppliers of each
company;
. developing new products that utilize the assets and resources of both
companies; and
. developing and maintaining uniform standards, controls, procedures,
policies and information systems.
If the combined company is not successful in addressing these and other
challenges, then the benefits of the merger will not be realized and, as a
result, the combined company's operating results and the market price of the
combined company's common stock may be adversely affected. Further, neither
Phone.com nor Software.com can assure you that the growth rate of the combined
company will equal the historical growth rates experienced by Phone.com and
Software.com.
Software.com stockholders will receive 1.6105 shares of Phone.com common stock
for each share of Software.com common stock despite changes in the market
value of Software.com common stock or Phone.com common stock.
Each share of Software.com common stock will be exchanged for 1.6105 shares
of Phone.com common stock upon completion of the merger. This exchange ratio
is a fixed number and will not be adjusted for changes in the market price of
either Software.com common stock or Phone.com common stock. Neither party is
permitted to terminate the merger agreement solely because of changes in the
market price of Phone.com or Software.com common stock. Consequently, the
specific dollar value of Phone.com common stock to be received by Software.com
stockholders will depend on the market value of Phone.com at the time of
completion of the merger and may decrease from the date that you submit your
proxy. You are urged to obtain recent market quotations for Phone.com common
stock and Software.com common stock. Phone.com cannot predict or give any
assurances as to the market price of Phone.com common stock at any time before
or after the merger. The prices of Phone.com common stock and Software.com
common stock may vary because of factors such as:
. changes in the business, operating results or prospects of Phone.com or
Software.com;
. actual or anticipated variations in quarterly results of operations;
. market assessments of the likelihood that the merger will be completed;
. the timing of the completion of the merger;
. sales of Phone.com common stock or Software.com common stock;
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. additions or departures of key personnel;
. announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
. conditions or trends in the Internet and telecommunications industries;
. announcements of technological innovations, new products or services by
Phone.com, Software.com or their competitors;
. changes in market valuations of other Internet software companies;
. the prospects of post-merger operations;
. regulatory considerations; and
. general market and economic conditions.
If the merger is successfully completed, holders of Software.com common
stock will become holders of Phone.com common stock. Phone.com's business
differs from Software.com's business, and Phone.com's results of operations,
as well as the price of Phone.com common stock, may be affected by factors
different than those affecting Software.com's results of operations and the
price of Software.com common stock. In particular, Phone.com's business is not
operationally profitable and it is not certain that it will achieve
profitability in the foreseeable future.
The market price of the combined company's common stock may decline as a
result of the merger.
The market price of the combined company's common stock may decline as a
result of the merger for a number of reasons including if:
. the integration of Phone.com and Software.com is not completed in a
timely and efficient manner;
. the combined company does not achieve the perceived benefits of the
merger as rapidly or to the extent anticipated by financial or industry
analysts;
. the effect of the merger on the combined company's financial results is
not consistent with the expectations of financial or industry analysts;
or
. significant stockholders of Phone.com and Software.com decide to dispose
of their shares following completion of the merger.
Phone.com's and Software.com's officers and directors have conflicts of
interest that may influence them to support or approve the merger.
The directors and officers of Phone.com and Software.com participate in
arrangements and have continuing indemnification against liabilities that
provide them with interests in the merger that are different from, or in
addition to, yours including the following:
. Phone.com has agreed to cause the surviving corporation in the merger to
indemnify each present and former Software.com officer and director
against liabilities arising out of such person's services as an officer
or director;
. Phone.com will cause the surviving corporation to maintain officers' and
directors' liability insurance to cover any such liabilities for the next
six years;
. Phone.com and Software.com have agreed that Software.com shall be
entitled to designate three individuals currently on Software.com's board
to the combined company's board of directors, and Phone.com shall be
entitled to designate three of the six current Phone.com directors to
continue on the board of directors of the combined company following the
merger;
. Phone.com and Software.com have agreed that Donald J. Listwin, a member
of Software.com's board, will serve as the combined company's President
and Chief Executive Officer. Phone.com and Software.com also agreed that
Alain Rossmann, Phone.com's current Chief Executive Officer, will serve
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as the combined company's Executive Vice President and Chairman of the
Board of Directors, that John L. MacFarlane, Software.com's current Chief
Executive Officer, will serve as the combined company's Executive Vice
President and that Alan Black, Phone.com's current Chief Financial Officer
and Vice President of Finance and Administration, will serve as Chief
Financial Officer for the combined company following the merger;
. the merger may result in a change of control of Software.com and
Software.com's officers and key employees have entered into change of
control agreements that provide for one-half of the unvested portion of
any stock option held by the officer or employee to accelerate and become
exercisable in the event that the officer or employee is involuntarily
terminated or assigned a position of lesser responsibility or
compensation following a change of control; and
. the merger may result in a change of control of Phone.com and Phone.com's
officers and key employees have entered into change of control agreements
that provide for all of the unvested portion of any stock option or
restricted stock held by the officer or employee to accelerate and become
exercisable in the event that the officer or employee is terminated other
than for cause or assigned a position of lesser responsibility or
compensation within 18 months following a change of control transaction.
For the above reasons, the directors and officers of Phone.com and
Software.com may have been more likely to vote to approve the merger agreement
than if they did not hold these interests. Phone.com stockholders and
Software.com stockholders should consider whether these interests may have
influenced these directors and officers to support or recommend the merger.
You should read more about these interests under "The Merger--Interests of
Directors and Officers in the Merger."
Failure to complete the merger could negatively impact Phone.com's and/or
Software.com's stock price, future business and operations.
If the merger is not completed for any reason, Phone.com and Software.com
may be subject to a number of material risks, including the following:
. Phone.com may be required under certain circumstances to pay
Software.com, and Software.com may be required under certain
circumstances to pay Phone.com, a substantial termination fee;
. benefits that the combined company expects to realize from the merger,
such as the potentially enhanced financial and competitive position of
the combined company, would not be realized;
. Phone.com stockholders may experience dilution to their stock ownership
because the stock option granted to Software.com by Phone.com may become
exercisable and Software.com stockholders may experience dilution of
their stock ownership because the stock option granted to Phone.com by
Software.com may become exercisable;
. Phone.com and Software.com may no longer qualify as an entity that may be
a party to a business combination for which pooling-of-interests
accounting would be available;
. the price of Phone.com and/or Software.com common stock may decline to
the extent that the relevant current market price reflects a market
assumption that the merger will be completed and that Donald J. Listwin
will assume the role of President and Chief Executive Officer of the
combined company;
. costs related to the merger, such as legal, accounting and financial
printing fees, as well as a portion of the investment banking fees, must
be paid even if the merger is not completed; and
. the diversion of management attention from the day-to-day business of
each company and the unavoidable disruption to its employees and its
relationships with customers and suppliers, during the period before
consummation of the merger may make it difficult for each company to
regain its financial and market position if the merger does not occur.
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Uncertainty regarding the merger and the effects of the merger could cause
each company's customers strategic partners or key employees to delay or defer
decisions.
Phone.com's and/or Software.com's customers and strategic partners, in
response to the announcement of the merger, may delay or defer decisions,
which could have a material adverse effect on the business of the relevant
company, regardless of whether the merger is ultimately completed. Similarly,
current and prospective Phone.com and/or Software.com employees may experience
uncertainty about their future roles with the combined company. This may
adversely affect Phone.com's and/or Software.com's ability to attract and
retain key management, sales, marketing and technical personnel. Further, if
the merger is terminated and either company's board of directors determines to
seek another merger or business combination, there can be no assurance that it
will be able to find a partner on terms similar to those provided for in this
merger agreement. In addition, while the merger agreement is in effect and
subject to very narrowly defined exceptions, each party is prohibited from
soliciting, initiating or encouraging or entering into certain extraordinary
transactions, such as a merger, sale of assets or other business combination,
with any third party.
The costs of the proposed merger could adversely affect combined financial
results.
Phone.com and Software.com expect to incur direct transaction costs of
approximately $100.0 million in connection with the merger. If the benefits of
the merger do not exceed the costs associated with the merger, including any
dilution to the stockholders of both companies resulting from the issuance of
shares in connection with the merger, the combined company's financial
results, including earnings per share, could be adversely affected.
Failure to qualify for pooling-of-interests accounting treatment may impact
reported operating results.
While the merger is expected to qualify for pooling-of-interests accounting
treatment, pooling treatment is not a condition to the merger. If the merger
does not qualify for pooling-of-interests accounting treatment, the purchase
method of accounting will apply. Under the purchase method, the fair value of
the shares of Phone.com common stock issued in the merger would be recorded as
the cost of acquiring the business of Software.com. That cost would be
allocated to the individual assets acquired and liabilities assumed according
to their respective estimated fair values, with the excess of the fair value
of shares of Phone.com common stock over the estimated fair value of net
assets acquired recorded as goodwill, to be amortized over a period of 3 to 7
years.
Purchase accounting treatment would have a material adverse effect on the
reported operating results of the combined company as compared to pooling-of-
interests accounting treatment because of potential charges to the combined
company's earnings for in-process research and development and amortization of
goodwill and other intangible assets required by purchase accounting treatment
which would result in the combined company reporting a net loss for a longer
period of time.
Phone.com and Software.com may not be able to obtain the required regulatory
approvals for completion of the merger.
Phone.com and Software.com cannot complete the merger until they give
notification and furnish information to the Federal Trade Commission and the
Antitrust Division of the Department of Justice and observe a statutory
waiting period requirement. Phone.com and Software.com filed the required
notification and report forms with the Federal Trade Commission and the
Antitrust Division and the waiting period was terminated on August 30, 2000.
At any time before or after the effective time of the merger, and
notwithstanding that the waiting period has terminated or the merger may have
been consummated, the Federal Trade Commission, the Antitrust Division or any
state could take any action under the applicable antitrust or competition laws
as it deems necessary or desirable. This action could include seeking to
enjoin the completion of the merger. Private parties may also institute legal
actions under the antitrust laws under some circumstances.
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Risks Relating to the Business and Operations of Phone.com
Phone.com's future profitability is uncertain because it has a limited
operating history.
Because Phone.com commenced operations in December 1994 and commercially
released its first products in June 1996, Phone.com has only a limited
operating history on which you can base your evaluation of its
business. In addition, until its 1999 fiscal year, Phone.com has had less than
$2.25 million in annual revenue, which represents a small percentage of its
future anticipated annual revenues.
Phone.com may not continue to grow or achieve profitability.
Phone.com faces a number of risks encountered by early stage companies in
the wireless telecommunications and Internet software industries, including:
. its need for network operators to launch and maintain commercial services
utilizing its products;
. the uncertainty of market acceptance of commercial services utilizing its
products;
. its substantial dependence on products with only limited market
acceptance to date;
. its need to introduce reliable and robust products that meet the
demanding needs of network operators and wireless telephone
manufacturers;
. its need to expand its marketing, sales, consulting, and support
organizations, as well as its distribution channels;
. its ability to anticipate and respond to market competition;
. its need to manage expanding operations; and
. its dependence upon key personnel.
Phone.com's business strategy may not be successful, and it may not
successfully address these risks.
Phone.com may not achieve or sustain revenue or profit goals.
Because Phone.com expects to continue to incur significant product
development, sales and marketing, and administrative expenses, Phone.com will
need to generate significant revenues to become profitable and sustain
profitability on a quarterly or annual basis. Phone.com may not achieve or
sustain its revenue or profit goals, and Phone.com's ability to do so depends
on a number of factors outside of its control, including the extent to which:
. there is market acceptance of commercial services utilizing Phone.com's
products;
. Phone.com's competitors announce and develop, or lower the prices of,
competing products; and
. Phone.com's strategic partners dedicate resources selling Phone.com's
products and services.
As a result, Phone.com may not be able to increase revenue or achieve
profitability on a quarterly or annual basis.
Phone.com's quarterly operating results are subject to significant
fluctuations, and its stock price may decline if it does not meet expectations
of investors and analysts.
Phone.com's 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 Phone.com's customers of
its products and services;
. changes in demand by Phone.com's customers for additional products and
services;
. Phone.com's lengthy sales cycle;
. Phone.com's 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;
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. introduction of new products or services by Phone.com or its competitors;
. delays in developing and introducing new products and services;
. changes in Phone.com's pricing policies or those of its competitors or
customers;
. changes in Phone.com's mix of domestic and international sales;
. risks inherent in international operations;
. changes in Phone.com's 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 Phone.com's expenses, such as employee compensation and lease
payments for facilities and equipment, are relatively fixed and growing. In
addition, Phone.com's expense levels are based, in part, on its expectations
regarding future revenues. As a result, any shortfall in revenues relative to
Phone.com's expectations could cause significant changes in its operating
results from quarter to quarter. Due to the foregoing factors, Phone.com
believes period to period comparisons of its revenue levels and operating
results are not meaningful. You should not rely on Phone.com's quarterly
revenues and operating results to predict its future performance.
Phone.com may be unable to successfully integrate acquired companies into its
business or achieve the expected benefits of the acquisitions.
Phone.com's acquisitions of AtMotion and Paragon, which were completed in
February 2000 and March 2000, respectively, and its acquisition of Onebox,
which was completed in April 2000, will require further integration of the
products, business and operations of these companies with Phone.com. Phone.com
may not be able to successfully assimilate the personnel, operations and
customers of these companies into its business. Additionally, Phone.com 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 Phone.com's existing financial
and managerial controls and reporting systems and procedures. This may result
in the diversion of management and financial resources from Phone.com's core
business objectives. In addition, Phone.com is relatively inexperienced in
managing significant facilities or operations in geographically distant areas.
Finally, Phone.com cannot be certain that it will be able to retain these
companies' key employees.
Any future merger or acquisition of companies or technologies may result in
disruptions to Phone.com's business and/or the distraction of its management.
In addition to our pending merger with Software.com, Phone.com may merge
with or acquire technologies or companies in the future. Entering into any
business combination entails many risks, any of which could materially harm
its business, including:
. diversion of management's attention from other business concerns;
. failure to assimilate the merged or acquired company with Phone.com's
pre-existing businesses;
. potential loss of key employees from either Phone.com's pre-existing
business or the merged or acquired business;
. dilution of Phone.com's existing stockholders as a result of issuing
equity securities; and
. assumption of liabilities of the merged or acquired company.
To date, Phone.com has completed acquisitions of seven companies or their
assets, consisting of APiON, Angelica Wireless, AtMotion, Paragon, Onebox,
Velos and MyAble and has pending its merger with Software.com. Phone.com may
merge with or acquire other complementary businesses and technologies in the
future. Phone.com may not be able to identify other future suitable merger or
acquisition candidates, and even if
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it does identify suitable candidates, it may not be able to make these
transactions on commercially acceptable terms, or at all. If Phone.com does
merge with or acquire other companies, it may not be able to realize the
benefits it expected to achieve at the time of entering into the transaction.
In any future merger or acquisition,
Phone.com will likely face the same risks as discussed above. Further,
Phone.com 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 its
existing stockholders.
Phone.com may not be successful in making strategic investments.
In the future, Phone.com may make strategic investments in other companies.
Some of these investments may be made in immature businesses with unproven
track records and technologies, and have a high degree of risk, with the
possibility that Phone.com may lose the total amount of its investments.
Phone.com may not be able to identify suitable investment candidates, and even
if it does, it may not be able to make those investments on acceptable terms,
or at all. In addition, even if Phone.com makes investments, it may not gain
strategic benefits from those investments.
Phone.com's sales cycle is long, and its stock price could decline if sales
are delayed or cancelled.
Quarterly fluctuations in Phone.com's operating performance are exacerbated
by its sales cycle, which is lengthy, typically between six and twelve months,
and unpredictable. Many factors outside Phone.com's control add to the lengthy
education and customer approval process for its products. For example, many of
Phone.com's 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 its products and
services. As a result, Phone.com spends a substantial amount of time educating
customers regarding the use and benefits of its products and they in turn
spend a substantial amount of time performing internal reviews and obtaining
capital expenditure approvals before purchasing Phone.com's 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 Phone.com's products could cause
Phone.com's quarterly operating results to vary significantly from projected
results, which could cause Phone.com's stock price to decline.
Phone.com's success depends on acceptance of its products and services by
network operators and their subscribers.
From inception through June 30, 2000, Phone.com has generated a significant
portion of its total cumulative revenues from fees paid to it by wireless
telephone manufacturers that embed its browser in their wireless telephones.
However, Phone.com's future success depends on its ability to increase
revenues from sales of its 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 its MyPhone wireless
Internet portal framework and related server-based communications applications
software products, and Phone.com 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 Phone.com's products. Phone.com cannot assure you that
network operators will widely deploy or successfully market services based on
its 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 Phone.com 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 process of
introducing or developing, products that facilitate the delivery of Internet-
based services through wireless telephones. As a result, the life cycle of
Phone.com's products is difficult to estimate. Phone.com 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 its business would suffer. In addition,
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Phone.com 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.
Phone.com's 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
Phone.com's 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. Phone.com has 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
Phone.com's products in a timely and effective manner could harm its business.
Until recently, Phone.com has relied on sales to a small number of customers,
and the failure to retain these customers or add new customers may harm its
business.
To date, a significant portion of Phone.com's revenues in any particular
period has been attributable to a limited number of customers, comprised
primarily of network operators and wireless telephone manufacturers. Phone.com
believes that it will continue to depend upon a limited number of customers
for a significant portion of its revenues for each quarter for the foreseeable
future. Any failure by Phone.com to capture a significant share of those
customers could materially harm its 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, Phone.com's business could suffer.
Phone.com has focused its efforts on mass-market wireless telephones as the
principal means of delivery of Internet-based services using its products. If
wireless telephones are not widely adopted for mobile delivery of Internet-
based services, Phone.com's 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 adoption of wireless telephones as the dominant mobile
device for accessing Internet-based services. If mobile individuals do not
adopt wireless telephones as a means of accessing Internet-based services,
Phone.com's business would suffer.
If widespread integration of browser technology does not occur in wireless
telephones, Phone.com's business could suffer.
Because Phone.com's 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, Phone.com expects that
future versions of its UP.Link Server Suite and related server-based software
will offer features and functionality that are compatible with the
specifications promulgated by the WAP Forum. Phone.com's 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
Phone.com's agreements with wireless telephone manufacturers are nonexclusive,
so they may choose to embed a browser other than Phone.com's in their wireless
telephones. Phone.com may not succeed in maintaining and developing
relationships with telephone manufacturers, and any arrangements may be
terminated early or not renewed at
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expiration. In addition, wireless telephone manufacturers may not produce
products using UP.Browser in a timely manner and in sufficient quantities, if
at all.
Phone.com's strategy for the MyPhone business model is subject to
uncertainties, and Phone.com may not be able to generate sufficient revenues
to achieve profitability.
In September 1999, Phone.com announced its MyPhone service. Phone.com offers
MyPhone as an OEM service to enable network operators to create branded mobile
Internet portals for their subscribers, and Phone.com does not currently
intend to develop its own branded portal site. Phone.com also offers MyPhone
as software products that network operators can license from Phone.com and
host themselves. Phone.com has limited experience in developing mobile
internet portals, and it may not be successful in executing its 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 network operators, Phone.com's 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 Phone.com
to incur significant additional expenses, including costs relating to
operating the portal, as well as sales and marketing and research and
development expenses. Phone.com expects to incur these costs and expenses in
advance of generating revenues from the services and products. Furthermore,
Phone.com's business model for MyPhone is new and evolving. Even if Phone.com
is successful in executing this strategy, it cannot be certain that its
business model for the MyPhone service and products will result in sufficient
revenue to achieve profitability.
The market for Phone.com's products and services is highly competitive.
The market for Phone.com's 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 Phone.com's software
products. In addition, a number of Phone.com's competitors, including Nokia,
have announced or are expected to announce enhanced features and functionality
as proprietary extensions to the WAP protocol. Furthermore, some of
Phone.com's competitors, such as NTT, have introduced or may introduce
services based on proprietary wireless protocols that are not compliant with
the WAP specifications.
Phone.com expects that it will compete primarily on the basis of price, time
to market, functionality, quality and breadth of product and service
offerings. Phone.com's 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.
In particular, Microsoft Corporation has announced its intention to
introduce products and services that may compete directly with Phone.com's
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
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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 Phone.com's existing competitors, as well as
potential competitors, have substantially greater financial, technical,
marketing and distribution resources than Phone.com does.
As Phone.com enters new markets and introduces new services, such as the
MyPhone products and services, it will face additional competitors. As
Phone.com enters the unified messaging market, it 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 Phone.com's MyPhone service. These existing and
potential competitors may include telecommunications companies such as Lucent
Technologies, traditional Internet portals, Internet infrastructure software
companies and several private mobile Internet portal companies. Phone.com's
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.
Phone.com's software products may contain defects or errors, and shipments of
Phone.com's software may be delayed.
The software Phone.com develops is complex and must meet the stringent
technical requirements of its customers. Phone.com must develop its products
quickly to keep pace with the rapidly changing Internet software and
telecommunications markets. Software products and services as complex as
Phone.com's are likely to contain undetected errors or defects, especially
when first introduced or when new versions are released. Phone.com has in the
past experienced delays in releasing some versions of its products until
software problems were corrected. Phone.com's products may not be free from
errors or defects after commercial shipments have begun, which could result in
the rejection of its products and damage to its reputation, as well as lost
revenues, diverted development resources, and increased service and warranty
costs, any of which could harm Phone.com's business.
Phone.com depends on recruiting and retaining key management and technical
personnel with telecommunications and Internet software experience.
Because of the technical nature of Phone.com's products and the dynamic
market in which Phone.com competes, its performance depends on attracting and
retaining key employees. In particular, Phone.com's future success depends in
part on the continued services of each of its 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. Phone.com believes 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 Phone.com's employees.
Phone.com may fail to support its anticipated growth in operations.
To succeed in the implementation of its business strategy, Phone.com must
rapidly execute its sales strategy and further develop products and expand
service capabilities, while managing anticipated growth by implementing
effective planning and operating processes. If Phone.com fails to manage its
growth effectively, its business could suffer materially. To manage
anticipated growth, Phone.com must:
. continue to implement and improve its operational, financial and
management information systems; for example, Phone.com is currently in
the process of implementing Oracle financial software;
. hire, train and retain additional qualified personnel;
. continue to expand and upgrade core technologies;
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. 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 its acquired companies.
Phone.com's systems, procedures and controls may not be adequate to support
its operations, and its management may not be able to achieve the rapid
execution necessary to exploit the market for its products and services.
Phone.com's success, particularly in international markets, depends in part on
its ability to maintain and expand its distribution channels.
Phone.com's success depends in part on its ability to increase sales of its
products and services through value-added resellers and systems integrators
and to expand its indirect distribution channels. If Phone.com is unable to
maintain the relationships that it has with its existing distribution
partners, increase revenues derived from sales through its indirect
distribution channels, or increase the number of distribution partners with
whom it has relationships, then Phone.com may not be able to increase its
revenues or achieve profitability.
Phone.com expects that many network operators in international markets will
require that Phone.com's products and support services be supplied through
value-added resellers and systems integrators. Thus, Phone.com expects that a
significant portion of international sales will be made through value-added
resellers and systems integrators, and the success of its international
operations will depend on its ability to maintain productive relationships
with value-added resellers and systems integrators.
In addition, Phone.com's agreements with its distribution partners generally
do not restrict the sale by them of products and services that are competitive
with Phone.com's products and services, and each of Phone.com's partners
generally can cease marketing our products and services at their option and,
in some circumstances, with little or no notice or penalty.
Phone.com depends on others to provide content and develop applications for
wireless telephones.
In order to increase the value to customers of Phone.com's product platform
and encourage subscriber demand for Internet-based services via wireless
telephones, Phone.com 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, its business could suffer
materially. Phone.com's 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 its 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 Phone.com is unable to integrate its products with third-party technology,
such as network operators' systems, its business may suffer.
Phone.com products are integrated with network operators' systems and
wireless telephones. If Phone.com is unable to integrate its platform products
with these third-party technologies, its business could suffer materially. For
example, if, as a result of technology enhancements or upgrades of these
systems or telephones, Phone.com is unable to integrate its products with
these systems or telephones, Phone.com could be required to redesign its
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 Phone.com's UP.Link Server Suite. Phone.com may
not be able to redesign its products or develop redesigned products that
achieve market acceptance.
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An interruption in the supply of software that Phone.com licenses from third
parties could cause a decline in product sales.
Phone.com licenses technology that is incorporated into its 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 Phone.com is able to replace the
functionality provided by this licensed software. Phone.com also depends 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 Phone.com's business.
Phone.com may be unable to adequately protect its proprietary rights.
Phone.com's success depends significantly on its ability to protect its
proprietary rights to the technologies used in Phone.com's products. If
Phone.com is not adequately protected, its competitors could use the
intellectual property that Phone.com has developed to enhance their products
and services, which could harm Phone.com's business. Phone.com relies on
patent protection, as well as a combination of copyright and trademark laws,
trade secrets, confidentiality provisions and other contractual provisions, to
protect its proprietary rights, but these legal means afford only limited
protection.
Phone.com 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 Phone.com's market increases,
the possibility of an intellectual property claim against Phone.com 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 Phone.com's core business.
In April 2000, Phone.com 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. Phone.com 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 Phone.com's complaint and asserted
a counterclaim against Phone.com alleging that Phone.com infringes the patent
and seeking various forms of relief. Phone.com denies Geoworks' allegations
and while Phone.com intends to pursue its position vigorously, the outcome of
any litigation is uncertain, and Phone.com may not prevail. Additionally, we
may incur substantial expenses in defending against this claim. Should
Phone.com be found to infringe the Geoworks patent, Phone.com may be liable
for potential monetary damages, and could be required to obtain a license from
Geoworks. If Phone.com was 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.
International sales of products is an important part of Phone.com's strategy,
and this expansion carries specific risks.
International sales of products and services accounted for 73% of
Phone.com's total revenues for the year ended June 30, 2000. Phone.com expects
international sales to continue to account for a significant portion of its
revenues, although the percentage of Phone.com's total revenues derived from
international sales may vary. Risks inherent in Phone.com's international
business activities include business, economic, political and legal risks. See
"Phone.com's Management's Discussion and Analysis of Financial Condition and
Results of Operations-Overview."
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Undetected Year 2000 problems could potentially harm Phone.com's business.
Although the date is now past January 1, 2000 and Phone.com has not
experienced any material adverse impact from the transition to the Year 2000,
Phone.com cannot provide assurance that its suppliers and customers have not
been affected in a manner that is not yet apparent. In addition, certain
computer programs that were date sensitive to the Year 2000 may experience
difficulties with future dates even though they have not experienced
difficulties to date.
Phone.com's stock price, like that of many companies in the Internet and
telecommunications software industries, may be volatile.
Since Phone.com's initial public offering in June 1999, its stock price has
experienced significant volatility. Phone.com expects that the market price of
its common stock also will fluctuate in the future as a result of variations
in its quarterly operating results. These fluctuations may be exaggerated if
the trading volume of Phone.com's common stock is low. In addition, due to the
technology-intensive and emerging nature of Phone.com's business, the market
price of its common stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by Phone.com or its competitors;
. the gain or loss of a significant customer or order; and
. changes in estimates of Phone.com's 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 Phone.com's pending merger with of
Software.com, fluctuations in Software.com's stock price can increase the
volatility in the market price of Phone.com's common stock.
Phone.com's stock price may be volatile, exposing it 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,
Phone.com's stock price could decline below current levels or the initial
public offering price regardless of its actual operating performance.
Furthermore, the historical trading volume of Phone.com's stock is not
indicative of any future trading volume of Phone.com's stock because a
substantial portion of shares were not eligible for sale until recently.
Therefore, if a large number of shares of Phone.com's stock are sold in a
short period of time, Phone.com's 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. Phone.com may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert Phone.com's management's time and resources,
which could harm its business, financial condition, and operating results.
Phone.com's certificate of incorporation, bylaws, rights agreement and
Delaware law contain provisions that could discourage a takeover.
On August 8, 2000, in connection with Phone.com's pending merger with
Software.com, Phone.com's board of directors declared a dividend distribution
of one right for each share of Phone.com's common stock outstanding on August
18, 2000. The rights are exercisable for a series of Phone.com's preferred
stock under certain circumstances as specified in Phone.com's 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 Phone.com's
certificate of incorporation and bylaws and Delaware law may discourage, delay
or prevent a merger. 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;
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. authorizing the board to issue preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Risks Relating to the Business and Operations of Software.com
Software.com's future revenues are unpredictable and it expects its quarterly
operating results to fluctuate.
Software.com may fail to accurately forecast its revenues in any given
period as a result of its limited operating history, the emerging nature of
the markets in which it competes and its reliance on a small number of
products and large customers. Software.com's revenues could fall short of its
expectations if it experiences delays in signing new customer accounts or
cancellation of one or more current or new customer accounts. A number of
factors are likely to cause fluctuations in Software.com's operating results,
including:
. the volume and timing of mailbox activation by Software.com's InterMail
Mx customers;
. the length of Software.com's sales and product deployment cycles for
Software.com's InterMail products;
. Software.com's ability to attract and retain customers in new markets,
including Europe and Asia;
. Software.com's continuing dependence on the InterMail line of products
and related services for substantially all of its revenues;
. Software.com's dependence on a small number of large customers;
. Software.com's dependence on continued growth of the service provider
market;
. any delays in Software.com's introduction of new products or
enhancements;
. the amount and timing of operating costs and capital expenditures
relating to expansion of Software.com's operations;
. the announcement or introduction of new or enhanced products or services
by Software.com's competitors;
. adverse customer reaction to technical difficulties or "bugs" in
Software.com's software;
. the growth rate and performance of the Internet in general and of
Internet communications in particular;
. the growth rate and performance of wireless networks in general and of
wireless communications in particular;
. the volume of sales by Software.com's distribution partners and
resellers;
. Software.com's pricing policies and those of its competitors; and
. the increase in Software.com's cost to resell, or its customers' cost to
buy or the unavailability of, the Oracle 8i database which is currently
necessary to use Software.com's InterMail Mx product and any related
price concessions on Software.com's InterMail Mx product that its
customers demand as a result.
Due to the foregoing factors, Software.com's quarterly operating results
have fluctuated significantly and it expects that future operating results
will be subject to similar fluctuations. Software.com's revenue from large-
scale installations of its software depends heavily on the customers' timing
of deployment of its software, the migration of their installed base of users
to its software platform, and the rate of growth of their customer base.
Accordingly, a delay in a deployment past the end of a particular quarter
could negatively impact Software.com's results of operations for that quarter.
It is possible that in future quarters Software.com's operating results could
fall below the expectations of public market analysts or investors. In this
event, the price of Software.com's common stock may fall.
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Software.com plans to significantly increase its operating expenses to
expand its international sales and marketing operations and fund greater
levels of research and development. Software.com's operating expenses, which
include sales and marketing, research and development, and general and
administrative expenses, are based on expectations of future revenues and are
relatively fixed in the short term. If revenues fall below Software.com's
expectations and it is not able to quickly reduce its spending in response,
its business, financial condition, and operating results will suffer.
Accordingly, period-to-period comparisons of Software.com's operating results
are not a good indication of its future performance. It is possible that
Software.com's operating results in some quarters will not meet the
expectations of stock market analysts and investors.
Variations in the time it takes to sell, deploy and activate mailboxes using
Software.com's InterMail Mx product may cause fluctuations in Software.com's
operating results.
Variations in the length of Software.com's sales and deployment cycles for
InterMail Mx could cause its revenue, and thus its business, financial
condition and operating results, to fluctuate widely from period to period.
Software.com's customers generally take a long time to evaluate its InterMail
Mx product, and many people are involved in the evaluation process.
Software.com expends significant resources educating and providing information
to its prospective customers regarding the use and benefits of InterMail Mx.
Additionally, at present, in order to deploy Software.com's InterMail Mx
product, a customer must have a license to use an Oracle 8i database.
Software.com's customers' cost for purchasing an Oracle 8i database, whether
from Software.com or directly from Oracle, has increased and may cause
potential customers to decide not to buy Software.com's InterMail Mx product.
If this happens, Software.com may be forced to absorb some of the costs of the
increase in order to sell the InterMail Mx product. In either case, unless
Software.com is able to identify and implement a suitable alternative to the
Oracle database, Software.com's revenues from its InterMail Mx product would
decrease. Although Software.com is actively evaluating alternative databases,
there can be no assurance that it will be able to substitute a new database
for Oracle in a timely and cost-effective manner. Even if a customer decides
to purchase Software.com's InterMail Mx product, Software.com's customers tend
to integrate InterMail Mx into their existing systems slowly and deliberately.
The timing of the deployment depends upon:
. the efforts of Software.com's professional services staff;
. the geographic disbursement of the customer's hardware;
. the complexity of the customer's network and the resulting degree of
hardware configuration necessary to deploy InterMail Mx on their system;
. the internal technical capabilities of the customer;
. the customer's budgetary constraints; and
. the stability and sophistication of the customer's current messaging
system.
Because of the number of factors influencing the sales and deployment
processes, the period between Software.com's initial contact with a new
customer and the time when Software.com begins to recognize revenue from that
customer varies widely in length. Software.com's sales cycles for InterMail Mx
typically range from six months to a year, and its software deployment cycles
typically range from three to six months thereafter, although occasionally
these cycles can be much longer. During these cycles, Software.com typically
commits substantial resources in advance of receiving any software license
revenue.
In addition, the amount of software license revenue that Software.com is
able to recognize in any given period depends on how quickly Software.com's
customers activate new mailboxes and report the activation of those new
mailboxes to Software.com. Under Software.com's InterMail Mx license
agreements, Software.com's customers typically pay it a fee for each new user
account, or "mailbox," they activate using InterMail Mx. Software.com
recognizes software license revenue from these agreements when its customer
reports mailbox activations to it or Software.com otherwise learns of such
activations. Customers typically report activations on a quarterly basis after
they have completed a deployment of InterMail Mx. Because Software.com charges
its customers only for activating "new" mailboxes, a customer can reassign a
lost subscriber's mailbox to a new subscriber without having to pay
Software.com a fee. Software.com cannot control how quickly its customers
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activate new mailboxes. The primary factors affecting the timing are the
ability of Software.com's customers to retain subscribers and grow their
subscriber bases by attracting end users to their online services, and their
willingness to promote InterMail Mx messaging services with their subscribers.
Mailbox activations and the associated revenue may be concentrated in a
particular quarter and, as a result, Software.com's revenue for a particular
quarter is not a good indication of its future revenue. Software.com's
revenues may fluctuate widely from period to period depending on the timing of
its customers' activation of new mailboxes, and any delay in or failure by its
customers to activate new mailboxes will harm its business, financial
condition, and operating results.
In addition, Software.com bases its quarterly revenue projections, in part,
upon its expectations of how many mailboxes its InterMail Mx customers will
activate in that quarter. Because the timing of mailbox activation is outside
of Software.com's control, it is often difficult for Software.com to make
accurate forecasts. If Software.com's expectations, and thus its revenue
projections, are not accurate for a particular quarter, its actual operating
results for that quarter could fall below the expectations of analysts and
investors.
Because Software.com has a limited operating history, it may be difficult for
you to evaluate Software.com's business and prospects.
Software.com has only a limited operating history, which makes it difficult
for investors to predict its future operating performance. You should consider
the risks, expenses, and difficulties that Software.com may encounter as a
young company in a rapidly evolving market. These risks include Software.com's
ability to:
. expand its sales and marketing activities;
. expand its customer base;
. develop and introduce new products and services;
. identify and integrate acquisitions; and
. compete effectively.
Software.com cannot be certain that its business strategy will be successful
or that it will successfully address these risks.
Software.com has a history of losses and it may not be able to achieve or
sustain profitability in the future.
Software.com has a history of losses and may not be able to achieve or
sustain profitability in the future. Software.com has historically invested
heavily in its sales and marketing efforts and in technology research and
development. Software.com expects to continue to spend substantial resources
on developing and introducing new software products and on expanding its sales
and marketing activities, particularly in Europe, Japan and Asia Pacific. As a
result, Software.com needs to generate significant revenues to achieve and
maintain profitability. Software.com expects that its sales and marketing
expenses, research and development expenses, and general and administrative
expenses will continue to increase in absolute dollars and may increase as
percentages of revenues. In addition, any amortization of goodwill or other
intangible assets, or other charges resulting from the costs of acquisitions
could significantly impact its business, financial condition, and operating
results.
As of June 30, 2000, Software.com had an accumulated deficit of
approximately $60.1 million. Although Software.com's revenues have grown
significantly in recent quarters, it may not be able to sustain these growth
rates or obtain sufficient revenues to achieve or maintain profitability.
Software.com depends on a small number of customers for most of its revenues,
and its business, financial condition, and operating results could be harmed
by a decline or delay in revenue from these customers.
Software.com has generated a significant portion of its revenues from a
limited number of customers. Software.com expects that a small number of
customers will continue to account for a significant portion of
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revenues for the foreseeable future. Software.com's target market is made up
only of service providers, which constitute only a small portion of all users
of messaging and directory solutions. As a result, if Software.com loses a
major customer, or if there is a decline in usage, or if there is a downturn
in the service provider industry, Software.com's business, financial
condition, and operating results will suffer. Software.com cannot be certain
that customers that have accounted for significant revenues in past periods,
individually or as a group, will continue to generate revenues for
Software.com in any future period.
Software.com must overcome significant and increasing competition in order to
continue its growth.
The market for Internet standards-based messaging and infrastructure
products and services is intensely competitive, and Software.com expects it to
become increasingly so in the future. Software.com competes in its core
service provider market with many software providers and, in some instances,
with outsourced messaging providers who have either internally developed or
acquired their own messaging software. Software.com also competes, principally
on the basis of performance, features and price, against messaging solutions
based on public domain software code that is developed and enhanced internally
by service providers. Software.com competes to a more limited extent with
providers of messaging applications designed for the enterprise market.
Software.com's current software competitors in the service provider market
include iPlanet E-Commerce Solutions (a Sun/Netscape Alliance) and Isocor,
which was recently acquired by Critical Path. Software.com also indirectly
competes with Critical Path when it offers outsourced messaging to the service
provider market and with Microsoft, whose current messaging product was
developed for the enterprise market but is sold to some service providers. In
addition, with Software.com's release of a highly scalable LDAP directory with
InterMail Mx, Software.com has become more direct competitors with Novell's
NDS technology and Microsoft's Active Directory product, to the extent that
these products are marketed to service providers. Software.com believes that
competition will intensify as its current competitors increase the
sophistication of their offerings and as new market participants, including
additional providers of outsourced messaging services enter the market. Many
of Software.com's current and future competitors have longer operating
histories, larger installed customer bases, greater brand recognition, and
significantly greater financial, marketing and other resources than
Software.com does. In addition, these competitors may benefit from existing
strategic and other relationships with each other or with Software.com's
current customers. Software.com must respond quickly and effectively to the
new products, services, and enhancements offered by its competitors in order
to continue its growth.
Microsoft and other competitors possess many competitive advantages over
Software.com that present risks to the sales of Software.com's products.
Microsoft, among other software providers, is well positioned to become
increasingly competitive in Software.com's service provider messaging market.
Software.com believes that Microsoft is currently in the process of developing
electronic messaging software to compete more directly in its core service
provider market. Because of its dominance in other software markets, Microsoft
has many competitive advantages over Software.com. For example, Microsoft
could incorporate electronic messaging technology into its Web browser
software, its client operating system or email interface, or its server
software offerings, possibly at no additional cost to service providers or end
users. In addition, Microsoft may promote technologies and standards that are
not compatible with Software.com's technology, or that are less compatible
with Software.com's technology than competitive products offered by Microsoft.
Software.com believes that Microsoft's increasing presence in the electronic
messaging software industry will dramatically increase competitive pressure in
the market, leading to increased pricing pressure and longer sales cycles.
These competitive pressures may force Software.com to reduce the prices of its
products, and may also materially reduce its market share.
In addition to the existing competitors listed above, voicemail solutions
providers could be formidable competitors in the unified communications
infrastructure software and Internet voicemail markets because of their
existing presences in service providers and ownership of technologies for the
conversion of voice to data. If Software.com is unable to compete effectively
with Microsoft, existing voicemail solution providers, or its other existing
or emerging competitors, its business, financial condition, and operating
results will suffer.
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Software.com's InterMail Kx product may interfere with sales of its other
products.
Competition from InterMail Kx has had a negative effect on Software.com's
sales of Post.Office and could have a negative impact on its sales of
InterMail Mx, or the prices it could charge for these products. Software.com's
InterMail Kx product was introduced in March of 1999 and overlaps to some
extent with its Post.Office product as both products are targeted at small and
medium size service providers worldwide. Software.com currently has several
licenses for its Post.Office product with service providers that have more
than 25,000 subscribers and Software.com has licensed its InterMail Mx product
to service providers with fewer than 250,000 subscribers. Accordingly,
InterMail Kx may compete to some extent with Software.com's other products.
Software.com may also divert sales and marketing resources from Post.Office in
order to successfully promote and develop InterMail Kx. This diversion of
resources could have a further negative effect on Software.com's sales of
Post.Office. If Software.com's revenues from InterMail Kx are not sufficient
to compensate for the effect of any decrease in sales or prices of its other
products, its business, financial condition, and operating results will
suffer.
Software.com's acquisition strategy could cause financial or operational
problems.
Software.com's success depends on its ability to continually enhance and
broaden its product offerings in response to changing technologies, customer
demands, and competitive pressures. To this end, Software.com may acquire new
and complementary businesses, products, or technologies, instead of developing
them itself. Software.com does not know if it will be able to complete any
acquisitions or that it will be able to successfully integrate any acquired
business, operate them profitably, or retain their key employees. For example,
Software.com completed the acquisitions of Mobility.Net Corporation, in April
1999, of Telarc, in October 1999, and of bCandid, in June 2000, and continue
to integrate these companies' products and personnel into Software.com's
organization. Software.com completed the acquisition of AtMobile in April
2000. AtMobile is a substantially larger organization than either Mobility.Net
or Telarc and therefore will present greater challenges in terms of
integration of products and employees. Integrating AtMobile or any other newly
acquired business, product or technology could be expensive and time-
consuming, could disrupt Software.com's ongoing business, and could distract
Software.com's management. Software.com may face competition for acquisition
targets from larger and more established companies with greater financial
resources. In addition, in order to finance any acquisitions, Software.com
might need to raise additional funds through public or private financings. In
that event, Software.com could be forced to obtain equity or debt financing on
terms that are not favorable to it and, in the case of equity financing, that
results in dilution to Software.com's stockholders. If Software.com is unable
to integrate AtMobile or any other newly acquired entities or technologies
effectively, Software.com's business, financial condition, and operating
results would suffer. In addition, any amortization of goodwill or other
assets, or other charges resulting from the costs of acquisitions could harm
Software.com's business, financial condition, and operating results.
Software.com's expanding international operations are subject to significant
uncertainties in addition to those it faces in domestic markets.
Revenues attributable to customers outside of North America accounted for
approximately 45% of Software.com's total revenues for the three months ended
June 30, 2000. If Software.com's revenues from international operations, and
particularly from its operations in the countries and regions on which
Software.com has focused its spending, do not exceed the expense of
establishing and maintaining these operations, its business, financial
condition, and operating results will suffer. Software.com continues to invest
significant financial and managerial resources to expand its sales and
marketing operations in international markets, and it must continue to do so
for the foreseeable future in order to succeed in these markets. In
particular, Software.com is making significant expenditures on expansion in
Europe and Asia, including the translation of its products for use in these
regions, and it expects these expenditures to continue or increase.
Software.com is expending the most resources in the countries and regions that
it thinks will be the most receptive markets for its products. Software.com
has only limited experience in international operations, and it may not be
able to capitalize on its
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investment in these markets. In this regard, Software.com faces certain risks
inherent in conducting business internationally, including:
. fluctuations in currency exchange rates;
. problems caused by the ongoing conversion of various European currencies
into a single currency, the Euro;
. any imposition of currency exchange controls;
. unexpected changes in regulatory requirements applicable to the Internet
or Software.com's business;
. difficulties and costs of staffing and managing international
operations;
. differing technology standards;
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonal variations in customer buying patterns or electronic messaging
usage;
. political instability or economic downturns;
. potentially adverse tax consequences; and
. reduced protection for intellectual property rights in certain
countries.
Any of these factors could harm Software.com's international operations and,
consequently, its business, financial condition, and operating results.
The loss of any of Software.com's senior management or key personnel could
harm its business, financial condition, and operating results.
Software.com's success depends on the skills, experience and performance of
its senior management and certain other key personnel, some of whom have
worked together for only a short period of time. With the exception of certain
key personnel who have joined Software.com in connection with acquisitions,
Software.com does not have employment agreements with any of its senior
management, and their employment is at will. The loss of the services of any
of Software.com's senior management or other key personnel could harm its
business, financial condition, and operating results.
If Software.com is unable to attract and retain highly skilled employees, its
financial and operational results may suffer.
Software.com's success depends on its ability to recruit, integrate, retain,
and motivate highly skilled sales and marketing, engineering, and quality
assurance personnel. In particular, Software.com's ability to attract and
retain qualified sales management personnel is critical to the success of its
planned expansion in Europe and Asia. Competition for these people in the
Internet messaging industry is intense, and Software.com may not be able to
successfully recruit, train, or retain qualified personnel. If Software.com
fails to retain and recruit necessary sales and marketing, engineering, and
quality assurance personnel, its ability to obtain new customers, develop new
products and provide acceptable levels of customer service could suffer, and
this could harm its business, financial condition, and operating results.
Software.com must adapt to rapid changes in technology and customer
preferences in order to remain competitive.
The Internet messaging industry is characterized by rapidly changing
technology, changes in customer and end user requirements and preferences, and
evolving industry standards and practices that could render its software
products obsolete. Software.com's success depends on its ability to enhance
its existing messaging and directory platform and products on a timely basis
and to develop new products that address the increasingly sophisticated and
varied needs of its customers and their end users. Software.com must
accurately forecast the features and functionality required by its target
customers and end users in order to continually improve its products. For
example, in response to customer and end user demand, Software.com has
recently developed for
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some of its products a voicemail feature based on Internet standards that
govern data transmission and receipt, known as Internet Protocol or "IP." In
addition, in response to the rapid development of opportunities in the
wireless sector, Software.com is aggressively pursuing the development and/or
acquisition of key technologies required by service providers in the wireless
sector. The development of proprietary technology and product enhancements has
required, and will continue to require, substantial expenditures and lead-
time, and Software.com may not always be able to keep pace with the latest
technological developments. If Software.com cannot, for technical, legal,
financial, or other reasons, adapt its products to changing customer or end
user requirements or industry standards in a cost-effective and timely
fashion, or if any new product, enhancement, or feature, including IP
voicemail or the wireless messaging products and technologies acquired in the
Telarc acquisition and the AtMobile.com acquisition is not favorably received
and accepted by customers and end users, Software.com's business, financial
condition, and operating results will suffer.
Software.com's software products may have unknown defects, which could harm
its reputation or impede market acceptance of its products.
Despite testing by Software.com, defects have in the past and may in the
future occur in its software. Complex software like Software.com's is
difficult to integrate with customers' existing systems and often contains
errors or defects, particularly when first introduced or when new versions or
enhancements are released. Although Software.com conducts extensive testing,
it may not discover software defects that affect its current or new products,
including new releases or editions of its InterMail products, the wireless
messaging products acquired in the Telarc acquisition or the wireless products
intended to be developed as a result of the AtMobile acquisition, until after
they are sold. Software.com also experiences difficulty in deploying software
at Software.com's customer's sites due to its complex nature. Any defect in
other software or hardware with which Software.com's software interacts could
be mistakenly attributed to Software.com's software by its customers or their
end users. These defects or perceptions of defects could cause Software.com's
customers and their end users to experience service interruptions. Because
Software.com's customers depend on its software to provide critical services
to their end users, any service interruptions could damage Software.com's
reputation or increase its product development costs, divert its product
development resources, cause it to lose revenue, or delay market acceptance of
its products, any of which could harm its business, financial condition, and
operating results.
The rapid growth of Software.com's operations could strain its resources and
harm its business, financial condition, and operating results.
Software.com's recent growth has placed and will continue to place a
significant strain on its management systems, infrastructure, and resources.
Software.com is increasing the scope of its operations and its customer base
domestically and internationally, and it has recently increased its headcount
substantially. From December 31, 1997 to July 31, 2000 Software.com's total
number of employees increased from 144 to 516. Software.com expects that it
will need to continue to improve its financial and managerial controls and
reporting systems and procedures, and will need to continue to expand, train,
and manage its workforce worldwide. Software.com expects that it will be
required to manage an increasing number of relationships with various
customers and other third parties. Software.com's ability to successfully
offer products and services and implement its business plan in a rapidly
evolving market requires an effective planning and management process. Any
failure to expand any of the foregoing areas efficiently and effectively could
harm Software.com's business, financial condition and operating results. In
addition, there can be no assurance that Software.com's business will continue
to grow at historical rates.
Software.com's business depends on continued growth in use and improvement of
the Internet and its customers' ability to operate their systems effectively.
The infrastructure, products, and services necessary to maintain and expand
the Internet may not be developed, and the Internet may not continue to be a
viable medium for secure and reliable personal and business communication, in
which case its business, financial condition, and operating results would be
harmed. Because Software.com is in the business of providing Internet
infrastructure applications, its future success depends on
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the continued expansion of, and reliance of consumers and businesses on, the
Internet for communications and other services. The Internet may not be able
to support an increased number of users or an increase in the volume of data
transmitted over it. As a result, the performance or reliability of the
Internet in response to increased demands will require timely improvement of
the high speed modems and other communications equipment that form the
Internet's infrastructure. The Internet has already experienced temporary
outages and delays as a result of damage to portions of its infrastructure.
The effectiveness of the Internet may also decline due to delays in the
development or adoption of new technical standards and protocols designed to
support increased levels of activity and due to the transmission of computer
viruses.
In addition to problems that may affect the Internet as a whole,
Software.com's customers have in the past experienced some interruptions in
providing their Internet-related services, including services related to
Software.com's software products. Software.com believes that these
interruptions will continue to occur from time to time. Software.com's
revenues depend substantially upon the number of end-users who use the
services provided by its customers. Software.com's business may suffer if its
customers experience frequent or long system interruptions that result in the
unavailability or reduced performance of their systems or networks or reduce
their ability to provide services to their end users.
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving, and Software.com may
not be able to adequately address this market.
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving and is characterized
by an increasing number of market entrants that have introduced or developed,
or are in the process of introducing or developing, products that facilitate
wireless communication and the delivery of Internet-based services through
wireless devices. Software.com intends to devote significant efforts and
resources on developing and marketing infrastructure applications for wireless
communications and the wireless delivery of Internet-based content and
services. Software.com's acquisitions of Telarc and AtMobile and
Software.com's proposed merger with Phone.com were undertaken in part to
address opportunities in that market. If wireless devices are not widely
adopted for data communications or mobile delivery of Internet-based services,
Software.com would not realize expected benefits from these acquisitions and
proposed merger and its business would suffer.
In addition, the emerging nature of the market for wireless communications
and Internet-based services via wireless devices may lead prospective
customers to postpone adopting wireless devices or using wireless technology.
As a result, the life cycle of Software.com's wireless products is difficult
to estimate. Software.com 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 Software.com's
business would suffer. In addition, Software.com cannot predict the rate of
adoption by wireless subscribers of these services or the price they will be
willing to pay for these services. As a result, it is extremely difficult to
predict the pricing of these services and the future size and growth rate of
the wireless market.
Software.com's service provider customers face implementation and support
challenges in expanding wireless communications and introducing Internet-based
services via wireless devices, which may slow their rate of adoption or
implementation of the services Software.com's wireless messaging products
enable. Historically, service providers have been relatively slow to implement
new complex services such as wireless messaging services and wireless delivery
of Internet content. In addition, service providers may encounter greater
customer service demands to support Internet-based services via wireless
devices than they do for their traditional Internet services. Software.com has
limited or no control over the pace at which service providers implement these
new services. The failure of service providers to introduce and support
services utilizing Software.com's products in a timely and effective manner
could harm its business.
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Software.com's intellectual property or proprietary rights could be
misappropriated, which could force Software.com to become involved in
expensive and time-consuming litigation.
Software.com's ability to compete and continue to provide technological
innovation is substantially dependent upon internally developed technology,
including the entire InterMail product line. Software.com relies on a
combination of copyright, trade secret, and trademark law to protect its
technology, although it believes that other factors such as the technological
and creative skills of its personnel, new product developments, frequent
product and feature enhancements, and reliable product support and maintenance
are more essential to maintaining a technology leadership position. As a
result of the AtMobile acquisition, Software.com acquired one patent and a
number of patent applications, specifically for wireless subject matter.
Software.com generally enters into confidentiality and nondisclosure
agreements with its employees, consultants, prospective customers, licensees,
and corporate partners. In addition, Software.com control access to and
distribution of its software, documentation, and other proprietary
information. Except for certain limited escrow arrangements, Software.com does
not provide third parties with access to the source code for Software.com's
products. Despite Software.com's efforts to protect its intellectual property
and proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use Software.com's products or technology. Effectively policing the
unauthorized use of Software.com's products is time consuming and costly, and
there can be no assurance that the steps taken by Software.com will prevent
misappropriation of Software.com's technology, particularly in foreign
countries where in many instances the local laws or legal systems do not offer
the same level of protection as in the United States.
If others claim that Software.com's products infringe their intellectual
property rights, Software.com may be forced to seek expensive licenses,
reengineer its products, engage in expensive and time-consuming litigation, or
stop marketing its products.
Software.com attempts to avoid infringing known proprietary rights of third
parties in its product development efforts. However, Software.com does not
regularly conduct comprehensive patent searches to determine whether the
technology used in its products infringes patents held by third parties. There
are many issued patents as well as patent applications in the electronic
messaging field. Because patent applications in the United States are not
publicly disclosed until the patent is issued, applications may have been
filed which relate to Software.com's software products. In addition,
Software.com's competitors and other companies as well as research and
academic institutions have conducted research for many years in the electronic
messaging field, and this research could lead to the filing of further patent
applications. If Software.com were to discover that its products violated or
potentially violated third party proprietary rights, it might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can
Software.com be certain that any licenses would be available on commercially
reasonable terms.
Substantial litigation regarding intellectual property rights exists in the
software industry, and Software.com expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in its industry segments grows and the functionality of software
products in different industry segments overlaps. Any third-party infringement
claims could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product and service delays or
require Software.com to enter into royalty or licensing agreements. Any
royalty or licensing arrangements, if required, may not be available on terms
acceptable to Software.com, if at all. A successful claim of infringement
against Software.com and its failure or inability to license the infringed or
similar technology could have a material adverse effect on its business,
financial condition, and results of operations.
The geographic disbursement of Software.com's senior management could impede
their ability to communicate effectively.
Software.com's senior management and key personnel are based in several
different offices, which makes coordination of projects more difficult. For
example, John MacFarlane, Software.com's Chief Executive Officer,
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and Amy Staas, Software.com's Chief Financial Officer, are based at
Software.com's headquarters in Santa Barbara, California, while Valdur Koha,
Software.com's President, and John Poulack, Software.com's Senior Vice
President, Operations, are based at Software.com's office in Lexington,
Massachusetts. In addition, acquisitions and Software.com's proposed merger
with Phone.com may have the effect of increasing geographic disbursement of
senior management and key personnel. The geographic disbursement of
Software.com's senior management team and key personnel could impede their
ability to communicate effectively or work together efficiently, either of
which could harm Software.com's business, financial condition, and operating
results.
The security provided by Software.com's messaging products could be breached,
in which case Software.com's reputation, business, financial condition, and
operating results could suffer.
The occurrence or perception of security breaches could harm Software.com's
business, financial condition, and operating results. A fundamental
requirement for online communications is the secure transmission of
confidential information over the Internet. Third parties may attempt to
breach the security provided by Software.com's messaging products, or the
security of its customers' internal systems. If they are successful, they
could obtain confidential information about Software.com's customers' end
users, including their passwords, financial account information, credit card
numbers, or other personal information. Software.com's customers or their end
users may file suits against it for any breach in security. Even if
Software.com is not held liable, a security breach could harm Software.com's
reputation, and even the perception of security risks, whether or not valid,
could inhibit market acceptance of Software.com's products. Despite
Software.com's implementation of security measures, its software is vulnerable
to computer viruses, electronic break-ins and similar disruptions, which could
lead to interruptions, delays, or loss of data. Software.com may be required
to expend significant capital and other resources to license encryption or
other technologies to protect against security breaches or to alleviate
problems caused by these breaches. In addition, Software.com's customers might
decide to stop using Software.com's software if their end users experience
security breaches.
Future governmental regulation of the Internet could limit Software.com's
ability to conduct its business.
Although there are currently few laws and regulations directly applicable to
the Internet and commercial messaging, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust, and characteristics and quality
of products and services. Further, the growth and development of the market
for online messaging may prompt calls for more stringent consumer protection
laws that may impose additional burdens on those companies, including
Software.com, that conduct business online. The adoption of any additional
laws or regulations may impair the growth of the Internet or commercial online
services, which would decrease the demand for Software.com's services and
could increase its cost of doing business or otherwise harm Software.com's
business, financial condition, and operating results. Moreover, the
applicability of existing laws governing property ownership, sales and other
taxes, libel, and personal privacy to the Internet is uncertain and may take
years to resolve.
Software.com's stock price may be volatile, exposing it 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,
Software.com's stock price could decline below current levels regardless of
its actual operating performance. Furthermore, the historical trading volume
of Software.com's stock is not indicative of any future trading volume of
Software.com's stock because a substantial portion of shares were not eligible
for sale until recently. Therefore, if a large number of shares of
Software.com's stock are sold in a short period of time, Software.com's 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. Software.com may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert
Software.com's management's time and resources, which could harm its business,
financial condition, and operating results.
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THE PHONE.COM SPECIAL MEETING
This joint proxy statement/prospectus is furnished in connection with the
solicitation of proxies from holders of Phone.com common stock by the
Phone.com board of directors for use at the special meeting of Phone.com
stockholders.
Time and Place; Purpose
The special meeting will be held at , on , 2000, starting at
. At the special meeting, Phone.com common stockholders will be asked to
consider and vote upon:
The merger proposals
. the issuance of shares of Phone.com common stock pursuant to the merger
agreement ("Proposal One"); and
. an amendment to Phone.com's certificate of incorporation to change the
name of Phone.com to at the effective time of the proposed merger
with Software.com ("Proposal Two").
Other proposals
. an amendment to Phone.com's certificate of incorporation to increase the
number of authorized shares of Phone.com common stock from 250,000,000 to
1,000,000,000 ("Proposal Three"); and
. any other business as may properly come before the special meeting.
For more information regarding the proposals described above, see "Proposals
to Phone.com Stockholders To Be Voted on at the Phone.com Special Meeting."
Record Date and Outstanding Shares
The Phone.com board of directors has fixed the close of business on ,
as the record date for purposes of voting at the special meeting. Only holders
of record of shares of common stock on the record date are entitled to notice
of and to vote at the special meeting. On the record date, there were
shares of Phone.com common stock outstanding and entitled to vote at the
special meeting held by stockholders of record.
Vote and Quorum Required
Each holder of record, as of the record date, of common stock is entitled to
cast one vote per share. The presence, in person or by proxy, of the holders
of a majority of the outstanding shares of common stock entitled to vote is
necessary to constitute a quorum at the special meeting.
The affirmative vote, in person or by proxy, of at least a majority of the
votes properly cast, is required to approve the share issuance. The
affirmative vote, in person or by proxy, of a majority of the shares
outstanding as of the record data is required to approve and adopt the
amendments to Phone.com's certificate of incorporation to change its name and
increase the share capital. As of July 31, 2000, directors, executive officers
of Phone.com and their affiliates beneficially owned an aggregate of
10,797,288 shares of Phone.com common stock entitled to vote at the Phone.com
special meeting (including shares issuable upon the exercise of options
exercisable within 60 days of July 31, 2000) or approximately 13.0% of the
shares of Phone.com common stock outstanding and entitled to vote on such
date.
Stockholders who beneficially own shares of Phone.com common stock
representing approximately 13.0% of the voting power of Phone.com, as of July
31, 2000, entered into voting agreements with Software.com on August 8, 2000.
Under the voting agreement, the stockholders have agreed to vote in favor of
the share issuance and the name change amendment proposals. See "Related
Agreements--Phone.com Voting Agreement."
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How Shares Will Be Voted at the Special Meeting
All shares of common stock represented by properly executed proxies received
before or at the special meeting, and not revoked, will be voted as specified
in the proxies. Properly executed proxies that do not contain voting
instructions will be voted "FOR" the adoption of the proposals set forth in
the accompanying notice of special meeting.
A properly executed proxy marked "ABSTAIN" with respect to any proposal will
be counted as present for purposes of determining whether there is a quorum at
the special meeting. Abstentions, however, will have the same effect as a vote
against the adoption of each of the proposals.
Under Nasdaq National Market rules, your broker cannot vote your shares
without specific instructions from you. Unless you follow the directions your
broker provides to you regarding how to instruct your broker to vote your
shares, your shares will not be voted and will be considered "broker non-
votes." Broker non-votes are counted as present for purposes of determining
whether there is a quorum for the special meeting. Broker non-votes will not
be counted in determining the number of votes for or against the proposed
share issuance and will have the same effect as a vote against the approval of
the name change and increase in share capital.
Phone.com's board of directors is not currently aware of any business to be
acted upon at the special meeting other than the proposals described in the
accompanying notice of special meeting. If, however, other matters are
properly brought before the special meeting, or any adjournments or
postponements of the meeting, the people appointed as proxies will have
discretion to vote the shares represented by duly executed proxies according
to their best judgment.
The people named as proxies by a stockholder may propose and vote for one or
more adjournments of the special meeting to permit further solicitations of
proxies in favor of approval of the share issuance and name change proposals;
except that no proxy which is voted against the approval of the share issuance
and name change proposals will be voted in favor of any such adjournment.
Methods of Voting
All stockholders of record may vote by mail. Stockholders of record can also
vote by telephone or electronically over the Internet. Stockholders who hold
their shares through a bank or broker can vote by telephone or electronically
over the Internet if that option is offered by the bank or broker.
. Voting by mail. Stockholders of record may sign, date and mail their
proxies in the postage-paid envelope provided.
. Voting by telephone or Internet. Stockholders of record may vote by using
the toll-free number listed on the proxy card or electronically over the
Internet. The telephone and Internet voting procedures verify
stockholders through the use of a control number that is provided on each
proxy card. Both procedures allow you to vote your shares and to confirm
that your shares have been properly recorded. Please see your proxy card
for specific instructions.
How to Revoke a Proxy
A stockholder may revoke his or her proxy at any time before its use by
delivering to Phone.com's secretary a signed notice of revocation or a later-
dated signed proxy or by attending the special meeting and voting in person.
Attendance at the special meeting will not in itself constitute the revocation
of a proxy.
Solicitation of Proxies
The cost of solicitation of proxies for the special meeting will be paid by
Phone.com. In addition to solicitation by mail, arrangements will be made with
brokerage houses and other custodians, nominees and fiduciaries to send proxy
material to beneficial owners; and Phone.com will, upon request, reimburse
them for their reasonable
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expenses in so doing. Phone.com has retained to aid in the solicitation of
proxies and to verify records related to the solicitations. will receive a
fee of approximately $ plus reasonable out-of-pocket expenses for such
services. Phone.com or its representatives may request by telephone,
facsimile, electronic mail, telegram or over the Internet the return of proxy
cards in order to ensure sufficient representation at the special meeting. The
extent to which this will be necessary depends entirely upon how promptly
proxy cards are returned. You are urged to send in your proxies without delay.
Recommendation of the Phone.com Board of Directors
The Phone.com board of directors believes that the issuance of shares of
Phone.com common stock pursuant to the merger agreement and the amendment to
Phone.com's certificate of incorporation to change the name of Phone.com and
the increase in share capital are in the best interests of, and the terms of
the merger and the merger agreement are fair to, and in the best interests of,
Phone.com and the stockholders of Phone.com. Phone.com's board of directors
has, by unanimous vote, approved the share issuance, the name change
amendment, and the increase in share capital and unanimously recommends that
Phone.com stockholders vote "FOR" the approval of the share issuance and name
change proposals. In addition, the Phone.com board of directors recommends a
vote "FOR" the increase in share capital.
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THE SOFTWARE.COM SPECIAL MEETING
This joint proxy statement/prospectus is furnished in connection with the
solicitation of proxies from holders of Software.com common stock by the
Software.com board of directors for use at the special meeting of Software.com
stockholders.
Time and Place; Purpose
The special meeting will be held at the Hotel Du Pont, 11th and Market
Streets, Wilmington, Delaware, 19801, on , 2000, starting at . At
the special meeting, Software.com common stockholders will be asked to
consider and vote upon:
. a proposal to adopt the merger agreement; and
. any other business as may properly come before the special meeting.
The merger agreement is included as Annex A to this joint proxy
statement/prospectus.
Record Date and Outstanding Shares
The Software.com board of directors has fixed the close of business on
, as the record date for purposes of voting at the special meeting. Only
holders of record of shares of common stock on the record date are entitled to
notice of and to vote at the special meeting. On the record date, there were
shares of Software.com common stock outstanding and entitled to vote at
the special meeting held by stockholders of record.
Vote and Quorum Required
Each holder of record, as of the record date, of common stock is entitled to
cast one vote per share. The presence, in person or by proxy, of the holders
of a majority of the outstanding shares of common stock entitled to vote is
necessary to constitute a quorum at the special meeting.
The affirmative vote, in person or by proxy, of at least a majority of the
shares of Software.com common stock outstanding on the record date, is
required to adopt the merger agreement. As of July 31, 2000, directors,
executive officers of Software.com and their affiliates beneficially owned an
aggregate of 12,719,628 shares of Software.com common stock entitled to vote
at the special meeting (including shares issuable upon the exercise of options
exercisable within 60 days of July 31, 2000) or approximately 25.5% of the
shares of Software.com common stock outstanding and entitled to vote on such
date.
Stockholders who beneficially own shares of Software.com common stock
representing approximately 19.1% of the voting power of Software.com, as of
July 31, 2000, have entered into voting agreements with Phone.com on August 8,
2000. Under the voting agreement, the stockholders have agreed to vote in
favor of the adoption of the merger agreement. See "Related Agreements--
Software.com Voting Agreement."
How Shares Will Be Voted at the Special Meeting
All shares of common stock represented by properly executed proxies received
before or at the special meeting, and not revoked, will be voted as specified
in the proxies. Properly executed proxies that do not contain voting
instructions will be voted "FOR" the adoption of the proposals set forth in
the accompanying notice of special meeting.
A properly executed proxy marked "ABSTAIN" with respect to any proposal will
be counted as present for purposes of determining whether there is a quorum at
the special meeting. Abstentions, however, will have the same effect as a vote
against the adoption of each of the proposals.
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Under Nasdaq National Market rules, your broker cannot vote your shares
without specific instructions from you. Unless you follow the directions your
broker provides to you regarding how to instruct your broker to vote your
shares, your shares will not be voted and will be considered "broker non-
votes." Broker non-votes are counted as present for purposes of determining
whether there is a quorum for the special meeting. Broker non-votes will have
the same effect as a vote against the adoption of the merger agreement.
Software.com's board of directors is not currently aware of any business to
be acted upon at the special meeting other than the proposal described in the
accompanying notice of special meeting. If, however, other matters are
properly brought before the special meeting, or any adjournments or
postponements of the meeting, the people appointed as proxies will have
discretion to vote the shares represented by duly executed proxies according
to their best judgment.
The people named as proxies by a stockholder may propose and vote for one or
more adjournments of the special meeting to permit further solicitations of
proxies in favor of the adoption of the merger agreement; except that no proxy
which is voted against the the adoption of the merger agreement will be voted
in favor of any such adjournment.
Methods of Voting
All stockholders of record may vote by mail. Stockholders of record can also
vote by telephone or electronically over the Internet. Stockholders who hold
their shares through a bank or broker can vote by telephone or electronically
over the Internet if that option is offered by the bank or broker.
. Voting by mail. Stockholders of record may sign, date and mail their
proxies in the postage-paid envelope provided.
. Voting by telephone or Internet. Stockholders of record may vote by using
the toll-free number listed on the proxy card or electronically over the
Internet. The telephone and Internet voting procedures verify
stockholders through the use of a control number that is provided on each
proxy card. Both procedures allow you to vote your shares and to confirm
that your shares have been properly recorded. Please see your proxy card
for specific instructions.
How to Revoke a Proxy
A stockholder may revoke his or her proxy at any time before its use by
delivering to Software.com's secretary a signed notice of revocation or a
later-dated signed proxy or by attending the special meeting and voting in
person. Attendance at the special meeting will not in itself constitute the
revocation of a proxy.
Solicitation of Proxies
The cost of solicitation of proxies for the special meeting will be paid by
Software.com. In addition to solicitation by mail, arrangements will be made
with brokerage houses and other custodians, nominees and fiduciaries to send
proxy material to beneficial owners; and Software.com will, upon request,
reimburse them for their reasonable expenses in so doing. Software.com has
retained to aid in the solicitation of proxies and to verify records
related to the solicitations. will receive a fee of approximately $ plus
reasonable out-of-pocket expense for such services. Software.com or its
representatives may request by telephone, facsimile, electronic mail, telegram
or over the Internet the return of proxy cards in order to ensure sufficient
representation at the special meeting. The extent to which this will be
necessary depends entirely upon how promptly proxy cards are returned. You are
urged to send in your proxies without delay.
Dissenter's or Appraisal Rights
Dissenter's or appraisal rights are not available with respect to a merger
or consolidation by a corporation the shares of which are either listed on a
national securities exchange or Nasdaq or held of record by more than
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2,000 stockholders if such stockholders are required to receive only shares of
the surviving corporation, shares of any other corporation which are either
listed on a national securities exchange or Nasdaq or held of record by more
than 2,000 holders, cash in lieu of fractional shares or a combination of the
foregoing. Therefore, stockholders of Software.com will not able to exercise
any appraisal rights in connection with this merger.
Recommendation of the Software.com Board of Directors
The Software.com board of directors believes that the terms of the merger
and the merger agreement are fair to, and in the best interests of,
Software.com and the stockholders of Software.com and Software.com's board of
directors has, by unanimous vote, approved the merger agreement and the
transactions contemplated by the merger agreement, and unanimously recommends
that Software.com stockholders vote "FOR" the adoption of the merger
agreement.
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THE MERGER
This section of the joint proxy statement/prospectus describes the proposed
merger. Although Phone.com and Software.com believe that the description in
this section covers the material terms of the merger and the related
transactions, this summary may not contain all of the information that is
important to you. You should carefully read the entire joint proxy
statement/prospectus for a more complete understanding of the merger.
General
The merger agreement provides that, at the effective time of the merger,
Silver Merger Sub, a wholly-owned subsidiary of Phone.com, will merge with and
into Software.com, with Software.com continuing in existence as the surviving
corporation. Each share of Software.com common stock issued and outstanding at
the effective time of the merger will be converted into 1.6105 shares of
Phone.com common stock. Upon completion of the merger, Software.com will be a
wholly-owned subsidiary of Phone.com and market trading of Software.com common
stock will cease.
Background of the Merger
In light of the rapid changes in the wireless and wireline
telecommunications and Internet industries, it had become a regular practice
of the board of directors of both Phone.com and Software.com to review
periodically with senior management the relative position of each company in
these industries, changes in the competitive landscape and technology as well
as strategic alternatives available to each company in order to remain
competitive and enhance stockholder value. In connection with this ongoing
review of long-term strategic plans, each company had been considering a wide
range of strategic options, including internal growth strategies, growth
through various strategic alliances, investments, acquisitions or business
combinations. In furtherance of these objectives, from time to time each
company has had contact with various parties to explore on a preliminary basis
several of these alternatives, including some discussions with one or more
parties during the time periods described below.
During the fourth quarter of calendar year 1999, Phone.com evaluated
products from various developers of electronic mail software, including from
Software.com, for the purpose of adding electronic mail applications to its
product line.
On January 14, 2000, Jeff Damir, Vice President of Phone.com, and Obie
Oberoi, Director of Business Development of Phone.com, met with Tom Cullen,
Senior Vice President of World Wide Sales of Software.com, and other
representatives of Software.com for the purpose of discussing a potential
customer/supplier relationship between the two companies. At this meeting, the
representatives of Phone.com stated that Phone.com was interested in
incorporating Software.com's InterMail Mx product into Phone.com's product
line. The representatives of both companies discussed Phone.com's use of the
InterMail Mx product, but were unable to reach an agreement.
On January 21, 2000, Alain Rossmann, Chairman and Chief Executive Officer of
Phone.com, met with John L. MacFarlane, Chief Executive Officer of
Software.com, to discuss Software.com's electronic mail software and the
possibility of including that software in Phone.com's products. Mr. Rossmann
and Mr. MacFarlane discussed a potential customer/supplier relationship
between the two companies but were unable to reach any agreement. Mr. Rossmann
also explained at this meeting that Phone.com, as part of its growth
strategies, periodically explores acquisitions, business combinations and
other strategic transactions. Mr. Rossmann then discussed with Mr. MacFarlane
whether Software.com would be interested in exploring the possibility of a
strategic transaction with Phone.com, including a business combination. Mr.
MacFarlane indicated that Software.com was presently focused on other types of
growth strategies and that Software.com was not interested in exploring a
possible strategic transaction with Phone.com.
In connection with Phone.com's acquisition of Onebox.com, Inc., or Onebox,
Phone.com learned during its due diligence investigation of Onebox that
Software.com was an important supplier of software to Onebox.
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On April 4, 2000, Mr. Rossmann, Ross Bott, former Chief Executive Officer of
Onebox and current Chief Operating Officer of Phone.com, and Mike Mulica Vice
President of Worldwide Sales, Consulting and Support for Phone.com, met with
Mr. McFarlane, Mr. Cullen and Adarbad Master, Chief Technology Officer of
Software.com. At this meeting, the participants discussed Software.com's
future customer/supplier relationship with Onebox following its pending
acquisition by Phone.com, including a proposed amendment to the existing
agreement. At this meeting, Mr. Rossmann again raised with Mr. MacFarlane the
possibility of Phone.com and Software.com exploring a strategic transaction
including a business combination. Mr. MacFarlane declined to pursue
discussions concerning a potential business combination but instead indicated
a desire to expand the existing customer/supplier relationship.
At its regularly scheduled board meeting on April 12, 2000, Mr. Rossmann
briefed the board of directors of Phone.com on recent discussions with various
entities, including Software.com.
On April 13, 2000, Software.com and Onebox entered into an amendment to
their existing contract. On April 14, 2000, Phone.com completed its
acquisition of Onebox.
During the remainder of April 2000 and May 2000, there were several
telephone discussions among representatives of Phone.com and Software.com
regarding expansion of their customer/supplier relationship, possible
strategic relationships and transactions and the strategic objectives that
could be achieved through such relationships and transactions.
On June 1, 2000, Mr. MacFarlane advised the Software.com board of directors
that discussions had been held between Phone.com and Software.com regarding
expanding the customer/supplier relationship with Phone.com, including the
possibility of developing a strategic relationship with Phone.com.
On June 6, 2000, Mr. Rossmann called Mr. MacFarlane and suggested that they
meet again to discuss the potential benefits of expanding the
customer/supplier relationship between the two companies and the benefits of a
strategic transaction including a possible business combination between
Phone.com and Software.com. Mr. MacFarlane agreed to meet with Mr. Rossmann on
June 13, 2000. During their June 13, 2000 meeting, Mr. Rossmann and Mr.
MacFarlane discussed certain potential strategic transactions including a
business combination of Phone.com and Software.com, although no agreement was
reached on how to proceed.
On June 15, 2000, Mr. MacFarlane telephoned Mr. Rossmann and stated that
Software.com would agree to explore with Phone.com in more detail the
possibility of a business combination transaction. During this discussion, Mr.
MacFarlane stated that, given the relatively comparable market capitalization
of the two companies, any possible business combination transaction should be
structured as a "merger of equals," after which the shareholders of Phone.com
and Software.com would each, collectively, own approximately 50 percent of the
resulting company. Mr. Rossmann and Mr. MacFarlane agreed to discuss such a
potential business combination with their respective boards of directors and
management.
On June 16, 2000, Mr. Rossmann and Kennen Hagen, Vice President of Corporate
Development of Phone.com, met with representatives of Credit Suisse First
Boston. Credit Suisse First Boston had previously acted as financial advisor
to Phone.com in connection with its initial public offering and other
transactions, including its acquisition of Onebox. At this meeting the
representatives of Phone.com discussed certain potential strategic
transactions with the representatives of Credit Suisse First Boston including
a possible business combination transaction with Software.com.
On June 18, 2000, in a status update to the board of directors on several
business items, Mr. MacFarlane briefed the Software.com board of directors on
recent discussions with Phone.com regarding a potential strategic
relationship.
On June 22, 2000, representatives of Phone.com and Credit Suisse First
Boston again met to discuss strategic transactions including a possible
business combination transaction between Phone.com and Software.com.
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Also on June 22, 2000, Mr. Mulica met with Mr. Cullen to discuss the
synergies and potential impact on product sales of a possible business
combination transaction between Phone.com and Software.com. At this meeting,
Mr. Mulica and Mr. Cullen agreed that the potential synergies from such a
business combination could potentially have a strong positive impact on the
product sales of both companies. Mr. Mulica so advised members of his senior
management.
On June 26, 2000, Mr. MacFarlane met with other members of the
Software.com's senior management for the purpose of informing them of the need
to evaluate a potential business combination transaction with Phone.com. Mr.
Cullen advised members of his management team of his June 22, 2000, meeting
with Mr. Mulica. Also on June 26, 2000, Mr. Rossmann telephoned Mr. MacFarlane
to discuss the potential business combination transaction between Phone.com
and Software.com and agreed to meet with Mr. MacFarlane on June 28, 2000.
On June 28, 2000, Mr. Rossmann met with Mr. MacFarlane to discuss a
potential "merger of equals" business combination transaction between
Phone.com and Software.com, including possible transaction structures and
proposed management of the combined company.
On July 5, 2000, Mr. Rossmann and Alan Black, Chief Financial Officer, Vice
President of Finance and Administration and Treasurer of Phone.com, met with
Mr. MacFarlane and other members of Software.com's senior management. During
this meeting, Mr. Rossmann and Mr. Black provided an overview of Phone.com's
business and strategies for future growth. On July 6, 2000, Mr. Rossmann held
several meetings with individual members of Software.com's senior management
for the purposes of introducing himself to such individuals and to analyze the
potential benefits of a business combination between Phone.com and
Software.com.
On July 10, 2000, Mr. Hagen met with Valdur Koha, President of Software.com.
At this meeting, Mr. Hagen and Mr. Koha discussed in more detail a potential
"merger of equals" business combination transaction between Phone.com and
Software.com. Following this meeting, Phone.com and Software.com executed a
confidentiality agreement, effective as of June 9, 2000, covering the exchange
of nonpublic information between the companies for the purpose of evaluating a
strategic transaction. The parties agreed to continue their respective due
diligence investigations.
On July 11, 2000 and July 12, 2000 Mr. MacFarlane held several meetings with
individual members of Phone.com's senior management for the purposes of
introducing himself and providing a business overview of Software.com.
On July 12, 2000, at its regularly scheduled meeting, Mr. Rossmann briefed
the board of directors of Phone.com on recent discussions with Software.com.
On July 13, 2000, Mr. Black and Mr. Mulica met with Mr. MacFarlane, Amy
Staas, Vice President, Finance and Chief Financial Officer of Software.com,
and other members of Software.com's management. At this meeting, the
representatives of each company discussed potential synergies and financial,
accounting and tax issues related to the potential business combination
between Phone.com and Software.com.
During the week of July 17, 2000, representatives of Phone.com held several
discussions with representatives of Software.com regarding the principal
business terms of a proposed "merger of equals" business combination. The
contemplated terms provided for a share for share exchange of Software.com
shares for Phone.com shares following which Phone.com stockholders and
Software.com stockholders would each, collectively, own approximately 50
percent of the resulting company. The exact exchange ratio would be based on
the relative capitalization of each company as determined during a measurement
period ending prior to the execution of definitive documentation. The terms
discussed also provided that the business combination would be intended to be
a tax-free reorganization and accounted for as a pooling of interests.
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Also during the week of July 17, 2000, representatives of Software.com met
with representatives of Morgan Stanley for the purpose of discussing Morgan
Stanley's engagement as Software.com's financial advisor for a potential
business combination transaction between Phone.com and Software.com.
From July 19 through August 8, 2000, representatives of Phone.com and
Software.com, including their financial, legal and accounting advisors,
conducted extensive mutual due diligence concerning businesses and operations
of the other party.
On July 21, 2000, Software.com held a regularly scheduled meeting of its
board of directors to discuss, among other things, a potential business
combination with Phone.com and the contemplated terms of such combination.
On July 24, 2000, Skadden, Arps, Slate, Meagher & Flom LLP, Phone.com's
legal adviser, delivered a draft merger agreement and related draft documents
to Software.com and Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Software.com's legal advisor.
From July 24 through August 8, 2000, representatives of Phone.com and
Software.com, together with their financial and legal advisors, held numerous
calls and face-to-face meetings to discuss and negotiate the terms and
conditions of the merger agreement, the stock option agreements, the voting
agreements and other related documents and various other legal, financial and
regulatory issues, including, among other things, the treatment of employee
benefit plans, the anticipated tax treatment of the proposed transaction and
the proper accounting treatment of the proposed transaction.
On August 2, 2000, the Phone.com board of directors held a special meeting
to discuss the potential business combination with Software.com. At this
meeting, management briefed the board on its discussions with Software.com. In
addition, management, Skadden, Arps, Slate, Meagher & Flom, LLP and KPMG LLP
discussed the benefits and issues related to the merger, the terms of the
merger agreement and related documents, and the results of due diligence. Also
at this meeting, representatives of Phone.com's financial advisors reviewed
with the board its analysis of the financial terms of the proposed
transaction. In addition, management and representatives of Phone.com's legal
and financial advisors reviewed the proposed terms of the stockholder rights
plan with the board.
On August 2, 2000, the Software.com board of directors held a special
meeting. At the meeting, Mr. MacFarlane updated the board on the status of
discussions with Phone.com regarding a potential business combination. The
directors discussed the benefits and issues associated with a combination of
the companies. The directors instructed Mr. MacFarlane to pursue further
discussions and negotiations with Phone.com.
On August 5, 2000, the Software.com board of directors held a special
meeting. At the meeting, Mr. MacFarlane updated the board on the status of
negotiations with Phone.com and outlined the material terms of the proposed
transaction. Wilson Sonsini Goodrich & Rosati, Professional Corporation,
discussed the board's fiduciary duties in considering a strategic business
combination and discussed the terms of the merger agreement and related
documents. In addition, Morgan Stanley discussed the proposed merger from a
financial perspective. Management and representatives of Software.com's legal
and financial advisors also reviewed the proposed terms of the stockholder
rights agreement with the board.
On August 7, 2000, the Phone.com board held a special meeting to review the
terms of the proposed business combination. At this meeting, Skadden, Arps,
Slate, Meagher & Flom LLP advised the board regarding its fiduciary duties
with respect to any potential merger transaction involving Software.com.
Representatives of management and Skadden, Arps, Slate, Meagher & Flom LLP
updated the board on the status of negotiations with Software.com. Several
presentations were then made by Phone.com senior management regarding, among
other things, an overview of Software.com, strategies for the combined company
and the results of due diligence. Representatives of Phone.com's financial
advisor then reviewed with the board its updated financial analysis relating
to Software.com. In addition, representatives of management and Skadden, Arps,
Slate, Meagher & Flom LLP reviewed with the board the terms of the merger
agreement and related documents including the stockholder
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rights plan. Also at this meeting, Mr. Rossmann reported to the board that
Donald J. Listwin, Executive Vice President of Cisco Systems and a member of
Software.com's board of directors, was interested in joining the combined
company as its Chief Executive Officer and a member of its board of directors.
The directors then discussed the possibility of Mr. Listwin joining the
combined company as it's Chief Executive Officer and Mr. Rossmann continuing
as Chairman of the combined company. The directors then agreed to meet with
Mr. Listwin later in the day. Following such meetings, Mr. Listwin agreed to
join the combined company as its Chief Executive Officer.
On August 7, 2000, the Software.com board of directors held a special
meeting. At the meeting, Mr. MacFarlane updated the board on the status of
negotiations with Phone.com and management's due diligence review. Also at
this meeting, Mr. Listwin advised the board of directors that he had agreed to
join the combined company as its Chief Executive Officer and a member of its
board of directors. Software.com's legal advisors further discussed the terms
of the merger agreement and related documents. In addition, Software.com's
financial advisors further reviewed the financial terms of the proposed
merger.
On August 8, 2000, the Phone.com board of directors held a special meeting
to review the terms of the proposed business combination. At the meeting
Skadden, Arps, Slate, Meagher & Flom LLP advised the Phone.com board of
directors regarding its fiduciary duties with respect to any potential merger
transaction involving Software.com. Representatives of management and Skadden,
Arps, Slate, Meagher & Flom LLP reviewed the terms of the proposed merger
agreement, the stock option agreements, the voting agreement, the reciprocal
reseller license and services memorandum of understanding and the stockholder
rights agreement. The board of directors also discussed the significant and
potential effects of the break-up fee, the stock option agreement and the
stockholder rights agreement. Representatives of Credit Suisse First Boston
reviewed with the board its financial analyses of the exchange ratio provided
for in the proposed merger agreement and rendered its opinion to the effect
that, as of the date of its opinion and based on and subject to the matters
discussed in its opinion, the exchange ratio was fair, from a financial point
of view, to Phone.com. After further discussions and considerations, the
Phone.com board of directors unanimously determined that the merger was fair
to Phone.com and approved the merger agreement, the stock option agreements,
the voting agreements, the reciprocal reseller license and services memorandum
of understanding and the stockholder rights agreement and resolved to
recommend that the Phone.com stockholders approve the share issuance in the
merger and related transactions.
On August 8, 2000, the Software.com board of directors held a special
meeting during which senior management and legal and financial advisors of
Software.com reviewed the following:
. the status of negotiations with Phone.com;
. the potential benefits and risks of the transaction with Phone.com; and
. the principal terms of the merger agreement and related documents.
Software.com's legal advisors further discussed the terms of the merger
agreement and related documents. Software.com's financial advisors reviewed
the financial analyses relating to, the proposed merger. In addition, at the
meeting Software.com's financial advisors provided their opinion that as of
August 8, 2000 and based on and subject to various conditions in its opinion,
the exchange ratio pursuant to the merger agreement was fair, from a financial
point of view, to the holders of shares of Software.com common stock.
Following discussion, the Software.com board of directors determined that the
proposed merger was advisable and approved the merger agreement, the stock
option agreements, the voting agreements, the reciprocal reseller license and
services memorandum of understanding, and the stockholder rights agreement and
resolved to recommend that Software.com stockholders adopt the merger
agreement and approve the merger.
Following the Software.com board meeting, the merger agreement, the voting
agreements, the stock option agreements and the reciprocal reseller license
and services memorandum of understanding were executed. The parties issued a
joint press release announcing the proposed merger before the opening of
business on August 9, 2000.
On August 18, 2000, Software.com and Phone.com entered into a Reseller
License and Services Agreement, as contemplated by the reciprocal reseller
license and services memorandum of understanding.
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Phone.com's Reasons for the Merger; Recommendation of the Phone.com Board
The Phone.com board has approved the merger agreement and has deemed the
merger advisable and has determined that the terms of the merger agreement are
fair and in the best interests of Phone.com and its stockholders. During the
course of its deliberations, the Phone.com board considered, with the
assistance of management and its financial and other advisors, a number of
factors. The following discussion of the factors considered by the Phone.com
board of directors in making its decision is not intended to be exhaustive but
includes all material factors considered by the Phone.com board of directors.
The Phone.com board of directors considered the following factors as reasons
that the merger will be beneficial to Phone.com and its stockholders:
. the expansion of the product and service offerings Phone.com can make
available to its existing and prospective customers to include
Software.com's messaging technologies and applications;
. the potential revenue synergies including cross-selling opportunities for
the products of both companies;
. the belief of Phone.com's management that, given the complementary nature
of the technologies and business strategies of Software.com and
Phone.com, the merger will enhance the opportunity for the potential
realization of Phone.com's strategic objectives;
. the terms of the merger agreement, including the benefits to be received
by Phone.com and the dilution to Phone.com's stockholders in the merger
and a comparison of comparable merger transactions;
. Credit Suisse First Boston's opinion to the Phone.com board of directors
that the exchange ratio in the merger is fair to Phone.com from a
financial point of view; and
. the strength of the management team of the combined company, including
the addition of Donald J. Listwin as President and Chief Executive
Officer of Phone.com and the combined company.
In the course of deliberations, the Phone.com board of directors also
considered a number of additional factors relevant to the merger, including:
. the financial condition, results of operations, businesses and prospects
of Phone.com and Software.com before and after giving effect to the
merger;
. current financial market conditions and historical market prices,
volatility and trading information with respect to Phone.com common stock
and Software.com common stock;
. reports from management and from legal, accounting and financial advisors
as to the results of their due diligence investigation of Software.com;
. detailed financial analysis and pro forma and other information with
respect to the companies presented by Credit Suisse First Boston to
Phone.com's board of directors;
. the terms of the merger agreement, including the parties'
representations, warranties and covenants, and the conditions to their
respective obligations;
. the terms of the merger agreement regarding the right of Phone.com to
consider and negotiate other strategic transaction proposals, as well as
the possible effects of the provisions regarding termination fees and the
stock option agreements;
. historical information concerning Phone.com's and Software.com's
respective businesses, prospects, financial performance and condition,
operations, technology, management and competitive position, including
public reports concerning results of operations during the most recent
fiscal year and fiscal quarter for each company as filed with the
Securities and Exchange Commission;
. a comparison of comparable merger transactions;
. the potential of developing in-house scalable messaging technology and
applications similar to Software.com's technology and applications or
acquiring it from other third party sources;
. the technical expertise and experience of Software.com's employees;
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. the depth of experience of the combined management; and
. the impact of the merger on Phone.com's customers and employees.
The Phone.com board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including but not limited to:
. the risk that the potential benefits sought in the merger might not be
fully realized;
. the challenges of integrating the management teams, strategies, cultures
and organizations of the companies;
. the risk that despite the efforts of the combined company, key management
and other personnel might not remain employed by the combined company;
. the risk that certain key employees of both Phone.com and Software.com
that are parties to change of control agreements will leave the combined
company upon any triggering of such change of control agreements, and the
costs resulting from such departures;
. risks associated with fluctuations in Software.com's stock price and
Phone.com's stock price prior to closing of the merger;
. the risk of disruption of sales momentum as a result of uncertainties
created by the announcement of the merger;
. the possibility that the merger might not be consummated, even if
approved by each company's stockholders including the possible effect of
the termination fee and the Phone.com stock option agreement;
. the effect of the public announcement of the merger and the possibility
that the merger might not be consummated on (a) demand for Phone.com's
products and services, Phone.com's relationships with strategic partners,
Phone.com's operating results and Phone.com's stock price and (b)
Phone.com's ability to attract and retain key management and marketing,
sales, technical and other personnel;
. the significant adverse impact to the net income of the combined company
that will arise if the merger is not accounted for as a pooling of
interests due to the amortization of goodwill and other intangibles in
light of the impact of purchase accounting for the merger;
. the substantial charges to be incurred in connection with the merger,
including costs of integrating the businesses and transaction expenses
arising from the merger; and
. other applicable risks described in the section of this joint proxy
statement/prospectus entitled "Risk Factors" on page .
The Phone.com board of directors believed that these risks were outweighed by
the potential benefits of the merger.
The foregoing discussion is not exhaustive of all factors considered by the
Phone.com board of directors. Each member of Phone.com's board may have
considered different factors, and the Phone.com board of directors evaluated
these factors as a whole and did not quantify or otherwise assign relative
weights to factors considered. In addition, the Phone.com board of directors
did not reach any specific conclusion with respect to each of the factors
considered, or any aspect of any particular factor. Instead, the Phone.com
board conducted an overall analysis of the factors described above.
Recommendation of the Phone.com Board of Directors. After due consideration,
the Phone.com board of directors approved the merger by unanimous vote, deemed
the merger advisable and determined that the merger is fair to and in the best
interests of Phone.com and its stockholders. Accordingly, the Phone.com board
recommends that Phone.com stockholders vote "FOR" approval of the issuance of
shares of Phone.com common stock pursuant to the merger agreement and an
amendment to Phone.com's certificate of incorporation to change the name of
Phone.com to .
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Software.com's Reasons for the Merger; Recommendation of the Software.com
Board
Reasons for the merger. In reaching its decision to approve the merger
agreement and the merger and to recommend adoption of the merger agreement by
Software.com stockholders, the Software.com board of directors consulted with
its management team and advisors and independently considered the proposed
merger, the merger agreement and the transactions contemplated by the merger
agreement. The following discussion of the factors considered by the
Software.com board of directors in making its decision is not intended to be
exhaustive but includes all material factors considered by the Software.com
board of directors.
The Software.com board of directors considered the following factors as
reasons that the merger will be beneficial to Software.com and its
stockholders:
. Phone.com's wireless technologies and applications will facilitate and
expedite Software.com's entry into the market for wireless communications
service providers;
. the potential revenue synergies including cross-selling opportunities for
the products of both companies;
. Software.com's stockholders would have the opportunity to participate in
the future growth potential for the combined company following the
merger;
. the stronger financial position of the combined company;
. the belief of Software.com's management that, given the complementary
nature of the technologies and business strategies of Software.com and
Phone.com, the merger will enhance the opportunity for the potential
realization of Software.com's strategic objectives;
. the terms of the merger agreement, including consideration to be received
by Software.com's stockholders in the merger and the relationship between
the market value of the Phone.com common stock to be issued in exchange
for each share of Software.com common stock and a comparison of
comparable merger transactions;
. Morgan Stanley's financial analysis and opinion that, as of August 8,
2000 and based on and subject to the various considerations in its
opinion, the exchange ratio in the merger agreement was fair to such
holders of shares of Software.com common stock from a financial point of
view; and
. the strength of the management team of the combined company, including
the addition of Donald J. Listwin as President and Chief Executive
Officer of the combined company.
In the course of deliberations, the Software.com board of directors also
considered a number of additional factors relevant to the merger, including:
. the financial condition, results of operations, businesses and prospects
of Software.com and Phone.com before and after giving effect to the
merger;
. current financial market conditions and historical market prices,
volatility and trading information with respect to Software.com common
stock and Phone.com common stock;
. reports from management and from legal, accounting and financial advisors
as to the results of their due diligence investigation of Phone.com;
. detailed financial analysis and pro forma and other information with
respect to the companies presented by Morgan Stanley to Software.com's
board of directors;
. the terms of the merger agreement, including the parties'
representations, warranties and covenants, and the conditions to their
respective obligations;
. the terms of the merger agreement regarding the right of Software.com to
consider and negotiate other strategic transaction proposals, as well as
the possible effects of the provisions regarding termination fees and the
stock option agreements;
. historical information concerning Software.com's and Phone.com's
respective businesses, prospects, financial performance and condition,
operations, technology, management and competitive position, including
public reports concerning results of operations during the most recent
fiscal year and fiscal quarter for each company as filed with the
Securities and Exchange Commission;
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<PAGE>
. a comparison of comparable merger transactions;
. the prospects of Software.com as an independent company;
. the potential for other third parties to enter into strategic
relationships with or to acquire Software.com;
. the depth of experience of the combined management; and
. the impact of the merger on Software.com's customers and employees.
The Software.com board of directors also identified and considered a number
of potentially negative factors in its deliberations concerning the merger,
including but not limited to:
. the risk that the potential benefits sought in the merger might not be
fully realized;
. the challenges of integrating the management teams, strategies, cultures
and organizations of the companies;
. the risk that despite the efforts of the combined company, key management
and other personnel might not remain employed by the combined company;
. risks associated with fluctuations in Phone.com's stock price and
Software.com's stock price prior to closing of the merger;
. the risk of disruption of sales momentum as a result of uncertainties
created by the announcement of the merger;
. the possibility that the merger might not be consummated, even if
approved by each company's stockholders including the possible effect of
the termination fee and the Software.com stock option agreement;
. the effect of the public announcement of the merger and the possibility
that the merger might not be consummated on (a) demand for Software.com's
products and services, Software.com's relationships with strategic
partners, Software.com's operating results and Software.com's stock price
and (b) Software.com's ability to attract and retain key management and
marketing, sales, technical and other personnel;
. if the merger is not accounted for as a pooling of interests, the
significant adverse impact to the net income of the combined company that
will arise due to the amortization of goodwill and other intangibles in
light of the impact of purchase accounting for the merger;
. the substantial charges to be incurred in connection with the merger,
including costs of integrating the businesses and transaction expenses
arising from the merger; and
. other applicable risks described in the section of this joint proxy
statement/prospectus entitled "Risk Factors" on page 13.
The Software.com board of directors believed that these risks were
outweighed by the potential benefits of the merger.
The foregoing discussion is not exhaustive of all factors considered by the
Software.com board of directors. Each member of Software.com's board may have
considered different factors, and the Software.com board of directors
evaluated these factors as a whole and did not quantify or otherwise assign
relative weights to factors considered. In addition, the Software.com board
did not reach any specific conclusion with respect to each of the factors
considered, or any aspect of any particular factor. Instead, the Software.com
board conducted an overall analysis of the factors described above.
Recommendation of the Software.com Board of Directors. After careful
consideration, the Software.com board of directors has determined that the
terms of the merger agreement and the merger are fair to, and in the best
interests of, the stockholders of Software.com and has approved the merger
agreement and the merger. The Software.com board of directors recommends that
the stockholders of Software.com vote "FOR" the adoption of the merger
agreement. All of the Software.com directors who considered the merger concur
in the foregoing determination and recommendation.
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<PAGE>
Opinion of Phone.com's Financial Advisor
Credit Suisse First Boston has acted as Phone.com's financial advisor in
connection with the merger. Phone.com selected Credit Suisse First Boston
based on Credit Suisse First Boston's experience, expertise and reputation,
and familiarity with Phone.com's business. Credit Suisse First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, Phone.com
requested that Credit Suisse First Boston evaluate the fairness, from a
financial point of view, to Phone.com of the exchange ratio provided for in
the merger. On August 8, 2000, at a meeting of the Phone.com board of
directors held to evaluate the merger, Credit Suisse First Boston rendered to
the Phone.com board of directors an oral opinion, which opinion was confirmed
by delivery of a written opinion dated August 8, 2000, to the effect that, as
of that date and based on and subject to the matters described in its opinion,
the exchange ratio provided for in the merger was fair, from a financial point
of view, to Phone.com.
The full text of Credit Suisse First Boston's written opinion, dated August
8, 2000, to the Phone.com board of directors, which sets forth, among other
things, the procedures followed, assumptions made, matters considered and
limitations on the review undertaken, is attached as Annex J and is
incorporated into this document by reference. Holders of Phone.com common
stock are urged to, and should, read this opinion carefully and in its
entirety. Credit Suisse First Boston's opinion is addressed to the Phone.com
board of directors and relates only to the fairness of the exchange ratio from
a financial point of view, does not address any other aspect of the proposed
merger or any related transaction and does not constitute a recommendation to
any stockholder as to any matter relating to the merger. The summary of Credit
Suisse First Boston's opinion in this document is qualified in its entirety by
reference to the full text of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and related documents, as well as publicly available business and
financial information relating to Phone.com and Software.com. Credit Suisse
First Boston also reviewed other information relating to Phone.com and
Software.com, including publicly available financial forecasts, that were
provided to or discussed with Credit Suisse First Boston by Phone.com and
Software.com. Credit Suisse First Boston also met with the managements of
Phone.com and Software.com to discuss the businesses and prospects of
Phone.com and Software.com and potential synergies that might be achieved in
the merger. Credit Suisse First Boston considered financial and stock market
data of Phone.com and Software.com, and compared those data with similar data
for publicly held companies in businesses similar to those of Phone.com and
Software.com. Credit Suisse First Boston considered, to the extent publicly
available, the financial terms of other business combinations and other
transactions which have recently been effected. Credit Suisse First Boston
also considered other information, financial studies, analyses and
investigations and financial, economic and market criteria which it deemed
relevant.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the foregoing
information and relied on such information being complete and accurate in all
material respects. With respect to the financial forecasts for Phone.com and
Software.com, Credit Suisse First Boston assumed, with the consent of the
managements of Phone.com and Software.com, that the forecasts represented
reasonable estimates and judgments as to the future financial performance of
Phone.com and Software.com. In addition, Credit Suisse First Boston relied on,
without independent verification, the assessment of the managements of
Phone.com and Software.com as to the strategic benefits anticipated to result
from the merger, the existing and future technology and products of Phone.com
and Software.com and the risks associated with the future technology and
products, Phone.com's and Software.com's ability to integrate the businesses
of Phone.com and Software.com, and Phone.com's and Software.com's ability to
retain key employees of Phone.com and Software.com. Credit Suisse First Boston
also assumed, with the consent of the Phone.com board of directors, that the
merger would be treated as a tax-free reorganization for federal income tax
purposes. In
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<PAGE>
addition, Credit Suisse First Boston was not requested to make, and did not
make, an independent evaluation or appraisal of the assets or liabilities,
contingent or otherwise, of Phone.com and Software.com, nor was Credit Suisse
First Boston furnished with any evaluations or appraisals.
Credit Suisse First Boston's opinion is necessarily based upon information
available to it, and financial, economic, market and other conditions as they
existed and could be evaluated, on the date of the Credit Suisse First Boston
opinion. Credit Suisse First Boston did not express any opinion as to what the
value of the Phone.com common stock actually would be when issued in the
merger or the prices at which the Phone.com common stock would trade after the
merger. Although Credit Suisse First Boston evaluated the exchange ratio in
the merger from a financial point of view, Credit Suisse First Boston was not
requested to, and did not, recommend the specific consideration payable in the
merger, which consideration was determined between Phone.com and Software.com.
No other limitations were imposed on Credit Suisse First Boston with respect
to the investigations made or procedures followed in rendering its opinion.
In preparing its opinion to the Phone.com board of directors, Credit Suisse
First Boston performed a variety of financial and comparative analyses,
including those described below. The summary of Credit Suisse First Boston's
analyses described below is not a complete description of the analyses
underlying Credit Suisse First Boston's opinion. The preparation of a fairness
opinion is a complex process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, a fairness
opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion, Credit Suisse First Boston made qualitative
judgments as to the significance and relevance of each analysis and factor
that it considered. Accordingly, Credit Suisse First Boston believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors or focusing on information presented in tabular format,
without considering all analyses and factors or the narrative description of
the analyses, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
In its analysis, Credit Suisse First Boston considered industry performance,
regulatory, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Phone.com and
Software.com. No company, transaction or business used in Credit Suisse First
Boston's analyses as a comparison is identical to Phone.com and Software.com
or the proposed merger, and an evaluation of the results of those analyses is
not entirely mathematical. Rather, the analyses involve complex considerations
and judgments concerning financial and operating characteristics and other
factors that could affect the acquisition, public trading or other values of
the companies, business segments or transactions being analyzed. The estimates
contained in Credit Suisse First Boston's analyses and the ranges of
valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Credit Suisse
First Boston's analyses and estimates are inherently subject to substantial
uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one of
many factors considered by the Phone.com board of directors in its evaluation
of the proposed merger and should not be viewed as determinative of the views
of the Phone.com board of directors or management with respect to the merger
or the exchange ratio.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion
and reviewed with the Phone.com board of directors at a meeting of the
Phone.com board of directors held on August 8, 2000. The financial analyses
summarized below include information presented in tabular format. In order to
fully understand Credit Suisse First Boston's financial analyses, the tables
must be read together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses. Considering the
data in the tables below without
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considering the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of Credit Suisse First Boston's
financial analyses.
Historical Stock Price Analysis. Credit Suisse First Boston analyzed the
prices at which Phone.com common stock traded since Phone.com's initial public
offering on June 11, 1999 through August 7, 2000. Credit Suisse First Boston
noted that the all-time high closing price for Phone.com common stock was
$200.75 on March 10, 2000, and the all-time low closing price for Phone.com
common stock was $16.56 on June 15, 1999.
Credit Suisse First Boston also analyzed the prices at which Software.com
common stock traded since Software.com's initial public offering on June 24,
1999 through August 7, 2000. Credit Suisse First Boston noted that the all-
time high closing price for Software.com common stock was $149.50 on March 28,
2000, and the all-time low closing price for Software.com common stock was
$18.06 on June 24, 1999.
Peer Group Comparison. Credit Suisse First Boston compared financial,
operating and stock market data of Phone.com and Software.com to corresponding
data of the following 11 publicly traded companies in the Internet and e-
business infrastructure and wireless Internet infrastructure industries:
<TABLE>
<CAPTION>
Wireless Internet
Internet and eBusiness Infrastructure
Infrastructure Companies Companies
------------------------ ---------------------
<S> <C>
. Critical Path, Inc. .Aether Systems, Inc.
. Infospace, Inc. .Infospace, Inc.
. Inktomi Corporation .Palm, Inc.
. Interwoven, Inc. .724 Solutions, Inc.
. Liberate Technologies
. Micromuse, Inc.
. Portal Software, Inc.
. Quest Software, inc.
</TABLE>
Credit Suisse First Boston compared equity values as multiples of estimated
calendar years 2000 and 2001 earnings and enterprise values, calculated as
equity value, plus debt, less cash, as multiples of estimated calendar years
2000 and 2001 revenue. All multiples were based on closing stock prices on
August 7, 2000. Estimated financial data for the selected companies, Phone.com
and Software.com were based on publicly available research analysts'
estimates. This analysis indicated the following implied mean multiples for
the groups of companies, as compared to the implied multiples for Phone.com
and Software.com:
<TABLE>
<CAPTION>
Aggregate Value/ Price/Earnings
Revenue Multiples Multiples
----------------- ---------------
2000 2001 2000 2001
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Internet and eBusiness Infrastructure
Companies.................................. 45.1x 28.1x 331.6x 296.1x
Wireless Internet Infrastructure Companies.. 60.5x 28.0x 371.1x 303.1x
Phone.com................................... 52.3x 24.6x NM NM
Software.com................................ 50.3x 29.1x 653.8x 423.4x
</TABLE>
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<PAGE>
Contribution Analysis. Credit Suisse First Boston analyzed the relative
contributions of Phone.com and Software.com to the revenue and gross profit of
the combined company for the latest quarter annualized, calendar year 1999,
estimated calendar years 2000 and 2001 and estimated fiscal years ended June
30, 2000 and 2001, based on estimates prepared by securities research
analysts. Credit Suisse First Boston then calculated the pro forma ownership
of the combined company implied by Software.com's relative contribution, the
resulting implied exchange ratio and the premium/(discount) represented by the
implied exchange ratio to the exchange ratio in the merger. This analysis
indicated the following:
<TABLE>
<CAPTION>
Premium/(Discount)
of Exchange Ratio
Software.com Implied in the Merger to
Implied Exchange Implied Exchange
Ownership Ratio Ratio
------------ -------- ------------------
<S> <C> <C> <C>
Revenue
Latest Quarter Annualized........... 49.2% 1.567x 2.8 %
Calendar Year 1999.................. 56.8% 2.125x (24.2)%
Estimated Calendar Year 2000........ 46.9% 1.430x 12.6 %
Estimated Calendar Year 2001........ 42.0% 1.171x 37.6 %
Phone.com Fiscal Year Ended June 30,
2000............................... 51.4% 1.707x (5.6)%
Phone.com Fiscal Year Ended June 30,
2001............................... 43.8% 1.261x 27.7 %
Gross Profit
Latest Quarter Annualized........... 51.2% 1.696x (5.1)%
Calendar Year 1999.................. 56.4% 2.090x (22.9)%
Estimated Calendar Year 2000........ 48.8% 1.541x 4.5 %
Estimated Calendar Year 2001........ 42.9% 1.214x 32.7 %
Phone.com Fiscal year Ended June 30,
2000............................... 52.0% 1.752x (8.1)%
Phone.com Fiscal year Ended June 30,
2001............................... 45.7% 1.358x 18.6 %
Mean.................................. 48.9% 1.576x 5.9 %
Median................................ 49.0% 1.554x 3.6 %
</TABLE>
Exchange Ratio Analysis. Credit Suisse First Boston reviewed the average of
the ratios of the closing price of Software.com common stock divided by the
closing price of Phone.com common stock over various periods beginning June
24, 1999 and ending August 7, 2000, referred to as the average market exchange
ratio, and computed the premiums/(discounts) of the exchange ratio in the
merger to the average ratio of the closing prices for Phone.com common stock
to the closing prices of Software.com common stock, or the market exchange
ratio, over each of the various periods covered. This analysis indicated the
following:
<TABLE>
<CAPTION>
Premium/(Discount)
of Exchange Ratio
in the Merger to
Average Market Average Market
Exchange Ratio Exchange Ratio
Period ending August 7, 2000 Over Period Over Period
---------------------------- -------------- ------------------
<S> <C> <C>
Period since June 24, 1999.................... 0.889x 81.1%
90 trading days............................... 1.221x 31.9%
60 trading days............................... 1.328x 21.3%
30 trading days............................... 1.512x 6.5%
10 trading days............................... 1.290x 24.9%
Current market................................ 1.378x 16.8%
</TABLE>
Precedent Transactions Analysis. Credit Suisse First Boston analyzed the
publicly available financial terms of the following six publicly announced
stock-for-stock merger-of-equals transactions involving companies in the
technology industry:
. NetIQ Corporation / Mission Critical Software, Inc.
. Whittman-Hart, Inc. / USWeb Corporation
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. MindSpring Enterprises, Inc. / Earthlink, Inc.
. Wellfleet Communications, Inc. / SynOptics Communications, Inc.
. KLA Instruments Corporation / Tencor Instruments
. Uniphase Corporation / JDS Fitel, Inc.
The following table presents the premium/(discount) of the exchange ratio in
each transaction to the ratio of the stock prices for the parties in the
transactions on the date of the announcement of the transaction and, on
average, over various periods prior to the announcement of the transaction:
<TABLE>
<CAPTION>
Exchange Ratio Premium/(Discount) of
Precedent Stock-for-Stock Merger-of-Equals
Transactions
------------------------------------------------------
Date of
90 Days 60 Days 30 Days 10 Days Announcement Average
------- ------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
NetlQ/Mission Critical
Software............... (20.7)% (13.7)% 2.2% 5.8% 11.1% (3.1)%
Whittman-Hart/US Web.... 3.7 % 3.2 % 10.5% 27.6% 34.7% 16.0 %
MindSpring/Earthlink.... 10.6 % 9.3 % 2.2% 6.7% 22.1% 10.2 %
Wellfleet/SynOptics..... 17.9 % 17.5 % 11.4% 19.3% 16.2% 16.5 %
KLA Instruments/Tencor.. 29.9 % 37.2 % 38.7% 36.9% 34.0% 35.3 %
Uniphase/JDS Fitel...... 45.3 % 32.9 % 19.6% 5.5% 4.4% 21.6 %
</TABLE>
Precedent Merger-of-Equals Transactions Analysis. Credit Suisse First Boston
reviewed 70 precedent merger-of-equals transactions across a wide range of
industries in order to determine the median and mean premium paid to the
stockholders of the effective target in each transaction one trading day and
30 trading days prior to announcement of each transaction. Credit Suisse First
Boston identified the acquiror and target in each transaction by considering
the party issuing shares in the transaction, relative ownership and control of
the combined entity and location of the combined entity's headquarters. Credit
Suisse First Boston compared the results of this review to the premium to be
paid to Software.com's stockholders in the merger utilizing closing prices for
Phone.com common stock on August 7, 2000 at the exchange ratio in the merger.
The results of this analysis are as follows:
<TABLE>
<CAPTION>
Premium to Stock Price
-------------------------
30 Days One Day
Prior to Prior to
Announcement Announcement
------------ ------------
<S> <C> <C>
70 Precedent Merger-of-Equals Transactions
Median........................................... 15.9% 12.2%
Mean............................................. 19.7% 16.0%
Exchange Ratio in the Merger....................... 8.2% 16.8%
</TABLE>
No transaction utilized as a comparison in the precedent transactions
analysis or precedent merger-of-equals transactions analysis is identical to
the merger. In evaluating the business combination, Credit Suisse First Boston
made judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Phone.com and Software.com, such as the impact
of competition on the businesses of Phone.com and Software.com and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of Phone.com, Software.com or
the industry or in the financial markets in general. Mathematical analysis,
such as determining the average or median, is not in itself a meaningful
method of using comparable transaction data.
Analysis of Pro Forma Impact of the Merger. Credit Suisse First Boston also
conducted an analysis of the potential pro forma impact of the merger on the
estimated quarterly revenues, gross profit, operating income and net income of
Phone.com through December 31, 2001 based on estimates prepared by securities
research analysts. Credit Suisse First Boston noted that, assuming no
synergies, the transaction would be dilutive to Phone.com's revenue per share
during estimated calendar year 2001. Credit Suisse First Boston also noted
that
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the combined company would have a higher gross profit margin than would
Phone.com on a stand-alone basis and that, assuming no synergies, the combined
company would achieve profitability sooner than would Phone.com on a stand-
alone basis.
Other Factors. In the course of preparing its opinion, Credit Suisse First
Boston also reviewed and considered other information and data, including the
potential pro forma effect of the merger on near term and one-year forward
prices for Phone.com common stock.
Miscellaneous. Phone.com has agreed to pay Credit Suisse First Boston for
its financial advisory services customary fees based on the aggregate value of
the business combination. Phone.com also has agreed to reimburse Credit Suisse
First Boston for all out-of-pocket expenses, including fees and reasonable
expenses of legal counsel, and to indemnify Credit Suisse First Boston and
related parties against liabilities, including liabilities under the federal
securities laws, arising out of its engagement. Credit Suisse First Boston and
its affiliates have in the past provided financial services to Phone.com and
Software.com, and may in the future provide financial services to Phone.com,
unrelated to the proposed merger, for which services Credit Suisse First
Boston and its affiliates have received and will receive compensation. In the
ordinary course of business, Credit Suisse First Boston and its affiliates may
actively trade the debt and equity securities of Phone.com and Software.com
for their own accounts and for the accounts of customers and, accordingly, may
at any time hold long or short positions in those securities.
Opinion of Software.com's Financial Advisor
Under an engagement letter dated July 28, 2000, Software.com retained Morgan
Stanley to provide it with financial advisory services and a financial
fairness opinion in connection with the merger. Software.com's board of
directors selected Morgan Stanley to act as its financial advisor based on
Morgan Stanley's qualifications, expertise and reputation and its knowledge of
the business and affairs of Software.com. At the meeting of the Software.com
board of directors on August 8, 2000, Morgan Stanley rendered its oral
opinion, subsequently confirmed in writing, that as of August 8, 2000, based
upon and subject to the various considerations set forth in the opinion, the
exchange ratio pursuant to the merger agreement was fair from a financial
point of view to holders of shares of Software.com common stock.
The full text of the written opinion of Morgan Stanley, dated as of August
8, 2000, is attached as Annex K to this document. The opinion sets forth,
among other things, the assumptions made, procedures followed, matters
considered and limitations on the scope of the review undertaken by Morgan
Stanley in rendering its opinion. We urge you to read the entire opinion
carefully. Morgan Stanley's opinion is directed to Software.com's board of
directors and addresses only the fairness from a financial point of view of
the exchange ratio pursuant to the merger agreement to holders of shares of
Software.com common stock as of the date of the opinion. It does not address
any other aspects of the merger and does not constitute a recommendation to
any holder of Software.com common stock as to how to vote at the Software.com
special meeting. The summary of the opinion of Morgan Stanley set forth in
this document is qualified in its entirety by reference to the full text of
the opinion.
In connection with rendering its opinion, Morgan Stanley, among other
things:
. reviewed certain publicly available financial statements and other
information of Software.com and Phone.com, respectively;
. reviewed certain internal financial statements and other financial and
operating data concerning Software.com and Phone.com, prepared by the
managements of Software.com and Phone.com, respectively;
. reviewed certain financial projections prepared by the managements of
Software.com and Phone.com;
. reviewed the pro forma impact of the merger on certain operational and
financial metrics for the combined company;
. discussed the past and current operations and financial condition and the
prospects of Software.com and Phone.com, including a review of publicly
available projections from equity research analyst estimates
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and information relating to certain strategic, financial and operational
benefits anticipated from the merger, with senior executives of
Software.com and Phone.com, respectively;
. reviewed the reported prices and trading activity for the Software.com
common stock and Phone.com common stock;
. compared the financial performance of Software.com and Phone.com and the
prices and trading activity of the Software.com common stock and
Phone.com common stock with that of certain other publicly-traded
companies comparable to Software.com and Phone.com, respectively, and
their securities;
. reviewed the financial terms, to the extent publicly available, of
certain comparable merger transactions;
. reviewed and discussed with the senior managements of Software.com and
Phone.com their strategic rationales for the merger;
. participated in discussions and negotiations among representatives of
Software.com, Phone.com and their financial and legal advisors;
. reviewed the draft merger agreement and certain related documents; and
. performed such other analyses and considered such other factors as Morgan
Stanley deemed appropriate.
Morgan Stanley assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by it for the purposes of
its opinion. With respect to the financial projections and information relating
to the strategic, financial and operational benefits anticipated from the
merger, Morgan Stanley has assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and judgements of the future
financial performance of Software.com and Phone.com, respectively. In addition,
Morgan Stanley has assumed that the merger will be consummated in accordance
with the terms set forth in the merger Agreement and will be treated as a tax-
free reorganization pursuant to Section 368(a) of the Internal Revenue Code of
1986. Morgan Stanley's opinion is necessarily based on financial, economic,
market and other conditions as in effect on, and the information made available
to Morgan Stanley as of, the date of its opinion.
Morgan Stanley relied upon the assessment by the managements of Software.com
and Phone.com of their ability to retain key employees of Software.com and
Phone.com, respectively. Morgan Stanley also relied upon, without independent
verification, the assessment by the managements of Software.com and Phone.com
of: (1) the strategic, financial and other benefits expected to result from the
merger; (2) the timing and risks associated with the integration of
Software.com and Phone.com; and (3) the validity of, and risks associated with,
Software.com's and Phone.com's existing and future technologies, services or
business models. Morgan Stanley has not made any independent valuation or
appraisal of the assets or liabilities or technology of Software.com and
Phone.com, nor has Morgan Stanley been furnished with any such appraisals.
In arriving at its opinion, Morgan Stanley was not authorized to solicit, and
did not solicit, interest from any party with respect to an acquisition,
business combination or other extraordinary transaction involving Software.com.
The following is a brief summary of the material analyses performed by Morgan
Stanley in connection with its oral opinion and the preparation of its written
opinion letter dated August 8, 2000. Some of these summaries of financial
analyses include information presented in tabular format. In order to fully
understand the financial analyses used by Morgan Stanley, the tables must be
read together with the text of each summary. The tables alone do not constitute
a complete description of the financial analyses.
On August 8, 2000, Software.com and Phone.com entered into the merger
agreement whereby each holder of Software.com common stock would receive 1.6105
shares of Phone.com common stock. As a result, Software.com's shareholders
would own approximately 50% of the combined company on a pro forma basis.
Exchange Ratio Premium Analysis. Morgan Stanley reviewed the ratios of the
closing prices of Software.com common stock divided by the corresponding
closing prices of Phone.com common shares over
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various periods ending August 8, 2000. The ratios are referred to as average
exchange ratios. Morgan Stanley examined the premiums represented by the
exchange ratio set forth in the merger agreement over the averages of these
period average exchange ratios, and found them to be as follows:
<TABLE>
<CAPTION>
Transaction Exchange
Ratio (1.6105x)
Average Premium to Average
Period (ending August 8, 2000) Exchange Ratio Exchange Ratio
------------------------------ -------------- --------------------
<S> <C> <C>
August 8, 2000........................... 1.380x 16.7%
Last 5 days.............................. 1.307 23.2
Last 10 days............................. 1.294 24.5
Last 20 days............................. 1.362 18.2
Last 30 days............................. 1.511 6.6
Last 60 days............................. 1.331 21.0
Last 90 days............................. 1.227 31.3
Last 120 days............................ 1.116 44.3
Last twelve months....................... 0.881 82.8
</TABLE>
Morgan Stanley noted that the transaction exchange ratio was higher than the
average exchange ratio of the closing prices for all periods. Morgan Stanley
also noted that the exchange ratio ranged from a low of 0.527x to a high of
1.994x over the 180-day period ending August 8, 2000. Morgan Stanley noted
that the transaction exchange ratio was at the high-end of this relative
trading range.
Comparable Company Valuation Analysis. Morgan Stanley compared certain
financial information of Software.com and Phone.com with publicly available
information for other companies that shared some characteristics of
Software.com and Phone.com. The companies analyzed by Morgan Stanley included
Verisign Inc., Ariba Inc., Broadvision Inc., Oracle Corporation, and Vignette
Corporation (the "Internet Software" Index), Exodus Communications Inc.,
Inktomi Corporation, Akamai Technologies Inc., Mail.com Inc., Internap Network
Services Corporation and Critical Path Inc. (the "Infrastructure Services"
Index), and Aether Systems Inc., 724 Solutions Inc., and Puma Technologies
Inc. (the "Wireless Software and Services" Index).
For purposes of this analysis, Morgan Stanley analyzed the following
statistics for purposes of a comparison across various companies:
--the ratio of aggregate value (defined as market capitalization plus total
debt less cash and cash equivalents) to estimated calendar year 2001
revenues (based on equity research analyst estimates); and
--the estimated five-year growth rate for each of these companies.
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The following table presents, as of August 8, 2000, the statistics of the
various companies Morgan Stanley analyzed. The first table compares
Software.com with companies in the Internet Software Index and the Internet
Services Index. The second table compares Phone.com with companies in the
Wireless Software and Services Index.
<TABLE>
<CAPTION>
Aggregate Value
to Calendar
Year 2001 Estimated Estimated 5 Year
Company Revenues Growth Rate
------- ------------------- ----------------
<S> <C> <C>
Software.com............................... 29 63%
Infrastructure Software Index
Ariba...................................... 69 55
Verisign................................... 32 50
Oracle..................................... 19 25
Broad Vision............................... 17 50
Vignette................................... 15 50
Infrastructure Services Index
Akamai..................................... 42 N/A
Inktomi.................................... 37 50
Internap................................... 21 N/A
Critical Path.............................. 17 55
Exodus Communications...................... 15 60
Mail.com................................... 4 45
Phone.com.................................. 25 100
Wireless Software and Services Index
Aether Systems............................. 62 100
InfoSpace.................................. 31 50
724 Solutions.............................. 21 63
Puma Technology............................ 15 48
</TABLE>
Morgan Stanley observed that the Software.com and Phone.com revenue
multiples were in the middle of their respective peer groups. Further,
Software.com's and Phone.com's valuation multiples were closer to each other
than they were to certain other companies in the respective comparable company
groups.
Morgan Stanley also noted that both Software.com and Phone.com were on the
high end of their respective peer group(s) in terms of projected growth rates.
For example, Phone.com had the highest growth rate when compared to the other
companies in the Wireless Software and Services Index; however, its valuation
multiple was in the middle of this range when compared to these comparable
companies.
No company utilized in the peer group(s) comparison analysis is identical to
Software.com or Phone.com. In evaluating the peer groups, Morgan Stanley made
judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Software.com and Phone.com, such as the impact
of competition on the businesses of Software.com and Phone.com and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of Software.com and Phone.com
or the industry or in the financial markets in general. Mathematical analysis,
such as determining the average or median, is not in itself a meaningful
method of using peer group data.
Securities Research Analysts' Price Targets. Morgan Stanley reviewed and
analyzed future public market trading price targets for Software.com and
Phone.com common stock prepared and published by securities research analysts
during the period between July 21, 2000 and July 27, 2000 for each of the
companies. These targets reflect each analyst's estimate of the future public
market trading price of Software.com and Phone.com
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<PAGE>
common stock at the end of the twelve month period beginning the date of each
of the respective research reports. The range of the price targets are set
forth below:
<TABLE>
<CAPTION>
Price Target
-------------------------
Low High Average Median
---- ---- ------- ------
<S> <C> <C> <C> <C>
Software.com common stock............................ $140 $180 $ 165 $ 175
Phone.com common stock............................... 125 200 151 139
Ratio................................................ 1.096x 1.264x
Transaction exchange ratio premium to ratio.......... 47% 27%
</TABLE>
Morgan Stanley compared the transaction exchange ratio to the ratio implied
by the respective average and median price targets published by such analysts
for Phone.com and Software.com, respectively. Morgan Stanley noted that the
transaction exchange ratio reflected a 47% and 27% premium to the ratio of
such average and median price targets. Morgan Stanley also noted that the
range of exchange ratios resulting from comparing these ranges of price
targets of Software.com and Phone.com was from 0.700 to 1.440. The transaction
exchange ratio of 1.6105x was above this range.
Morgan Stanley noted that the public market trading price targets published
by the securities research analysts do not necessarily reflect current market
trading prices for Software.com and Phone.com common stock and these estimates
are subject to uncertainties, including the future financial performance of
Software.com and Phone.com and future financial market conditions.
Relative Contribution Analysis. Morgan Stanley compared Software.com and
Phone.com stockholders' respective percentage ownership of the combined
company to Software.com's and Phone.com's respective percentage contribution
(and the implied ownership based on such contribution) to the combined company
using revenues and gross profit based on equity research analysts' estimates.
<TABLE>
<CAPTION>
Implied %
Pro Forma Ownership by
----------------------
Software.com Phone.com
------------ ---------
<S> <C> <C>
Revenue
Calendar Year 1999 Actual........................... 56.9% 43.1%
Jan--Jun 2000....................................... 49.8 50.2
Calendar Year 2000 Estimated........................ 47.0 53.0
Calendar Year 2001 Estimated........................ 42.1 57.9
Calendar Year 2002 Estimated........................ 39.0 61.0
Gross Profit
Calendar Year 2000 Estimated........................ 48.9 51.1
Calendar Year 2001 Estimated........................ 43.0 57.0
Operating Income
Calendar Year 2000 Estimated........................ NM NM
Calendar Year 2001 Estimated........................ NM NM
Market Value
Current............................................. 46.1 53.9
30-day Average...................................... 48.0 52.0
</TABLE>
Morgan Stanley noted that the implied pro forma Software.com ownership of
the combined company was approximately 50% based on the transaction exchange
ratio of 1.6105x. Morgan Stanley also noted that the 50% ownership position
was higher than Software.com's contribution to the combined company in future
periods, based on the revenue and gross profit projections used.
Morgan Stanley also noted that Software.com was already profitable, as of
the second quarter of 2000 on an operating income basis, excluding one-time
charges while Phone.com had negative operating income, excluding one-time
charges. As a result, the contribution analysis based on operating income was
not meaningful.
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Analysis of Stock Price Premiums Paid. Morgan Stanley also compared publicly
available statistics for merger transactions involving mergers of equals of
public companies for 27 transactions, between January 1997 to August 8, 2000,
where the target company's ownership of the newly formed entity exceeded 35%.
Morgan Stanley reviewed the premiums to the unaffected stock price of the
target company 1-day and 30-days prior to announcement for each of these
transactions.
Based on these analyses, Morgan Stanley applied a 0% to 25% premium to the
current exchange ratio of Software.com common stock to Phone.com common stock
and calculated a reference exchange ratio range of 1.380x to 1.725x. Morgan
Stanley noted that the transaction exchange ratio was within this range.
No company or transaction utilized in the analysis of stock price premiums
paid is identical to Software.com or Phone.com or the merger. In evaluating
the precedent acquisition transactions, Morgan Stanley made judgments and
assumptions with regard to general business, market and financial conditions
and other matters, which are beyond the control of Software.com and Phone.com,
such as the impact of competition on the business of Software.com, Phone.com,
or the industry generally, industry growth and the absence of any adverse
material change in financial condition of Software.com, Phone.com or the
industry or in the financial markets in general, which could affect the public
trading value of the companies and the aggregate value of the transactions to
which they are being compared.
Accretion/Dilution Analysis: Morgan Stanley analyzed the impact on revenues
per share based on the transaction exchange ratio for the Software.com
shareholders. Morgan Stanley utilized equity research analyst estimates to
determine the revenues in Calendar Year 2000 and Calendar Year 2001.
<TABLE>
<CAPTION>
Accretion/Dilution to
Software.com,
Revenues ($MM) assuming Synergies ($MM)
-------------------------------- ----------------------------
Software.com Phone.com Pro Forma $0 $50 $75
<S> <C> <C> <C> <C> <C> <C>
Calendar Year
2001E......... $203 $267 $470 16% 28% 34%
</TABLE>
Based on equity research analysts' revenue estimates for Calendar Year 2001
for both Software.com and Phone.com and assuming no synergies, Morgan Stanley
calculated that this transaction would be 16% accretive to Software.com
shareholders on a revenue per share basis. Assuming $75 million in synergies
for Calendar Year 2001, the accretion would be approximately 34%.
In connection with the review of the merger by Software.com's board of
directors, Morgan Stanley performed a variety of financial and comparative
analyses for purposes of rendering its opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to a partial
analysis or summary description. In arriving at its opinion, Morgan Stanley
considered the results of all of its analyses as a whole and did not attribute
any particular weight to any analysis or factor it considered. Morgan Stanley
believes that selecting any portion of its analyses, without considering all
analyses as a whole, would create an incomplete view of the process underlying
its analyses and opinion. In addition, Morgan Stanley may have given various
analyses and factors more or less weight than other analyses and factors, and
may have deemed various assumptions more or less probable than other
assumptions. As a result, the ranges of valuations resulting from any
particular analysis described above should not be taken to be Morgan Stanley's
view of the actual value of Software.com or Phone.com. In performing its
analyses, Morgan Stanley made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters. Many
of these assumptions are beyond the control of Software.com or Phone.com. Any
estimates contained in Morgan Stanley's analyses are not necessarily
indicative of future results or actual values, which may be significantly more
or less favorable than those suggested by such estimates.
Morgan Stanley conducted the analyses described above solely as part of its
analysis of the fairness of the exchange ratio pursuant to the merger
agreement from a financial point of view to holders of shares of Software.com
common stock and in connection with the delivery of its opinion to
Software.com's board of directors. These analyses do not purport to be
appraisals or to reflect the prices at which shares of common stock of
Software.com or Phone.com might actually trade.
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<PAGE>
The exchange ratio pursuant to the merger agreement was determined through
arm's-length negotiations between Software.com and Phone.com and was approved
by Software.com's board of directors. Morgan Stanley provided advice to
Software.com during these negotiations. Morgan Stanley did not however,
recommend any specific exchange ratio to Software.com or that any specific
exchange ratio constituted the only appropriate exchange ratio for the merger.
In addition, Morgan Stanley's opinion and its presentation to Software.com's
board of directors was one of many factors taken into consideration by
Software.com's board of directors in deciding to approve the merger.
Consequently, the analyses as described above should not be viewed as
determinative of the opinion of Software.com's board of directors with respect
to the exchange ratio or of whether Software.com's board of directors would
have been willing to agree to a different exchange ratio.
Software.com's board of directors retained Morgan Stanley based upon Morgan
Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan
Stanley, as part of its investment banking and financial advisory business, is
continuously engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate, estate and other
purposes. In the ordinary course of Morgan Stanley's trading and brokerage
activities, Morgan Stanley or its affiliates may at any time hold long or
short positions, may trade or otherwise effect transactions, for its own
account or for the account of customers in the equity and other securities of
Software.com, Phone.com or any other parties involved in the merger.
Under the engagement letter, Morgan Stanley provided financial advisory
services and a financial fairness opinion in connection with the merger, and
Software.com agreed to pay Morgan Stanley a customary fee for providing
financial advisory services and a financial fairness opinion in connection
with the merger. Software.com has also agreed to reimburse Morgan Stanley for
its expenses incurred in performing its services. In addition, Software.com
has agreed to indemnify Morgan Stanley and its affiliates, their respective
directors, officers, agents and employees and each person, if any, controlling
Morgan Stanley or any of its affiliates against certain liabilities and
expenses, including certain liabilities under the federal securities laws,
related to or arising out of Morgan Stanley's engagement.
Certain United States Federal Income Tax Considerations
The following is a summary of certain federal income tax considerations of
the merger to the holders of Software.com common stock that exchange such
stock for Phone.com common stock pursuant to the merger. This summary
addresses only such stockholders who hold their Software.com common stock as a
capital asset and will hold Phone.com common stock received in exchange
therefor as a capital asset. This summary does not address all United States
federal income tax considerations that may be relevant to particular
stockholders in light of their individual circumstances or to stockholders
that are subject to special rules, such as financial institutions, tax-exempt
organizations, insurance companies, dealers in securities, foreign
stockholders, stockholders who hold Software.com common stock as part of a
straddle, hedge, or conversion transaction, and stockholders who acquired
their Software.com common stock pursuant to the exercise of employee stock
options or otherwise as compensation. The following summary is based upon the
provisions of the Internal Revenue Code of 1986, as amended, applicable
Treasury regulations thereunder, judicial decisions and current administrative
rulings, as of the date hereof, all of which are subject to change, possibly
on a retroactive basis. Tax considerations under state, local, foreign, and
other laws are not addressed herein. Accordingly, each stockholder is advised
to consult his or her tax advisor as to the particular facts and circumstances
which may be unique to such stockholder and also as to any estate, gift,
state, local, foreign, or federal tax considerations arising out of the
merger.
No rulings have been or will be requested from the Internal Revenue Service
with respect to any of the matters discussed herein. There can be no assurance
that future legislation, regulations, administrative rulings or court
decisions would not alter the tax considerations set forth below. It is a
condition to the obligation of Phone.com to consummate the merger that
Phone.com receive an opinion from its counsel, Skadden, Arps, Slate,
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Meagher & Flom LLP, and it is a condition to the obligation of Software.com to
consummate the merger that Software.com receive an opinion from its counsel,
Wilson Sonsini Goodrich & Rosati, Professional Corporation, in both cases
substantially to the effect that, based upon certain facts, representations,
and assumptions, the merger will constitute a "reorganization" within the
meaning of section 368(a) of the Internal Revenue Code of 1986, as amended.
The issuance of such opinions is conditioned, among other things, on the
receipt by Skadden, Arps, Slate, Meagher & Flom LLP and Wilson Sonsini
Goodrich & Rosati, Professional Corporation, of representation letters from
each of Phone.com, Silver Merger Sub and Software.com, in each case, in form
and substance reasonably satisfactory to Skadden, Arps, Slate, Meagher & Flom
LLP and Wilson Sonsini Goodrich & Rosati, Professional Corporation. The
following summary assumes that the merger will be consummated as described in
the merger agreement and this joint proxy statement/prospectus and that the
merger will constitute a "reorganization" within the meaning of section 368(a)
of the Internal Revenue Code of 1986, as amended.
Treatment of Software.com, Phone.com and Silver Merger Sub. No gain or loss
will be recognized by Software.com, Phone.com, or Silver Merger Sub as a
result of the merger.
Exchange of Software.com Common Stock for Phone.com Common Stock. A holder
of Software.com common stock whose shares of Software.com common stock are
exchanged in the merger for Phone.com common stock will not recognize gain or
loss, except to the extent of cash, if any, received in lieu of a fractional
share. See "Cash in Lieu of Fractional Shares" below. The aggregate tax basis
of Phone.com common stock received by such holder will be equal to the
aggregate tax basis of the Software.com common stock exchanged therefor
(excluding any portion of the holder's basis allocable to fractional shares),
and the holding period of Phone.com common stock received will include the
holding period of the Software.com common stock exchanged therefor.
Cash in Lieu of Fractional Shares. A holder of Software.com common stock who
receives cash in lieu of a fractional share of Phone.com common stock will be
treated as having received such fractional share pursuant to the merger and
then as having exchanged such fractional share for cash in a redemption by
Phone.com. The amount of any gain or loss will be equal to the difference
between the ratable portion of the tax basis of the Software.com common stock
exchanged in the merger that is allocable to such fractional share and the
cash received in lieu thereof. Any such gain or loss will constitute long-term
capital gain or loss if such Software.com common stock has been held by the
holder for more than one year at the time of the consummation of the merger.
Backup Withholding. Holders of Software.com common stock who receive cash in
lieu of fractional shares of Phone.com common stock may be subject to backup
withholding at a rate of 31%. Backup withholding will not apply, however, to a
stockholder who (a) furnishes a correct taxpayer identification number and
certifies, under penalties of perjury, that he or she is not subject to backup
withholding on a Form W-9, (b) provides a certificate of foreign status on
Form W-8, or (c) is otherwise exempt from backup withholding. A stockholder
who fails to provide the correct taxpayer identification number on Form W-9
may be subject to a $50 penalty imposed by the Internal Revenue Service.
Reporting Requirements. Each holder of Software.com common stock that
receives Phone.com common stock in the merger will be required to retain
records and file with such stockholder's United States federal income tax
return a statement setting forth certain facts relating to the merger.
Anticipated Accounting Treatment
The merger is expected to be accounted for as a pooling of interests for
accounting purposes but pooling-of-interests accounting treatment is not a
condition to the closing of the merger. Under this accounting method, the
historical financial information of Phone.com and Software.com will be
restated to reflect the combined financial position and operations of both
companies. The combined financial position and operations will be adjusted to
conform the accounting practices of the companies. Each of Phone.com and
Software.com will use commercially reasonable efforts to obtain a letter from
their respective independent auditors stating that they concur with the
conclusion of Phone.com's and Software.com's management that the merger will
qualify for pooling-of-interests accounting treatment.
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Some of the conditions to be met to qualify for pooling-of-interests
accounting treatment cannot be fully assessed until the passage of specified
periods of time after the effective time of the merger, as certain of the
conditions for pooling-of-interests accounting treatment address transactions
occurring within such specified periods of time. Certain events, including
certain transactions with respect to shares of Phone.com and Software.com
common stock by affiliates of Phone.com and Software.com could prevent the
merger from qualifying as pooling-of-interests for accounting purposes. For
information concerning certain restrictions to be imposed on the
transferability of shares of our common stock by affiliates in order, among
other things, to ensure the availability of pooling-of-interests accounting
treatment, see "The Merger Agreement--Affiliates."
If events occur that cause the merger to be deemed no longer to qualify for
pooling-of-interests accounting treatment, the purchase method of accounting
would be applied. The purchase method of accounting could have a material
adverse effect on the reported operating results of Phone.com as compared to
pooling-of-interests accounting treatment. See "Risk Factors--Failure to
qualify for pooling-of-interests accounting treatment may impact reported
operating results."
Interests of Directors and Officers in the Merger
When considering the recommendation of Software.com's and Phone.com's boards
of directors, you should be aware that both companies' directors and officers
have interests in the merger that are different from, or are in addition to,
your interests.
In accordance with the terms of the merger agreement, the combined company's
board of directors will be comprised of six members. It is expected that
Donald J. Listwin, John L. MacFarlane and Bernard Puckett from Software.com's
board of directors will join Phone.com's board of directors and Alain
Rossmann, Reed E. Hundt and Roger Evans from Phone.com's board of directors
will continue as directors. After the merger, Donald J. Listwin will be
President and Chief Executive Officer of the combined company, Alain Rossmann
will be Executive Vice President and Chairman, John L. MacFarlane will be
Executive Vice President and Alan J. Black will be Chief Financial Officer.
Donald J. Listwin is expected to resign from Software.com's board of directors
and join Phone.com as its President and Chief Executive Officer prior to the
merger.
Software.com's executive officers John L. MacFarlane and Valdur Koha and 14
other officers and key employees of Software.com have entered into change of
control agreements that provide that if an officer's employment is terminated
as a result of an "involuntary termination" during a period beginning two
months before, and ending six months after a change of control, then one-half
of the unvested portion of any stock options held by the officer will
accelerate and become exercisable, subject to certain limitations. The merger
with Phone.com may constitute a change of control. For purposes of the
agreement, "involuntary termination" includes a change in the nature or scope
of the officer's duties that is inconsistent with the position held by the
officer immediately before the change of control, a material reduction of
benefits or perquisites, a reduction in base cash salary, a relocation that is
more than 20 miles from the officer's present location, any purported
termination of the officer by Software.com, or the failure by Software.com to
obtain the assumption of the change of control agreement.
Phone.com also has entered into change of control agreements with Alan
Black, Benjamin Linder, Charles Parrish, Alain Rossmann and Mike Mulica and
five other officers and key employees. These agreements provide that if the
officer's employment is terminated as a result of an "involuntary termination"
other than for cause within 18 months following a change of control
transaction, the vesting of any stock option or restricted stock held by the
officer shall be automatically accelerated so that the option or restricted
stock becomes completely vested and exercisable. The merger with Software.com
may constitute a change control. For purposes of the change of control
agreements, "involuntary termination" includes a significant reduction in the
employee's duties, authority or responsibilities, a substantial reduction of
facilities or perquisites, a reduction in base salary, a material reduction in
employee benefits, a relocation that is more than 30 miles from the employee's
then-present location, the failure of successors of Phone.com to assume the
change of control agreement, the purported termination of the employee other
than for disability or cause, or any act or circumstances that would
constitute a constructive termination under California case law or statute.
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In addition, the directors and officers of Software.com have continuing
indemnification against liabilities. Phone.com has agreed to cause the
surviving corporation in the merger to indemnify each Software.com officer and
director to the same extent as provided in Software.com's certificate of
incorporation and bylaws and the indemnification agreements between
Software.com and its officers and directors. In addition, Phone.com has agreed
to cause the surviving corporation to maintain Software.com's directors' and
officers' liability insurance for at least six years from the completion of
the merger.
Regulatory Clearances and Approvals
Hart-Scott-Rodino Antitrust Improvements Act
Phone.com and Software.com cannot complete the merger until they give
notification and furnish information to the Federal Trade Commission and the
Antitrust Division of the Department of Justice and observe a statutory
waiting period requirement. Phone.com and Software.com filed the required
notification and report forms with the Federal Trade Commission and the
Antitrust Division and the waiting period was terminated on August 30, 2000.
At any time before or after the effective time of the merger, and
notwithstanding that the waiting period has terminated or the merger may have
been consummated, the Federal Trade Commission, the Antitrust Division or any
state could take any action under the applicable antitrust or competition laws
as it deems necessary or desirable. This action could include seeking to
enjoin the completion of the merger. Private parties may also institute legal
actions under the antitrust laws under some circumstances.
No Dissenter's or Appraisal Rights
Under Delaware law, no holder of Phone.com common stock or Software.com
common stock will have any dissenter's or appraisal rights in connection with
the merger.
Quotation on the Nasdaq National Market
It is a condition to the merger that the shares of Phone.com common stock to
be issued in the merger and the other shares to be reserved for issuance in
connection with the merger be approved for trading on the Nasdaq National
Market subject to official notice of issuance. The merger agreement provides
that Phone.com will use its commercially reasonable efforts to cause the
shares of Phone.com common stock to be issued in the merger and the shares of
Phone.com common stock to be reserved for issuance in connection with the
merger to be approved for trading on the Nasdaq National Market.
Delisting and Deregistration of Software.com Common Stock
If the merger is completed, Software.com common stock will be delisted from
the Nasdaq National Market and will be deregistered under the Securities
Exchange Act of 1934, as amended.
Federal Securities Laws Consequences
The shares of Phone.com common stock to be issued in the merger will be
registered under the Securities Act of 1933, as amended. These shares will be
freely transferable under the Securities Act, except for Phone.com common
stock issued to any person who is deemed to be an affiliate of Software.com or
the combined company. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under common
control with Software.com and include Software.com's officers and directors,
as well as its principal stockholders. Software.com's affiliates may not sell
their Phone.com common stock acquired in the merger, except pursuant to:
. an effective registration statement under the Securities Act covering the
resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act; or
. any other applicable exemption under the Securities Act.
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THE MERGER AGREEMENT
This section is a summary of the material terms of the merger agreement, a
copy of which is attached as Annex A to this document. The following
description does not purport to be complete and is qualified in its entirety
by reference to the merger agreement. You should refer to the full text of the
merger agreement for details of the merger and the terms and conditions of the
merger agreement.
The Merger
The merger agreement provides that when all closing conditions have been
satisfied or waived, Silver Merger Sub will be merged into Software.com, with
Software.com as the surviving corporation. As a result of the merger,
Software.com will become a wholly-owned subsidiary of Phone.com. The merger
will become effective on the date of filing of a certificate of merger with
the Secretary of State of the State of Delaware or a later date as is
specified in the certificate of merger and agreed upon by the parties. This is
referred to as the effective time of the merger.
The Exchange Ratio and Treatment of Software.com Securities
At the effective time of the merger:
. each share of Software.com common stock issued and outstanding
immediately prior to the effective time, other than shares of
Software.com common stock held in the treasury of Software.com, or owned
by Phone.com or any direct or indirect subsidiary of Software.com or
Phone.com, will be converted into the right to receive 1.6105 shares of
Phone.com common stock; and
. shares of Software.com common stock held in the treasury of Software.com,
or owned by Phone.com or any direct or indirect subsidiary of
Software.com or Phone.com, will be canceled and no Phone.com common stock
or other consideration will be delivered in exchange for this
cancellation.
Each outstanding option or warrant to purchase Software.com common stock
will be converted at the effective time of the merger into, and will become an
option or warrant to purchase, 1.6105 shares of Phone.com common stock for
each share of Software.com common stock covered by the option or warrant
before the merger. After conversion, the exercise price per share of Phone.com
common stock subject to each option and warrant will equal its pre-conversion
exercise price per share of Software.com common stock divided by 1.6105. Each
such outstanding option or warrant to purchase Software.com common stock,
whether or not exercisable, shall be assumed by Phone.com and shall be subject
to, and exercisable upon, the same terms and conditions as under the
applicable stock plan, except as provided in the merger agreement.
At the effective time of the merger, all outstanding rights to purchase
Software.com common stock under the Software.com Employee Stock Purchase Plan
will be converted, in accordance with the exchange ratio of 1.6105, into, and
will become rights to purchase shares of Phone.com common stock. Each
converted right and outstanding offering period in effect under the
Software.com Employee Stock Purchase Plan immediately prior to the effective
time shall be assumed by Phone.com.
Exchange of Certificates
As soon as reasonably practicable after the effective time of the merger,
U.S. Stock Transfer Corporation, as exchange agent, will mail to each
stockholder of record of Software.com a letter of transmittal containing
instructions for the surrender of certificates representing Software.com
common stock in exchange for certificates representing Phone.com common stock.
No fractional shares of Phone.com common stock will be issued in the merger.
Instead of issuing fractional shares of Phone.com common stock to the holders
of shares of Software.com common stock, Phone.com will pay cash in an amount
equal to the fractional amount multiplied by the average of the closing price
of a share of Phone.com common stock on the Nasdaq National Market for the ten
most recent trading days Phone.com
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common stock has traded ending on the trading day immediately prior to the
effective time of the merger. No interest will be paid or accrued on cash in
lieu of fractional shares, if any.
If, after six months from the effective time of the merger, a holder of
shares of Software.com common stock has not surrendered the stock certificates
representing such shares to the exchange agent, then the holder of stock
certificates representing Software.com common stock may look only to Phone.com
to receive its shares of Phone.com common stock, cash in lieu of fractional
shares and any unpaid dividends and distributions on shares of Phone.com
common stock. None of Phone.com, Silver Merger Sub, Software.com or the
exchange agent will be liable to any holder of a certificate formerly
representing shares of Software.com common stock for Phone.com common stock,
cash in lieu of fractional shares, or any unpaid dividends and distributions
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
If, after seven years from the effective time of the merger, a holder of a
certificate formerly representing shares of Software.com common stock has not
surrendered the holder's certificate, then unclaimed shares of Phone.com
common stock, cash in lieu of fractional shares and any unpaid dividends and
distributions on shares of Phone.com common stock will, to the extent
permitted by applicable law, become the property of Software.com as the
surviving corporation of the merger.
Holders of Software.com common stock should not send in their certificates
until they receive a letter of transmittal from the exchange agent.
Corporate Organization and Governance
Upon consummation of the merger, Software.com will become the surviving
corporation and shall continue to be governed by the laws of the State of
Delaware. The directors and officers of Silver Merger Sub at the effective
time of the merger will be the directors and officers of the surviving
corporation, until their respective successors are duly elected, appointed or
qualified or until their earlier death, removal or resignation in accordance
with the certificate of incorporation and by-laws of the surviving
corporation.
Representations and Warranties
The merger agreement contains reciprocal customary representations and
warranties, subject to qualifications, made by each of us to the other
relating to the following matters:
. organization, standing and similar corporate matters;
. subsidiaries;
. capital structure;
. the corporate power and authority to execute, deliver and perform the
merger agreement and the related agreements and to consummate the
transactions contemplated by these agreements;
. the absence of conflicts between organizational documents, by-laws and
agreements and the merger agreement and the related transactions;
. the absence of any required governmental consents, approvals or
authorizations other than those specified in the merger agreement;
. the timely filing of documents and the accuracy of information contained
in documents filed with the Securities and Exchange Commission;
. the absence of undisclosed liabilities;
. the accuracy of information supplied by us in connection with this proxy
statement/prospectus and the registration statement of which it is a
part;
. the absence of material changes or events relating to our businesses
since March 31, 2000;
. compliance with applicable laws and possession of material permits;
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. the absence of undisclosed pending or threatened material litigation;
. benefit plans and other employment-related matters;
. timely filing of tax returns and other tax-related matters;
. voting requirements in connection with the merger agreement and the
related transactions;
. the inapplicability of state anti-takeover laws;
. the absence of undisclosed brokers and finders;
. the receipt of fairness opinions from our respective financial advisors;
. ownership by one party of the common stock of another party;
. intellectual property matters;
. the existence, validity and status of material agreements;
. shareholder rights plans;
. compliance with environmental laws and regulations;
. insurance;
. the absence of actions that would prevent the accounting for the merger
as a pooling of interests;
. the absence of transactions with affiliates; and
. full disclosure of material facts.
All representations and warranties of Phone.com, Software.com and Silver
Merger Sub will expire at the effective time of the merger.
Covenants
The merger agreement contains reciprocal covenants made by each of us to the
other relating to certain matters. Each of us has agreed that, except as
provided in the merger agreement or with the consent of the other party, which
shall not be unreasonably withheld or delayed prior to the time the merger
becomes effective, it will conduct its business in the ordinary course
consistent with past practice and will use its reasonable efforts to preserve
its business organization and to maintain its existing relationships with
customers, suppliers, employees, creditors and business partners.
Accordingly, each of us has agreed that neither it nor its subsidiaries
will, prior to the effective time of the merger, without the consent of the
other party, which consent shall not be unreasonably withheld or delayed:
. declare, set aside or pay any dividend or other distribution on any of
its capital stock;
. split, combine or reclassify its common stock;
. purchase, redeem or otherwise acquire any of its capital stock or any of
its subsidiaries' capital stock;
. issue additional shares of or securities convertible into, or options,
warrants or rights to acquire, any capital stock, except issuances
pursuant to the exercise of its options outstanding on the date of the
merger agreement in accordance with their present terms;
. amend its certificate of incorporation or by-laws or similar
organizational documents;
. acquire a substantial portion of the assets or securities of any business
or person;
. make any material investment in any other individual or entity other than
its subsidiaries;
. sell, lease, license, mortgage or encumber any assets other than in the
ordinary course of business;
. take any action that would cause any of its representations and
warranties to become inaccurate;
. incur or assume any debt or guarantee the debt of others other than in
the ordinary course of business;
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. settle any material claims or proceedings involving money damages except
in the ordinary course of business;
. make any material tax election except in the ordinary course of business;
. enter into, modify, amend or terminate any material agreements other than
in the ordinary course of business;
. increase the compensation of or benefits to officers or directors or
materially increase the compensation of or benefits to employees except
for increases in accordance with normal past practice, or provide any new
or change any existing benefit plan, or enter into any employment
agreement involving compensation in excess of $200,000 per year;
. change the accounting methods used by it or any of its subsidiaries or
take any action to jeopardize the treatment of the merger as a pooling of
interests for accounting purposes; or
. authorize, or commit or agree to take, any of the above actions.
In addition, Phone.com, Software.com and Silver Merger Sub have agreed not
to take any action or permit any of their respective subsidiaries to take any
action that could result in any of the closing conditions to the merger not
being satisfied. Each of Phone.com, Software.com and Silver Merger Sub agree
to advise the other parties if they are aware of any event that would cause a
failure of any such closing condition.
No Solicitation of Transactions
In the merger agreement, each party has agreed that it will not, nor will it
permit any of its subsidiaries to, nor will it authorize or permit any
representatives retained by it or any of its subsidiaries to, directly or
indirectly:
. solicit, initiate or encourage, or take any other action designed to
facilitate, any inquiries or the making of any proposal the consummation
of which would result in:
-- a transaction or series of transactions pursuant to which a person or
group of persons, other than Phone.com and its subsidiaries or
Software.com and its subsidiaries, would acquire beneficial ownership
of more than 20% of the outstanding shares of its common stock;
-- any acquisition or proposed acquisition of it or any of its
significant subsidiaries by a merger or other business combination,
regardless of whether it or any of its subsidiaries survives the
merger; or
-- any other transaction pursuant to which a third party would acquire,
directly or indirectly, control of assets of it or any of its
subsidiaries, including the equity securities of such subsidiaries,
for consideration equal to 20% or more of the fair market value of all
of the outstanding shares of its common stock.
. participate in any discussions or negotiations regarding any proposals or
offers described above, each of which we will refer to as an "alternative
transaction."
However, if either Phone.com or Software.com receives an unsolicited
proposal with respect to an alternative transaction and the holders of its
common stock have not adopted the merger proposals set forth in this joint
proxy statement/prospectus, and if its board of directors determines in good
faith, after consultation with outside legal counsel, that the failure to
provide information or participate in such negotiations would result in a
reasonable possibility that its board of directors would breach its fiduciary
duties to its stockholders, then it may:
. furnish information with respect to itself and its subsidiaries pursuant
to a customary confidentiality agreement containing terms no less
restrictive than the one between Software.com and Phone.com; and
. participate in negotiations regarding such proposal.
Each party has also agreed in the merger agreement that its board of
directors may not:
. withdraw, qualify or modify, or propose publicly to do any of the
foregoing, in a manner adverse to the other party, its approval or
recommendation with respect to the merger;
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. approve or recommend, or propose publicly to approve or recommend, any
alternative transaction; or
. cause its company to enter into an agreement with respect to any
alternative transaction.
However, if Phone.com or Software.com receives a superior proposal and the
holders of its common stock have not adopted the merger agreement, and if its
board of directors determines in good faith, after consultation with outside
legal counsel, that the failure to do so would result in a reasonable
possibility that the board of directors would breach its fiduciary duties to
its stockholders, then the board of directors may inform its stockholders that
it no longer believes that the merger or this agreement is advisable and no
longer recommends the merger proposal. However, prior to making such a
determination, Phone.com or Software.com must provide the other notice which
includes the terms and conditions of the superior proposal.
A "superior proposal" means any proposal made by a third party to enter into
an alternative transaction that the board of directors of Phone.com or
Software.com determines in its good faith judgment, after consultation with a
financial advisor of nationally recognized reputation, to be more favorable to
its stockholders than the merger. However, each party must submit the merger
agreement to its stockholders even if its board of directors determines that
is no longer advisable and no longer recommends the merger proposals.
Additionally, each party will promptly advise the other party of any request
for information or of any proposal in connection with an alternative
transaction, the material terms and conditions of such request or proposal and
the identity of the person making such request or proposal and keep the other
party reasonably informed of the status and details of any request or
proposal.
The merger agreement provides that these restrictions will not prohibit
Phone.com or Software.com from:
. complying with Rule 14e-2(a) and Rule 14d-9 under the Securities and
Exchange Act of 1934, as amended; or
. making any disclosure to its stockholders if, in the good faith judgment
of its board of directors, after consultation with outside counsel, the
failure to disclose would be inconsistent with its board of directors'
fiduciary duties to its stockholders.
Board of Directors' Agreement to Recommend
Subject to the provisions described above under "--No Solicitation of
Transactions," Phone.com has agreed that its board of directors will recommend
to its stockholders the approval of the issuance of shares of Phone.com common
stock pursuant to the merger agreement and the amendment to its certificate of
incorporation to change the name of Phone.com to .
Subject to the provisions described above under "--No Solicitation of
Transactions," Software.com has agreed that its board of directors will
recommend to its stockholders the approval and adoption of the merger
agreement, the merger and the other transactions contemplated thereby.
Pooling Letters
Software.com will use commercially reasonable efforts to obtain from its
independent auditor a letter stating that it concurs with the conclusion of
Software.com's management that Software.com qualifies as a "combining company"
for purposes of pooling-of-interests accounting. Phone.com will use
commercially reasonable efforts to obtain from its independent accountant a
letter stating that it concurs with the conclusion of Phone.com's management
that the merger qualifies for pooling-of-interests accounting. In addition,
both Phone.com and Software.com agree, on behalf of themselves and their
subsidiaries, to use their reasonable efforts to cause the merger to be
accounted for as a pooling of interests, although pooling-of-interests
accounting treatment is not a condition to the merger.
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Access to Information
Subject to existing confidentiality obligations, Software.com and Phone.com
have agreed to afford each other and each of their respective representatives
reasonable access during normal business hours to their respective properties,
books, contracts, commitments, personnel and records.
Commercially Reasonable Efforts
Under the merger agreement and subject to the conditions and limitations
specified in the merger agreement, the parties have agreed to cooperate with
each other to take specified actions and to use commercially reasonable
efforts to consummate the merger.
Indemnification, Exculpation and Insurance
The merger agreement provides that Phone.com agrees to indemnify, at all
times after the effective time, directors or officers of Software.com, any of
its subsidiaries or affiliates, to the same extent as provided in
Software.com's certificate of incorporation or by-laws or indemnity agreements
in effect at the effective time.
In addition, Phone.com also agrees to maintain for at least six years after
the effective time of the merger directors' and officers' liability insurance
policies on the same terms and conditions as Software.com's insurance policies
in effect on August 8, 2000, which will cover events occurring prior to the
effective time of the merger.
Affiliates
Phone.com's and Software.com's respective affiliates, for purposes of
applicable Securities and Exchange Commission accounting releases with respect
to pooling-of-interests accounting treatment, have delivered written
agreements to the effect that such affiliates will not sell, transfer or
otherwise dispose of or reduce their risk with respect to any shares of the
common stock of our companies at any time from the date thirty days prior to
the effective time until there has been a public filing or announcement that
includes appropriate combined results of operations of Phone.com and
Software.com.
Employee Benefits
After the closing of the merger, for a period of one year, Phone.com has
agreed to provide all active employees of Software.com and their dependents
and all qualified beneficiaries with coverage under one or more Phone.com
welfare benefits plans, including health coverage, which, in the aggregate, is
comparable to that provided under the Software.com benefit plans before the
effective time of the merger.
Post-Merger Operations; Phone.com Board of Directors and Officers
After the merger, the headquarters of Phone.com and its subsidiaries will be
located in Redwood City, California. The Phone.com board of directors has
agreed to recommend that Phone.com's stockholders approve an amendment to
Phone.com's certificate of incorporation to change the name of Phone.com to a
name to be mutually agreed upon by Phone.com and Software.com. Phone.com has
agreed that its board of directors will take all action necessary so that as
of the effective time, the board of directors of Phone.com will consist of six
members, three of whom were members of the Phone.com board of directors as of
the date of the merger agreement designated by Phone.com and three of whom
were members of the Software.com board of directors as of the date of the
merger agreement designated by Software.com. It is expected that Donald J.
Listwin, John L. MacFarlane and Bernard Puckett from Software.com's board of
directors will join Phone.com's board of directors and Alain Rossmann, Reed E.
Hundt and Roger Evans from Phone.com's board of directors will continue as
directors. Phone.com has also agreed for its board of directors to take all
action necessary so that as of the effective time Donald J. Listwin will be
appointed to the position of President and Chief Executive Officer of
Phone.com, Alain Rossmann will be appointed to the position of Executive Vice
President of Phone.com, John L. MacFarlane will be appointed to the position
of Executive Vice President of Phone.com and Alan J. Black will be appointed
to the position of Chief Financial Officer of Phone.com. Donald J. Listwin is
expected
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to resign from Software.com's board of directors and join Phone.com as its
President and Chief Executive Officer prior to the merger.
Conditions to the Consummation of the Merger
The respective obligations of Phone.com, Silver Merger Sub and Software.com
to effect the merger are subject to the following conditions:
. the approval of the stockholders of Phone.com of the issuance of shares
of Phone.com common stock pursuant to the merger agreement and the
amendment to Phone.com's certificate of incorporation to change the name
of Phone.com;
. the approval of the stockholders of Software.com of the adoption of the
merger agreement and the transactions contemplated thereby;
. all required regulatory consents and approvals, including the observance
of the statutory waiting period under the HSR Act, have been obtained;
. there may be no judgment, order, law, injunction or other legal restraint
or prohibition preventing the consummation of the merger or likely to
have a material adverse effect on Phone.com or the effective operation of
the combined company after the effective time of the merger;
. the registration statement of which this joint proxy statement/prospectus
is a part is declared effective and no stop order suspends the
effectiveness of the registration statement, and no proceeding for that
purpose is initiated or threatened by the Securities and Exchange
Commission; and
. the shares of Phone.com common stock to be issued in the merger are
qualified for inclusion in the Nasdaq National Market.
Software.com's obligations to effect the merger are subject to the following
additional conditions:
. the representations and warranties of Phone.com and Silver Merger Sub are
true and correct when made and as of the closing date except where the
failure of such representations and warranties to be true and correct
does not and is not likely to have a material adverse effect on
Phone.com;
. each of Phone.com and Silver Merger Sub has performed in all material
respects its obligations required to be performed by it prior to and at
the closing date;
. since August 8, 2000, no material adverse change has occurred relating to
Phone.com;
. an officer of Phone.com certifies that the above closing conditions have
been satisfied; and
. Software.com has received an opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, that the merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended,
Phone.com and Silver Merger Sub's obligations to effect the merger are
subject to the following additional conditions:
. the representations and warranties of Software.com are true and correct
when made and as of the closing date except where the failure of such
representations and warranties to be true and correct does not and is not
likely to have a material adverse effect on Software.com;
. Software.com has performed in all material respects its obligations
required to be performed by it prior to and at the closing date;
. since August 8, 2000, no material adverse change has occurred relating to
Software.com;
. an officer of Software.com certifies that the above closing conditions
have been satisfied; and
. Phone.com has received an opinion of Skadden, Arps, Slate, Meagher & Flom
LLP that the merger will constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended,
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Termination
The merger agreement provides that at any time prior to the effective time
of the merger, the merger agreement may be terminated:
. by mutual written consent of Phone.com and Software.com if the board of
directors of each determines to do so by a vote of a majority of the
entire board of directors;
. by the board of directors of either Phone.com or Software.com if:
-- the merger has not been completed on or prior to March 31, 2001, or
June 30, 2001 if either Phone.com or Software.com has received a
request for additional information from a governmental entity
responsible for antitrust regulation, in any case so long as the party
seeking to terminate did not prevent the consummation of the merger by
failing to perform any of its obligations under the merger agreement;
-- the Phone.com stockholders fail to approve the issuance of shares of
Phone.com common stock and the amendment to Phone.com's certificate of
incorporation to change the name of Phone.com;
-- the Software.com stockholders fail to approve the adoption of the
merger agreement and the transactions contemplated thereby; or
-- any court or other governmental body issues a nonappealable final
order that has a material adverse effect on Phone.com or the effective
operation of the combined company following the merger, or a required
regulatory approval is denied.
. by the board of directors of Software.com if:
-- Phone.com or Silver Merger Sub materially breaches or fails to perform
any of its representations, warranties, covenants or other agreements
in the merger agreement, which breach or failure to perform is
incapable of being cured or is not cured within 15 business days of
written notice from Software.com; or
-- at any time prior to Phone.com's special meeting, Phone.com's board of
directors withdraws, modifies, qualifies in a manner adverse to
Software.com or fails to reconfirm, on Software.com's request, its
recommendation that stockholders approve the issuance of shares of
Phone.com common stock in the merger and the amendment to Phone.com's
certificate of incorporation to change the name of Phone.com, or
Phone.com materially breaches its covenant not to solicit alternative
transactions.
.by the board of directors of Phone.com if:
-- Software.com materially breaches or fails to perform any of its
representations, warranties, covenants or other agreements in the
merger agreement, which breach or failure to perform is incapable of
being cured or is not cured within 15 business days of written notice
from Phone.com; or
-- at any time prior to Software.com's special meeting, Software.com's
board of directors withdraws, modifies, qualifies in a manner adverse
to Phone.com or fails to reconfirm, on Phone.com's request, its
recommendation that the stockholders approve the merger agreement and
the transactions contemplated thereby, or Software.com materially
breaches its covenant not to solicit alternative transactions.
Termination Fee and Expenses
If the merger agreement is terminated by either Software.com or Phone.com
because of:
. the failure of Phone.com stockholders to approve the issuance of shares
of Phone.com common stock and the amendment to Phone.com's certificate
of incorporation to change the name of Phone.com; and
. at the time of such termination or prior to the meeting of Phone.com
stockholders there was a publicly announced offer or proposal for an
alternative transaction involving an acquisition of at least fifty
percent of Phone.com's outstanding shares,
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then the merger agreement provides that Phone.com will pay to Software.com all
of Software.com's expenses incurred in connection with the merger agreement
and the transactions contemplated thereby.
The merger agreement provides that Phone.com will pay to Software.com a
termination fee of $195 million less any expenses paid as described in the
above paragraph, if the merger agreement is terminated and:
. within twelve months following a termination described in the above
paragraph, Phone.com consummates an alternative transaction or enters
into an agreement or binding letter of intent providing for an
alternative transaction;
. Phone.com materially breaches its obligations to promptly convene and
hold its stockholder meeting and to recommend approval of the issuance of
shares of Phone.com common stock pursuant to the merger agreement or the
amendment of Phone.com's certificate of incorporation to change the name
of Phone.com, which breach is not cured within 30 days after notice from
Software.com; or
. at any time prior to Phone.com's special meeting, Phone.com's board of
directors withdraws, modifies, qualifies in a manner adverse to
Software.com or fails to reconfirm, on Software.com's request, its
recommendation that stockholders approve the issuance of shares of
Phone.com common stock in the merger and the amendment to Phone.com's
certificate of incorporation to change the name of Phone.com, or
Phone.com materially breaches its covenant not to solicit alternative
transactions.
Any termination fee shall be paid in cash and shares of Phone.com shares
provided that the amount of cash is at least $40 million. Shares of Phone.com
will be valued at a price per share equal to the average closing price of
Phone.com common stock on Nasdaq for the five trading days ending on the
trading day immediately prior to the termination date.
If the merger agreement is terminated by either Software.com or Phone.com
because of:
. the failure of Software.com stockholders to approve the adoption of the
merger agreement and the transactions contemplated thereby; and
. at the time of such termination or prior to the meeting of Software.com
stockholders there was a publicly announced offer or proposal for an
alternative transaction involving an acquisition of at least fifty
percent of Software.com's outstanding shares,
then the merger agreement provides that Software.com will pay to Phone.com all
of Phone.com's expenses incurred in connection with the merger agreement and
the transactions contemplated thereby.
The merger agreement provides that Software.com will pay to Phone.com a
termination fee of $195 million less any expenses paid as described in the
above paragraph, if the merger agreement is terminated and:
. within twelve months following a termination described in the above
paragraph, Software.com consummates an alternative transaction or enters
into an agreement or binding letter of intent providing for an
alternative transaction;
. Software.com materially breaches its obligations to promptly convene and
hold its stockholder meeting and to recommend approval of adoption of the
merger agreement, the merger and the other transactions contemplated
thereby, to its stockholders, which breach is not cured within 30 days
after notice from Phone.com; or
. at any time prior to Software.com's special meeting, Software.com's board
of directors withdraws, modifies, qualifies in a manner adverse to
Phone.com or fails to reconfirm, on Phone.com's request, its
recommendation that stockholders approve the merger, or Software.com
materially breaches its covenant not to solicit alternative transactions.
Any termination fee shall be paid in cash and shares of Software.com shares
provided that the amount of cash is at least $40 million. Shares of
Software.com will be valued at a price per share equal to the average closing
price of Software.com common stock on Nasdaq for the five trading days ending
on the trading day immediately prior to the termination date.
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In addition, except as specifically provided in the merger agreement, each
party has agreed to bear its own expenses in connection with the merger
agreement and the other related agreements and the transactions contemplated
by the merger agreement.
Amendment; Extension and Waiver
The parties may amend the merger agreement at any time before or after the
approval of the merger proposals by the Phone.com stockholders or the
Software.com stockholders. After the approval by either the Phone.com
stockholders or the Software.com stockholders, the parties may not amend the
merger agreement without further stockholder approvals of the Phone.com
stockholders and the Software.com stockholders if the amendment changes the
amount or the form of consideration to be issued to Software.com stockholders,
or which by law requires the further approval of the stockholders.
At any time prior to the effective time of the merger, any party may,
subject to the amendment restrictions described above:
. extend the time for the performance of any of the obligations or other
acts of the other parties;
. waive any inaccuracies in the representations and warranties of the other
parties contained in the merger agreement or in any document delivered
pursuant to the merger agreement; and
. waive compliance by the other party with any of the agreements or
conditions in the merger agreement.
Any extension or waiver described above will be valid if set forth in
writing and signed on behalf of the waiving party.
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RELATED AGREEMENTS
Phone.com Stock Option Agreement
General
Phone.com and Software.com have entered into a stock option agreement giving
Software.com the right to acquire shares of Phone.com. The stock option
agreement may prevent a third party from completing a pooling-of-interests
transaction with Phone.com and would make alternative transactions, including
a merger with another company, significantly more expensive for a potential
purchaser than would otherwise be the case. Accordingly, the stock option
agreement may discourage third parties from proposing alternative transactions
that may be more advantageous than the merger for Phone.com stockholders.
The stock option agreement gives Software.com an option to purchase shares
of Phone.com common stock at an exercise price of $78.0625 per share. The
maximum number of shares that Software.com may purchase under the option is
16,516,495 shares of Phone.com common stock, which represents 19.9% of the
shares of Phone.com common stock outstanding on July 31, 2000.
Phone.com has attached the stock option agreement to this document as Annex
B. Phone.com urges you to read the full text of the stock option agreement.
When the option may be exercised
The option will become exercisable when the merger agreement is terminated
in a circumstance under which Software.com is permitted to receive a
termination fee from Phone.com. These circumstances are described under "The
Merger Agreement--Termination Fee and Expenses."
Events terminating the right to exercise
The right to exercise the option terminates if Software.com completes the
merger. The right to exercise the option also terminates in the following
circumstances:
. six months after the option first becomes exercisable, provided that, if
the option cannot be exercised as of such date by reason of any
applicable judgment, decree, law, regulation or order, or by reason of
the waiting period under the HSR Act, then the right to exercise the
option will terminate thirty days after such impediment has been removed
or such waiting period has expired;
. twelve months after the termination of the merger agreement if such
termination results from Phone.com's failure to obtain the required
approval of merger agreement from the Phone.com stockholders, provided
that Software.com is entitled to recover its expenses as described under
the "The Merger Agreement--Termination Fee and Expenses," unless within
such twelve-month period Phone.com is required to pay a termination fee
to Software.com, as described under the "The Merger Agreement--
Termination Fee and Expenses," in which case the right to exercise the
option shall terminate six months after the actual payment of the
termination fee; and
. upon termination of the merger agreement under any other circumstances
not described in item 2 above, which do not result in the option becoming
exercisable.
Repurchase
At any time after the option becomes exercisable and before the option
expires, Software.com may request that Phone.com repurchase all or any portion
of the option, to the extent not previously exercised, and all or any portion
of the shares of Phone.com common stock issued pursuant to the option as
Software.com may designate.
The option will be repurchased at a price equal to the difference between
(i) the higher of (A) the highest price per share offered as of the date of
such repurchase pursuant to any alternative transaction described under
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the "The Merger Agreement--Termination Fee and Expenses" above, and (B) the
average closing sale price of Phone.com common stock during the five trading
days ending on the trading day immediately preceding the repurchase and (ii)
option exercise price, multiplied by the number of shares of Phone.com common
stock purchasable pursuant to the option. The shares of Phone.com common stock
issued pursuant to the option will be repurchased at (i) the higher of (A) the
highest price per share offered as of the date of such repurchase pursuant to
any alternative transaction described under the "The Merger Agreement--
Termination Fee and Expenses," and (B) the average closing sale price of
Phone.com common stock during the five trading days ending on the trading day
immediately preceding such repurchase (ii) multiplied by the number of shares
being repurchased.
Limitation on total profit
The "total profit" that Software.com can realize from the stock option
agreement and the termination fee may not exceed $230,454,545. The "total
profit" realized by Software.com is defined as the sum of the following
amounts received by Software.com from:
. the sale of shares purchased under the option, less the purchase price
for those shares;
. the sale of shares received as part of the termination fee;
. the repurchase of the option by Phone.com;
. the transfer of the option; and
. any expenses or termination fee received under the merger agreement.
Registration rights
Software.com may demand on two occasions that Phone.com file a registration
statement, including a shelf registration statement, to register the shares of
Phone.com common stock that it may acquire upon the exercise of the option.
The registration rights terminate three years after the first exercise of the
option. The option agreement also grants Software.com the right to have shares
of Phone.com common stock that it may acquire upon exercise of the option
included in registration statements filed by Phone.com for a period of two
years after the first exercise of the option.
Adjustments
The type and number of securities purchasable under the option agreement
will be adjusted appropriately to reflect any change in Software.com's common
stock involving reclassifications, recapitalizations, stock dividends,
dividends, split-ups, combinations, subdivisions, exchanges or similar events.
Transfer
Software.com may not transfer the exercise of rights or the option to any
person without Phone.com's prior written consent.
Phone.com Voting Agreements
Certain stockholders of Phone.com have agreed with Software.com, and have
granted John L. MacFarlane and Craig A. Shelburne of Software.com irrevocable
proxies to vote all of the voting securities of Phone.com which are
beneficially owned by them in favor of the issuance of Phone.com common stock
in the merger and the amendment to Phone.com's certificate of incorporation to
change the name of Phone.com. These stockholders have also agreed that
beginning thirty days prior to the effective time of the merger, they will not
sell or transfer the securities of Phone.com which are beneficially owned by
them except to a person who executes the Phone.com voting agreement and have
agreed in writing to be bound by its terms. As of July 31, 2000, these
stockholders beneficially owned 10,752,845 shares of Phone.com common stock,
representing approximately 13.0% of the voting power of the outstanding
Phone.com common stock.
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<PAGE>
The voting agreement also restricts the stockholders and their
representatives from initiating, taking, soliciting or encouraging any action
to facilitate the making of any offer or proposal for any of (i) a transaction
or series of transactions pursuant to which any person or group of persons
other than Software.com and its subsidiaries acquires or would acquire,
directly or indirectly, beneficial ownership of more than 20% of the
outstanding shares of Phone.com, (ii) any acquisition or proposed acquisition
of Phone.com or any of its significant subsidiaries, by a merger or other
business combination or (iii) any other transaction pursuant to which any
person or group of persons other than Software.com and its subsidiaries
acquires or would acquire, directly or indirectly, control of assets of
Phone.com or any of its subsidiaries for consideration equal to 20% or more of
the fair market value of all of the outstanding shares of Phone.com common
stock. The stockholders and their representatives are also prohibited from
engaging in negotiations or discussions with or providing information to
anyone who proposes such an alternative transaction to the extent Phone.com is
prohibited from taking those actions.
The voting agreement will terminate on the earliest of:
. the completion of the merger;
. the termination of the merger agreement; and
. the mutual agreement of the parties to terminate the voting agreement.
The Phone.com voting agreement is attached as Annex D to this document. You
should read it in its entirety.
Phone.com Affiliate Agreements
Each member of the Phone.com board of directors, each executive officer of
Phone.com and certain significant stockholders of Phone.com have executed
affiliate agreements. Under the affiliate agreements, these Phone.com
officers, directors and stockholders agreed not to transfer or otherwise
reduce their risk relative to any shares of Phone.com or Software.com common
stock during the period from the date 30 days prior to the effective date of
the merger until the combined company publicly announces financial results
covering at least 30 days of combined operations of Phone.com and
Software.com. The form of Phone.com affiliate agreement is attached as Annex F
to this document, and you are urged to read it in its entirety.
Phone.com Rights Agreement
Phone.com has entered into a rights agreement that entitles each holder of
Phone.com common stock to purchase one one-thousandth of a share of Series A
Junior Participating Preferred Stock at a price of $500 per one one-thousandth
of a share, subject to adjustment. Ten business days after a person or group
of affiliated or associated persons acquires beneficial ownership of 15% or
more of the outstanding shares of Phone.com common stock, other than as a
result of repurchases of stock by Phone.com or certain inadvertent actions by
institutional or certain other stockholders, and except pursuant to an offer
for all outstanding shares of Phone.com common stock which the independent
directors of Phone.com determine to be fair and in the best interests of
Phone.com and its stockholders, and other than pursuant to the merger
agreement, the Software.com option agreement and the Phone.com voting
agreements, each holder of a right to purchase one one-thousandth of a share
of Series A Junior Participating Preferred Stock will thereafter have the
right to receive, upon exercise of the right, shares of Phone.com common stock
having a value equal to two times the exercise price of the right.
At any time until the tenth business day after a person or group of
affiliated or associated persons acquires beneficial ownership of 15% or more
of the outstanding shares of Phone.com common stock, Phone.com may redeem the
rights in whole, but not in part, at a price of $0.001 per right. This rights
agreement will terminate on August 18, 2008, unless such date is extended or
the rights are redeemed by Phone.com prior to such date.
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<PAGE>
This rights agreement may have certain anti-takeover effects. The rights
will cause substantial dilution to a person or group that attempts to acquire
Phone.com in a manner which causes the rights to become discount rights unless
the offer is conditional upon a substantial number of rights being acquired.
Memorandum of Understanding Between Phone.com and Software.com
Phone.com and Software.com have entered into a memorandum of understanding
which memorializes the intent of both Phone.com and Software.com to use good
faith efforts to enter into definitive agreements regarding the rights of
Phone.com to license, distribute, resell, sublicense, use and test all of the
products commercially available to Software.com and the rights of Software.com
to license, distribute, resell, sublicense, use and test all of the products
commercially available to Phone.com. Each party has agreed to bear its own
costs of such definitive documentation and has agreed to keep all information
shared between the companies confidential pursuant to a confidentiality
agreement. The memorandum of understanding between Phone.com and Software.com
is attached as Annex I to this document. You should read it in its entirety.
On August 18, 2000, Software.com and Phone.com entered into a Reseller
License and Services Agreement, or the VAR Agreement, as contemplated by the
memorandum of understanding. The VAR Agreement provides that each party has
the right to resell the other's products and services based on standard
reseller discounts. There are no minimum commitments for either party under
the VAR Agreement. In addition, the VAR Agreement contemplates that each party
will provide sales and marketing training to resell the various products, and
the parties will hold periodic meetings amongst various personnel to conduct
such training. Other meetings will be held among various development personnel
to evaluate integration opportunities for the products to be resold under the
VAR Agreement. Each party will, for at least the first six months of the VAR
Agreement, provide technical support to the customers of the other party who
have sub-licensed the products.
Software.com Stock Option Agreement
General
Software.com and Phone.com have entered into a stock option agreement giving
Phone.com the right to acquire shares of Software.com. The stock option
agreement may prevent a third party from completing a pooling-of-interests
transaction with Software.com and would make alternative transactions,
including a merger with another company, significantly more expensive for a
potential purchaser than would otherwise be the case. Accordingly, the stock
option agreement may discourage third parties from proposing alternative
transactions that may be more advantageous than the merger for Software.com
stockholders.
The stock option agreement gives Phone.com an option to purchase shares of
Software.com common stock at an exercise price of $125.7197 per share. The
maximum number of shares that Phone.com may purchase under the option is
9,724,460 shares of Software.com common stock, which represents 19.9% of the
shares of Software.com common stock outstanding on July 31, 2000.
Software.com has attached the stock option agreement to this document as
Annex C. Software.com urges you to read the full text of the stock option
agreement.
When the option may be exercised
The option will become exercisable when the merger agreement is terminated
in a circumstance under which Phone.com is permitted to receive a termination
fee from Software.com. These circumstances are described under "The Merger
Agreement--Termination Fee and Expenses."
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<PAGE>
Events terminating the right to exercise
The right to exercise the option terminates if Phone.com completes the
merger. The right to exercise the option also terminates in the following
circumstances:
. six months after the option first becomes exercisable, provided that, if
the option cannot be exercised as of such date by reason of any
applicable judgment, decree, law, regulation or order, or by reason of
the waiting period under the HSR Act, then the right to exercise the
option will terminate thirty days after such impediment has been removed
or such waiting period has expired;
. twelve months after the termination of the merger agreement if such
termination results from Software.com's failure to obtain the required
approval of merger agreement from the Software.com stockholders, provided
that Phone.com is entitled to recover its expenses as described under the
"The Merger Agreement--Termination Fee and Expenses," unless within such
twelve-month period Software.com required to pay a termination fee to
Phone.com as described under the "The Merger Agreement--Termination Fee
and Expenses," in which case the right to exercise the option shall
terminate six months after the actual payment of the termination fee; and
. upon termination of the merger agreement under any other circumstances
not described in item 2 above, which do not result in the option becoming
exercisable.
Repurchase
At any time after the option becomes exercisable and before the option
expires, Phone.com may request that Software.com repurchase all or any portion
of the option, to the extent not previously exercised, and all or any portion
of the shares of Software.com common stock issued pursuant to the option as
Phone.com may designate.
The option will be repurchased at a price equal to the difference between
(i) the higher of (A) the highest price per share offered as of the date of
such repurchase pursuant to any alternative transaction described under the
"The Merger Agreement--Termination Fee and Expenses" above, and (B) the
average closing sale price of Software.com common stock during the five
trading days ending on the trading day immediately preceding the repurchase
and (ii) option exercise price multiplied by the number of shares of
Software.com common stock purchasable pursuant to the option. The shares of
Software.com common stock issued pursuant to the option will be repurchased at
(i) the higher of (A) the highest price per share offered as of the date of
such repurchase pursuant to any alternative transaction described under the
"The Merger Agreement--Termination Fee and Expenses," and (B) the average
closing sale price of Software.com common stock during the five trading days
ending on the trading day immediately preceding such repurchase (ii)
multiplied by the number of shares being repurchased.
Limitation on total profit
The "total profit" that Phone.com can realize from the stock option
agreement and the termination fee may not exceed $230,454,545. The "total
profit" realized by Phone.com is defined as the sum of the following amounts
received by Phone.com from:
. the sale of shares purchased under the option, less the purchase price
for those shares;
. the sale of shares received as part of the termination fee;
. the repurchase of the option by Software.com;
. the transfer of the option; and
. any expenses or termination fee received under the merger agreement.
Registration rights
Phone.com may demand on two occasions that Software.com file a registration
statement, including a shelf registration statement, to register the shares of
Software.com common stock that it may acquire upon the exercise
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<PAGE>
of the option. The registration rights terminate three years after the first
exercise of the option. The option agreement also grants Phone.com the right
to have shares of Software.com common stock that it may acquire upon exercise
of the option included in registration statements filed by Software.com for a
period of two years after the first exercise of the option.
Adjustments
The type and number of securities purchasable under the option agreement
will be adjusted appropriately to reflect any change in Software.com common
stock occurs involving reclassifications, recapitalizations, stock dividends,
dividends, split-ups, combinations, subdivisions, exchanges or similar events.
Transfer
Phone.com may not transfer the exercise of rights or the option to any
person without Software.com's prior written consent.
Software.com Voting Agreements
Certain stockholders of Software.com have agreed with Phone.com, and have
granted Alan Black and Steve Peters of Phone.com irrevocable proxies to vote
all of the voting securities of Software.com which are beneficially owned by
them in favor of the merger and any action required in furtherance of these
matters and the merger. These stockholders have also agreed that beginning
thirty days prior to the effective time of the merger, they will not sell or
transfer the securities of Software.com which are beneficially owned by them
except to a person who executes the Software.com voting agreement and have
agreed in writing to be bound by its terms. As of July 31, 2000, these
stockholders beneficially owned 9,331,547 shares of Software.com common stock,
representing approximately 19.1% of the voting power of the outstanding
Software.com common stock.
The voting agreement also restricts the stockholders and their
representatives from initiating, taking, soliciting or encouraging any action
to facilitate the making of any offer or proposal for any of (i) a transaction
or series of transactions pursuant to which any person or group of persons
other than Phone.com and its subsidiaries acquires or would acquire, directly
or indirectly, beneficial ownership of more than 20% of the outstanding shares
of Software.com, (ii) any acquisition or proposed acquisition of Software.com
or any of its significant subsidiaries, by a merger or other business
combination or (iii) any other transaction pursuant to which any person or
group of persons other than Phone.com and its subsidiaries acquires or would
acquire, directly or indirectly, control of assets of Phone.com or any of its
subsidiaries for consideration equal to 20% or more of the fair market value
of all of the outstanding shares of Software.com common stock. The
stockholders and their representatives are also prohibited from engaging in
negotiations or discussions with or providing information to anyone who
proposes such an alternative transaction to the extent Software.com is
prohibited from taking those actions.
The voting agreement will terminate on the earliest of:
. the completion of the merger;
. the termination of the merger agreement; and
. the mutual agreement of the parties to terminate the voting agreement.
The Software.com voting agreement is attached as Annex E to this document.
You should read it in its entirety.
Software.com Affiliate Agreements
Each member of the Software.com board of directors, each executive officer
of Software.com and certain significant stockholders of Software.com have
executed affiliate agreements. Under the affiliate agreements, these
Software.com officers, directors and stockholders agreed not to transfer or
otherwise reduce their risk relative to any shares of Phone.com or
Software.com common stock during the period from the date 30 days prior to the
81
<PAGE>
effective date of the merger until the combined company publicly announces
financial results covering at least 30 days of combined operations of
Software.com and Phone.com. Further, two persons have executed a special
affiliate agreement, the form of which is attached to this proxy
statement/prospectus as Annex H, that acknowledged the resale restrictions
imposed by Rule 145 under the Securities Act on shares of Phone.com common
stock to be received by them in the merger. In accordance with the affiliate
agreements, Phone.com will be entitled to place appropriate legends on these
Software.com stockholders' certificates evidencing any Phone.com common stock
to be received by them. The form of Software.com affiliate agreements are
attached to this document as Annex G and Annex H. You are urged to read both
affiliate agreements in their entirety.
Software.com Rights Agreement
Software.com has entered into a rights agreement which entitles each holder
of Software.com common stock to purchase one one-thousandth of a share of
Series A Participating Preferred Stock at a price of $600 per one one-
thousandth of a share, subject to a adjustment. Ten business days after a
person or group of affiliated or associated persons acquires, or announces a
tender offer to acquire, beneficial ownership of 15% or more of the
outstanding shares of Software.com common stock, other than pursuant to the
merger agreement, the Phone.com option agreement and the Software.com voting
agreements, each holder of a right to purchase one one-thousandth of a share
of Series A Participating Preferred Stock will thereafter have the right to
receive, upon exercise of the right, shares of Software.com stock having a
value equal to two times the exercise price of the right.
At any time until the fifth business day after a public announcement that a
person or group of affiliated or associated persons has acquired beneficial
ownership of 15% or more of the outstanding shares of Software.com common
stock, Software.com may redeem the rights in whole, but not in part, at a
price of $0.001 per right. This right agreement will terminate on the earlier
(i) August 24, 2010, (ii) the date the rights are redeemed by Software.com and
(iii) the effective date of merger.
This rights agreement may have certain anti-takeover effects. The rights
will cause substantial dilution to a person or group that attempts to acquire
Phone.com in a manner not approved by Software.com's board of directors,
except pursuant to an offer conditioned upon the negation, purchase or
redemption of the rights.
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Overview
On August 8, 2000, Phone.com entered into an agreement to merge with
Software.com in a transaction expected to be accounted for as a pooling of
interests. Under the terms of the agreement, each issued and outstanding share
of Software.com common stock will be exchanged for 1.6105 shares of Phone.com
common stock. In addition, all outstanding stock options and warrants of
Software.com will be exchanged for Phone.com stock options and warrants based
on the exchange ratio.
The following unaudited pro forma combined condensed financial statements
reflect adjustments to the historical consolidated financial statements of
Phone.com and Software.com to give effect to the merger using the pooling-of-
interests method of accounting, and to certain other acquisitions of Phone.com
and Software.com using purchase accounting as discussed below.
During the period from October 1999 through June 2000, Phone.com completed
the acquisitions of APiON, AtMotion, Paragon, and Onebox in various
transactions accounted for as purchases. Collectively, the companies acquired
by Phone.com through June 2000 accounted for as purchases are referred to
herein as the "Phone.com Acquired Entities."
During the period from October 1999 through June 2000, Software.com
completed the acquisitions of Telarc and bCandid in transactions accounted for
as purchases. Collectively, these companies acquired by Software.com through
June 2000 accounted for as purchases are referred to herein as the
"Software.com Acquired Entities."
Between April 1999 and April 2000, Software.com acquired two entities under
separate transactions that were accounted for as poolings of interests.
Accordingly, the historical financial statements of Software.com for all
periods have been restated to give retroactive effect to these acquisitions.
The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily
indicative of the combined financial position or results of operations for
future periods or the results of operations or financial position that
actually would have been realized had Phone.com, Software.com, Phone.com
Acquired Entities, and Software.com Acquired Entities been a combined company
during the specified periods. The unaudited pro forma combined condensed
financial statements, including the related notes, are qualified in their
entirety by reference to, and should be read in conjunction with, the
historical consolidated financial statements of Phone.com, Software.com,
Phone.com Acquired Entities, and Software.com Acquired Entities, included
elsewhere in this joint proxy statement/prospectus. The pro forma adjustments
are preliminary and are based upon available information and certain
assumptions that management of Phone.com and Software.com believe are
reasonable.
The accompanying unaudited pro forma combined condensed balance sheet as of
June 30, 2000, gives effect to the merger of Phone.com and Software.com as if
such transaction occurred on June 30, 2000. The unaudited pro forma combined
condensed balance sheet combines the consolidated balance of Phone.com as of
June 30, 2000, with the consolidated balance sheet of Software.com as of June
30, 2000.
The accompanying unaudited pro forma combined condensed statements of
operations presents the consolidated results of operations of Phone.com for
the fiscal years ended June 30, 1998, 1999 and 2000, combined with the
consolidated statements of operations of Software.com for the fiscal years
ended December 31, 1998 and 1999, and the year ended June 30, 2000,
respectively, as if Phone.com and Software.com had merged at the beginning of
such periods. Additionally, the unaudited pro forma combined condensed
statement of operations for the year ended June 30, 2000, reflects the
acquisitions by Phone.com of the Phone.com Acquired Entities and the
acquisitions by Software.com of the Software.com Acquired Entities as if such
entities had been acquired on July 1, 1999.
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
June 30, 2000
<TABLE>
<CAPTION>
Historical Pro forma
------------------------ -------------------------
Phone.com Software.com Adjustments Combined
---------- ------------ ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 78,873 $ 41,712 $ -- $ 120,585
Short-term investments.. 356,715 45,707 -- 402,422
Accounts receivable..... 46,939 30,738 (292)(A) 77,385
Prepaid expenses and
other current assets... 9,033 2,982 (516)(A) 11,499
---------- -------- --------- ----------
Total current assets.. 491,560 121,139 (808) 611,891
Property and equipment,
net...................... 25,188 9,636 -- 34,824
Restricted cash and in-
vestments................ 20,700 -- -- 20,700
Deposits and other as-
sets..................... 8,508 829 (3,457)(A) 5,880
Goodwill and other intan-
gible assets, net........ 1,612,877 70,213 1,667 (A) 1,684,757
---------- -------- --------- ----------
$2,158,833 $201,817 $ (2,598) $2,358,052
========== ======== ========= ==========
LIABILITIES AND STOCKHOLD-
ERS'
EQUITY
Current liabilities:
Current portion of
equipment loan and
capital lease
obligations............ $ 2,882 $ 485 -- $ 3,367
Accounts payable........ 9,062 5,114 -- 14,176
Accrued liabilities..... 45,497 6,658 (2,031)(A)
100,000 (B) 150,124
Deferred revenue........ 77,344 20,519 -- 97,863
---------- -------- --------- ----------
Total current
liabilities.......... 134,785 32,776 97,969 265,530
Equipment loans and capi-
tal lease obligations,
less current portion..... 3,291 28 -- 3,319
---------- -------- --------- ----------
Total liabilities..... 138,076 32,804 97,969 268,849
---------- -------- --------- ----------
Stockholders' equity:
Common stock............ 83 230,470 (230,392)(D) 161
Additional paid-in
capital................ 2,335,683 -- 230,392 (D) 2,566,075
Deferred stock-based
compensation........... (6,659) (1,368) 790 (C) (7,237)
Notes receivable from
stockholders........... (724) -- -- (724)
Accumulated other
comprehensive loss..... (532) (29) -- (561)
Accumulated deficit..... (307,094) (60,060) (567)(A)
(100,000)(B)
(790)(C) (468,511)
---------- -------- --------- ----------
Total stockholders'
equity............... 2,020,757 169,013 (100,567) 2,089,203
---------- -------- --------- ----------
$2,158,833 $201,817 $ (2,598) $2,358,052
========== ======== ========= ==========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements
84
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended June 30, 1998
<TABLE>
<CAPTION>
Pro forma
Historical Phone.com/
----------------------- Software.com
Phone.com Software.com Adjustments Combined
--------- ------------ ----------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
License.................. $ 522 $ 17,462 $ -- $ 17,984
Maintenance and support
services................ 1,683 2,713 -- 4,396
Consulting services...... -- 6,558 -- 6,558
-------- -------- ------- --------
Total revenues......... 2,205 26,733 -- 28,938
-------- -------- ------- --------
Cost of revenues:
License.................. 95 1,568 -- 1,663
Maintenance and support
services................ 1,063 1,639 (2)(C) 2,700
Consulting services...... -- 7,382 (6)(C)
(2,215)(E) 5,161
-------- -------- ------- --------
Total cost of
revenues.............. 1,158 10,589 (2,223) 9,524
-------- -------- ------- --------
Gross profit........... 1,047 16,144 2,223 19,414
-------- -------- ------- --------
Operating expenses:
Research and
development............. 5,732 12,093 (3)(C) 17,822
Sales and marketing...... 5,011 12,337 (22)(C)
2,215 (E) 19,541
General and
administrative.......... 1,801 5,891 (15)(C) 7,677
Stock-based
compensation............ 108 -- 227 (C) 335
Legal matter............. -- (400) -- (400)
-------- -------- ------- --------
Total operating
expenses.............. 12,652 29,921 2,402 44,975
-------- -------- ------- --------
Operating loss......... (11,605) (13,777) (179) (25,561)
Interest income (expense),
net....................... 982 (536) -- 446
-------- -------- ------- --------
Loss before income
taxes................... (10,623) (14,313) (179) (25,115)
Income taxes............... -- (446) -- (446)
-------- -------- ------- --------
Net loss................. (10,623) (14,759) (179) (25,561)
Accretion on redeemable
convertible preferred
stock..................... -- (825) -- (825)
-------- -------- ------- --------
Net loss attributable to
common stock
stockholders............ $(10,623) $(15,584) $ (179) $(26,386)
======== ======== ======= ========
Basic and diluted net loss
per share attributable to
common stockholders....... $ (1.02) $ (0.54) $ (0.47)
======== ======== ========
Shares used in computing
basic and diluted per
share data................ 10,442 28,671 17,504 (F) 56,617
======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements
85
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended June 30, 1999
<TABLE>
<CAPTION>
Pro forma
Historical Phone.com/
----------------------- Software.com
Phone.com Software.com Adjustments Combined
--------- ------------ ----------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
License.................. $ 5,229 $ 26,847 $ -- $ 32,076
Maintenance and support
services................ 5,921 7,586 -- 13,507
Consulting services...... 2,292 12,508 -- 14,800
-------- -------- ------- --------
Total revenues......... 13,442 46,941 -- 60,383
-------- -------- ------- --------
Cost of revenues:
License.................. 371 2,677 (2)(C) 3,046
Maintenance and support
services................ 3,022 2,816 (41)(C) 5,797
Consulting services...... 1,146 10,865 (67)(C)
(3,259)(E) 8,685
-------- -------- ------- --------
Total cost of
revenues.............. 4,539 16,358 (3,369) 17,528
-------- -------- ------- --------
Gross profit........... 8,903 30,583 3,369 42,855
-------- -------- ------- --------
Operating expenses:
Research and
development............. 13,082 15,910 (58)(C) 28,934
Sales and marketing...... 10,840 19,686 (188)(C)
3,259 (E) 33,597
General and
administrative.......... 4,432 8,055 (188)(C) 12,299
Stock-based
compensation............ 1,011 125 1,100 (C) 2,236
Amortization of goodwill
and other intangible
assets.................. -- 329 -- 329
In-process research and
development............. -- 3,210 -- 3,210
Legal matter............. -- (200) -- (200)
-------- -------- ------- --------
Total operating
expenses.............. 29,365 47,115 3,925 80,405
-------- -------- ------- --------
Operating loss......... (20,462) (16,532) (556) (37,550)
Interest income, net....... 1,803 1,026 -- 2,829
-------- -------- ------- --------
Loss before income
taxes................. (18,659) (15,506) (556) (34,721)
Income taxes............... (2,104) (212) -- (2,316)
-------- -------- ------- --------
Net loss................. (20,763) (15,718) (556) (37,037)
Accretion on redeemable
convertible preferred
stock..................... -- (403) -- (403)
-------- -------- ------- --------
Net loss attributable to
common stockholders..... $(20,763) $(16,121) $ (556) $(37,440)
======== ======== ======= ========
Basic and diluted net loss
per share attributable to
common stockholders....... $ (1.49) $ (0.45) $ (0.52)
======== ======== ========
Shares used in computing
basic and diluted per
share data................ 13,932 35,754 21,828 (F) 71,514
======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements
86
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended June 30, 2000
<TABLE>
<CAPTION>
Pro Forma Software.com Acquired
Phone.com/ Phone.com Acquired Entities Entities
Software.com ---------------------------------------------- --------------------------- Pro Forma
Combined APiON AtMotion Paragon Onebox Adjustments Telarc bCandid Adjustments Combined
------------ ----- -------- ------- ------- ----------- ------ ------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License............. $ 93,126 $ 473 $ -- $ 1,843 $ 212 $ -- $364 $3,103 $ -- $ 99,121
Maintenance and
support services.... 25,835 -- -- -- -- -- -- 873 -- 26,708
Consulting
services............ 27,447 -- -- -- -- -- 21 246 -- 27,714
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Total revenues.... 146,408 473 -- 1,843 212 -- 385 4,222 -- 153,543
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Cost of revenues:
License............. 6,739 310 -- 1,127 5,022 -- -- 158 -- 13,356
Maintenance and
support services.... 14,867 -- -- -- -- -- -- 283 -- 15,150
Consulting
services............ 16,894 -- -- -- -- -- 56 270 -- 17,220
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Total cost of
revenues.......... 38,500 310 -- 1,127 5,022 -- 56 711 -- 45,726
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Gross profit
(loss)............ 107,908 163 -- 716 (4,810) -- 329 3,511 -- 107,817
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Operating expenses:
Research and
development......... 59,675 197 3,563 1,745 2,923 -- -- 639 -- 68,742
Sales and
marketing........... 68,745 276 -- 2,485 6,512 -- -- 1,300 -- 79,318
General and
administrative...... 24,056 241 1,757 3,292 2,318 -- 49 698 -- 32,411
Stock-based
compensation........ 10,185 -- -- 3,189 -- 1,274 (G)
(3,189)(H) -- -- 547 (T) 12,006
Amortization of
goodwill and other
intangible assets... 216,446 -- -- -- -- 27,084 (I)
55,626 (J)
103,478 (K)
202,517 (L) -- 1,472 657 (R)
20,425 (S)
(1,472)(U) 626,233
In-process research
and development..... 27,700 -- -- -- -- -- -- -- -- 27,700
Acquisition related
costs............... 10,395 -- -- -- -- -- -- -- -- 10,395
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Total operating
expenses.......... 417,202 714 5,320 10,711 11,753 386,790 49 4,109 20,157 856,805
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Operating income
(loss)............ (309,294) (551) (5,320) (9,995) (16,563) (386,790) 280 (598) (20,157) (748,988)
Interest and other
income (expense),
net.................. 23,220 -- (68) 13 (10,085) -- 1 745 -- 13,826
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Income (loss)
before income
taxes............. (286,074) (551) (5,388) (9,982) (26,648) (386,790) 281 147 (20,157) (735,162)
Income taxes......... (2,019) (68) -- -- -- -- -- (6) -- (2,093)
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Net income
(loss)............ (288,093) (619) (5,388) (9,982) (26,648) (386,790) 281 141 (20,157) (737,255)
Accretion on
redeemable
convertible preferred
stock................ -- -- (752) -- -- 752 (M) -- -- -- --
--------- ----- ------- ------- ------- --------- ---- ------ -------- ---------
Net income (loss)
attributable to
common
stockholders...... $(288,093) $(619) $(6,140) $(9,982) (26,648) $(386,038) $281 $ 141 $(20,157) $(737,255)
========= ===== ======= ======= ======= ========= ==== ====== ======== =========
Basic and diluted net
loss per share....... $ (2.06) $ (4.92)
========= =========
Shares used in
computing basic and
diluted net loss per
share................ 139,921 774 (N)
=========
1,393 (O)
1,831 (P)
4,898 (Q) 104 (V)
1,027 (W) 149,948
=========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements
87
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended June 30, 2000
<TABLE>
<CAPTION>
Pro Forma
Historical Phone.com/
----------------------- Software.com
Phone.com Software.com Adjustments Combined
--------- ------------ ----------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
License.................. $ 43,729 $ 50,182 $ (785)(A) $ 93,126
Maintenance and support
services................ 14,548 11,423 (136)(A) 25,835
Consulting services...... 10,450 16,997 -- 27,447
--------- -------- ------- ---------
Total revenues......... 68,727 78,602 (921) 146,408
--------- -------- ------- ---------
Cost of revenues:
License.................. 4,233 2,863 (354)(A)
(3)(C) 6,739
Maintenance and support
services................ 10,437 4,463 (33)(C) 14,867
Consulting services...... 6,156 15,452 (79)(C)
(4,635)(E) 16,894
--------- -------- ------- ---------
Total cost of
revenues.............. 20,826 22,778 (5,104) 38,500
--------- -------- ------- ---------
Gross profit........... 47,901 55,824 4,183 107,908
--------- -------- ------- ---------
Operating expenses:
Research and
development............. 37,965 21,777 (67)(C) 59,675
Sales and marketing...... 37,222 27,122 (234)(C)
4,635 (E) 68,745
General and
administrative.......... 13,492 10,757 (193)(C) 24,056
Stock-based
compensation............ 5,464 3,771 950 (C) 10,185
Amortization of goodwill
and other intangible
assets.................. 214,401 2,045 -- 216,446
In-process research and
development............. 22,490 5,210 -- 27,700
Acquisition related
costs................... -- 10,395 -- 10,395
--------- -------- ------- ---------
Total operating
expenses.............. 331,034 81,077 5,091 417,202
--------- -------- ------- ---------
Operating loss......... (283,133) (25,253) (908) (309,294)
Interest income, net....... 19,586 3,634 -- 23,220
--------- -------- ------- ---------
Loss before income
taxes................. (263,547) (21,619) (908) (286,074)
Income taxes............... (1,597) (422) -- (2,019)
--------- -------- ------- ---------
Net loss............... $(265,144) $(22,041) $ (908) $(288,093)
========= ======== ======= =========
Basic and diluted net loss
per share................. $ (3.81) $ (0.51) $ (2.06)
========= ======== =========
Shares in computing compute
basic and diluted net loss
per share................. 69,650 43,633 26,638 (F) 139,921
========= ======== ======= =========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements
88
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Note 1--Periods Presented
Phone.com's fiscal year ends on June 30. Software.com's fiscal year ends on
December 31. The accompanying unaudited pro forma combined condensed statement
of operations information gives effect to the merger of Phone.com and
Software.com as if such merger occurred at the beginning of the earliest year
presented. The unaudited pro forma combined condensed statement of operations
for the year ended June 30, 1998, reflects the results of operations of
Phone.com for the fiscal year ended June 30, 1998 combined with the results of
operations of Software.com for the fiscal year ended December 31, 1998. The
unaudited pro forma combined condensed statement of operations for the year
ended June 30, 1999, reflects the results of operations of Phone.com for the
fiscal year ended June 30, 1999 combined with the results of operations of
Software.com for the fiscal year ended December 31, 1999. The unaudited pro
forma combined condensed statement of operations for the year ended June 30,
2000 on page 88 reflects the results of operations of Phone.com for the fiscal
year ended June 30, 2000 combined with the results of operations of
Software.com for the year ended June 30, 2000. The unaudited pro forma
combined condensed statement of operations for the year ended June 30, 2000 on
page 87 reflects the results of Phone.com/Software.com combined, which is
derived at page 88, combined with the results of operations of the Phone.com
Acquired Entities and the Software.com Acquired Entities for the period from
July 1, 1999 through their respective dates of acquisition.
Note 2--Phone.com Acquired Entities
The WAP Business of APiON
On October 26, 1999, Phone.com completed its acquisition of APiON Telecom
Limited, or APiON, a company based in Belfast, Northern Ireland, in exchange
for 2,393,026 shares of its common stock. In addition, Phone.com 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
Phone.com 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 common stock of Phone.com 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 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, Phone.com 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 FASB Interpretation No. 28.
The historical balance sheet of Phone.com as of June 30, 2000 reflects the
acquisition of APiON.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION--
(Continued)
AtMotion
On February 8, 2000, Phone.com acquired all of the outstanding common and
redeemable convertible preferred stock of AtMotion, Inc., or AtMotion, in
exchange for 2,280,287 shares of its common stock. Phone.com 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 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 Phone.com 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.
The historical balance sheet of Phone.com as of June 30, 2000 reflects the
acquisition of AtMotion.
Paragon
On March 4, 2000, Phone.com acquired all of the outstanding common and
convertible preferred stock of Paragon Software (Holdings) Limited, or
Paragon, a company incorporated in England and Wales, in exchange for
approximately 3,051,016 shares of its common stock. Phone.com also assumed all
of the outstanding options of Paragon. Paragon is a provider of
synchronization technology allowing PC-based personal information to be easily
transferred to mobile devices. Total consideration aggregated approximately
$453.7 million in common stock of Phone.com in addition to a cash payment of
$3.6 million. An additional $17.0 million was to be paid within one year,
payable in approximately 143,000 common shares of Phone.com's common stock at
the election of the shareholder or in cash with the consent of Phone.com as
well as additional cash payments of approximately $3.9 million to be allocated
among certain employees of Paragon. The $17.0 million was paid to the former
shareholder on August 11, 2000, in conjunction with the former shareholder's
separation from Phone.com. There were also transaction costs in connection
with the purchase of approximately $11.6 million. 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.
The historical balance sheet of Phone.com as of June 30, 2000 reflects the
acquisition of Paragon.
Onebox
On April 14, 2000, Phone.com acquired all of the outstanding common and
preferred stock of Onebox.com, Inc., or Onebox, a company based in San Mateo,
California, in exchange for approximately 6,207,865 shares of its common
stock. Phone.com 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 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.
The historical balance sheet of Phone.com as of June 30, 2000 reflects the
acquisition of Onebox.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION--
(Continued)
Note 3--Software.com Acquired Entities
Telarc
On October 20, 1999, Software.com acquired Telarc, a provider of carrier-
scale Short Messaging Service (SMS) technologies. The total purchase price of
approximately $11.5 million consisted of $1.5 million of cash and $10.0
million of Software.com common stock (211,918 shares). In addition,
Software.com incurred approximately $101,000 in costs directly attributable to
the completion of the acquisition. Of the total estimated purchase price of
$11.6 million, approximately $263,000 was allocated to net tangible assets,
and the remainder was allocated to intangible assets, including $43,000 to
assembled workforce, $82,000 to covenant not to compete, $5.7 million to
core/alternative use technology, and $2.3 million to goodwill. The Company
recorded a one-time charge related to in-process research and development of
$3.2 million at the date of acquisition. The acquired intangible assets and
goodwill are being amortized over their estimated useful lives of three to
five years.
The historical balance sheet of Software.com as of June 30, 2000 reflects
the acquisition of Telarc.
bCandid
On June 14, 2000, Software.com completed its acquisition of bCandid
Corporation, a market leader in providing carrier-class discussion server
infrastructure software to service providers worldwide. BCandid was formed in
early 1999 through the merger of two companies, ISPNews, a service related
business, and Highwind Software, Inc., a software developer. Immediately prior
to the acquisition by Software.com, bCandid spun-off the service portion of
its business. As a result, Software.com acquired the remaining business of
bCandid representing its core software development operations. In connection
with the acquisition of bCandid, Software.com issued approximately 667,000
shares of its common stock with a value of $65.4 million in exchange for all
of the issued and outstanding capital stock of bCandid, as well as the
assumption of all outstanding warrants and options to purchase shares of
bCandid. The purchase price plus costs directly attributable to the completion
of the acquisition have been allocated to the assets and liabilities acquired
based on their approximate fair market value. Approximately $1.7 million was
allocated to tangible assets and the remainder was allocated to intangible
assets, including $300,000 to covenant not to compete, $400,000 to assembled
workforce, $600,000 to customer relations and $6.7 million to core/alternative
use technology and $55.9 million to goodwill. In addition, Software.com
assumed approximately $2.2 million in current liabilities as part of the
purchase. Software.com recorded a one-time charge related to in-process
research and development of $2.0 million at the date of acquisition. The
acquired intangible assets and goodwill are being amortized over their
estimated useful lives of two to four years.
The historical balance sheet of Software.com as of June 30, 2000 reflects
the acquisition of bCandid and the spin-off of its service business, ISP News.
Note 4--Adjustments Applied to the Historical Financial Information of
Phone.com, Software.com, Phone.com Acquired Entities, and Software.com
Acquired Entities to Arrive at the Unaudited Pro Forma Combined
Condensed Financial Information
(A) To eliminate intercompany purchases and sales, and related balance sheet
amounts, between Phone.com and Software.com.
(B) To record the accrual of estimated costs resulting from the merger of
Phone.com and Software.com. It is anticipated that Phone.com and
Software.com will incur charges to operations related to the merger
currently estimated to total approximately $100.0 million to be recorded
in the quarter in which the merger is consummated. These charges include
direct transaction costs, principally for financial advisory and legal
fees, and costs associated with combining operations of the two
companies. The estimated charge is reflected in the unaudited pro forma
combined condensed balance sheet data, but is not reflected in the
unaudited pro forma combined condensed statement of operations data. The
charge is a preliminary estimate only and is subject to change.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION--
(Continued)
(C) To adjust Software.com's amortization of deferred stock-based
compensation consistent with Phone.com's method as described in FASB
Interpretation No. 28 which resulted in additional amortization of
deferred stock-based compensation of $179,000, $556,000 and $341,000 in
the years ended December 31, 1998, December 31, 1999, and June 30, 2000,
respectively.
(D) In connection with the merger, Phone.com will issue approximately
78,000,000 shares of its common stock to Software.com based on an
exchange ratio of 1.6105 shares of Phone.com common stock for each share
of Software.com common stock.
(E) To reclassify approximately $2.2 million, $3.3 million and $4.6 million
from Software.com's consulting services costs of revenues to sales and
marketing expense for the years ended December 31, 1998, December 31,
1999 and June 30, 2000, respectively, in order to conform to Phone.com's
accounting policies and basis of presentation.
(F) To reflect the number of Software.com weighted average shares outstanding
for basic and diluted earnings per share to give effect to the 1.6105 to
1 exchange ratio.
(G) To reflect the accelerated amortization of deferred stock-based
compensation associated with common stock of Phone.com to be issued to
current employees of APiON in a manner consistent with FASB
Interpretation No. 28. The accelerated amortization results in 75% and
25% of the deferred stock-based compensation being amortized in the first
year and second year after the closing of the acquisition of APiON,
respectively.
(H) To reverse Paragon's historical amortization of stock-based compensation.
(I) Adjustment to record the amortization of goodwill and intangible assets
resulting from the allocation of the APiON purchase price. The pro forma
adjustment reflects goodwill and other intangible assets amortized on a
straight-line basis over an estimated life of three years.
(J) Adjustment to record the amortization of goodwill and intangible assets
resulting from the allocation of the AtMotion purchase price. The pro
forma adjustment reflects goodwill and other intangible assets amortized
on a straight-line basis over an estimated life of three years.
(K) Adjustment to record the amortization of goodwill and intangible assets
resulting from the allocation of the Paragon purchase price. The pro
forma adjustment reflects goodwill and other intangible assets amortized
on a straight-line basis over an estimated life of three years.
(L) Adjustment to record the amortization of goodwill and intangible assets
resulting from the allocation of the Onebox purchase price. The pro forma
adjustment reflects goodwill and other intangible assets amortized on a
straight-line basis over an estimated life of three years.
(M) To reverse historical accretion on preferred stock of AtMotion.
(N) To reflect the shares issued as consideration for the acquisition of
APiON.
(O) To reflect common stock issued to shareholders of AtMotion. Shares to be
issued for stock options and warrants and shares subject to repurchase
until vested are excluded as they are antidilutive.
(P) To reflect common stock issued to shareholders of Paragon. Shares to be
issued for stock options are excluded as they are antidilutive.
(Q) To reflect common stock issued to shareholders of Onebox. Shares to be
issued for stock options and warrants and shares subject to repurchase
until vested are excluded as they are antidilutive.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION--
(Continued)
(R) Adjustment to record the amortization of goodwill and intangible assets
resulting from the allocation of the Telarc purchase price. The pro forma
adjustment reflects goodwill and other intangible assets amortized on a
straight-line basis over estimated lives of three to five years.
(S) Adjustment to record the amortization of goodwill and intangible assets
resulting from the allocation of the bCandid purchase price. The pro
forma adjustment reflects goodwill and other intangible assets amortized
on a straight-line basis over an estimated life of three years.
(T) To record compensation expense related to the Telarc acquisition. In
connection with the acquisition of Telarc, the sole shareholder of Telarc
is entitled to additional consideration of up to $3.5 million
(10 quarterly payments of $350,000) as long as such shareholder is
continuously employed by Software.com from the closing date through each
payment date.
(U) To reverse historical amortization of goodwill and other intangible
assets of bCandid.
(V) To reflect common stock issued to shareholders of Telarc.
(W) To reflect common stock issued to shareholders of bCandid. Shares to be
issued for stock options are excluded as they are antidilutive.
93
<PAGE>
PHONE.COM BUSINESS
Overview
Phone.com is a leading provider of software, applications, and services that
enable the convergence of the Internet and wireless communications. Using
Phone.com's 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 Phone.com's software, network
operators may also provide their subscribers with a unified mailbox for e-
mail, voicemail, and fascimile.
Phone.com's 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. Phone.com's UP.Browser software is
designed to be embedded in wireless telephones. As of June 30, 2000, 77
network operators have licensed Phone.com's software and have commenced or
announced commercial service or are in market or laboratory trials. In
addition, 35 wireless telephone manufacturers have licensed Phone.com's
UP.Browser software, and UP.Browser has been ported to approximately 80 phone
models.
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 that the number of users will grow to 623
million by the end of 2003. IDC 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. Phone.com 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, Phone.com introduced and deployed its first products
based on this technology.
To provide a worldwide open standard enabling the delivery of Internet-based
services to mass-market wireless telephones, Phone.com 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
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<PAGE>
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,
or ISP, businesses are finding that they can achieve greater economies of
scale by deploying common service platforms and applications across their
various networks. Phone.com's MyPhone application suite and unified messaging
application allow its 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
Phone.com provides platforms, applications and services that enable the
delivery of Internet-based services to mass-market wireless telephones,
personal computers and other mobile devices. Using Phone.com's scalable
products, network 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 Phone.com's 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-
mail and facsimiles. Existing carrier deployments, built on Phone.com's
platform, include such services as unified messaging, e-mail, news, stock
trading, weather, travel, sports, commerce, and calendaring.
Phone.com's solutions exhibit several characteristics valued by network and
service operators:
. Innovative--Phone.com's products contain innovative features and
functionality, and enable the network operator to provide valuable new
services to their customers.
. Standards-based--Phone.com's products are based on industry standards,
including those defined by WAP, W3C and the Internet Engineering Task
Force, or IETF.
. Reliability--Phone.com's products are reliable, enabling the network
operator to provide a high quality of service to their customers.
. Scalability--Phone.com's products have market-proven scalability into the
millions of users, with high performance and reliability.
. Maturity--Phone.com's products are deployed in many networks, and have
many features that make them desirable.
. Unity--Phone.com's products enable network operators to offer common
services across their wireless, wireline and ISP businesses.
Phone.com's software platform consists of the UP.Link Server Suite, UP.
Browser, Mobile Management Server, MyPhone Application Suite and FoneSync data
synchronization software products.
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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 Phone.com's 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>
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.
Phone.com's 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. Phone.com's software supports all major digital wireless
telephony standards in use around the world, including:
<TABLE>
<S> <C>
. CDMA (Code Division Multiple Access) . PHS (Personal Handyphone System)
. TDMA (Time Division Multiple Access) . GSM (Global System for Mobile Communication)
. iDEN (Integrated Digital Enhanced . CDPD (Cellular Digital Packet Data)
Network) . PDC (Personal Digital Cellular)
</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.
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. 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 fascimile.
. Personal Information Manager--a PIM managing contact lists, calendar and
other personal information.
FoneSync
Phone.com's 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 Phone.com's products are delivered as packaged software, for
deployment on the premises of its customers. However, to support the rapid
deployment of network operator portals, large portions of the MyPhone product
are available in a hosted configuration. In addition, Phone.com offers
extensive consulting services to its customers to enable the rapid and
successful deployment of Phone.com products.
Key benefits of Phone.com's 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 email
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
Phone.com's 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
enhances subscriber retention.
. Opportunity to reduce operating costs. Phone.com's 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. Phone.com's 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. Phone.com believes
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.
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The Phone.com Strategy
Phone.com's 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 Phone.com's
strategy include:
. Focus on Providing Products and Services to Network Operators. Phone.com
focuses on providing comprehensive solutions that enable network
operators to deliver Internet-based services to their wireless and
wireline subscribers. Phone.com's close working relationships with
network operators provide it with a valuable understanding of its
customers' technology and operations, which it intends to leverage to
accelerate time to market of its products and identify new sales
opportunities. In order to generate revenues from its products and
related services, Phone.com utilizes direct and indirect sales channels.
Its direct sales force focuses on selling products and consulting
services and assists its indirect channel partners in selling its
products and services. Phone.com's indirect sales channel partners
currently include Alcatel, Itocho Techno-Science Corporation, Motorola,
Nortel, Saritel, Sema Group, Siemens and Unisys. These partners are
licensed to sell Phone.com's products and services to network operators
primarily in international markets. Phone.com intends to add new partners
to its 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. Phone.com also expects that network operators will demand
regular upgrades that include new functions and features. Consequently,
Phone.com intends to continue to invest heavily in research and product
development. Phone.com also intends to maintain its technology leadership
by leveraging its role in prominent industry standard-setting
organizations such as the WAP Forum and the World Wide Web Consortium.
. Drive the Sale and Development of Internet-Based Communication
Applications and Services. Network operators that offer Internet-based
services by using Phone.com's UP.Link Server generally seek new value-
added applications to offer to their subscribers. Phone.com currently
offers the following MyPhone applications:
. Unified Messaging, which delivers e-mail, voicemail, and fascimile 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.
Phone.com is continuously enhancing its existing products and developing
new applications and services to provide additional functionality for
network operators and their subscribers. Phone.com believes that the
adoption of its 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. Phone.com believes that increasing the number of wireless
telephone manufacturers that incorporate UP.Browser into its mass-market
wireless telephones enhances the attractiveness of its UP.Link server
software to network operators. Therefore, in order to drive widespread
adoption, Phone.com generally licenses UP.Browser to wireless telephone
manufacturers, free of per-unit royalties. As of June 30, 2000, Phone.com
had licensed UP.Browser to over 35 wireless telephone manufacturers. In
addition, Phone.com estimates 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 its business, Phone.com
actively encourages Internet content and application developers to create
WML applications.
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Products and Services
Products
Phone.com's 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 to 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.
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 fascimile 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>
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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.
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
Phone.com's 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. Phone.com's 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.
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. 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 fascimile.
. Personal Information Manager--a PIM managing customer contact lists,
calendar and other personal information.
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
-------- -----------
<S> <C>
One Button Multi-point Click one button and FoneSync will synchronize
Synchronization.............. all connected devices.
Support for Multiple Device Desktop PIMs, Internet PIMs, or iPIMs, standard
Types........................ mobile phone handsets, feature phones, PDAs.
Personalization of FoneSync has built-in drag and drop capability,
Information.................. 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
Phone.com provides maintenance and engineering support services to wireless
telephone manufacturers who have ported its UP.Browser to their telephones. In
addition, Phone.com provides consulting services to wireless network operators
who have licensed its mobile Internet platform software and engage Phone.com
to perform integration services relating to the commercial launches of its
technology. Phone.com also offers certain components of MyPhone as a hosted
service.
New Products and Services under Development
UP.Browser
Phone.com is continuously enhancing its existing products to provide
additional functionality for wireless telephone manufacturers. As Phone.com
continues 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.
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. Improved graphical user interface for use on devices with high quality
displays.
. In May 2000, Phone.com announced a collaborative effort with Conversa to
integrate device-based voice recognition technology with the UP.Browser
software.
Over-the-Air Synchronization
Phone.com is 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.
Mobile Location Server
In July 2000, Phone.com 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
Phone.com believes that mobile communication products are of high value to
network operators, and is developing enhancements to the MyPhone platform in
the area of instant messaging. Phone.com intends 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 Phone.com's products
support IP transport and are expected to continue to function correctly on 3G
networks. Phone.com is engaged in ongoing testing of its products to ensure
that they will fully support 3G deployments in the future.
Customers
Network Operators
Phone.com sells 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.
Phone.com also provides its network operator customers with consulting
services that enable them to rapidly adopt Phone.com's technology and bring
wireless Internet-based services to market. Phone.com's consulting services
focus on those areas where its products interface with the network operators'
internal systems such as billing, provisioning and customer care. Phone.com
also provides its network operator customers with assistance in choosing the
appropriate content and applications for their subscribers.
Phone.com's agreements with network operators provide these customers with
non-exclusive licenses to use its mobile Internet platform software in
connection with providing Internet-based services to their subscribers. There
are two pricing models under which Phone.com sells its 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 Phone.com a recurring fee either
on a monthly or a quarterly basis based on the active
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number of subscribers such operator has for that period. While these
agreements do not provide for a right of return, Phone.com typically provides
for a three-month warranty, limited indemnification against intellectual
property infringement claims and a source code escrow. In addition, Phone.com
typically provides fee-based maintenance and support services to its
customers, under which they receive error corrections and remote support. They
can also elect to receive new releases of Phone.com's products for an
additional fee.
Wireless Telephone Manufacturers
Phone.com licenses its 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,
generally no per-unit royalty is charged. In addition, Phone.com provides
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, Phone.com is currently providing engineering
support services in connection with integration projects for over 150 phone
models.
Phone.com's 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
Phone.com continues to enhance the features and performance of its existing
products. In addition, Phone.com is continuing to develop new products to meet
its customers' expectations of ongoing innovation and enhancement within its
product family.
Phone.com's ability to meet its customer's expectation of innovation and
enhancement depends on a number of factors, including its ability to identify
and respond to emerging technological trends in its target markets, develop
and maintain competitive products, enhance its existing products by adding
features and functionality that differentiate them from those of its
competitors and bring products to market on a timely basis and at competitive
prices. Consequently, Phone.com has made, and it intends to continue to make,
significant investments in research and product development. Phone.com's
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, Phone.com had 432 employees engaged in research and product
development activities. Phone.com is recruiting additional skilled engineers
for research and product development, and its business could be adversely
affected if it is unable to hire these engineers on a timely basis.
Technology
Technology and technology innovation are core elements of Phone.com's value.
Phone.com's 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. Phone.com has 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 Phone.com's products.
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Wireless Application Protocol
Phone.com 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 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
Phone.com has 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
Phone.com has 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. Phone.com's products have substantial dependencies on W3C
technology, including XML, HTML, HTTP, P3P and the overall WWW architecture.
Phone.com is working to ensure that future developments in the W3C are fully
enabled for wireless and mobile devices, and that it has substantive insight
into the motivation and design of these new technologies.
UP.Link Technology
Phone.com's 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
Phone.com's 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 (WMLScript),
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.
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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.
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
Phone.com sells its 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, Phone.com
had 203 persons in sales and marketing serving the United States market, and
103 persons in sales and marketing outside the United States. Phone.com plans
to significantly expand this group over the next 12 months. In addition,
Phone.com's international offices include London, Newbury, Belfast, Paris,
Madrid, Rome, Copenhagen, Mexico City, Hong Kong, Seoul and Tokyo. Phone.com's
direct sales force focuses on selling products and consulting services and
assists its indirect channel partners in selling its products and services.
International sales of products and services accounted for 48%, 68% and 73% of
Phone.com's total revenues for the years ended June 30, 1998, 1999 and 2000,
respectively. Phone.com expects international revenues to continue to account
for a significant portion of its revenues. Phone.com's international sales
strategy is to sell directly to large carriers and partner with leading
distributors and systems integrators that have strong industry backgrounds and
market presence in their respective markets and geographic regions.
Phone.com believes 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. Phone.com believes these customer relationships enable it to
improve customer satisfaction and develop products to meet specific customer
needs. Phone.com's agreements with its network operator customers provide for
support 24 hours per day and seven days per week.
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Phone.com actively recruits content and application developers to its
platform and provides to them free of charge its software developer's kit,
UP.SDK. Phone.com also provides them with free membership in its Developer
Program, free e-mail-based support and the opportunity to participate in its
Alliances Program. As of July 2000, approximately 110,000 registered
developers in Phone.com's 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>
Phone.com's Alliances Program is comprised of a select group of our content
and application developers. Phone.com screens applications to its Alliances
Program based on the availability and quality of the content or applications
produced by the partner. Phone.com performs joint marketing activities with
the partner, as well as provides introductions between its wireless network
operators and its Alliances Program members.
Competition
The market for Phone.com's 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 Phone.com's software
products. In addition, a number of Phone.com's competitors, including Nokia,
have announced or are expected to announce enhanced features and functionality
as proprietary extensions to the WAP protocol. Furthermore, some of
Phone.com's competitors have introduced or may introduce services based on
proprietary wireless protocols that are not compliant with the WAP
specifications.
Phone.com expects that it will compete primarily on the basis of price,
time-to-market, functionality, quality and breadth of product and service
offerings. Phone.com's 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 Phone.com's existing and potential customers.
. Microsoft, which has produced a wireless a 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 Phone.com through an agreement with its MID
subsidiary, is pursuing a strategy to become a global wireless carrier.
As part of this strategy, NTT DoCoMo, may seek to offer or sublicense its
iMode service to other wireless service providers in a manner that would
be competitive with the wireless Internet service offerings of
Phone.com's customers.
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With the expansion of Phone.com's MyPhone application suite to include such
services as unified messaging, electronic messaging, personal information
management software solutions and other advanced communications applications,
Phone.com faces additional competitors. These competitors are varied as they
individually touch various aspects of Phone.com's offerings. Competitors may
include telecommunications messaging providers such as Comverse.
Many of Phone.com's existing competitors as well as potential competitors
have substantially greater financial, technical, marketing and distribution
resources than it does. Several of these companies also have greater name
recognition and better established relationships with Phone.com's target
customers. Furthermore, these competitors may be able to adopt more aggressive
pricing policies and offer more attractive terms to customers than Phone.com
can. Phone.com may face increasing price pressure from its 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 Phone.com's products.
Intellectual Property Rights
Phone.com's performance depends significantly on its ability to protect its
proprietary rights to the technologies used in its products. If Phone.com is
not adequately protected, its competitors could use the intellectual property
that Phone.com has developed to enhance their products and services, which
could harm Phone.com's business. As of June 30, 2000, Phone.com had four
issued United States patents. It also had six other United States patent
applications containing allowed claims, and 79 pending United States patent
applications. Phone.com has also filed corresponding foreign patent
applications for approximately 50 of these United States patents and
applications. In addition, Phone.com relies on a combination of copyright,
trademark, trade secret laws, confidentiality provisions and other contractual
provisions to protect its proprietary rights, but these legal means afford
only limited protection. Despite any measures taken to protect its
intellectual property, unauthorized parties may attempt to copy aspects of its
products or to obtain and use information which it regards as proprietary. In
addition, the laws of some foreign countries may not protect Phone.com's
proprietary rights as fully as do the laws of the United States. Thus, the
measures that Phone.com is taking to protect its proprietary rights in the
United States and abroad may not be adequate. Finally, Phone.com's 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 Phone.com's
market increases, the possibility of an infringement claim against Phone.com
grows. For example, Phone.com may be inadvertently infringing a patent of
which it is unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which
Phone.com is unaware, and which Phone.com may be accused of infringing when it
issues in the future. To address any patent infringement claims, Phone.com may
have to enter into royalty or licensing agreements on disadvantageous
commercial terms. Phone.com 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 Phone.com, and
its failure to license the infringed or similar technology, would harm
Phone.com's 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 Phone.com's core business.
Phone.com relies 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 Phone.com's
election, for convenience.
As a member of several groups involved in setting standards for the
industry, the WAP Forum, for example, Phone.com has agreed to license its
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.
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Employees
As of June 30, 2000, Phone.com had a total of 875 employees. None of
Phone.com's employees is covered by any collective bargaining agreements.
Phone.com believes that its relations with its employees are good.
Properties
Phone.com's 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. Phone.com has renewal options on two buildings for another
five-year term. Phone.com's Belfast, Ireland office totals 20,000 square feet
under a lease which expires in July 2014, with an option to terminate in 2009.
Phone.com also leases space for our offices in London, Newbury, Copenhagen,
Paris, Madrid, Rome, Mexico City, Hong Kong, Seoul and Tokyo.
In March 2000, Phone.com 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.
Legal Proceedings
In April 2000, Phone.com 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.
Phone.com 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 Phone.com's complaint and asserted a counterclaim
against Phone.com alleging that it infringes the patent and seeking various
forms of relief. Phone.com denies Geoworks' allegations and while it intends
to pursue its position vigorously, the outcome of any litigation is uncertain,
and it may not prevail. Additionally, it may incur substantial expenses in
defending against this claim. Should Phone.com be found to infringe the
Geoworks patent, Phone.com may be liable for potential monetary damages, and
could be required to obtain a license from Geoworks. If Phone.com were unable
to obtain a license on commercially reasonable terms, Phone.com may not be
able to proceed with development and sale of some of Phone.com's products.
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PHONE.COM'S MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Phone.com was incorporated in December 1994 and, from inception until June
1996, its operations consisted primarily of various start-up activities,
including development of technologies central to its business, recruiting
personnel and raising capital. In 1995, Phone.com developed its initial
technology, which enables the delivery of Internet-based services to wireless
telephones. In 1996, Phone.com introduced and deployed its first products
based on this technology. Phone.com 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. Phone.com 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, Phone.com 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, Phone.com 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, Phone.com 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
Phone.com's technology and on Internet standards. Leading network operators,
telecommunications device and equipment manufacturers and software companies
worldwide have sanctioned the specifications promulgated by the WAP Forum. In
addition to the standard-setting process developed by the WAP Forum, Phone.com
is 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. Phone.com
anticipates that the standards developed through these initiatives will
continue to increase the acceptance of Internet-based services over wireless
telephones.
Phone.com generates revenues from licenses, maintenance and support services
and consulting services. Phone.com receives license revenues from licensing
its software platform directly to network operators and indirectly through
value-added resellers. Currently, Phone.com's 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 Phone.com's
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 Phone.com
or indirectly through resellers.
Phone.com's future success depends on its 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 Phone.com's business would
be materially and adversely affected. In addition, because there is a
relatively small number of network operators worldwide, any failure to sell
Phone.com's products to network operator customers successfully could result
in a shortfall in revenues that could not be readily offset by other revenue
sources.
Phone.com's business strategy also relies to a significant extent on the
widespread propagation of UP.Browser-enabled telephones through its
relationships with network operators and wireless telephone manufacturers. In
order to encourage adoption of UP.Browser-enabled wireless telephones,
Phone.com generally licenses its 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,
Phone.com had licensed UP.Browser to 35 wireless telephone manufacturers.
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Effective July 1, 1998, Phone.com 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.
Phone.com 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. Phone.com'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 Phone.com'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 Phone.com 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. Phone.com recognizes revenues
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
Phone.com'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 Phone.com's products.
Revenues from consulting services provided to network operators are recognized
as the services are performed.
Phone.com recognizes revenues from UP.Browser agreements with wireless
telephone manufacturers ratably over the period during which the services are
performed, generally one year. Phone.com 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.
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, Phone.com expects that deferred revenue will
decline in the long term as network operators deploy services based on its
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.
Phone.com expects that its gross profit on revenues derived from sales
through indirect channel partners will be less than the gross profit on
revenues from direct sales. Phone.com's success, in particular in
international markets, depends in part on its ability to increase sales of its
products and services through value-added resellers and to expand its indirect
distribution channels. In addition, Phone.com's agreements with its
distribution partners generally do not restrict the sale of products that are
competitive with its products and services, and each of Phone.com's partners
can cease marketing Phone.com's products and services at their option.
International sales of products and services accounted for 48%, 68% and 73%
of Phone.com's total revenues in the years ended June 30, 1998, 1999 and 2000,
respectively. Phone.com expects international sales to continue to account for
a significant portion of its revenues, although the percentage of Phone.com's
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 Phone.com's international business
activities, include:
. failure by Phone.com and/or third parties to develop localized content
and applications that are used with its products;
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. costs of localizing Phone.com's 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;
. 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, Phone.com has invested substantially in research and
development, marketing, domestic and international sales channels,
professional services and its general and administrative infrastructure. These
investments have significantly increased Phone.com's operating expenses,
contributing to net losses in each fiscal quarter since its inception.
Phone.com's limited operating history makes it difficult to forecast future
operating results. Although Phone.com's revenues have grown in recent
quarters, its revenues may not increase at a rate sufficient to achieve and
maintain profitability, if at all. Phone.com anticipates that its operating
expenses will increase substantially in absolute dollars for the foreseeable
future as it expands its product development, sales and marketing,
professional services and administrative staff. Even if Phone.com was to
achieve profitability in any period, it may not sustain or increase
profitability on a quarterly or annual basis.
Acquisitions
On October 26, 1999, Phone.com completed its acquisition of APiON Telecoms
Limited, or APiON, a company based in Belfast, Northern Ireland, in exchange
for 2,393,026 shares of its common stock. In addition, Phone.com also agreed
to issue cash and common stock with an aggregate value of up to approximately
$14.1 million to 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 Phone.com
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 common stock of Phone.com 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, which may increase Phone.com's losses in future
periods. Common stock issuable in the future to current employees of APiON has
been recorded as deferred stock-based compensation.
Phone.com 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, Phone.com recorded deferred stock-based compensation in the
amount of approximately $5.1 million, to be amortized over a two-year period.
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On October 27, 1999, Phone.com acquired substantially all of the assets of
Angelica Wireless ApS, or 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 Phone.com's MyPhone mobile Internet portal software. Total
consideration paid, including direct acquisition costs, was approximately $2.0
million. In addition, Phone.com also agreed to issue approximately 16,000
shares of its common stock to employees of Angelica with an aggregate value of
approximately $1.7 million, subject to certain forfeiture conditions dependent
on continued employment. Phone.com 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, Phone.com
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, Phone.com acquired all of the outstanding common and
redeemable convertible preferred stock of AtMotion, Inc., or AtMotion, in
exchange for 2,280,287 shares of its common stock. Phone.com 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. Phone.com expects to incur significant
additional expenses in developing, integrating and commercializing the
acquired technology, as well as sales and marketing and research and
development expenses. Phone.com expects to incur these costs and expenses in
advance of generating revenues and cannot be certain that its business model
for the incorporation of the AtMotion technology will result in significant
revenues or profitability.
On March 4, 2000, Phone.com acquired all of the outstanding common and
convertible preferred stock of Paragon Software (Holdings) Limited, or
Paragon, a company incorporated in England and Wales, in exchange for
3,051,016 shares of its common stock. Phone.com also assumed all of the
outstanding options of Paragon. Paragon is a provider of synchronization
technology allowing PC-based personal information to be easily transferred to
mobile devices. Phone.com plans to extend the Paragon technology to WAP-based
over-the-air synchronization to meet phone users' 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 common stock of
Phone.com 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 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, Phone.com expects to incur significant
additional expenses in developing, integrating and commercializing the
acquired technology, as well as sales and marketing and research and
development expenses. Phone.com expects to incur these costs and expenses in
advance of generating revenues and cannot be certain that its business model
for the incorporation of the Paragon technology will result in significant
revenues or profitability. On August 11, 2000, the Company 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. The
payment was accelerated in conjunction with the former shareholder's
separation from Phone.com.
On April 14, 2000, Phone.com acquired all of the outstanding common and
preferred stock of Onebox.com, Inc., or Onebox, a wireless communications
application service provider offering users unified e-mail, voicemail
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and fascimile, in exchange for 6,207,865 shares of Phone.com common stock.
Phone.com 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
it acquired as a result of Phone.com's Onebox acquisition now forms a part of
its MyPhone application suite, Phone.com expects 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, Phone.com acquired all of the outstanding common stock of
Velos 2 S.r.l., or Velos, a company based in Milan, Italy, in exchange for
8,134 shares of Phone.com 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, Phone.com issued an additional 9,866 shares of its
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, Phone.com acquired all of the outstanding common stock of
MyAble, Inc., or MyAble, a company based in Palo Alto, California, in exchange
for 193,873 shares of Phone.com common stock. Phone.com 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.
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 Phone.com's 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>
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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, Phone.com 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.
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 Phone.com's deployment obligations related to AT&T. In total,
Phone.com 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
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to the increased number of wireless network operators who have licensed
Phone.com's technology and engaged Phone.com to perform integration services
relating to their commercial launches of its 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. Phone.com expects 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
engineering and support services to wireless telephone manufacturers. The
engineering and support services performed for wireless telephone
manufacturers include assistance relating to integrating Phone.com's
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. Phone.com anticipates 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 Phone.com's 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 Phone.com performs 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 Phone.com
achieves is also impacted by the contractual terms of the consulting
assignments Phone.com undertakes, and the gross profit on fixed price
contracts typically is more susceptible to fluctuation than contracts
performed on a time-and-materials basis. Phone.com anticipates that the cost
of consulting services revenues will increase in absolute dollars as it
continues to invest in the growth of its consulting operations.
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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 Phone.com's research and development organization associated
with product development. Phone.com expects to continue to make substantial
investments in research and development and anticipates that research and
development expenses will increase in absolute dollars. Phone.com further
anticipates that research and development expenses will increase substantially
due to product development efforts associated with all of Phone.com's
initiatives, including Unified Messaging. Phone.com has also added a
significant numbers of engineering personnel through its 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 $37.2 million in the fiscal
year ended June 30, 2000. These increases resulted from the addition of
personnel in Phone.com's sales and marketing organizations, reflecting its
increased selling effort to develop market awareness of its products and
services. Phone.com anticipates that sales and marketing expenses will
increase in absolute dollars as it increases its investment in these areas. In
addition, Phone.com expects 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 Phone.com's
operation as a public company and, to a lesser extent, legal expenses
associated with increased product licensing and patent activity. Phone.com
expects general and administrative expenses to increase in absolute dollars as
it adds personnel and incurs additional expenses related to the anticipated
growth of its business, the management of its international operations, and
its 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 Phone.com's stock, giving rise to deferred stock-based compensation
in the amount of $2.8 million. For the year ended June 30, 2000, Phone.com
recognized stock-based compensation expense
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related to this award in the amount of $1.3 million. Phone.com expects
amortization of approximately $1.3 million, $600,000 and $300,000 in the
fiscal years ending June 30, 2001, 2002 and 2003, respectively, relating to
the amortization of the deferred stock-based compensation associated with
stock options granted and restricted stock issued from October 1997 through
June 2000.
In connection with its acquisition of APiON in October 1999, Phone.com
recorded additional deferred stock-based compensation of approximately $5.1
million. For the year ended June 30, 2000, Phone.com recognized stock-based
compensation expense related to APiON in the amount of $2.6 million, and it
expects amortization of approximately $2.1 million and $400,000 in the fiscal
years ending June 30, 2001 and 2002, respectively. In connection with its
acquisition of Angelica in October 1999, Phone.com recorded additional
deferred stock-based compensation of approximately $1.7 million. For the year
ended June 30, 2000, Phone.com recognized stock-based compensation expense
related to Angelica in the amount of $818,000, and expects amortization of
approximately $700,000 and $200,000 in the fiscal years ending June 30, 2001
and 2002, respectively. In connection with its acquisition of Velos in June
2000, Phone.com recorded additional deferred stock-based compensation of
approximately $1.2 million. For the year ended June 30, 2000, Phone.com
recognized stock-based compensation expense related to Velos in the amount of
$145,000, and it expects amortization of approximately $800,000 and $300,000
in the fiscal years ending June 30, 2001 and 2002, respectively. Phone.com may
in the future issue stock options with exercise prices below the then fair
market value, which would increase deferred stock-based compensation.
Amortization of Goodwill and Other Intangible Assets and In-Process Research
and Development
Amortization of goodwill and intangible assets relating to Phone.com's
October 1999 acquisitions of APiON and Anglica and its 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, Phone.com
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.
Phone.com 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, Phone.com 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,
Phone.com 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, Phone.com
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.
Phone.com 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, Phone.com 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. Phone.com 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, Phone.com 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, Phone.com recorded goodwill of
approximately $18.4 million, which is being amortized on straight-line basis
over a three-year period. Phone.com expects 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, Phone.com may have
additional acquisitions in future periods, which could give rise to additional
goodwill or other intangible assets being acquired. If Phone.com acquires
additional goodwill or other intangible assets, its 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
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equivalent, and short-term investment balances as a result of Phone.com's
private placement financings in February 1998 and March 1999, its initial
public offering in June 1999, and its 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
Phone.com's 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
its inception, Phone.com has incurred net losses for federal and state tax
purposes and has not recognized any tax provision or benefit. As of June 30,
2000, Phone.com had net operating loss carryforwards for federal and
California income tax purposes of approximately $192 million and $96 million,
respectively. In addition, Phone.com 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 Phone.com's
ownership that constitutes an "ownership change," as defined in Section 382 of
the Internal Revenue Code. If Phone.com has an ownership change, the ability
to utilize the stated carryforwards could be significantly reduced. The merger
with Software.com may result in an ownership change.
As of June 30, 2000, Phone.com 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-
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
Phone.com's 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, Phone.com has 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 its inception, Phone.com has financed its operations through private
sales of convertible preferred stock, which totaled $66.0 million in aggregate
net proceeds through March 31, 1999, through its initial public offering in
June 1999, which generated net proceeds of approximately $66.8 million, and
through its secondary public offering in November 1999, which generated net
proceeds of approximately $390.4 million. As of June 30, 2000, Phone.com 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
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$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, Phone.com's 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. Phone.com 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, Phone.com completed an initial public
offering of 9,200,000 shares of its common stock at a public offering price of
$8.00 per share, which resulted in net proceeds to Phone.com of approximately
$66.8 million. In November 1999, Phone.com completed a secondary public
offering of 3,041,500 shares of its common stock at a public offering price of
$135.00 per share, which resulted in net proceeds to Phone.com 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, Phone.com's principal commitments consisted of
obligations outstanding under operating leases and its equipment loans and
capital lease obligations. On March 30, 2000, Phone.com 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
term is for a period of twelve years from the commencement date of the lease.
The agreement required that Phone.com provide a letter of credit in the amount
of $16.5 million. As of June 30, 2000, Phone.com 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 Phone.com pay leasehold improvements, which are expected to be at least
$15 million over the next year. Although Phone.com has no material other
commitments for capital expenditures, it expects to increase capital
expenditures and lease commitments consistent with its anticipated growth in
operations, infrastructure, and personnel.
Phone.com believes that its current cash, cash equivalents, and short-term
investments will be sufficient to meet its 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 its liquidity
requirements, Phone.com 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 Phone.com's operations. The sale of additional
equity or convertible debt securities could result in additional dilution to
Phone.com's stockholders, and additional financing may not be available in
amounts or on terms acceptable to Phone.com, if at all. If Phone.com is unable
to obtain this additional financing, it may be required to reduce the scope of
its planned product development and marketing efforts, which could harm its
business, financial condition, and operating results.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities, as
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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. Phone.com adopted SFAS No. 133 effective
July 1, 2000. Management does not believe the adoption of SFAS No. 133 will
have a material effect on Phone.com'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. Phone.com 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, Phone.com 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, 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 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. Phone.com will be required to adopt EITF Issue No. 00-2 in
its first fiscal quarter, beginning after June 30, 2000. Phone.com 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. Phone.com 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 Phone.com's 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. Phone.com does not anticipate that the adoption of FIN 44 will
have a significant impact on Phone.com's consolidated financial position or
results of operations. Phone.com adopted FIN 44 effective July 1, 2000.
Year 2000 Readiness Disclosure
With the changeover to the year 2000, Phone.com did not experience any
disruption to its operations as a result of the issues associated with the
limitations of the programming code in many existing computer systems, whereby
the computer systems may not properly recognize or process date-sensitive
information. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. There can be no assurance
that there will not be future complications arising from Year 2000 issues.
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Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Hedging Instruments
Phone.com transacts business in various foreign currencies and, accordingly,
Phone.com is 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 Phone.com's revenues are earned in U.S. dollars. Operating expenses
incurred by its European and Japanese subsidiaries are denominated primarily
in U.K. pounds sterling and Japanese yen, respectively.
Phone.com currently does not use financial instruments to hedge operating
expenses in foreign currencies. Phone.com intends to assess the need to
utilize financial instruments to hedge currency exposures on an ongoing basis.
Phone.com does not use derivative financial instruments for speculative
trading purposes, nor does Phone.com currently hedge its foreign currency
exposure to offset the effects of changes in foreign exchange rates.
Fixed Income Investments
Phone.com's exposure to market risks for changes in interest rates relates
primarily to corporate debt securities, U.S. Treasury Notes and certificates
of deposit. Phone.com places its investments with high credit quality issuers
and, by policy, limit the amount of the credit exposure to any one issuer.
Phone.com's 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, Phone.com's
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>
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PHONE.COM MANAGEMENT
Phone.com Directors and Executive Officers
The following section sets forth information regarding Phone.com's executive
officers and directors as of June 30, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Alain Rossmann.......... 44 Chairman of the Board, Chief Executive Officer and Secretary
Charles Parrish......... 53 Executive Vice President and Director
Alan Black.............. 40 Vice President, Finance and Administration, Chief Financial Officer
and Treasurer
Ross Bott............... 40 Chief Operating Officer
Mike Mulica............. 40 Senior Vice President, Worldwide Sales, Consulting, and Support
Benjamin Linder......... 34 Vice President, Marketing
Roger Evans............. 55 Director
Reed Hundt.............. 52 Director
David Kronfeld.......... 52 Director
Andrew Verhalen......... 44 Director
</TABLE>
Alain Rossmann is the founder, Chairman of the Board, Chief Executive
Officer and Secretary of Phone.com. Prior to founding Phone.com in December
1994, he was Chief Executive Officer of EO Corporation, a pioneer in personal
digital assistant devices, from 1991 to 1993. Prior to his involvement with
EO, he was Vice President of Operations for C-Cube Microsystems Inc., a
semiconductor design company, from 1989 to 1991. From 1986 to 1989, Mr.
Rossmann co-founded and served as Vice President of Marketing and Sales at
Radius, Inc., a developer of digital video products. From 1983 to 1986, Mr.
Rossmann was manager of the third-party developer group at Apple Computer,
Inc. Mr. Rossmann holds an M.S. degree in Mathematics from the Ecole
Polytechnique, an M.S. degree in Civil Engineering from Ecole Nationale des
Ponts et Chaussees and an M.B.A. degree from Stanford University.
Charles Parrish joined Phone.com as President and a director in June 1995,
and was appointed Executive Vice President in June 1997. Mr. Parrish was
General Manager of the Mobile Data Division of GTE Mobile Communications, a
telecommunications company, from 1994 to June 1995, and Vice President of
Marketing for GTE, from 1991 to 1994. Prior to working for GTE, Mr. Parrish
was Senior Vice President of Operations for Contel Cellular, a
telecommunications company, from July 1990 to 1991, when Contel was acquired
by GTE. Prior to serving at Contel, he was the co-Founder, President and Chief
Executive Officer of AmeriCom Corporation, a telecommunications equipment
company, from 1984 to June 1990. Mr. Parrish served as Executive Assistant to
the Secretary of the United States Department of the Interior under the Carter
Administration. Mr. Parrish holds a B.S. degree in Industrial Management from
the Georgia Institute of Technology.
Alan Black joined Phone.com as Vice President of Finance and Administration
and Chief Financial Officer in August 1997 and was appointed to the additional
office of Treasurer in September 1997. Mr. Black was Chief Financial Officer
of Vicor, Inc., a provider of Internet information capture and delivery
systems for financial services firms, from August 1992 to August 1997. Prior
to his tenure at Vicor, Mr. Black was with KPMG LLP between 1982 and 1992,
most recently with the firm's High Technology practice. Mr. Black holds a
Bachelor of Commerce and a graduate diploma in Public Accountancy from McGill
University. Mr. Black is a member of the California Society of Certified
Public Accountants and the Canadian Institute of Chartered Accountants.
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Ross Bott joined Phone.com in April 2000 as Chief Operating Officer. Prior
to Phone.com, Dr. Bott was President and Chief Executive Officer of
Onebox.com, a leading provider of Web-based communications. Before joining
Onebox.com, Dr. Bott served as Executive Vice President, Product Divisions at
Adobe Systems, with responsibility for five product and marketing divisions of
Adobe. Prior to Adobe, Dr. Bott served as Sr. Vice President of Enterprise
Technologies at Silicon Graphics, where he founded their Commercial Server
Division. Before Silicon Graphics, he served as Chief Technical Officer and
Vice President of Advanced Development at Pyramid Technology Corp. Dr Bott
holds a B.S. degree in Mathematics from Stanford University and a Ph.D. in
Artificial Intelligence/Cognitive Science from the University of California,
San Diego.
Mike Mulica joined Phone.com in November 1999 as the Senior Vice President
of Worldwide Sales, Consulting, and Support for Phone.com. Before joining
Phone.com, Mr. Mulica was the former President of Global Sales and Marketing
for Adaptive Broadband, Inc. Before working at Adaptive Broadband, Mr. Mulica
held the position of Vice President of Worldwide Sales at Motorola's Wireless
Alliance Group. Prior to Motorola, he spent six years at Tandem Computer
developing the enhanced services and intelligent network applications business
in both the Infrastructure vendor and wireless carrier market. Mr. Mulica
holds an M.B.A. from the J.L. Kellogg Graduate School of Management at
Northwestern University and a B.S. degree in Business from Marquette
University.
Benjamin Linder joined Phone.com in January 1996 as Vice President of
Product Management and was appointed as Vice President of Marketing in October
1996. From July 1987 to December 1995 Mr. Linder worked at Oracle Corporation,
where he most recently served as Vice President of Marketing, co-founding
Oracle's New Media Division in 1992. Prior to working in the New Media
division of Oracle, Mr. Linder was Director of Technical Services for the
massively parallel processing technology at Oracle. He holds B.S. degrees in
Electrical Engineering and Computer Science from the Massachusetts Institute
of Technology.
Roger Evans has been a director of Phone.com since September 1995. Mr. Evans
has been associated with Greylock Management Corporation, a Boston-based
venture capital firm since 1989, serving as a general partner since January
1991. At Greylock Management Corporation, Mr. Evans focused on the data
communication industry. He also serves as a director of Copper Mountain
Networks, RightNow Technologies, Sirocco Systems, Syndesis, PraiseComm, Inc.
and Maker Communications, Inc. Mr. Evans is a graduate of Cambridge
University.
Reed Hundt has been a director of Phone.com since April 1999. Since November
1998, Mr. Hundt has been a senior advisor on information industries to
McKinsey & Company, a worldwide management consulting firm. He has also been a
principal of Charles Ross Partners, LLC, a Bethesda, Maryland firm that
provides consulting and investment advice on telecommunications, since
November 1997. From November 1993 to November 1997, Mr. Hundt was Chairman of
the Federal Communications Commission. Prior to joining the FCC, Mr. Hundt was
a partner at the law firm of Latham & Watkins. Mr. Hundt serves on the boards
of directors of Allegiance Telecom, Inc., NorthPoint Communications, Inc., and
Novell, Inc.
David Kronfeld has been a director of Phone.com since February 1998. Mr.
Kronfeld founded JK&B Capital in January 1996 and is the managing member. Mr.
Kronfeld is also a general partner at Boston Capital Ventures, where he
specializes in the telecommunications and software industries. Before joining
Boston Capital Ventures in October 1989, Mr. Kronfeld was the Vice President
of Acquisitions and Venture Investments at Ameritech, a telecommunications
company, from October 1984 to October 1989. Prior to working for Ameritech,
Mr. Kronfeld was a Senior Manager at Booz Allen & Hamilton, an international
management consulting firm, from 1977 to 1981. Mr. Kronfeld is a director of
SCC Communications, Inc., a 911 service provider, MGC Communications, Inc., a
local exchange carrier, and 21st Century Telecom Group, a telecommunications
company. He holds a B.S. degree in Electrical Engineering and an M.S. degree
in Computer Science from Stevens Institute of Technology and an M.B.A. degree
from The Wharton School of Business.
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Andrew Verhalen has been a director of Phone.com since September 1995. Mr.
Verhalen is a general partner of Matrix Partners, a venture capital firm,
which he joined in 1992. From 1986 to 1991, Mr. Verhalen worked at 3Com
Corporation, a network equipment manufacturer, initially as a Vice President
of Marketing, then as Vice President and General Manager of the Network
Adapter Division. Prior to joining 3Com, he worked for five years in the
Microprocessor Group at Intel Corporation, in various marketing, management
and strategic planning roles. He currently is a director of Copper Mountain
Networks, a network equipment manufacturer, WatchGuard Technologies, a network
security company, and several private technology companies. Mr. Verhalen holds
a B.S. degree in Electrical Engineering, an M. Eng. degree in Electrical
Engineering and an M.B.A. degree from Cornell University.
Phone.com Classified Board of Directors
Phone.com's bylaws currently provide for a board of directors consisting of
six members, each serving staggered three-year terms: Class I, whose term will
expire at this year's annual meeting of stockholders of Phone.com; Class II,
whose term will expire at next year's annual meeting of stockholders of
Phone.com; and Class III, whose term will expire at the 2002 annual meeting of
stockholders of Phone.com. As a result, only one class of directors will be
elected at each annual meeting of Phone.com stockholders, with the other
classes continuing for the remainder of their respective terms.
Phone.com Committees of the Board of Directors
Phone.com's board of directors has audit and compensation committees, which
assist the board of directors in the discharge of its responsibilities.
The compensation committee currently consists of Messrs. Evans and Verhalen.
The compensation committee:
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plans; and
. makes recommendations to the board of directors regarding executive
compensation matters.
The audit committee currently consists of Messrs. Kronfeld and Evans. The
audit committee:
. makes recommendations to the board of directors regarding the selection
of independent auditors;
. reviews the results and scope of the audit and other services provided
by our independent auditors; and
. reviews and evaluates our audit and control functions.
Phone.com Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors currently consists of
Roger Evans and Andrew Verhalen. No member of the Compensation Committee or
executive officer of Phone.com has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.
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Phone.com Executive Compensation
The following table shows the compensation awarded to, earned by or paid to
(a) the individual who served as Phone.com's Chief Executive Officer during
the fiscal year ended June 30, 2000, (b) the four other most highly
compensated individuals who served as an executive officer of Phone.com during
the fiscal year ended June 30, 2000; and (c) the compensation received by each
such individuals during the preceding fiscal year. The following table also
shows the compensation received by two employees whose total individual
compensation exceeded the lowest paid executive officer reported below. These
two employees served as executive officers for an interim period during the
fiscal year ended June 30, 2000, but were not executive officers as of June
30, 2000.
Phone.com Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------- ------------
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary($) Bonus($) Options(#) Compensation($)
------------------ ------ --------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Alain Rossmann.......... 2000 $275,000 $ -- -- $ 576(1)
Chairman and Chief
Executive Officer 1999 200,000 -- -- 1,092(1)
Tony Miranzadeh......... 2000 130,667 1,472,631(2) 112,666 392(1)
V.P. of Sales and 1999 40,000 98,700(2) 86,666 384(1)
Business Development,
Asia Pacific and Latin
America
Charles Parrish......... 2000 189,000 -- -- 43,416(6)
Executive Vice 1999 180,000 -- 120,000 43,930(6)
President and Director
Benjamin Linder......... 2000 180,250 -- -- 519(1)
Vice President, 1999 175,000 -- -- 999(1)
Marketing
Mike Mulica............. 2000 146,667 771,560(2) 936,667(5) 576(1)
Senior Vice President 1999 -- -- -- --
of Worldwide Sales,
Consulting, and
Support.
Malcolm Bird............ 2000 136,754(3) 376,983(2) -- 18,642(4)
Managing Director,
Phone.com (Europe) Ltd. 1999 132,480(3) 139,548(2) 26,666 18,000(4)
Alan Black.............. 2000 170,500 -- -- 576(1)
Vice President, Finance 1999 155,000 -- 100,000 917(1)
and Administration,
Chief Financial Officer
and Treasurer
</TABLE>
--------
(1) Consists of life insurance premiums paid by Phone.com.
(2) Consists of sales commissions.
(3) Includes auto allowance of approximately $12,480.
(4) Consists of contribution to pension plan.
(5) Includes option grant for 50,000 shares of common stock with an exercise
price of $55.16, which was one-half of the fair market value on the grant
date.
(6) Consists of $42,840 for monthly payments for housing expenses pursuant to
relocation agreement with the remainder representing life insurance
premiums paid by Phone.com.
Phone.com Director Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at board meetings and the grant of stock options, Phone.com
directors are not compensated for their services as directors. Directors who
are employees of Phone.com are eligible to participate in Phone.com's 1995 and
1996 Stock Plans and Phone.com's Employee Stock Purchase Plan. Directors who
are not employees of Phone.com are eligible to participate in Phone.com's 1996
Stock Plan and Phone.com's Directors' Stock Option Plan.
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The Directors' Stock Option Plan provides that each person who becomes a
Phone.com nonemployee director will be granted a nonstatutory stock option to
purchase 66,666 shares of common stock on the date on which the individual
first becomes a nonemployee director. Thereafter, on the first date of the
board of directors meeting of each calendar quarter beginning on or after
October 1, 2000, each nonemployee director who was a member of the board of
directors prior to Phone.com's initial public offering in June 1999 will be
granted an option to purchase 5,000 shares of common stock. In addition, on
the date of the first board of directors meeting of each calendar quarter that
begins at least one year following the initial option grant to a nonemployee
director who becomes a director after the completion of Phone.com's initial
public offering in June 1999, but in no event earlier than October 1, 2000,
such director will be granted an option to purchase 5,000 shares of common
stock.
All options granted under the Directors' Stock Option Plan shall vest in
full immediately upon grant of the option and have a term of five years.
Phone.com Option Grants in Last Fiscal Year
The following table provides certain information with respect to stock
options granted to the executive officers named in the Phone.com Summary
Compensation Table in the last fiscal year. In addition, as required by
Securities and Exchange Commission rules, the table sets forth the
hypothetical gains that would exist for the options based on assumed rates of
annual compound stock price appreciation during the option term. No stock
appreciation rights were granted to these individuals during the year.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Number of Exercise Rates Of Stock Price
Shares Percentage of Price Appreciation for Option
Underlying Total Options per Term(1)
Options/SARs Granted to Share Expiration -----------------------
Name Granted (#s) Employees (%) ($/sh) Date 5% 10%
---- ------------ ------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alain Rossmann.......... -- -- -- -- -- --
Charles Parrish......... -- -- -- -- -- --
Alan Black.............. -- -- -- -- -- --
Mike Mulica............. 350,000 5.40 $110.33 11/1/09 $24,281,228 $61,533,400
50,000 0.77 $ 55.16 11/1/09 $ 6,226,559 $11,548,298
200,000 3.08 $120.50 1/3/10 $15,156,361 $38,409,193
336,667 5.19 $ 75.31 5/3/10 $15,945,770 $40,409,712
Benjamin Linder......... -- -- -- -- -- --
Tony Miranzadeh......... 112,666(2) 1.73 65.13 6/30/10 4,614,435 11,693,883
Malcolm Bird............ -- -- -- -- -- --
</TABLE>
--------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the Securities and Exchange Commission. There is no
assurance provided to any executive officer or any other holder of our
securities that the actual stock price appreciation over the 10-year
option term will be at the assumed 5% and 10% levels or at any other
defined level.
(2) These stock options, which were granted under the 1996 stock plan, become
exercisable at a rate of 5% of the total number of shares on a monthly
basis during the first year after grant, as to an aggregate of 10% of the
total number of shares on a monthly basis during the second year after
grant, as to an aggregate of 45% of the shares on a monthly basis during
the third, fourth and fifth years after grant and as to an aggregate of
40% of the shares on a monthly basis during the sixth and seventh years
after grant, as long as the optionee remains an employee with, or
consultant to, or director of Phone.com.
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Phone.com Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth certain information with respect to stock
options exercised by the executive officers named in the Phone.com Summary
Compensation Table during the fiscal year ended June 30, 2000. In addition,
the table sets forth the number of shares covered by stock options as of the
fiscal year ended June 30, 2000, and the value of "in-the-money" stock
options, which represents the positive spread between the exercise price of a
stock option and the market price of the shares subject to such option at the
end of the fiscal year ended June 30, 2000.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at June 30, In-the-Money Options at
Shares 2000(#) June 30, 2000($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alain Rossmann.......... -- -- -- -- -- --
Charles Parrish......... -- -- 28,832 304,500 1,791,286 18,692,962
Alan Black.............. -- -- 3,292 96,708 202,467 5,947,784
Mike Mulica............. -- -- 7,291 929,376 72,682 425,755
Benjamin Linder......... 127,203 11,126,332 138,914 168,169 8,992,029 10,461,399
Tony Miranzadeh......... 14,791 1,042,513 3,360 181,001 203,606 4,064,147
Malcolm Bird............ 24,000 2,916,215 118,833 123,833 7,701,253 7,805,223
</TABLE>
--------
(1) The amount set forth represents the difference between the fair market
value of the underlying common stock at June 30, 2000 of $65.13 and the
exercise price of the option.
Phone.com Employment Agreements and Change of Control Agreements
Phone.com has entered into an employment agreement with Mr. Mike Mulica that
provides that through May 3, 2001, Mr. Mulica will not be an "at will"
employee. Accordingly, for such period, Mr. Mulica's employment will not be
terminated for any reason other than any of the following: (i) gross
negligence or willful misconduct by Mr. Mulica, (ii) repeated unexplained or
unjustified absence from Phone.com, (iii) a material and willful violation of
any federal or state law, (iv) the commission of any act of fraud with respect
to Phone.com, or (v) the conviction of a felony. Phone.com also has entered
into "change of control" agreements with the following of its executive
officers: Alain Rossmann, Charles Parrish, Alan Black, Benjamin Linder and
Mike Mulica. An additional five employees who were not executive officers were
covered by "change of control" agreements. These agreements provide that if
the officer's employment is terminated as a result of an "involuntary
termination" other than for cause within 18 months following a change of
control transaction, the vesting of any stock option or restricted stock held
by the officer shall be automatically accelerated so that the option or
restricted stock becomes completely vested and exercisable. The merger with
Software.com may constitute a change of control. For purposes of the change of
control agreements, "involuntary termination" includes a significant reduction
in the employee's duties, authority or responsibilities, a substantial
reduction of facilities or perquisites, a reduction in base salary, a material
reduction in employee benefits, a relocation that is more than 30 miles from
the employee's then-present location, the failure of successors of Phone.com
to assume the change of control agreement, the purported termination of the
employee other than for disability or cause, or any act or circumstances that
would constitute a constructive termination under California case law or
statute.
Phone.com Employee Benefit Plans
1995 Stock Plan. Phone.com's 1995 stock plan provides for the grant of
incentive stock options to employees and nonstatutory stock options and stock
purchase rights to employees, directors and consultants. The purposes of the
1995 stock plan are to attract and retain the best available personnel, to
provide additional incentives to Phone.com's employees and consultants and to
promote the success of Phone.com's business. The 1995 stock plan was
originally adopted by Phone.com's board of directors in October 1995 and
approved by its stockholders in October 1995. Unless terminated earlier by the
board of directors, the 1995 stock plan shall
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terminate in October 2005. A total of 3,298,924 shares of common stock have
been reserved for issuance under the 1995 stock plan. As of June 30, 2000,
options to purchase 143,333 shares of common stock were outstanding at a
weighted average exercise price of $0.08 per share, 3,155,591 shares had been
issued upon exercise of outstanding options or pursuant to restricted stock
purchase agreements, and no shares remained available for future grant.
The administrator of the 1995 stock plan may be either the board of
directors or a committee of the board. The administrator determines the terms
of options granted under the 1995 stock plan, including the number of shares
subject to the option, exercise price, term and exercisability. Incentive
stock options granted under the 1995 stock plan must have an exercise price of
at least 100% of the fair market value of the common stock on the date of
grant and at least 110% of the fair market value in the case of an optionee
who holds more than 10% of the total voting power of all classes of our stock.
Nonstatutory stock options granted under the 1995 stock plan must have an
exercise price of at least 85% of the fair market value of the common stock on
the date of grant (or at least 110% of the fair market value in the case of an
optionee who holds more than 10% of the total voting power of all classes of
our stock). Payment of the exercise price may be made in cash or other
consideration as determined by the administrator.
The administrator determines the term of options, which may not exceed 10
years (or five years in the case of an option granted to a holder of more than
10% of the total power of all classes of our stock). No option may be
transferred by the optionee other than by will or the laws of descent or
distribution. Each option may be exercised during the lifetime of the optionee
only by the optionee. The administrator determines when options become
exercisable. Options granted under the 1995 stock plan generally must be
exercised within 60 days after the termination of the optionee's status as an
employee, director or consultant of Phone.com, or within 12 months if
termination is due to the death or disability of the optionee, but in no event
later than the expiration of the option's term. Options granted under the 1995
stock plan generally vest at the rate of 1/4 of the total number of shares
subject to the option 12 months after the date of grant, and 1/48 of the total
number of shares subject to the option each month thereafter.
In the event of Phone.com's merger with or into another corporation, each
option may be assumed or an equivalent option substituted by the successor
corporation. The administrator has the authority to amend or terminate the
1995 stock plan provided that no action that impairs the rights of any holder
of an outstanding option may be taken without the holder's consent. In
addition, stockholder approval will be obtained for any amendment to the
extent required by applicable law.
In addition to stock options, the administrator may issue stock purchase
rights under the 1995 stock plan to employees, directors and consultants. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights. The purchase price
of a stock purchase right granted under the 1995 stock plan must be at least
85% of the fair market value of the shares as of the date of the offer. The
period during which the stock purchase right is held open is determined by the
administrator, but in no case shall this period exceed 30 days. Unless the
administrator determined otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting Phone.com an
option to repurchase unvested shares at cost upon termination of the
recipient's relationship with Phone.com.
1996 Stock Plan. Phone.com's 1996 stock plan provides for the grant of
incentive stock options to employees and nonstatutory stock options and stock
purchase rights to employees, directors and consultants. The purposes of the
1996 stock plan are to attract and retain the best available personnel, to
provide additional incentives to Phone.com's employees and consultants and to
promote the success of Phone.com's business. The 1996 stock plan was
originally adopted by Phone.com's board of directors in September 1996 and
approved by its stockholders in October 1996. The 1996 stock plan was amended
by Phone.com's board of directors in March 1999 to increase the total number
of shares reserved for issuance by 4,250,000 shares and to incorporate other
changes. This amendment to the 1996 stock plan was approved by Phone.com's
stockholders in May 1999. Unless terminated earlier by the board of directors,
the 1996 stock plan shall terminate in September 2006. A total of 15,468,850
shares of common stock have been reserved for issuance under the 1996 stock
plan. In
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addition, the number of shares reserved under the plan will automatically be
increased each year, beginning on July 1, 2000 in an amount equal to the
lesser of (a) 3,000,000 shares, (b) four percent of the shares outstanding on
the last day of the preceding fiscal year or (c) a lesser number of shares as
is determined by the board of directors. As of June 30, 2000, options to
purchase 11,647,120 shares of common stock were outstanding at a weighted
average exercise price of $41.61 per share, 2,852,743 shares had been issued
upon exercise of outstanding options or pursuant to restricted stock purchase
agreements, and 968,987 shares remained available for future grant.
The administrator of the 1996 stock plan may be either the board of
directors or a committee of the board. The administrator determines the terms
of options granted under the 1996 stock plan, including the number of shares
subject to the option, exercise price, term and exercisability. In no event,
however, may an individual receive option grants for more than 2,000,000
shares under the 1996 plan in any fiscal year. Incentive stock options granted
under the 1996 stock plan must have an exercise price of at least 100% of the
fair market value of the common stock on the date of grant and at least 110%
of the fair market value in the case of an optionee who holds more than 10% of
the total voting power of all classes of Phone.com's stock. Nonstatutory stock
options granted under the 1996 stock plan must have an exercise price of at
least 85% of the fair market value of the common stock on the date of grant.
Payment of the exercise price may be made in cash or other consideration as
determined by the administrator.
The administrator determines the term of options, which may not exceed 10
years (or five years in the case of an option granted to a holder of more than
10% of the total voting power of all classes of our stock). No option may be
transferred by the optionee other than by will or the laws of descent or
distribution provided, however, that the administrator may in its discretion
provide for the transferability of nonstatutory stock options granted under
the 1996 stock plan. Each option may be exercised during the lifetime of the
optionee only by the optionee or permitted transferee. The administrator
determines when options become exercisable. Options granted under the 1996
stock plan generally must be exercised within 30 to 90 days, as determined by
the administrator, after the termination of the optionee's status as an
employee, director or consultant of Phone.com, or within 12 months if
termination is due to the death or disability of the optionee, but in no event
later than the expiration of the option's term. Options granted under the 1996
stock plan generally vest over a period of four or five years.
In the event of Phone.com's merger with or into another corporation, each
option may be assumed or an equivalent option substituted by the successor
corporation. However, if the successor corporation does not agree to assume or
substitute the option, the option will terminate. The administrator has the
authority to amend or terminate the 1996 stock plan provided that no action
that impairs the rights of any holder of an outstanding option may be taken
without the holder's consent.
In addition, stockholder approval is required to increase the number of
shares subject to the 1996 stock plan, to change the designation of the class
of persons eligible to be granted options or to increase the individual grant
limitation. In addition to stock options, the administrator may issue stock
purchase rights under the 1996 stock plan to employees, directors and
consultants. The administrator determines the number of shares, price, terms,
conditions and restrictions related to a grant of stock purchase rights. The
purchase price of a stock purchase right granted under the 1996 stock plan
must be at least 85% of the fair market value of the shares as of the date of
the offer. The period during which the stock purchase right is held open is
determined by the administrator, but in no case shall this period exceed 30
days. Unless the administrator determines otherwise, the recipient of a stock
purchase right must execute a restricted stock purchase agreement granting
Phone.com an option to repurchase the unvested shares at cost upon termination
of the recipient's relationship with Phone.com.
2000 Non-Executive Stock Option Plan (2000 stock plan). Phone.com's 2000
stock plan provides for the grant of non-statutory stock options to employees
and consultants. The purposes of the 2000 stock plan are to attract and retain
the best available personnel, to provide additional incentives to Phone.com's
employees and consultants and to promote the success of Phone.com's business.
The 2000 stock plan was originally adopted by
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Phone.com's board of directors on May 3, 2000. Unless terminated earlier by
the board of directors, the 2000 stock plan shall terminate on May 3, 2010. A
total of 2,000,000 shares of common stock have been reserved for issuance
under the 2000 stock plan. As of June 30, 2000, options to purchase 1,246,777
shares of common stock were outstanding at a weighted average exercise price
of $75.31 per share, no shares had been issued upon exercise of outstanding
options, and 753,223 shares remained available for future grant.
The administrator of the 2000 stock plan may be either the board of
directors or a committee of the board. The administrator determines the terms
of options granted under the 2000 stock plan, including the number of shares
subject to the option, exercise price, term and exercisability. In no event,
however, may an individual receive option grants for more than 2,000,000
shares under the 2000 plan in any fiscal year. Nonstatutory stock options
granted under the 2000 stock plan must have an exercise price of at least 85%
of the fair market value of the common stock on the date of grant. Payment of
the exercise price may be made in cash or other consideration as determined by
the administrator.
The administrator determines the term of options, which may not exceed 10
years. No option may be transferred by the optionee other than by will or the
laws of descent or distribution provided, however, that the administrator may
in its discretion provide for the transferability of nonstatutory stock
options granted under the 2000 stock plan. Each option may be exercised during
the lifetime of the optionee only by the optionee or permitted transferee. The
administrator determines when options become exercisable. Options granted
under the 2000 stock plan generally must be exercised within 30 to 90 days, as
determined by the administrator, after the termination of the optionee's
status as an employee or consultant of Phone.com, or within 12 months if
termination is due to the death or disability of the optionee, but in no event
later than the expiration of the option's term. Options granted under the 2000
stock plan generally vest over a period of four or five years.
In the event of Phone.com's merger with or into another corporation, each
option may be assumed or an equivalent option substituted by the successor
corporation. However, if the successor corporation does not agree to assume or
substitute the option, the option will terminate. The administrator has the
authority to amend or terminate the 2000 stock plan provided that no action
that impairs the rights of any holder of an outstanding option may be taken
without the holder's consent.
1999 Employee Stock Purchase Plan. Phone.com's employee stock purchase plan
was adopted by the board of directors in March 1999 and was approved by
Phone.com's stockholders in May 1999. A total of 1,200,000 shares of common
stock has been reserved for issuance under the employee stock purchase plan,
plus an automatic annual increase on the first day of each of our fiscal years
beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 1,000,000
shares or 1% of Phone.com's outstanding common stock on the last day of the
immediately preceding fiscal year. Unless terminated earlier by the board of
directors, the employee stock purchase plan shall terminate in March 2019.
The employee stock purchase plan, which is intended to qualify under Section
423 of the Code, will be implemented by a series of overlapping offering
periods of approximately 24 months' duration, with new offering periods (other
than the first offering period) commencing on May 1 and November 1 of each
year. Each offering period will generally consist of four consecutive purchase
periods of six months' duration, at the end of which an automatic purchase
will be made for participants. The initial offering period commenced on June
11, 1999
and will end on April 30, 2001; the initial purchase period began on June 11,
1999 and ended on January 31, 2000, with subsequent purchase periods ending on
April 30, 2000, October 31, 2000 and April 30, 2001. The employee stock
purchase plan will be administered by the board of directors or by a committee
appointed by the board. Phone.com's employees (including officers and employee
directors), or of any majority-owned subsidiary designated by the board, are
eligible to participate in the employee stock purchase plan if they are
employed by Phone.com or a subsidiary of Phone.com for at least 20 hours per
week and more than five months per year. The employee stock purchase plan
permits eligible employees to purchase common stock through payroll
deductions, which in any event may not exceed 20% of an employee's base
salary. The purchase price is equal to the lower of 85% of the fair market
value of the common stock at the beginning of each offering period or at the
end of
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each purchase period. Employees may end their participation in the employee
stock purchase plan at any time during an offering period, and participation
ends automatically on termination of employment.
An employee cannot be granted an option under the employee stock purchase
plan if immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of Phone.com's stock or stock of Phone.com's
subsidiaries, or if the option would permit an employee to purchase stock
under the employee stock purchase plan at a rate that exceeds $25,000 of fair
market value of stock for each calendar year in which the option is
outstanding. In addition, no employee may purchase more than 5,000 shares of
common stock under the employee stock purchase plan in any one purchase
period. If the fair market value of the common stock on a purchase date is
less than the fair market value at the beginning of the offering period, each
participant in that offering period shall automatically be withdrawn from the
offering period as of the end of the purchase date and re-enrolled in the new
twenty-four month offering period beginning on the first business day
following the purchase date.
If Phone.com merges or consolidates with or into another corporation or
sells all or substantially all of its assets, each right to purchase stock
under the employee stock purchase plan will be assumed or an equivalent right
substituted by the successor corporation. However, the board of directors will
shorten any ongoing offering period so that employees' rights to purchase
stock under the employee stock purchase plan are exercised prior to the
transaction in the event that the successor corporation refuses to assume each
purchase right or to substitute an equivalent right of the acquiring
corporation. The board of directors has the power to amend or terminate the
employee stock purchase plan and to change or terminate offering periods as
long as this action does not adversely affect any outstanding rights to
purchase stock thereunder. However, the board of directors may amend or
terminate the employee stock purchase plan or an offering period even if it
would adversely affect outstanding options in order to avoid our incurring
adverse accounting charges.
Phone.com Limitation of Liability and Indemnification
Phone.com's certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that a
director of a corporation will not be personally liable for monetary damages
for breach of an individual's fiduciary duties as a director except for
liability;
. for any breach of a director's duty of loyalty to Phone.com or to its
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which a director derives an improper personal
benefit.
Phone.com's bylaws provide that Phone.com shall indemnify its directors and
executive officers and may indemnify its officers, employees and other agents
to the full extent permitted by law. Phone.com believes that indemnification
under its bylaws covers at least negligence and gross negligence on the part
of an indemnified party. Phone.com's bylaws also permit it to advance expenses
incurred by an indemnified party in connection with the defense of any action
or proceeding arising out of a party's status or service as a director,
officer, employee or other agent of Phone.com upon an undertaking by the party
to repay the advances if it is ultimately determined that he or she is not
entitled to indemnification.
Phone.com has entered into separate indemnification agreements with each of
our directors and officers. These agreements require Phone.com to, among other
things, indemnify the director or officer against expenses (including
attorney's fees), judgments, fines and settlements paid by the individual in
connection with any action, suit or proceeding arising out of the individual's
status or service as a director or officer of Phone.com (other than
liabilities arising from willful misconduct or conduct that is knowingly
fraudulent or deliberately dishonest)
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and to advance expenses incurred by the individual in connection with any
proceeding against the individual with respect to which he or she may be
entitled to indemnification by Phone.com. Phone.com believes that its
certificate of incorporation and bylaw provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers. Phone.com also maintains directors' and officers' liability
insurance.
At present, Phone.com is not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of Phone.com where
indemnification will be required or permitted. Furthermore, Phone.com is not
aware of any threatened litigation or proceeding that might result in a claim
for indemnification.
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STOCK OWNERSHIP OF PRINCIPAL
STOCKHOLDERS, MANAGEMENT AND
DIRECTORS OF PHONE.COM
The following table sets forth certain information with respect to
beneficial ownership of Phone.com's common stock as of July 31, 2000, as to:
. each person (or group of affiliated persons) known by Phone.com to own
beneficially more than 5% of Phone.com's outstanding common stock (1),
. each of Phone.com's directors,
. each of the executive officers named in the Phone.com Summary
Compensation Table, and
. all directors and executive officers as a group.
Except as indicated in the footnotes to this table and under applicable
community property laws, to our knowledge, the persons named in the table have
sole voting and investment power with respect to all shares of common stock.
For the purposes of calculating percent ownership, as of July 31, 2000,
82,997,462 shares were issued and outstanding, and, for any individual who
beneficially owns shares represented by options exercisable on or before
September 30, 2000, these shares are treated as if outstanding for that
person, but not for any other person. Unless otherwise indicated, the address
of each of the individuals named below is: c/o Phone.com, Inc., 800 Chesapeake
Drive, Redwood City, California 94063.
<TABLE>
<CAPTION>
Amount and Nature Percent of
of Beneficial Common
Name and Address Ownership Stock
---------------- ----------------- ----------
<S> <C> <C>
FMR Corp.(2) .................................... 10,232,410 12.33%
82 Devonshire Street,
Boston, Massachusetts 02109
Alain Rossmann(3)................................ 6,661,282 8.03%
Charles Parrish(4)............................... 1,157,373 1.39%
Alan Black(5).................................... 326,250 *
Mike Mulica(6)................................... 30,416 *
Benjamin Linder(7)............................... 419,503 *
Tony Miranzadeh(8)............................... 11,150 *
Malcolm Bird..................................... 3,461 *
Roger Evans(9)................................... 376,967 *
Reed Hundt(10)................................... 29,832 *
David Kronfeld(11)............................... 90,786 *
Andrew Verhalen(12).............................. 1,101,698 1.33%
All directors and executive officers as a group
(12 persons)(13)................................ 10,797,288 12.94%
</TABLE>
--------
* Less than 1%.
(1) Subsequent to July 31, 2000, Software.com entered into voting agreements
with certain stockholders of Phone.com and 10,752,845 shares of Phone.com
common stock are subject to the voting agreements. Software.com also
entered into a stock option agreement with Phone.com pursuant to which
Phone.com granted Software.com an option to purchase up to 16,516,495
shares of Phone.com common stock under certain circumstances.
Software.com disclaims beneficial ownership of these shares.
(2) As reported in the Schedule 13G dated August 10, 2000, FMR Corp., a
parent holding company, has sole power to vote or to direct the vote of
850,100 shares and sole power to dispose or to direct the disposition
with respect to 10,232,410 shares. Various persons have the right to
receive or the power to direct the receipt of dividends from, or the
proceeds from the sale of, the common stock of Phone.com. As further
reported in this Schedule 13G, the interest of one person, OTC Fund, an
investment company registered under the Investment Company Act of 1940,
in the common stock of Phone.com, amounted to 4,372,780 shares or 5.27%
of the total outstanding common stock at July 31, 2000.
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(3) Includes 149,664 shares held by Platane Investments Limited. Mr. Rossmann
is the manager of Platane Investments Limited, and disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
(4) Includes 31,082 shares issuable upon exercise of outstanding options
exercisable on or before September 30, 2000.
(5) Includes 319,801 shares held in a revocable trust for the benefit of Alan
Black and 6,449 shares issuable upon exercise of outstanding options
exercisable on or before September 30, 2000.
(6) Is comprised entirely of shares issuable upon exercise of outstanding
options exercisable on or before September 30, 2000.
(7) Includes 163,164 shares issuable upon exercise of outstanding options
exercisable on or before September 30, 2000.
(8) Includes 7,826 shares issuable upon exercise of outstanding options
exercisable on or before September 30, 2000.
(9) Includes 120,286 shares held by Greylock Equity Limited Partnership. Mr.
Evans is a director of Phone.com and a general partner of Greylock Equity
GP Limited Partnership, the general partner of Greylock Equity Limited
Partnership. Mr. Evans disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein. The other general
partners of Greylock Equity GP Limited Partnership with whom Mr. Evans
shares voting and dispositive powers over these shares are Henry F.
McCance, Howard E. Cox, Jr., David N. Strohm, William W. Helman and
William S. Kaiser.
(10) Includes 24,166 shares issuable upon exercise of outstanding options
exercisable on or before September 30, 2000.
(11) Includes 16,080 shares held by JK&B Capital, L.P. and 8,040 shares held
by JK&B Capital II, L.P. Mr. Kronfeld is a director of Phone.com and
general partner of JK&B Capital, the general partner of JK&B Capital,
L.P. and JK&B Capital II, L.P. Mr. Kronfeld disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein. The other general partners of JK&B Capital with whom Mr.
Kronfeld shares voting and dispositive powers over these shares are
George Spencer and Eileen Richardson. Also includes 66,666 shares
issuable upon exercise of outstanding options exercisable on or before
September 30, 2000.
(12) Includes 48,318 shares held by Matrix IV Entrepreneurs Fund LP and
846,658 shares held by Matrix Partners IV LP. Mr. Verhalen is a director
of Phone.com and a general partner of Matrix Partners, the general
partner of each of Matrix Entrepreneurs Fund and Matrix Partners IV LP.
Mr. Verhalen disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein. The other general partners of
Matrix Partners with whom Mr. Verhalen shares voting and dispositive
powers over the shares are Paul J. Ferri, W. Michael Humphreys, Timothy
A. Barrows and Andrew Marcuvitz. Also includes 66,666 shares issuable
upon exercise of outstanding options exercisable on or before September
30, 2000.
(13) Includes 396,435 shares issuable upon exercise of outstanding options
exercisable on or before September 30, 2000.
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PHONE.COM TRANSACTIONS WITH RELATED PARTIES
The following officers issued full recourse promissory notes to Phone.com to
purchase restricted stock under the 1996 Stock Plan. The full principal amount
and accrued interest under each note remain outstanding. The terms of the
notes are summarized below:
<TABLE>
<CAPTION>
Principal
Name Date of Note Amount Date Due Interest Rate
---- ---------------- --------- ---------------- -------------
<S> <C> <C> <C> <C>
Alan Black........ October 31, 1997 $ 52,000 October 31, 2001 6.24%
July 20, 1998 $123,750 July 20, 2002 5.49%
</TABLE>
Phone.com has entered into indemnification agreements with its officers and
directors containing provisions requiring Phone.com to, among other things,
indemnify its officers and directors against liabilities that may arise by
reason of its status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
Phone.com also has entered into "change of control" agreements with the
following of its executive officers: Alain Rossmann, Charles Parrish, Alan
Black, Benjamin Linder and Mike Mulica. These agreements provide that if the
officer's employment is terminated involuntarily other than for cause within
18 months following a change of control transaction then, subject to
limitations, the vesting of any stock option or restricted stock held by the
officer shall be automatically accelerated so that the option or restricted
stock becomes completely vested.
Phone.com has entered into a relocation agreement with Charles Parrish on
December 23, 1996 pursuant to which Phone.com has agreed to pay Mr. Parrish a
housing allowance of $3,570 per month starting in September 1996 through the
earlier of August 2003 or the date that Mr. Parrish's terminates employment
with Phone.com. Phone.com has also entered into a loan agreement with Mr.
Parrish on December 23, 1996, under which Phone.com has agreed to lend Mr.
Parrish $300,000 less the aggregate amount of all payments made to him under
the relocation agreement upon Mr. Parrish's request before August 1, 2003 in
order to assist him in purchasing a residence. In addition, Phone.com has
agreed to pay Mr. Parrish a severance payment equal to six months of his base
salary if Mr. Parrish's employment with Phone.com is involuntarily terminated.
Phone.com has entered into a letter agreement with Malcolm Bird on August
18, 1997, which provides that if Mr. Bird's employment with Phone.com is
involuntarily terminated by Phone.com other than for cause, he will receive a
severance payment equal to six months of his base salary and continue to
receive his medical insurance benefits for a period of six months following
his termination.
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SOFTWARE.COM BUSINESS
Overview
Software.com develops and markets Internet infrastructure software based on
open standards and protocols for Internet and telecommunications service
providers. It designs this software, which it refers to as Internet
infrastructure software, to enable communications service providers to
transition to the Internet as the technology foundation for worldwide
communications and services. Software.com's infrastructure software platform
and related applications are designed exclusively for the communications
service provider market: traditional telecommunications carriers; Internet
service providers (or ISPs) and wholesalers; cable-based, Internet access
providers; application service providers (or ASPs); competitive local exchange
carriers; Internet destination sites or portals; and wireless telephony
carriers. Software.com believes that a fundamental component of the success
and timing of the transition to an Internet-based communications structure
will be enabling and empowering those service providers who possess the
vision, experience, infrastructure and economies of scale to bring next-
generation communications and services to the consumer and business mass-
markets. There is significant and increasing competition for users of these
new services, especially with the expansion of the wireless market. Therefore,
Software.com believes successful service providers must utilize Internet
infrastructure platforms and applications that have the ability to perform at
increasingly high capacities, or scale, and that have the flexibility to unite
both traditional and next-generation communication devices within a common
architecture in a cost-effective manner.
Software.com's business is focused on equipping communications service
providers with a highly scalable and extensible infrastructure software
platform based on open standards that enables them to offer the most
competitive, next generation communication services to millions of
subscribers. To accomplish this, it provides its customers with a scalable and
extensible software platform and selected applications leveraging the
underlying components of this platform, as well as a broad range of consulting
and customer support services that complement these offerings. Since
Software.com's founding in 1993, its vision has remained the same-supplying
standards-based, service provider software solutions enabling Internet and
communications services.
In the race to build user bases, service providers increasingly focus on
providing applications and services that help attract and retain customers.
Software.com's initial applications, based on the underlying infrastructure
software platform have been designed to provide service providers with a
common platform for multiple electronic messaging services. Internet
electronic mail, or Internet email, has proven to be one of the most popular
applications on the Internet and a compelling application for attracting
subscribers. The growth in the use of Internet email has also attracted
businesses, as email becomes a routine method of communicating among employees
and with customers, vendors, and partners. As service providers seek to
differentiate offerings to attract more business users, service providers are
expanding basic email service to create new and innovative Internet-based
messaging services, including "fail-safe" email, wireless messaging, and new
types of unified communications services such as integrated email, faxmail and
voicemail.
To take advantage of opportunities in both consumer and business messaging,
service providers must deploy messaging services capable of meeting the
evolving needs of these groups. Service outages or the loss of messages can
lead to adverse publicity for service providers, and can result in the loss of
substantial numbers of subscribers. In order to leverage infrastructure
investments, service providers must provide systems that can grow to
accommodate hundreds of thousands, or even millions, of users and the rapidly
increasing number of messages being sent by their larger user bases. Most
service providers, however, have neither the products and services in place
nor the existing internal technical and development capabilities to address
this enormous growth.
Software.com's service provider customers deploy its scalable, high-
performance infrastructure software platform and related applications to
deliver advanced messaging services to their consumer and business
subscribers. Its products have been proven to deliver messaging services in
some of the most demanding service provider environments in the world,
including those of AT&T WorldNet(R) Service, Excite@Home, Japan Telecom,
Sprint PCS, Telecom Italia Net, Telecom Italia Mobile and Verizon. As of June
30, 2000, Software.com
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had licensed approximately 116 million seats and estimates that approximately
70 million of these seats had been activated. It combines its infrastructure
software platform, applications and services to create advanced solutions that
provide several benefits to communications service providers.
Software.com's infrastructure software is designed to easily scale and
enable a service provider to offer an increasing array of applications and
services to a rapidly-growing number of subscribers. Software.com designs its
products to be highly available, meaning that a user can access the service
when needed, as well as highly reliable, meaning that the users do not lose
data that is sent or received. In addition, its technology enables service
providers to create, manage, and host multiple offerings on the same
infrastructure software platform. A service provider can therefore easily
tailor feature sets to meet the different and evolving needs of individual
segments of its subscriber base. In addition to its infrastructure software,
Software.com offers business planning, system design, capacity planning, on-
site operations training, and integrated support services to help service
providers rapidly pilot, launch and scale innovative new service offerings.
After completion of a consulting engagement, Software.com's professional
services staff passes essential, site-specific knowledge to its support staff
to facilitate a smooth transition from deployment to ongoing customer care. It
supports its customers' sites on a 24 hour basis and has developed
sophisticated tracking and response systems to provide customers with the
highest quality support.
Software.com's goal is to be the leading provider of Internet infrastructure
software designed for communications service providers. To this end, it
intends to continue its exclusive focus on the communications service provider
market. Software.com believes that its exclusive focus on service providers,
as opposed to the enterprise market, enables it to better identify and offer
the feature sets and attributes that are required for its products to be
successful in the communications service provider marketplace. Within the
communications service provider marketplace, it focuses its sales efforts on
the world's largest service providers. Software.com believes that this
strategy allows it to capture the broadest possible user base while targeting
a limited number of accounts. It also believes that winning the large, well-
known accounts helps its sales to smaller and medium sized providers by
enhancing its reputation as a leading provider of Internet infrastructure
software in the communications service provider market. Software.com also
intends to leverage its infrastructure software platform to build additional
service provider applications. For example, Software.com has integrated web-
based technology, acquired in the Mobility.Net acquisition of April 1999, to
enhance the performance of its existing Web interface and ultimately extend
the reach of its infrastructure software platform to encompass additional Web-
based applications. Software.com has pursued a similar strategy to leverage
the wireless technologies acquired in the Telarc acquisition of October 1999.
In April 2000 Software.com acquired AtMobile.com, Inc., (or AtMobile), a
wireless Internet application developer with Instant Messaging technology and
Wireless Intelligent Network integration expertise. Software.com is working on
integrating the AtMobile wireless applications to leverage the infrastructure
software platform and increase the scope of service offerings for
communications service providers. Software.com intends to add more
applications as extensions to the infrastructure software platform through
internal development, external development programs, partnering arrangements
or the acquisition of third party technologies. Software.com also intends to
continue to leverage the expertise of its professional services organization
to help customers design, build, and deploy systems based on its products.
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Products and Services
Software.com has developed a scalable, extensible infrastructure software
platform that provides the foundation for its applications. This platform is
the core technology that underlies its three current messaging applications:
Post.Office, InterMail Kx, and InterMail Mx. These product packages enable
service providers to support a user base ranging from hundreds to millions of
subscribers, for both consumers and businesses. The following table sets forth
the target customer and architecture for these product packages:
<TABLE>
<CAPTION>
Post.Office InterMail Kx InterMail Mx
------------------- ----------------------------- -------------------------
<S> <C> <C> <C>
Target Customer......... 100 to 25,000 users 25,000 to 400,000 users 250,000 and above users
Architecture............ Single server Multiple servers, distributed Multiple servers,
and modular distributed and modular
Operating System........ NT, UNIX UNIX UNIX
Directory............... Single application LDAP Multiple application,
directory highly scalable LDAP
directory
Object Store Single multimedia Single, highly-parallel Multiple, highly-parallel
Technology............. object store multimedia object store multimedia object stores
</TABLE>
Post.Office
Designed to meet the messaging needs of small to medium size service
providers, Post.Office is typically chosen by service providers with 100 to
25,000 users, although it can scale to support up to 250,000 subscribers on a
single UNIX server. E-mail system administrators, or postmasters, can use
Post.Office to easily administer their entire email systems, while allowing
end users to manage their individual email accounts. Post.Office provides a
user-friendly administration interface featuring fill-in-the-blank forms and
pop-up options assisted by Web-based help links. Post.Office offers a broad
array of security features, including multiple password protection levels and
numerous user restriction settings. Post.Office also provides a variety of
features for preventing the sending and receiving of Internet junk mail, or
"spam." Post.Office operates independently of the host computer system, making
it difficult to compromise the main system security through the email
application.
InterMail Kx and InterMail Mx
The InterMail Mx and InterMail Kx product packages are designed to meet the
rapidly evolving needs of communications service providers and provide the
foundation for continued growth in applications and service offerings.
InterMail Kx and InterMail Mx are designed to enable service providers to
offer premium consumer, business, and Web-based messaging services from a
single, integrated solution. InterMail Kx is designed for fast-growing,
medium-sized service providers with a subscriber base of up to 400,000.
InterMail Mx, which is designed for the largest service providers, scales to
support millions of subscribers. The InterMail Kx and InterMail Mx product
packages provide postmasters with a suite of powerful system administration
tools that enable streamlined subscriber account creation and management.
InterMail Kx and InterMail Mx components run on multiple servers, providing
greater scalability, reliability, and performance than a single server system.
Within the InterMail Kx and InterMail Mx product packages, Software.com has
developed a broad set of customizable messaging applications, which are
designated as different editions: InterMail Standard Edition, InterMail
Business Advantage Edition and the recently developed, initial version of
InterMail IP Unified Messaging (IPUM) Edition. InterMail Mx also offers the
InterMail Mx Mobile Mail Edition, specifically designed for mobile messaging
users. These editions provide a range of functionality and allow service
providers to create and customize multiple classes of service at varying price
points for consumer and business subscribers. A single InterMail Kx or
InterMail Mx installation can host multiple classes of messaging services,
thereby eliminating the expense associated with running separate systems.
These capabilities help service providers to expand market share, retain
subscribers, lower total cost of ownership, and derive increased profits from
their businesses. Additionally, Software.com recently began selling a highly
scalable, Lightweight Directory Access Protocol
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(LDAP) Directory, as part of InterMail Mx, and upon which its service provider
customers can design and develop multiple directory applications.
InterMail Standard Edition-Designed for service providers offering consumer
email or hosting the consumer-oriented services of another service provider,
InterMail Standard Edition provides a standard post office protocol or POP3
mailbox, and interfaces with commonly used desktop email clients such as
Microsoft Outlook and Outlook Express, Netscape Navigator, and QUALCOMM
Eudora. InterMail Standard Edition also includes the ability to access
mailboxes from any location where the Internet can be accessed through
commonly used Internet browsers such as Microsoft Internet Explorer and
Netscape Navigator. InterMail Standard Edition is typically bundled with dial-
up or cable access as part of an entry level service provider offering. As
with all its InterMail editions, InterMail Standard Edition supports
individual account spam protection.
InterMail Business Advantage Edition-Designed for service providers offering
managed messaging to businesses or hosting the business-oriented services of
another service provider, InterMail Business Advantage Edition enables service
providers to offer fully-functional business mailboxes. InterMail Business
Advantage Edition provides a full range of advanced features, including the
advanced Internet protocol for delivery and retrieval of messages known as
IMAP4, enhanced message encryption, delegated administration, and customer
self-care tools.
InterMail IP Unified Messaging Edition-InterMail IP UM Edition is designed
to provide a full function "universal mailbox" that works with Internet
standards-based voicemail and faxmail network components. Software.com's
solution is intended to be a cost-efficient replacement for traditional call
answering, or as a more functional universal mailbox where email, faxmail and
voicemail messages are stored in a single mailbox accessed either by telephone
or computer.
Wireless
Software.com has developed InterMail Mx Mobile Mail Edition and will
continue to develop additional wireless applications, based on its
infrastructure software platform, to enable service providers to meet the
increasing demands of both consumer and business customers to expand mobile
communications and access to Internet content and services beyond wireline
devices. For example, it has developed products designed to enable the
extraction and encoding of Internet data (typically found in HyperText Markup
Language (HTML), the document format language used on the World Wide Web) into
a document format language, such as Wireless Markup Language (WML) or compact
HTML (cHTML), that is readable on particular wireless devices.
Professional and Support Services
Software.com has designed its professional services offerings to enable its
customers to bring their service offerings to market more quickly by
leveraging its significant expertise in deploying and managing large-scale
messaging solutions. Software.com's professional services offerings include a
wide range of consulting services such as business planning services, system
assessment, system architecture review, system migration, and operations
management, as well as rapid deployment and integration of its InterMail
messaging products. It offers professional services in connection with the
initial deployment of its products, as well as on an ongoing basis to address
the continuing needs of its customers. Its services are designed to ensure on-
schedule implementation, whether the customer is installing a completely new
system, migrating from an old system, or expanding an existing Software.com
system. It works with its customers to ensure that all of the components of
their messaging systems are selected, configured, and integrated to manage
subscriber services and growth. As of June 30, 2000, Software.com's
professional services staff consisted of 76 employees. In addition, it also
supplements its professional services staff with outside contractors from time
to time.
Software.com's Support Solutions group provides 24 hour global support
services to meet the demanding needs of the largest service providers. For
each customer, it designates a primary support engineer with responsibility
for fielding and addressing all support issues for that customer. Software.com
monitors support
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issues internally using a variety of integrated processes, including regular
customer interaction sessions. Customers have access to a dedicated Web site
where information on past and outstanding issues is posted, and through which
updates and upgrades can be delivered for ease of implementation. Software.com
maintains support groups in Santa Barbara, California and Lexington,
Massachusetts for North American customers, as well as Windsor, England and
Naarden, the Netherlands for European customers, Hong Kong, PRC for Asian
customers and Tokyo, Japan for Japanese customers. As of June 30, 2000, its
customer support group consisted of 31 employees.
Customers
Numerous service providers around the world use Software.com's products as
the platform for their Internet messaging applications. As of June 30, 2000,
over 1,000 service providers had purchased licenses for its Post.Office and
InterMail messaging software. Software.com's customers range from some of the
largest communications service providers in the world, with millions of users,
to local Internet service providers providing Internet connectivity and
services with a hundred or more users. In 1999 no customer accounted for more
than 10% of revenue. The majority of its customers can be classified according
to the following criteria:
. Traditional Telecommunication Carriers: These customers are comprised of
the Internet service provider organizations within established
telecommunications companies, such as the Regional Bell Operating
Companies (RBOCs) in the United States and national telephone companies
overseas.
. Internet Service Providers (ISPs) and Wholesalers: This group is made up
of companies focused primarily on providing Internet connectivity and
related services enabled by the Internet, such as Web hosting and managed
messaging. Software.com's customers in this group include hundreds of
local ISPs in North America, South America, Europe, and Asia focused on
providing Internet services to local communities.
. Cable-based Internet Access Providers: Software.com's customer base
includes a number of companies focusing on providing Internet services to
end users through broadband access, notably cable modems. Some of these
customers partner with cable companies, and some are wholly owned
divisions within established cable providers.
. Application Service Providers: These customers are comprised of the
increasing number of companies that host specific applications as a
service to their end users.
. Competitive Local Exchange Carriers (CLECs): This group is made up of
companies, other than RBOCs, that offer local phone service. These
companies typically also offer Internet connectivity and services.
. Internet Portals: A number of companies position themselves as Internet
destination sites, or portals, a point of entry to the Internet for a
consumer or business. Many of these portals offer messaging services to
consumers without charge, generating revenues instead by selling
advertising space on the message screens.
. Wireless Telephony Carriers: This group is made up of companies that
offer wireless network services (such as telephone and short messaging
services) and, increasingly, Internet access and services (such as
content delivery to mobile devices).
Strategic Relationships
Software.com has established a number of formal and informal relationships
with companies that provide Internet infrastructure components and software to
service providers. It works with these companies to expand sales channels and
to develop additional applications and services based on Software.com's
infrastructure platform. Set forth below are descriptions of its relationships
with several of its partners:
Cisco Systems. Software.com has been working with Cisco Systems on a variety
of product development efforts, including unified communications based on
Internet protocols, network (hosted) applications, and
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directory technology. Its work with Cisco has focused on providing solutions
for common customers and partners. In February 1997, Cisco made the first of
two equity investments in Software.com.
Hewlett-Packard. Hewlett-Packard has selected InterMail as its preferred
messaging application for the service provider market. Hewlett-Packard markets
solutions, including its applications, to rapidly growing service providers
that are building the infrastructure to offer unified communications and
managed messaging services and to those offering Internet services to
consumers and businesses. Software.com also works closely with Hewlett-Packard
to improve the performance and customization of its applications on Hewlett-
Packard's HP-UX operating systems. In April 1999, Hewlett-Packard purchased a
minority equity interest in Software.com.
IBM. IBM offers InterMail Kx and Post.Office on its high performance
operating systems and hardware, including bundled offerings of InterMail Kx
and Post.Office on its servers. Software.com's works with IBM on a high
availability, high reliability, carrier-scale performance solution based on
InterMail and IBM's Serial Storage Architecture disk subsystems, and high-
availability cluster multiprocessing software. In addition, IBM integrates its
Intelligent Subscriber Management System with InterMail for IBM's service
provider customers.
Telcordia Technologies. Software.com's Strategic Solutions and Professional
Services groups have been working with Telcordia Technologies (formerly
Bellcore) on deploying a next-generation, unified messaging platform based on
standard Internet protocols. It will continue to partner with Telcordia to
explore emerging opportunities created by the convergence of voice and data
networks, including voicemail and faxmail based on Internet protocols.
Nortel. Nortel Networks has selected the InterMail platform as a messaging
component of its Managed Application Services Initiative, giving application
service providers (ASPs) an end-to-end solution. It will continue to partner
with Nortel to explore emerging opportunities created by the convergence of
voice and data networks, including voicemail and faxmail based on Internet
protocols in the ASP market.
Software.com works closely with many other UNIX vendors to customize its
messaging software to run on their systems. These relationships enable
Software.com to sell its products to service providers that use different
hardware platforms. It has relationships with Sun Microsystems (for Solaris)
and Compaq/DEC (for Digital UNIX). It also works on integration, sales and
marketing projects with other companies that currently sell in the service
provider market, including several billing/provisioning systems vendors.
Sales
Software.com markets and sells its Internet infrastructure software and
services exclusively to communications service providers. Its sales strategy
focuses on the pursuit of key accounts worldwide through a direct sales force
and additional market segments through a combination of direct and indirect
channels. It divides the communications service provider market into three
segments: Tier One, Tier Two, and Tier Three. Software.com's sales approach
for a given customer depends upon the tier in which it categorizes the
customer's account.
Tier One Accounts
Tier One accounts consist of a designated list of the largest and most well-
known communications service providers in the world, and are targeted by its
direct sales force. Software.com's InterMail Mx product is specifically
designed for these Tier One accounts whose current subscriber base generally
exceeds 250,000 users, and whose projected subscriber base generally exceeds
one million users. Software.com has Tier One direct sales force personnel
located in California, Washington, Colorado, Texas, Virginia, Massachusetts,
England, Germany, France, Italy, Spain, the Netherlands, Sweden, Japan, Korea,
Australia, and the People's Republic of China (PRC). The direct sales force is
organized into account teams, consisting of a sales director and a sales
engineer, or "technology consultant," and shared account managers. Each team
has responsibility for a designated number of Tier One accounts in the region.
Software.com generate sales leads for Tier One accounts through a
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combination of direct and indirect initiatives, such as conferences,
presentations and responses to requests for proposals. The Tier One sales
process typically involves a large expense commitment from Software.com and
the sales cycle in these accounts lasts from several months to over a year.
Software.com intends to increase the size of its direct sales force in the
Americas, Europe, and Asia to further pursue Tier One account opportunities.
In addition, Software.com intends to engage more strategic partners to
increase its indirect channels for Tier One accounts.
Tier Two Accounts
Software.com characterizes Tier Two accounts as those service providers with
a current subscriber base in excess of 25,000 users and a projected subscriber
base of up to 400,000 users. The performance and feature requirements of Tier
Two accounts are closely aligned with those of larger service providers.
Software.com offers the InterMail Kx package to satisfy the requirements for
these Tier Two accounts. It targets these accounts through a combination of
direct and indirect channels, referred to as the "territory" channel.
Software.com has Tier Two direct sales force personnel located in California,
Colorado, Massachusetts, Texas, Florida, Virginia, Italy, Japan, PRC,
Singapore, and the Netherlands. The Tier Two direct sales force is
complemented by multiple indirect distribution channel partners, including
resellers, systems integrators, and joint marketing partners, such as IBM,
Nortel and Hewlett-Packard. The majority of its indirect sales partners
purchase software from Software.com at a specified discount and resell the
software to their customers. The indirect channels are designed to increase
geographic sales coverage for Tier Two service providers and to leverage the
existing sales organizations of key strategic partners. Software.com is in the
early stages of building these distribution channels and intends to
significantly increase its indirect channel for territory sales.
Tier Three Accounts
Tier Three accounts consist of small to medium size service providers that
operate on a single-server architecture and typically have an installed base
of less than 25,000 users. In general, these small to medium size service
providers are best suited for the Post.Office product package. Software.com
targets these accounts primarily through indirect channels, including
resellers, systems integrators, and joint marketing partners. However,
Software.com also has several Tier Three direct telephone sales force
personnel located in California. It conducts a substantial amount of Tier
Three sales via its external website with direct software downloads to users.
Marketing
Software.com engages in a broad range of marketing activities, including
advertising its products and services in print and electronic media,
sponsoring seminars and events for customers and potential customers,
participating in trade shows and conferences, and providing product
information through its Web site. It also works closely with the marketing
departments of its strategic partners and customers to promote new service
offerings, including their messaging initiatives, that are enabled by its
products. These efforts are augmented with the assistance of several public
relations firms specializing in the technology marketplace in an effort to
further establish and define the market for highly scalable infrastructure
software for communications service providers. For the Tier Two and Tier Three
market segments, Software.com periodically undertakes direct mail programs
designed to promote brand name awareness and inform existing customers of
advances in product features. In addition, it periodically publishes white
papers and industry reports to promote awareness of its technology and
advances in industry practices.
Technology
Infrastructure Software Platform
Software.com has developed a scalable, high performance infrastructure
software platform upon which its service provider customers can build Internet
standards-based applications and services, such as messaging. This
infrastructure software platform consists of a number of core technologies
and/or components. Software.com's
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software "partitions" or separates application processing into a series of
steps, such as retrieving a message from the Internet, storing it on disk, and
delivering it to the user. The software for each step is called a component,
and a set of partitioned components makes up a cluster. The components and the
clustering concept are described below.
Replicated, Multi-Master Directory. The central component of Software.com's
software infrastructure platform is the directory repository, which stores
information about each user of the application. Each component in a
distributed platform needs to access common information, such as a user's name
and password. This data is accessed every time an application interacts with a
user or with another application in a cooperative processing environment. As a
result, specialized, replicated directory technology is needed to support a
large cluster. Software.com's directory has a core database that contains the
common information and a set of high-speed multi-threaded partitioned replicas
of that information, meaning that different operations can take place
concurrently within the same program. By using multiple replicas, the common
information can be accessed a virtually unlimited number of times. The
replicas support the industry standard Lightweight Directory Access Protocol
(LDAP) access, so third party applications can access information in a
standard format. The directory is a "multi-master" system, meaning that
applications can access or add information to any replica and the directory
will automatically update the database and other replicas so that data is
consistent across all components. These advanced replication and updating
protocols are unique to the directory system and are a key element in
providing scalability. Numerous enhancements, such as partial replication,
transaction support and batch processing make the Software.com directory an
infrastructure component and a centrally provisioned entity in the system.
Multimedia Object Store. The object-level storage component is used to
reliably and efficiently store, organize and retrieve a variety of data types,
including text, graphics, voice, audio, video, and facsimile. In
Software.com's storage component, data is accessed via an object-oriented
software layer, which uses self-contained, reusable pieces of software code
known as "objects" to separate, protect, and isolate the data from the
components that use it, so that both the data structures and components can be
independently updated. Software.com's object store is multithreaded, meaning
that several specific tasks within the component are run in parallel. It
utilizes a high degree of caching, where frequently used information is kept
in memory, to increase performance and scalability for data intensive
operations. The object store has an extensible file system layout, so that
additional storage can be added while the system is on-line, supporting high
availability operation.
Partitioned Cluster Architecture. The Software.com architecture consists of
software components arranged as a loosely coupled cluster. All components can
run on a single computer for a smaller system, or can be distributed across
many computers for a large system. When required, components can be duplicated
to provide even more capacity. The partitioned cluster architecture increases
performance and capacity by doing steps in parallel on separate computers.
Disk intensive operations, such as saving messages on the disk, are separated
from network intensive operations, such as delivering messages to the
Internet. The computer running a disk-intensive component can be optimized for
high-speed disk access, while the network intensive component can run on a
much less expensive computer. Partitioning increases overall performance and
capacity while minimizing hardware costs. Components are location independent
in that they can be freely moved from one computer to another to reconfigure
the cluster. Hardware can be added or removed from the cluster while it
continues to operate. Duplicating individual partitions enables high-
availability or non-stop operation, where the cluster continues to run even
with a particular partition out of service.
Distributed Object Protocol. Software.com has developed an innovative
distributed object communications protocol for reliable, efficient
communications between the components. This protocol, called Remote Method
Execution, or RME, supports messaging transactions and journaling to ensure
that the cluster is reliable. A transaction is composed of several operations,
such as inserting a message into a user's mailbox. Software.com's transaction
software ensures that every operation is either fully completed or fully
reversed so it can be done at a later time. A list of completed transactions
is kept in a separate file, called a journal. The journal is used to
reconstruct the messages in the event that there is a system failure. In
addition, RME has a
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"versioning" mechanism that allows older components to properly work with
newer ones. This allows upgrading the cluster to new software while the
cluster is running for non-stop operation. RME provides a high performance
programming interface to all components and enables Software.com and third
parties to create new messaging applications.
Access and Delivery Components. Software.com's cluster has a set of data
access and delivery servers that implement industry standard protocols, such
as those used in messaging. The Message Transport Agent (MTA) implements
simple mail transfer protocol or SMTP, the standard protocol used to send mail
from one computer to another on the Internet. POP3 and IMAP4 data access
components implement the protocols used by desktop email applications, such as
Microsoft Outlook or Netscape Navigator. The Web component provides a complete
Web server for accessing email using standard browsers. Software.com's
Mobility.Net technology provides additional flexibility for service providers
to customize their Web interfaces. The number and type of access components
can be optimized to meet the requirements of particular service providers.
Applications and Related Technologies.
Unified Messaging. Software.com's software infrastructure platform has been
integrated with voice-over Internet protocol, or VOIP, gateway services from
vendors such as Cisco Systems. In a typical unified communications system,
voice and fax data are converted into email messages, which are then delivered
to the message storage system for storage and retrieval. An LDAP directory
provides account and mailbox information storage. Software.com's unified
messaging platform also provides service providers the ability to leverage
their existing subscriber bases and offer enhanced services such as unified
mailbox and integrated fax services. In addition to offering a unified
communications platform for new market entrants, Software.com's software
infrastructure platform may also allow a service provider to replace legacy
voice mail servers, thereby reducing costs, increasing telephony bandwidth and
maintaining a flexible service creation platform.
Telephony Integration. Software.com's Telarc technology provides an
infrastructure for the convergence of IP network services and telephony
network services by enabling IP-based access directly to networks using
standard telephony protocols known as Signaling System 7 (SS7) protocols. The
SS7 protocols form an important infrastructure component for the delivery of
voice and information over the various wireless networks. Software.com's
Telarc technology also allows it to offer products to service providers in the
short messaging services market by allowing direct access to the mobile
switching centers of a wireless telephony provider.
Software.com is working to layer applications developed from the AtMobile
technology upon the Telarc infrastructure. It plans to leverage AtMobile's
Wireless Intelligent Networking expertise and its Instant Messaging technology
with the LDAP directory to address the wireless data services needs of
wireless network carriers, to produce a wireless Instant Messaging product,
and ultimately to enhance its software infrastructure platform and short
messaging technology. Software.com's goal is to enable its customers to
provide end-to-end wireless unified communications solutions to their
subscribers.
Mobility.Net Technology. Software.com's Mobility.Net technology consists
primarily of software designed to improve a user's ability to retrieve and
send electronic messages using a Web browser. This is referred to as a Web
access server. It has integrated the Mobility.Net technology into its
Post.Office and InterMail product packages to improve the performance of its
Web access server and to enable Software.com to offer additional features that
are dependent on advanced Web access server technology.
Software.com has made substantial investments in research and development.
It believes that its future performance will depend in large part on its
ability to maintain and enhance its current platform and product families,
develop or acquire new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of service provider
requirements. As of June 30, 2000, Software.com's research and development
staff consisted of 170 employees.
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Competition
The market for Internet infrastructure software products and services is
intensely competitive, and Software.com expects it to become increasingly so
in the future. Software.com competes in its core service provider market with
many software providers and, in some instances, with outsourced messaging
providers who have either internally developed or acquired their own messaging
software. It also competes, principally on the basis of performance, features
and price, against messaging solutions based on public domain software code
that is developed and enhanced internally by service providers. Software.com
competes to a more limited extent with providers of messaging applications
designed for the enterprise market.
Software.com's current software competitors in the service provider market
include iPlanet E-Commerce Solutions (a SunNetscape Alliance) and Isocor,
which was recently acquired by Critical Path. It also indirectly competes with
Critical Path when it offers outsourced messaging to the service provider
market and with Microsoft, whose current messaging product was developed for
the enterprise market but is sold to some service providers. In addition, with
Software.com's release of a highly scalable LDAP directory with InterMail Mx,
it will more directly compete with Novell's NDS technology and Microsoft's
Active Directory product, to the extent that these products are marketed to
service providers. In addition, as it continues to enter the wireless
messaging market, a rapidly developing field, several larger companies could
turn out to be its competitors. Software.com believes that competition will
intensify as its current competitors increase the sophistication of their
offerings and as new market participants, including additional providers of
outsourced messaging services enter the market. Many of its current and future
competitors have longer operating histories, larger installed customer bases,
greater brand recognition, and significantly greater financial, marketing and
other resources than it does. In addition, these competitors may benefit from
existing strategic and other relationships with each other or with
Software.com's current customers. Software.com must respond quickly and
effectively to the new products, services, and enhancements offered by its
competitors in order to continue its growth.
Microsoft, among other software providers, is well-positioned to become
increasingly competitive in Software.com's core service provider messaging
market. Software.com believes that Microsoft is currently in the process of
developing electronic messaging software to compete more directly in its core
service provider market. Because of its dominance in other software markets,
Microsoft has many competitive advantages over Software.com. For example,
Microsoft could incorporate electronic messaging technology into its Web
browser software, its client operating system or email interface, or its
server software offerings, possibly at no additional cost to service providers
or end users. In addition, Microsoft may promote technologies and standards
that are not compatible with Software.com's technology, or that are less
compatible with Software.com's technology than competitive products offered by
Microsoft. Software.com believes that Microsoft's increasing presence in the
electronic messaging software industry will dramatically increase competitive
pressure in the market, leading to increased pricing pressure and longer sales
cycles. These competitive pressures may force Software.com to reduce the
prices of its products, and may also materially reduce its market share.
In addition to the existing competitors listed above, voicemail solutions
providers could be formidable competitors in the unified communications
infrastructure software and Internet voicemail markets because of their
established presences as voicemail providers to the service provider market
and ownership of technologies for the conversion of voice to data. If it is
unable to cooperate or compete effectively with Microsoft, existing voicemail
solution providers, or its other existing or emerging competitors,
Software.com's business, financial condition, and operating results will
suffer.
Intellectual Property and Proprietary Rights
Software.com's ability to compete and continue to provide technological
innovation is substantially dependent upon internally developed technology,
including the entire InterMail product line. It relies on a combination of
copyright, trade secret, patent and trademark law to protect its technology,
although it believes that other factors such as the technological and creative
skills of its personnel, new product developments, frequent product and
feature enhancements, and reliable product support and maintenance are more
essential to
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maintaining a technology leadership position. As of June 30, 2000,
Software.com had one patent issued and a number of patent applications,
primarily for wireless subject matter.
Software.com generally enters into confidentiality and nondisclosure
agreements with its employees, consultants, prospective customers, licensees,
and corporate partners. In addition, it controls access to and distribution of
its software, documentation, and other proprietary information. Except for
certain limited escrow arrangements, it does not provide third parties with
access to the source code for its products. Despite Software.com's efforts to
protect its intellectual property and proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use its products or technology.
Effectively policing the unauthorized use of its products is time-consuming
and costly, and there can be no assurance that the steps taken by Software.com
will prevent misappropriation of its technology, particularly in foreign
countries where in many instances the local laws or legal systems do not offer
the same level of protection as in the United States.
Software.com attempts to avoid infringing known proprietary rights of third
parties in its product development efforts. However, it does not regularly
conduct comprehensive patent searches to determine whether the technology used
in its products infringes patents held by third parties. There are many issued
patents as well as patent applications in the Internet infrastructure software
and electronic messaging fields. Because patent applications in the United
States are not publicly disclosed until the patent is issued, applications may
have been filed which relate to its software products. In addition,
Software.com's competitors and other companies as well as research and
academic institutions have conducted research for many years in the electronic
messaging and wireless fields, and this research could lead to the filing of
further patent applications. If Software.com were to discover that its
products violated or potentially violated third party proprietary rights, it
might not be able to obtain licenses to continue offering those products
without substantial reengineering. Any reengineering effort may not be
successful, nor can Software.com be certain that any licenses would be
available on commercially reasonable terms.
Substantial litigation regarding intellectual property rights exists in the
software industry, and Software.com expects that its software products may be
increasingly subject to third-party infringement claims as the number of
competitors in its industry segments grows and the functionality of software
products in different industry segments overlaps. Any third-party infringement
claims could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product and service delays or
require Software.com to enter into royalty or licensing agreements. Any
royalty or licensing arrangements, if required, may not be available on terms
acceptable to Software.com, if at all. A successful claim of infringement
against Software.com and its failure or inability to license the infringed or
similar technology could have a material adverse effect on its business,
financial condition, and results of operations.
Employees
As of June 30, 2000, Software.com had 488 full-time employees, 170 of whom
were in research and development, 119 in sales and marketing, 140 in services
and support and documentation, and 59 in general and administrative. None of
its employees is represented by a labor union. It has not experienced any work
stoppages, and it considers its relations with its employees to be good.
Legal Matters
From time to time Software.com has been subject to legal proceedings and
claims in the ordinary course of business. Although it is not currently
involved in any material legal proceedings, Software.com expects that it will
in the future be subject to legal disputes, including claims of alleged
infringement of third party patents, trademarks, and other intellectual
property rights by Software.com or its licensees. Any claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. Software.com is not aware of any legal proceedings or
claims that Software.com believes will have, individually or in the aggregate,
a material adverse effect on its business, financial condition, or results of
operations.
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Facilities
Software.com's corporate headquarters are located in Santa Barbara,
California, where it has multiple leases for approximately 43,000 square feet
of space in separate office buildings. Software.com's East Coast headquarters
are located in Lexington, Massachusetts, where it has a lease for
approximately 32,000 square feet of space in a single office building.
Software.com leases additional space in San Mateo, California; Bellevue,
Washington; and Hauppauge, New York for development personnel. Software.com's
primary European operations are located in Naarden, the Netherlands, with an
additional office in Windsor, England. Primary Asian operations are located in
Tokyo, Japan, and Hong Kong, PRC. In addition to these facilities,
Software.com also leases office space for sales personnel in Dallas, Texas;
Denver, Colorado; Reston, Virginia; Germany, Australia and Korea. Software.com
believes that these existing facilities are adequate to meet current
foreseeable requirements or that suitable additional or substitute space will
be available on commercially reasonable terms.
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SOFTWARE.COM'S MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Software.com is a leading developer and provider of scalable Internet
infrastructure software applications. Its products and services are
specifically designed to enable service providers to market Internet-based
services to businesses and consumers. Software.com has focused on developing
carrier-scale, high performance messaging and directory software applications
for providers of Internet communications and services. Software.com currently
develops, markets, sells, and supports a variety of Internet standards-based
messaging and directory software to customers worldwide, including traditional
telecommunications carriers, Internet service providers and wholesalers,
application service providers, cable-based Internet access providers,
competitive local exchange telephone carriers, Internet destination sites or
portals and wireless telephony carriers. Software.com has developed three
product packages: InterMail Mx, InterMail Kx and Post.Office based on its
infrastructure platform. These products allow Software.com's customers to
provide a variety of advanced messaging services to their Internet- based
consumer and business users.
In April 1999, Software.com completed the acquisition of Mobility.Net
Corporation, a California company incorporated in July 1996. Mobility.Net
developed an integrated Web mail and calendaring system using a Java-based
technology platform that complements Software.com's product offerings. The
acquisition of Mobility.Net has been accounted for as a pooling-of-interests.
Accordingly, the financial information presented reflects the combined
financial position and operations of Software.com and Mobility.Net for all
dates and periods presented. In October 1999, Software.com completed the
acquisition of Telarc, Inc., which provides carrier-scale Short Messaging
Service (SMS) technologies that complement Software.com's product offerings.
The acquisition of Telarc Inc. has been accounted for as a purchase. In April
2000, Software.com completed its acquisition of AtMobile.com, Inc., or
AtMobile, a leading wireless Internet application service provider with
wireless Instant Messaging technology and Wireless Intelligent Network
integration expertise. The acquisition of AtMobile has been accounted for as a
pooling-of-interests. Accordingly, the financial information presented
reflects the combined financial position and operations of Software.com and
AtMobile for all dates and periods presented. In June 2000, Software.com
completed its acquisition of bCandid Corporation, or bCandid, a market leader
in providing carrier-class discussion server infrastructure software to
service providers worldwide. The acquisition of bCandid has been accounted for
as a purchase.
On August 8, 2000, Software.com signed a definitive merger agreement with
Phone.com. Under the terms of the agreement, which was unanimously approved by
the Boards of Directors of both companies, stockholders of Phone.com and
Software.com will each own approximately 50 percent of the combined company.
Each Software.com stockholder will be entitled to receive 1.6105 shares of
Phone.com common stock for each share of Software.com common stock. The merger
is expected to be accounted for as a pooling of interests and is intended to
be tax-free to stockholders of both companies. Subject to stockholder and
regulatory approval and other standard closing conditions, the merger is
expected to close at the end of fiscal 2000.
Software.com recognizes revenue from sales of software upon delivery of a
license key to the customer, provided that persuasive evidence of an
arrangement exists, the license fee is fixed and determinable, and collection
of the fee is considered probable. If the license agreement has a multi-year
term, as is typical with an InterMail Mx contract, or the license fees are
calculated based on variable measures, such as the number of mailboxes in use,
Software.com recognizes revenue as the customer activates mailboxes on their
system. When Software.com enters into a contract where a customer may activate
up to a specified number of mailboxes and support and maintenance fees are
based on that specified number, it recognizes revenue evenly and ratably as
payments become due over the term of the arrangement. When Software.com enters
into license agreements under which its revenues are based on a percentage of
its customer's revenues, Software.com recognizes revenue as earned and
reported by the customer. Revenues from sales to significant resellers are not
recognized until the product is sold through to the end user and the license
key is issued.
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Service revenue is composed of revenue from support and maintenance
contracts as well as professional services and training. Revenues from support
and maintenance contracts are recognized ratably over the term of the support
and maintenance period. Substantially all of Software.com's InterMail Mx and
InterMail Kx customers purchase support and maintenance, which is paid
generally on a quarterly basis. Although the majority of Software.com's
Post.Office customers initially purchase an annual support and maintenance
contract, a relatively small percentage of these customers renew the contracts
after the first year. This is primarily due to the ease of use of the product
and the customers' ability to purchase more economical "per-incident" support
services. Consulting services revenues are primarily related to deployment
services performed on a time-and-materials basis under separate service
arrangements. Software.com recognizes revenue, contract costs, and profit on
management and consulting contracts for fixed fee contracts on the percentage-
completion method. Revenue, contract costs, and profit on time-and-material
of-contracts are recorded based upon direct labor hours at fixed hourly rates
and cost of materials as incurred. When current estimates of total contract
revenue and contract cost indicate a loss, a provision for the entire loss on
the contract is recorded. When software and services are billed prior to the
time the related revenue is recognized, deferred revenue is recorded.
In a typical InterMail Mx customer relationship, Software.com receives
software license revenue, support and maintenance revenue, and professional
services revenue. Software.com recognizes these three types of revenue at
different stages of its customer relationship. Substantially all of its
professional services are performed prior to the activation of mailboxes by
the customer. As a result, Software.com generally recognizes revenue from
professional services in advance of revenue from software license fees. If a
customer has a large number of existing users, Software.com typically sees a
large revenue contribution at the time the customer transfers or "migrates"
existing user mailboxes to its software platform. After this transfer, the
software license revenue primarily reflects the growth in the number of
mailboxes on the customer's system. Support and maintenance revenue begins
after installation of Software.com's software and also primarily reflects the
growth in the number of mailboxes.
Revenues attributable to customers outside of North America accounted for
approximately 45% of Software.com's total revenues for the three months ended
June 30, 2000. Software.com is making significant expenditures on expansion in
Europe and Asia, including the translation of its products for use in these
regions, and Software.com expects these expenditures to increase. If
Software.com's revenues from international operations do not exceed the
expense of establishing and maintaining these operations, Software.com's
business, financial condition and operating results will suffer.
Software.com believes its success depends on its ability to execute on its
global sales strategy and continue to develop carrier-class products and
services that address the unique requirements of service providers.
Accordingly, Software.com intends to continue to invest heavily in sales,
support, and research and development.
In view of the rapidly changing nature of Software.com's business and its
limited operating history, Software.com believes that period-to-period
comparisons of revenues and operating results are not necessarily meaningful
and should not be relied upon as indications of future performance.
Additionally, despite Software.com's sequential quarterly revenue growth
during 1999 and 1998, Sofware.com does not believe that its historical growth
rates are necessarily sustainable or indicative of future growth. Furthermore,
as a result of past acquisitions and future acquisitions that Software.com may
make, Software.com expects to incur losses as a result of the amortization of
non-cash acquisition related costs for the next several quarters. However, at
this time Software.com expects to be operationally profitable, exclusive of
one-time cash acquisition related costs and continuing non-cash and/or non-
recurring charges.
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Results of Operations
<TABLE>
<CAPTION>
Six
Months
Year Ended December Ended
31, June 30,
------------------------- -----------
1999 1998 1997 1996 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenues:
Software licenses....................... 57% 65% 73% 83% 68% 57%
Services................................ 43 35 27 17 32 43
--- --- ---- --- --- ---
Total revenues........................ 100 100 100 100 100 100
Gross margins:
Gross margin on software licenses....... 90 91 91 97 96 89
Gross margin on services................ 32 3 8 42 25 24
--- --- ---- --- --- ---
Gross profit.......................... 65 60 68 88 73 61
Operating expenses:
Sales and marketing..................... 42 46 81 58 32 46
Research and development................ 34 45 62 44 25 38
General and administrative.............. 17 22 32 27 12 17
Stock based composition--acquisition
related................................ -- -- -- -- 7 --
Amortization of goodwill and purchased.. 1 -- -- -- 3 --
Purchased in-process research and
development............................ 7 -- -- -- 4 --
Acquisition related costs............... -- -- -- -- 21 --
Legal matter............................ -- (2) 9 -- -- (1)
--- --- ---- --- --- ---
Total operating expenses.............. 100 112 185 129 105 100
--- --- ---- --- --- ---
Loss from operations...................... (35) (52) (116) (41) (32) (39)
Other income (expense):
Interest income......................... 4 1 3 1 5 --
Interest expense........................ (2) (3) -- -- -- (2)
Other................................... -- -- -- -- -- --
--- --- ---- --- --- ---
Total other income (expense).............. 2 (2) 3 1 4 (3)
--- --- ---- --- --- ---
Loss before income taxes.................. (33) (54) (114) (40) (27) (72)
Provision for income taxes................ -- 2 -- -- 1 1
--- --- ---- --- --- ---
Net loss.................................. (33)% (55)% (114)% (40)% (28)% (42)%
=== === ==== === === ===
</TABLE>
Comparison of the Six Month Periods Ended June 30, 2000 and 1999
Software Licenses. Software license revenue increased $23.3 million, or
227%, from $10.3 million for the six months ended June 30, 1999 to $33.6
million in the same period in 2000. The increase in software license revenue
was primarily due to greater revenue from sales of Software.com's InterMail
product offerings, somewhat offset by a decrease in sales of its Post.Office
product. The largest contributor to software license revenue continues to be
Software.com's InterMail Mx product offering, which grew 321% in the six
months ended June 30, 2000 over the same period in 1999. The increase in
InterMail Mx revenue was primarily a result of increased growth from existing
and new customers. Notably, in the second quarter of 2000, Software.com had a
one-time recognition of revenue of approximately $2.0 million relating to
previously provisioned mailboxes from one customer who switched from a revenue
sharing license agreement to a regular per mailbox provisioning license
agreement.
The increase in software license revenue as a percentage of total revenues
was primarily related to increased growth in licenses of Software.com's
InterMail products from existing and new customers.
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Services. Services revenue is primarily derived from consulting services,
maintenance and support contracts, and training. Services revenue increased
$8.3 million, or 109%, from $7.7 million in the six months ended June 30, 1999
to $16.0 million in the same period in 2000. The increase in services revenue
for the six months ended June 30, 2000 from the same period in 1999 was
primarily due to a $4.5 million increase in professional services as the
number of professional services engagements increased and a $3.5 million
increase in support and maintenance contracts as Software.com's customer base
grew. The number of professional services engagements increased to 65 for the
six months ended June 30, 2000 as compared to 30 in the same period in 1999.
As a percentage of total revenues, services revenue decreased from 43% in the
six months ended June 30, 1999 to 32% in the same period in 2000. This
decrease was primarily related to an increase in license revenue of
Software.com's InterMail products. In 2000, Software.com expects services
revenue as a percentage of total revenues to remain relatively the same as
Software.com continues to install its products in service provider customers
worldwide.
Cost of Software License Revenue. Cost of software license revenue consists
primarily of the cost of third party products integrated into Software.com's
products or resold by Software.com and the salaries and related costs for its
documentation department and the production of documentation for its InterMail
products. Cost of software license revenue increased $200,000, or 18%, from
$1.1 million in the six months ended June 30, 1999 to $1.3 million in the same
period in 2000. The increase was primarily due to an increase in the size of
Software.com's documentation department as well as increased investment in
product translation for Software.com's international markets.
Cost of Services Revenue. Cost of services revenue includes salaries and
related costs of Software.com's consulting services, customer support and
training organizations, cost of third parties contracted to provide consulting
services to Software.com's customers, and an allocation of its facilities and
depreciation expenses. Cost of services revenue increased $6.3 million, or
107%, from $5.8 million in the six months ended June 30, 1999 to $12.1 million
in the same period in 2000. The increase in cost of services was primarily due
to an increase in Software.com's consulting and support organizations from 58
employees at June 30, 1999 to 121 employees at June 30, 2000 to support its
larger customer base.
Sales and Marketing. Sales and marketing expense consists primarily of
salaries and benefits of Software.com's sales, marketing, product management
and business development organizations, sales commissions, marketing programs,
and an allocation of Software.com's facilities and depreciation expenses.
Sales and marketing expense increased by $7.5 million, or 90%, from $8.2
million in the six months ended June 30, 1999 to $15.7 million in the same
period in 2000. The increase in sales and marketing expense was primarily due
to growth in Software.com's global sales and product management organizations
as well as an increase in marketing programs. The total number of employees in
the sales and marketing organization increased from 72 at June 30, 1999 to 119
at June 30, 2000. The decrease in sales and marketing as a percentage of total
revenues was primarily due to increased growth in license revenue from
existing customers. Software.com expects its sales and marketing expenses will
increase in absolute dollars in future periods due to the planned expansion of
its international sales and marketing operations.
Research and Development. Research and development expense consists
primarily of salaries and benefits of Software.com's engineering and quality
assurance organizations, and an allocation of Software.com's facilities and
depreciation expenses. Research and development expense increased by $5.9
million, or 86%, from $6.8 million in the six months ended June 30, 1999 to
$12.7 million in the same period in 2000. The increase in research and
development expense was primarily due to an increase in Software.com's
development organization from 99 employees at June 30, 1999 to 170 employees
at June 30, 2000. The decrease in research and development as a percentage of
total revenues was primarily due to increased growth in license revenue from
existing customers. Software.com believes continued investment in research and
development is essential to its future success, and Software.com expects its
research and development expenses to increase in absolute dollars in future
periods with the growth in demand of unified and wireless messaging products.
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General and Administrative. General and administrative expense consists
primarily of salaries and benefits of Software.com's finance, human resources
and legal services organizations, third party legal, accounting, and other
professional services fees, an allocation of Software.com's facilities and
depreciation expenses and bad debt expense. General and administrative expense
increased by $2.7 million, or 87%, from $3.1 million in the six months ended
June 30, 1999 to $5.8 million in the same period in 2000. The increase in
general and administrative expense was primarily related to an increase in
Software.com's general and administrative organization from 42 employees at
June 30, 1999 to 59 employees at June 30, 2000 as well as fees for accounting
and legal services and reserves for bad debts. The decrease in general and
administrative as a percentage of total revenues was primarily due to
increased growth in license revenue from existing customers. Software.com
expects general and administrative expenses to increase in absolute dollars
but decrease slightly as a percentage of total revenues in future periods.
Stock Based Compensation--Acquisition Related Expense. Stock based
compensation-acquisition related expense consists primarily of charges
recorded for the underlying value of warrants issued by recently acquired
AtMobile in conjunction with a Web development, hosting, maintenance and
licensing agreement entered into with a contractor in late 1999. The charges
recorded for the six months ended June 30, 2000 was $3.6 million. Software.com
will continue to record related charges based on the underlying value of the
warrants as the warrants continue to vest.
Amortization of Goodwill and Purchased Intangible Assets. In June 2000,
Software.com completed its acquisition of bCandid. The acquisition was
accounted for as a purchase and, accordingly, bCandid's operating results have
been included in Software.com's consolidated financial statements results from
the acquisition date. The purchase price plus costs directly attributable to
the completion of the acquisition have been allocated to the assets and
liabilities acquired based on their approximate fair market value. Using
proven valuation procedures and techniques in an independent appraisal, a
portion of the purchase price was identified as intangible assets as follows:
$300,000 to a covenant not to compete, $400,000 to assembled workforce,
$600,000 to customer relationships, $6.7 million to developed technology, and
$55.9 million to goodwill. Goodwill and identified intangibles are being
amortized on a straight-line basis over their estimated economic useful lives
of two to four years. Additionally, in October 1999, Software.com completed
its acquisition of Telarc, Inc. ("Telarc") which also had a portion of the
purchase price identified as intangible assets allocated as follows: $263,000
to net intangible assets, $5.7 million to developed technology, $125,000 to
assembled workforce and other intangibles and $2.3 million to goodwill.
Goodwill and identified intangibles from the Telarc acquisition are being
amortized on a straight-line basis over their estimated economic useful lives
of three to five years. The Company recorded $1.7 million of amortization of
goodwill and other intangibles related to these acquisitions for the six
months ended June 30, 2000.
Purchased In-Process Research and Development. Software.com obtained an
independent appraisal using proven valuation procedures and techniques for the
acquisition of bCandid. The appraisal allocated a portion of the acquired
business to in-process research and development. This acquired technology had
not yet reached technological feasibility and had no alternative future uses.
Accordingly, the Company wrote off $2.0 million at the time of the
acquisition.
Acquisition Related Costs. Acquisition related costs consist primarily of
investment banker fees associated with the close of acquisitions as well as
legal and accounting professional services fees. The Company recorded 10.4
million of acquisition related costs for the six months ended June 30, 2000.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net consists primarily of interest income from Software.com's cash
and short-term investments net of interest associated with a credit facility
Software.com had in 1999. Total other income (expense) increased $2.6 million,
from an expense of $500,000 in the six months ended June 30, 1999 to income of
$2.1 million in the same period in 2000. The increase in both periods was
primarily related to interest earned on the proceeds of Software.com's initial
public offering of common stock in June 1999.
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Provision for Income Taxes. Provision for income taxes consists mainly of
foreign withholding and income taxes. Provision for income taxes increased
$210,000 from $146,000 in the six months ended June 30, 1999 to $356,000 in
the same period in 2000. The increase was related to Software.com's continued
expansion into foreign tax withholding jurisdictions.
Stock-Based Compensation. Software.com recorded deferred compensation of
approximately $770,000 and $1.5 million in 1999 and 1998, respectively,
representing the difference between the exercise prices of options granted to
employees during 1999 and 1998 and the deemed fair value for accounting
purposes of Software.com's common stock on the grant dates. Software.com
amortized deferred compensation expense of $304,000 during the six months
ended June 30, 2000 compared to $240,000 for the same period in 1999. This
compensation expense relates to options awarded to individuals in all
operating expense categories.
Comparison of Years Ended December 31, 1999 and 1998
Software Licenses. Software license revenue increased $9.3 million, or 53%,
from $17.5 million in 1998 to $26.8 million in 1999. The increase in software
license revenue was primarily due to greater revenue from sales of
Software.com's InterMail product offerings, somewhat offset by a decrease in
sales of Software.com's Post.Office product. The largest contributor to
software license revenue continues to be Software.com's InterMail Mx product
offering, which grew 56% in 1999 over 1998. The increase in InterMail Mx
revenue was primarily a result of increased growth from existing and new
customers and to a lesser extent large migrations of mailboxes from other
existing platforms of new customers.
Software.com's InterMail Kx product was introduced in March of 1999 and
overlaps to some extent with Software.com's Post.Office product. Both products
are targeted at small and medium size service providers worldwide. Combined
revenues from Post.Office and InterMail Kx resulted in a 57% increase from
1998 to 1999, however revenues from Post.Office decreased 27% from 1998 to
1999. Software.com expects revenues from Post.Office to continue to decrease
as sales of its InterMail Kx product offering increase.
The decrease in software license revenue as a percentage of total revenues
was primarily related to an increase in support and maintenance from ongoing
and new contracts, and increase in professional services engagements
contributed from Software.com's AtMobile acquisition and to a lesser extent a
decrease in migrations of mailboxes from new customers from 1998 to 1999. In
1999 Software.com had seven migrations of InterMail Mx customers compared to
13 in 1998.
Services. Services revenue increased $10.8 million, or 116%, from $9.3
million in 1998 to $20.1 million in 1999. The increase in services revenue for
1999 as compared to 1998 was primarily due to a $5.6 million increase in
professional services as the number of professional services increased,
coupled with the increased engagements contributed from Software.com's
AtMobile acquisition, and a $4.9 million increase in support and maintenance
contracts as Software.com's customer base grew. As a percentage of total
revenues, services revenue increased to 43% in 1999 from 35% in 1998. This
increase was primarily related to an increased number of professional services
engagements associated with new and existing contracts as well as support and
maintenance from ongoing and new contracts. In 2000 Software.com expects
services revenue as a percentage of total revenues to decrease to some extent
as a result of continued growth in license revenue relative to growth in
services revenue.
Cost of Software License Revenue. Cost of software license revenue increased
$1.1 million, or 69%, from $1.6 million in 1998 to $2.7 million in 1999. The
increase was primarily due to an increase in Software.com's documentation
department as well as increased investment in product translation for its
international markets. Additionally, in 1999 Software.com resold a third party
database to eight of its InterMail Mx customers, with the cost of that
software included in cost of software license revenue in 1999. In 1998,
Software.com resold a third-party database to five of its customers.
Cost of Services Revenue. Cost of services revenue increased $4.7 million,
or 52%, from $9.0 million in 1998 to $13.7 million in 1999. The increase in
cost of services was primarily due to an increase in
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Software.com's consulting and support organizations from 54 employees at
December 31, 1998 to 83 employees at December 31, 1999 to support
Software.com's larger customer base. The improvement in gross margin on
services revenue from 3% for 1998 to 32% in 1999 was substantially
attributable to improved margins on Software.com's professional service
engagements as contributed from Software.com's AtMobile acquisition.
Sales and Marketing. Sales and marketing expense increased by $7.4 million,
or 60%, from $12.3 million in 1998 to $19.7 million in 1999. The increase in
sales and marketing expense was primarily due to an increase in sales
commissions commensurate with the increase in revenues as well as growth in
Software.com's global sales organization. The total number of employees in the
sales and marketing organization increased from 64 at December 31, 1998 to 83
at December 31, 1999. Software.com expects its sales and marketing expenses
will increase in absolute dollars in future periods due to the planned
expansion of its international sales and marketing operations.
Research and Development. Research and development expense increased by $3.8
million, or 31%, from $12.1 million in 1998 to $15.9 million in 1999. The
increase in research and development expense was primarily due to an increase
in Software.com's development organization from 93 employees at December 31,
1998 to 122 employees at December 31, 1999. Software.com believes continued
investment in research and development is essential to its future success, and
Software.com expects its research and development expenses to increase in
absolute dollars in future periods with the growth in demand of unified and
wireless messaging products.
General and Administrative. General and administrative expense increased by
$2.2 million, or 37%, from $5.9 million in 1998 to $8.1 million in 1999. The
increase in general and administrative expense for 1999 was primarily related
to fees for accounting and legal services, increased reserves for bad debts,
and an increase in Software.com's general and administrative organization from
34 employees at December 31, 1998 to 45 employees at December 31, 1999.
Software.com expects general and administrative expenses to decrease as a
percentage of total revenues in future periods.
General and Administrative--Non-Cash Expense. Charges of $125,000 were
recorded for the year ended December 31, 1999. Software.com will continue to
record related charges based on the underlying value of the warrants as the
services are provided and the warrants continue to vest.
Acquisition costs. In April, 1999, Software.com completed the acquisition of
Mobility.Net, Inc. which offers products for Web messaging using a Java-based
technology platform that complement Software.com's product offerings.
Software.com issued 1,579,000 shares of its common stock in exchange for all
of the outstanding shares of Mobility.Net. The acquisition was accounted for
as a pooling-of-interests. Accordingly, the financial information presented
reflects the combined financial position and operations of Software.com and
Mobility.Net for all dates and periods presented.
In October, 1999, Software.com acquired Telarc, Inc., which provides
carrier-scale Short Messaging Service (SMS) technologies that complement
Software.com's product offerings. In exchange for all of the issued and
outstanding stock of Telarc, Software.com issued 212,000 shares of
Software.com common stock and $1.5 million in cash. The acquisition of Telarc
was accounted for as a purchase and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair values at the date of
acquisition. Telarc's operating results have been included in Software.com's
consolidated financial statements results from the acquisition date of October
20, 1999. The purchase price plus costs directly attributable to the
completion of the acquisition have been allocated to the assets and
liabilities acquired based on their approximate fair market value. A
significant portion of the purchase price was identified as intangible assets
in an independent appraisal using proven valuation procedures and techniques.
The appraisal of the acquired business included $3.2 million of purchased in-
process research and development (IPR&D). This acquired technology had not yet
reached technological feasibility and had no alternative future uses.
Accordingly, it was written off at the time of the acquisition. The remainder
of the purchase price was allocated as follows: $263,000 to net intangible
assets, $5.7 million to developed technology, $125,000 to assembled workforce
and other intangibles and $2.3 million to goodwill. Goodwill and identified
intangibles are being amortized on a straight-line basis over their estimated
economic useful lives of three to five years.
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On the date of its acquisition, Telarc's technology was classified between
core or developed technology and IPR&D. Three principal Telarc products were
identified and their reliance on the developed technology and IPR&D was
determined. IPR&D was further analyzed to determine: (1) the estimated time
required to complete the development, (2) the estimated cost to complete and
(3) the complexity involved in overcoming technological obstacles that must be
resolved during development. The completion of in-process development at the
time of the acquisition ranged from 50% to 86%. Software.com's management
estimates the cost to complete the development effort to be approximately $1.8
million as of December 31, 1999 and the release of the products incorporating
these technologies to occur during the fourth quarter of 2000.
These IPR&D valuations represent the five year after-tax cash flow of this
technology using a discounted rate of 40%. In valuing the developed technology
and IPR&D, the initial focus was on the revenue contribution generated by each
of the products. Revenue estimates were based on the following: (1) aggregate
revenue growth rates for the business as a whole, (2) individual product
revenues, (3) growth rates for related products, (4) anticipated product
development and introduction schedules, (5) product sales cycles and (6) the
estimated useful life of a product's underlying technology. The aggregate
product revenue amounts were estimated and segregated between the developed
technology and IPR&D. Operating expenses were deducted from the revenue
estimates to arrive at operating income. Operating expenses include cost of
revenue, selling and marketing, and general and administrative expenses but no
non-cash charges such as depreciation and amortization. Certain adjustments
were made to operating income to derive the after-tax cash flow. These
adjustments included the calculation of an applicable tax expense and an
appropriate charge for the use of contributory assets necessary to generate
revenue and operating income associated with the subject intangible assets.
Software.com believes that it is positioned to complete development of the
Telarc technology and products, however there is a risk that Software.com may
not be able to complete these projects within the estimated timeframe or cost
budget. Furthermore, there is no assurance that any product will meet with
either technological or commercial success. See "Risk Factors" for further
information.
Legal Matter. Software.com was involved in a contract dispute with a third
party technology partner under a 1996 licensing agreement. The dispute related
to a minimum royalty obligation of $1,000,000 purportedly owed by Software.com
to the third party. In 1997, Software.com accrued $1,000,000 for its potential
exposure under the claim. In February 1999, the parties entered into an
agreement to settle all outstanding claims. Software.com paid the third party
$400,000, and as a result the related accrual was reduced to $600,000 at
December 31, 1998 to reflect the complete resolution of this matter.
Other Income (Expense). Other income (expense) consists primarily of
interest income from Software.com's cash and short-term investments net of
interest associated with its credit facility. Total other income (expense)
increased $1.6 million, from an expense of $536,000 for 1998 to income of $1.0
million in 1999. The increase was primarily related to interest earned on the
proceeds of its initial public offering of common stock in June of 1999.
Provision for Income Taxes. Provision for income taxes consists mainly of
foreign withholding and income taxes. Provision for income taxes decreased
$234,000 from $446,000 in 1998 to $212,000 in 1999. The decrease was primarily
related to the completion of a large professional services engagement in
Canada in 1998 that resulted in withholding and income taxes during that
period.
As of December 31, 1999, Software.com had federal and state net operating
loss carryforwards of approximately $40.9 million and $11.1 million,
respectively. The net operating loss and credit carryforwards will expire at
various dates beginning in 2011 through 2019 for federal and 2002 to 2004 for
state, if not utilized. On December 31, 1999, Software.com also had federal
and state research and development tax credit carryforwards of approximately
$613,000 and $188,000, expiring in 2011 to 2014. Software.com also has a
foreign tax credit of approximately $484,000, which will expire in 2003. As a
result of changes in Software.com's equity ownership resulting from its
convertible preferred stock financings and its initial public offering,
utilization of the net operating losses and tax credits may be subject to
substantial annual limitations. This is due to the
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ownership change limitations provided by the Internal Revenue Code of 1986, as
amended, and similar state provisions. The annual limitation may result in the
expiration of net operating losses and tax credits before utilization. See
Note 6 of Notes to Consolidated Financial Statements.
Stock-based Compensation. Software.com recorded deferred compensation of
approximately $1.5 million and $770,000 in 1998 and 1999, respectively,
representing the difference between the exercise prices of options granted to
employees during 1998 and 1999 and the deemed fair value for accounting
purposes of Software.com's common stock on the grant dates. Software.com
amortized deferred compensation expense of $544,000 during 1999. This
compensation expense relates to options awarded to individuals in all
operating expense categories. Total deferred compensation at December 31, 1999
of $1.67 million is being amortized over the vesting periods of the options.
The amortization of deferred compensation recorded will approximate $600,000,
$521,000, $480,000, and $47,000 for the years 2000, 2001, 2002 and 2003.
Comparison of Years Ended December 31, 1998 and 1997
Software Licenses. Software licenses revenue increased $9.6 million, or
122%, from $7.9 million in 1997 to $17.5 million in 1998. The increase in
software license revenue was primarily due to an increase in the number of
service providers worldwide using InterMail Mx for their consumer email
offering. Software license revenue from InterMail Mx increased 291% from 1997
to 1998. In addition, software license revenue from Post.Office increased 36%
from 1997 to 1998 as Software.com continued to expand sales of Post.Office
into the small to medium size service provider market. During 1998,
Software.com received $619,000 of software license revenue from the resale of
a third party database to its InterMail Mx customers as compared to $94,000
during 1997.
Services. Services revenue increased $6.3 million, or 210%, from $3.0
million in 1997 to $9.3 million in 1998. As a percentage of total revenues,
services revenue increased from 27% in 1997 to 35% in 1998. The increase in
services revenue was substantially due to an increase in professional services
revenue from 1997 to 1998 as the number of consulting projects increased,
including a large InterMail Mx installation for which Software.com recognized
$2.4 million in services revenue. In addition, in 1998 there were an increased
number of professional services engagements contributed through the
acquisition of AtMobile.
In addition, support and maintenance revenue increased 116% from 1997 to
1998 as Software.com's customer base grew. The increase in services revenue as
a percentage of total revenues was primarily due to the recognition of
services revenue from this large InterMail Mx installation.
Cost of Software License Revenue. Cost of software license revenue increased
by $879,000, or 128%, from $689,000 in 1997 to $1.6 million in 1998. This
increase was primarily due to a $433,000 increase resulting from the resale of
third party software used in conjunction with Software.com's InterMail Mx
product and, to a lesser extent, a $317,000 increase due to growth in the
number of employees in Software.com's documentation department.
Cost of Services Revenue. Cost of services revenue increased by $6.3
million, or 233%, from $2.7 million in 1997 to $9.0 million in 1998. Cost of
services during this period increased commensurate with the increase in the
number of professional services deployments.
Sales and Marketing. Sales and marketing expense increased by $3.5 million,
or 40%, from $8.8 million in 1997 to $12.3 million in 1998. Substantially all
of this increase was due to significant expansion in Software.com's global
direct sales organization, primarily in North America. The total number of
employees in the sales and marketing organization increased from 42 at the end
of 1997 to 64 at the end of 1998. The decrease in sales and marketing expense
as a percentage of total revenues from 81% in 1997 to 46% in 1998 was
primarily due to the recognition of InterMail Mx software licenses revenue
from contracts signed in 1997.
Research and Development. Research and development expense increased by $5.4
million, or 81%, from $6.7 million in 1997 to $12.1 million in 1998. The
increase in research and development expense was primarily
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due to costs associated with the development and testing of Software.com's new
InterMail Kx product package, which was introduced in March 1999, and, to a
lesser extent, the cost of porting Software.com's InterMail messaging
technology to the Hewlett-Packard and IBM Unix platforms. The decrease in
research and development as a percentage of total revenues from 62% in 1997 to
45% in 1998 was primarily due to an increase in software licenses revenue from
products developed in previous periods.
General and Administrative. General and administrative expense increased by
$2.4 million, or 69%, from $3.5 million in 1997 to $5.9 million in 1998. The
increase in general and administrative expense was due in significant part to
increased depreciation related to operations in new facilities as well as a
$431,000 increase in the provision for doubtful accounts. The decrease in
general and administrative costs as a percentage of total revenues from 32% in
1997 to 22% in 1998 was primarily due to Software.com's increase in software
license revenue.
Legal Matter. Software.com accrued in 1997 for an asserted claim related to
a minimum royalty obligation of $1 million purportedly owed by Software.com
under a licensing agreement with a third party technology partner. In February
1999, Software.com and the third party entered into an agreement to settle all
outstanding claims. Under the settlement agreement, Software.com agreed to pay
the third party a minimum of $400,000, with a contingent obligation to pay an
additional $200,000 if Software.com did not take certain actions prior to
December 31, 1999.
Other Income (Expense). Other income (expense) consists primarily of
interest expense associated with Software.com's credit facility and interest
income on short-term investments. Total other income (expense) increased
$808,000, from income of $272,000 for 1997 to expense of $536,000 in 1998. The
increase was primarily related to an increase in interest paid for
Software.com's credit facility. The credit facility was opened in November
1997, resulting in only two months of interest expense for 1997.
Provision for Income Taxes. For the year ended December 31, 1998,
Software.com had a tax provision of $446,000 related to foreign withholding
taxes.
Liquidity and Capital Resources
Software.com has funded its operations primarily through the private
placement of equity securities and the initial public offering of shares, and
raised net proceeds of approximately $79.8 million in 1999. At June 30, 2000,
Software.com's principal sources of liquidity included approximately $41.7
million of cash and cash equivalents and $45.7 million of marketable
securities.
Net cash used in operating activities for the six months ended June 30, 2000
was primarily due to Software.com's net loss of $13.9 million which included
acquisition-related investment banker fees of $10.3 million and was also due
to an increase in accounts receivable of $7.3 million, primarily offset by
increases in deferred revenue of $9.1 million, non-employee equity-based
compensation of $3.6 million and depreciation and amortization of $3.4
million. Cash used in operating activities for the same period in 1999 was
primarily due to Software.com's net loss of $7.6 million, partially offset by
an increase in accounts payable of $2.0 million.
Net cash used in investing activities for the six months ended June 30, 2000
was primarily due to purchases (net of maturities) of marketable securities of
$20.0 million as well as $5.7 million in the acquisition of property and
equipment. Cash used in investing activities for the same period in 1999 was
primarily due to purchases (net of maturities) of marketable securities of
$2.5 million.
Net cash provided by financing activities for the six months ended June 30,
2000 was primarily due to the issuance of $12.5 million of preferred stock by
AtMobile and $9.0 million in exercises of stock options. Cash provided by
financing activities for the same period in 1999 was primarily due to $68.0
million in net proceeds from the issuance of common stock in Software.com's
initial public offering and the issuance of $10.0 million of preferred stock,
partially offset by $5.0 million in repayments (net of proceeds) of long-term
debt and notes payable to bank.
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<PAGE>
Software.com believes that its existing cash and marketable securities
balanced together with cash generated from operations will be sufficient to
meet its working capital, financing and capital expenditure needs for at least
the next twelve months. Software.com continues to evaluate the potential
acquisition of key technology, complementary product lines and other
companies. If Software.com decides to proceed with any such acquisitions, they
may be financed by a variety of sources, including equity or debt financing.
Effect of Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The company is required to adopt
SAB 101 in the first quarter of fiscal 2001. Management does not expert the
adoption of SAB 101 to have a material effect on the company's operation or
financial position.
Quantitative and Qualitative Disclosure about Market Risk
Software.com develops products in the United States and sell in North
America, South America, Asia and Europe. As a result, Software.com's financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As all sales
are currently made in U.S. dollars, a strengthening of the dollar could make
Software.com's products less competitive in foreign markets. Software.com's
interest income is sensitive to changes in the general level of U.S. interest
rates, particularly since the majority of its investments are in short-term
instruments. Due to the nature of Software.com's short- term investments and
debt, Software.com has concluded that there is no material market risk
exposure.
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<PAGE>
SOFTWARE.COM MANAGEMENT
Software.com Directors and Executive Officers
The following section sets forth information regarding Software.com's
directors who will serve as directors of the combined company subsequent to
the merger and Software.com's executive officers as of July 31, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John L. MacFarlane.................. 34 Chief Executive Officer, Founder and
Director
Valdur Koha......................... 45 President
Amy Staas........................... 29 Vice President, Finance and Chief Financial
Officer
Donald J. Listwin................... 41 Director
Bernard Puckett..................... 55 Director
</TABLE>
John L. MacFarlane has been Chief Executive Officer and a director of
Software.com since its incorporation. From July 1988 to August 1989, Mr.
MacFarlane was with Harris Corporation working in the Defense Communications
division on military communications systems. From November 1989 to July 1991,
Mr. MacFarlane worked for the U.S. Navy, where he worked on optical signal
processing. Mr. MacFarlane received his B.S. in electrical engineering from
Rensselaer Polytechnic Institute and his M.S. in electrical engineering from
the University of California at Santa Barbara.
Valdur Koha has been President of Software.com since May 1996. From August
1994 to May 1996, Mr. Koha was Chief Executive Officer, President and Chairman
of the Board of Directors of Accordance Corporation, which was acquired by
Software.com in May 1996. From January 1991 to August 1994, Mr. Koha was
Director of Development of the Open Systems at Siemens Nixdorf, Inc., in which
position he was responsible for products in the areas of distributed
computing, multimedia, imaging and operating systems. Mr. Koha received his
degree in mathematics and computer science from the University of Bonn.
Amy Staas has been Vice President of Finance and Chief Financial Officer for
Software.com since June 2000. From April 1996 to June 2000, Mrs. Staas held
various roles in Software.com's finance department, including most recently
Director of Financial Strategy & Analysis. Prior to Software.com, Mrs. Staas
was a financial analyst for American Express in New York City. Mrs. Staas
holds a B.A. in political science from Boston College and an MBA from Duke
University's Fuqua School of Business.
Donald J. Listwin has been a director of Software.com since July 1997. Since
May 1998, Mr. Listwin has been an Executive Vice President at Cisco Systems.
Prior to the merger, Mr. Listwin is expected to resign from Sofware.com's
board of directors and Cisco and join Phone.com as its President and Chief
Executive Officer. Prior to May 1998, he held a variety of positions at Cisco
Systems, including from April 1997 to May 1998, Senior Vice President of
Service Provider Line of Business, from August 1996 to April 1997, Senior Vice
President of IOS Development and Marketing, from September 1995 to August
1996, Vice President and General Manager of Cisco's Access Business Unit, and
from September 1993 to September 1995, Vice President of Marketing. Mr.
Listwin also serves on the board of directors of TIBCO Software, Inc. and E-
Tek Dynamics, Inc. Mr. Listwin holds a B.S. degree in electrical engineering
from the University of Saskatchewan, Canada.
Bernard Puckett has been a director of Software.com since July 1997. From
January 1994 to January 1996, Mr. Puckett was President and CEO of Mobile
Telecommunications Technologies. From 1967 to 1994, Mr. Puckett was at IBM
Corp., where he held a variety of positions including, Senior Vice President,
Corporate Strategy and Development and Vice President and General Manager,
Applications Software. Mr. Puckett serves on the boards of directors of P-COM,
R.R. Donnelley & Sons Company, Iomega Corporation and IMS Health. Mr. Puckett
received his B.S. in mathematics from the University of Mississippi.
Software.com Classified Board of Directors
Software.com's Amended and Restated Certificate of Incorporation provides
for a board of directors consisting of three classes of directors, each
serving staggered three-year terms. As a result, a portion of
159
<PAGE>
Software.com's board of directors is elected each year. Messrs. Listwin and
Mr. Puckett are in the class of directors whose term expires at the 2001
annual meeting of stockholders. Mr. MacFarlane is in the class of directors
whose term expires at the 2003 annual meeting of stockholders.
Software.com Committees of the Board of Directors
Software.com's board of directors has standing audit, compensation and stock
option committees, which assist the board of directors in the discharge of its
responsibilities. In addition, the board of directors from time to time
establishes an acquisition committee for consideration of proposed
acquisitions.
The audit committee reports to Software.com's board of directors regarding
the appointment of Software.com's independent public auditors, the scope and
fees of prospective annual audits and the results thereof, compliance with
Software.com's accounting and financial policies and management's procedures
and policies relative to the adequacy of Software.com's internal accounting
controls. Members of the audit committee are appointed by the board of
directors and serve for one-year terms.
The compensation committee reviews and approves the annual compensation for
each executive officer consistent with the terms of any applicable employment
arrangements, reviews, approves and recommends terms and conditions for all
employee benefit plans, and, together with the stock option committee,
administers Software.com's stock plans. Members of Software.com's compensation
committee are appointed by the board of directors and serve one-year terms.
The stock option committee is authorized by the board of directors to grant
stock options under Software.com's various option plans to new employees or
existing employees who are not directors or executive officers. Members of the
stock option committee are appointed by the board of directors and serve for
one-year terms.
Software.com Compensation Committee Interlocks and Insider Participation
No member of Software.com's board of directors or compensation committee has
served as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of
Software.com's board of directors or compensation committee.
Software.com Executive Compensation
The following table sets forth information concerning the compensation paid
by Software.com to its Chief Executive Officer and the other most highly
compensated executive officer who was an executive officer of Software.com
during fiscal 1999 and who will be an officer of the combined company post-
merger for services rendered to Software.com during the last two fiscal years.
Software.com Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awares
------------
Securities
Underlying
Name and Principal Positions Year Salary Bonus Options Compensation
---------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John L. MacFarlane............ 1999 $140,000 $ -- -- --
Chief Executive Officer 1998 140,000 -- 1,000,000 --
Valdur Koha................... 1999 135,000 -- -- --
President 1998 135,000 150,000 -- --
</TABLE>
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<PAGE>
Software.com Director Compensation
Software.com's directors do not currently receive any cash compensation for
their service as directors, but are reimbursed for reasonable expenses
incurred in attending meetings. Non-employee directors are eligible to receive
options under Software.com's 1995 stock plan and Messrs. Listwin and Puckett
were each granted the following options:
. In July 1997, Messrs. Listwin and Puckett each received options to
purchase 30,000 shares of Software.com's common stock at an exercise
price of $3.65 per share. Such options vested over a one-year period at a
rate of 1/12th of the shares underlying the options vesting each month;
. In July 1998, Messrs. Listwin and Puckett each received options to
purchase 30,000 shares of Software.com's common stock at an exercise
price of $3.65 per share. Such options vested over a one-year period at a
rate of 1/12th of the shares underlying the options vesting each month;
. In June 1999, Messrs. Listwin and Puckett each received options to
purchase 30,000 shares of Software.com's common stock at an exercise
price of $11.00 per share. Such options were not subject to vesting and
were immediately exercisable; and
. In July 2000, Messrs. Listwin and Puckett each received options to
purchase 60,000 shares of Software.com's common stock at an exercise
price of $90.00 per share. Such options vest over a three-year period at
a rate of 1/36th of the shares underlying the options vesting each month.
Software.com Option Grants in Last Fiscal Year
No stock options were granted to the named executive officers during the
fiscal year ended December 31, 1999.
Software.com Aggregate Stock Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
The following table sets forth information with respect to unexercised
options held by the executive officers named in the Software.com Summary
Compensation Table as of December 31, 1999. The amounts under "Value of
Unexercised In-the-Money Options" were calculated by determining the
difference between the exercise price and the closing price of Software.com's
common stock on the Nasdaq National Market as of December 31, 1999, which was
$96.00.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-The-Money Options
Acquired on Options at December 31, 1999 at December 31, 1999
Exercise of Value -------------------------------- -------------------------
Name Shares (#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John L. MacFarlane...... -- -- 281,250 718,750 $25,973,438 $66,365.563
Valdur Koha............. -- -- 541,381 77,340 51,295,850 7,327,965
</TABLE>
Software.com Employment Agreements and Change of Control Agreements
Software.com does not have any employment agreements with any of its
executive officers named in the Software.com Summary Compensation Table.
Software.com has, however, entered into "change of control" agreements with
each of its executive officers named in the Software.com Summary Compensation
Table and with other officers and key employees. These agreements provide that
if an officer's employment is terminated as a result of an "involuntary
termination" during a period beginning two months before, and ending six
months after a change of control, then one-half of the unvested portion of any
stock option held by the officer will accelerate and become exercisable,
subject to certain limitations. The merger with Phone.com may constitute a
change control. For purposes of the agreement, "involuntary termination"
includes a change in the nature or scope of the officer's duties that is
inconsistent with the position held by the officer immediately before the
change of control, a material reduction of benefits or perquisites, a
reduction in base cash salary, a relocation that is more than 20 miles from
the officer's present location, any purported termination of the officer by
Software.com, or the failure by Software.com to obtain the assumption of the
change of control agreement.
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<PAGE>
Software.com Employee Benefit Plans
1995 Stock Plan
Software.com's 1995 stock plan, as amended and restated, allows Software.com
to grant to employees incentive stock options within the meaning of Section
422 of the Internal Revenue Code and to grant to employees, directors and
consultants nonstatutory stock options and stock purchase rights. Unless
terminated sooner, the plan will automatically terminate in 2005.
Software.com's board of directors approved the plan in October 1995 and
Software.com's stockholders approved the plan in January 1996. The plan was
most recently amended by Software.com's board of directors in May 1999 and
approved by Software.com's stockholders in June 1999. A total of 12,448,931
shares of common stock is reserved for issuance under the plan, plus annual
increases, to be added on July 1 of each year, equal to the lesser of:
. 5,000,000 shares;
. 4% of the outstanding shares on such date; or
. a lesser amount determined by the board.
Software.com's board of directors or an administrator appointed by the board
may administer the 1995 stock plan. The plan administrator has the power to
determine the terms and conditions of the options and stock purchase rights
granted, including:
. the exercise price;
. the number of shares of common stock subject to each option and stock
purchase right;
. the exercisability thereof; and
. the form of consideration payable upon the exercise of the option.
In addition, Software.com's board of directors has the authority to amend,
suspend or terminate the plan, provided that no action may affect any share of
common stock previously issued and sold or any option previously granted under
the plan.
Options and purchase rights granted under Software.com's 1995 stock plan are
not generally transferable by the optionee. Each option is exercisable during
the lifetime of the optionee only by the optionee. Options granted under
Software.com's 1995 stock plan must generally be exercised within three months
of the end of optionee's status as an employee, consultant or director of
Software.com, or within twelve months after the optionee's termination by
death or disability. However, an option may never be exercised later than the
expiration of its term.
The exercise price of all incentive stock options granted under the plan is
determined by the administrator, but must be at least equal to the fair market
value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of Software.com's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date. The exercise price of nonstatutory stock options
granted under the plan is determined by the administrator, but must be equal
to at least 85% of the fair market value on the grant date. With respect to
any participant who owns stock possessing more than 10% of the voting power of
all classes of Software.com's outstanding capital stock, the exercise price of
any nonstatutory stock option granted must equal at least 110% of the fair
market value on the grant date. The term of all other options granted under
the 1995 stock plan may not exceed ten years. However, the term of incentive
stock options granted to any participant who owns stock with more than 10% of
the voting power of all classes of Software.com's outstanding capital stock
cannot exceed five years.
Software.com's 1995 stock plan provides that in the event of a merger of
Software.com with or into another corporation, each outstanding option or
purchase right shall be assumed or an equivalent option or right substituted
by the successor corporation. If the outstanding options or rights are not
assumed or substituted as described in the preceding sentence, the options or
rights shall terminate as of the date of the merger.
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<PAGE>
2000 NonStatutory Stock Option Plan
Software.com established the 2000 nonstatutory stock option plan in order to
provide additional incentive to its employees and consultants. Options granted
under Software.com's 2000 nonstatutory stock option plan will be nonstatutory
stock options and are not intended to qualify as incentive stock options
within the meaning of Section 422 of the Internal Revenue Code. Options may be
granted to employees and consultants, but not to officers and directors of
Software.com. A total of 2,050,000 shares of common stock has been reserved
for issuance under the 2000 nonstatutory stock option plan.
Options and purchase rights granted under Software.com's 2000 nonstatutory
stock option plan are not generally transferable by the optionee. Each option
is exercisable during the lifetime of the optionee only by the optionee.
Options granted under Software.com's 2000 nonstatutory stock option plan must
generally be exercised within three months of the end of optionee's status as
an employee, consultant or director of Software.com, or within twelve months
after the optionee's termination by death or disability. However, an option
may never be exercised later than the expiration of its term.
Software.com's 2000 nonstatutory stock option plan provides that in the
event of a merger of Software.com with or into another corporation, each
outstanding option or purchase right shall be assumed or an equivalent option
or right substituted by the successor corporation. If the outstanding options
or rights are not assumed or substituted as described in the preceding
sentence, the options or rights shall terminate as of the date of the merger.
The 2000 nonstatutory stock option plan will terminate in 2010. The board of
directors has the authority to amend or terminate the 2000 nonstatutory stock
option plan, except that no such action may adversely affect any optionee.
1999 Employee Stock Purchase Plan
Software.com's 1999 employee stock purchase plan was adopted by
Software.com's board of directors in May 1999 and approved by its stockholders
in June 1999. A total of 1,000,000 shares of common stock has been reserved
for issuance under the purchase plan, plus annual increases, to be added the
first day of each fiscal year commencing in 2001, equal to the lesser of:
. 500,000 shares;
. 2% of the shares outstanding on that date; or
. a lesser amount determined by the board.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, contains successive twenty-four
month offering periods. The offering periods generally start on the first
trading day on or after May 1 and November 1 of each year, except for the
first such offering period which commences on the first trading day on or
after the effective date of this offering and ends on the trading day on or
before April 30, 2001.
Employees are eligible to participate if they are employed by Software.com
or any participating subsidiary for at least 20 hours per week and for more
than five months in any calendar year. However, the following employees may
not be granted options to purchase stock under the purchase plan:
. any employee who immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of
Software.com's capital stock, or
. any employee whose rights to purchase stock under all Software.com's
employee stock purchase plans accrues at a rate which exceeds $25,000
worth of stock for each calendar year.
Participants may purchase common stock through payroll deductions of up to
15% of the participant's compensation. The maximum number of shares a
participant may purchase during a single offering period is 10,000 shares.
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<PAGE>
Amounts deducted and accumulated by the participant are used to purchase
shares of Software.com's common stock at the end of each offering period. The
price of stock purchased under the purchase plan is 85% of the lower of the
fair market value of the common stock at the beginning of the offering period
and the end of each purchase period.
The purchase plan provides that, in the event Software.com merges with or
into another corporation or a sale of substantially all of Software.com's
assets, each outstanding option may be assumed or substituted by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be
shortened and a new exercise date will be set, which will occur before the
proposed sale or merger.
The purchase plan will terminate in 2009. The board of directors has the
authority to amend or terminate the purchase plan, except that no such action
may adversely affect any outstanding rights to purchase stock.
401(k) Plan
In 1996, Software.com adopted a 401(k) Retirement Savings and Investment
Plan covering its full-time employees located in the United States. The plan
is intended to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended, so that (a) contributions to the plan by employees or by
Software.com, and the investment earnings thereon, are not taxable to
employees until withdrawn from the plan, and so that (b) contributions by
Software.com, if any, will be deductible by Software.com when made. Under the
plan, eligible employees may elect to make payroll deductions up to 20% of
their compensation, up to the statutorily prescribed annual limit ($10,500 in
2000) and to have the amount of their deduction contributed to the plan. The
plan permits, but does not require, additional matching contributions by
Software.com on behalf of all participants. To date, Software.com has not made
any matching contributions to the plan.
Software.com Limitations of Liability and Indemnification
Software.com's certificate of incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for (i) any breach of their duty of loyalty to the corporation or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments
of dividends or unlawful stock repurchases or redemption, or (iv) any
transaction from which the director derived an improper personal benefit. The
limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Software.com's bylaws provide that Software.com shall indemnify its
directors and officers and may indemnify its employees and other agents to the
fullest extent permitted by law. Software.com believes that indemnification
under its bylaws covers at least negligence and gross negligence on the part
of indemnified parties. Software.com's bylaws also permit Software.com to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
Software.com has entered into agreements to indemnify Software.com's
directors and officers, in addition to indemnification provided for in
Software.com's bylaws. These agreements, among other things, provide for
indemnification of Software.com's directors and officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred
by any such person in any action or proceeding, including any action by or in
the right of Software.com, arising out of the person's services as a director
or officer of Software.com, any of Software.com's subsidiaries or any other
company or enterprise to which the person provides services at Software.com's
request. Software.com believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
164
<PAGE>
STOCK OWNERSHIP OF PRINCIPAL
STOCKHOLDERS, MANAGEMENT AND
DIRECTORS OF SOFTWARE.COM
The following table sets forth certain information with respect to the
beneficial ownership of the common stock of Software.com as of July 31, 2000,
of:
. each person or entity who is known by Software.com to beneficially own
five percent (5%) or more of the outstanding shares of its common stock
(1);
. each current director of Software.com;
. Software.com's executive officers named in the Software.com Summary
Compensation Table; and
. all of Software.com's current directors and executive officers as a
group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of July 31, 2000 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
Unless otherwise indicated, the address of each individual listed in the
table is Software.com, Inc., 525 Anacapa Street, Santa Barbara, CA 93101. The
pre-merger percentages in the table below are based on 48,866,633 shares of
Software.com's common stock outstanding as of July 31, 2000. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, each stockholder named in the table has had sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name.
<TABLE>
<CAPTION>
Percentage
Ownership of
Shares
Options Total Shares Beneficially
Shares Exercisable In Beneficially Owned Before
Name Owned 60 Days Owned Merger
---- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
FMR Corp................ 5,764,517(2) -- 5,764,517 11.8%
82 Devonshire Street
Boston, MA 02109
John L. MacFarlane...... 5,004,232 318,750 5,322,982 10.8%
Valdur Koha............. 2,967,344(3) 468,721 3,436,065 7.0%
Donald J. Listwin....... 3,221,560(4) 9,166 3,230,726 6.6%
Cisco Systems, Inc...... 3,119,060 -- 3,119,060 6.4%
170 W. Tasman Drive
San Jose, CA 95014
Janus Capital 2,449,870(5) -- 2,449,870 5.8%
Corporation............
100 Fillmore Street
Denver, CO 80206-4923
Neal Douglas............ 200,516(6) 61,666 262,182 *
Judith Hamilton......... 103,625 119,359 122,984 *
Frank Perna, Jr......... 95,988 1,666 97,654 *
Bernhard Woebker........ 86,000 31,666 117,666 *
Bernard Puckett......... 15,000 76,666 91,666 *
All directors and
executive officers as a
group (9 persons)...... 11,712,102 1,007,526 12,719,628 25.5%
</TABLE>
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<PAGE>
--------
* Indicates ownership of less than 1% of the outstanding shares of the
Software.com's common stock.
(1) Subsequent to July 31, 2000, Phone.com entered into voting agreements with
certain stockholders of Software.com and 9,321,551 shares of Software.com
common stock are subject to the voting agreements. Phone.com also entered
into a stock option agreement with Software.com pursuant to which
Software.com granted Phone.com an option to purchase up to 9,724,460
shares of Software.com common stock under certain circumstances. Phone.com
disclaims beneficial ownership of these shares.
(2) As indicated in the Schedule 13G filed by FMR Corp. pursuant to the
Exchange Act on April 7, 2000.
(3) Includes 1,000,000 shares held by the Valdur Koha Qualified Annuity Trust.
(4) Includes 3,119,060 held by Cisco Systems, Inc. Mr. Listwin, a director of
Software.com, is an Executive Vice President of Cisco Systems and
disclaims beneficial ownership of all shares held by Cisco Systems.
(5) As indicated in the Schedule 13G filed by Janus Capital Corporation
pursuant to the Exchange Act on February 15, 2000.
(6) Includes 1 share held by Venture Fund I, LP. Mr. Douglas, a director of
Software.com, is a Founding General Partner of AT&T Ventures.
SOFTWARE.COM TRANSACTIONS WITH RELATED PARTIES
In February 1996, Software.com entered into a contract with 525 Anacapa LLC
for the lease of its offices at 525 Anacapa Street, Santa Barbara. Pursuant to
the lease, it agreed to pay 525 Anacapa LLC a flexible amount per month such
that it would recover its costs and expenses in relation to the ownership and
operation of the property, and a 9% return on the actual cash invested in
acquiring and improving the property, as set forth in the lease. In 1997, 1998
and 1999, Software.com paid an aggregate of $165,000, $171,000 and $193,000 to
525 Anacapa LLC pursuant to the lease. John MacFarlane, Chief Executive
Officer and a director of Software.com, is a member of 525 Anacapa LLC.
In February 1997, Software.com issued and sold an aggregate of 1,789,279
shares of Series B preferred stock to Cisco Systems, at a per share price of
$4.15, and in August 1998, Software.com issued and sold an aggregate of
1,329,781 shares of Series C preferred stock to Cisco at a per share price of
$5.15. Upon the closing of Software.com's initial public offering, the Series
B and Series C preferred stock automatically converted into 1,789,279 and
1,329,781 shares of Software.com common stock. Holders of the Series B and
Series C preferred stock are entitled to "piggyback" and demand registration
rights with respect to the shares of common stock into which the Series B and
Series C preferred stock converted. Mr. Listwin, one of Software.com's
directors, is an Executive Vice President of Cisco Systems.
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<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Market prices and dividends
Phone.com common stock trades on the Nasdaq National Market under the symbol
"PHCM." Software.com common stock is listed on the Nasdaq National Market
under the symbol "SWCM."
The table below shows, for the calendar quarters indicated, the reported
high and low sale prices of Phone.com and Software.com common stock as
reported on the Nasdaq National Market, in each case based on published
financial sources and the dividends, if any, declared on the stock.
<TABLE>
<CAPTION>
Phone.com Common Stock Software.com Common Stock
----------------------------- ----------------------------
Market Price Cash Market Price Cash
------------------- Dividends ------------------ Dividends
High Low Declared High Low Declared
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999
Period from June 11,
1999 to
June 30, 1999........ $ 32.7813 $ 16.1250 $-0- $ 24.8750 $17.6250 $-0-
Period from July 1,
1999 to September 30,
1999................. $ 92.6562 $ 19.8125 $-0- $ 55.0000 $21.0000 $-0-
Period from October 1,
1999 to December 31,
1999................. $175.0000 $ 74.8125 $-0- $119.1250 $42.5000 $-0-
2000
Period from January 1,
2000 to March 31,
2000................. $208.0000 $100.5000 $-0- $155.0000 $65.0000 $-0-
Period from April 1,
2000 to June 30,
2000................. $160.6250 $ 50.0000 $-0- $131.2500 $59.5000 $-0-
</TABLE>
The following table presents trading information for the Phone.com common
stock and Software.com common stock on August 8, 2000 and August 30, 2000.
August 8, 2000 was the last full trading day before our announcement of the
signing of the merger agreement. August 30, 2000 was the last practicable
trading day for which information was available before the date of this
document. The equivalent pro forma price of Software.com common stock is also
presented below for each price. The equivalent pro forma price for each price
was determined by multiplying the applicable price of Phone.com common stock
by the exchange ratio. We cannot assure you what the market prices of the
Phone.com common stock will be at the merger date. You should obtain current
market quotations.
<TABLE>
<CAPTION>
Software.com
Phone.com Software.com Equivalent
Common Stock Common Stock Pro Forma
------------ ------------ ------------
<S> <C> <C> <C>
Closing price on August 8, 2000......... $78.0625 $107.7500 $125.7197
Closing price on August 30, 2000........ $86.5625 $135.0000 $139.4089
</TABLE>
Neither Phone.com nor Software.com has ever declared or paid cash dividends
on its capital stock. Phone.com does not anticipate paying cash dividends on
its common stock in the foreseeable future. The terms of some debt instruments
of Phone.com limit its ability to pay cash dividends. Future cash dividends,
if any, will be at the discretion of the Phone.com board of directors and will
depend upon, among other things, Phone.com's operations, capital requirements
and surplus, general financial condition, contractual restrictions and those
other factors the Phone.com board of directors may deem relevant. See
"Phone.com's Management Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 109.
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DESCRIPTION OF PHONE.COM CAPITAL STOCK
The following summary is a description of the material terms of Phone.com
common stock, does not purport to be complete and is subject in all respects
to the applicable provisions of Delaware law and of the constituent documents
of Phone.com and each of its subsidiaries. The Phone.com certificate of
incorporation and by-laws are filed as exhibits to the registration statement
of which this document is a part.
General
Phone.com's authorized capital stock consists of 250,000,000 shares of
common stock, par value $0.001 per share, and 5,000,000 shares of preferred
stock, par value $0.001 per share.
As of July 31, 2000, there were 82,997,462 shares of common stock
outstanding that were held of record by approximately 600 stockholders, and no
shares of preferred stock were outstanding.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of Phone.com
common stock are entitled to receive ratably any dividends that may be
declared from time to time by the board of directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up
of Phone.com, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
preferred stock, if any, then outstanding. The Phone.com common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions available to the common stock. All
outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock
Phone.com is authorized to issue 5,000,000 shares of undesignated preferred
stock. The Phone.com board of directors will have the authority to issue the
undesignated preferred stock in one or more series and to determine the
powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon any wholly unissued series of
undesignated preferred stock and to fix the number of shares constituting any
series and the designation of a series, without any further vote or action by
the stockholders. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Phone.com without
further action by the stockholders and may adversely affect the voting and
other rights of the holders of common stock. At present, Phone.com has no
plans to issue any shares of preferred stock.
Registration Rights of Stockholders
The holders of approximately 1,437,000 shares of common stock of Phone.com
are entitled to rights to register these shares under the Securities Act
pursuant to an agreement between Phone.com and the holders of such shares,
entered into in connection with Phone.com's acquisition of Apion. Subject to
the limitations in this agreement, the holders of the shares may require, on
one occasion at any time before October 25, 2001, that Phone.com use its best
efforts to register the shares for public resale, provided that the proposed
aggregate offering price is in excess of $1,000,000. All of the fees, costs
and expenses incurred in connection with the registration must be borne by
Phone.com and all of the selling expenses, including underwriting discounts,
selling commissions and stock transfer taxes, relating to shares must be borne
by the holders of the shares being registered.
The holders of 3,103,692 shares of common stock of Phone.com are entitled to
rights to register these shares under the Securities Act pursuant to an
agreement between Phone.com and the holders of such shares, entered into in
connection with Phone.com's acquisition of Paragon. Subject to the limitations
in this agreement, the
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holders of the shares may require, on one occasion at any time before February
8, 2002, that Phone.com use its best efforts to register the shares for public
resale, provided that the proposed aggregate offering price is in excess of
$1,000,000. All of the fees, costs and expenses incurred in connection with
the registration of the shares and all of the selling expenses, including
underwriting discounts, selling commissions and stock transfer taxes, up to
$50,000 must be borne by Phone.com. All of the expenses selling expenses in
excess of $50,000 relating to the shares must be borne by the holders of the
shares being registered.
The holders of 193,873 shares of common stock of Phone.com are entitled to
rights to register these shares under the Securities Act pursuant to an
agreement between Phone.com and the holders of such securities, entered into
in connection with Phone.com's acquisition of MyAble. Pursuant to this
agreement, if Phone.com registers any of its common stock either for its own
account or for the account of other security holders, the holders of
registrable securities are entitled to include their shares of common stock in
the registration. A holder's rights to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in the offering.
Warrants
As of June 30, 2000, warrants were outstanding to purchase an aggregate of
10,079 shares of Phone.com common stock at a weighted average exercise price
of $8.43 per share.
Anti-takeover Provisions of Delaware Law and Charter Provisions
Phone.com is subject to the provisions of Section 203 of the Delaware Law.
In general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, with exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale or other transaction resulting in a financial benefit to
the stockholder, and an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior, did own,
15% or more of the corporation's outstanding voting stock. This provision may
have the effect of delaying, deferring or preventing a change in control of
Phone.com without further action by the stockholders. Phone.com's stock option
and purchase plans generally provide for assumption of our plans or
substitution of an equivalent option of a successor corporation or,
alternatively, at the discretion of the board of directors, exercise of some
or all of the options stock, including non-vested shares, or acceleration of
vesting of shares issued pursuant to stock grants, upon a change of control or
similar event. The board of directors has authority to issue up to
5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the stockholders. The rights of the holders of
the common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, thereby delaying, deferring or preventing a
change in control of Phone.com. Furthermore, this preferred stock may have
other rights, including economic rights senior to the common stock, and, as a
result, the issuance of preferred stock could have a material adverse effect
on the market value of the common stock. Phone.com has no present plan to
issue shares of preferred stock.
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COMPARISON OF RIGHTS OF HOLDERS
OF PHONE.COM COMMON STOCK AND
SOFTWARE.COM COMMON STOCK
Upon completion of the merger, holders of Software.com common stock will
become entitled to receive Phone.com common stock. Both Phone.com and
Software.com are companies formed under the laws of the State of Delaware.
The following is a summary of some material differences between the rights
of holders of Software.com common stock and the holders of Phone.com common
stock. These differences arise from differences between the Software.com
second amended and restated certificate of incorporation and the Software.com
by-laws, on the one hand, and the Phone.com amended and restated certificate
of incorporation and the Phone.com by-laws, on the other hand. See
"Description of Phone.com Capital Stock." This discussion is not a complete
statement of all differences between rights of holders of Phone.com common
stock and Software.com common stock. This summary discusses material
differences the Software.com second amended and restated certificate of
incorporation and by-laws and the Phone.com amended and restated certificate
of incorporation and by-laws. This summary is qualified by the full text of
each document. For information as to how to get those documents, see "Where
You Can Find More Information" on page 175.
Size and Classification of the Board of Directors
Both the amended and restated certificate of incorporation of Phone.com and
the second amended and restated certificate of incorporation of Software.com
provide that the board of directors shall be divided into three classes of
directors with staggered terms. The Phone.com by-laws provide that the board
of directors shall consist of six members, whereas the Software.com by-laws
provide that the board of directors shall consist of seven members.
Removal of Directors; Vacancies
The Phone.com amended and restated certificate of incorporation provides
that stockholders may remove any director, with cause, upon an affirmative
vote of the holders of a majority of the then-outstanding shares of voting
stock, or, without cause, upon an affirmative vote of the holders of at least
two-thirds ( 2/3) of the then-outstanding shares of voting stock. Any vacancy
created by the removal of a director may be filled by an affirmative vote of a
majority of the then outstanding voting stock or, in the absence of such an
election, by an affirmative vote of a majority of the remaining directors then
in office.
The second amended and restated certificate of incorporation of Software.com
provides that stockholders may only remove a director with cause by an
affirmative vote of the holders of a majority of the then-outstanding shares
of voting stock. Any vacancy created by the removal of a director may only be
filled by an affirmative vote of a majority of the remaining directors then in
office.
Meetings of Stockholders
The by-laws of each of Phone.com and Software.com provide that a meeting of
the stockholders shall be held each year at a time and place designated by the
board of directors. The Phone.com by-laws provide that a special meeting may
be convened at any time by the board of directors, the chairman of the board
of directors, or the president of Phone.com. The Software.com by-laws provide
that a special meeting may be convened at any time by the board of directors,
the chairman of the board of directors, the president of Software.com, the
chief executive officer of Software.com, or one or more stockholders holding
shares in the aggregate entitled to cast not less than fifty-one percent (51%)
of the votes at the special meeting. Hence, the proposed merger, if completed,
will eliminate the authority to convene a special meeting of the chief
executive officer of Software.com and any stockholder or stockholders holding
shares entitled to cast at least fifty-one percent (51%) of the votes at such
special meeting.
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Indemnification of Officers and Directors
The by-laws of both Phone.com and Software.com provide for indemnification
of directors, officers and employees to the fullest extent permitted by the
General Corporation Law of Delaware. In addition, the by-laws of both
Phone.com and Software.com provide that each company will pay any expenses
incurred in defending any indemnified action, in advance, upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified party is not entitled
to indemnification. However, the by-laws of Software.com contain a provision
limiting the obligation of Software.com to pay such expenses in advance if a
determination is made (i) by the board of directors of Software.com by a
majority vote of a quorum consisting of directors who were not parties to the
proceeding that resulting in the indemnification claim or (ii) if such quorum
is not obtainable, by independent legal counsel in a written opinion, that the
facts known to the decision-making party at the time such determination is
made demonstrate that the indemnified party acted in bad faith or in a manner
that such indemnified party did not believe was in the best interests of
Software.com. The by-laws of Phone.com contain no such limitation on
Phone.com's obligations to pay indemnification expenses in advance.
Annual Statement to Stockholders
The by-laws of Phone.com provide that the board of directors shall present
at each annual meeting a full and clear statement of the business and
condition of Phone.com. The by-laws of Software.com provide for no such
obligation on the part of Software.com.
PROPOSALS TO PHONE.COM STOCKHOLDERS
TO BE VOTED ON AT THE PHONE.COM SPECIAL MEETING
The merger proposals
Proposal One--Issuance of shares of Phone.com common stock in the merger with
Software.com
Phone.com's board of directors unanimously adopted a resolution approving
the issuance of shares of Phone.com common stock, par value $0.001 per share,
in the merger with Software.com, subject to completion of the merger. These
shares will not be issued unless the merger is completed. This share issuance
is being submitted for the approval of the stockholders of Phone.com pursuant
to the requirements of the National Association of Securities Dealers
applicable to companies with securities quoted on the Nasdaq National Market.
The share issuance must be approved by the affirmative vote, in person or by
proxy, of at least a majority of the votes properly cast at the Phone.com
special meeting. The merger cannot be completed unless Phone.com stockholders
approve the issuance of these shares in the merger and the amendment to
Phone.com's amended and restated certificate of incorporation described in
Proposal Two. These shares will be issued to Software.com stockholders in
exchange for their Software.com common stock in a number per share of
Software.com common stock equal to the exchange ratio described in this
document. See "The Merger Agreement--The Exchange Ratio and Treatment of
Software.com Securities."
The Phone.com board of directors unanimously recommends that Phone.com
stockholders vote "FOR" the issuance of shares of Phone.com common stock in
the merger.
Proposal Two--Amendment to amended and restated certificate of incorporation
to change name
Phone.com's amended and restated certificate of incorporation, or
certificate, provides that the name of Phone.com is "Phone.com, Inc." Pursuant
to the merger agreement with Software.com, Phone.com has agreed to propose and
recommend that the certificate be amended at the effective time to change
Phone.com's name to " ." The Phone.com board of directors has authorized
this amendment, subject to stockholder approval. Under the proposed amendment,
subject to and upon consummation of the merger, Article I of the certificate
would be amended and restated to read in its entirety as follows:
"The name of this corporation is (the "Corporation")."
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The Phone.com stockholders are being asked to approve such amendment. The
affirmative vote, in person or by proxy, of a majority of the shares of
Phone.com common stock outstanding as of the Phone.com record date will be
required to approve the amendment of the certificate. The effect of an
abstention and a broker non-vote is the same as that of a vote against the
proposal. The merger cannot be completed unless Phone.com stockholders approve
the amendment of the certificate and the issuance of shares in the merger
described in Proposal One above. In addition, the amendment of the certificate
will not occur unless the stockholders approve Proposal One and the merger
with Software.com is completed.
The Phone.com board of directors unanimously recommends that Phone.com
stockholders vote "FOR" the amendment of the certificate to change the
corporate name of Phone.com to subject to and contingent upon consummation
of the merger.
The other proposal
Proposal Three--Amendment to certificate to increase authorized common stock
Phone.com's board of directors has approved an amendment to the certificate
to increase the number of authorized shares of common stock from 250,000,000
shares to 1,000,000,000 shares, subject to stockholder approval. Under the
amendment, Article IV Section (A) of the certificate would be amended and
restated to read in its entirety as follows:
"(A) Classes of Stock. The Corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the Corporation is authorized to issue is
1,005,000,000 shares, each with a par value of $0.001 per share. 1,000,000,000
of such shares shall be Common Stock, and 5,000,000 of such shares shall be
Preferred Stock."
As of July 31, 2000, there were 250,000,000 shares of Phone.com common stock
authorized, of which approximately 82,997,462 shares were issued and
outstanding. In addition, approximately 27,700,417 shares of common stock were
reserved for issuance under Phone.com's stock benefit plans. While the
additional authorized stock is not required to complete the merger with
Software.com, the issuance of Phone.com common stock to the stockholders,
optionholders and warrantholders of Software.com pursuant to Proposal One will
require at least 94,506,060 shares of Phone.com common stock. In addition,
although Phone.com has no specific plans to use the additional authorized
shares of Phone.com common stock other than as described above, the Phone.com
board of directors believes that it is prudent to increase the number of
authorized shares of Phone.com common stock to the proposed level in order to
provide a reserve of shares available for issuances in connection with
possible future actions. Such actions may include, but are not limited to,
annual increases in the number of shares available for issuance pursuant to
Phone.com's employee benefits plans, and stock splits or stock dividends if
the Phone.com board of directors were to determine that such would be
desirable to facilitate a broader base of stockholders.
The Phone.com board of directors also believes that the increased number of
shares will provide the flexibility to effect other possible actions such as
financings, corporate mergers, acquisitions of property, employee benefit
plans and for other general corporate purposes. Having such additional
authorized Phone.com common stock available for issuance in the future would
allow the Phone.com board of directors to issue shares of Phone.com common
stock without the delay and expense associated with seeking stockholder
approval. Elimination of such delays and expense occasioned by the necessity
of obtaining stockholder approval will better enable Phone.com, among other
things, to engage in financing transactions and acquisitions as well as to
take advantage of changing market and financial conditions on a more
competitive basis as determined by the Phone.com board of directors. The
Phone.com stockholders are being asked to approve such amendment.
The affirmative vote, in person or by proxy, of a majority of the shares of
Phone.com common stock outstanding on the Phone.com record date will be
required to approve the amendment of the certificate. The
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effect of an abstention and broker non-vote is the same as that of a vote
against the proposal. The increase in authorized Phone.com common stock will
not have any immediate effect on the rights of existing stockholders. To the
extent that the additional authorized shares are issued in the future, they
will decrease the existing stockholders' percentage equity ownership and,
depending on the price at which they are issued, could be dilutive to the
existing stockholders.
The proposed amendment to increase the authorized number of shares of common
stock could, under certain circumstances, have an anti-takeover effect,
although this is not the intention of this proposal. For example, in the event
of a hostile attempt to take over control of Phone.com, it may be possible for
Phone.com to attempt to impede the attempt by issuing shares of the common
stock, thereby diluting the voting power of the other outstanding shares and
increasing the potential cost to acquire control of Phone.com. The amendment
therefore may have the effect of discouraging unsolicited takeover attempts. By
potentially discouraging initiation of any such unsolicited takeover attempt,
the proposed amendment may limit the opportunity for Phone.com's stockholders
to dispose of their shares at the higher price generally available in takeover
attempts or that may be available under a merger proposal. The proposed
amendment may have the effect of permitting Phone.com's management, including
the board of directors, to retain its position, and place it in a better
position to resist changes that stockholders may wish to make if they are
dissatisfied with the conduct of Phone.com's business. However, the board of
directors is not aware of any attempt to take control of Phone.com and the
board of directors has not presented this proposal with the intent that it be
utilized as a type of anti-takeover device.
The Phone.com board of directors unanimously recommends that Phone.com
stockholders vote "FOR" the amendment of the certificate to increase the
authorized Phone.com common stock to 1,000,000,000 shares.
LEGAL MATTERS
The validity of the shares of Phone.com common stock to be issued to
Software.com stockholders pursuant to the merger will be passed upon by
Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to Phone.com. Certain
tax matters will be passed upon by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel to Software.com, and Skadden, Arps, Slate,
Meagher & Flom LLP.
EXPERTS
The consolidated financial statements and related financial statement
schedule of Phone.com, Inc. and subsidiaries as of June 30, 1999 and 2000, and
for each of the years in the three-year period ended June 30, 2000, have been
included in this joint proxy statement/prospectus in reliance upon the report
of KPMG LLP, independent auditors, appearing elsewhere in this prospectus, and
upon the authority of said firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Software.com at December 31, 1999 and
1998, and for each of the three years in the period ended December 31, 1999, as
set forth in their report. These financial statements and schedule have been
included in this joint proxy statement/prospectus in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
The statement of assets acquired and liabilities assumed as of March 31,
1999, and the statement of operations and cash flows for the period from May 1,
1998 (inception) through March 31, 1999 of the WAP business of APiON, have been
included in this joint proxy statement/prospectus in reliance upon the report
of PricewaterhouseCoopers, independent auditors, appearing elsewhere in this
prospectus, and upon the authority of said firm as experts in auditing and
accounting.
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Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of AtMotion Inc. at June 30, 1999 and for the year ended
June 30, 1999 and for the periods from November 10, 1997 (date of
incorporation) to June 30, 1998 and 1999, as set forth in their report. These
financial statements have been included in this joint proxy
statement/prospectus in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
Ernst & Young, independent auditors, have audited the consolidated financial
statements of Paragron Software (Holdings) Limited at December 31, 1999 and
1998, and for each of the two years in the period ended December 31, 1999, as
set forth in their report. These financial statements have been included in
this joint proxy statement/prospectus in reliance upon Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of Onebox.com, Inc. at December 31, 1999 and 1998, and
for the year ended December 31, 1999 and for the periods from May 20, 1998
(date of incorporation) to December 31, 1998 and 1999, as set forth in their
report. These financial statements have been included in this joint proxy
statement/prospectus in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of Telarc, Inc. at December 31, 1998, and for the year
then ended, as set forth in their report. These financial statements have been
included in this joint proxy statement/prospectus in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of bCandid Corporation at December 31, 1999, and for the
year then ended, as set forth in their report. These financial statements have
been included in this joint proxy statement/prospectus in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
The financial statements of HighWind Software, Inc. as of December 31, 1998
and for the year then ended, have been included in this joint proxy
statement/prospectus in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere in this prospectus, and upon the authority of
said firm as experts in accounting and auditing.
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SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be included in Phone.com's proxy
statement for the 2001 Annual Meeting of Stockholders, including nominations
of persons to the Board of Directors, must be received by Alain Rossmann at
Phone.com, 800 Chesapeake Drive, Redwood City, California 94063, no later than
, 2001. For business to be brought before an annual meeting by a
stockholder at the 2001 Annual Meeting of Stockholders, the stockholder must
give notice of such matter in the manner prescribed in Phone.com's by-laws not
less than 20 days nor more than 90 days prior to the first anniversary of the
2000 Annual Meeting; provided, however, that in the event that the date of
such annual meeting is more than 30 days prior to or more than 60 days after
such anniversary date, notice by the stockholder must be so delivered not
earlier than the 90th day prior to such annual meeting and not later than the
close of business on the later of the 20th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of
such meeting is first made. For a stockholder to nominate persons for election
to the Board of Directors, in addition to the requirements of the previous
sentence, the stockholder must provide notice in the manner prescribed in
Phone.com's bylaws not less than 60 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 60 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which
such notice of the date of the meeting was mailed or such public disclosure
was made.
Due to the contemplated completion of the merger, Software.com does not
intend to hold a 2001 Annual Meeting of Stockholders. If that meeting is held,
any proposal of a stockholder of Software.com that is intended to be presented
by such stockholder at Software.com's 2001 Annual Meeting of Stockholders must
be received by Software.com no later than January 1, 2001 in order for such
proposal to be considered for inclusion in Software.com's proxy statement and
form of proxy relating to such meeting. Stockholder proposals received by
Software.com after that time will be considered untimely.
In addition, Software.com's by-laws provide that stockholders intending to
nominate candidates for election as directors or to bring business before an
annual meeting of stockholders which were not included in Software.com's proxy
statement must deliver the prescribed notice and information to the Secretary
of Software.com no later than January 1, 2001. If a stockholder who has
notified Software.com of his or her intention to present a proposal at an
annual meeting does not appear or send a qualified representative to present
his or her proposal at such meeting, Software.com need not present the
proposal for a vote at such meeting.
WHERE YOU CAN FIND MORE INFORMATION
Phone.com and Software.com file annual, quarterly and other reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information Phone.com
files at the Securities and Exchange Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference rooms. Our Securities and Exchange Commission filings
are also available to the public from commercial document retrieval services
and at the web site maintained by the Securities and Exchange Commission at
"http://www.sec.gov."
Phone.com filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission the Phone.com common stock to be issued to
Software.com stockholders in the merger. This document is a part of that
registration statement and constitutes a prospectus of Phone.com in addition
to being a joint proxy statement of Phone.com and Software.com for the
Phone.com and Software.com meetings.
Requests for documents relating to Phone.com should be directed to
Phone.com, 800 Chesapeake Drive, Redwood City, California, 94063, Attn:
Investor Relations. Requests for documents relating to Software.com
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should be directed to Software.com, 525 Anacapa Street, Santa Barbara,
California, 93101, Attn: Investor Relations.
You should rely only on the information contained in this joint proxy
statement/prospectus to vote on the merger agreement and the merger. Phone.com
and Software.com have not authorized anyone to provide you with information
that is different from what is contained in this joint proxy
statement/prospectus. This joint proxy statement/prospectus is dated ,
2000.
You should not assume that the information contained in this joint proxy
statement/prospectus is accurate as of any date other than , 2000, and
neither the mailing of the joint proxy statement/prospectus to Phone.com and
Software.com stockholders nor the issuance of Phone.com common stock in the
merger shall create any implication to the contrary.
This document does not constitute an offer to sell, or a solicitation of an
offer to purchase, the Phone.com common stock or the solicitation of a proxy,
in any jurisdiction to or from any person to whom or from whom it is unlawful
to make the offer, solicitation of an offer or proxy solicitation in that
jurisdiction. Neither the delivery of this joint proxy statement/prospectus
nor any distribution of securities means, under any circumstances, that there
has been no change in the information set forth in this document or in its
affairs since the date of this joint proxy statement/prospectus. The
information contained in this document with respect to Software.com and its
subsidiaries was provided by Software.com. The information contained in this
document with respect to Phone.com and its subsidiaries was provided by
Phone.com.
176
<PAGE>
PHONE.COM, INC. AND SOFTWARE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Phone.com, Inc.:
Report of KPMG LLP, independent auditors................................ F-3
Consolidated balance sheets............................................. F-4
Consolidated statements of operations................................... F-5
Consolidated statements of stockholders' equity and comprehensive loss.. F-6
Consolidated statements of cash flows................................... F-8
Notes to consolidated financial statements.............................. F-9
Schedule II--Valuation and Qualifying Accounts.......................... F-27
Software.com, Inc.:
Report of Ernst & Young LLP, independent auditors....................... F-28
Consolidated balance sheets............................................. F-29
Consolidated statements of operations................................... F-30
Consolidated statements of shareholders' equity (deficit)............... F-31
Consolidated statements of cash flows................................... F-33
Notes to consolidated financial statements.............................. F-35
Schedule II--Valuation and Qualifying Accounts.......................... F-54
WAP Business of APiON Limited:
Report of independent accountants....................................... F-55
Statement of operations................................................. F-56
Statement of assets acquired and liabilities assumed.................... F-57
Cash flow statement..................................................... F-58
Notes to financial statements........................................... F-59
Unaudited condensed statements of operations............................ F-63
Unaudited condensed statement of assets acquired and liabilities
assumed................................................................ F-64
Unaudited condensed statements of cash flows............................ F-65
Notes to unaudited condensed financial statements....................... F-66
AtMotion, Inc.:
Report of Ernst & Young LLP, independent auditors....................... F-67
Balance sheets.......................................................... F-68
Statements of operations................................................ F-69
Statements of shareholders' equity...................................... F-70
Statements of cash flows................................................ F-71
Notes to financial statements........................................... F-72
Unaudited condensed balance sheet....................................... F-81
Unaudited condensed statements of operations............................ F-82
Unaudited condensed statements of cash flows............................ F-83
Notes to unaudited condensed financial statements....................... F-84
Paragon Software (Holdings) Limited:
Report of Ernst & Young, independent auditors........................... F-85
Consolidated balance sheets............................................. F-86
Consolidated statements of operations................................... F-87
Consolidated statements of shareholders' equity......................... F-88
Consolidated statements of cash flows................................... F-89
Notes to consolidated financial statements.............................. F-90
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Onebox.com, Inc.:
Report of Ernst & Young LLP, independent auditors...................... F-97
Balance sheets......................................................... F-98
Statements of operations............................................... F-99
Statement of stockholders' equity...................................... F-100
Statements of cash flows............................................... F-101
Notes to financial statements.......................................... F-102
Unaudited condensed balance sheet...................................... F-110
Unaudited condensed statements of operations........................... F-111
Unaudited condensed statements of cash flows........................... F-112
Notes to unaudited condensed financial statements...................... F-113
Telarc, Inc.:
Report of Ernst & Young LLP, independent auditors...................... F-114
Balance sheets......................................................... F-115
Statements of income................................................... F-116
Statements of shareholders' equity..................................... F-117
Statements of cash flows............................................... F-118
Notes to financial statements.......................................... F-119
bCandid:
Report of Ernst & Young LLP, independent auditors--bCandid............. F-122
Consolidated Balance sheets............................................ F-123
Consolidated Statements of operations.................................. F-124
Consolidated Statement of stockholders' equity......................... F-125
Consolidated Statements of cash flows.................................. F-126
Notes to consolidated financial statements............................. F-127
Independent Auditors report--Highwind Software, Inc. .................. F-134
Balance sheet.......................................................... F-135
Statement of operations................................................ F-136
Statement of stockholders' deficit..................................... F-137
Statement of cash flows................................................ F-138
Notes to financial statements.......................................... F-139
</TABLE>
F-2
<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-3
<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-4
<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-5
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Years 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-6
<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-7
<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 rate 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-8
<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
revenues 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.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities of less than 90 days at the date of purchase. The Company
is exposed to credit risk in the event of default by the
F-9
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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
F-10
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-11
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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,
F-12
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-13
<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.
(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>
F-14
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
<CAPTION>
June 30,
2000
----------
<S> <C>
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>
<CAPTION>
June 30,
--------------
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 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.
F-15
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 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
F-16
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-17
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 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-18
<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-19
<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 outstanding 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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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.
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-26
<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>
F-27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Software.com, Inc.
We have audited the accompanying consolidated balance sheets of
Software.com, Inc. (Software.com) as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1999. Our audits also included the financial statement schedule listed in the
index on page F-1. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Software.com,
Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Woodland Hills, California
July 12, 2000
F-28
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31
------------------ June 30
1998 1999 2000
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 6,262 $ 47,175 $ 41,712
Marketable securities........................ 496 25,748 45,707
Accounts receivable, less allowance of $481,
$1,024 and $1,127 for December 31, 1998,
1999 and June 30, 2000 ..................... 9,382 23,054 30,738
Prepaid expenses and other current assets.... 550 1,974 2,982
-------- -------- --------
Total current assets......................... 16,690 97,951 121,139
Property and equipment, net................... 4,713 5,302 9,636
Goodwill and intangibles, net................. -- 8,048 70,213
Deposits and other assets..................... 345 591 829
-------- -------- --------
$ 21,748 $111,892 $201,817
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................. $ 1,421 $ 3,423 $ 5,114
Accrued payroll and related liabilities...... 1,600 3,707 3,637
Other accrued liabilities.................... 1,980 2,171 3,021
Deferred revenue............................. 3,806 10,488 20,519
Note payable to bank......................... 7,545 -- --
Current portion of capital lease
obligations................................. 401 433 485
Current portion of long-term debt............ 937 750 --
-------- -------- --------
Total current liabilities.................... 17,690 20,972 32,776
Capital lease obligations, less current
portion...................................... 642 256 28
Long-term debt................................ 3,115 5,500 --
Commitment and contingencies Software.Com
redeemable convertible preferred stock--
Series A, no par value, 1,587,000, 0 and 0
shares authorized, issued and outstanding in
1998, 1999 and June 30, 2000, respectively... 5,972 -- --
Software.Com redeemable convertible preferred
stock--Series B, no par value, 1,789,000, 0
and 0 shares authorized, issued and
outstanding in 1999, 1998 and June 30, 2000,
respectively................................. 7,398 -- --
Stockholders' equity (deficit):
At Mobile convertible preferred stock--Series
A, B, C & D, $.017 par value, 3,218,000
shares authorized, 734,000, 2,050,000 and
2,753,000 shares issued and outstanding in
December 1998, 1999 and June 30, 2000,
respectively................................ 5,170 12,969 --
Software.com convertible preferred stock--
Series C, no par value, 1,330,000, 0 and 0
shares authorized, issued and outstanding in
1998, 1999 and June 30, 2000, respectively.. 6,848 -- --
Common stock, $0.001 par value, authorized--
150,000,000 shares in 1999 and 50,000,000 in
1998, issued and outstanding--29,070,000,
42,611,000, and 48,714,000 shares at
December 31, 1998, 1999 and June 30, 2000,
respectively................................ 6,418 120,053 230,470
Deferred compensation......................... (1,447) (1,673) (1,368)
Accumulated other comprehensive loss.......... -- (6) (29)
Accumulated deficit........................... (30,058) (46,179) (60,060)
-------- -------- --------
Total stockholders' equity (deficit)......... (13,069) 85,164 169,013
-------- -------- --------
Total liabilities and stockholders' equity
(deficit)................................... $ 21,748 $111,892 $201,817
======== ======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31 June 30
---------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses...... $ 7,859 $ 17,462 $ 26,847 $10,285 $ 33,620
Services............... 2,963 9,271 20,094 7,666 15,992
-------- -------- -------- ------- --------
Total revenues....... 10,822 26,733 46,941 17,951 49,612
Cost of revenues:
Software licenses...... 689 1,568 2,677 1,142 1,328
Services............... 2,736 9,021 13,681 5,823 12,057
-------- -------- -------- ------- --------
Total cost of
revenues............ 3,425 10,589 16,358 6,965 13,385
-------- -------- -------- ------- --------
Gross profit......... 7,397 16,144 30,583 10,986 36,227
Operating expenses:
Sales and marketing.... 8,767 12,337 19,686 8,249 15,685
Research and
development........... 6,710 12,093 15,910 6,784 12,651
General and
administrative........ 3,505 5,891 8,055 3,076 5,778
Stock based
compensation--
acquisition related... -- -- 125 -- 3,646
Amortization of
goodwill and purchased
intangible assets..... -- -- 329 -- 1,716
Purchased in-process
research and
development........... -- -- 3,210 -- 2,000
Acquisition--related
costs................. -- -- -- -- 10,395
Legal matter........... 1,000 (400) (200) (200) --
-------- -------- -------- ------- --------
Total operating
expenses............ 19,982 29,921 47,115 17,909 51,871
-------- -------- -------- ------- --------
Loss from
operations.......... (12,585) (13,777) (16,532) (6,923) (15,644)
Other income (expense):
Interest income........ 335 363 2,073 6 2,326
Interest expense....... (63) (815) (956) (427) (50)
Other.................. -- (84) (91) (68) (157)
-------- -------- -------- ------- --------
Total other income
(expense)........... 272 (536) 1,026 (489) 2,119
-------- -------- -------- ------- --------
Loss before income
taxes............... (12,313) (14,313) (15,506) (7,412) (13,525)
Provision for income
taxes............... 1 446 212 146 356
-------- -------- -------- ------- --------
Net loss............. $(12,314) $(14,759) $(15,718) $(7,558) $(13,881)
Accretion on redeemable
convertible preferred
stock................... $ (730) $ (825) $ (403) $ (403) $ --
Net loss applicable to
common stockholders... $(13,044) $(15,584) $(16,121) $(7,961) $(13,881)
Basic and diluted net
loss per share........ $ (0.46) $ (0.54) $ (0.45) $ (0.27) $ (0.30)
Weighted average shares
of common stock
outstanding used in
computing basic and
diluted net loss per
share................. 28,119 28,671 35,754 29,740 45,633
</TABLE>
See accompanying notes.
F-30
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Preferred Accumulated
Stock Common Stock Other
-------------- -------------- Accumulated Deferred Comprehensive
Shares Amount Shares Amount Deficit Compensation Loss Total
------ ------- ------ ------ ----------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996...... -- $ -- 26,381 $3,406 $ (1,430) $ -- $-- $ 1,976
Net loss................ -- -- -- -- (12,314) -- -- (12,314)
Issuance of common
stock.................. -- -- 1,815 45 -- -- -- 45
Issuance of AtMobile
Series A preferred..... 734 5,145 -- -- -- -- -- 5,145
Accretion of mandatory
redemption value of
preferred stock........ -- -- -- -- (730) -- -- (730)
Stock option exercises.. -- -- 273 288 -- -- -- 288
----- ------- ------ ------ -------- ------- ---- --------
Balance at
December 31, 1997...... 734 5,145 28,469 3,739 (14,474) -- -- (5,590)
Net loss................ -- -- -- -- (14,759) -- -- (14,759)
Issuance of AtMobile
common stock........... -- -- 1 1 -- -- -- 1
Issuance of Software.com
Series C preferred..... 1,330 6,848 -- -- -- -- -- 6,848
Repricing of warrants... -- -- -- 294 -- -- -- 294
Capital contribution.... -- -- -- 36 -- -- -- 36
Accretion of mandatory
redemption value of
preferred stock........ -- -- -- -- (825) -- -- (825)
Stock option exercises.. -- -- 618 760 -- -- -- 760
Issue of warrants....... -- -- -- 94 -- -- -- 94
Issuance of AtMobile
Series B Preferred
warrants............... -- 25 -- -- -- -- -- 25
Deferred compensation
related to stock
options................ -- -- -- 1,495 -- (1,495) -- --
Amortization of deferred
compensation in
connection with stock
options................ -- -- -- -- -- 48 -- 48
Repurchase of common
stock.................. -- -- (18) (1) -- -- -- (1)
----- ------- ------ ------ -------- ------- ---- --------
Balance at
December 31, 1998...... 2,064 12,018 29,070 6,418 (30,058) (1,447) -- (13,069)
Comprehensive loss:
Net loss................ -- -- -- -- (15,718) -- -- (15,718)
Other comprehensive
loss, net of tax:
Unrealized loss on
securities............. -- -- -- -- -- -- (6) (6)
----- ------- ------ ------ -------- ------- ---- --------
Comprehensive loss...... -- -- -- -- (15,718) -- (6) (15,724)
Issuance of Software.com
Series D preferred
stock.................. 1,626 10,000 -- -- -- -- -- 10,000
Issuance of AtMobile
Series B preferred
stock.................. 579 4,060 -- -- -- -- -- 4,060
Issuance of AtMobile
Series C preferred
stock.................. 737 3,645 -- -- -- -- -- 3,645
Capital contribution.... -- -- -- 12 -- -- -- 12
Accretion of mandatory
redemption value of
preferred stock........ -- -- -- -- (403) -- -- (403)
Stock option exercises.. -- -- 1,204 3,306 -- -- -- 3,306
Issuance of common stock
in connection with
employee stock purchase
plan................... -- -- 76 968 -- -- -- 968
Deferred compensation
related to stock
options................ -- -- -- 770 -- (770) -- --
Amortization of deferred
compensation in
connection with stock
options................ -- -- -- -- -- 544 -- 544
Compensation Expense
nonemployee............ -- $ -- -- $ 4 $ -- $ -- $-- $ 4
</TABLE>
F-31
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)--(continued)
(In thousands)
<TABLE>
<CAPTION>
Common Accumulated
Preferred Stock Stock Other
---------------- ---------------- Accumulated Deferred Comprehensive
Shares Amount Shares Amount Deficit Compensation Loss Total
------ -------- ------ -------- ----------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Conversion into common
stock of Software.com
redeemable convertible
preferred
Series A and B......... -- $ -- 3,376 $ 13,840 $ -- $ -- $-- $ 13,840
Conversion into common
stock of Software.com
convertible preferred
Series C and D......... (2,956) (16,848) 2,956 16,848 -- -- -- --
Issuance of common stock
in initial public
offering, net of
offering costs of
$1,983................. -- -- 5,000 67,767 -- -- -- 67,767
Issuance of common stock
in connection with
Telarc, Inc.
acquisition............ -- -- 212 10,000 -- -- -- 10,000
Issuance of common stock
warrants in exchange
for services........... -- -- -- 121 -- -- -- 121
Issuance of preferred
stock warrants in
connection with bank
term note agreement.... -- 94 -- -- -- -- -- 94
Exercise of warrants.... -- -- 753 -- -- -- -- --
Repurchase of common
stock.................. -- -- (36) (1) -- -- -- (1)
------ -------- ------ -------- -------- ------- ---- --------
Balance December 31,
1999................... 2,050 12,969 42,611 120,053 (46,179) (1,673) (6) 85,164
Net loss*............... -- -- -- -- (13,880) -- -- (13,880)
Other comprehensive loss, net
of tax:
Unrealized loss on
securities*............ -- -- -- -- -- -- (23) (23)
------ -------- ------ -------- -------- ------- ---- --------
Comprehensive Loss ..... -- -- -- -- (13,880) -- (23) (13,903)
Issuance of AtMobile
Series D preferred
stock*................. 704 17,530 -- -- -- -- -- 17,530
Issuance of common stock
in exchange for
services*.............. -- -- 2 226 -- -- -- 226
Stock option
exercises*............. -- -- 2,510 8,980 -- -- -- 8,980
Nonemployee equity-based
compensation*.......... -- -- -- 3,420 -- -- -- 3,420
Issuance of common stock
in connection with
employee stock purchase
plan*.................. -- -- 134 1,891 -- -- -- 1,891
Exercise of warrants*... -- -- 36 3 -- -- -- 3
Conversion into common
stock of AtMobile
preferred Series A, B,
C and D*............... (2,754) (30,499) 2,754 30,499 -- -- -- --
Issuance of common stock
in connection with
bCandid acquisition*... -- -- 667 65,397 -- -- -- 65,397
Amortization of deferred
compensation in
connection with stock
options*............... -- -- -- -- -- 305 -- 305
------ -------- ------ -------- -------- ------- ---- --------
Balance at June 30,
2000* ................. -- $ -- 48,714 $230,469 $(60,059) $(1,368) $(29) $169,013
====== ======== ====== ======== ======== ======= ==== ========
</TABLE>
* (Unaudited)
See accompanying notes.
F-32
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31 June 30
---------------------------- -----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss.................... $(12,314) $(14,759) $(15,718) $(7,558) $(13,881)
Adjustments to reconcile net
loss to net cash provided
by (used in) operating
activities:
Depreciation and
amortization............. 1,227 2,103 2,876 918 3,390
Noncash stock-based
expense.................. -- 6 154 -- --
Accrued interest on
convertible notes........ -- -- -- -- 26
Loss on disposal of
assets................... -- -- 10 -- --
Deferred compensation..... -- 48 544 240 304
Non-employee equity-based
compensation............. -- -- -- -- 3,646
Write-off of in-process
R&D...................... -- -- 3,210 -- 2,000
Provision for doubtful
accounts................. 123 554 790 308 375
Changes in operating assets
and liabilities:
Accounts receivable....... (1,380) (7,259) (14,469) (1,957) (7,267)
Prepaid expenses and other
current assets........... (44) 60 (1,409) (408) (917)
Deferred income taxes..... 258 -- -- -- --
Accounts payable.......... 297 995 2,092 1,833 1,016
Deferred maintenance
revenue.................. -- 58 (51) -- --
Accrued payroll and
related liabilities...... 291 759 2,107 201 (69)
Other accrued
liabilities.............. 1,249 506 175 (495) 286
Deferred revenue.......... 3,452 182 6,740 459 9,062
Other..................... -- 23 -- -- --
-------- -------- -------- ------- --------
Net cash provided by (used in)
operating activities......... (6,841) (16,724) (12,949) (6,459) (2,029)
-------- -------- -------- ------- --------
Investing activities
Acquisition of property and
equipment.................. (2,985) (1,590) (3,144) (613) (5,745)
Acquisition of Telarc,
Inc........................ -- -- (1,601) -- --
Purchase of marketable
securities................. (892) (504) (30,752) (2,971) (70,905)
Maturities of marketable
securities................. -- 900 5,500 496 50,924
Cash from bCandid
acquisition.................. -- -- -- -- 547
Increase (decrease) in other
assets....................... (204) 54 (190) (8) (204)
-------- -------- -------- ------- --------
Net cash provided by (used in)
investing activities......... $ (4,081) $ (1,140) $(30,187) $(3,096) $(25,383)
-------- -------- -------- ------- --------
</TABLE>
(continued)
F-33
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
<TABLE>
<CAPTION>
Six months
Year ended December 31 ended June 30
------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Financing activities
Proceeds from line of credit.... $ -- $ 150 $ -- $ -- $ --
Proceeds from long-term debt.... 1,363 3,359 7,613 4,763 --
Repayments of long-term debt.... (20) (467) (1,330) (2,674) (728)
Proceeds (repayments) of note
payable to bank, net............. 4,388 3,007 (7,635) (7,089) (698)
Proceeds from issuance of
preferred stock, net............. 4,735 -- 3,279 -- --
Proceeds from issuance of common
stock, net....................... 35 36 69,762 67,992 --
Costs related to issuance of
common stock..................... -- -- (1,914) -- --
Issuance of convertible preferred
stock............................ 7,398 6,848 10,000 10,000 --
Proceeds from issuance of AtMobile
preferred stock, net............. -- -- -- -- 12,504
Issuance of common stock related
to ESPP.......................... -- -- 968 -- 1,891
Exercise of stock options......... 288 760 3,306 2,187 8,980
------- ------- ------- ------- -------
Net cash provided by financing
activities....................... 18,187 13,693 84,049 75,179 21,949
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents............. 7,265 (4,171) 40,913 65,624 (5,463)
Cash and cash equivalents at
beginning of period.............. 3,168 10,433 6,262 6,262 47,175
------- ------- ------- ------- -------
Cash and cash equivalents at end
of period........................ $10,433 $ 6,262 $47,175 $71,886 $41,712
======= ======= ======= ======= =======
Supplemental cash flow information
Interest and income taxes paid
during the year:
Income taxes paid............... $ 1 $ 383 $ 87 $ 26 $ 349
------- ------- ------- ------- -------
Interest paid................... $ 61 $ 775 $ 839 $ 599 $ 418
------- ------- ------- ------- -------
Noncash transactions:
Conversion of notes payable and
accrued interest into preferred
stock.......................... $ 410 $ -- $ 4,426 $ -- $ 5,026
------- ------- ------- ------- -------
Property and equipment acquired
pursuant to capital leases..... $ -- $ 1,269 $ -- $ -- $ --
------- ------- ------- ------- -------
Warrants issued in connection
with borrowing agreements...... $ -- $ 25 $ 96 $ -- $ --
------- ------- ------- ------- -------
Warrant issued for placement fee
in connection with Series D
preferred stock financing...... $ -- $ -- $ -- $ -- $ 46
------- ------- ------- ------- -------
</TABLE>
See accompanying notes.
F-34
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business
Software.com (the Company) develops, markets, sells, and supports a variety
of Internet infrastructure applications to service providers worldwide,
including telecommunications companies, Internet Service Providers,
application service providers, cable-based Internet access providers, wireless
telephony carriers, Internet portals, competitive local exchange carriers, and
Internet service wholesalers. Service providers use these products to provide
advanced messaging offerings, such as Internet mail services, to their
consumer and business customers.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
As further described in Note 11, the Company acquired AtMobile.com, Inc.
(AtMobile) on April 11, 2000. The acquisition was accounted for as a pooling
of interests. Accordingly, the financial information presented reflects the
combined financial position and operations of the Company and AtMobile for all
dates and periods presented.
Interim Financial Statements
The accompanying balance sheet as of June 30, 2000, and the statements of
operations and cash flows for the six months ended June 30, 1999 and 2000, and
the statement of stockholders' equity for the six months ended June 30, 2000,
are unaudited. Certain information and footnote disclosures normally included
in the financial statements have been condensed or omitted. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the financial position, results of operations, and cash flows for the
interim periods. The results of operation for the six months ended June 30,
2000, are not necessarily indicative of operating results to be expected for
the full fiscal year.
Cash and Cash Equivalents
The Company considers cash equivalents to be only those investments, which
are highly liquid, readily convertible to cash and which mature within three
months from date of purchase. Cash and cash equivalents include commercial
paper, money market accounts, debt securities and auction rate securities at
December 31, 1999 and 1998.
Marketable Securities
Marketable securities consist of investments in commercial paper, government
securities, corporate notes and certificates of deposit that have maturities
greater than three months but less than one year from date of purchase.
The Company considers its investment portfolio available-for-sale as defined
in Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," issued by the Financial
Accounting Standards Board (FASB). Accordingly, these investments are recorded
at fair value. Unrealized losses for the year ended December 31, 1999, were
$6,000 and have been recorded as comprehensive
F-35
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
income (loss). There were no material unrealized gains or losses nor any
material differences between the estimated fair values and costs of securities
at December 31, 1997 and 1998. There were no material realized gains and
losses for the years ended December 31, 1997, 1998 and 1999. The cost of
securities sold is based on the specific identification method.
The fair value of available-for-sale marketable securities by type of
security are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
------------
1998 1999
---- -------
<S> <C> <C>
Type of security:
Commercial paper......................................... $496 $15,842
U.S. Treasury securities and obligations of U.S.
government agencies..................................... -- 5,927
Corporate notes.......................................... -- 2,979
Other interest-bearing securities........................ -- 1,000
---- -------
$496 $25,748
==== =======
</TABLE>
Concentration of Credit Risk, Other Risks and Significant Customers
The Company's business is extremely competitive and is characterized by
rapid technology change, new product development and product obsolescence, and
evolving industry standards.
The Company grants credit terms in the normal course of business to its
customers. The Company does not require collateral; however, it does perform
periodic credit evaluations and analysis of the amounts due from its
customers. Credit losses have been within management's expectations and
potential uncollectible accounts have been provided for in the financial
statements.
There were no customers that accounted for greater than 10% of total
revenues for the year ended December 31, 1999. Revenues from the Company's two
largest customers in each of the years ended December 31, 1997 and 1998,
accounted for and 17% and 11% and 12% and 9% of total revenues, respectively.
At December 31, 1998 and 1999, accounts receivable from one and two customers,
respectively, was 25% and 16% of total accounts receivable.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense as incurred. Expenditures for
additions and major improvements are capitalized.
Depreciation and amortization are computed on a straight-line basis over the
following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and
software............... 3 to 5 years
Furniture and fixtures.. 7 years
Leasehold improvements.. Lesser of estimated useful life or life of lease
</TABLE>
Goodwill and Intangible Assets
Goodwill recognized in business combinations accounted for as a purchase is
being amortized on a straight-line basis over five years. Goodwill
amortization expense was $100,000 for the year ended December 31, 1999.
F-36
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
Intangible assets resulting from business combinations consists of
core/alternative use technology, a covenant not to compete and assembled
workforce, and are being amortized on a straight-line basis over three to five
years. Patent and trademark costs are amortized using the straight-line method
over periods ranging from 5 to 15 years. Intangible asset amortization expense
was $1,000, $2,000 and $231,000 for the years ended December 31, 1997, 1998
and 1999, respectively.
Long-Lived Assets
The Company assesses on an ongoing basis the recoverability of long-lived
assets, including goodwill and other intangible assets, based on estimates of
future undiscounted cash flows for the applicable business compared to net
book value. If the future undiscounted cash flows estimate were less than net
book value, net book value would then be reduced to fair value based on an
estimate of discounted cash flows. The Company also evaluates the amortization
periods of all assets to determine whether events or circumstances warrant
revised estimates of useful lives.
Income Taxes
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," issued by the FASB (see Note 6). Under this method, deferred tax
liabilities and assets are recognized for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities. A valuation allowance is recorded on the Company's
deferred tax assets until such time that it is more likely than not that the
deferred tax assets will be realized.
Accounting for Stock-Based Compensation
Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of expense when the option price is less than the fair value of
the stock at the date of grant.
The Company generally awards options for a fixed number of shares at an
option price equal to the fair value at the date of grant. The Company has
adopted the disclosure-only provisions of FASB's Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).
The Company accounts for stock issued to nonemployees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force consensus in
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to other
than Employees for Acquiring, or in Conjunction with Selling Goods or
Services."
Other Comprehensive Income (Loss)
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130). Under FAS 130, the
Company is required to report unrealized gains (losses) on its marketable
securities and any other foreign currency translation adjustments within other
comprehensive income (loss). In 1999, other comprehensive loss consists of
unrealized gains (losses) on marketable securities.
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), which was amended by SOP 98-4
and SOP 98-9, "Software Revenue Recognition." These
F-37
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
statements provide guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. This guidance is
effective for the Company's transactions entered into subsequent to January 1,
1998. The application of certain provisions was deferred until fiscal years
beginning on or after March 15, 1999. Final adoption of these provisions is
not expected to have a material impact on the Company's financial condition or
results of operation.
Revenue from Software Licenses. The Company recognizes revenue from sales of
software upon delivery of a license key to the customer, provided that
persuasive evidence of an arrangement exists, the license fee is fixed and
determinable, and collection of the fee is considered probable. If the license
agreement has a multi-year term, as is typical with an InterMail Mix contract,
or the license fees are calculated based on variable measures, such as the
number of mailboxes in use, the Company recognizes revenue as the customer
activates mailboxes on their system. When the Company enters into a contract
where a customer may activate up to a specified number of mailboxes and
support and maintenance fees are based on that specified number, the Company
recognizes revenue evenly and ratably as payments become due over the term of
the arrangement. When the Company enters into license agreements under which
revenues are based on a percentage of our customer's revenues, the Company
recognizes revenue as earned and reported by the customer. To date, revenues
and expenses related to these revenue-sharing arrangements have not been
significant. Revenues from sales to significant resellers are not recognized
until the end user has been identified and the license key is issued.
Revenue from Services. Support and maintenance contracts generally call for
the Company to provide technical support and software updates and upgrades to
customers. Support and maintenance revenue is recognized ratably over the
support or maintenance period.
The Company recognizes revenue, contract costs, and profit on management and
consulting contracts in accordance with Statement of Position No. 81-1 (SOP
No. 81-1), "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Consulting services revenues are primarily related
to deployment services performed on a time-and-materials basis under separate
service arrangements. Revenue, contact costs, and profit on contracts on
fixed-fee contracts are recognized on the percentage-of-completion method
(determined based on the cost-to-cost method). Revenue, contract costs, and
profits on time-and-material contracts are recorded based upon direct labor
hours at fixed hourly rates and cost of materials as incurred. When the
current estimates of total contract revenue and contract cost indicate a loss,
a provision for the entire loss on the contract is recorded. Revisions to
contract estimates are recorded as the estimating factors are refined. The
effect of these revisions is included in income in the period the revisions
are made.
When software and services are billed prior to the time the related revenue
is recognized under the foregoing policy, deferred revenue is recorded. There
were no unbilled accounts receivable at December 31, 1998 and 1999.
Research and Development
Pursuant to Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
development costs related to software products are expensed as incurred until
the "technological feasibility" of the product has been established. Because
of the relatively short time period between "technological feasibility" and
product release, and the insignificant amount of costs incurred during such
period, no software development costs have been capitalized.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
totaled $553,000, $499,000 and $732,000 for 1997, 1998 and 1999, respectively.
F-38
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per share has been computed using the weighted-average number of
shares of common stock outstanding during the period.
For the year ended December 31, 1999, options to purchase 239,400 shares
with exercise prices greater than the average market prices of common stock
were outstanding.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period. The Company has excluded all redeemable
convertible preferred stock, convertible preferred stock, warrants and
outstanding stock options from the calculation of diluted loss per share
because all such securities are antidilutive for all periods presented.
Segment Information
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers, presented in Notes 1 and 9. Based on the
provisions of FAS 131 and the manner in which management analyzes its
business, the Company has determined that it does not have separately
reportable operating segments.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, marketable securities, accounts receivable and accounts payable
approximate their fair values due to the short-term nature of these financial
instruments. The carrying values of the note payable to bank and the long-term
debt outstanding as of December 31, 1998, approximate their fair values. The
fair values of these instruments were estimated based on current interest
rates available to the Company for debt instruments with similar terms,
degrees of risk and remaining maturities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ materially from those estimates.
Reclassifications
Certain prior year amounts were reclassified to conform with current year
financial statement presentation.
2. Acquisitions
In April 1999, the Company completed its acquisition of Mobility.Net, Inc.
(Mobility.Net), which offers products for Web messaging using a Java-based
technology platform that complement the Company's product offerings. The
Company issued 1,579,000 shares of its common stock in exchange for all of the
outstanding shares of Mobility.Net. The acquisition was accounted for as a
pooling of interests. Accordingly, the financial
F-39
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
information presented reflects the combined financial position and operations
of the Company and Mobility.Net for all dates and periods presented.
In October 1999, the Company completed its acquisition of Telarc, Inc.
(Telarc), which currently provides carrier-scale Short Messaging Service (SMS)
technologies that complement the Company's product offerings. In exchange for
all of the issued and outstanding stock of Telarc, the Company issued 212,000
shares of the Company's common stock with a value of $10.0 million and $1.5
million in cash. The acquisition of Telarc was accounted for as a purchase
and, accordingly, the acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition. Telarc's operating results
have been included in the Company's consolidated financial statements results
from the acquisition date of October 20, 1999. The purchase price plus costs
directly attributable to the completion of the acquisition of approximately
$101,000 have been allocated to the assets and liabilities acquired based on
their approximate fair value as determined through an independent appraisal
using proven valuation procedures and techniques. The purchase price of $11.6
million was allocated as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets.................................................. $ 263
Developed technology............................................. 5,700
Assembled workforce and other intangibles........................ 125
In-process research and development.............................. 3,210
Goodwill......................................................... 2,303
-------
Total purchase price........................................... $11,601
=======
</TABLE>
The appraisal of the acquired business included $3.2 million of in-process
research and development, which was primarily related to three products under
development. The valuation represents the five-year after tax cash flow of the
in-process technology using a discount rate of 40%. This acquired technology
had not yet reached technological feasibility and had no future alternative
uses. Accordingly, it was written off at the time of the acquisition. Goodwill
and identified intangibles are being amortized on a straight-line basis over
their estimated economic useful lives of three to five years. The pro-forma
effect of the Telarc acquisition as if it has occurred on January 1, 1998 and
1999, is not significant to the financial statements presented herein.
In addition, in conjunction with the Company's acquisition of Telarc, the
Company entered into an employment agreement with an executive of Telarc which
the Company will pay a total of $3.5 million in cash to be paid out and
expensed in equal quarterly installments over ten quarters beginning March
2000.
3. Property and Equipment
The major components of property and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31
--------------
1998 1999
------ -------
<S> <C> <C>
Computer equipment and software........................... $5,746 $ 8,004
Furniture and fixtures.................................... 1,217 1,811
Leasehold improvements.................................... 1,586 1,865
------ -------
8,549 11,680
Less accumulated depreciation............................. 3,836 6,378
------ -------
$4,713 $ 5,302
====== =======
</TABLE>
F-40
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
4. Note Payable to Bank, Long-Term Debt and Credit Facilities
The Company had an arrangement with a financial institution which provided
for a total line of credit not to exceed the lesser of $15.0 million (of which
the Company could draw down up to $2.5 million as an equipment acquisition
loan), or an amount based on certain receivables collection criteria (the
Software.com. credit facility). As of December 31, 1999, the Company had
repaid all borrowings using proceeds of the initial public offering of its
common stock in June 1999, and has terminated this arrangement. At December
31, 1998, borrowings under the line of credit totaled $7,395,000. The interest
rate for borrowing under the line of credit was prime rate plus 1.5% (9.25% at
December 31, 1998).
The Company also had a $2 million revolving line of credit with a bank (the
AtMobile line of credit). Borrowings outstanding under this line of credit
were $150,000 at December 31, 1998. The line of credit was secured by
substantially all accounts receivable. The line of credit was refinanced on
April 30, 1999, with a term loan from the bank.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31
-------------- June 30
1998 1999 2000
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Term loan from bank, interest at prime plus 2%
(10.5% at December 31, 1999), 36 monthly
principal payments of $62,500 beginning on May
5, 1999........................................ $2,000 $1,750 --
Convertible note bearing interest at the rate of
5.06% per annum, converted on June 15, 1999.... 735 -- --
Convertible note bearing interest at the rate of
5.06% per annum, converted on June 15, 1999.... 711 -- --
Equipment acquisition loan from bank, interest
at prime rate plus 1.75% (9.5% at December 31,
1998).......................................... 340 -- --
Convertible note bearing interest at the rate of
5.06% per annum, converted on June 15, 1999.... 54 -- --
Convertible note bearing interest at 5.88%,
converted on February 18, 2000................. -- 4,500 --
Term loan from bank, interest at prime plus
1.50%, refinanced on April 30, 1999............ 212 -- --
------ ------ ---
4,052 6,250 --
Less current portion............................ (937) (750) --
------ ------ ---
$3,115 $5,500 --
====== ====== ===
</TABLE>
In connection with a renegotiation of the Software.com credit facility in
1998, the Company issued a warrant to the financial institution to purchase
68,000 shares of common stock of the Company at an exercise price of $5.15 per
share. The fair value of the warrants was determined to be approximately
$94,000, using the Black-Scholes option pricing model with an expected
volatility factor of 35%, risk-free interest rate of 6%, no dividend yield,
and a 5 year life, and was amortized as interest expense over the term of the
credit facility agreement.
F-41
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
In January 2000, the Company issued additional convertible promissory notes
for bridge financing aggregating $500,000. These notes bear interest at the
rate of 5.88%. On February 18, 2000, these promissory notes and the MCP Global
promissory note of $4,500,000 with accrued interest of $26,000 were converted
into 187,498 shares of AtMobile Series D preferred stock (see Note 5).
In August 1999, the Company obtained an $800,000 letter of credit with a
bank to secure a long-term facilities operating lease.
Aggregate maturities on the term loan as of December 31, 1999, are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31:
------------------------
<S> <C>
2000............................................................. $ 750
2001............................................................. 750
2002............................................................. 250
------
$1,750
======
</TABLE>
5. Stockholders' Equity (Deficit)
Preferred Stock
The following table summarizes the historical issuances of convertible
preferred stock by Software.com (the Software.com preferred stock).
<TABLE>
<CAPTION>
Net
Date Issued Series Shares Proceeds
----------- --------------- --------- -----------
<S> <C> <C> <C> <C>
October 1996.......................... A (Redeemable) 1,587,302 $ 4,960,000
February 1997......................... B (Redeemable) 1,789,279 7,398,000
August 1998........................... C 1,329,781 6,848,000
April 1999............................ D 1,626,016 10,000,000
--------- -----------
6,332,378 $29,206,000
========= ===========
</TABLE>
Upon completion of the Company's initial public offering on June 29, 1999,
all series of Software.com preferred stock automatically converted into common
stock at a 1:1 ratio.
In connection with the acquisition of AtMobile in April of 2000 (see Note
11), all shares of preferred stock previously issued by AtMobile were
converted into common shares of Software.com upon closing of the transaction.
The following table summarizes the historical issuances of convertible
preferred stock by AtMobile (the AtMobile preferred stock). The amounts of
preferred shares issued have been adjusted to give effect to the conversion
ratio used to effect the business combination.
<TABLE>
<CAPTION>
Conversion of Notes
Aggregate Net Payable and
Date Issued Series Shares Proceeds Accrued Interest
----------- ------ --------- ----------- -------------------
<S> <C> <C> <C> <C>
September 1997............. A 734,037 $ 5,145,000 $ --
June 1999.................. B 579,221 -- 4,076,000
August and November 1999... C 666,290 3,295,000 --
August 1999................ C 70,241 -- 350,000
February 2000.............. D 703,326 12,504,000 5,026,000
--------- ----------- ----------
2,753,115 $20,944,000 $9,452,000
========= =========== ==========
</TABLE>
F-42
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
Each share of AtMobile preferred stock was convertible into one share of
AtMobile common stock.
During June 1999, in connection with the issuance of the Series B AtMobile
preferred stock, the board of directors of AtMobile declared a 2.19769223-to-1
stock split on the Series A AtMobile preferred stock. The effect of the split
was to increase the number of authorized, issued and outstanding shares of
Series A AtMobile preferred stock. The number of shares issued and outstanding
has been retroactively adjusted to reflect these changes.
Prior to the conversion of all outstanding Software.com preferred stock into
common stock upon completion of the Company's initial public offering, the
Series A Software.com Preferred Stock redemption price included a redemption
premium of 10% per year compounded annually. Accordingly, the initial fair
value of the Software.com Preferred Stock A was increased by periodic
accretions, using the interest method, so that the carrying amount would equal
the mandatory redemption amount at the redemption date. For the years ended
December 31, 1997, 1998 and 1999, such periodic accretions totaled $730,000,
$825,000 and $403,000, respectively, and are reflected as charges against the
Company's accumulated deficit for each year.
Warrants and Options
In connection with the issuance of the Software.com Series A Preferred
stock, the Company also issued a warrant to purchase 529,101 shares of common
stock of the Company at an exercise price of $5.00 per share and a warrant to
purchase 279,841 shares of common stock at an exercise price of $7.00 per
share (the Common Stock Purchase Warrants). The warrants were exercisable for
a period of five years from the date of issuance. At issuance, the fair value
of the warrants, approximately $430,000, was recorded as common stock on the
Company's balance sheet. The fair value of the warrants was determined using
the Black-Scholes option pricing model using an expected volatility factor of
30%, risk free interest rate of 6%, no dividend yield, and a 5-year life. In
November 1999, the warrant holders exercised the warrants, which resulted in
the issuance of 753,379 shares of common stock.
In July 1998, the Company executed an agreement with the holders of the
Software.com Preferred Stock A (the Waiver of Redemption Rights Agreement)
whereby the holders of such shares agreed to extend the redemption date of the
Series A Preferred Stock for a period of 15 months to January 3, 2000. In
consideration of the Waiver of Redemption Rights Agreement, the Company
executed an amendment to the Common Stock Purchase warrants, which reduced the
exercise price of such warrants to $4.15 per share. The exercise period of the
warrants remained unchanged. As a result of the change in the exercise price,
the fair value of the warrants increased by approximately $294,000, which was
reclassified from redeemable convertible preferred stock into common stock.
During 1998, the Company issued warrants to purchase shares of AtMobile
Series A preferred stock in connection with a capital lease financing
arrangement. In accordance with the warrant agreement, the number of shares
originally issuable and the related exercise price were adjusted based on a
subsequent AtMobile Series B preferred financing in June 1999 whereby the
warrants were for 6,395 shares of AtMobile Series A preferred stock with an
exercise price of $7.04 per share. The warrants were exercised in connection
with the Software.com and AtMobile business combination (see Note 11) and the
AtMobile preferred shares were converted into 6,395 shares of Software.com
common stock. The Company estimated the value of the warrants to be
approximately $3.95 per share, based on a Black-Scholes valuation model, and
recorded corresponding deferred debt issuance costs which are being amortized
over the life of the related capital lease.
F-43
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
In July 1999, in connection with a bank financing agreement, the Company
issued warrants to a bank to purchase up to 20,370 shares of AtMobile Series B
preferred stock at a per share purchase price of $7.04. The warrants were
exercised in connection with the Software.com and AtMobile business
combination (see Note 11) and the AtMobile preferred shares were converted
into 20,370 shares of Software.com common stock. The Company estimated the
value of the warrants to be approximately $4.64 per share, based on a Black-
Scholes valuation model, and recorded corresponding deferred debt issuance
costs which are being amortized over the term of the related financing
agreement.
Amortization of debt issuance cost was $6,250, $29,331, and $13,276 in 1998,
1999, and for the six months ended June 30, 2000, respectively.
As part of the placement fee associated with the AtMobile Series D capital
placement and the bridge financing in March and February 2000, the Company
issued a warrant to purchase 6,640 shares of AtMobile Series D Preferred Stock
at $26.80 per share. The warrant expires in 2005. The Company estimated the
value to be approximately $6.87 per share, based on the Black-Scholes
valuation model.
The AtMobile Preferred Series A, Series B, and Series D warrants were valued
using the Black-Scholes valuation model based upon the exercise prices
described above, a risk free rate of 6%, a dividend yield of 0%, volatility of
.6 and an expected life of 1-7 years.
In June 1999, AtMobile entered into a web development, hosting, maintenance,
and licensing agreement with a contractor. As part of the agreement, AtMobile
issued warrants to the contractor to purchase 75,944 shares of common stock
with an exercise price of $0.17 per share in exchange for these services. The
warrants expire June 2009. The warrants become exercisable based on the
achievement of certain milestones or over the period for which the services
are performed through June 2002, as prescribed in the agreement. During both
1999 and the six months ended June 30, 2000, warrants for 20,938 shares became
exercisable for the services performed by the contractor. The value of the
services performed was determined based upon the underlying value of the
exercisable warrants. During 1999 and the six months ended June 30, 2000, the
Company recorded stock based compensation-acquisition related costs related to
these services of $100,732 and $2,372,593, respectively. If and when the
warrants become exercisable into additional shares, the Company will record
the cost for the services based on the then fair value of the exercisable
portion of the related warrant.
In July 1999, the Company obtained bridge financing in the form of a
convertible promissory note of $350,000 from a stockholder. In connection with
that financing the Company issued a warrant to the stockholder to purchase
4,974 shares of common stock at $0.69 per share. The warrant expires in 2004.
The Company estimated the value of the warrant to be approximately $0.34 per
share and recorded corresponding interest expense of $1,710 related to the
warrant in 1999.
In November 1999, the Company entered into a development agreement with a
contractor. As part of the agreement, the Company issued warrants to the
contractor to purchase 12,466 shares of common stock, with an exercise price
of $0.69 per share in exchange for these services. The warrants expire
November 2004. The warrants become exercisable once certain performance
milestones are achieved, as prescribed in the agreement. During 1999 and the
three months ended March 31, 2000, warrants for 4,155 and 6,233 shares,
respectively, became exercisable for the services performed by the contractor.
The remaining unexercisable warrants as of March 31, 2000 were cancelled as
the Company elected, as provided for in the agreement, not to pursue the
attainment of the remaining milestones. The value of the services performed
was based upon the underlying value of the exercisable warrants. During 1999
and the six months ended June 30, 2000, the Company recorded cost related to
these services of $18,563 and $585,464, respectively.
F-44
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
The Company issued options for 4,656 shares at $0.69 per share of common
stock to consultants during 1999, which were fully vested at the date of
grant. During 1999, the Company recognized compensation-related expense of
$2,667 related to these equity awards.
The common stock warrants and options were valued using the Black-Scholes
valuation model based upon the exercise prices described above, a risk free
rate of 6%, a dividend yield of 0%, volatility of .6, and an expected life of
2 to 10 years.
In March 2000, the Company issued 2,328 shares of common stock in connection
with a professional service agreement. The Company estimated the value of the
common stock at $97.08 per share. In connection with the issuance of the
stock, the Company recognized costs of $226,000 for the value of the services.
Common Stock Restriction Agreements
In 1997, AtMobile concluded an equity financing through a private offering
of 453,960 shares of common stock generating net proceeds of $20,800. These
common stock issuances are subject to common stock restriction agreements,
whereby if a shareholder ceases to be an employee of the Company, the Company
has the right to repurchase any remaining shares of restricted common stock at
the original issuance price paid by the shareholder. Generally, the
restrictions lapse ratably over five years. The Company repurchased shares of
two such employees who terminated their employment with the Company during
1998 and 1999. The number of shares subject to repurchase was 129,586 as of
December 31, 1999.
Common Stock Reserved
The following table summarizes the number of common shares reserved for
issuance as of December 31, 1999. All amounts have been adjusted as necessary
to give effect to the conversion ratio used to effect the business combination
(see Note 11).
<TABLE>
<S> <C>
Conversion of AtMobile preferred stock............................ 2,050,000
AtMobile stock option plan........................................ 402,000
Common stock warrants and non plan options........................ 1,118,000
AtMobile preferred stock warrants................................. 27,000
Software.com 1995 stock option plan............................... 8,011,000
----------
11,608,000
==========
</TABLE>
All AtMobile preferred stock warrants reflected above were exercised for
AtMobile preferred stock and concurrently all AtMobile preferred shares were
converted into common shares of Software.com in connection with the
acquisition of AtMobile by Software.com in April 2000 (see Note 11).
Authorization to Issue Common Stock
In June 1999, the Company's board of directors increased the number of
authorized common shares from 50,000,000 to 150,000,000.
F-45
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
6. Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................. $-- $-- $--
State................... 1 1 1
Foreign................. -- 445 211
---- ---- ----
1 446 212
Deferred................ -- -- --
---- ---- ----
$ 1 $446 $212
==== ==== ====
The provision for foreign income taxes in 1998 and 1999 relates primarily to
foreign withholding and foreign income taxes.
A reconciliation of the statutory federal income tax rate to the effective
tax rate, as a percentage of loss before income tax, is as follows:
<CAPTION>
Year ended
December 31
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory federal income
tax (benefit) rate....... (34)% (34)% (34)%
State income tax
benefits............... (4) (2) --
Research and development
credits.................. (2) (6) --
Non qualified stock
options................ -- (7) --
Deferred compensation... -- -- 2
Foreign taxes........... -- 7 2
In process research and
development.............. -- -- 10
Changes in valuation
allowance................ 41 43 19
Non deductible
expenses............... -- -- 2
Other................... (1) 2 --
---- ---- ----
-- % 3% 1%
==== ==== ====
</TABLE>
F-46
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
The components of the Company's deferred tax assets and liabilities as of
December 31, 1998 and 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 8,669 $ 14,892
Tax credit carryforwards............................... 996 1,339
Deferred revenue....................................... 1,232 3,947
Accruals and reserves.................................. 341 1,070
-------- --------
Total deferred tax assets............................ 11,238 21,248
Less valuation allowance............................. (11,238) (18,816)
-------- --------
Net deferred tax assets.............................. -- 2,432
Deferred tax liabilities:
Basis difference in assets............................... -- (2,432)
-------- --------
Net deferred taxes................................... $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
At December 31, 1999, the Company had net operating loss carryforwards
available to reduce future federal and state income of $40.9 million and $11.1
million, respectively, which expire from 2011 to 2019 for federal and 2002 to
2004 for state.
The Company has federal and state research and development credits of
approximately $861,000 and $188,000, respectively, expiring in 2011 to 2014,
which may be used to offset future tax liabilities. The Company also has
foreign tax credits of approximately $484,000, which will expire in the years
2003 to 2004.
Under Section 382 of the Internal Revenue Code, the utilization of the net
operating loss and tax credit carryforwards (including those related to the
operations of AtMobile) may be limited based on changes in the percentage of
ownership of the Company.
Included in the valuation allowance balance is $5.8 million related to the
exercise of stock options which is not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation
allowance relating to this amount will be recorded in equity and not reflected
as an income tax benefit in the statement of operations.
No provision has been made for federal, state, or additional foreign income
taxes related to approximately $506,000 of undistributed earnings of foreign
subsidiaries, which have been or are intended to be permanently reinvested.
7. Commitments and Contingencies
The Company leases computer equipment, computer software, and office
equipment under capital lease agreements expiring in 2002. The Company also
leases its office space and other equipment under noncancelable
F-47
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
operating leases that expire at various dates through 2004. Future minimum
lease payments under these leases as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
2000....................................................... $ 466 $1,408
2001....................................................... 259 1,056
2002....................................................... 1 108
2003....................................................... -- 73
2004....................................................... -- 43
----- ------
Total.................................................... $ 726 $2,688
Less amount representing interest........................ (37)
-----
Net present value of minimum lease payments.............. 689
Less current portion..................................... (433)
-----
$ 256
</TABLE>
Rent expense totaled $988,000, $1,607,000 and $2,403,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
The Company leases one of its facilities from a related party (see Note 10).
The lease expires in February 2002.
The Company was involved in a contract dispute with a third-party technology
partner under a 1996 licensing agreement. The dispute related to a minimum
royalty obligation of $1,000,000 purportedly owed by the Company to the third
party. In 1997, the Company accrued $1,000,000 for its potential exposure
under the claim. In February 1999, the parties entered into an agreement to
settle all outstanding claims. The Company paid the third party $400,000, and
as a result the related accrual was reduced to $600,000 at December 31, 1998,
to reflect the complete resolution of this matter.
8. Employee Stock Option, Stock Purchase and Defined Contribution Plans
Employee Stock Option Plans
In October 1995, the Company adopted a stock option plan (the 1995 Plan)
that provides for the issuance of incentive and nonqualified stock options.
Options under the 1995 Plan are granted for a term of five and ten years at an
exercise price equal to the fair market value of the shares at the date of
grant, as determined by the board of directors. The options generally vest
over a period of four years at 25% per year. The 1995 Plan authorizes a total
of up to 10,500,000 shares of Common Stock for issuances as either incentive
stock or nonqualified options. At December 31, 1999, 362,000 shares remain
available for grant under this plan.
In addition to the options granted under the 1995 Plan, the Company has
granted options outside of the 1995 Plan to purchase an aggregate of 1,074,000
shares of common stock. These options contain the same vesting provisions as
those granted under the 1995 Plan except that an option to purchase 250,000
shares is subject to accelerated vesting in certain circumstances. At December
31, 1999, 38,000 shares remained authorized and available for grant.
F-48
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
Subsequent to year end, in January 2000, the Company adopted a stock option
plan (the 2000 Plan) that provides for the issuance of nonqualified stock
options. Options under the 2000 Plan are granted for a term of ten years at an
exercise price equal to the fair market value of the shares at the date of
grant, as determined by the board of directors. The options generally vest
over a period of four years at 25% per year. The 2000 Plan authorizes a total
of up to 750,000 shares of common stock for issuances as nonqualified options.
The Amended and Restated AtMobile 1997 Stock Option Plan (the AtMobile Plan)
provided for the granting of nonqualified and incentive stock options to
officers, directors, employees, and consultants.
Stock options granted under the AtMobile Plan typically vest over a four-
year period and expire ten years from the date of grant. Vested incentive
stock options are exercisable during continued employment or generally within
90 days of terminating employment. Vested nonqualified stock options are
exercisable until expiration. All stock options issued and outstanding under
the AtMobile Plan were converted into Software.com common stock options in
connection with the business combination (see Note 11) using the exchange
ratio used to effect the combination. All disclosures related to stock options
issued under the AtMobile Plan have been adjusted to give effect to the
conversion ratio.
In October and December 1999, the Company issued stock options under the
AtMobile Plan to consultants to acquire 13,433 shares of common stock at an
exercise price of $0.69 per share, which expire in December 2009. Of these
options, 1,793 shares were vested on the date of grant. The remaining 11,640
shares vest over four years. The Company recognized stock-based compensation
expense of $924 and $462,000 related to these stock options in 1999, and the
six months ended June 30, 2000, respectively.
A summary of the stock option activity is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Exercise Price
-----------------------
Weighted
Shares Low High Average
------ ------ ------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996............ 5,016 $ 1.00 $ 3.35 $ 1.56
Granted................................... 2,395 1.55 3.65 3.58
Exercised................................. (273) 1.00 3.35 1.06
Canceled.................................. (1,567) 1.00 3.65 1.00
------ ------ ------- ------
Outstanding at December 31, 1997............ 5,571 1.00 3.65 2.61
Granted................................... 3,883 1.55 3.65 3.58
Exercised................................. (618) 1.00 3.65 1.23
Canceled.................................. (1,192) 1.00 3.65 2.99
------ ------ ------- ------
Outstanding at December 31, 1998............ 7,644 1.00 3.65 3.15
Granted................................... 3,575 0.63 96.50 14.85
Exercised................................. (1,204) 0.63 11.00 2.75
Canceled.................................. (607) 0.63 11.00 3.49
------ ------ ------- ------
Outstanding at December 31, 1999............ 9,408 0.63 96.50 7.63
Granted (unaudited)....................... 2,461 24.15 128.50 75.02
Exercised (unaudited)..................... (2,510) 0.63 42.86 3.52
Canceled (unaudited)...................... (146) .69 114.12 54.18
------ ------ ------- ------
Outstanding at June 30, 2000 (unaudited).... 9,213 $ .63 $128.50 $26.39
====== ====== ======= ======
</TABLE>
F-49
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
<TABLE>
<CAPTION>
Options Outstanding at December Options Exercisable
31, 1999 at December 31, 1999
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Shares Contractual Exercise Shares Exercise
Exercise Price Range Outstanding Life Price Exercisable Price
-------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.63--$1.54......... 1,426 3.58 $ 1.15 941 $ 1.21
$ 3.00--$3.65......... 5,001 4.15 3.62 2,273 3.59
$ 5.50--$6.15......... 1,377 5.93 5.71 65 5.50
$ 9.00--$32.13........ 1,163 9.40 12.58 112 10.88
$41.00--$96.50........ 441 9.83 65.66 1 43.62
----- ---- ------ ----- ------
9,408 5.24 $ 7.56 3,392 $ 3.22
===== ==== ====== ===== ======
</TABLE>
Prior to the Company's initial public offering in June 1999, the fair value
of each Software.com option grant was determined on the date of the grant
using the minimum value method. Subsequent to the offering, the fair value of
Software.com options was determined using the Black-Scholes method. The fair
value of each AtMobile option was determined on the date of grant using the
minimum value method. The weighted average fair value of an option granted
during 1997, 1998 and 1999 was $.64, $.64 and $7.71, respectively. Except for
the volatility assumption, which was only used under the Black-Scholes method,
the following assumptions were used for 1997, 1998 and 1999, respectively, to
perform the calculations: risk-free interest rate of 6%, 6% and 5.8%, a
weighted-average expected life of the options of 3.4, 3.3 and 4.3 years, 90%
volatility in 1999 only and no assumed dividend yield for all years.
If the Company recognized employee stock option-related compensation expense
in accordance with FAS 123 and used the minimum value method for 1997 and 1998
and the combined Black-Scholes and minimum value methods for 1999 for
determining the weighted average fair value of options granted, the Company's
pro forma net loss applicable to common stockholders would have been
$12,749,000, $16,367,000 and $20,083,000, respectively. The 1997, 1998 and
1999 pro forma basic and diluted loss per share would have been $0.46, $0.57
and $0.56.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect
on net loss for 1997, 1998 and 1999 is not representative of the pro forma
effect on net income or loss in future years because compensation expense in
future years will reflect the amortization of a larger number of stock options
granted in several succeeding years.
As of December 31, 1999, the Company's stock options had a weighted-average
remaining contractual life of 5.24 years.
In connection with the grant of certain share options to employees during
1998 and 1999, the Company recorded deferred compensation of approximately
$1,495,000 and $770,000, respectively, for the aggregate differences between
the exercise prices of options at their dates of grant and the deemed fair
value for accounting purposes of the common shares subject to such options.
Such amounts are being amortized over the vesting period of the related
options. Amortization expense recognized for the years ended December 31, 1998
and 1999, totaled $48,000 and $544,000, respectively.
Employee Stock Purchase Plan
In May 1999, the Company adopted an employee stock purchase plan (the ESPP).
A total of 1,000,000 shares of common stock have been reserved for issuance
under the ESPP. The number of common shares
F-50
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
reserved under the ESPP may be increased annually on July 1 of each year
beginning in 2000. Such increases are limited to the lesser of 500,000 shares
or 2% of the shares outstanding on that date or can be further limited by the
board of directors.
The ESPP, which is intended to qualify under Section 423 of the Internal
Revenue Code, contains four six-month purchase periods within twenty-four
month offering periods. The offering periods generally start on the first
trading day on or after May 1 and November 1 of each year. Eligible
participants may purchase common stock through payroll deductions of up to 15%
of each participant's compensation. The maximum number of shares a participant
may purchase is 10,000 shares. Amounts deducted and accumulated by the
participant are used to purchase common shares at the end of each purchase
period. The price of stock purchased under the ESPP is 85% of the lower of the
fair market value of the common stock at the beginning of the offering period
and the end of each purchase period. The ESPP will terminate in 2009.
For the year ended December 31, 1999, employees purchased 75,948 shares at
$12.75. At December 31, 1999, 924,000 shares remained available for future
issuance under the Purchase Plan.
Defined Contribution Plan
The Company maintains a defined contribution 401(k) plan under which its
employees are eligible to participate. Participants may make, within certain
limitations, voluntary contributions based upon a percentage of their
compensation. The Company may make voluntary contributions to the Plan.
Participants are fully vested in the Company's contributions after a specified
number of years of service, as defined under the plan. No Company
contributions have been made to date under the plan.
9. Geographic Information
Information regarding revenues and long-lived assets attributable to the
Company's primary geographic operating regions is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues:
United States...................................... $ 7,559 $14,492 $20,057
Europe............................................. 1,034 5,130 14,171
Asia............................................... 1,232 3,884 9,964
Canada............................................. 701 2,754 2,374
Other.............................................. 296 473 375
------- ------- -------
Total revenues................................... $10,822 $26,733 $46,941
======= ======= =======
</TABLE>
The geographic classification of revenues is based upon the location of the
customer.
<TABLE>
<CAPTION>
Year Ended
December 31
-------------
1998 1999
------ ------
<S> <C> <C>
Long-lived assets:
United States............................................... $4,626 $5,089
Europe...................................................... 53 160
Asia........................................................ 34 53
------ ------
Total long-lived assets................................... $4,713 $5,302
====== ======
</TABLE>
F-51
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
10. Related Party Transactions
The Company leases one of its facilities from a limited liability company,
which includes two members of the board of directors. The aggregate lease
commitments related to this lease totaled $418,000 at December 31, 1999. Rent
expense under this lease for the years ended December 31, 1997, 1998 and 1999,
totaled $165,000, $171,000 and $193,000, respectively.
For the years ended December 31, 1997, 1998 and 1999, revenues from
companies affiliated with AT&T Corporation, which is considered a related
party due to its involvement with AT&T Ventures, a preferred/common
stockholder, totaled approximately $2,687,000, $3,599,000 and $1,962,000,
respectively. At December 31, 1998 and 1999, accounts receivable from such
companies totaled approximately $948,000 and $532,000 respectively.
11. Acquisition of AtMobile.com, Inc.
On April 11, 2000, the Company completed its acquisition of AtMobile.
AtMobile was incorporated on August 16, 1996, as Global Mobility Systems, Inc.
During June 1999, Global Mobility Systems, Inc. changed its name to AtMobile
to reflect its shift to developing mass market Internet service applications
that integrate both current and future generations of digital wireless phones
with the Internet. The Company is an application service provider for wireless
carriers and Internet content providers in search of a technology gateway that
links and integrates Web-based content, commerce and applications with current
and future generations of wireless phones.
The acquisition was accounted for as a pooling of interests. Accordingly,
the financial information presented reflects the combined financial position
and operations of the Company and AtMobile for all dates and periods
presented. The Company issued 3,750,000 shares of its common stock in exchange
for all of the issued and outstanding common stock of AtMobile as well as in
exchange for all outstanding options and warrants to purchase AtMobile common
stock.
Separate operating results of the combined entities for the years ended
December 31, 1997, 1998 and 1999, and the three months ended March 31, 1999
and 2000, were as follows (in thousands):
<TABLE>
<CAPTION>
December 31 March 31
---------------------------- ----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software.com............... $ 10,666 $ 25,619 $ 44,638 $ 8,071 $19,544
AtMobile................... 156 1,114 2,303 271 574
-------- -------- -------- ------- -------
Combined..................... $ 10,822 $ 26,733 $ 46,941 $ 8,342 $20,118
Net loss:
Software.com............... $(11,469) $ (7,403) $(10,533) $(2,053) $ 1,609
AtMobile................... (845) (7,356) (5,185) (1,641) (4,477)
-------- -------- -------- ------- -------
Combined..................... $(12,314) $(14,759) $(15,718) $(3,694) $(2,868)
</TABLE>
Diluted net loss per share of Software.com on a historical basis without
giving effect to the acquisition of AtMobile for the years ended December 31,
1997, 1998 and 1999, and for the three months ended March 31, 1999 and 2000,
were $(.44), $(.29), $(.31), $(.08) and $.03.
F-52
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 2000 and for the six months ended
June 30, 2000 and 1999 is unaudited)
The financial position of the combined entities as of December 31, 1998 and
1999 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31
---------------- March 31
1998 1999 2000
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Total assets:
Software.com.................................. $19,059 $104,039 $119,222
AtMobile...................................... 2,689 7,853 18,661
------- -------- --------
Combined.................................... $21,748 $111,892 $137,883
Total liabilities:
Software.com.................................. $15,750 $ 18,610 $ 25,858
AtMobile...................................... 5,697 8,118 3,803
------- -------- --------
Combined.................................... $21,447 $ 26,728 $ 29,661
======= ======== ========
</TABLE>
There were no intercompany transactions between the two companies or
significant conforming accounting adjustments.
12. Initial Public Offering Registration
In June 1999, the Company completed an initial public offering, in which it
sold 5,000,000 shares of common stock at $15.00 per share, resulting in
proceeds to the Company of approximately $68.0 million, net of issuance costs
of approximately $1.9 million.
13. Subsequent Events
In June 2000, the Company acquired bCandid Corporation, a market leader in
providing carrier-class discussion server infrastructure software to service
providers worldwide. In exchange for bCandid Corporation, the Company issued
759,911 shares of its common stock at $92.12 per share. The acquisition was
accounted for as a purchase.
14. Quarterly Results of Operations (unaudited)
<TABLE>
<CAPTION>
June
1998 Quarters Ended March 31 30 September 30 December 31
------------------- -------- ------ ------------ -----------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Total revenues....................... $5,027 $6,469 $ 7,258 $ 7,979
Gross profit......................... 2,660 4,300 4,550 4,634
Net loss applicable to common
stockholders........................ 4,147 3,093 3,766 4,578
Basic and diluted loss per share..... 0.15 0.11 0.13 0.16
<CAPTION>
June
1999 Quarters Ended March 31 30 September 30 December 31
------------------- -------- ------ ------------ -----------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Total revenues....................... $8,342 $9,610 $12,711 $16,278
Gross profit......................... 5,450 5,541 8,022 11,570
Net loss applicable to common
stockholders........................ 3,904 4,051 2,854 5,312
Basic and diluted loss per share..... 0.13 0.13 0.07 0.13
</TABLE>
F-53
<PAGE>
SCHEDULE II
Software.com, Inc.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Additions Deductions
Balance at Charged to Amount Balance at
Beginning Costs and Charged to End of
of Period Expenses Reserve Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
December 31, 1997................ $ 21,000 $123,000 $ 30,000 $ 114,000
December 31, 1998................ 114,000 554,000 187,000 481,000
December 31, 1999................ 481,000 790,000 247,000 1,024,000
June 30, 2000.................... 1,024,000 375,000 272,000 1,127,000
</TABLE>
F-54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Phone.com, Inc.
In our opinion, the accompanying statement of assets acquired and
liabilities assumed and the related statement of operations and of cash flows
present fairly, in all material respects, the financial position of the WAP
business of APiON at March 31, 1999 and the results of its operations and cash
flows for the period from May 1, 1998 (inception) through March 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of APiON's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United Kingdom, which are
substantially consistent with auditing standards generally accepted in the
United States, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
Belfast, United Kingdom
26 October 1999
F-55
<PAGE>
WAP BUSINESS OF APiON
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
May 1, 1998
(inception) to
March 31, 1999
--------------
$000's
<S> <C>
Operating expenses:
Salaries....................................................... 370
Depreciation................................................... 143
Government grants.............................................. (124)
Other identifiable overhead costs.............................. 260
Allocated overhead costs....................................... 435
-----
Total operating expenses..................................... 1,084
Tax expenses..................................................... 147
-----
Net operating expenses........................................... 1,231
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
WAP BUSINESS OF APiON
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
<TABLE>
<CAPTION>
As at
March 31,
1999
---------
$000's
<S> <C>
ASSETS
Cash.................................................................. 1,414
Accounts receivable................................................... 3,062
Capitalised software development costs................................ 180
Plant and equipment, net.............................................. 321
-----
4,977
=====
LIABILITIES
Current liabilities:
Accounts payable.................................................... 1,431
Amounts due under capital leases.................................... 31
Bank loans.......................................................... 53
-----
Total current liabilities......................................... 1,515
-----
Non current liabilities:
Amounts due under capital leases.................................... 3
Bank loans.......................................................... 78
Deferred government grants.......................................... 96
Deferred taxation................................................... 147
-----
Total non current liabilities..................................... 324
-----
Total liabilities................................................. 1,839
-----
Net assets acquired................................................... 3,138
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
WAP BUSINESS OF APiON
CASH FLOW STATEMENT
<TABLE>
<CAPTION>
May 1, 1998
(inception) to
March 31, 1999
--------------
$000's
<S> <C>
Operating activities:
Net operating expenses........................................ (1,231)
Depreciation.................................................. 143
Amortization of government grants............................. (35)
Changes in WAP operating assets and liabilities:
Increase in accounts payable................................ 197
Increase in deferred tax liabilities........................ 147
------
Net cash outflow from operating activities................ (779)
------
Investing activities:
Capitalised software development costs........................ (180)
Purchase of plant and equipment............................... (401)
Government grants received.................................... 131
------
Net cash outflow from investing activities................ (450)
------
Financing activities:
Cash proceeds from bank loans................................. 220
Cash repaid against bank loans................................ (89)
Cash repaid against capital leases............................ (29)
Contribution of cash from the Services business............... 2,541
------
Net cash provided by financing activities................. 2,643
------
Net increase in cash............................................ 1,414
Balance at May 1, 1998.......................................... --
------
Balance at March 31, 1999....................................... 1,414
======
Supplemental cash flow disclosures:
Contribution of accounts receivable by the Services business
to WAP....................................................... 3,062
Accounts payable transferred to WAP........................... (1,234)
Fixed assets acquired under capital leases.................... (63)
Interest paid................................................. 8
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
WAP BUSINESS OF APiON
NOTES TO THE FINANCIAL STATEMENTS
1. Description of business
APiON was incorporated in the United Kingdom in May 1995 to provide computer
software consulting services. Its WAP business was established in May 1998 to
develop wireless Internet products for sale to world wide telecommunications
service providers.
2. Accounting policies
Basis of Presentation
The activities referred to above were carried out jointly by APiON Limited
and by its related company, incorporated in the Republic of Ireland, APiON
Telecoms Limited (jointly referred to as "APiON").
The operations of APiON consisted of the WAP business ("WAP"), and other
trading activities (the "Services business"). In conjunction with the
acquisition of WAP the trading activities associated with the Services
business have been spun off to the common shareholders of APiON. Please refer
to the Subsequent Events note for a discussion of the impact of this on WAP.
Although APiON began research and development on WAP in 1998 it did not
commence commercial marketing of it until after March 31, 1999. As a result
there were no WAP revenues in the period to that date.
The Statement of Operations reflects the direct operating expenses for WAP,
for which APiON maintained separate accounting information. Of APiON's total
operating costs of $8,852,000, $6,688,000 can be specifically identified with
the respective businesses. Of the residual total overhead costs, mainly
consisting of management and administration salaries, and property and
recruitment costs, $435,000 has been allocated to the WAP business on the
basis of the respective head counts of each business. Management believes that
the allocations described above provide a reasonable basis of allocating
corporate overhead costs.
The Statement of Assets Acquired and Liabilities Assumed of WAP as at March
31, 1999 reflects the assets acquired and liabilities acquired assumed by
Phone.com in the transaction discussed in note 8. Since WAP had no revenue-
generating activities prior to March 31, 1999, the accounts receivable and
certain trade payables shown in the Statement of Assets Acquired and
Liabilities Assumed relate to the Services business, but have been included
since they were acquired by Phone.com in conjunction with its acquisition of
WAP.
Development Stage Enterprise
Since WAP has not commenced commercial operations, WAP is considered a
development stage enterprise as defined by Financial Accounting Standards
Board Opinion No. 7, Accounting and Reporting by Development Stage
Enterprises. The deficit accumulated in the development stage from May 1998 to
March 31, 1999 is $1,231,000.
Financial Instruments and Concentration of Credit Risk
The carrying value of WAP's financial instruments, including cash, accounts
receivable, bank loans and amounts due under capital leases, approximates fair
value. Financial instruments that subject WAP to concentrations of credit risk
consist primarily of trade accounts receivable.
The receivables relate to the sale of services by the Services business,
principally to leading mobile telephone operators and manufacturers. Credit
risk is concentrated in the United Kingdom. As part of the ordinary course of
its business, the management of APiON performed credit evaluations of its
customers'
F-59
<PAGE>
WAP BUSINESS OF APiON
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
financial condition and did not require collateral from its customers. APiON
has had no write-offs of accounts receivable and, based on its evaluation of
its accounts receivable collectibility and customer creditworthiness, has
recorded no allowance for doubtful accounts receivable.
Research and Development
Research and development costs are expensed as incurred until technological
feasibility has been established. Until January 1999, WAP's software was under
development and had not yet achieved technological feasibility and,
accordingly, only development costs incurred subsequent to that date have been
capitalised.
Income taxes
Income taxes are accounted for under the asset and liability method as if
WAP was filing a separate return. Deferred tax assets and liabilities are
recognised for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognised 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.
Tangible fixed assets
The cost of tangible fixed assets is their purchase cost, together with any
incidental costs of acquisition. Depreciation is calculated so as to write off
the cost of tangible fixed assets, less their estimated residual values, on a
straight-line basis over the expected useful economic lives of the assets
concerned. The annual rate used for this purpose is 33% per annum.
Capital leases
Leasing agreements, which transfer to WAP substantially all the benefits and
risks of ownership of an asset are treated as if the asset had been purchased
outright. The assets are included in fixed assets and the capital element of
the leasing commitments is shown as obligations under capital leases. Assets
held under capital leases are depreciated over the shorter of the lease terms
and the useful lives of equivalent owned assets.
Government grants
Revenue grants against revenue expenditure are credited to profit and loss
in the same period as the related expenditure is incurred.
Grants against capital expenditure are taken to deferred income and credited
to profit and loss on the same basis as depreciation is charged on the related
assets. These grants are repayable to the government agency concerned in the
event that the relevant assets are disposed of, or cease to be used for the
purpose of the trade, within four years of the receipt of the grant. In light
of the carve-out of certain fixed assets as described in the Subsequent Event
note, management of APiON and Phone.com have met with the government agency
concerned. Agreement has been reached that the related grants will not be
repayable, and that the shareholders of APiON rather than WAP will assume the
liability to repay the grants relating to the carve-out fixed assets in the
circumstances of any subsequent disposal or failure to use them for the
purpose intended.
F-60
<PAGE>
WAP BUSINESS OF APiON
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets.
Comprehensive income
WAP has no material components of other comprehensive income (loss) for all
periods presented.
3. Related party transactions
During the period presented WAP purchased services from companies with
common shareholders and directors. WAP paid $38,455 during the period for
services rendered, at what the directors considered to be commercial market
prices.
4. Capitalised Software Development Costs
<TABLE>
<CAPTION>
$000's
------
<S> <C>
Cost:
At May 1, 1998...................................................... --
Additions........................................................... 180
---
At March 31, 1999................................................... 180
===
</TABLE>
There was no amortisation of the capitalised software development costs in
the period from May 1, 1998 to March 31, 1999 as no sales of WAP were made
before March 31, 1999.
5. Plant and Equipment
<TABLE>
<CAPTION>
Fixtures &
Computers Fittings Total
--------- ---------- ------
$000's $000's $000's
<S> <C> <C> <C>
Cost:
At May 1, 1998................................. -- -- --
Additions...................................... 392 72 464
Disposals...................................... -- (13) (13)
--- --- ---
At March 31, 1999.............................. 392 59 451
=== === ===
Depreciation:
At May 1, 1998................................. -- -- --
Disposals...................................... -- (13) (13)
Charge for the period.......................... 112 31 143
--- --- ---
At March 31, 1999.............................. 112 18 130
--- --- ---
Net book value at March 31, 1999................. 280 41 321
=== === ===
</TABLE>
F-61
<PAGE>
WAP BUSINESS OF APiON
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
6. Bank Loans and Capital Leases
WAP has a series of bank loan facilities to finance the purchase of fixed
assets, each repayable in monthly installments over a three-year period at a
rate of interest of UK bank base rate plus 1.5% (currently 6.75% per annum).
In addition it has capital lease facilities, the final repayment on which
falls due in the year to March 2001. The repayment schedule for the total bank
loan and capital lease balances due at March 31,1999, was:
<TABLE>
<CAPTION>
Bank Capital
Loans leases
------ -------
$000's $000's
<S> <C> <C>
Repayable in the year to March, 31:
2000........................................................ 53 34
2001........................................................ 49 3
2003........................................................ 29 --
--- ---
Total minimum payments.................................... 131 37
Less amounts representing interest............................ -- 3
--- ---
131 34
=== ===
</TABLE>
7. Deferred taxation
<TABLE>
<CAPTION>
As at
March 31,
1999
---------
$000's
<S> <C>
Fixed asset temporary differences.................................. 147
Net operating loss carry forwards.................................. 373
Less: Valuation allowance.......................................... (373)
----
Total deferred tax liabilities, net............................ 147
====
</TABLE>
Management has evaluated the positive and negative evidence impacting the
realizability of the deferred tax assets that consist principally of net
operating losses carried forward in the UK. Management has considered the
short operating history of WAP as well as the uncertainty associated with the
Company's future profitability and has concluded that as of March 31, 1999,
such deferred tax assets are less likely than not to be realized in the
foreseeable future. Therefore management has recorded a full valuation
allowance against deferred tax assets. Management evaluates the positive and
negative evidence on a quarterly basis.
8. Subsequent events
Subsequent to March 31, 1999, ownership of APiON Limited and APiON Telecoms
Limited was consolidated under a new United Kingdom company, also called APiON
Telecoms Limited, which was the statutory entity to be acquired by Phone.com.
On October 26, 1999, all of the outstanding capital stock of APiON Telecoms
Limited was acquired by Phone.com, Inc. in exchange for 1,196,513 shares of
Phone.com common stock.
Immediately prior to the acquisition, APiON spun off its Services business
to the vendor shareholders. The transfer involved certain employees, and fixed
assets employed in the Services business that had a net book value of $937,000
at March, 31 1999, and related asset finance liabilities of $573,000. The
Services business was transferred to the vendor shareholders for a cash
payment of $3,254,000, made in addition to the payment made for its book value
of net assets acquired.
F-62
<PAGE>
WAP BUSINESS OF APiON
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Six months
ended
September 30,
--------------
1998 1999
----- -------
<S> <C> <C>
Revenues........................................................ $ -- $ 1,220
Cost of revenues................................................ 111 3,113
----- -------
Gross profit (loss)......................................... (111) (1,893)
----- -------
Operating expenses:
Research and development...................................... 110 1,451
Sales and marketing........................................... 1 71
General and administrative.................................... -- 383
----- -------
Total operating expenses.................................... 111 1,905
----- -------
Net loss.................................................... $(222) $(3,798)
===== =======
</TABLE>
See accompanying notes to unaudited condensed financial statements
F-63
<PAGE>
WAP BUSINESS OF APiON
UNAUDITED CONDENSED STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
(in thousands)
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 876
Accounts receivable........................................... 3,967
Prepaids and other current assets............................. 148
------
Total current assets........................................ 4,991
Property and equipment, net..................................... 501
Deposits........................................................ 525
------
$6,017
======
LIABILITIES
Current liabilities:
Accounts payable.............................................. $2,179
Accrued expenses.............................................. 331
Current portion of equipment loan and capital lease
obligation................................................... 119
------
Total current liabilities................................... 2,629
------
Equipment loans and capital lease obligation, less current
portion........................................................ 115
Total liabilities........................................... 2,744
------
Net assets acquired......................................... $3,273
======
</TABLE>
See accompanying notes to unaudited condensed financial statements
F-64
<PAGE>
WAP BUSINESS OF APiON
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months
ended
September 30,
---------------
1998 1999
------ -------
<S> <C> <C>
Net loss..................................................... $ (202) $(3,798)
Adjustments to reconcile net loss to net cash used in
operating activities: 53 91
Depreciation and amortization..............................
Changes in assets and liabilities:
Accounts receivable...................................... (3,135) (905)
Prepaids and other assets................................ (10) (673)
Accounts payable......................................... 2,524 748
Accrued expenses......................................... -- 331
Other long-term liabilities.............................. 550 --
------ -------
Net cash used in operating activities........................ (240) (4,206)
------ -------
Net cash used in investing activities--capital expenditures.. (200) --
------ -------
Financing activities:
Proceeds from debt......................................... -- 234
Repayments of bank loans and capital leases................ -- (84)
Contribution of cash from the services business............ 1,203 3,518
------ -------
Net cash provided by financing activities.................... 1,203 3,668
------ -------
Net increase in cash and cash equivalents.................... 763 (538)
Cash and cash equivalents at beginning of period............. -- 1,414
------ -------
Cash and cash equivalents at end of period................... $ 763 $ 876
====== =======
</TABLE>
See accompanying notes to unaudited condensed financial statements
F-65
<PAGE>
WAP BUSINESS OF APiON
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles and reflect all adjustments, consisting only of normal recurring
adjustments which in the opinion of management are necessary to fairly state
the Company's financial position, results of operations, and cash flows for
the periods presented. The results of operations for the six months ended
September 30, 1999, are not necessarily indicative of the results to be
expected for any subsequent period.
2. SUBSEQUENT EVENT
On October 26, 1999, all of the outstanding capital stock of APiON Telecoms
Limited was acquired by Phone.com, in exchange for 2,393,026 shares of
Phone.com common stock.
F-66
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
AtMotion Inc.
We have audited the accompanying balance sheets of AtMotion Inc. (a
development stage company, formerly known as Arabesque Communications, Inc.)
as of June 30, 1999 and 1998, and the related statements of operations,
shareholders' equity, and cash flows for the year ended June 30, 1999 and for
the periods from November 10, 1997 (date of incorporation) to June 30, 1998
and 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AtMotion Inc. at June 30,
1999 and 1998, and the results of its operations and its cash flows for the
year ended June 30, 1999 and for the periods from November 10, 1997 (date of
incorporation) to June 30, 1998 and 1999, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
August 6, 1999
F-67
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 4,714,868 $ 885,366
Short-term investments.............................. 1,025,693 --
Prepaid expenses and other current assets........... 80,001 6,345
----------- ----------
Total current assets............................ 5,820,562 891,711
Property and equipment:
Computers........................................... 2,180,987 338,877
Software............................................ 48,903 26,961
Furniture and equipment............................. 100,098 3,672
----------- ----------
2,329,988 369,510
Accumulated depreciation............................ 448,521 26,560
----------- ----------
1,881,467 342,950
Other assets........................................ 111,463 --
----------- ----------
Total assets.................................... $ 7,813,492 $1,234,661
=========== ==========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.................................... $ 414,611 $ 246,693
Accrued payroll and related expenses................ 347,313 1,466
Payable to related parties.......................... 240,458 25,910
Current portion of line of credit................... 660,825 --
Current portion of capital lease obligations........ 192,608 --
----------- ----------
Total current liabilities....................... 1,855,815 274,069
Long-term liabilities:
Line of credit, less current portion................ 43,342 --
Long-term capital lease obligations................. 587,183 --
----------- ----------
Total long-term liabilities..................... 630,525 --
Commitments
Shareholders' equity:
Redeemable convertible preferred stock, no par
value:
Authorized shares--8,829,365 issued and
outstanding shares--6,877,690 in 1999 and
1,912,500 in 1998, net of issuance costs......... 12,868,747 1,871,879
Aggregate liquidation preference--$12,530,606 and
$1,912,500 at June 30, 1999 and 1998.............
Common stock, no par value:
Authorized shares--50,000,000 Issued and
outstanding shares--3,204,400 in 1999 and
2,895,000 in 1998................................ 99,816 36,600
Notes receivable from shareholders.................. (59,970) (30,900)
Deficit accumulated during the development stage.... (7,581,441) (916,987)
----------- ----------
Total shareholders' equity...................... 5,327,152 960,592
----------- ----------
Total liabilities and shareholders' equity...... $ 7,813,492 $1,234,661
=========== ==========
</TABLE>
See accompanying notes.
F-68
<PAGE>
ATMOTION INC.
(a development stage company,
formerly known as Arabesque Communications, Inc.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From Period From
November 10, November 10,
1997 1997
(Date of (Date of
Year Ended Incorporation) Incorporation)
June 30, to June 30, to June 30,
1999 1998 1999
----------- -------------- --------------
<S> <C> <C> <C>
Net revenues....................... $ -- $ -- $ --
Operating expenses:
Research and development......... 4,670,879 591,745 5,262,624
General and administrative....... 1,488,927 320,142 1,809,069
----------- --------- -----------
Total operating expenses....... 6,159,806 911,887 7,071,693
----------- --------- -----------
Loss from operations............... (6,159,806) (911,887) (7,071,693)
Interest and other expense......... (196,965) (7,548) (204,513)
Interest and other income.......... 55,725 2,448 58,173
----------- --------- -----------
Net loss........................... (6,301,046) (916,987) (7,218,033)
Accretion of preferred stock....... (363,408) -- (363,408)
----------- --------- -----------
Net loss applicable to common
shareholders...................... $(6,664,454) $(916,987) $(7,581,441)
=========== ========= ===========
</TABLE>
See accompanying notes.
F-69
<PAGE>
ATMOTION INC.
(a development stage company,
formerly known as Arabesque Communications, Inc.)
STATEMENTS OF SHAREHOLDERS' EQUITY
Period from November 10, 1997 (date of incorporation) to June 30, 1999
<TABLE>
<CAPTION>
Deficit
Convertible Notes Accumulated
Preferred Stock Common Stock Receivable During the
--------------------- ----------------- From Development
Shares Amount Shares Amount Shareholders Stage Total
--------- ----------- --------- ------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders in February
and April 1998......... -- $ -- 2,810,000 $28,100 $(23,400) $ -- $ 4,700
Issuance of common stock
upon exercise of
options from January to
May 1998............... -- -- 85,000 8,500 (7,500) -- 1,000
Issuance of Series A
convertible preferred
stock at $1.00 per
share for cash and
conversion of notes
payable and accrued
interest, net of
issuance costs in April
1998................... 1,912,500 1,871,879 -- -- -- -- 1,871,879
Net loss................ -- -- -- -- -- (916,987) (916,987)
--------- ----------- --------- ------- -------- ----------- -----------
Balance at June 30,
1998................... 1,912,500 1,871,879 2,895,000 36,600 (30,900) (916,987) 960,592
Issuance of common stock
upon exercise of
options from August
1998 to May 1999....... -- -- 301,000 59,245 (52,470) -- 6,775
Sale of common stock in
February 1999.......... -- -- 8,400 1,428 -- -- 1,428
Issuance of warrants for
common stock........... -- -- -- 2,543 -- -- 2,543
Collection of notes
receivable from
shareholders........... -- -- -- -- 23,400 -- 23,400
Issuance of Series A
convertible preferred
stock at $1.00 per
share, net of issuance
costs in September
1998................... 500,000 493,905 -- -- -- -- 493,905
Issuance of Series A1
convertible preferred
stock at $1.40 per
share, net of issuance
costs in October 1998.. 357,143 495,428 -- -- -- -- 495,428
Issuance of warrants for
Series A convertible
preferred stock........ -- 33,750 -- -- -- -- 33,750
Issuance of Series B
convertible preferred
stock at $2.25 per
share for cash and
conversion of notes
payable and accrued
interest, net of
issuance costs in April
1999................... 3,358,047 7,505,491 -- -- -- -- 7,505,491
Issuance of warrants for
Series B convertible
preferred stock........ -- 50,625 -- -- -- -- 50,625
Issuance of Series B1
convertible preferred
stock at $2.75 per
share for cash and
conversion of notes
payable and accrued
interest, net of
issuance costs in April
1999................... 750,000 2,054,261 -- -- -- -- 2,054,261
Accretion of preferred
stock.................. -- 363,408 -- -- -- (363,408) --
Net loss................ -- -- -- -- -- (6,301,046) (6,301,046)
--------- ----------- --------- ------- -------- ----------- -----------
Balance at June 30,
1999................... 6,877,690 $12,868,747 3,204,400 $99,816 $(59,970) $(7,581,441) $ 5,327,152
========= =========== ========= ======= ======== =========== ===========
</TABLE>
See accompanying notes.
F-70
<PAGE>
ATMOTION INC.
(a development stage company,
formerly Arabesque Communications, Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From Period From
November 10, November 10,
1997 1997
(Date of (Date of
Year Ended Incorporation) Incorporation)
June 30, to June 30, to June 30,
1999 1998 1999
----------- -------------- --------------
<S> <C> <C> <C>
Operating activities
Net loss.......................... $(6,301,046) $ (916,987) $(7,218,033)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation.................... 421,961 26,560 448,521
Warrants........................ 64,540 -- 64,540
Changes in operating assets and
liabilities:
Prepaid expenses and other
current assets............... (73,656) (6,345) (80,001)
Accounts payable.............. 359,676 272,603 632,279
Accrued payroll and related
expenses..................... 368,637 1,466 370,103
Other assets.................. (111,463) -- (111,463)
----------- ---------- -----------
Net cash used in operating
activities......................... (5,271,351) (622,703) (5,894,054)
Investing activities
Purchases of property and
equipment........................ (1,022,687) (369,510) (1,392,197)
Purchases of available-for-sale
securities....................... (1,025,693) -- (1,025,693)
----------- ---------- -----------
Net cash used in investing
activities......................... (2,048,380) (369,510) (2,417,890)
Financing activities
Proceeds from issuance of
preferred stock, net of issuance
costs............................ 9,942,247 1,471,879 11,414,126
Proceeds from notes payable....... 606,838 400,000 1,006,838
Proceeds from issuance of common
stock............................ 8,203 5,700 13,903
Officer note receivable........... -- (35,000) (35,000)
Payment of officer note
receivable....................... 23,400 35,000 58,400
Payments on capital leases........ (135,999) -- (135,999)
Proceeds from loan payable........ 750,000 -- 750,000
Repayment of loan payable......... (45,456) -- (45,456)
----------- ---------- -----------
Net cash provided by financing
activities......................... 11,149,233 1,877,579 13,026,812
----------- ---------- -----------
Net increase in cash and cash
equivalents........................ 3,829,502 885,366 4,714,868
Cash and cash equivalents at
beginning of year.................. 885,366 -- --
----------- ---------- -----------
Cash and cash equivalents at end of
year............................... $ 4,714,868 $ 885,366 $ 4,714,868
=========== ========== ===========
Supplemental disclosures of cash
flow information
Cash paid for interest............ $ 113,253 $ 7,464 $ --
Supplemental schedules of noncash
investing and financing activities
Notes payable and accrued interest
converted to preferred stock..... $ 606,838 $ 400,000 $ 1,006,838
Issuance of common stock to
shareholders for notes
receivable....................... $ 52,470 $ 30,900 $ 83,370
Fixed assets acquired under
capital leases................... $ 937,791 $ -- $ 937,791
</TABLE>
See accompanying notes.
F-71
<PAGE>
ATMOTION INC.
(a development stage company,
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
1. Organization and Significant Accounting Policies
Description of Business
AtMotion, Inc. (the Company), a California corporation, formerly known as
Arabesque Communications, Inc., was incorporated on November 10, 1997 for the
purpose of designing, developing, producing, and marketing an enhanced
wireless telecommunications services platform. This platform will provide a
suite of applications, including wireless access to the Internet, that
enhances productivity for the user. Through June 30, 1999, the Company was
active in product development, the acquisition of equipment and facilities,
raising capital, and had no revenues. Accordingly, the Company was in the
development stage.
Basis of Presentation
The Company's primary activities since inception have been devoted to
developing its product offerings and related technologies, recruiting of key
management and technical personnel, and raising capital to fund operations.
The Company has been unprofitable since inception. As a result, the financial
statements are presented in accordance with Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Enterprises."
For the year ended June 30, 1999, the Company incurred a net loss of
$6,301,046. The financial statements have been prepared on a going-concern
basis. The Company will require additional financing during fiscal 2000. The
Company anticipates raising capital through the sales of preferred stock and
believes that sufficient outside financing sources will be available to meet
its requirements. If sufficient outside financing is not available, the
Company believes it can reduce expenses within the limits of current financial
resources and still make progress toward accomplishing its business
objectives, although at a slower pace.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are invested in money market funds with major financial
institutions.
The Company has classified all investments as available-for-sale. Available-
for-sale securities are carried at fair market value based on quoted market
prices with unrealized gains and losses, net of tax, reported in shareholders'
equity. Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale securities are included in interest
income. The Company invests its excess cash in high-quality, short-term debt
instruments. None of the Company's debt security instruments have maturities
greater than one year. Interest and dividends on the investments are included
in interest income. As of June 30, 1999 and 1998, there were no material
realized gains or losses on investments.
F-72
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table presents the estimated fair value of the Company's
investments by balance sheet classification:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
--------------------- --------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Money market funds.............. $ 846,274 $ 846,274 $703,084 $703,084
Commercial paper................ 1,999,608 1,999,608 -- --
---------- ---------- -------- --------
Amounts included in cash and
cash equivalents............. 2,845,882 2,845,882 703,084 703,084
Commercial paper................ 1,025,693 1,025,693 -- --
---------- ---------- -------- --------
Amounts included in short-term
investments.................. 1,025,693 1,025,693 -- --
---------- ---------- -------- --------
Total available-for-sale
securities................. $3,871,575 $3,871,575 $703,084 $703,084
========== ========== ======== ========
</TABLE>
Fair Value of Other Financial Instruments
The carrying and estimated fair values of the Company's other financial
instruments at June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
-------- ---------
<S> <C> <C>
Line of credit.......................................... $704,167 $704,167
Capital leases.......................................... $779,791 $779,791
</TABLE>
The Company had no outstanding debt at June 30, 1998. The fair value of the
Company's obligations under lines of credit and capital leases are based on
current rates offered to the Company for similar debt instruments of the same
remaining maturities.
Research and Development
Research and development expenses include costs of developing new products
and processes as well as design and engineering costs. Such costs are charged
to expense as incurred.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Property and equipment are depreciated for financial reporting purposes using
the straight-line method over the estimated useful lives of three years.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations in accounting for its employee stock options because,
as discussed in Note 4, the alternative fair value accounting provided for
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB
F-73
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Opinion No. 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized. As permitted under FAS 123, the Company
has elected to follow APB Opinion No. 25 and related interpretations in
accounting for stock- based awards to employees and to adopt the "disclosure
only" alternative described in FAS 123.
Concentration of Credit Risk
The Company maintains its investments with two financial institutions. The
Company performs periodic evaluations of the relative credit standing of the
institutions that are considered in the Company's investment strategy. To
date, the Company has not incurred losses related to these investments.
Accounting for Internal-Use Computer Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use and identifies the characteristics of internal-use software. The
Company's accounting policy with respect to accounting for computer software
developed or obtained for internal use is consistent with SOP 98-1. Software
is amortized for financial reporting purposes using the straight-line method
over the estimated useful life of three years.
Financial Presentation
Certain prior year amounts on the financial statements have been
reclassified to conform to the current year presentation.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 establishes standards for the reporting and display of
comprehensive income and its components and was effective for fiscal 1999. The
adoption of FAS 130 had no impact on net loss or shareholders' equity.
2. Notes Payable and Line of Credit
The Company has a $750,000 line of credit that expires on December 4, 2000,
of which $0 was available on June 30, 1999. Borrowings under the line of
credit bear interest at the bank's prime rate (7.75% at June 30, 1999). The
line of credit requires the Company to place all of its assets as collateral
and restricts the payments of cash dividends on the Company's stock. As of
June 30, 1999, the Company had approximately $704,000 outstanding under the
line of credit.
In connection with the line of credit, the Company issued warrants to
purchase up to 3,333 shares of Series B preferred stock at a price of $2.25
per share. The warrants are exercisable immediately and expire ten years from
the date of grant. The fair value of the warrants was approximately $5,600 and
is being amortized as interest expense over the term of the line of credit.
In February 1999, the Company issued $600,000 of promissory notes that bear
interest at 8.00% per annum to related parties. In connection with such notes,
the Company issued warrants to purchase up to 26,667 shares
F-74
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
of Series B preferred stock at a price of $2.25 per share. The warrants are
exercisable immediately and expire ten years from the date of grant. The fair
value of the warrants was approximately $45,000 and was originally recorded as
capitalized debt issuance costs. In April 1999, the Company converted the
promissory notes into Series B preferred stock (see Note 4), which resulted in
expensing the unamortized portion of the debt issuance costs.
3. Lease Obligations
The Company leases its facility under a noncancelable operating lease,
expiring in January 2003. The agreement provides for a rent escalation each
year. Rent expense under operating leases was $360,000 and $47,000 for the
year ended June 30, 1999 and for the period from November 10, 1997 (date of
incorporation) to June 30, 1998, respectively.
The Company entered into two lease agreements during the year and the total
available credit available under these agreements was approximately $1,200,000
as of June 30, 1999. As of June 30, 1999, the Company had $779,791 outstanding
under its capital lease agreements. Borrowings under the lease agreements bear
interest at the weighted average interest rate of 14.9% as of June 30, 1999.
For the assets financed under these agreements, the Company has accounted for
the leases as a capital lease. Property and equipment at June 30, 1999 and
1998 include assets under capitalized leases of $937,791 and $0, respectively.
Accumulated amortization related to leased assets was $251,038 and $0 at June
30, 1999 and 1998, respectively. In connection with the lease agreements, the
Company issued warrants to purchase up to 45,000 shares of Series A preferred
stock at a price of $1.00 per share. The warrants are exercisable immediately
and expire ten years from the date of grant. The fair value of the warrants
was approximately $33,750 and is being amortized as interest expense over the
term of the lease agreements.
Future minimum lease payments under capital leases and operating leases are
as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
Years ending June 30:
2000................................................. $ 298,929 $ 467,555
2001................................................. 329,529 483,402
2002................................................. 328,500 500,321
2003................................................. 43,074 297,727
2004................................................. -- --
Thereafter........................................... -- --
--------- ----------
Total minimum lease and principal payments......... 1,000,032 $1,749,005
==========
Amount representing interest........................... 220,241
---------
Present value of future lease payments................. 779,791
Current portion of capital lease obligations........... 192,608
---------
Noncurrent portion of capital lease obligations........ $ 587,183
=========
</TABLE>
F-75
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Shareholders' Equity
Founders' Shares
During the year ended June 30, 1998, the Company issued 2,810,000 shares of
common stock at $0.01 per share to the founders of the Company for cash
proceeds of $4,700 and full-recourse notes receivable of $23,400. The
founders' shares are subject to adjustment for certain events, including
mergers, stock dividends, stock splits, and other events. The founders' stock
rights have provisions whereby 1,275,000 shares vested immediately upon
purchase. The remaining shares vest over a four-year period beginning on the
purchase date. In the event a founder's employment with the Company is
terminated, the Company has the right to repurchase all unvested shares from
the founder at $0.01 per share. At June 30, 1999 and 1998, approximately
950,000 and 1,405,000 shares, respectively, were subject to repurchase by the
Company at the original issuance price.
Convertible Preferred Stock
The following is a summary of the authorized and issued preferred stock:
<TABLE>
<CAPTION>
Shares Issued
and Outstanding
-------------------
June 30,
Shares -------------------
Series Authorized 1999 1998
------ ---------- --------- ---------
<S> <C> <C> <C>
A.............................................. 2,500,000 2,412,500 1,912,500
A1............................................. 357,143(1) 357,143 --
B.............................................. 4,222,222(1) 3,358,047 --
B1............................................. 1,750,000(1) 750,000 --
--------- --------- ---------
Total preferred stock........................ 8,829,365 6,877,690 1,912,500
========= ========= =========
</TABLE>
--------
(1) Shares were authorized during the current fiscal year.
All preferred shareholders have the same voting rights as common
shareholders. Each share of Series A, A-1, B, and B-1 preferred stock has a
number of votes equal to the number of shares of common stock into which it is
convertible. As long as a majority of the Series A, A-1, B, and B-1 preferred
stock shares originally issued remain outstanding, the holders of the Series
A, A-1, B, and B-1 preferred stock, voting as a separate class, shall be
entitled to elect one director to the Board of Directors.
In the event of any voluntary or involuntary liquidation of the Company,
Series A, A-1, B, and B-1 holders are entitled to liquidation preferences of
$1.00, $1.40, $2.25, and $2.75, respectively, per share plus any accrued
dividends. Any remaining assets would be distributed to the holders of common
stock and preferred stock on a pro rata basis, as if such preferred stock was
converted to common stock, until the holders of Series A, A-1, B, and B-1
preferred stock shall have received an additional amount of $2.00, $2.80,
$4.50, and $5.50 per share, respectively. All remaining assets would be
distributed on a pro rata basis solely among the holders of common stock.
At any time after March 24, 2004, upon written request from the holders of
two- thirds or more of the then outstanding shares of any preferred stock, all
of the shares requested of such holders' shares of preferred stock shall be
redeemed. The redemption amount shall be equal to $1.00, $1.40, $2.25, and
$2.75 per share plus any declared but unpaid dividends plus interest at the
rate of $0.08, $0.112, $0.18, and $0.22 per share, per annum for Series A, A-
1, B, and B-1 preferred stock, respectively.
F-76
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The holders of preferred stock are entitled to receive dividends when and if
declared by the Board of Directors. The dividends are payable in preference
and priority to any payment of any dividend on common stock of the Company.
Such dividends are not cumulative, and no right accrues to the holders of
preferred stock. No dividends have been declared to date.
Each share of preferred stock is convertible at the option of the holder and
is determined by dividing $1.00, $1.40, $2.25, and $2.75 for Series A, A-1, B,
and B-1 preferred stock, respectively, by the applicable conversion price.
Therefore, at the current conversion price, each share of any preferred stock
will convert into one share of common stock. The conversion price per share
for any preferred stock shall be adjusted for certain recapitalizations,
splits, and combinations. The preferred stock automatically converts into
shares of common stock at the conversion price in effect upon the earlier of
(i) the closing of an underwritten public offering registered under the
Securities Act of 1933, as amended, covering the offer and sale of common
stock at a public offering price of not less than $7.00 per share (adjusted
for stock dividends, stock splits, or recapitalizations) with aggregate cash
proceeds to the Company of at least $15,000,000; or (ii) the date specified by
written consent or agreement of the holders of two-thirds of the then
outstanding shares of preferred stock.
The Company recorded accretion of preferred stock of $363,408 in 1999 for
the interest accrued to the holders of preferred stock.
Common Stock
The Company is authorized to issue up to 50,000,000 shares of common stock.
As of June 30, 1999 and 1998, a total of 3,204,400 and 2,895,000 shares of
common stock, respectively, were issued and outstanding.
Common stock was reserved for issuance as follows:
<TABLE>
<CAPTION>
June 30,
1999
---------
<S> <C>
Convertible preferred stock outstanding.......................... 6,877,690
Stock options.................................................... 1,114,000
---------
7,991,690
=========
</TABLE>
Stock Plan
The Company's 1998 Stock Plan (the Plan) provides for the granting of
incentive stock options and nonstatutory stock options as determined by the
Board of Directors. Per the Plan, the exercise price of incentive stock
options and nonstatutory stock options granted to an employee or service
providers, who respectively at the time of grant own stock representing more
than 10% of the voting power of all classes of the stock of the Company, shall
be granted at no less than 110% of the fair market value per share of the
common stock on the date of grant. The exercise price of nonstatutory stock
options granted to other service providers shall be at no less than 85% of the
fair market value per share of the common stock on the date of grant. Except
in the case of options granted to officers, directors, and consultants,
options shall become exercisable at a rate of no less than 20% per year over
five years from the date of the option grant. All option grants shall be
eligible for early exercise, but unvested shares shall be subject to
repurchase. The term of each option grant will be no more than ten years.
However, in the case of an incentive stock option issued to an optionee who,
at the time of grant, owns stock representing more than 10% of the voting
power of all classes of the stock of the Company, the term of the option will
be no more than five years.
F-77
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rights to immediately purchase stock may also be granted under the Plan with
terms, conditions, and restrictions determined by the Board of Directors.
Except for shares purchased by officers, directors, and consultants, shares
acquired through stock purchase rights vest over a period not to exceed five
years with 20% vesting each year. Any unvested shares acquired are subject to
repurchase by the Company.
Information with respect to the Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
Shares ---------------------------
Available For Number of Weighted Average
Grant Shares Price Per Share
------------- --------- ----------------
<S> <C> <C> <C>
Shares reserved.................... 1,500,000 -- $ --
Options granted.................... (280,500) 280,500 $0.10
Options exercised.................. -- (85,000) $0.10
Options canceled................... 35,000 (35,000) $0.10
---------- ---------
Balance at June 30, 1998........... 1,254,500 160,500 $0.10
Shares reserved.................... -- -- $ --
Options granted.................... (1,264,700) 1,264,700 $0.21
Options exercised.................. -- (301,000) $0.20
Options canceled................... 110,200 (110,200) $0.11
---------- ---------
Balance at June 30, 1999........... 100,000 1,014,000 $0.22
========== =========
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------
Number Weighted Average
Outstanding as of Remaining Weighted Average
Range of Exercise Prices June 30, 1999 Contractual Life Exercise Price
------------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C>
$0.10................... 337,500 9.16 $0.10
$0.17................... 349,500 9.65 $0.17
$0.35................... 327,000 9.90 $0.35
---------
Total................. 1,014,000 9.58 $0.22
=========
</TABLE>
At June 30, 1999, 67,382 options were vested, and 319,231 shares were
subject to repurchase by the Company at the original issuance price. At June
30, 1998, no options were vested, and 85,000 shares were subject to repurchase
by the Company at the original issuance price.
Stock-Based Compensation
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company has accounted
for its employee stock options granted during the years ended June 30, 1999
and 1998 under the fair value method of FAS 123. The fair value for options
was estimated at the date of grant using the minimum value method with the
following weighted average assumptions: a risk-free interest rate of 6.4% and
5.4% for 1999 and 1998, respectively; no dividend yield or volatility factors
of the expected market price of the Company's common stock for both years; and
a weighted average expected life of the option of ten years for both years.
F-78
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The difference between the reported loss and the pro forma loss for the
years ended June 30, 1999 and 1998 was not material.
The options' weighted average grant-date fair value, which is the value
assigned to the options under FAS 123, was $0.10 and $0.04 for options granted
during 1999 and 1998, respectively.
The pro forma impact of options on the net loss for the year ended June 30,
1999 is not representative of the effects on net income (loss) for future
years, as future years will include the effects of options vesting as well as
the impact of multiple years of stock option grants. The full effect of FAS
123 will not be fully reflected until 2001.
Warrants to Consultants
During the year ended June 30, 1999, the Company issued warrants to
consultants to purchase up to 27,900 shares of common stock at a price ranging
from $0.10 to $0.35 per share. The warrants are exercisable immediately, and
the vesting terms range from immediately to two years. The fair value of the
warrants was approximately $2,500 and was expensed during the year. The
warrants will be remeasured to fair value until they have vested.
5. Related Parties
During the year ended June 30, 1999 and the period from November 10, 1997
(date of incorporation) to June 30, 1998, the Company incurred legal fees of
approximately $87,000 and $53,000, respectively, for services rendered by
Wilson Sonsini Goodrich & Rosati, a law firm in which a current member of the
Board of Directors of the Company is a senior partner. As of June 30, 1999 and
1998, the amount owed to Wilson Sonsini Goodrich & Rosati was approximately
$23,000 and $26,000, respectively.
During the year ended June 30, 1999, one of the Company's suppliers became
an investor in the Company. During the year, the Company purchased
approximately $500,000 from the supplier. As of June 30, 1999, the Company had
an outstanding payable balance to the supplier of approximately $218,000.
6. Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" (FAS
109), which provides for the establishment of deferred tax assets and
liabilities for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. As of June 30, 1999 and 1998,
the Company has total deferred tax assets of approximately $3,003,000 and
$391,000, respectively, relating primarily to federal and California net
operating loss carryforwards and research and development credits. The
valuation allowance increased by $2,612,000 and $391,000 during the years
ended
F-79
<PAGE>
ATMOTION INC.
(a development stage company
formerly known as Arabesque Communications, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 1999 and 1998, respectively. The net deferred asset has been fully
offset by a valuation allowance as it is "more likely than not" that the
Company will realize the benefit of this asset in the future. The federal and
California net operating loss carryforwards of approximately $5,766,000 expire
in 2013 and 2019, respectively. Utilization of the net operating losses may be
subject to a substantial annual limitation due to the ownership change
regulations provided by the Internal Revenue Code and similar state
provisions, which may result in the expiration of net operating losses before
utilization.
7. Subsequent Event (Unaudited)
In September 1999, the Company entered into a new equipment line of credit
agreement with the same financial institution in which it has a $750,000
equipment lease (see Note 3). The new equipment line of credit increases the
Company's borrowing capacity with the financial institution from $750,000 to
$2,000,000. The total amount borrowed under the two agreements shall not
exceed $2,000,000. Borrowings under the equipment line of credit bear interest
at 13%. The equipment line of credit requires the Company to place all of the
assets financed under the line as collateral.
In connection with the equipment line of credit, the Company issued warrants
to purchase up to 17,818 shares of Series B-1 preferred stock at a price of
$2.75 per share. The warrants are exercisable immediately and expire ten years
from the date of grant. The fair value of the warrants is approximately
$37,000 and will be amortized as interest expense over the term of the
equipment line of credit.
8. Year 2000 (Unaudited)
The Company has determined that its current computer systems are year 2000
compliant and would function properly with respect to dates in the year 2000
and beyond. The Company has not noted any year 2000 issues with its products;
however, the Company has not performed significant testing with respect to its
products. The cost of year 2000 initiatives is not expected to be material to
the Company's results of operations or financial position. The Company has yet
to initiate discussions with all of its third-party relationships to ensure
that those parties have appropriate plans in place to correct all of their
year 2000 issues. While the Company believes its planning efforts are adequate
to address its year 2000 concerns, there can be no assurance that the systems
and products of other companies on which the Company's operations rely will be
converted on a timely basis and will not have a material adverse effect on the
Company's results of operations.
F-80
<PAGE>
ATMOTION INC.
(a development stage company)
UNAUDITED CONDENSED BALANCE SHEET
As of December 31, 1999
(in thousands)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 1,353
Other current assets................................................ 133
--------
Total current assets.............................................. 1,486
Property and equipment, net........................................... 3,305
Other long-term assets................................................ 146
--------
Total assets...................................................... $ 4,937
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of equipment loans and capital lease obligations.... $ 537
Accounts payable and accrued liabilities............................ 1,320
--------
Total current liabilities......................................... 1,857
Equipment loans and capital lease obligations, less current........... 1,784
--------
Total liabilities................................................. 3,641
--------
Shareholders' equity:
Redeemable convertible preferred stock.............................. 13,486
Common stock........................................................ 770
Notes receivable from shareholders.................................. (689)
Accumulated deficit................................................. (12,271)
--------
Total shareholders' equity........................................ 1,296
--------
Total liabilities and shareholders' equity........................ $ 4,937
========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-81
<PAGE>
ATMOTION, INC.
(a development stage company)
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the Six Months Ended December 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net revenues................................................. $ -- $ --
------- -------
Operating expenses:
Research and development................................... 2,897 2,035
General and administrative................................. 1,250 640
------- -------
Total operating expenses................................. 4,147 2,675
------- -------
Loss from operations......................................... (4,147) (2,675)
Other expenses, net.......................................... (42) (39)
------- -------
Net loss..................................................... (4,189) (2,714)
------- -------
Preferred stock accretion.................................... (501) --
------- -------
Net loss attributable to common shareholders................. $(4,690) $(2,714)
======= =======
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-82
<PAGE>
ATMOTION, INC.
(a development stage company)
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(4,690) $(2,714)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 542 124
Preferred stock accretion................................ 501 --
Changes in operating assets and liabilities:
Other assets........................................... (88) (181)
Accounts payable and accrued liabilities............... 319 528
------- -------
Net cash used in operating activities................ (3,416) (2,243)
------- -------
Cash flows from investing activities:
Capital expenditures....................................... (1,929) (733)
Proceeds from sale of short-term investments............... 1,025 --
------- -------
Net cash used in investing activities................ (904) (733)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of convertible redeemable
preferred stock........................................... 116 1,023
Net proceeds from issuance of common stock................. 41 24
Proceeds from borrowings, net of payments.................. 801 1,206
------- -------
Net cash provided by financing activities............ 958 2,253
------- -------
Decrease in cash and cash equivalents........................ (3,362) (723)
Cash and cash equivalents, beginning of period............... 4,715 885
------- -------
Cash and cash equivalents, end of period..................... $ 1,353 $ 162
======= =======
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-83
<PAGE>
ATMOTION, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
December 31, 1999
1. Basis of Presentation
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles and reflect all adjustments, consisting only of normal recurring
adjustments which in the opinion of management are necessary to fairly state
the Company's financial position, results of operations, and cash flows for
the periods presented. Through December 31, 1999, the Company was active in
product development, the acquisition of equipment and facilities, raising
capital, and had no revenues. Accordingly, the Company was in the development
stage, and the financial statements have been prepared on a going-concern
basis. The results of operations for the six months ended December 31, 1999
are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire fiscal year ended June 30, 2000.
2 Subsequent Event
On December 21, 1999, the Company signed a definitive agreement to be
acquired by Phone.com, Inc. In connection with the acquisition, which was
completed on February 8, 2000, Phone.com issued 2,280,287 shares of its common
stock in exchange for all of the outstanding common stock and preferred stock
of AtMotion, and assumed options and warrants of AtMotion for total
consideration valued at approximately $285.2 million.
F-84
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
To the Board of Directors
Paragon Software (Holdings) Limited
We have audited the accompanying consolidated balance sheets of Paragon
Software (Holdings) Limited as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the two years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United Kingdom auditing
standards, which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Paragon
Software (Holdings) Limited at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young
Reading, England
May 12, 2000
F-85
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Pounds) (Pounds)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................ 7,407,405 830,739
Receivables.......................................... 243,713 224,768
Inventories.......................................... 218,529 114,121
Prepaid expenses..................................... 38,787 35,443
Other current assets................................. 88,028 6,400
---------- ----------
Total current assets............................. 7,996,462 1,211,471
Fixed assets
Equipment, fixtures and fittings, net................ 69,460 19,835
Intangible assets, net............................... -- 82,900
---------- ----------
Total assets..................................... 8,065,922 1,314,206
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft....................................... 72,483 --
Accounts payable..................................... 386,019 175,648
Obligations under finance leases..................... 7,148 --
Corporation tax...................................... -- 1,250
Other taxation and social security................... 65,830 41,768
Accruals............................................. 631,149 172,108
Deferred revenue..................................... 260,406 480,000
---------- ----------
Total current liabilities........................ 1,423,035 870,774
Capital lease obligations less current portion......... 15,600 --
---------- ----------
Total liabilities................................ 1,438,635 870,774
---------- ----------
C' Redeemable convertible preferred shares of par value
10p per share......................................... 8,564,020 --
---------- ----------
Shareholders' equity
Ordinary shares of par value 10p per share (1998--par
value (Pounds)
1 per share):
Authorised--44,197,222 (1998--4,692,437)
Issued and outstanding--10,000,000 (1998--
1,000,000)........................................ 1,000,000 1,000,000
"A' Preferred convertible shares of par value 10p per
share (1998--(Pounds) 1 each):
Authorised, issued and outstanding--1,441,650
(1998--144,165)................................... 144,165 144,165
"B' Preferred convertible shares of par value 10p per
share (1998--(Pounds) 1 each):
Authorised, issued and outstanding--1,633,980
(1998--163,398)................................... 163,398 163,398
Additional paid-in capital........................... 5,381,988 770,041
Deferred share compensation.......................... (3,027,987) --
Retained deficit..................................... (5,598,297) (1,634,172)
---------- ----------
Total shareholders' equity....................... (1,936,733) 443,432
---------- ----------
Total liabilities and shareholders' equity....... 8,065,922 1,314,206
========== ==========
</TABLE>
See notes to consolidated financial statements
F-86
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Pounds) (Pounds)
<S> <C> <C>
Net sales............................................... 1,861,643 586,194
Cost of sales........................................... (729,373) (623,642)
Selling, general and administrative expenses............ (5,178,667) (1,588,827)
Interest income......................................... 85,413 5,381
Interest expense........................................ (3,141) (16,120)
---------- ----------
Loss before taxation.................................... (3,964,125) (1,637,014)
Tax..................................................... -- 4,994
---------- ----------
Net loss................................................ (3,964,125) (1,632,020)
========== ==========
</TABLE>
See notes to consolidated financial statements
F-87
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Share capital
------------------------------------- Additional Deferred Total
Ordinary "A' preferred "B' preferred Paid-in Share Retained Shareholders'
shares shares shares Capital Compensation Earnings Equity
--------- ------------- ------------- ---------- ------------ ---------- -------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C> <C> <C>
At January 1, 1998...... 2 -- -- -- -- (2,152) (2,150)
Proceeds from issues of
shares, net of issue
costs.................. 999,998 144,165 163,398 361,066 -- -- 1,668,627
Unearned deferred share
compensation........... -- -- -- 408,975 (408,975) -- --
Amortisation of deferred
share compensation..... -- -- -- -- 408,975 -- 408,975
Retained loss for
period................. -- -- -- -- -- (1,632,020) (1,632,020)
--------- ------- ------- --------- ---------- ---------- ----------
At 31 December 1998..... 1,000,000 144,165 163,398 770,041 -- (1,634,172) 443,432
Unearned deferred share
compensation........... -- -- -- 4,611,947 (4,611,947) -- --
Amortisation of deferred
share compensation..... -- -- -- -- 1,583,960 -- 1,583,960
Retained loss for
period................. -- -- -- -- -- (3,964,125) (3,964,125)
--------- ------- ------- --------- ---------- ---------- ----------
At 31 December 1999..... 1,000,000 144,165 163,398 5,381,988 (3,027,987) (5,598,297) (1,936,733)
========= ======= ======= ========= ========== ========== ==========
</TABLE>
The group has no comprehensive income other than the retained losses for the
periods presented.
See notes to consolidated financial statements
F-88
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Pounds) (Pounds)
<S> <C> <C>
Operating activities
Net loss............................................. (3,964,125) (1,632,020)
Adjustments to reconcile net loss to cash provided by
operations
Depreciation....................................... 26,867 16,820
Amortisation of intangible fixed assets............ 82,900 84,646
Amortisation of deferred share compensation........ 1,583,960 408,975
(Increase) in receivables.......................... (103,917) (167,715)
(Increase) in stocks............................... (104,408) (78,737)
Increase in creditors.............................. 472,630 778,835
---------- ----------
Net cash used by operating activities............ (2,006,093) (589,196)
Investing activities
Payments to acquire tangible fixed assets............ (76,492) (7,155)
---------- ----------
Net cash used by investing activities............ (76,492) (7,155)
Financing activities
Issue of ordinary share capital...................... -- 1,668,725
Issue of redeemable convertible shares............... 8,564,020 --
Capital element of capital lease rental payments..... 22,748 (5,483)
Borrowings........................................... 72,483 (130,384)
Loan from director................................... (116,295)
---------- ----------
Net cash provided by financing activities........ 8,659,251 1,416,563
Net increase in cash and cash equivalents.............. 6,576,666 820,212
Cash and cash equivalents at 1 January................. 830,739 10,527
---------- ----------
Cash and cash equivalents at 31 December............... 7,407,405 830,739
========== ==========
Supplemental cash flow information:
Interest paid........................................ (3,141) (16,120)
Interest received.................................... 85,413 5,381
Tax paid............................................. (1,250) 6,455
</TABLE>
See notes to consolidated financial statements
F-89
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
Accounting convention
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States.
Basis of consolidation
The financial statements consolidate the accounts of Paragon Software
(Holdings) Limited (the "Company") and all its subsidiary undertakings drawn
up to 31 December each year. As more fully described in note 2, on 10 February
1998 the company merged with Paragon Software Limited and Paragon Software
(Developments) Limited. The transaction was accounted for as a combination of
entities under common control in a manner similar to pooling of interests and,
accordingly, all financial data provided herein includes the results of these
companies.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue recognition
Paragon recognises revenue upon shipment when no significant vendor
obligations remain and collection of the receivable, net of provisions for
estimated future returns, is probable. Paragon offers the right of return of
its products under various programs. The company estimates and maintains
reserves for product returns.
Cash equivalents
Paragon considers investments in highly liquid instruments purchased with an
original maturity of 90 days or less to be cash equivalents. All of the
company's cash equivalents are classified as available for sale as of the
balance sheet date. These securities are reported at fair market value.
Development costs
Development costs on separately identified specific projects, the outcome of
which has been assessed with reasonable certainty, are capitalised to the
extent that their recovery can reasonably be regarded as assured and are
amortised on a unit basis over a maximum of 30 months. Other development
expenditure is written off against profits in the year in which it is
incurred.
Intellectual Property Rights
Intellectual property rights have been recorded at cost and are being
amortised evenly over a period of three years, their expected useful life.
F-90
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation
Depreciation is provided on all tangible fixed assets at rates calculated to
write off cost, less estimated residual value, of each asset evenly over its
expected useful life, as follows:
<TABLE>
<S> <C>
Computer equipment............................................ over 3 years
Software...................................................... over 3 years
Office equipment.............................................. over 4 years
Fixtures and fittings......................................... over 4 years
</TABLE>
Inventories
Inventories, consisting principally of consumable products, are stated at
the lower of cost and net realisable value. Cost is determined on a first in
first out basis.
Deferred taxation
Deferred taxation is provided on the liability method on all timing
differences which are expected to reverse in the future, calculated at the
rate at which it is estimated that tax will be payable.
Foreign currencies
Transactions in foreign currencies are recorded at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies
are retranslated at the rate of exchange ruling at the balance sheet date. All
differences are taken to the profit and loss account.
The accounts of overseas subsidiary companies are translated at the rate of
exchange ruling at the balance sheet date. The exchange difference arising on
the retranslation of opening net assets is taken directly to reserves. All
other translation differences are taken to the profit and loss account.
Leasing
Assets acquired under capital leases are capitalised as fixed assets. The
amount capitalised is that sum for which the leased asset could be purchased
at the start of the lease, this sum also being treated as a liability.
Depreciation on such leased assets is provided at rates calculated to write
off the capitalised cost over the shorter of the lease term and the asset's
economic life. Lease payments are apportioned between financing charges
(computed on the basis of implicit interest rates) and a reduction in the
original liability.
Rentals paid under operating leases are expensed on a straight line basis
over the term of the lease.
Share based compensation
Where share options are granted to employees the company recognises as a
charge in the profit and loss account the difference between the fair market
value of the shares at the date the award is made to participants in the
scheme and the amount of the consideration that participants may be required
to pay for the shares. This charge is spread evenly over the period the share
options vest.
For share options granted under Stock Appreciation Right plans (SAR), the
compensation related to the grant of the option is determined based on the
market price at the date the recipient exercises their option. Until exercise
has occurred, the compensation is determined by reference to the market price
at the end of each
F-91
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounting period. The difference in value of the option using the current
accounting period's market price and the last accounting period's market price
is charged to the profit and loss account.
Share options were also granted to a consultant. The difference between the
fair value of the shares at the date of the grant and the amount of
consideration that the participants may be required to pay for the shares is
recorded as a charge to the profit and loss account over the vesting period.
2. Business Combinations
On 10 February 1998, 948,998 (Pounds)1 ordinary shares were issued fully
paid in consideration on the merger with Paragon Software Limited and Paragon
Software (Developments) Limited (the subsidiaries'). The subsidiaries
principal activities are the development, marketing and selling of software
products linking mobile phones to personal computers worldwide.
The combination has been accounted for as a combination of interests under
common control in a manner similar to the pooling of interests and accordingly
all financial data presented herein has been restated to include the results
of the subsidiaries. The following table sets forth the composition of
combined net revenue and net loss for the periods indicated. Information for
1998 with respect to the subsidiaries reflects the period from 1 January 1998
to 10 February 1998, the date of the combination.
<TABLE>
<CAPTION>
Paragon Paragon
Software Paragon Software
(Holdings) Software (Developments)
Ltd Ltd Ltd Total
---------- -------- -------------- ----------
1998 1998 1998 1998
---------- -------- -------------- ----------
<S> <C> <C> <C> <C>
Net sales.................... 586,194 -- -- 586,194
Net loss..................... (1,557,020) (50,000) (25,000) (1,632,020)
</TABLE>
The accounting policies for the subsidiaries conform with those of the
company.
3. Business Segment Information
Net sales represents the amounts derived from one business segment--the
development, and marketing of software products linking mobile phones to
personal computers worldwide.
The following table analyses worldwide operations by geographical segment,
based on the location of the group's facilities.
<TABLE>
<CAPTION>
Year ended December
31,
----------------------
1999 1998
---------- ----------
(Pounds) (Pounds)
<S> <C> <C>
Net sales:
United States...................................... 1,037,793 223,134
United Kingdom..................................... 823,850 363,060
---------- ----------
Total net revenue................................ 1,861,643 586,194
========== ==========
Loss from operations:
United States...................................... (720,204) --
United Kingdom..................................... (3,243,921) (1,632,020)
---------- ----------
(3,964,125) (1,632,020)
========== ==========
</TABLE>
F-92
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
As of December
31,
--------------
1999 1998
------ -------
<S> <C> <C>
Long-lived assets:
United States............................................... 32,950 --
United Kingdom.............................................. 36,510 102,735
------ -------
69,460 102,735
====== =======
</TABLE>
4. Development Costs
<TABLE>
<CAPTION>
Year ended
December 31
-----------------
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Development costs written off............................. 732,744 361,368
Amortisation of capitalised costs......................... 77,718 77,723
------- -------
810,462 439,091
======= =======
5. Taxation
<CAPTION>
Year ended
December 31,
-----------------
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Tax expense (benefit)
Current
United Kingdom corporation tax at 21% 1998.............. -- (4,994)
United States........................................... -- --
------- -------
Total current......................................... -- (4,994)
======= =======
</TABLE>
Due to continuing losses and the recovery of previous years taxation
payments the group has achieved a negative effective tax rate.
Loss before taxation is analysed as follows:
<TABLE>
<CAPTION>
Year ended 31
December
----------------------
1999 1998
---------- ----------
(Pounds) (Pounds)
<S> <C> <C>
United States........................................ (720,204) --
United Kingdom....................................... (3,243,921) (1,632,020)
---------- ----------
(3,964,125) (1,632,020)
========== ==========
</TABLE>
F-93
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes:
<TABLE>
<CAPTION>
As of December
31,
------------------
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Deferred tax assets
Losses carried forward................................. 746,625 373,860
Valuation allowance for deferred tax assets............ (746,625) (373,860)
-------- --------
Net tax asset........................................ -- --
======== ========
</TABLE>
The realisation of the deferred tax asset is dependent on the group's
ability to generate approximately (Pounds) 2.5 million of taxable income.
Management are currently unable to estimate the timing of the generation of
this income and have therefore set a valuation allowance in full against the
asset. This allowance will be reviewed annually.
6. Tangible Fixed Assets
<TABLE>
<CAPTION>
As of December
31,
------------------
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Computer equipment....................................... 46,344 33,985
Software................................................. 11,033 12,751
Office equipment......................................... 54,786 7,992
Fixtures and fittings.................................... 984 1,430
------- -------
Equipment, fixtures and fittings--at cost................ 113,147 56,158
Less: accumulated depreciation........................... (43,687) (36,323)
------- -------
69,640 19,835
======= =======
</TABLE>
The above figures include assets under capital leases as follows:
<TABLE>
<CAPTION>
As of December
31,
-----------------
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Cost....................................................... 26,948 --
Less: accumulated depreciation............................. (2,235) --
------ ---
24,713 --
====== ===
</TABLE>
7. Intangible Assets
<TABLE>
<CAPTION>
As of December
31,
------------------
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Development expenditure.................................. 155,441 155,441
Intellectual Property Rights............................. 12,104 12,104
-------- -------
Intangible assets........................................ 167,545 167,545
Less: accumulated amortisation........................... (167,545) (84,645)
-------- -------
Intangible assets--net................................... -- 82,900
======== =======
</TABLE>
F-94
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Obligations Under Capital Leases
Future minimum capital lease obligations are as follows:
<TABLE>
<CAPTION>
As at
December 31, 1999
-----------------
(Pounds)
<S> <C>
Amounts payable:
within one year.......................................... 9,514
in two to three years.................................... 9,514
in three to four years................................... 8,550
------
27,578
Less: finance charges allocated to future periods.......... 4,830
------
22,748
======
</TABLE>
9. "C' Redeemable Convertible Preferred Shares ("C' Shares)
During 1999, 2,727,148 "C' shares of par value 10p per share were allotted
for (Pounds) 8,564,020, gross of issue costs of (Pounds) 108,386.
"C' shares rank pari passu in all respects to voting rights with other
classes of shareholders.
The "C' preferred shareholders have priority over all other shareholders to
a non-cumulative dividend of 8%. After accounting for the preferential
dividend all classes rank pari passu in respect of further dividends.
On a winding up of the company, the "C' preferred shareholders have the
right to receive, in priority to all other shareholders, the subscription
price of the "C' preferred shares plus any dividends in arrears, the "B'
preferred shareholders then have the right to receive, in priority to "A'
preferred and ordinary shareholders, the subscription price of the "B'
preferred shares plus any dividends in arrears. The "A' preferred shareholders
have the right to receive, subject to the rights of the "B' and "C' preferred
shareholders, but in priority to ordinary shareholders, the subscription price
of the "A' preferred shares plus any dividends in arrears. Any remaining
balance will then be shared pari passu between the "B' and "C' preferred
shareholders and the ordinary shareholders.
A holder of any class of preferred shares is entitled to convert each share
held into such number of fully paid ordinary shares as determined by the
Articles of Association.
If approval of 50% of the "C' preferred shareholders is given, the company
shall redeem at the subscription price the shares of such holder giving
notice.
10. Share Capital
On 10 February 1998, 948,998 (Pounds) 1 ordinary shares were issued fully
paid in consideration on merger with Paragon Software Limited and Paragon
Software (Developments) Limited. Also on this date, 50,000 (Pounds) 1 ordinary
shares were issued fully paid for a cash consideration of (Pounds) 50,000.
On 12 February 1998, 144,165 (Pounds) 1 ordinary shares were issued fully
paid for a cash consideration of (Pounds) 450,000. Issue costs of (Pounds)
27,282 were incurred.
On 12 February 1998, 163,398 (Pounds) 1 ordinary shares were issued fully
paid for a cash consideration of (Pounds) 1,249,995. Issue costs of (Pounds)
54,100 were incurred.
F-95
<PAGE>
PARAGON SOFTWARE (HOLDINGS) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999 the company subdivided each (Pounds) 1 ordinary, "A' preferred
and "B' preferred shares into 10 10p ordinary, "A' preferred and "B' preferred
shares respectively.
The company has an unapproved share option plan under which options to
subscribe for the company's shares have been awarded to consultants and
employees. The Board of Directors determines the term of each award and the
award price. The awards are made at the discretion of the Board of Directors.
At the beginning of 1998 there were no options under the plan in place. During
1998 options under this plan were granted over 615,000 shares exercisable at
10p each, between 25 October 2001 and 25 October 2007. During 1999 further
options were granted over 1,360,000 ordinary shares exercisable at 10p each,
between 1 April 2002 and 1 April 2008. No options were exercised or lapsed
during 1998 or 1999.
The "C' preferred shareholders have priority over all other shareholders to
a non-cumulative dividend of 8%. After accounting for the preferential
dividend all classes rank pari passu in respect of further dividends.
On a winding up of the company, the "C' preferred shareholders have the
right to receive, in priority to all other shareholders, the subscription
price of the "C' preferred shares plus any dividends in arrears, the "B'
preferred shareholders then have the right to receive, in priority to "A'
preferred and ordinary shareholders, the subscription price of the "B'
preferred shares plus any dividends in arrears. The "A' preferred shareholders
have the right to receive, subject to the rights of the "B' and "C' preferred
shareholders, but in priority to ordinary shareholders, the subscription price
of the "A' preferred shares plus any dividends in arrears. Any remaining
balance will then be shared pari passu between the "B' and "C' preferred
shareholders and the ordinary shareholders.
A holder of any class of preferred shares is entitled to convert each share
held into such number of fully paid ordinary shares as determined by the
Articles of Association.
If approval of 50% of the "C' preferred shareholders is given, the company
shall redeem at the subscription price the shares of such holder giving
notice.
11. Commitments
As at December 31, 1999 the group had commitments under operating leases as
set out below:
<TABLE>
<CAPTION>
1999
--------
(Pounds)
<S> <C>
Minimum lease commitments
Within one year................................................ 154,491
In one to two years............................................ 139,491
In two to three years.......................................... 139,491
In three to four years......................................... 39,750
-------
473,223
=======
</TABLE>
During the years ended 31 December 1999 and 1998 rent expense totalled
(Pounds) 83,194 and (Pounds) 31,358 respectively.
12. Post Balance Sheet Event
On 4 March 2000, the entire share capital of the company was acquired by
Phone.com Inc., a company incorporated in the United States of America.
F-96
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Onebox.com, Inc.
We have audited the accompanying balance sheets of Onebox.com, Inc. (a
development stage company) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1999 and the periods from inception (May 20, 1998) to
December 31, 1999 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Onebox.com, Inc. (a
development stage company) at December 31, 1999 and 1998, and the results of
its operations and its cash flows for the year ended December 31, 1999 and the
periods from inception (May 20, 1998) to December 31, 1999 and 1998, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young
San Jose, California
February 18, 2000
F-97
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,198,503 $2,293,584
Short-term investments............................. 1,543,616 --
Accounts receivable................................ 76,451 --
Prepaids and other current assets.................. 1,717,223 53,159
------------ ----------
Total current assets............................. 4,535,793 2,346,743
Property and equipment, net.......................... 6,436,136 764,339
Purchased software................................... 1,150,000 --
Deposits............................................. 755,675 17,965
------------ ----------
$ 12,877,604 $3,129,047
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 935,569 $ 597,602
Accrued expenses................................... 2,938,735 95,726
Short-term capital lease obligations............... 1,608,347 --
------------ ----------
Total current liabilities........................ 5,482,651 693,328
Long-term capital lease obligations.................. 2,745,148 --
Long-term debt....................................... 700,000 --
Other long-term liabilities.......................... 32,921 --
Commitments
Stockholders' equity:
Series A convertible preferred stock, par value
$0.001; 9,776,250 shares authorized, 9,776,250 and
9,765,000 shares issued and outstanding at
December 31, 1999 and 1998, respectively
(liquidation preference of $9,776,250)............ 9,776 9,765
Series B convertible preferred stock, par value
$0.001; 7,800,000 shares authorized, 7,064,684
shares issued and outstanding (liquidation
preference of $40,409,992)........................ 7,065 --
Common stock, par value $0.001; 37,500,000 shares
authorized, 13,189,779 and 6,666,862 shares issued
and outstanding at December 31, 1999 and 1998,
respectively...................................... 13,190 6,667
Additional paid-in capital......................... 17,096,915 3,230,435
Deficit accumulated during the development stage... (13,210,062) (811,148)
------------ ----------
Total stockholders' equity....................... 3,916,884 2,435,719
------------ ----------
$ 12,877,604 $3,129,047
============ ==========
</TABLE>
See notes to consolidated financial statements.
F-98
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from inception
(May 20, 1998) to
Year ended December 31,
December 31, -----------------------
1999 1998 1999
------------ --------- ------------
<S> <C> <C> <C>
Revenues................................ $ 84,751 $ -- $ 84,751
Cost of revenues........................ 3,238,866 -- 3,238,866
Operating expenses:
Research and development.............. 2,714,556 610,277 3,324,833
Sales and marketing................... 4,593,457 63,157 4,656,614
General and administrative............ 1,888,455 154,308 2,042,763
------------ --------- ------------
Total operating expenses............ 9,196,468 827,742 10,024,210
------------ --------- ------------
Loss from operations.................... (12,350,583) (827,742) (13,178,325)
Interest and other income............... 216,245 16,594 232,839
Interest and other expense.............. (264,576) -- (264,576)
------------ --------- ------------
Net loss................................ $(12,398,914) $(811,148) $(13,210,062)
============ ========= ============
</TABLE>
See notes to consolidated financial statements.
F-99
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY
Period from inception (May 20, 1998) to December 31, 1999
<TABLE>
<CAPTION>
Convertible Preferred Stock Deficit
--------------------------------- Accumulated
Series A Series B Common Stock Additional During the Total
---------------- ---------------- ------------------- Paid-In Development Stockholders'
Shares Amount Shares Amount Shares Amount Capital Stage Equity
--------- ------ --------- ------ ---------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
at $0.001 per share to
founders for cash in
August 1998............ -- $ -- -- $ -- 8,565,300 $ 8,565 $ (2,855) $ -- $ 5,710
Issuance of Series A
convertible preferred
stock at $0.33 per
share in October 1998,
less issuance costs of
$12,578................ 9,765,000 9,765 -- -- -- -- 3,232,657 -- 3,242,422
Repurchase of common
stock in September 1998
at $0.0007 per share... -- -- -- -- (1,898,438) (1,898) 633 -- (1,265)
Net loss since
inception.............. -- -- -- -- -- -- -- (811,148) (811,148)
--------- ------ --------- ------ ---------- ------- ----------- ------------ ------------
Balances at December 31,
1998................... 9,765,000 9,765 -- -- 6,666,862 6,667 3,230,435 (811,148) 2,435,719
Issuance of Series A
convertible preferred
stock at $0.33 in
January 1999........... 11,250 11 -- -- -- -- 3,739 -- 3,750
Issuance of Series B
convertible preferred
stock at $1.91 per
share in June 1999,
less issuance costs of
$33,484................ -- -- 7,064,684 7,065 -- -- 13,434,157 -- 13,441,222
Issuance of warrants to
purchase Series A
preferred stock in
connection with lease
financing.............. -- -- -- -- -- -- 70,461 -- 70,461
Issuance of common stock
to employees and
consultants at $0.03-
$0.33 per share for
cash and services...... -- -- -- -- 544,895 545 25,763 -- 26,308
Exercise of options to
purchase common stock
in August 1999--October
1999 at $0.0007-$0.03
per share.............. -- -- -- -- 6,520,286 6,520 340,997 -- 347,517
Repurchase of common
stock at $0.03-$0.33
per share.............. -- -- -- -- (542,264) (542) (8,637) -- (9,179)
Net loss................ -- -- -- -- -- -- -- (12,398,914) (12,398,914)
--------- ------ --------- ------ ---------- ------- ----------- ------------ ------------
Balances at December 31,
1999................... 9,776,250 $9,776 7,064,684 $7,065 13,189,779 $13,190 $17,096,915 $(13,210,062) $ 3,916,884
========= ====== ========= ====== ========== ======= =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-100
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Periods from inception
(May 20, 1998)
Year ended to December 31,
December 31, ------------------------
1999 1998 1999
------------ ---------- ------------
<S> <C> <C> <C>
Operating activities
Net loss............................. $(12,398,914) $ (811,148) $(13,210,062)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation....................... 1,257,285 8,396 1,265,681
Warrant expense.................... 17,615 -- 17,615
Changes in assets and liabilities:
Accounts receivable.............. (76,451) -- (76,451)
Prepaids and other current
assets.......................... (1,611,218) (53,159) (1,664,377)
Deposits......................... (737,710) (17,965) (755,675)
Accounts payable................. 337,967 597,602 935,569
Accrued expenses................. 2,843,009 95,726 2,938,735
Other long-term liabilities...... 32,921 -- 32,921
------------ ---------- ------------
Net cash used in operating
activities.................... (10,335,496) (180,548) (10,516,044)
------------ ---------- ------------
Investing activities
Capital expenditures................. (6,929,082) (772,735) (7,701,817)
Purchase of capitalized software..... (1,150,000) -- (1,150,000)
Purchase of marketable securities.... (1,543,616) -- (1,543,616)
------------ ---------- ------------
Net cash used in investing
activities.................... (9,622,698) (772,735) (10,395,433)
------------ ---------- ------------
Financing activities
Proceeds from capital lease
obligations......................... 5,010,822 -- 5,010,822
Proceeds from debt................... 700,000 -- 700,000
Principal payments under capital
lease obligations................... (657,327) -- (657,327)
Proceeds from issuance of preferred
stock, net.......................... 13,444,972 3,242,422 16,687,394
Proceeds from issuance of common
stock............................... 373,825 5,710 379,535
Repurchase of common stock........... (9,179) (1,265) (10,444)
------------ ---------- ------------
Net cash provided by financing
activities.................... 18,863,113 3,246,867 22,109,980
Net increase in cash and cash
equivalents........................... (1,095,081) 2,293,584 1,198,503
Cash and cash equivalents at beginning
of period............................. 2,293,584 -- --
------------ ---------- ------------
Cash and cash equivalents at end of
period................................ $ 1,198,503 $2,293,584 $ 1,198,503
============ ========== ============
Supplemental schedule of cash flow
information
Interest paid........................ $ 153,634 $ -- $ 153,634
============ ========== ============
Supplemental disclosure of noncash
financing activities
Warrants issued in connection with
lease financing..................... $ 70,461 $ -- $ 70,461
============ ========== ============
</TABLE>
See notes to consolidated financial statements.
F-101
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Organization and Summary of Significant Accounting Policies
Nature of Operations
Onebox.com, Inc. (the "Company") was incorporated in the state of Delaware
on May 20, 1998. The Company is engaged in web-based services that simplify
and reduce the cost of communications for consumers and businesses.
The Company has incurred losses to date of approximately $13,200,000. The
Company expects such losses to continue until the Company successfully
completes development and market introduction of its products. Consequently,
management recognizes the need to raise additional funds from outside sources.
Management believes currently available resources along with proceeds from
Series C preferred stock offering (see Note 8) will provide sufficient funds
to enable the Company to meet its obligations through at least December 31,
2000. If anticipated operations are not achieved, management has the intent
and believes it has the ability to delay or reduce expenditures so as not to
require additional financial resources if such resources were not available.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ materially from these
estimates.
Revenue Recognition
Revenues are derived principally from short-term on-line advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. These revenues are
generally recognized ratably over the term of the agreements, provided that
the Company does not have any significant remaining obligations and collection
of the resulting receivable is probable. To the extent that impression
deliveries do not meet the guarantees, the Company defers recognition of the
corresponding revenues.
Revenues are derived principally from a Service Distribution Agreement (see
Note 4) in which the Company agrees to co-brand an Internet Website. The
Company receives 25% of the advertising revenue generated by the co-branded
Website, which is determined and remitted to Onebox.com directly by the
Website's co-owner.
Cash, Cash Equivalents, and Short-Term Investments
Onebox.com generally invests its excess cash in money market accounts,
certificates of deposits and U.S. Treasury bills. Onebox.com considers all
highly liquid investments with a maturity from date from original purchase of
three months or less to be cash equivalents. The carrying amount reported in
the balance sheet for cash and cash equivalents approximates its fair value.
Onebox.com classifies its short-term investment as "available-for-sale."
Onebox.com considers all investments with a maturity date of one year from
date of original purchase to be short-term investments. These investments are
recorded at fair value based on quoted market prices. The amortized cost of
these investments approximates their fair value. Unrealized gains and losses
are not material and have, therefore, not been shown separately.
F-102
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
which is provided using the straight-line method over the estimated useful
lives of the assets, generally three to five years. Equipment purchased under
capital lease is amortized on a straight-line basis over the lesser of the
estimated useful life of the asset or the lease term.
Advertising Expense
Advertising is expensed as incurred. Advertising expense was approximately
$2,600,000 and none for the year ended December 31, 1999 and the period from
inception (May 20, 1998) to December 31, 1998, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees ("APB 25")," and has adopted the disclosure only
alternative of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on the Company's
product development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready
for general release have been insignificant. Accordingly, the Company has
charged all such costs to research and development expense in the period
incurred.
Onebox.com adopted SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" during 1999, which requires
capitalization of certain costs incurred during the development of internal
use software. Through December 31, 1999 capitalizable costs incurred have not
been significant for any development project. Accordingly, Onebox.com has
charged all costs to research and development expense in the periods they were
incurred.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." ("SFAS No. 133"). SFAS No. 133 establishes methods
for derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because Onebox.com does not
currently hold any derivative instruments and does not engage in hedging
activities, the adoption of SFAS No. 133 is not expected to have a significant
impact on its financial position, results of operations or cash flows.
Onebox.com will be required to implement SFAS No. 133, as amended, for the
year ending December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"). SAB 101 summarizes the Staff's views in applying generally accepted
accounting principles to revenue recognition. The Company believes that its
current revenue recognition principles comply with SAB 101.
F-103
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes revenues and expenses and gains
and losses that are not included in net loss, but, rather are recorded
directly in stockholders' equity. To date, Onebox.com has not had any
significant transactions that are required to be reported in other
comprehensive income (loss).
2. Property and Equipment
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---------- --------
<S> <C> <C>
Computer equipment and software......................... $2,549,553 $652,894
Furniture and equipment................................. 175,648 119,841
Leased equipment........................................ 4,976,616 --
---------- --------
7,701,817 772,735
Accumulated depreciation................................ 1,265,681 8,396
---------- --------
$6,436,136 $764,339
========== ========
</TABLE>
3. Purchased Software License
In December 1999, the Company signed a $1,840,000 Software License
Agreement. Under the agreement, the Company paid $1,150,000 for a software
license for software to be integrated into the Onebox.com product, subject to
maximum of 35 million users. The license will be amortized to cost of goods
sold as products are sold. In addition to the license, the Company purchased
three years of technical support and maintenance for $690,000, which will be
amortized over the three years, beginning in December 1999.
4. Service Distribution Agreement
In September 1999, the Company entered into a two-year Service Distribution
Agreement to co-brand an Internet website. The agreement calls for Onebox.com
to pay $2,250,000 for distribution, marketing, and advertising of the co-
branded site. The payment will be made in two installments; $1,500,000 on the
effective date of the agreement and $750,000 payable on the first anniversary
of the effective date. These fees are being amortized over the two years,
beginning in September 1999, and are classified as a current asset on the
balance sheet. In addition to these payments, Onebox.com will be paid 25% of
the advertising revenue generated by the co-branded website. Revenue related
to this agreement was $84,559 for the year ended December 31, 1999.
F-104
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Commitments
As of December 31, 1999, minimum payments under all noncancelable lease
agreements were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------- ----------
<S> <C> <C>
Years ending December 31:
2000.............................................. $ 1,927,841 $1,357,624
2001.............................................. 1,927,841 1,397,090
2002.............................................. 1,036,543 680,600
2003.............................................. -- --
2004 and thereafter............................... -- --
----------- ----------
Total minimum lease payments.................... 4,892,225 $3,435,314
==========
Less amount representing interest................... (538,730)
-----------
Present value of future payments.................... 4,353,495
Less current portion................................ (1,608,347)
-----------
Long-term portion................................... $ 2,745,148
===========
</TABLE>
The Company leases its main facility under a noncancelable operating lease
agreement, which expires in 2002. Rent expense was approximately $700,000 and
$65,000 for the year ended December 31, 1999 and for the period from inception
(May 20, 1998) to December 31, 1998, respectively. The Company subleases a
portion of its facility under a noncancelable operating lease agreement, which
expires in February 2002. Sublease rental income was approximately $163,000
for the year ended December 31, 1999 and none for the period from inception
(May 20, 1998) to December 31, 1998.
In March 1999, the Company entered into a Master Lease Agreement with a
financial institution for the purchase of up to $3,000,000 of equipment,
software and leasehold improvements. Advances under this agreement are treated
as capital leases and may only be used to finance purchases of equipment and
software, subject to certain limitations. Advances are secured by the assets
acquired. The advances bear interest at 7% per annum and are payable in 36
monthly installments of principal and interest. At December 31, 1999, none
remained available and the Company owed approximately $2,700,000 under this
agreement.
In June 1999, the Company entered into a $700,000 Loan and Security
Agreement with a lender for the purchase of equipment. The loan bears interest
at a rate of 8.75% per annum and is payable beginning in December 2002. The
loan is secured by the assets acquired.
In August 1999, the Company entered into a lease agreement with a financial
institution for the purchase of approximately $400,000 in equipment. The lease
is payable in 30 equal monthly payments of approximately $13,500 beginning in
September 1999. As of December 31, 1999 the Company owed approximately
$346,000 under this lease agreement.
In September 1999, the Company entered into a Master Lease Agreement for the
purchase of approximately $1,400,000 in equipment. Advances under this
agreement are treated as capital leases and are secured by the assets
acquired. The advances bear interest at approximately 14% per annum and are
payable in 36 monthly installments of principal and interest. At December 31,
1999, the Company owed approximately $1,300,000 under this agreement.
F-105
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity
Convertible Preferred Stock
In October 1998, the Company issued 9,765,000 Series A convertible preferred
shares at a price of $0.33 per share under a stock purchase agreement. In May
1999, the Company issued 7,064,684 Series B convertible preferred shares at a
price of $1.91 per share under a stock purchase agreement.
Each share of Series A and B convertible preferred stock is, at the option
of the holder, convertible into one share of common stock, subject to certain
adjustments for dilution, if any, resulting from future stock issuances. The
outstanding shares of convertible preferred stock automatically convert into
common stock (i) upon the affirmative vote of the majority of each class of
preferred stock or (ii) immediately prior to the closing of an underwritten
public offering of common stock under the Securities Act of 1933 provided
that, with respect to Series A, the Company receives at least $15,000,000 in
gross proceeds and the price per share is at least $2.50 and, with respect to
Series B, the product of the price per share to the public and the aggregate
number of shares of the Company's common stock outstanding prior to such an
offering is at least $150,000,000 and aggregate proceeds to the Company are
not less than $15,000,000.
Series A and B convertible preferred stockholders are entitled to
noncumulative dividends of $0.03 and $0.15 per share, respectively. Dividends
will be paid only when declared by the board of directors out of legally
available funds. No dividends have been declared as of December 31, 1999.
Series A and B convertible preferred stock have liquidation preferences of
$0.33 and $3.81 per share, respectively, with the remaining liquidation
occurring on a pro rata basis between common and preferred stock until holders
of Series A and B preferred stock have received an aggregate, which includes
the initial liquidation preference, of $1.00 and $5.72 per share,
respectively.
The Series A and B convertible preferred stockholders have voting rights
equal to the common shares issuable upon conversion of their preferred shares.
Common Stock
The Company has sold 9,110,195 shares of common stock to employees and
investors for $0.001 to $0.50 per share. Of these shares, 8,565,300 are
subject to repurchase by the Company, at the price paid by the stockholder, in
the event of termination of services by the stockholder to the Company; the
repurchase right lapses over a 48-month period. Of these shares, 310,200 are
subject to repurchase until the sooner of the date on which the last of four
milestones are met or five years from April 1999. During the period from
inception (May 20, 1998) to December 31, 1999, 2,440,702 shares of common
stock were repurchased. As of December 31, 1999, the Company had 2,377,800
shares of common stock outstanding subject to repurchase.
At December 31, 1999, an aggregate of 20,066,049 shares of common stock were
reserved for issuance upon exercise of warrants, the conversion of preferred
stock, outstanding stock options and stock options reserved for issuance.
Stock Warrants
In conjunction with a capital lease agreement, the Company issued the
lenders warrants to purchase an aggregate of 81,301 shares of its Series A
convertible preferred stock at $1.47 per share. The warrants shall be
exercisable for a period of (i) seven years or (ii) three years from the
effective date of the company's initial
F-106
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
public offering, whichever is earlier. The warrants were valued using the
Black-Scholes model (0.5 volatility, seven year life, $1.47 exercise price,
and a 6% risk-free interest rate). The total value of $70,461 will be
amortized to interest expense over the term of the capital lease.
1999 Incentive Stock Plan
As discussed in Note 1, the Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options. The alternative
fair value accounting provided for under Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
During the period ended December 31, 1999, the Company adopted the 1999
Stock Plan (the "Plan"). Under the Plan, up to 9,664,100 shares of the
Company's common stock may be granted as options or sold to eligible
participants. Under the Plan, options to purchase common stock may be granted
at no less than 85% of the fair value on the date of the grant (110% of fair
value in certain instances), as determined by the board of directors. Options
generally vest over a 48-month period and have a maximum term of ten years.
Pro forma information regarding net income is required by FAS 123, which
also requires that the information be determined as if the Company has
accounted for its employee stock options under the fair value method of FAS
123. The fair value of these options was estimated at the date of grant using
the minimum value method option pricing model with the following weighted-
average assumptions for the period from inception (May 20, 1998) to December
31, 1999: risk-free interest rates of 6%; a dividend yield of 0%; and a
weighted-average expected life of the option of five years.
The effect of applying FAS 123 to the Company's stock option awards did not
result in pro forma net loss that was materially different from amounts
reported. Therefore, such pro forma information is not separately presented
herein. Future pro forma net income/loss results may be materially different
from actual amounts reported.
Information with respect to stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Weighted-
Options ----------------------- Average
Available Number of Price Per Exercise
for Grant Shares Share Price
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Shares authorized....... 6,833,137 -- --
Options granted......... (1,480,702) 1,480,702 $ 0.03 $0.03
---------- ---------- -----------
Balance at December 31,
1998................... 5,352,435 1,480,702 $ 0.03 $0.03
Additional shares
authorized............. 2,830,963 -- -- --
Options granted......... (7,249,350) 7,249,350 $0.03-$0.33 $0.10
Options exercised....... -- (6,520,286) $0.03-$0.33 $0.05
Options canceled........ 628,767 (628,767) $0.03-$0.33 $0.09
---------- ---------- -----------
Balance at December 31,
1999................... 1,562,815 1,580,999 $0.03-$0.33 $0.33
========== ========== ===========
</TABLE>
The weighted-average fair value of options granted was $0.02 during the year
ended December 31, 1999 and $0.01 during the period from inception (May 20,
1998) to December 31, 1998.
F-107
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, no options to purchase shares were exercisable. The
weighted-average remaining contractual life of all outstanding options is 9.2
years.
7. Income Taxes
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $13.2 million and $10.2 million,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $100,000. The federal and state net operating
loss and credit carryforwards will expire at various dates beginning in the
year 2006 through 2019, if not utilized.
Utilization of the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the Company's deferred
tax assets for federal and state income taxes as of December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------- -----
(In
thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 5,100 $ 300
Research and development credits........................... 100 --
Capitalized research and development expenses.............. 200 --
Other, net................................................. -- --
------- -----
Total deferred tax assets................................ 5,400 300
Valuation allowance.......................................... (5,400) (300)
------- -----
Net deferred taxes........................................... $ -- $ --
======= =====
</TABLE>
Due to the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $300,000 during the year ended December 31, 1998, respectively.
8. Subsequent Events
Stock Split
In February 2000, the Company effected a three-for-two stock split of its
preferred and common stock. All share and per share information included in
these financial statements has been retroactively adjusted to reflect this
stock split.
Series C Preferred Stock
In February 2000, the Company issued 1,856,374 Series C convertible
preferred shares at a price of $7.45 per share under a stock purchase
agreement.
Each share of Series C convertible preferred stock is, at the option of the
holder, convertible into one share of common stock, subject to certain
adjustments for dilution, if any, resulting from future stock issuances. The
F-108
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
outstanding shares of convertible Series C preferred stock automatically
convert into common stock immediately prior to the closing of an underwritten
public offering of common stock under the Securities Act of 1933 in which the
Company receives at least $25,000,000 in gross proceeds and the price per
share is at least $1.67.
Series C convertible preferred stockholders are entitled to noncumulative
dividends of $0.60 per share.
Series C convertible preferred stock has an initial liquidation preference
of $14.90, with the remaining liquidation occurring on a pro rata basis
between common and preferred stock until holders of Series C preferred stock
have received an aggregate, which includes the initial liquidation preference,
of $22.35 per share.
The Series C convertible preferred stockholders have voting rights equal to
the common shares issuable upon conversion of their preferred shares.
Merger with Phone.com
In February 2000, the Company signed a merger agreement with Phone.com, Inc.
Under the agreement, Phone.com agreed to purchase all of Onebox.com's
outstanding common and preferred stock and assume all unexpired and
unexercised outstanding options, warrants, and other rights for 6,469,413
shares of Phone.com common stock.
F-109
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
UNAUDITED CONDENSED BALANCE SHEET
As of March 31, 2000
(in thousands)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 7,293
Accounts receivable................................................. 93
Prepaids and other current assets................................... 2,467
--------
Total current assets.............................................. 9,853
Property and equipment, net........................................... 7,141
Deposits.............................................................. 756
--------
$ 17,750
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 726
Accrued expenses.................................................... 1,315
Short-term capital lease obligations................................ 28
--------
Total current liabilities......................................... 2,069
Long-term capital lease obligations................................... 3,965
Long-term debt........................................................ --
Other long-term liabilities........................................... 32
--------
Total liabilities................................................. 6,066
--------
Stockholders' equity
Convertible preferred stock......................................... 24
Common stock........................................................ 9
Additional paid-in capital.......................................... 30,973
Notes receivable from stockholders.................................. (122)
Deficit accumulated during the development stage.................... (19,200)
--------
Total stockholders' equity........................................ 11,684
--------
$ 17,750
========
</TABLE>
F-110
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
Three months
ended March
31,
--------------
2000 1999
------- -----
<S> <C> <C>
Revenues....................................................... $ 92 $ --
Cost of revenues............................................... 1,932 46
Operating expenses:
Research and development..................................... 1,263 354
Sales and marketing.......................................... 2,086 95
General and administrative................................... 778 281
------- -----
Total operating expenses................................... 4,127 730
------- -----
Loss from operations........................................... (5,967) (776)
Interest and other income...................................... 92 13
Interest and other expense..................................... (115) (3)
------- -----
Net loss....................................................... $(5,990) $(766)
======= =====
</TABLE>
F-111
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
UNAUDITED STATEMENTS OF CASH FLOWS
For the 3 months ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Operating activities
Net loss................................................... $(5,990) $ (766)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 1,461 66
Changes in assets and liabilities:
Accounts receivable.................................... (17) --
Prepaids and other current assets...................... (750) (34)
Deposits............................................... -- (93)
Accounts payable....................................... (210) (451)
Accrued expenses....................................... (1,596) (29)
Other long-term liabilities............................ (1) --
------- -------
Net cash used in operating activities................ (7,103) (1,307)
------- -------
Investing activities
Capital expenditures....................................... (1,016) (2,068)
Sales of short-term investments............................ 1,544 --
------- -------
Net cash provided by (used in) investing activities.. 528 (2,068)
------- -------
Financing activities
Proceeds from capital lease obligations.................... 6 2,418
Debt repayments............................................ (700) --
Principal payments under capital lease obligations......... (394) (39)
Proceeds from issuance of preferred stock, net............. 13,761 103
Proceeds from issuance of common stock..................... 1 1
Repurchase of common stock................................. (5) (2)
------- -------
Net cash provided by financing activities............ 12,669 2,481
------- -------
Net increase (decrease) in cash and cash equivalents......... 6,094 (894)
Cash and cash equivalents at beginning of period............. 1,199 2,294
------- -------
Cash and cash equivalents at end of period................... $ 7,293 $ 1,400
======= =======
</TABLE>
F-112
<PAGE>
ONEBOX.COM, INC.
(a development stage company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
1. Basis of Presentation
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles and reflect all adjustments, consisting only of normal recurring
adjustments which in the opinion of management are necessary to fairly state
the Company's financial position, results of operations, and cash flows for
the periods presented. Through March 31, 2000, the Company was active in
product development, the acquisition of equipment and facilities, raising
capital, and had virtually no revenues. Accordingly, the Company was in the
development stage, and the financial statements have been prepared on a going-
concern basis. The results of operations for the three months ended March 31,
2000 are not necessarily indicative of the results to be expected for any
subsequent quarter.
2. Subsequent Event
On February 14, 2000, the Company signed a definitive agreement to be
acquired by Phone.com, Inc. In connection with the acquisition, which was
completed on April 14, 2000, Phone.com issued approximately 6.5 million shares
of its common stock in exchange for all of the outstanding common stock and
preferred stock of Onebox, and assumed options and warrants of Onebox for
total consideration valued at approximately $800 million.
F-113
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders of
Software.com, Inc.
We have audited the accompanying balance sheets of Telarc, Inc. as of
December 31, 1998 and 1997, and the related statements of income,
shareholder's equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Telarc, Inc. at December
31, 1998 and 1997, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Woodland Hills, California
December 27, 1999
F-114
<PAGE>
TELARC, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
-------- ------- -------------
(unaudited)
-------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 82,721 $49,545 $ 37,721
Accounts receivable........................... 25,716 38,520 48,560
Prepaid expenses and other assets............. -- 4,880 6,012
-------- ------- --------
Total current assets........................ 108,437 92,945 92,293
Property and equipment, net..................... 4,539 6,478 11,684
-------- ------- --------
$112,976 $99,423 $103,977
======== ======= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.............................. $ 8,748 $ 5,787 $ 288
Accrued payroll and related liabilities....... -- 1,065 1,523
Other accrued liabilities..................... -- 18,000 --
Deferred revenue.............................. -- -- 9,928
-------- ------- --------
Total current liabilities................... 8,748 24,852 11,739
Shareholder's equity:
Common stock, no par value, 200 shares
authorized; 10 shares issued and
outstanding.................................. 10 10 10
Retained earnings............................. 104,218 74,561 92,228
-------- ------- --------
Total shareholder's equity.................. 104,228 74,571 92,238
-------- ------- --------
Total liabilities and shareholder's equity.. $112,976 $99,423 $103,977
======== ======= ========
</TABLE>
See accompanying notes.
F-115
<PAGE>
TELARC, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
---------------- ----------------
1997 1998 1998 1999
-------- ------- ------- --------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software licenses......................... $ -- $ -- $ -- $309,000
Services.................................. 328,798 293,521 198,715 277,086
-------- ------- ------- --------
Total revenues.......................... 328,798 293,521 198,715 586,086
-------- ------- ------- --------
Cost of revenues:
Software licenses......................... -- -- -- --
Services.................................. 111,713 164,836 124,777 179,622
-------- ------- ------- --------
Total cost of revenues.................. 111,713 164,836 124,777 179,622
-------- ------- ------- --------
Gross profit................................ 217,085 128,685 73,938 406,464
Selling, general and administrative
expenses................................... 12,638 71,189 56,044 49,044
-------- ------- ------- --------
Income from operations...................... 204,447 57,496 17,894 357,420
Other income, net........................... 211 610 515 1,431
-------- ------- ------- --------
Net income.................................. $204,658 $58,106 $18,409 $358,851
======== ======= ======= ========
</TABLE>
See accompanying notes.
F-116
<PAGE>
TELARC, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock
------------- Retained
Shares Amount Earnings Total
------ ------ -------- --------
<S> <C> <C> <C> <C>
Issuance of common stock at inception........ 10 $10 $ -- $ 10
Net income................................. -- -- 204,658 204,658
Shareholder distributions.................. -- -- (100,440) (100,440)
--- --- -------- --------
Balance at December 31, 1997................. 10 10 104,218 104,228
Net income................................. -- -- 58,106 58,106
Shareholder distributions.................. -- -- (87,763) (87,763)
--- --- -------- --------
Balance at December 31, 1998................. 10 10 74,561 74,571
Net income (unaudited)..................... -- -- 358,851 358,851
Shareholder distributions (unaudited)...... -- -- (341,184) (341,184)
--- --- -------- --------
Balance at September 30, 1999 (unaudited).... 10 $10 $ 92,228 $ 92,238
=== === ======== ========
</TABLE>
See accompanying notes.
F-117
<PAGE>
TELARC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
------------------- -------------------
1997 1998 1998 1999
--------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income.......................... $ 204,658 $ 58,106 $ 18,409 $ 358,851
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation...................... 301 1,272 949 2,168
Changes in operating assets and
liabilities:
Accounts receivable.............. (25,716) (12,804) (15,404) (10,040)
Prepaid expenses and other
current assets.................. -- (4,880) (9,880) (1,132)
Accounts payable................. 8,748 (2,960) (8,748) (5,499)
Accrued payroll and related
liabilities..................... -- 1,064 1,000 458
Other accrued liabilities........ -- 18,000 -- (18,000)
Deferred revenue................. -- -- -- 9,928
--------- -------- -------- ---------
Net cash provided by (used in)
operating activities............... 187,991 57,798 (13,674) 336,734
Investing activities
Purchases of property and
equipment........................ (4,840) (3,211) (395) (7,374)
--------- -------- -------- ---------
Net cash used in investing
activities......................... (4,840) (3,211) (395) (7,374)
Financing activities
Issuance of common stock.......... 10 -- -- --
Shareholder distributions......... (100,440) (87,763) (39,531) (341,184)
--------- -------- -------- ---------
Net cash used by financing
activities......................... (100,430) (87,763) (39,531) (341,184)
Net increase (decrease) in cash and
cash equivalents................... 82,721 (33,176) (53,600) (11,824)
Cash and cash equivalents at
beginning of period................ -- 82,721 82,721 49,545
--------- -------- -------- ---------
Cash and cash equivalents at end of
period............................. $ 82,721 $ 49,545 $ 29,121 $ 37,721
========= ======== ======== =========
</TABLE>
See accompanying notes.
F-118
<PAGE>
TELARC, INC.
NOTES TO FINANCIAL STATEMENTS
(Information at September 30, 1999 and for the nine months ended
September 30, 1998 and September 30, 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business
Telarc, Inc. (the Company), a New York Corporation, provides Internet, SS7,
SMS, and Paging products, middleware and consulting solutions for the
telecommunication industries. The Company was incorporated in January 1997
through the issuance of 10 shares of common stock with no par value.
Interim Financial Information (Unaudited)
The accompanying balance sheet as of September 30, 1999, the statements of
income and cash flows for the nine months ended September 30, 1999 and 1998,
and the statement of shareholder's equity for the nine months ended September
30, 1999, are unaudited. In the opinion of management, the unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the interim periods. The results of
operations for the nine months ended September 30, 1999, are not necessarily
indicative of operating results to be expected for the full fiscal year.
Cash Equivalents
The Company considers investments in money market funds to be cash
equivalents.
Concentration of Credit Risk, Other Risks and Significant Customers
The Company grants credit terms in the normal course of business to its
customers. The Company does not require collateral. Credit losses have been
within management's expectations and potential uncollectible accounts have
been provided for in the financial statements. The Company's only employee is
its sole shareholder. For the years ended December 31, 1997 and 1998, salary
and related benefits paid to the sole shareholder totaled $101,200 and
$160,000, respectively, and have been classified as cost of services in the
accompanying statements of income. For the nine months ended September 30,
1998 and 1999, salary and related benefits paid to the sole shareholder
totaled $126,000 and $175,000, respectively, and have been classified as cost
of services in the accompanying statements of income.
Total revenues from the Company's two largest customers in the years ended
December 31, 1997 and 1998, accounted for 49% and 48% of total revenues,
respectively. Total revenues from the Company's two largest customers in the
nine months ended September 30, 1998 and 1999, accounted for 49% and 57% of
total revenues, respectively. One of the Company's two largest customers for
the nine months ended September 30, 1999, was Software.com, Inc. At December
31, 1997 and 1998, and September 30, 1999, the largest customer receivable
balances totaled 63%, 40% and 44% of total accounts receivable, respectively.
Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed on a straight-line basis over the following
estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software................................... 3 years
Furniture and fixtures............................................ 7 years
</TABLE>
F-119
<PAGE>
TELARC, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at September 30, 1999 and for the nine months ended
September 30, 1998 and September 30, 1999 is unaudited)
Income Taxes
The Company has been organized for federal and state income tax purposes as
an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended, and comparable state laws. As a result, the earnings of the Company
are included in the taxable income of the Company's sole shareholder at his
individual federal and state income tax rates, rather than that of the
Company.
Revenue Recognition
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 (SOP 97-2), which was amended by SOP 98-4 and SOP
98-9, "Software Revenue Recognition." These statements provide guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. This guidance is effective for the Company's
transactions entered into subsequent to January 1, 1998. The application of
certain provisions was deferred until fiscal years beginning on or after March
15, 1999. Final adoption of these provisions is not expected to have a
material impact on the Company's financial condition or results of operation.
Software Licenses Revenue. The Company recognizes revenue from sales of
software upon delivery of the license key to the customer, provided that
persuasive evidence of an arrangement exists, the license fee is fixed and
determinable, and collection of the fee is considered probable.
Services Revenue. Services revenue consists of consulting revenue and
support and maintenance contracts related to software licenses. Consulting
revenue are recognized on a time and materials basis as the services are
performed. Support and maintenance contracts generally call for the company to
provide technical support and software updates and upgrades to customers.
Support and maintenance revenue is recognized ratably over the support or
maintenance period.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable and accounts payable, approximate their fair
values due to the short-term nature of these financial instruments
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ materially from those estimates.
2. Property and Equipment
The major components of property and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31
-------------- September 30
1997 1998 1999
------ ------ ------------
(unaudited)
<S> <C> <C> <C>
Computer equipment and software................. $1,839 $4,654 $ 7,698
Furniture and fixtures.......................... 3,000 3,395 7,725
------ ------ -------
4,839 8,049 15,423
Less accumulated depreciation................... (300) (1,571) (3,739)
------ ------ -------
$4,539 $6,478 $11,684
====== ====== =======
</TABLE>
F-120
<PAGE>
TELARC, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at September 30, 1999 and for the nine months ended
September 30, 1998 and September 30, 1999 is unaudited)
3. Related Party Transactions
The Company uses a portion of its shareholder's premises at no cost.
4. Subsequent Event (unaudited)
On October 20, 1999, Software.com, Inc. acquired all outstanding common
shares of the Company in exchange for $1,500,000 in cash and 211,918 shares of
Software.com common stock valued at $10,000,000. In addition, the sole
shareholder of Telarc, Inc. will be entitled to receive (as additional
consideration for the shares of common stock) 10 cash payments of $350,000
each for 10 consecutive quarters starting March 30, 2000, provided that such
shareholder is continuously employed by Software.com, Inc. from the
acquisition date through each payment date.
F-121
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
bCandid Corporation
We have audited the accompanying consolidated balance sheet of bCandid
Corporation as of December 31, 1999, and the related consolidated statement of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of bCandid
Corporation at December 31, 1999, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
August 25, 2000
Woodland Hills, California
F-122
<PAGE>
bCANDID CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 March 31
1999 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash............................................... $ 1,751,000 $ 696,000
Accounts receivable (net of allowance for doubtful
accounts of $28,000 and $29,000 respectively)..... 988,000 1,830,000
Prepaid and other.................................. 417,000 334,000
----------- -----------
Total current assets............................. 3,156,000 2,860,000
Equipment and improvements, net...................... 3,433,000 3,410,000
Goodwill, net........................................ 1,527,000 1,145,000
Other assets......................................... 34,000 40,000
----------- -----------
Total assets..................................... $ 8,150,000 $ 7,455,000
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable................................... $ 1,010,000 $ 736,000
Convertible promissory notes....................... 2,725,000 2,725,000
Current portion of line of credit.................. 338,000 263,000
Accrued liabilities................................ 692,000 497,000
Deferred revenue................................... 1,908,000 2,355,000
----------- -----------
Total current liabilities........................ 6,673,000 6,576,000
Line of credit, long-term portion.................... 549,000 549,000
Commitments
Shareholders' equity:
Series A Preferred stock, $.001 par value:
Authorized shares--5,000,000
Issued and outstanding shares--2,000,000......... 3,998,000 3,998,000
Common stock, $.001 par value:
Authorized shares--20,000,000
Issued and outstanding shares--6,685,591 and
6,687,091, respectively......................... 7,000 7,000
Additional paid in capital......................... 5,210,000 5,957,000
Notes receivable for common stock.................. (1,038,000) (1,038,000)
Deferred compensation.............................. -- (742,000)
Accumulated deficit................................ (7,249,000) (7,852,000)
----------- -----------
Total shareholders' equity....................... 928,000 330,000
----------- -----------
Total liabilities and shareholders' equity..... $ 8,150,000 $ 7,455,000
=========== ===========
</TABLE>
See accompanying notes.
F-123
<PAGE>
bCANDID CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
Year ended March 31
December 31 -----------------------
1999 1999 2000
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Net revenue............................... $ 3,802,000 $ 825,000 $ 1,673,000
Costs and expenses:
Cost of revenues........................ 2,675,000 202,000 868,000
R&D expense............................. 972,000 85,000 518,000
Selling, general and administrative..... 6,796,000 817,000 1,749,000
----------- --------- -----------
Operating loss............................ (6,641,000) (279,000) (1,462,000)
Gain on sale of assets.................... -- -- 848,000
Other income/(expense).................... (41,000) (6,000) 11,000
----------- --------- -----------
Loss before taxes......................... (6,682,000) (285,000) (603,000)
Provision for income taxes................ -- -- --
----------- --------- -----------
Net loss.................................. $(6,682,000) $(285,000) $ (603,000)
=========== ========= ===========
</TABLE>
See accompanying notes.
F-124
<PAGE>
bCANDID CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes
Preferred Stock Common Stock Additional Receivable
-------------------- ---------------- Paid-in for Common Deferred Accumulated
Shares Amount Shares Amount Capital Stock Compensation Deficit Total
--------- ---------- --------- ------ ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1999............ -- -- 2,999,994 $3,000 $1,080,000 -- -- $ (567,000) $ 516,000
Issuance of
preferred stock
for cash.......... 1,900,000 3,798,000 -- -- -- -- -- -- 3,798,000
Conversion of notes
payable to common
stock............. 100,000 200,000 -- -- -- -- -- -- 200,000
Issuance of common
stock for
acquisition of
Highwind.......... -- -- 2,004,627 2,000 2,003,000 -- -- -- 2,005,000
Issuance of common
stock............. -- -- 1,070,000 1,000 1,069,000 -- -- -- 1,070,000
Fair value of
warrants issued to
financial
institution....... -- -- -- -- 20,000 -- -- -- 20,000
Common stock issued
for note
receivable........ -- -- 610,970 1,000 1,038,000 (1,038,000) -- -- 1,000
Net loss........... -- -- -- -- -- -- -- (6,682,000) (6,682,000)
--------- ---------- --------- ------ ---------- ----------- --------- ----------- ----------
Balance, December
31, 1999........... 2,000,000 3,998,000 6,685,591 7,000 5,210,000 (1,038,000) -- (7,249,000) 928,000
Exercise of stock
options
(unaudited)....... -- -- 1,500 -- 2,000 -- -- -- 2,000
Deferred
compensation
(unaudited)....... -- -- -- 745,000 -- (745,000) -- --
Amortization of
deferred
compensation
(unaudited)....... -- -- -- -- -- -- 3,000 -- 3,000
Net loss
(unaudited)....... -- -- -- -- -- -- -- (603,000) (603,000)
--------- ---------- --------- ------ ---------- ----------- --------- ----------- ----------
Balance, March 31,
2000 (unaudited)... 2,000,000 $3,998,000 6,687,091 $7,000 $5,957,000 $(1,038,000) $(742,000) $(7,852,000) $ 330,000
========= ========== ========= ====== ========== =========== ========= =========== ==========
</TABLE>
See accompanying notes
F-125
<PAGE>
bCANDID CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31
December 31 ------------------------
1999 1999 2000
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating activities
Net loss............................... $(6,682,000) $ (285,000) $ (603,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 2,074,000 382,000 614,000
Gain on sale of assets............... -- -- (848,000)
Changes in other operating assets and
liabilities:
Accounts receivable................ (608,000) (337,000) (842,000)
Accounts payable and accrued
liabilities....................... 1,592,000 216,000 (462,000)
Accrued payroll and related........ 391,000 (7,000) 76,000
Deferred revenue................... 1,452,000 704,000 454,000
Other.............................. 38,000 (14,000) (108,000)
----------- ----------- -----------
Net cash used in operating activities.. (1,743,000) 659,000 (1,719,000)
Investing activities
Capital expenditures................... (3,655,000) (123,000) (239,000)
Cash paid to purchase HW............... (1,007,000) (1,007,000) --
----------- ----------- -----------
Net cash used in investing activities.. (4,662,000) (1,130,000) (239,000)
Financing activities
Proceeds related to sale of assets..... -- -- 1,000,000
Promissory note........................ 2,725,000 -- --
Proceeds related to the line of
credit................................ 1,106,000 -- --
Payments related to the line of
credit................................ (637,000) -- (100,000)
Common stock issuances/stock option
exercises............................. 1,071,000 1,070,000 3,000
Preferred stock issuances.............. 3,798,000 -- --
----------- ----------- -----------
8,063,000 1,070,000 903,000
Net increase (decrease) in cash........ 1,658,000 599,000 (1,055,000)
Cash at beginning of year.............. 93,000 93,000 1,751,000
----------- ----------- -----------
Cash at end of year.................... $ 1,751,000 $ 692,000 $ 696,000
=========== =========== ===========
Income tax paid........................ $ -- $ -- $ 3,000
=========== =========== ===========
Interest paid.......................... $ 42,000 $ 1,000 $ 36,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-126
<PAGE>
bCANDID CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2000 and for the three months ended March 31, 2000
and March 31, 1999 is unaudited)
1. Summary of Significant Accounting Policies
Business and Organization
ISPNews, Inc. (ISPNews), a privately held company, was incorporated in
Michigan in March of 1997. ISPNews is a service provider of usenet
technologies solutions.
Highwind Software, Inc. (Highwind), a privately held company, was
incorporated in Massachusetts in July of 1996. Highwind is a market leader in
providing carrier-class discussion server infrastructure software to service
providers worldwide.
On January 8, 1999, ISPNews and Highwind entered into an Agreement of
Reorganization ("the Agreement") by which a newly formed company was
incorporated in the state of Delaware under the name ISPNews--Highwind Inc.
Pursuant to the terms of the Agreement, each share of issued and outstanding
ISPNews common stock (12,109shares) was exchanged for 247.8 shares of
ISPNews--Highwind Inc. common stock (2,999,994 shares). Additionally, as a
condition of closing the Agreement, ISPNews shareholders contributed
$1,070,000 to ISPNews--Highwind Inc. in return for 1,070,000 shares of common
stock. ISPNews--Highwind Inc. also issued 2,004,677 shares of common stock ,
paid $1,007,000 in cash and issued a promissory note for $353,000 all to the
sole shareholder of Highwind in exchange for 100% of the common stock of
Highwind. For financial reporting purposes, the formation of ISPNews--Highwind
Inc. was accounted for as the purchase by ISPNews of Highwind and accordingly,
the excess of the purchase price over the fair value of the net assets
acquired was allocated to goodwill (see Note 2). The results of operations
from January 1, 1999 through January 8, 1999, were not significant.
In April of 1999, ISPNews--Highwind Inc. changed its name to bCandid
Corporation ("bCandid" or the "Company").
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
subsidiaries have been prepared in accordance with generally accepted
accounting principles. All significant intercompany balances and transactions
have been eliminated.
Interim Financial Statements
The accompanying consolidated balance sheet as of March 31, 2000 the
consolidated statements of operations and consolidated statement of cash flows
for the three months ended March 31, 1999 and 2000, and the statement of
shareholders' equity for the three months ended March 31, 2000, are unaudited.
In the opinion of management, the unaudited financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the interim periods. The results of operations for the three months ended
March 31, 2000, are not necessarily indicative of operating results to be
expected for the full fiscal year.
Significant Customers and Concentration of Credit Risk
The Company's customers are not concentrated in any geographic region.
During the year ended December 31, 1999, the Company had no significant
customers. At December 31, 1999, one customer accounted
F-127
<PAGE>
bCANDID CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months ended March 31, 2000
and March 31, 1999 is unaudited)
for 13% of accounts receivable. The Company routinely assesses the financial
strength of significant customers but generally does not require collateral.
The Company establishes an allowance for potential credit losses based on the
credit risk for specific customers, historical trends and other information;
such losses have been within management's expectations.
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), which was amended by SOP 98-4
and SOP 98-9, "Software Revenue Recognition." These statements provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. This guidance is effective for the Company's
transactions entered into subsequent to January 1, 1998. The application of
certain provisions was deferred until fiscal years beginning on or after
March 15, 1999. Final adoption of these provisions is not expected to have a
material impact on the Company's financial condition or results of operations.
The Company recognizes revenue from sales of products and software licenses
upon shipment of the product or issuance of a software access key to the
customer, provided that persuasive evidence of an agreement exists, the
license fee is fixed and determinable, and collection of the fee is considered
probable. Revenue from maintenance contracts generally call for the Company to
provide technical support and software updates and upgrades to customers and
is recognized ratably over the maintenance period, principally one year.
Training and other consulting services are recognized as the services are
performed.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 in the first quarter of fiscal 2001. Management does
not expect the adoption of SAB 101 to have a material effect on the Company's
operations or financial position.
Research and Development
Pursuant to Statement of Financial Accounting Standards No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
development costs related to software products are expensed as incurred until
the "technological feasibility" of the product has been established. Because
of the relatively short time period between "technological feasibility" and
product release, and the insignificant amount of costs incurred during such
period, no software development costs have been capitalized.
Cash Equivalents
Cash equivalents consist of investments with original maturities of three
months or less from the date of purchase.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation is provided for
by the straight-line method over the estimated useful lives ranging from 2-5
years. Leasehold improvements are amortized using the straight-line method
over the shorter of their estimated useful lives or the lease term.
F-128
<PAGE>
bCANDID CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months ended March 31, 2000
and March 31, 1999 is unaudited)
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the year
ended December 31, 1999 amounted to $282,000.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), encourages but does not require that stock
awards granted subsequent to December 31, 1994, be
recognized as compensation expense based on their fair value at the date of
grant. Pursuant to SFAS 123, a company may elect to continue to account for
stock awards using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25), but must disclose pro forma income amounts which would have resulted
from recognizing such awards at their fair value. The Company continues to
account for stock-based compensation under APB 25 and provides the pro forma
footnote disclosures required under SFAS 123 (Note 8).
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. To date, the Company has not had any transactions that
are required to be reported in comprehensive income.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable, and the line of credit
approximate their fair values due to the short-term nature of these financial
instruments.
Impairment of Long-Lived Assets
The Company assesses on an ongoing basis the recoverability of long-lived
assets, based on estimates of future undiscounted cash flows compared to net
book value. If the future undiscounted cash flow estimates were less than net
book value, net book value would then be reduced to fair value based on an
estimate of discounted cash flow. The Company also evaluates the amortization
periods of assets, including goodwill and other intangible assets, to
determine whether events or circumstances warrant revised estimates of useful
lives.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates and
such differences may be material to the financial statements.
2. Goodwill
In connection with the purchase of Highwind by ISPNews in January 1999 (See
Note 1), the majority of the purchase price was allocated to goodwill as the
net assets of Highwind on the date of acquisition had a nominal fair value.
The goodwill of $3,054,000 is being amortized on a straight-line basis over 2
years and is reported net of accumulated amortization of $1,527,000 at
December 31, 1999 and $1,909,000 at March 31, 2000.
F-129
<PAGE>
bCANDID CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months ended March 31, 2000
and March 31, 1999 is unaudited)
3. Equipment and Improvements, net
Equipment and improvements at December 31 consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ----------
<S> <C> <C>
Furniture and fixtures........................... $ 249,000 $ 327,000
Office computer equipment........................ 507,000 669,000
Network/computer equipment....................... 2,549,000 2,438,000
Leasehold improvements........................... 298,000 241,000
Software......................................... 519,000 451,000
---------- ----------
4,122,000 4,126,000
Less accumulated depreciation and amortization... (689,000) (716,000)
---------- ----------
$3,433,000 $3,410,000
========== ==========
</TABLE>
4. Debt Obligations
Convertible Promissory Notes and Warrants
In November and December of 1999, the Company issued convertible promissory
notes (the "Notes") for total proceeds of $2,725,000. The Notes bore interest
at 6% and were payable, including accrued interest, on April 25, 2000. Under
the terms of the Note agreements, if the Company was able to close the sale
and issuance of shares in a second round of preferred stock financing by April
25, 2000, the outstanding principal and unpaid accrued interest on the Notes
would automatically convert into shares of the second round preferred
financing. The conversion price would be equal to the price per share paid by
the investors purchasing such shares.
As part of the Note agreements, the Company was also required to issue
warrants to purchase Series A preferred shares to the holders of the Notes on
the earlier of April 25, 2000 or the closing of a second round of preferred
financing.
The Company was unable to close the second round of preferred financing and
on May 12, 2000, the principal and unpaid accrued interest was converted into
704,000 shares of the Company's common stock and the warrants were exercised
for 82,000 shares of Series A preferred stock.
Line of Credit
The Company has an equipment line of credit at December 31, 1999 for maximum
borrowings of $1,700,000 that expires August 2002. As of December 31, 1999,
there was $887,000 outstanding under the line of credit and is collateralized
by all assets of the Company. The line of credit agreement provides for
interest at 9%. Minimum future payments under the line of credit are $404,000,
$404,000 and 185,000 for 2000, 2001 and 2002, respectively.
5. Income Taxes
Prior to the formation of bCandid in January of 1999, ISPNews and Highwind
both had S corporation tax status for federal and state income tax purposes.
For the year ended December 31, 1999, the Company changed its tax status to a
taxable C corporation. In accordance with Financial Accounting Standards No.
109, the effect of the change in tax status resulted in the recognition of
deferred tax assets and liabilities primarily related to
F-130
<PAGE>
bCANDID CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months ended March 31, 2000
and March 31, 1999 is unaudited)
the current year net operating loss carryforward. However, the Company has
placed a valuation allowance against these otherwise recognizable deferred tax
assets due to the uncertainty of realizing the benefit of these favorable tax
attributes in the future.
At December 31, 1999, the Company's net operating loss carryforward was
approximately $5,399,000, expiring 2019.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 1,836,000
Bad debt reserve............................................ 10,000
-----------
Total deferred tax assets................................. 1,846,000
Deferred tax liability:
Depreciation and amortization............................... (118,000)
Less valuation reserve........................................ (1,728,000)
-----------
Net deferred taxes........................................ $ --
===========
</TABLE>
6. Commitments
The Company leases office space under an agreement expiring in 2001. The
office lease requires payment of real estate taxes and maintenance in addition
to the minimum rental payments.
Minimum future rental payments under the noncancelable operating lease for
the remaining lease term are as follows:
<TABLE>
<S> <C>
2000.............................................................. $105,000
2001.............................................................. 44,000
--------
$149,000
========
</TABLE>
Total rent expense was $73,000 in 1999.
7. Shareholders' Equity
Initial Issuance of Shares
On January 8, 1999, the Company issued 2,999,994 shares for all of the
issued and outstanding common stock of ISPNews. Additionally, the Company
issued 1,070,000 shares for $1,070,000. In exchange for 100% of the common
stock of Highwind common stock, the sole shareholder received 2,004,627 shares
of the Company, $1,007,000, and Company's promissory note for $353,000.
Approximately $61,000 was paid on the promissory note with the remaining
$92,000 recorded as an adjustment to goodwill. The remaining $200,000 was
converted into Series A convertible preferred stock.
F-131
<PAGE>
bCANDID CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months ended March 31, 2000
and March 31, 1999 is unaudited)
Series A Convertible Preferred Stock
On April 8, 1999, the Company sold an aggregate of 1,900,000 shares of
Series A convertible preferred stock ("Series A") at $2.00 per share,
resulting in net proceeds of $3,798,000. Additionally, a note payable to
shareholder in the amount of $200,000 was converted into 100,000 shares of
Series A. The Series A may, at the option of the holder, be converted at any
time into fully-paid and non-assessable shares of Common Stock. Each share of
Series A is entitled to share equally with the holders of common shares as to
dividends, if declared, and the preferred shareholders have the same voting
rights (on an as-converted basis) as the common shareholders. In the event of
liquidation, the preferred shareholders have preferential rights to
liquidation payments.
Warrants Issued
In connection with entering into an equipment line of credit (see Note 4),
the Company issued 25,500 and 12,750 warrants to purchase Series A convertible
preferred stock at exercise prices of $2.00 and $1.00, respectively. The
warrants are immediately exercisable and expire 10 years from the date of
grant. The fair value of the warrants granted was determined to be
approximately $20,000 using the minimum value option pricing model. In May
2000, the warrants were exercised.
Common Stock Issued for Notes Receivable
During December 1999, the Company issued 610,970 shares of common stock upon
exercise of stock options in exchange for notes receivable of $1,038,000. The
notes receivable are full recourse notes, bear interest at 6.02%, and are due
on December 29, 2004, including accrued interest. The notes receivable were
classified as a reduction of shareholders' equity.
8. Stock Options
The 1999 Equity Incentive Plan provides for the granting of nonqualified and
incentive stock options to directors, employees and consultants of the
Company. The Board of Directors is authorized to administer the Plan and
establish the stock option terms, including the grant price and vesting
period. The plan allows for the grant of options for 1,500,000 shares of
common stock. As of December 31, 1999, the Company had 123,000 shares of
common stock available for future grant under its stock option plan
Stock options typically vest over a four-year period and expire ten years
from the date of grant. Vested incentive stock options are exercisable during
continued employment or generally within 90 days of terminating employment.
Vested nonqualified stock options are exercisable until expiration.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Weighted-
Average
Shares Low High Price
--------- ----- ----- ---------
<S> <C> <C> <C> <C>
Options granted............................... 2,708,000 $1.00 $5.00 $2.17
Options forfeited............................. (720,000) 1.00 5.00 $3.45
Options exercised............................. (611,000) 1.70 1.70 $1.70
--------- ----- ----- -----
Outstanding at December 31, 1999.............. 1,377,000 $1.00 $5.00 $2.69
Options granted (unaudited)................... 674,000 1.70 4.00 $3.11
Options forfeited (unaudited)................. (724,000) 1.00 4.00 $1.66
Options exercised (unaudited)................. (2,000) 1.70 1.70 $1.70
--------- ----- ----- -----
Outstanding at March 31, 2000 (unaudited)..... 1,325,000 $1.00 $5.00 $2.99
========= ===== ===== =====
</TABLE>
F-132
<PAGE>
bCANDID CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months ended March 31, 2000
and March 31, 1999 is unaudited)
As of December 31, 1999 and March 31, 2000, stock options to purchase common
stock of 50,000 and 158,866, respectively, were exercisable. The weighted-
average remaining contractual life of options outstanding was 9.08 years at
December 31, 1999.
In computing the impact of SFAS 123, a weighted average fair value of $.38
for 1999 stock option grants was estimated at the date of grant using the
minimum value option pricing model with the following assumptions: risk-free
interest rate of 5.88%, a weighted-average expected life of the options of 3
years and no assumed dividend yield.
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the vesting period. If the Company elected to
recognize compensation cost based on the fair value at the date of grant for
options awarded under the Plan as prescribed by SFAS No. 123, the pro forma
amounts of the Company's net loss for the years ended 1999 and 1998 would have
been as follows:
<TABLE>
<CAPTION>
December 31
1999
-----------
<S> <C>
Net loss--as reported......................................... $6,682,000
Net loss--pro forma........................................... $6,873,000
</TABLE>
The pro forma effect on net loss for 1999 is not representative of the pro
forma effect on net income in future years because compensation expense in
future years will reflect the amortization of a larger number of stock options
granted in several succeeding years.
9. Subsequent Events
In March 2000, the Company sold one of its product lines to an outside party
for $1,000,000 proceeds which resulted in a gain of $848,000.
In connection with the grant of certain stock options to purchase common
stock to employees during March 2000, the Company recorded deferred
compensation of $745,000 for the aggregate difference between the exercise
prices of the options at their dates of grant and the fair value of the common
stock. Such amount is being amortized over the vesting period of the related
stock options. Amortization expense recognized for the three months ended
March 31, 2000 was $3,000.
On June 14, 2000, Software.com acquired all of the issued and outstanding
capital stock of the Company and assumed all of the outstanding warrants and
stock options in exchange for Software.com common stock valued at $65,400,000.
Immediately prior to the acquisition of the Company by Software.com on June
14, 2000, bCandid spun-off its service portion of the business. As a result,
Software.com acquired the remaining business of bCandid representing its core
software development operations.
The following unaudited pro forma information is presented as if the spin-
off had occurred on January 1, 1999.
<TABLE>
<CAPTION>
Pro Forma
bCandid BCandid
December ISPNews December 31,
31, 1999 Spin-off 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues............................ $ 3,802,000 $ 361,000 $3,441,000
Net loss............................ $(6,682,000) $(6,243,000) $ (439,000)
</TABLE>
F-133
<PAGE>
Independent Auditors' Report
The Board of Directors
bCandid Corporation:
We have audited the accompanying balance sheet of HighWind Software, Inc. as
of December 31, 1998, and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HighWind Software, Inc. as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
Boulder, Colorado
March 31, 2000
F-134
<PAGE>
HIGHWIND SOFTWARE, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents....................................... $ 69,601
Trade accounts receivable, net of allowance for doubtful
accounts of $2,000............................................. 101,980
Prepaid expenses and other...................................... 362
-----------
Total current assets.......................................... 171,943
Furniture, fixtures and equipment, net............................ 4,640
Other assets...................................................... 1,819
-----------
Total assets.................................................. $ 178,402
===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued liabilities........................ $ 48,556
Deferred revenue................................................ 1,216,172
-----------
Total liabilities............................................. 1,264,728
-----------
Stockholders' deficit:
Common stock, no par value, 1,000 shares authorized, issued and
outstanding.................................................... 11,000
Accumulated deficit............................................. (1,097,326)
-----------
Total stockholders' deficit................................... (1,086,326)
-----------
Commitment (note 3)
Total liabilities and stockholders' deficit................... $ 178,402
===========
</TABLE>
See accompanying notes to financial statements.
F-135
<PAGE>
HIGHWIND SOFTWARE, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenue............................................................. $1,028,665
Expenses:
Salaries and benefits............................................. 549,922
General and administrative........................................ 166,484
Sales and marketing............................................... 14,145
----------
Earnings from operations........................................ 298,114
Interest income, net................................................ 12,989
----------
Net earnings.................................................... $ 311,103
==========
Pro forma information (unaudited):
Historical net earnings........................................... $ 311,103
Pro forma adjustment for income tax expense....................... (124,000)
----------
Pro forma net earnings.......................................... $ 187,103
==========
</TABLE>
See accompanying notes to financial statements.
F-136
<PAGE>
HIGHWIND SOFTWARE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common stock Total
-------------- Accumulated stockholders'
Shares Amount deficit deficit
------ ------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1998.......... 1,000 $11,000 $ (212,765) $ (201,765)
Distributions to stockholders........ -- -- (1,195,664) (1,195,664)
Net earnings......................... -- -- 311,103 311,103
----- ------- ----------- -----------
Balances at December 31, 1998........ 1,000 $11,000 $(1,097,326) $(1,086,326)
===== ======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-137
<PAGE>
HIGHWIND SOFTWARE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings................................................... $ 311,103
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................ 20,325
Changes in operating assets and liabilities:
Accounts receivable........................................ (83,270)
Prepaid expenses and other assets.......................... (190)
Accounts payable and accrued liabilities................... 18,981
Deferred revenue........................................... 852,883
-----------
Net cash provided by operating activities................ 1,119,832
-----------
Cash flows from investing activities--purchase of furniture,
fixtures and equipment.......................................... (19,050)
-----------
Cash flows from financing activities--distributions to
stockholders.................................................... (1,195,664)
-----------
Net decrease in cash and cash equivalents................ (94,882)
Cash and cash equivalents at beginning of year................... 164,483
-----------
Cash and cash equivalents at end of year......................... $ 69,601
===========
</TABLE>
See accompanying notes to financial statements.
F-138
<PAGE>
HIGHWIND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) Business and Summary of Significant Accounting Policies
(a) Business and Basis of Financial Statement Presentation
Highwind Software, Inc., a Massachusetts corporation, (the Company)
develops and markets software for enterprise-based internet discussions.
The preparation of 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
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
(b) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
cash and investments with maturities of three months or less at the date of
purchase to be cash equivalents.
(c) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost. Costs of
maintenance and repairs are charged to operations as incurred. Depreciation
is calculated using an accelerated method over the estimated useful lives
of the assets, which range from 3 to 5 years.
(d) Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade accounts receivable, accounts payable, and accrued
liabilities, which carrying values approximate fair values based on their
short-term nature.
(e) Impairment of Long-Lived Assets and Assets to be Disposed Of
In accordance with Statement on Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, the Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used in operations is
generally measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is equal to the amount by which the carrying amounts of the
assets exceed their fair values. Assets to be disposed of are reported at
the lower of the carrying amount or fair value, less costs to sell. No
asset impairment was recognized in 1998.
(f) Revenue Recognition
In accordance with the provisions of Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), the Company recognizes software license
revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable and collectibility is probable,
based on the terms of the license agreement. In addition, SOP 97-2 requires
that revenue recognized from software arrangements be allocated to each
multiple element of the arrangement based on the relative fair values of
F-139
<PAGE>
HIGHWIND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
each element. The Company generally sells software licenses with one year
maintenance agreements. As the Company does not have objective evidence of
the relative fair values of the software and maintenance, revenue for
software sales is recognized over the one year maintenance period.
(g) Income Taxes
The Company has elected S Corporation status for income tax purposes and
the results of operations of the Company are included in the individual
income tax returns of the stockholders. Accordingly, no provision for
income taxes has been included in the accompanying financial statements.
However, pro forma information has been included in the accompanying
statement of operations to reflect a pro forma adjustment for income tax
expense as if the Company had been a separate taxable entity subject to
federal and state income taxes for 1998.
(2) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following at December 31,
1998:
<TABLE>
<S> <C>
Office and computer equipment and purchased software............. $ 147
Furniture and fixtures........................................... 42,480
--------
42,627
Less accumulated depreciation and amortization................... (37,987)
--------
$ 4,640
========
</TABLE>
(3) Sale of Company
On January 8, 1999, all of the outstanding common stock of the Company was
acquired by bCandid Corporation.
F-140
<PAGE>
ANNEX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PHONE.COM, INC.,
SILVER MERGER SUB INC.
AND
SOFTWARE.COM, INC.
DATED AS OF AUGUST 8, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AGREEMENT AND PLAN OF MERGER............................................. A-1
ARTICLE 1. THE MERGER.................................................... A-2
Section 1.1 The Merger................................................. A-2
Section 1.2 Closing.................................................... A-2
Section 1.3 Effective Time............................................. A-2
Section 1.4 Effects of the Merger...................................... A-2
Section 1.5 Certificates of Incorporation and By-laws of the Surviving
Corporation........................................................... A-2
Section 1.6 Directors and Officers..................................... A-2
ARTICLE 2. EFFECTS OF THE MERGER ON THE CAPITAL STOCK OF SOFTWARE.COM;
EXCHANGE OF CERTIFICATES........................................ A-3
Section 2.1 Effect on Software.com Capital Stock....................... A-3
Section 2.2 Exchange of Shares and Certificates........................ A-5
Section 2.3 Certain Adjustments........................................ A-6
ARTICLE 3. REPRESENTATIONS AND WARRANTIES................................ A-7
Section 3.1 Representations and Warranties of Phone and Merger Sub..... A-7
Section 3.2 Representations and Warranties of Software.com............. A-17
ARTICLE 4. COVENANTS RELATING TO CONDUCT OF BUSINESS SECTION............. A-27
Section 4.1 Conduct of Business........................................ A-27
Section 4.2 No Solicitation by Phone................................... A-30
Section 4.3 No Solicitation by Software.com............................ A-32
ARTICLE 5. ADDITIONAL AGREEMENTS......................................... A-33
Section 5.1 Preparation of the Form S-4 and the Joint Proxy Statement;
Stockholders' Meetings....................................... A-33
Section 5.2 Pooling Letters............................................ A-34
Section 5.3 Access to Information; Confidentiality..................... A-34
Section 5.4 Commercially Reasonable Efforts............................ A-34
Section 5.5 Indemnification, Exculpation and Insurance................. A-35
Section 5.6 Fees and Expenses.......................................... A-36
Section 5.7 Public Announcements....................................... A-36
Section 5.8 Affiliates................................................. A-36
Section 5.9 Nasdaq Listing............................................. A-37
Section 5.10 Tax and Accounting Treatment.............................. A-37
Section 5.11 Post-Merger Operations.................................... A-37
Section 5.12 Conveyance Taxes.......................................... A-37
Section 5.13 Employee Benefits......................................... A-37
Section 5.14 Consents of Accountants................................... A-37
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 5.15 Phone Board and Officers.................................... A-38
Section 5.16 Rights Plans................................................ A-38
Section 5.17 Action by Board of Directors................................ A-38
ARTICLE 6. CONDITIONS PRECEDENT............................................ A-38
Section 6.1 Conditions to Each Party's Obligation to Effect The Merger... A-38
Section 6.2 Conditions to Obligations of Software.com.................... A-39
Section 6.3 Conditions to Obligations of Phone and Merger Sub............ A-40
ARTICLE 7. TERMINATION, AMENDMENT AND WAIVER............................... A-40
Section 7.1 Termination.................................................. A-40
Section 7.2 Effect of Termination........................................ A-41
Section 7.3 Amendment.................................................... A-43
Section 7.4 Extension; Waiver............................................ A-43
ARTICLE 8. GENERAL PROVISIONS.............................................. A-44
Section 8.1 Nonsurvival of Representations and Warranties................ A-44
Section 8.2 Notices...................................................... A-44
Section 8.3 Definitions.................................................. A-45
Section 8.4 Interpretation............................................... A-45
Section 8.5 Counterparts................................................. A-45
Section 8.6 Entire Agreement; No Third-Party Beneficiaries............... A-45
Section 8.7 Governing Law................................................ A-46
Section 8.8 Assignment................................................... A-46
Section 8.9 Consent to Jurisdiction...................................... A-46
Section 8.10 Headings, etc............................................... A-46
Section 8.11 Severability................................................ A-46
EXHIBITS
EXHIBIT A--Form of Phone Stock Option Agreement
EXHIBIT B--Form of Software.com Stock Option Agreement
EXHIBIT C--Form of Software.com Voting Agreement
EXHIBIT D--Form of Phone Voting Agreement
EXHIBIT E--Form of Software.com Affiliate Letter
EXHIBIT F--Form of Phone Affiliate Letter
EXHIBIT G--Form of Strategic Alliance MOU
EXHIBIT H--Form of Software.com Special Affiliate Letter
</TABLE>
A-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of August 8, 2000, by and among
PHONE.COM, INC., a Delaware corporation ("Phone"), SILVER MERGER SUB INC., a
Delaware corporation and a wholly owned subsidiary of Phone ("Merger Sub") and
SOFTWARE.COM, INC., a Delaware corporation ("Software.com").
WITNESSETH:
WHEREAS, the Boards of Directors of Phone and Software.com deem it advisable
and in the best interests of each corporation and its respective stockholders
that Phone and Software.com engage in a business combination in a merger of
equals in order to advance the long-term strategic business interests of Phone
and Software.com; and
WHEREAS, in furtherance thereof, the Boards of Directors of each of Phone,
Merger Sub and Software.com have approved this Agreement and the merger of
Merger Sub with and into Software.com with Software.com continuing as the
surviving corporation (the "Merger") and have deemed the Merger advisable,
upon the terms and subject to the conditions set forth in this Agreement; and
WHEREAS, the Boards of Directors of each of Phone, Merger Sub and
Software.com, having determined that the Merger and the other transactions
contemplated hereby are advisable and in the best interests of its
stockholders, have approved the transactions contemplated by this Agreement,
the Option Agreements, the Voting Agreements and the Strategic Alliance MOU
(as such terms are hereinafter defined) in accordance with the provisions of
the Delaware General Corporation Law (the "DGCL"); and
WHEREAS, the Board of Directors of Software.com has resolved to recommend to
Software.com's stockholders the approval and adoption of this Agreement, and
the consummation of the transactions contemplated hereby upon the terms and
subject to the conditions set forth herein; and
WHEREAS, the Board of Directors of Phone has resolved to recommend to
Phone's stockholders the approval of the issuance of shares of Phone Common
Stock (as hereinafter defined) pursuant to the Merger and the amendment to
Phone's Certificate of Incorporation to change the name of Phone as of the
Effective Time to a name to be mutually agreed upon in good faith by Phone and
Software.com following the date hereof (the "Phone Charter Amendment"); and
WHEREAS, as a condition and inducement to the execution of this Agreement,
contemporaneously herewith Software.com and Phone will enter into a stock
option agreement (the "Phone Option Agreement") attached hereto as Exhibit A
and a stock option agreement (the "Software.com Option Agreement" and,
together with the Phone Option Agreement, the "Option Agreements") attached
hereto as Exhibit B; and
WHEREAS, as a condition and inducement to the execution of this Agreement,
contemporaneously herewith certain stockholders of Phone will enter into a
voting agreement (the "Phone Voting Agreement") attached hereto as Exhibit C
and certain stockholders of Software.com will enter into a voting agreement
(the "Software.com Voting Agreement" and together with the Phone Voting
Agreement, the "Voting Agreements") attached hereto as Exhibit D; and
WHEREAS, as a condition and inducement to the execution of this Agreement,
contemporaneously herewith Software.com and Phone will enter into the
Reciprocal Reseller License and Services Memorandum of Understanding (the
"Strategic Alliance MOU") attached hereto as Exhibit G; and
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization within the meaning of section
368(a) of the Internal Revenue Code of 1986, as amended, (the "Code"), and the
rules and regulations promulgated thereunder and this Agreement is intended to
be and is adopted as a plan of reorganization within the meaning of section
368(a) of the Code.
A-1
<PAGE>
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, in the Option Agreements, the
Voting Agreements and the Strategic Alliance MOU the parties agree as follows:
ARTICLE 1.
The Merger
Section 1.1 The Merger.
Upon the terms and subject to the conditions set forth in this Agreement,
and in accordance with the DGCL, Merger Sub shall be merged with and into
Software.com at the Effective Time (as defined in Section 1.3 hereof).
Following the Effective Time, the separate corporate existence of Merger Sub
shall cease and Software.com shall continue as the surviving corporation (the
"Surviving Corporation") in the Merger and shall succeed to and assume all the
rights, privileges, immunities, properties, powers, and franchises of Merger
Sub in accordance with the DGCL.
Section 1.2 Closing.
The closing of the Merger (the "Closing") shall take place at 10:00 a.m.,
California time, on a date to be specified by the parties, which shall be no
later than the second business day after satisfaction or waiver of all of the
conditions set forth in Article 6 (the "Closing Date"), at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Suite 220,
Palo Alto, California 94301, unless another time, date or place is agreed to
in writing by the parties hereto.
Section 1.3 Effective Time.
Subject to the provisions of this Agreement, as soon as practicable on the
Closing Date, the parties shall cause the Merger to be consummated by filing
with the Secretary of State of the State of Delaware (the "Secretary of
State") a certificate of merger (the "Certificate of Merger") executed in
accordance with the relevant provisions of the DGCL and shall make all other
filings or recordings required under the DGCL. The Merger shall become
effective at such time as the Certificate of Merger is duly filed with the
Secretary of State, or at such subsequent date or time as Phone and
Software.com shall agree and specify in the Certificate of Merger (the time
Merger becomes effective being hereinafter referred to as the "Effective
Time").
Section 1.4 Effects of the Merger.
The Merger shall have the effects set forth in Section 259 of the DGCL.
Section 1.5 Certificates of Incorporation and By-laws of the Surviving
Corporation.
At the Effective Time, subject to the requirements of Section 5.5, the
Certificate of Incorporation and the by-laws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation and by-laws of the Surviving Corporation, in each case until
thereafter amended in accordance with applicable law.
Section 1.6 Directors and Officers.
The directors and officers of Merger Sub at the Effective Time shall, from
and after the Effective Time, be the directors and officers, respectively, of
the Surviving Corporation until their successors shall have been duly elected
or appointed or qualified or until their earlier death, resignation or removal
in accordance with the Surviving Corporation's Certificate of Incorporation
and by-laws.
A-2
<PAGE>
ARTICLE 2.
Effects of the Merger on the Capital Stock of
Software.com; Exchange of Certificates
Section 2.1 Effect on Software.com Capital Stock.
As of the Effective Time of the Merger, by virtue of the Merger and without
any action on the part of the holders of any shares of common stock, par value
$0.001 per share, of Software.com ("Software.com Common Stock") or any shares
of common stock of Merger Sub:
(a) Conversion of Software.com Common Stock.
Each issued and outstanding share of Software.com Common Stock (other than
any shares of Software.com Common Stock to be canceled pursuant to Section
2.1(c) hereof) shall be converted into the right to receive 1.6105 (the
"Exchange Ratio") fully paid and nonassessable shares of common stock, par
value $0.001 per share, of Phone ("Phone Common Stock"). As of the Effective
Time, all such shares of Software.com Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist. As of the Effective Time, each certificate theretofore representing
shares of Software.com Common Stock, without any action on the part of Phone,
Software.com or the holder thereof, shall be deemed to represent that number
of shares of Phone Common Stock determined by multiplying the shares of
Software.com Common Stock represented thereby by the Exchange Ratio. Each
holder of a certificate representing any shares of Software.com Common Stock
shall cease to have any rights with respect thereto, except the right to
receive, upon the surrender of any such certificates, certificates
representing the shares of Phone Common Stock to be issued or paid in
consideration therefor upon surrender of such certificate in accordance with
Section 2.2 hereof without interest.
(b) Capital Stock of Merger Sub.
Each issued and outstanding share of common stock, par value $0.01 per
share, of Merger Sub shall be converted into one fully paid and nonassessable
share of common stock, par value $0.01 per share, of the Surviving
Corporation.
(c) Cancellation of Treasury Shares. Each share of Software.com Common Stock
held in the treasury of Software.com, or owned by Phone or any direct or
indirect subsidiary of Software.com or Phone immediately prior to the
Effective Time shall automatically be canceled and retired and shall cease to
exist, and no consideration shall be delivered in exchange thereof.
(d) Assumption and Conversion of Software.com Options.
(i) As of the Effective Time, each outstanding option or warrant to
purchase Software.com Common Stock (a "Software.com Option") issued under
each Software.com Stock Plan (as defined in Section 3.2(c)) shall
thereafter entitle the holder thereof to receive, upon the exercise
thereof, that number of shares of Phone Common Stock equal to the product
of (w) the number of shares of Software.com Common Stock subject to such
Software.com Option immediately prior to the Effective Time and (x) the
Exchange Ratio, at an exercise price for each full share of Phone Common
Stock subject to such Software.com Option equal to (y) the exercise price
per share of Software.com Common Stock subject to such Software.com Option
divided by (z) the Exchange Ratio, which exercise price per share shall be
rounded up to the nearest two-place decimal. The number of shares of Phone
Common Stock that may be purchased by a holder upon the exercise of any
Software.com Option shall not include any fractional share of Phone Common
Stock but shall be rounded, in the case of any Software.com Option other
than an "incentive stock option" (within the meaning of section 422 of the
Code), up and, in the case of any incentive stock option, down to the
nearest whole share, if necessary.
(ii) As of the Effective Time, Phone shall assume in full each
Software.com Option and all of the other rights and obligations of
Software.com under the Software.com Stock Plans (as defined in Section
3.2(c)) as provided herein. Section 2.1(d)(ii) of the Software.com
Disclosure Schedule sets forth a list summarizing
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all Software.com Options under all of the Software.com Stock Plans,
including the term and the exercise price of each Software.com Option. The
assumption of a Software.com Option by Phone shall not terminate or modify
(except as required hereunder) any right of first refusal, right of
repurchase, vesting schedule or other restriction on transferability
relating to a Software.com Option or the stock issuable upon the exercise
thereof. Continuous employment with Software.com shall be credited to an
optionee for purposes of determining the number of shares subject to
exercise, vesting or repurchase after the Effective Time, and the
provisions in the Software.com Stock Plans and/or in any stock option
agreement evidencing the terms and conditions of any Software.com Option
relating to the exercisability of any Software.com Option upon termination
of an optionee's employment or service as a director shall not be deemed
triggered until such time as such optionee shall be neither an employee or
officer nor serving as a director of Phone or any subsidiary. After such
assumption, Phone shall issue, upon any partial or total exercise of any
Software.com Option, in lieu of shares of Software.com Common Stock, the
number of shares of Phone Common Stock to which the holder of the
Software.com Option is entitled pursuant to this Agreement. The assumption
by Phone of Software.com Options shall not give holders of such
Software.com Options any additional benefits which they did not have
immediately prior to the Effective Time. Phone shall file with the
Securities and Exchange Commission (the "SEC") as soon as practicable, and
in any event within two (2) business days, following the Effective Time a
registration statement on Form S-8 under the Securities Act of 1933, as
amended (the "Securities Act"), covering, to the extent applicable, the
shares of Phone Common Stock to be issued upon the exercise of Software.com
Options assumed by Phone. Phone shall use commercially reasonable efforts
to qualify as soon as practicable, and in any event within two (2) business
days, after the Effective Time under the applicable state securities laws
the issuance of the shares of Phone Common Stock to be issued upon exercise
of such Software.com Options. Prior to the Effective Time, Software.com
shall make such amendments, if any, to the Software.com Stock Plans as
shall be necessary to permit such assumption in accordance with this
Section 2.1(d).
(iii) It is the intention of the parties that, to the extent that any
Software.com Option constitutes an incentive stock option immediately prior
to the Effective Time of the Merger, such Software.com Option shall
continue to qualify as an incentive stock option to the maximum extent
permitted by section 422 of the Code, and that the assumption of
Software.com Options provided by this Section 2.1(d) shall satisfy the
conditions of section 424(a) of the Code.
(e) At the Effective Time, Phone shall assume the outstanding offering
periods under the Software.com Employee Stock Purchase Plan (the "Software.com
ESPP"), and all outstanding rights to purchase shares of Software.com Common
Stock under the Software.com ESPP ("Purchase Rights") shall be converted (in
accordance with the Exchange Ratio) into rights to purchase shares of Phone
Common Stock (with the number of shares rounded down to the nearest whole
share and the purchase price as of the offering date for each offering period
in effect as of the Effective Time rounded up to the nearest whole cent). All
such converted Purchase Rights shall be assumed by Phone, and each offering
period in effect under the Software.com ESPP immediately prior to the
Effective Time shall be continued in accordance with the terms of the
Software.com ESPP until the end of such offering period. The Software.com ESPP
shall terminate or be merged into the stock purchase plan sponsored by Phone
(the "Phone ESPP") immediately following the exercise of the last assumed
Purchase Right, and no additional Purchase Rights shall be granted under the
Software.com ESPP following the Effective Time, provided that references to
Software.com in the Software.com ESPP and related documents shall mean Phone
(except that the purchase price as of the offering date for a relevant period
shall be determined with respect to the fair market value of Software.com
Common Stock on such date, as adjusted hereby). Phone shall take all corporate
action necessary to reserve for issuance a sufficient number of shares of
Phone Common Stock for issuance upon exercise of Purchase Rights under the
Software.com ESPP assumed in accordance with this Section 2.1(e). Phone agrees
that, from and after the Effective Time, Software.com employees may
participate in the Phone ESPP, subject to the terms and conditions of the
Phone ESPP; provided, however, that Phone shall amend the Phone ESPP to
provide for a special offering period that permits Software.com employees the
ability to immediately participate in the Phone ESPP after the Effective Time,
and that service with Software.com shall be treated as service with Phone for
determining eligibility of Software.com's employees under the Phone ESPP.
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Section 2.2 Exchange of Shares and Certificates.
(a) Exchange Agent. As of the Effective Time of the Merger, Phone shall
deposit with U.S. Stock Transfer Corporation or such other bank, trust company
or nationally recognized shareholder services provider as may be designated by
Phone (the "Exchange Agent"), for the benefit of the holders of shares of
Software.com Common Stock, for exchange in accordance with this Article 2,
through the Exchange Agent, certificates representing the shares of Phone
Common Stock (such shares of Phone Common Stock, together with any dividends
or distributions with respect thereto with a record date after the Effective
Time, and any cash payable in lieu of any fractional shares of Phone Common
Stock, being hereinafter referred to as the "Exchange Fund") issuable pursuant
to Section 2.1 hereof in exchange for outstanding shares of Software.com
Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Software.com Common Stock (the
"Certificates") whose shares were converted into shares of Phone Common Stock
pursuant to Section 2.1 hereof, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Phone may reasonably specify), and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Phone Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by Phone,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Phone Common Stock
which such holder has the right to receive pursuant to the provisions of this
Article 2, and the Certificate so surrendered shall forthwith be canceled. In
the event of a transfer of ownership of Software.com Common Stock which is not
registered in the transfer records of Software.com, a certificate representing
the proper number of shares of Phone Common Stock may be issued to a person
other than the person in whose name the Certificate so surrendered is
registered, if such Certificate shall be properly endorsed or otherwise be in
proper form for transfer and the person requesting such issuance shall pay any
transfer or other taxes required by reason of the issuance of shares of Phone
Common Stock to a person other than the registered holder of such Certificate
or establish to the satisfaction of Phone that such tax has been paid or is
not applicable. No interest shall be paid or shall accrue on any cash payable
in lieu of any fractional shares of Phone Common Stock.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to Phone Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Phone Common Stock represented thereby, and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 2.2(e) hereof, until the surrender of such Certificate in
accordance with this Article 2. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the holder
of the certificate representing whole shares of Phone Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of Phone Common Stock
to which such holder is entitled pursuant to Section 2.2(e) and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Phone Common Stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such whole shares of Phone Common Stock.
(d) No Further Ownership Rights in Software.com Common Stock. All shares of
Phone Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms of this Article 2 (including any cash paid pursuant
to Section 2.2(c) or 2.2(e) hereof) shall be deemed to have been issued (and
paid) in full satisfaction of all rights pertaining to the shares of
Software.com Common Stock theretofore represented by such Certificates,
subject, however, to the obligation of the Surviving Corporation, as
applicable, to pay any dividends or make any other distributions with a record
date prior to the Effective Time which may have been declared or
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made by Software.com on such shares of Software.com Common Stock in accordance
with the terms of this Agreement and which remain unpaid at the Effective
Time, and there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Software.com
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation or the Exchange Agent for any reason, they shall be canceled and
exchanged as provided in this Article 2, except as otherwise provided by law.
(e) Fractional Shares.
(i) No certificates representing fractional shares of Phone Common Stock
shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests shall not entitle the owner thereof to vote or
to any other rights of a stockholder of Phone.
(ii) Notwithstanding any other provision of this Agreement, each holder
of shares of Software.com Common Stock converted pursuant to the Merger who
would otherwise have been entitled to receive a fraction of a share of
Phone Common Stock (after taking into account all Certificates delivered by
such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to (i) such fraction multiplied by (ii) the average of the
closing price of a share of Software.com Common Stock for the ten (10) most
recent trading days that Software.com Common Stock has traded ending on the
trading day immediately prior to the Effective Time, as reported on the
Nasdaq National Market.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six (6) months
after the Effective Time shall be delivered to Phone, upon demand, and any
holders of the Certificates who have not theretofore complied with this
Article 2 shall thereafter look only to Phone for payment of their claim for
Phone Common Stock, any cash in lieu of fractional shares of Phone Common
Stock and any dividends or distributions with respect to Phone Common Stock.
(g) No Liability. None of Phone, Merger Sub, Software.com or the Exchange
Agent shall be liable to any person in respect of any shares of Phone Common
Stock (or dividends or distributions with respect thereto) or cash from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates shall not have
been surrendered prior to seven (7) years after the Effective Time, or
immediately prior to such earlier date on which any shares of Phone Common
Stock, any cash in lieu of fractional shares of Phone Common Stock or any
dividends or distributions with respect to Phone Common Stock in respect of
such Certificate would otherwise escheat to or become the property of any
Governmental Entity, any such shares, cash, dividends or distributions in
respect of such Certificate shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Phone, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Phone.
Section 2.3 Certain Adjustments.
If between the date hereof and the Effective Time, the outstanding shares of
Software.com Common Stock or Phone Common Stock shall be changed into a
different number of shares by reason of any reclassification,
recapitalization, split-up, combination or exchange of shares, or any dividend
payable in stock or other securities shall be declared thereon with a record
date within such period, the Exchange Ratio shall be adjusted accordingly to
provide to the holders of Software.com Common Stock the same economic effect
as contemplated by this Agreement prior to such reclassification,
recapitalization, split-up, combination, exchange, or dividend.
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ARTICLE 3.
Representations and Warranties
Section 3.1 Representations and Warranties of Phone and Merger Sub.
Phone and Merger Sub represent and warrant to Software.com, subject to such
exceptions as are disclosed in writing in the disclosure letter supplied by
Phone to Software.com dated as of the date hereof (the "Phone Disclosure
Schedule"), which disclosure shall provide an exception to or otherwise
qualify the representations, warranties or covenants of Phone and Merger Sub
contained in the section of this Agreement corresponding by number to such
disclosure or covenant and the other representations, warranties, and
covenants herein to the extent such disclosure shall reasonably appear to be
applicable to such other representations, warranties, or covenants as follows:
(a) Organization, Standing, and Corporate Power.
(i) Each of Phone and its subsidiaries (as defined in Section 8.3) is a
corporation or other legal entity duly organized, validly existing and in
good standing (with respect to jurisdictions which recognize such concept)
under the laws of the jurisdiction in which it is organized and has the
requisite corporate or other power, as the case may be, and authority to
carry on its business as now being conducted, except, as to subsidiaries,
for those jurisdictions where the failure to be so organized, existing or
in good standing individually or in the aggregate would not have a material
adverse effect (as defined in Section 8.3) on Phone. Each of Phone and its
subsidiaries is duly qualified or licensed to do business and is in good
standing (with respect to jurisdictions which recognize such concept) in
each jurisdiction in which the nature of its business or the ownership,
leasing or operation of its properties makes such qualification or
licensing necessary, except for those jurisdictions where the failure to be
so qualified or licensed or to be in good standing individually or in the
aggregate would not have a material adverse effect on Phone.
(ii) Phone and Merger Sub have delivered to or made available to
Software.com prior to the execution of this Agreement complete and correct
copies of any amendments to the certificate of incorporation of Phone (the
"Phone Certificate"), the certificate of incorporation of Merger Sub and
the by-laws of Phone and Merger Sub not filed as of the date hereof with
the Phone Filed SEC Documents (as defined in Section 3.1(g)).
(b) Subsidiaries. Exhibit 21 to Phone's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999, includes all the subsidiaries of Phone which
as of the date of this Agreement are Significant Subsidiaries (as defined in
Rule 1-02 of Regulation S-X of the SEC). All the outstanding shares of capital
stock of, or other equity interests in, each such Significant Subsidiary have
been validly issued and are fully paid and nonassessable and are owned
directly or indirectly by Phone, free and clear of all pledges, claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens") and free of any other restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests).
(c) Capital Structure.
The authorized capital stock of Phone consists of 250,000,000 shares of
Phone Common Stock and 5,000,000 shares of preferred stock, par value $0.001
per share ("Phone Preferred Stock"). At the close of business on July 31,
2000, (i) 82,997,462 shares of Phone Common Stock were issued and outstanding;
(ii) 908,334 shares were issued and held by Phone in its treasury; (iii) no
shares of Phone Preferred Stock were issued and outstanding; (iv) 27,700,417
shares of Phone Common Stock were reserved for issuance pursuant to all stock
option, restricted stock or other stock-based compensation, benefits or
savings plans, agreements or arrangements in which current or former employees
or directors of Phone or its subsidiaries participate as of the date hereof,
complete and correct copies of which, in each case as amended as of the date
hereof, have been filed as exhibits to the Phone Filed SEC Documents (as
defined below) or delivered to Software.com (such plans, collectively, the
"Phone Stock Plans"); (v) 18,105 shares of Phone Common Stock were reserved
for issuance upon the exercise of outstanding warrants; and (vi) 250,000
shares of Phone Preferred Stock will be designated
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as Series A Junior Participating Preferred Stock, all of which will be
reserved for issuance upon exercise of preferred stock purchase rights (the
"Phone Rights") issuable pursuant to the Rights Agreement approved by the
board of directors of Phone in connection with its approval of this Agreement
and to be entered into no later than ten (10) days following the date hereof
substantially in the form previously provided to Software.com (the "Phone
Rights Agreement"). The authorized capital stock of Merger Sub consists of 100
shares of common stock, par value $0.01 per share of which 100 shares are
issued and outstanding. Phone is the sole stockholder of Merger Sub and is the
legal and beneficial owner of all 100 issued and outstanding shares. Merger
Sub was formed by Phone on July 31, 2000, solely for the purpose of effecting
the Merger and the other transactions contemplated by this Agreement. Except
as contemplated by this Agreement, Merger Sub does not hold nor has it held
any material assets or incurred any material liabilities nor has Merger Sub
carried on any business activities other than in connection with the Merger
and the other transactions contemplated by this Agreement. All outstanding
shares of capital stock of Phone and Merger Sub are, and all shares of capital
stock of Phone which may be issued pursuant to the Phone Stock Plans will be,
when issued, duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights. Except as set forth in this Section 3.1(c)
and except for changes since June 30, 2000, resulting from the issuance of
shares of Phone Common Stock pursuant to the Phone Options or as expressly
permitted by this Agreement, (x) there are not issued, reserved for issuance
or outstanding (A) any shares of capital stock or other voting securities of
Phone, (B) any securities of Phone or any Phone subsidiary convertible into or
exchangeable or exercisable for shares of capital stock or voting securities
of Phone, (C) any warrants, calls, options or other rights to acquire from
Phone or any Phone subsidiary (including any subsidiary trust), or obligations
of Phone or any Phone subsidiary to issue, any capital stock, voting
securities or securities convertible into or exchangeable or exercisable for
capital stock or voting securities of Phone, and (y) there are no outstanding
obligations of Phone or any Phone subsidiary to repurchase, redeem or
otherwise acquire any such securities or to issue, deliver, or sell, or cause
to be issued, delivered, or sold, any such securities. Neither Phone nor any
Phone subsidiary is a party to any agreement restricting the purchase or
transfer of, relating to the voting of, requiring registration of, or granting
any preemptive or, except as provided by the terms of the Phone Options,
antidilutive rights with respect to, any securities of the type referred to in
the two preceding sentences. Other than the Phone subsidiaries, Phone does not
directly or indirectly beneficially own any securities or other beneficial
ownership interests in any other entity except for non-controlling investments
made in the ordinary course of business in entities that are not individually
or in the aggregate material to Phone and its subsidiaries as a whole.
(d) Authority; Non-contravention.
Each of Phone and Merger Sub has all requisite corporate power and authority
to enter into this Agreement, and Phone has all requisite corporate power and
authority to enter into the Option Agreements and, subject to the Phone
Stockholder Approval (as defined in Section 3.1(l)), to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement by Phone and Merger Sub, the execution and delivery of the
Option Agreements by Phone and the consummation by Phone and Merger Sub of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of Phone and Merger Sub, subject, in
the case of the Merger to the Phone Stockholder Approval. This Agreement and
the Option Agreements have been duly executed and delivered by Phone and
Merger Sub and, assuming the due authorization, execution and delivery of each
agreement to which they are parties by Software.com constitutes (or will
constitute, as the case may be) the legal, valid and binding obligation of
Phone and Merger Sub, enforceable against Phone and Merger Sub in accordance
with their terms. The execution and delivery of this Agreement does not, and
the execution and delivery of the Option Agreements and the consummation of
the transactions contemplated hereby and thereby and compliance with the
provisions of this Agreement and the Option Agreements will not, conflict
with, or result in any violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a benefit under, or
result in the creation of any Lien upon any of the properties or assets of
Phone or any of its subsidiaries or in any restriction on the conduct of
Phone's business or operations under, (i) the Phone Certificate or the by-laws
of Phone or the comparable organizational documents of any of its
subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, trust document, lease, or other agreement,
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instrument, permit, concession, franchise, license, or similar authorization
applicable to Phone or any of its subsidiaries or their respective properties
or assets or (iii) subject to the governmental filings and other matters
referred to in the following sentence, any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Phone or any of its
subsidiaries or their respective properties or assets, other than, in the case
of clauses (ii) and (iii), any such conflicts, violations, defaults, rights,
losses, restrictions, or Liens that individually or in the aggregate would not
(x) have a material adverse effect on Phone or Software.com or (y) reasonably
be expected to impair the ability of each of Phone and Merger Sub to perform
its obligations under this Agreement or the Option Agreements. No consent,
approval, order or authorization of, action by or in respect of, or
registration, declaration or filing with, any federal, state, local or foreign
government, any court, administrative, regulatory or other governmental
agency, commission or authority or any non-governmental self-regulatory
agency, commission or authority (a "Governmental Entity") is required by or
with respect to Phone or any of its subsidiaries in connection with the
execution and delivery of this Agreement by Phone and Merger Sub, or the
execution and delivery by Phone of the Option Agreements or the consummation
by Phone and Merger Sub of the transactions contemplated hereby and thereby,
except for (1) the filing of a pre-merger notification and report form by
Phone and Merger Sub under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act") or filings or notifications under the
antitrust, competition or similar laws of any foreign jurisdiction; (2) the
filing with the SEC of (A) a proxy statement relating to the Phone
Stockholders' Meeting (as defined in Section 5.1(b)) (such proxy statement,
together with the proxy statement relating to the Software.com Stockholders'
Meeting (as defined in Section 5.1(c)), in each case as amended or
supplemented from time to time, the "Joint Proxy Statement"), (B) the
registration statement on Form S-4 to be filed with the SEC by Phone in
connection with the issuance of Phone Common Stock in the Merger (the "Form S-
4"), and (C) such reports under Section 13(a), 13(d), 15(d) or 16(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be
required in connection with this Agreement, the Option Agreements and the
transactions contemplated hereby and thereby; (3) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other states in which
Phone and Merger Sub are qualified to do business and such filings with
Governmental Entities to satisfy the applicable requirements of state
securities or "blue sky" laws; and, (4) such consents, approvals, orders or
authorizations the failure of which to be made or obtained individually or in
the aggregate would not (x) have a material adverse effect on Phone and Merger
Sub or (y) reasonably be expected to impair the ability of each of Phone and
Merger Sub to perform its obligations under this Agreement.
(e) SEC Documents; Undisclosed Liabilities.
Phone has filed all required registration statements, prospectuses, reports,
schedules, forms, statements and other documents (including exhibits and all
other information incorporated therein) with the SEC since June 11, 1999 (the
"Phone SEC Documents"). As of their respective dates, the Phone SEC Documents
complied in all material respects with the requirements of the Securities Act
or the Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such Phone SEC Documents, and none of
the Phone SEC Documents when filed contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Phone included in the Phone SEC Documents comply as to form, as
of their respective dates of filing with the SEC, in all material respects
with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles ("GAAP") (except, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present the consolidated financial position of
Phone and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments which are not material). Except (i) as reflected in such financial
statements or in the notes thereto or (ii) for liabilities incurred in
connection with this Agreement, the Option Agreements, or the transactions
contemplated hereby or thereby, or (iii) for liabilities incurred in the
ordinary course of business consistent with past practices, and which would
not reasonably be expected to have a material adverse effect,
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neither Phone nor any of its subsidiaries has any liabilities or obligations
of any nature that, individually or in the aggregate, would have a material
adverse effect on Phone.
(f) Information Supplied.
None of the information supplied or to be supplied by Phone and Merger Sub
specifically for inclusion or incorporation by reference in (i) the Form S-4
will, at the time the Form S-4 becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or (ii) the Joint Proxy Statement will, at the date it is first
mailed to Phone's stockholders or at the time of the Phone Stockholders'
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Form S-4 and the Joint Proxy Statement will comply as to
form in all material respects with the requirements of the Exchange Act and
the rules and regulations thereunder, except that no representation or
warranty is made by Phone with respect to statements made or incorporated by
reference therein based on information supplied by Software.com specifically
for inclusion or incorporation by reference in the Form S-4 or the Joint Proxy
Statement.
(g) Absence of Certain Changes or Events.
Except for liabilities incurred in connection with this Agreement, the
Option Agreements or the transactions contemplated hereby and thereby, and
except as permitted by Section 4.1(a), since March 31, 2000, Phone and its
subsidiaries have conducted their business only in the ordinary course
consistent with past practice or as disclosed in any Phone SEC Document filed
since such date and prior to the date hereof, and there has not been (i) any
material adverse change in Phone, (ii) any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to any of Phone's capital stock, (iii) any split,
combination or reclassification of any of Phone's capital stock or any
issuance or the authorization of any issuance of any other securities in
respect of, in lieu of, or in substitution for shares of Phone's capital
stock, except for issuances of Phone Common Stock upon exercise or conversion
of Phone Options, in each case awarded prior to the date hereof in accordance
with their present terms or issued pursuant to Section 4.1(a), (iv) (A) any
granting by Phone or any of its subsidiaries to any current or former
director, officer or other key employee of Phone or its subsidiaries of any
increase in compensation, bonus or other benefits, except for normal increases
as a result of promotions, normal increases of base pay or target bonuses in
the ordinary course of business or as was required under any employment
agreements in effect as of March 31, 2000, (B) any granting by Phone or any of
its subsidiaries to any such current or former director, officer or key
employee of any increase in severance or termination pay, or (C) any entry by
Phone or any of its subsidiaries into, or any amendment of, any employment,
deferred compensation, consulting, severance, termination or indemnification
agreement with any such current or former director or officer, or any material
amendment of any of the foregoing with any key employee, (v) except insofar as
may have been disclosed in Phone SEC Documents filed and publicly available
prior to the date of this Agreement (as amended to the date hereof, the "Phone
Filed SEC Documents") or required by a change in GAAP, any change in
accounting methods, principles or practices by Phone materially affecting its
assets, liabilities or business, (vi) except insofar as may have been
disclosed in the Phone Filed SEC Documents, any tax election that individually
or in the aggregate would have a material adverse effect on Phone or any of
its tax attributes or any settlement or compromise of any material income tax
liability, or (vii) any action taken by Phone or any of the Phone subsidiaries
during the period from April 1, 2000, through the date of this Agreement that,
if taken during the period from the date of this Agreement through the
Effective Time, would constitute a breach of Section 4.1(a).
(h) Compliance with Applicable Laws; Litigation.
(i) Phone, its subsidiaries and employees hold all permits, licenses,
variances, exemptions, orders, registrations and approvals of all
Governmental Entities which are required for the operation of the
businesses of Phone and its subsidiaries (the "Phone Permits"), except
where the failure to have any such Phone Permits individually or in the
aggregate would not have a material adverse effect on Phone. Except
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as specifically disclosed in the Phone SEC Documents filed with the SEC
prior to the date hereof, Phone and its subsidiaries are in compliance with
the terms of the Phone Permits and all applicable laws, statutes, orders,
rules, regulations, policies or guidelines promulgated, or judgments,
decisions or orders entered by any Governmental Entity (all such laws,
statutes, orders, rules, regulations, policies, guidelines, judgments,
decisions and orders, collectively, "Applicable Laws"), relating to Phone
or its business or properties, except where the failure to be in compliance
with such Applicable Laws individually or in the aggregate would not have a
material adverse effect on Phone. As of the date of this Agreement, except
as disclosed in the Phone Filed SEC Documents, no action, demand,
requirement or investigation by any Governmental Entity and no suit, action
or proceeding by any person, in each case with respect to Phone or any of
its subsidiaries or any of their respective properties, is pending or, to
the knowledge (as defined in Section 8.3(e)) of Phone, threatened, other
than, in each case, those the outcome of which individually or in the
aggregate would not (A) have a material adverse effect on Phone and Merger
Sub or (B) reasonably be expected to impair the ability of each of Phone
and Merger Sub to perform its obligations under this Agreement or the
Option Agreements or prevent or materially delay the consummation of any of
the transactions contemplated hereby or thereby.
(ii) Neither Phone nor any Phone subsidiary is subject to any outstanding
order, injunction or decree which has had or, insofar as can be reasonably
foreseen, individually or in the aggregate would have, a material adverse
effect on Phone.
(i) Absence of Changes in Benefit Plans.
Phone has delivered to Software.com or made available to Software.com for
review true and complete copies of (i) all severance and employment agreements
of Phone with directors, executive officers or key employees, (ii) all written
and material unwritten severance programs and policies of each of Phone and
each Phone subsidiary, and (iii) all plans or arrangements of Phone and each
Phone subsidiary relating to its employees which contain change in control
provisions, in each case which has not been filed as an exhibit to a Phone
Filed SEC Document. Documents made available are identified in Section 3.1(i)
of the Phone Disclosure Schedule. Since March 31, 2000, there has not been any
adoption or amendment in any material respect by Phone or any of its
subsidiaries of (A) any collective bargaining agreement with respect to any
employees of, (B) any material bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other plan, arrangement or understanding
providing benefits to any current or former officers, directors or employees
of, (C) any employment agreement, consulting agreement or severance agreement
with any current or former officer or director of, or (D) any material
employment agreement, consulting agreement or severance agreement with any
employee of Phone or any of its wholly owned subsidiaries (collectively, the
"Phone Benefit Plans"), or any material change in any actuarial or other
assumption used to calculate funding obligations with respect to any Phone
pension plans, or any material change in the manner in which contributions to
any Phone pension plans are made or the basis on which such contributions are
determined. Since March 31, 2000, neither Phone nor any Phone subsidiary has
amended any Phone Options or any Phone Stock Plans to accelerate the vesting
of, or release restrictions on, awards thereunder, or to provide for such
acceleration in the event of a change in control.
(j) Benefit Plans.
(i) With respect to the Phone Benefit Plans, no event has occurred and
there exists no condition or set of circumstances, in connection with which
Phone or any of its subsidiaries would be subject to any liability that
individually or in the aggregate would have a material adverse effect on
Phone under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the Code or any other applicable law.
(ii) Each Phone Benefit Plan has been administered in accordance with its
terms, except for any failures so to administer any Phone Benefit Plan that
individually or in the aggregate would not have a material adverse effect
on Phone. The Phone Benefit Plans have been operated, and are, in
compliance with the applicable provisions of ERISA, the Code and all other
applicable laws and the terms of all applicable collective bargaining
agreements, except for any failures to be in such compliance that
individually or in
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the aggregate would not have a material adverse effect on Phone. Each Phone
Benefit Plan intended to qualify under section 401(a) of the Code and each
trust intended to qualify under section 501(a) of the Code has either
received a favorable determination, opinion or advisory letter from the
Internal Revenue Service (the "IRS") with respect to each such Phone
Benefit Plan as to its qualified status under the Code, or has remaining a
period of time under applicable Treasury regulations or IRS pronouncements
in which to apply for such a letter and make any amendments necessary to
obtain a favorable determination, opinion or advisory as to the qualified
status of each Phone Benefit Plan. To the knowledge of Phone, no fact or
event has occurred since the date of any determination opinion or advisory
letter from the IRS which is reasonably likely to affect adversely the
qualified status of any such Phone Benefit Plan or the exempt status of any
such trust.
(iii) No Phone Benefit Plan is subject to Title IV of ERISA or is a
"multi-employer plan" within the meaning of Section 3(37) of ERISA.
(iv) No Phone Benefit Plan provides medical benefits (whether or not
insured), with respect to current or former employees after retirement or
other termination of service (other than coverage mandated by applicable
law or benefits, the full cost of which is borne by the current or former
employee) other than individual arrangements the amounts of which are not
material.
(v) Phone has previously provided to Software.com a copy of each
collective bargaining or other labor union contract applicable to persons
employed by Phone or any of its subsidiaries to which Phone or any of its
subsidiaries is a party. No collective bargaining agreement is being
negotiated or renegotiated by Phone or any of its subsidiaries. As of the
date of this Agreement, there is no labor dispute, strike or work stoppage
against Phone or any of its subsidiaries pending or, to the knowledge of
Phone, threatened which may interfere with the respective business
activities of Phone or any of its subsidiaries, except where such dispute,
strike or work stoppage individually or in the aggregate would not have a
material adverse effect on Phone. As of the date of this Agreement, to the
knowledge of Phone, none of Phone, any of its subsidiaries or any of their
respective representatives or employees has committed any material unfair
labor practice in connection with the operation of the respective
businesses of Phone or any of its subsidiaries, and there is no material
charge or complaint against Phone or any of its subsidiaries by the
National Labor Relations Board or any comparable governmental agency
pending or threatened in writing.
(vi) No employee of Phone or any Phone subsidiary will be entitled to any
material payment, additional benefits or any acceleration of the time of
payment or vesting of any benefits under any Phone Benefit Plan as a result
of the transactions contemplated by this Agreement (either alone or in
conjunction with any other event such as a termination of employment).
(vii) To the knowledge of Phone, no material oral or written
representation or commitment with respect to any aspect of any Phone
Benefit Plan has been made to employees of Phone or any Phone subsidiaries
by an authorized Phone employee prior to the Closing Date that is not
materially in accordance with the written or otherwise preexisting terms
and provisions of such Phone Benefit Plans in effect immediately prior to
the Closing Date.
(viii) Except such as would not have a material adverse effect, there are
no material unresolved claims or disputes under the terms of, or in
connection with, any Phone Benefit Plan (other than routine undisputed
claims for benefits), and no action, legal or otherwise, has been commenced
with respect to any material claim.
(ix) To the knowledge of Phone, no non-exempt "prohibited transaction"
(within the meaning of section 4975(c) of the Code) involving any Phone
Benefit Plan has occurred that could subject Phone to any material tax
penalty or other cost or liability (by indemnification or otherwise).
(x) Neither Phone nor any Phone subsidiary is obligated to make any
parachute payments as such term is defined in section 280G of the Code, and
neither is a party to any agreement that under certain circumstances is
reasonably likely to obligate it, or any successor in interest, to make any
parachute payments that will not be deductible under section 280G of the
Code. Neither Phone nor any Phone
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subsidiary is obligated to make reimbursement or gross-up payments to any
person in respect to excess parachute payments.
(k) Taxes.
(i) Each of Phone and its subsidiaries has filed all material Tax Returns
required to be filed by it (taking into account all applicable extensions)
with the appropriate Tax Authority and all such returns are true, complete,
and correct in all material respects, or requests for extensions to file
such returns have been timely filed, granted, and have not expired, except
to the extent that such failures to file, to be complete, true, or correct,
or to have extensions granted that remain in effect individually or in the
aggregate would not have a material adverse effect on Phone. Phone and each
of its subsidiaries has paid (or Phone has paid or caused to be paid on its
behalf) all Taxes shown as due on such returns, and the most recent
financial statements contained in the Phone Filed SEC Documents reflect an
adequate reserve in accordance with GAAP for all Taxes payable by Phone and
its subsidiaries for all taxable periods and portions thereof accrued
through the date of such financial statements.
(ii) No deficiencies for any Taxes have been proposed, asserted or
assessed against Phone or any of its subsidiaries that are not adequately
reserved for, except for deficiencies that individually or in the aggregate
would not have a material adverse effect on Phone. Phone and its
subsidiaries have disclosed all material deficiencies or adjustments for
Taxes that have been proposed or assessed by any Tax Authority against
Phone or any of its subsidiaries. All of the Federal income Tax Returns of
the "affiliated group" (as defined in section 1504(a) of the Code) of which
Phone is the common parent are no longer subject to any Audit by virtue of
the expiration of the applicable statutory period of limitations for the
assessment of Tax.
(iii) Neither Phone nor any of its subsidiaries has taken any action or
knows of any fact, agreement, plan or other circumstance that is reasonably
likely to prevent the Merger from qualifying as a "reorganization" within
the meaning of section 368(a) of the Code.
(iv) No Audits are presently pending with regard to any Taxes or Tax
Returns of Phone or its subsidiaries.
(v) Neither Phone nor any of its subsidiaries is a party to any agreement
providing for the allocation, indemnification, or sharing of Taxes.
(vi) Other than the "affiliated group" (as defined in section 1504(a) of
the Code) of which Phone is the common parent, neither Phone nor any of its
subsidiaries has been a member of any "affiliated group."
(vii) There are no liens for Taxes on any of the assets of Phone or its
subsidiaries except for liens for Taxes that are not yet due and payable
and for which adequate reserves have been provided in accordance with GAAP
in the most recent financial statements contained in the Phone Filed SEC
Documents.
(viii) As used in this Agreement, "Audit" means any audit, assessment, or
other examination relating to Taxes by any Tax Authority or any
administrative or judicial proceedings or appeals of such proceedings
relating to Taxes. "Tax" or "Taxes" means all Federal, state, local, and
foreign taxes, and other assessments of a similar nature (whether imposed
directly or through withholding), including any interest, additions to tax,
or penalties applicable thereto, imposed by any Tax Authority. "Tax
Authority" means the Internal Revenue Service and any other domestic or
foreign governmental authority responsible for the administration of any
Taxes. "Tax Returns" mean all Federal, state, local and foreign tax
returns, declarations, statements, reports, schedules, forms, and
information returns and any amendments thereto.
(l) Voting Requirements.
The affirmative vote at the Phone Stockholders' Meeting (the "Phone
Stockholder Approval") of (i) the holders of a majority of all outstanding
shares of Phone Common Stock present in person or by proxy and entitled to
vote at a duly convened and held meeting of Phone stockholders to approve the
issuance of shares of Phone Common Stock pursuant to the Merger and (ii) the
holders of a majority of all outstanding shares of Phone Common Stock to
approve the Phone Charter Amendment are the only votes of the holders of any
class or series of Phone's capital stock necessary to adopt this Agreement and
approve the transactions contemplated hereby.
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(m) State Takeover Statutes; Certificate of Incorporation.
The Board of Directors of Phone has adopted a resolution or resolutions
approving this Agreement, the Option Agreements and the Software.com Voting
Agreement and the transactions contemplated hereby and thereby and, assuming
the accuracy of Software.com's representation and warranty contained in
Section 3.2(p), such approval constitutes approval of the Merger and the other
transactions contemplated hereby and by the Option Agreements and the
Software.com Voting Agreement by the Phone Board of Directors under the
provisions of Section 203 of the DGCL such that Section 203 of the DGCL does
not apply to this Agreement, the Option Agreements, the Software.com Voting
Agreement and the transactions contemplated hereby and thereby. To the
knowledge of Phone, no state takeover statute other than Section 203 of the
DGCL (which has been rendered inapplicable) is applicable to the Merger or the
other transactions contemplated hereby.
(n) Brokers.
Except for fees payable to Credit Suisse First Boston Corporation ("CSFB")
pursuant to an engagement letter, dated June 16, 2000, a true and complete
copy of which has been provided to Software.com, no broker, investment banker,
financial advisor or other person is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Phone or Merger Sub.
(o) Opinion of Financial Advisors.
Phone has received the opinion of CSFB, dated the date of this Agreement, to
the effect that, as of such date, the Exchange Ratio is fair from a financial
point of view to Phone, a signed copy of which opinion will be delivered to
Software.com promptly after execution of this Agreement.
(p) Ownership of Software.com Common Stock.
To the knowledge of Phone and Merger Sub, as of the date hereof or at any
time within twelve (12) months prior to the date of this Agreement (and before
giving effect to the Software.com Option Agreement and the Software.com Voting
Agreement, which will be entered into immediately after the execution of this
Agreement), neither Phone nor, to its knowledge without independent
investigation, any of its affiliates, (i) beneficially owns (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, or (ii) is party
to any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of, in each case, shares of capital stock of
Software.com.
(q) Intellectual Property.
(i) To the knowledge of Phone, Phone or its subsidiaries own or have a
valid right to use all trademarks, service marks, trade names, Internet
domain names, designs, slogans, and general intangibles of like nature,
together with all applications, registrations and goodwill related to the
foregoing (collectively, "Phone Trademarks"); patents (including any
registration, continuations, continuations-in-part, renewals and
applications for any of the foregoing); copyrights (including any
registrations, renewals and applications for any of the foregoing); Phone
Software (as defined below); technology, trade secrets and other
confidential information, know-how, proprietary processes, formulae,
algorithms, models, and methodologies (collectively, "Phone Trade Secrets")
used in or necessary for the conduct of Phone's and each of its
subsidiary's business as currently conducted (all such intellectual
property being referred to herein as the "Phone Intellectual Property"),
except where the failure to possess such right would not have a material
adverse effect. For purposes of this Section 3.1(q), "Phone Software" means
any and all (a) computer programs, including any and all software
implementations of algorithms, models and methodologies, whether in source
code or object code, (b) databases and compilations, including any and all
data and collections of data, whether machine readable or otherwise, (c)
descriptions, flowcharts and other work product used to design, plan,
organize and develop any of the foregoing, (d) the technology supporting
any Internet site(s) operated by or on behalf of Phone or any of its
subsidiaries and (e) all documentation, including user manuals and training
materials, relating to any of the foregoing.
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(ii) The Phone Intellectual Property owned by Phone or any of its
subsidiaries is free and clear of all Liens.
(iii) All material Phone Intellectual Property owned by Phone or any of
its subsidiaries is valid and subsisting, in full force and effect, and has
not been canceled, has not expired, nor has it been abandoned. There is no
pending or, to Phone's knowledge, threatened opposition, interference or
cancellation proceeding before any court or registration authority in any
jurisdiction against any registrations in respect of the Phone Intellectual
Property (other than Phone Trademarks) owned by Phone or any of its
subsidiaries.
(iv) To the actual knowledge of Phone or any of its subsidiaries, the
conduct of the business of Phone and its subsidiaries as currently
conducted does not infringe upon (either directly or indirectly such as
through contributory infringement or inducement to infringe) any
intellectual property rights owned or controlled by any third party. There
are no claims or suits pending and as to which Phone has received actual
notice or, to the knowledge of Phone, threatened, and neither Phone nor any
of its subsidiaries has received any notice of a third-party claim or suit,
(a) alleging that its activities or the conduct of its business infringes
upon, violates, or constitutes the unauthorized use of the intellectual
property rights of any third party or (b) challenging the ownership, use,
validity or enforceability of any Phone Intellectual Property, which in any
case would have a material adverse effect.
(v) There are no written settlements, forbearances to sue, consents,
judgments, or orders or similar obligations which in any material respect
(a) restrict the right of Phone or its subsidiaries to use any Phone
Intellectual Property owned by Phone, or (b) restrict the business of Phone
or its subsidiaries in order to accommodate a third party's intellectual
property rights or (c) except for licenses with customers for Phone
Software, there are no agreements that permit third parties to use any
Phone Intellectual Property owned or controlled by Phone or any of its
subsidiaries.
(vi) Phone and each of its subsidiaries takes reasonable measures to
protect the confidentiality of Phone Trade Secrets, including (i) requiring
its employees and independent contractors having access thereto to execute
written nondisclosure agreements and (ii) requiring all licensees to
maintain the confidentiality of Phone Trade Secrets. To the actual
knowledge of Phone or its subsidiaries, no Phone Trade Secret has been
knowingly disclosed or authorized to be disclosed to any third party other
than pursuant to a nondisclosure agreement or other appropriate instrument
that adequately protects Phone and the applicable subsidiary's proprietary
interests in and to such trade secrets. To the knowledge of Phone, no party
to any nondisclosure agreement or nondisclosure obligation relating to its
trade secrets is in breach or default thereof.
(vii) To the knowledge of Phone, no third party is misappropriating,
infringing, diluting, or violating any Phone Intellectual Property owned by
Phone or any of its subsidiaries other than immaterial disputes concerning
use by a third party of Phone Trademarks of Phone or a subsidiary.
(viii) The consummation of the Merger and the other transactions
contemplated by this Agreement shall not result in the loss or impairment
of Phone's or of any subsidiary's right to own or use any of the Phone
Intellectual Property, and will not require the consent of any governmental
authority, except where such loss or impairment or the failure to obtain
consent would not result in a material adverse effect.
(r) Certain Contracts.
Except as set forth in the Phone Filed SEC Documents, neither Phone nor any
of its subsidiaries is a party to or bound by (i) any "material contract" (as
such term is defined in Item 601(b)(10) of Regulation S-K of the SEC), (ii)
any non-competition agreement or any other agreement or obligation which
purports to limit in any material respect the manner in which, or the
localities in which, all or any material portion of the business of Phone and
its subsidiaries (including, for purposes of this Section 3.1(r), Software.com
and its subsidiaries, assuming the Merger have taken place), taken as a whole,
is or would be conducted, (iii) any exclusive supply or purchase contracts or
any exclusive requirements contracts or (iv) any contract or other agreement
which would prohibit or materially delay the consummation of the Merger or any
of the transactions contemplated by this Agreement (all contracts of the type
described in clauses (i) and (ii) being referred to herein as "Phone Material
Contracts"). Phone has delivered to Software.com or provided to Software.com
for review, prior to the execution
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of this Agreement, complete and correct copies of all Phone Material Contracts
not filed as exhibits to the Phone Filed SEC Documents. Each Phone Material
Contract is valid and binding on Phone (or, to the extent a Phone subsidiary
is a party, such subsidiary) and is in full force and effect, and Phone and
each Phone subsidiary have in all material respects performed all obligations
required to be performed by them to date under each Phone Material Contract,
except where such noncompliance, individually or in the aggregate, would not
have a material adverse effect on Phone. Neither Phone nor any Phone
subsidiary knows of, or has received notice of, any violation or default under
(nor, to the knowledge of Phone, does there exist any condition which with the
passage of time or the giving of notice or both would result in such a
violation or default under) any Phone Material Contract.
(s) Phone Rights Agreement.
Phone has delivered to Software.com a true, correct and complete copy of the
Phone Rights Agreement. Phone has taken all action so that the entering into
of this Agreement, the Phone Option Agreement, the Phone Voting Agreement, the
Merger, the acquisition of shares pursuant to the Phone Option Agreement and
the other transactions contemplated hereby and thereby will not result in the
grant of any rights to any person under the Phone Rights Agreement or enable
or require the Phone Rights to be exercised, distributed or triggered.
(t) Environmental Liability.
Except as set forth in the Phone Filed SEC Documents, there are no legal,
administrative, arbitral or other proceedings, claims, actions, causes of
action, private environmental investigations or remediation activities or
governmental investigations of any nature pending or threatened against Phone
or any of its subsidiaries seeking to impose, or that could reasonably be
expected to result in the imposition of, on Phone or any of its subsidiaries,
any liability or obligation arising under common law or under any local, state
or federal environmental statute, regulation or ordinance, including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), which liability or obligation
could reasonably be expected to have a material adverse effect on Phone. To
the knowledge of Phone, there is no reasonable basis for any such proceeding,
claim, action or governmental investigation that would impose any liability or
obligation that could reasonably be expected to have a material adverse effect
on Phone.
(u) Insurance.
Phone and each of its subsidiaries have policies of insurance and bonds of
the type and in amounts customarily carried by persons conducting businesses
or owning assets similar to those of Phone and its subsidiaries. There is no
claim pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds, except questioned, denied or disputed claims the failure to provide
coverage for which would not, individually or in the aggregate, have a
material adverse effect on Phone. All premiums due and payable under all such
policies and bonds have been paid and Phone and its subsidiaries are otherwise
in compliance in all material respects with the terms of such policies and
bonds. Phone has no knowledge of any threatened termination of, or material
premium increase with respect to, any of such policies.
(v) Accounting Matters.
As of the date hereof, to the knowledge of Phone, none of Phone, any of its
subsidiaries or any of their respective directors, officers or stockholders,
has taken any action which would prevent the accounting for the Merger as a
pooling of interests in accordance with Accounting Principles Board Opinion
No. 16 ("APB 16") and the interpretative releases pursuant thereto and the
pronouncements of the SEC.
(w) Transactions with Affiliates.
Except as disclosed in the Phone SEC Documents filed prior to the date of
this Agreement or as disclosed in the Phone Disclosure Schedule, since June
30, 1999, there have been no transactions, agreements, arrangements or
understandings between Phone and its affiliates that would be required to be
disclosed under the Item 404 of Regulation S-K under the Securities Act.
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(x) Full Disclosure.
None of the representations or warranties made by Phone or Merger Sub herein
or in any schedule hereto, including the Phone Disclosure Schedule, or any
certificate furnished by Phone or Merger Sub pursuant to this Agreement,
contains or will contain at the Effective Time any untrue statement of a
material fact, or omits or will omit at the Effective Time, to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
Section 3.2 Representations and Warranties of Software.com.
Software.com represents and warrants to Phone and Merger Sub, subject to
such exceptions as are disclosed in writing in the disclosure letter supplied
by Software.com to Phone dated as of the date hereof (the "Software.com
Disclosure Schedule"), which disclosure shall provide an exception to or
otherwise qualify the representations, warranties or covenants of Software.com
contained in the section of this Agreement corresponding by number to such
disclosure or covenant and the other representations, warranties and covenants
herein to the extent such disclosure shall reasonably appear to be applicable
to such other representations, warranties or covenants as follows:
(a) Organization, Standing and Corporate Power.
(i) Each of Software.com and its subsidiaries (as defined in Section 8.3)
is a corporation or other legal entity duly organized, validly existing and
in good standing (with respect to jurisdictions which recognize such
concept) under the laws of the jurisdiction in which it is organized and
has the requisite corporate or other power, as the case may be, and
authority to carry on its business as now being conducted, except, as to
subsidiaries, for those jurisdictions where the failure to be so organized,
existing or in good standing individually or in the aggregate would not
have a material adverse effect (as defined in Section 8.3(b)) on
Software.com. Each of Software.com and its subsidiaries is duly qualified
or licensed to do business and is in good standing (with respect to
jurisdictions which recognize such concept) in each jurisdiction in which
the nature of its business or the ownership, leasing or operation of its
properties makes such qualification or licensing necessary, except for
those jurisdictions where the failure to be so qualified or licensed or to
be in good standing individually or in the aggregate would not have a
material adverse effect on Software.com.
(ii) Software.com has delivered to Phone prior to the execution of this
Agreement complete and correct copies of any amendments to its Certificate
of Incorporation (the "Software.com Certificate") and by-laws not filed as
of the date hereof with the Software.com SEC Documents (as defined in
Section 3.2(e)).
(b) Subsidiaries.
Exhibit 21 to Software.com's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, includes all the subsidiaries of Software.com which
as of the date of this Agreement are Significant Subsidiaries (as defined in
Rule 102 of Regulation S-X of the SEC). All the outstanding shares of capital
stock of, or other equity interests in, each such Significant Subsidiary have
been validly issued and are fully paid and nonassessable and are owned
directly or indirectly by Software.com, free and clear of all Liens and free
of any other restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock or other ownership interests).
(c) Capital Structure.
The authorized capital stock of Software.com consists of 150,000,000 shares
of Software.com Common Stock, and 5,000,000 shares of preferred stock, without
par value ("Software.com Preferred Stock"). At the close of business on July
31, 2000: (i) 48,866,633 shares of Software.com Common Stock were issued and
outstanding; (ii) 52,698 shares of Software.com Common Stock were held by
Software.com in its treasury; (iii) no shares of Software.com Preferred Stock
were issued and outstanding; (iv) 8,817,838 shares of Software.com Common
Stock were reserved for issuance pursuant to all stock option, restricted
stock or other stock-based compensation, benefits or savings plans, agreements
or arrangements in which current or former employees or directors of
Software.com or its subsidiaries participate as of the date hereof, complete
and correct copies of
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which, in each case as amended as of the date hereof, have been filed as
exhibits to the Software.com Filed SEC Documents or delivered to Phone (such
plans, collectively, the "Software.com Stock Plans"), (v) 850,000 shares of
Software.com Common Stock were reserved for issuance pursuant to options
outside the Software.com Stock Plans; and (vi) 146,721 shares of Software.com
Common Stock were reserved for issuance upon the exercise of outstanding
warrants and (vii) 155,000 shares of Software.com Preferred Stock will be
designated as Series A Participating Preferred Stock all of which will be
reserved for issuance upon the exercise of preferred stock purchase rights
(the "Software.com Rights") issued pursuant to the Rights Agreement approved
by the board of directors of Software.com in connection with its approval of
this Agreement and to be entered into no later than ten (10) days following
the date hereof substantially in the form previously provided to Phone (the
"Software.com Rights Agreement"). All outstanding shares of capital stock of
Software.com are, and all shares which may be issued as permitted by this
Agreement or otherwise will be, when issued, duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights. Except as
set forth in this Section 3.2(c), and except for changes since March 31, 2000,
resulting from the issuance of shares of Software.com Common Stock pursuant to
the Software.com Options or as expressly permitted by this Agreement, (x)
there are not issued, reserved for issuance or outstanding (A) any shares of
capital stock or other voting securities of Software.com, (B) any securities
of Software.com or any Software.com subsidiary convertible into or
exchangeable or exercisable for shares of capital stock or voting securities
of Software.com, (C) any warrants, calls, options or other rights to acquire
from Software.com or any Software.com subsidiary, and any obligation of
Software.com or any Software.com subsidiary to issue, any capital stock,
voting securities or securities convertible into or exchangeable or
exercisable for capital stock or voting securities of Software.com, and (y)
there are no outstanding obligations of Software.com or any Software.com
subsidiary to repurchase, redeem or otherwise acquire any such securities or
to issue, deliver or sell, or cause to be issued, delivered or sold, any such
securities. Neither Software.com nor any Software.com subsidiary is a party to
any agreement restricting the purchase or transfer of, relating to the voting
of, requiring registration of, or granting any preemptive or, except as
provided by the terms of the Software.com Options, antidilutive rights with
respect to, any securities of the type referred to in the two preceding
sentences. Other than the Software.com subsidiaries, Software.com does not
directly or indirectly beneficially own any securities or other beneficial
ownership interests in any other entity except for non-controlling investments
made in the ordinary course of business in entities which are not individually
or in the aggregate material to Software.com and its subsidiaries as a whole.
(d) Authority; Non-contravention.
Software.com has all requisite corporate power and authority to enter into
this Agreement and the Option Agreements. Subject to the Software.com
Stockholder Approval (as defined in Section 3.2(l)), Software.com has all
requisite corporate power and authority to consummate the transactions
contemplated by this Agreement and the Option Agreements. The execution and
delivery of this Agreement and the Option Agreements by Software.com and the
consummation of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action on the part of Software.com,
subject in the case of the Merger, to the Software.com Stockholder Approval.
This Agreement and the Option Agreements have been duly executed and delivered
by Software.com and, assuming the due authorization, execution and delivery
thereof by Phone and Merger Sub, constitute (or will constitute, as the case
may be) the legal, valid and binding obligation of Software.com enforceable
against Software.com in accordance with their terms. The execution and
delivery of this Agreement does not, and the execution and delivery of the
Option Agreements and the consummation of the transactions contemplated hereby
and thereby and compliance with the provisions of this Agreement and the
Option Agreements will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of a benefit under, or result in the creation of any Lien upon any of the
properties or assets of Software.com or any of its subsidiaries or any
restriction on the conduct of Software.com's business or operations under, (i)
the Software.com Certificate or the by-laws of Software.com or the comparable
organizational documents of any of its subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, trust document, lease or other
agreement, instrument, permit, concession, franchise, license or similar
authorization applicable to Software.com or any of its subsidiaries or their
respective properties or assets or (iii)
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subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to Software.com or any of its subsidiaries or their
respective properties or assets, other than, in the case of clauses (ii) and
(iii), any such conflicts, violations, defaults, rights, losses, restrictions
or Liens that individually or in the aggregate would not (x) have a material
adverse effect on Software.com or (y) reasonably be expected to impair the
ability of Software.com to perform its obligations under this Agreement or the
Option Agreements. No consent, approval, order or authorization of, action by,
or in respect of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to Software.com or any of
its subsidiaries in connection with the execution and delivery of this
Agreement or the Option Agreements by Software.com or the consummation by
Software.com of the transactions contemplated hereby or thereby, except for
(1) the filing of a pre-merger notification and report form by Software.com
under the HSR Act or filings or notifications under the antitrust, competition
or similar laws of any foreign jurisdiction; (2) the filing with the SEC of
(A) the Joint Proxy Statement relating to the Software.com Stockholders'
Meeting and (B) such reports under Section 13(a), 13(d), 15(d) or 16(a) of the
Exchange Act as may be required in connection with this Agreement and the
Option Agreements and the transactions contemplated hereby and thereby; (3)
the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware and appropriate documents with the relevant authorities of
other states in which Software.com is qualified to do business; and (4) such
consents, approvals, orders or authorizations the failure of which to be made
or obtained individually or in the aggregate would not (x) have a material
adverse effect on Software.com or (y) reasonably be expected to impair the
ability of Software.com to perform its obligations under this Agreement.
(e) SEC Documents; Undisclosed Liabilities.
Software.com has filed all required registration statements, prospectuses,
reports, schedules, forms, statements and other documents (including exhibits
and all other information incorporated therein) with the SEC since June 29,
1999 (the "Software.com SEC Documents"). As of their respective dates, the
Software.com SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable to
such Software.com SEC Documents, and none of the Software.com SEC Documents
when filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of Software.com included
in the Software.com SEC Documents comply as to form, as of their respective
dates of filing with the SEC, in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with GAAP (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of Software.com and its consolidated subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows for
the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments which are not material). Except (i) as
reflected in such financial statements or in the notes thereto or (ii) for
liabilities incurred in connection with this Agreement, the Option Agreements
or the transactions contemplated hereby or thereby, or (iii) for liabilities
incurred in the ordinary course of business consistent with past practices and
which would not reasonably be expected to have a material adverse effect,
neither Software.com nor any of its subsidiaries has any liabilities or
obligations of any nature which, individually or in the aggregate, would have
a material adverse effect on Software.com.
(f) Information Supplied.
None of the information supplied or to be supplied by Software.com
specifically for inclusion or incorporation by reference in (i) the Form S-4
will, at the time the Form S-4 becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or (ii) the Joint Proxy Statement will, at the date it is first
mailed to Software.com's stockholders or at the time of the Software.com
Stockholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated
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therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Joint Proxy
Statement and the Form S-4 will comply as to form in all material respects
with the requirements of the Securities Act and the Exchange Act and the rules
and regulations thereunder, except that no representation or warranty is made
by Software.com with respect to statements made or incorporated by reference
therein based on information supplied by Phone specifically for inclusion or
incorporation by reference in the Joint Proxy Statement or the Form S-4.
(g) Absence of Certain Changes or Events.
Except for liabilities incurred in connection with this Agreement, the
Option Agreements or the transactions contemplated hereby or thereby, and
except as permitted by Section 4.1(b), since March 31, 2000, Software.com and
its subsidiaries have conducted their business only in the ordinary course
consistent with past practice or as disclosed in any Software.com SEC Document
filed since such date and prior to the date hereof, and there has not been (i)
any material adverse change (as defined in Section 8.3(b)) in Software.com,
(ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
capital stock of Software.com or any of its subsidiaries, (iii) any split,
combination or reclassification of any of the capital stock of Software.com or
any of its subsidiaries or any issuance or the authorization of any issuance
of any other securities in respect of, in lieu of or in substitution for
shares of the capital stock of Software.com or any of its subsidiaries, except
for issuances of Software.com Common Stock upon exercise or conversion of
Software.com Options, in each case awarded prior to the date hereof in
accordance with their present terms or issued pursuant to Section 4.1(b), (iv)
(A) any granting by Software.com or any of its subsidiaries to any current or
former director, officer or other key employee of Software.com or its
subsidiaries of any increase in compensation, bonus or other benefits, except
for normal increases as a result of promotions, normal increases of base pay
or target bonuses in the ordinary course of business or as was required under
any employment agreements in effect as of March 31, 2000, (B) any granting by
Software.com or any of its subsidiaries to any such current or former
director, officer or key employee of any increase in severance or termination
pay, or (C) any entry by Software.com or any of its subsidiaries into, or any
amendment of, any employment, deferred compensation, consulting, severance,
termination or indemnification agreement with any such current or former
director, officer, or any material amendment of any of the foregoing with any
key employee, (v) except insofar as may have been disclosed in Software.com
SEC Documents filed and publicly available prior to the date of this Agreement
(as amended to the date hereof, the "Software.com Filed SEC Documents") or
required by a change in GAAP, any change in accounting methods, principles or
practices by Software.com materially affecting its assets, liabilities or
business, (vi) except insofar as may have been disclosed in the Software.com
Filed SEC Documents, any tax election that individually or in the aggregate
would have a material adverse effect on Software.com or any of its tax
attributes or any settlement or compromise of any material income tax
liability or (vii) any action taken by Software.com or any of the Software.com
subsidiaries during the period from April 1, 2000, through the date of this
Agreement that, if taken during the period from the date of this Agreement
through the Effective Time, would constitute a breach of Section 4.1(b).
(h) Compliance with Applicable Laws; Litigation.
(i) Software.com, its subsidiaries and employees hold all permits,
licenses, variances, exemptions, orders, registrations and approvals of all
Governmental Entities which are required for the operation of the
businesses of Software.com and its subsidiaries (the "Software.com
Permits") except where the failure to have any such Software.com Permits
individually or in the aggregate would not have a material adverse effect
on Software.com. Except as specifically disclosed in the Software.com SEC
Documents filed with the SEC prior to the date hereof, Software.com and its
subsidiaries are in compliance with the terms of the Software.com Permits
and all Applicable Laws relating to Software.com and its subsidiaries or
their respective business or properties, except where the failure to be in
compliance with such Applicable Laws individually or in the aggregate would
not have a material adverse effect on Software.com. As of the date of this
Agreement, except as disclosed in the Software.com Filed SEC Documents, no
action, demand, requirement or investigation by any Governmental Entity and
no suit, action or proceeding by any person, in each case with respect to
Software.com or any of its subsidiaries or any of their respective
properties, is
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pending or, to the knowledge of Software.com, threatened, other than, in
each case, those the outcome of which individually or in the aggregate
would not (A) have a material adverse effect on Software.com or (B)
reasonably be expected to impair the ability of Software.com to perform its
obligations under this Agreement or the Option Agreements or prevent or
materially delay the consummation of any of the transactions contemplated
hereby or thereby.
(ii) Neither Software.com nor any Software.com subsidiary is subject to
any outstanding order, injunction or decree which has had or, insofar as
can be reasonably foreseen, individually or in the aggregate would have, a
material adverse effect on Software.com.
(i) Absence of Changes in Benefit Plans.
Software.com has delivered to Phone or made available to Phone for review
true and complete copies of (i) all severance and employment agreements of
Software.com with directors, executive officers, or key employees, (ii) all
written and material unwritten severance programs and policies of each of
Software.com and each Software.com subsidiary, and (iii) all plans or
arrangements of Software.com and each Software.com subsidiary relating to its
employees that contain change in control provisions, in each case which has
not been filed as an exhibit to a Software.com Filed SEC Document. Documents
made available are identified in Section 3.2(i) of the Software.com Disclosure
Schedule. Since March 31, 2000, there has not been any adoption or amendment
in any material respect by Software.com or any of its subsidiaries of any (A)
collective bargaining agreement with respect to any employees of, (B) any
material bonus, pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical or other plan, arrangement, or understanding providing benefits to any
current or former officers, directors or employees of, (C) any employment
agreement, consulting agreement or severance agreement with any current or
former officer or director of, or (D) any material employment agreement,
consulting agreement or severance agreement with any employee of Software.com
or any of its wholly owned subsidiaries (collectively, the "Software.com
Benefit Plans"), or any material change in any actuarial or other assumption
used to calculate funding obligations with respect to any Software.com pension
plans, or any material change in the manner in which contributions to any
Software.com pension plans are made or the basis on which such contributions
are determined. Since March 31, 2000, neither Software.com nor any
Software.com subsidiary has amended any Software.com Options or any
Software.com Stock Plans to accelerate the vesting of, or release restrictions
on, awards thereunder, or to provide for such acceleration in the event of a
change in control.
(j) Benefit Plans.
(i) With respect to the Software.com Benefit Plans, no event has occurred
and there exists no condition or set of circumstances, in connection with
which Software.com or any of its subsidiaries would be subject to any
liability that individually or in the aggregate could have a material
adverse effect on Software.com under ERISA, the Code or any other
applicable law.
(ii) Each Software.com Benefit Plan has been administered in accordance
with its terms, except for any failures so to administer any Software.com
Benefit Plan that individually or in the aggregate would not have a
material adverse effect on Software.com. The Software.com Benefit Plans
have been operated, and are, in compliance with the applicable provisions
of ERISA, the Code and all other applicable laws and the terms of all
applicable collective bargaining agreements, except for any failures to be
in such compliance that individually or in the aggregate would not have a
material adverse effect on Software.com. Each Software.com Benefit Plan
intended to qualify under section 401(a) of the Code and each trust
intended to qualify under section 501(a) of the Code has received either a
favorable determination, opinion or advisory letter from the IRS with
respect to each such Software.com Benefit Plan as to its qualified status
under the Code, or has remaining a period of time under applicable Treasury
regulations or IRS pronouncements in which to apply for such a letter and
make any amendments necessary to obtain a favorable determination, opinion
or advisory as to the qualified status of each Software.com Benefit Plan.
To the knowledge of Software.com, no fact or event has occurred since the
date of any determination letter from the IRS which
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is reasonably likely to affect adversely the qualified status of any such
Software.com Benefit Plan or the exempt status of any such trust.
(iii) No Software.com Benefit Plan is subject to Title IV of ERISA or is
a "multi-employer plan" within the meaning of Section 3(37) of ERISA.
(iv) No Software.com Benefit Plan provides medical benefits (whether or
not insured), with respect to current or former employees after retirement
or other termination of service (other than coverage mandated by applicable
law or benefits, the full cost of which is borne by the current or former
employee) other than individual arrangements the amounts of which are not
material.
(v) Software.com has previously provided to Phone a copy of each
collective bargaining or other labor union contract applicable to persons
employed by Software.com or any of its subsidiaries to which Software.com
or any of its subsidiaries is a party. No collective bargaining agreement
is being negotiated or renegotiated by Software.com or any of its
subsidiaries. As of the date of this Agreement, there is no labor dispute,
strike or work stoppage against Software.com or any of its subsidiaries
pending or, to the knowledge of Software.com, threatened which may
interfere with the respective business activities of Software.com or any of
its subsidiaries, except where such dispute, strike or work stoppage
individually or in the aggregate would not have a material adverse effect
on Software.com. As of the date of this Agreement, to the knowledge of
Software.com, none of Software.com, any of its subsidiaries or any of their
respective representatives or employees has committed any material unfair
labor practice in connection with the operation of the respective
businesses of Software.com or any of its subsidiaries, and there is no
material charge or complaint against Software.com or any of its
subsidiaries by the National Labor Relations Board or any comparable
governmental agency pending or threatened in writing.
(vi) No employee of Software.com or any Software.com subsidiary will be
entitled to any material payment, additional benefits or any acceleration
of the time of payment or vesting of any benefits under any Software.com
Benefit Plan as a result of the transactions contemplated by this Agreement
(either alone or in conjunction with any other event such as a termination
of employment).
(vii) To the knowledge of Software.com, no material oral or written
representation or commitment with respect to any aspect of any Software.com
Benefit Plan has been made to employees of Software.com or any Software.com
subsidiaries by an authorized Software.com employee prior to the Closing
Date that is not materially in accordance with the written or otherwise
preexisting terms and provisions of such Software.com Benefit Plans in
effect immediately prior to the Closing Date.
(viii) Except as would not have a material adverse effect, there are no
material unresolved claims or disputes under the terms of, or in connection
with, any Software.com Benefit Plan (other than routine undisputed claims
for benefits), and no action, legal or otherwise, has been commenced with
respect to any material claim.
(ix) To the knowledge of Software.com, no non-exempt "prohibited
transaction" (within the meaning of section 4975(c) of the Code) involving
any Software.com Benefit Plan has occurred that could subject Software.com
to any material tax penalty or other cost or liability (by indemnification
or otherwise).
(x) Neither Software.com nor any Software.com subsidiary is obligated to
make any parachute payments as such term is defined in section 280G of the
Code, and neither is a party to any agreement that under certain
circumstances is reasonably likely to obligate it, or any successor in
interest, to make any parachute payments that will not be deductible under
section 280G of the Code. Neither Software.com nor any Software.com
subsidiary is obligated to make reimbursement or gross-up payments to any
person in respect to excess parachute payments.
(k) Taxes.
(i) Each of Software.com and its subsidiaries has filed all material Tax
Returns required to be filed by it (taking into account all applicable
extensions) with the appropriate Tax Authority and all such returns are
complete, true, and correct in all material respects, or requests for
extensions to file such returns have been timely filed, granted, and have
not expired, except to the extent that such failures to file, to be
complete,
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true, or correct, or to have extensions granted that remain in effect
individually or in the aggregate would not have a material adverse effect
on Software.com. Software.com and each of its subsidiaries has paid (or
Software.com has paid or caused to be paid on its behalf) all Taxes shown
as due on such returns, and the most recent financial statements contained
in the Software.com Filed SEC Documents reflect an adequate reserve in
accordance with GAAP for all Taxes payable by Software.com and its
subsidiaries for all taxable periods and portions thereof accrued through
the date of such financial statements.
(ii) No deficiencies for any Taxes have been proposed, asserted or
assessed against Software.com or any of its subsidiaries that are not
adequately reserved for, except for deficiencies that individually or in
the aggregate would not have a material adverse effect on Software.com.
Software.com and its subsidiaries have disclosed all material deficiencies
or adjustments for Taxes that have been proposed or assessed by any Tax
Authority against Software.com or any of its subsidiaries. All of the
Federal income Tax Returns of the "affiliated group" (as defined in section
1504(a) of the Code) of which Software.com is the common parent are no
longer subject to any Audit by virtue of the expiration of the applicable
statutory period of limitations for the assessment of Tax.
(iii) Neither Software.com nor any of its subsidiaries has taken any
action or knows of any fact, agreement, plan or other circumstance that is
reasonably likely to prevent the Merger from qualifying as a
"reorganization" within the meaning of section 368(a) of the Code.
(iv) No Audits are presently pending with regard to any Taxes or Tax
Returns of Software.com or its subsidiaries.
(v) Neither Software.com nor any of its subsidiaries is a party to any
agreement providing for the allocation, indemnification, or sharing of
Taxes.
(vi) Other than the "affiliated group" (as defined in section 1504(a) of
the Code) of which Software.com is the common parent, neither Software.com
nor any of its subsidiaries has been a member of any "affiliated group."
(vii) There are no liens for Taxes on any of the assets of Software.com
or its subsidiaries except for liens for Taxes that are not yet due and
payable and for which adequate reserves have been provided in accordance
with GAAP in the most recent financial statements contained in the
Software.com Filed SEC Documents.
(l) Voting Requirements.
The affirmative vote at the Software.com Stockholders' Meeting (the
"Software.com Stockholder Approval") of the holders of a majority of all
outstanding shares of Software.com Common Stock entitled to vote at a duly
convened and held meeting of Software.com stockholders is the only vote of the
holders of any class or series of Software.com's capital stock necessary to
adopt this Agreement and approve the transactions contemplated hereby.
(m) State Takeover Statutes; Certificate of Incorporation.
The Board of Directors of Software.com has adopted a resolution or
resolutions approving this Agreement, the Option Agreements, the Phone Voting
Agreement and the transactions contemplated hereby and thereby, and, assuming
the accuracy of Phone's representation and warranty contained in Section
3.1(p), such approval constitutes approval of the Merger and the other
transactions contemplated hereby and by the Option Agreements and the Phone
Voting Agreement by the Software.com Board of Directors under the provisions
of Section 203 of the DGCL such that Section 203 of the DGCL does not apply to
this Agreement, the Option Agreements, the Phone Voting Agreement or the
transactions contemplated hereby and thereby. To the knowledge of
Software.com, no state takeover statute other than Section 203 of the DGCL
(which has been rendered inapplicable) is applicable to the Merger or the
other transactions contemplated hereby.
(n) Brokers.
Except for fees payable to Morgan Stanley & Co. Incorporated pursuant to an
engagement letter dated July 28, 2000, a true and correct copy of which has
been provided to Phone, no broker, investment banker, financial
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advisor or other person, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Software.com.
(o) Opinion of Financial Advisors.
Software.com has received the opinion of Morgan Stanley & Co. Incorporated,
dated the date of this Agreement, to the effect that, as of such date,
Exchange Ratio is fair from a financial point of view to holders of
Software.com Common Stock (other than Phone and its affiliates), a signed copy
of which opinion will be delivered to Phone promptly after execution of this
Agreement.
(p) Ownership of Phone Common Stock.
To the knowledge of Software.com, as of the date hereof or at any time
within twelve (12) months prior to the date of this Agreement (and before
giving effect to the Phone Option Agreement and the Phone Voting Agreement,
which will be entered into immediately after the execution of this Agreement)
neither Software.com nor, to its knowledge without independent investigation,
any of its affiliates, (i) beneficially owns (as defined in either Rule 13d-3
under the Exchange Act) or owned, directly or indirectly, or (ii) is or was
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of Phone.
(q) Intellectual Property.
(i) To the knowledge of Software.com, Software.com or its subsidiaries
own or have a valid right to use all trademarks, service marks, trade
names, Internet domain names, designs, slogans, and general intangibles of
like nature, together with all applications, registrations, renewals and
goodwill related to the foregoing (collectively, "Software.com
Trademarks"); patents (including any registration, continuations,
continuations-in-part, renewals and applications for any of the foregoing);
copyrights (including any registrations and applications for any of the
foregoing); Software.com Software (as defined below); technology, trade
secrets and other confidential information, know-how, proprietary
processes, formulae, algorithms, models, and methodologies (collectively,
"Software.com Trade Secrets") used in or necessary for the conduct of
Software.com's and each of its subsidiary's business as currently conducted
(all such intellectual property being referred to herein as the
"Software.com Intellectual Property"), except where the failure to possess
such right would not have a material adverse effect. For purposes of this
Section 3.2(q), "Software.com Software" means any and all (a) computer
programs, including any and all software implementations of algorithms,
models and methodologies, whether in source code or object code, (b)
databases and compilations, including any and all data and collections of
data, whether machine readable or otherwise, (c) descriptions, flowcharts
and other work product used to design, plan, organize and develop any of
the foregoing, (d) the technology supporting any Internet site(s) operated
by or on behalf of Software.com or any of its subsidiaries and (e) all
documentation, including user manuals and training materials, relating to
any of the foregoing.
(ii) The Software.com Intellectual Property owned by Software.com or any
of its subsidiaries is free and clear of all Liens.
(iii) All material Software.com Intellectual Property owned by
Software.com or any of its subsidiaries is valid and subsisting, in full
force and effect, and has not been canceled, has not expired, nor has it
been abandoned. There is no pending or, to Software.com's knowledge,
threatened opposition, interference or cancellation proceeding before any
court or registration authority in any jurisdiction against any
registrations in respect of the Software.com Intellectual Property owned by
Software.com or any of its subsidiaries.
(iv) To the actual knowledge of Software.com or any of its subsidiaries,
the conduct of the business of Software.com and its subsidiaries as
currently conducted does not infringe upon (either directly or indirectly
such as through contributory infringement or inducement to infringe) any
intellectual property rights owned or controlled by any third party. There
are no claims or suits pending and as to which Software.com has received
actual notice or, to the knowledge of Software.com, threatened, and neither
Software.com nor any
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of its subsidiaries has received any notice of a third-party claim or suit,
(a) alleging that its activities or the conduct of its business infringes
upon, violates, or constitutes the unauthorized use of the intellectual
property rights of any third party or (b) challenging the ownership, use,
validity or enforceability of any Software.com Intellectual Property (other
than Software.com Trademarks), which in any case would have a material
adverse effect.
(v) There are no written settlements, forbearances to sue, consents,
judgments, or orders or similar obligations which in any material respect
(a) restrict the right of Software.com or its subsidiaries to use any
Software.com Intellectual Property owned by Software.com, or (b) restrict
the business of Software.com or its subsidiaries in order to accommodate a
third party's intellectual property rights or (c) except for licenses with
customers for the Software.com Software, there are no agreements that
permit third parties to use any Software.com Intellectual Property owned or
controlled by Software.com or any of its subsidiaries.
(vi) Software.com and each of its subsidiaries takes reasonable measures
to protect the confidentiality of Software.com Trade Secrets, including (i)
requiring its employees and independent contractors having access thereto
to execute written nondisclosure agreements and (ii) requiring all
licensees to maintain the confidentiality of Software.com Trade Secrets. To
the actual knowledge of Software.com or its subsidiaries, no Software.com
Trade Secret has been knowingly disclosed or authorized to be disclosed to
any third party other than pursuant to a nondisclosure agreement or other
appropriate instrument that adequately protects Software.com and the
applicable subsidiary's proprietary interests in and to such trade secrets.
To the knowledge of Software.com, no party to any nondisclosure agreement
or nondisclosure obligation relating to its trade secrets is in breach or
default thereof.
(vii) To the knowledge of Software.com, no third party is
misappropriating, infringing, diluting, or violating any Software.com
Intellectual Property owned by Software.com or any of its subsidiaries
other than immaterial disputes concerning use by a third party of
Software.com Trademarks of Software.com or any of its subsidiaries.
(viii) The consummation of the Merger and the other transactions
contemplated by this Agreement shall not result in the loss or impairment
of Software.com's or of any subsidiary's right to own or use any of the
Software.com Intellectual Property, and will not require the consent of any
governmental authority, except where such loss or impairment or the failure
to obtain consent would not result in a material adverse effect.
(r) Certain Contracts.
Except as set forth in the Software.com Filed SEC Documents, neither
Software.com nor any of its subsidiaries is a party to or bound by (i) any
"material contract" (as such term is defined in Item 601(b)(10) of Regulation
S-K of the SEC), (ii) any non- competition agreement or any other agreement or
obligation which purports to limit in any material respect the manner in
which, or the localities in which, all or any material portion of the business
of Software.com and its subsidiaries (including, for purposes of this Section
3.2(r), Phone and its subsidiaries, assuming the Merger has taken place),
taken as a whole, is or would be conducted, (iii) any exclusive supply or
purchase contracts or any exclusive requirements contracts or (iv) any
contract or other agreement which would prohibit or materially delay the
consummation of the Merger or any of the transactions contemplated by this
Agreement (all contracts of the type described in clauses (i) and (ii) being
referred to herein as "Software.com Material Contracts"). Software.com has
delivered to Phone or made available to Phone for review, prior to the
execution of this Agreement, complete and correct copies of all Software.com
Material Contracts not filed as exhibits to the Software.com Filed SEC
Documents. Each Software.com Material Contract is valid and binding on
Software.com (or, to the extent a Software.com subsidiary is a party, such
subsidiary) and is in full force and effect, and Software.com and each
Software.com subsidiary have in all material respects performed all
obligations required to be performed by them to date under each Software.com
Material Contract, except where such noncompliance, individually or in the
aggregate, would not have a material adverse effect on Software.com. Neither
Software.com nor any Software.com subsidiary knows of, or has received notice
of, any violation or default under (nor, to the knowledge of Software.com,
does there exist any condition which with the
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passage of time or the giving of notice or both would result in such a
violation or default under) any Software.com Material Contract.
(s) Software.com Rights Agreement.
Software.com has delivered to Phone a true, correct and complete copy of the
Software.com Rights Agreement. Software.com has taken all action so that the
entering into of this Agreement, the Software.com Option Agreement, the
Software.com Voting Agreement and the Merger, the acquisition of shares
pursuant to the Software.com Option Agreement and the other transactions
contemplated hereby and thereby will not result in the grant of any rights to
any person under the Software.com Rights Agreement or enable or require the
Software.com Rights to be exercised, distributed or triggered.
(t) Environmental Liability.
Except as set forth in the Software.com Filed SEC Documents, there are no
legal, administrative, arbitral or other proceedings, claims, actions, causes
of action, private environmental investigations or remediation activities or
governmental investigations of any nature pending or threatened against
Software.com or any of its subsidiaries seeking to impose, or that could
reasonably be expected to result in the imposition, on Software.com or any of
its subsidiaries, of any liability or obligation arising under common law or
under any local, state or federal environmental statute, regulation or
ordinance, including, without limitation, CERCLA, which liability or
obligation could reasonably be expected to have a material adverse effect on
Software.com. To the knowledge of Software.com, there is no reasonable basis
for any such proceeding, claim, action or governmental investigation that
would impose any liability or obligation that could reasonably be expected to
have a material adverse effect on Software.com.
(u) Insurance.
Software.com and each of its subsidiaries have policies of insurance and
bonds of the type and in amounts customarily carried by persons conducting
businesses or owning assets similar to those of Software.com and its
subsidiaries. There is no material claim pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds, except questioned, denied or disputed
claims the failure to provide coverage for which would not, individually or in
the aggregate, have a material adverse effect on Software.com. All premiums
due and payable under all such policies and bonds have been paid and
Software.com and its subsidiaries are otherwise in compliance in all material
respects with the terms of such policies and bonds. Software.com has no
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
(v) Accounting Matters.
As of the date hereof, to the knowledge of Software.com, none of
Software.com, any of its subsidiaries or any of their respective directors,
officers or stockholders, has taken any action which would prevent the
accounting for the Merger as a pooling of interests in accordance with APB 16,
the interpretative releases pursuant thereto and the pronouncements of the
SEC.
(w) Transactions with Affiliates.
Except as disclosed in the Software.com SEC Documents filed prior to the
date of this Agreement or as disclosed in the Software.com Disclosure
Schedule, since December 31, 1999, there have been no transactions,
agreements, arrangements or understandings between Software.com and its
affiliates that would be required to be disclosed under the Item 404 of
Regulation S-K under the Securities Act.
(x) Full Disclosure.
None of the representations or warranties made by Software.com herein or in
any schedule hereto, including the Software.com Disclosure Schedule, or any
certificate furnished by Software.com pursuant to this Agreement, contains or
will contain at the Effective Time any untrue statement of a material fact, or
omits or will omit at the Effective Time, to state any material fact necessary
in order to make the statements contained herein or therein, in the light of
the circumstances under which made, not misleading.
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ARTICLE 4.
Covenants Relating to Conduct of Business Section
Section 4.1 Conduct of Business.
(a) Conduct of Business by Phone.
Except as set forth in Section 4.1(a) of the Phone Disclosure Schedule, as
otherwise expressly contemplated by this Agreement or as consented to by
Software.com in writing, such consent not to be unreasonably withheld or
delayed, during the period from the date of this Agreement to the Effective
Time, Phone shall, and shall cause its subsidiaries to, carry on their
respective businesses in the ordinary course consistent with past practice and
in compliance in all material respects with all applicable laws and
regulations and, to the extent consistent therewith, use reasonable efforts to
preserve intact their current business organizations, use reasonable efforts
to keep available the services of their current officers and other key
employees and preserve their relationships with those persons having business
dealings with them to the end that their goodwill and ongoing businesses shall
be unimpaired at the Effective Time. Without limiting the generality of the
foregoing (but subject to the above exceptions), during the period from the
date of this Agreement to the Effective Time, Phone shall not, and shall not
permit any of its subsidiaries to:
(i) other than dividends and distributions by a direct or indirect wholly
owned subsidiary of Phone to its parent, or by a subsidiary that is
partially owned by Phone or any of its subsidiaries, provided that Phone or
any such subsidiary receives or is to receive its proportionate share
thereof, (x) declare, set aside or pay any dividends on, make any other
distributions in respect of, or enter into any agreement with respect to
the voting of, any of its capital stock, (y) split, combine or reclassify
any of its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, except for issuances of Phone Common Stock upon the exercise
of Phone Options, in each case, outstanding as of the date hereof in
accordance with their present terms (including cashless exercise) or issued
pursuant to Section 4.1(a)(ii) or (z) purchase, redeem or otherwise acquire
any shares of capital stock of Phone or any of its subsidiaries or any
other securities thereof or any rights, warrants or options to acquire any
such shares or other securities (except, in the case of clause (z), for the
deemed acceptance of shares upon cashless exercise of Phone Options
outstanding on the date hereof, or in connection with withholding
obligations relating thereto);
(ii) except in connection with acquisitions permitted or contemplated by
clause (iv) of this Section 4.1(a), issue, deliver, sell, pledge or
otherwise encumber or subject to any Lien any shares of its capital stock,
any other voting securities or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, voting securities
or convertible securities (other than the issuance of Phone Common Stock
upon the exercise or conversion of Phone Options outstanding as of the date
hereof in accordance with their present terms or the issuance of Phone
Options (and shares of Phone Common Stock upon the exercise thereof)
granted after the date hereof in the ordinary course of business consistent
with past practice for employees (so long as such additional amount of
Phone Common Stock subject to Phone Options issued to such employees does
not exceed four and one-half million (4,500,000) shares of Phone Common
Stock in the aggregate));
(iii) except as contemplated hereby, amend its certificate of
incorporation, by-laws or other comparable organizational documents;
(iv) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets or equity or other
securities of, or by any other manner, any business or any person, or,
except for transactions pursuant to contracts or agreements in force at the
date of this Agreement or acquisitions or investments permitted or
contemplated by Section 4.1(a) of the Phone Disclosure Schedule, make any
material investment either by purchase of stock or securities,
contributions to capital, property transfers, or purchase of any property
or assets of any other individual, corporation or other entity other than a
subsidiary of Phone;
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(v) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets (including
securitizations), other than in the ordinary course of business consistent
with past practice, including, without limitation, in connection with
consolidation of acquired businesses or as would not have a material
adverse effect on Phone;
(vi) take any action that would cause the representations and warranties
set forth in Section 3.1(g) and qualified as to materiality to be no longer
true and correct or, if not so qualified, to be no longer true and correct
in all material respects;
(vii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for the obligations of any person for
borrowed money, other than pursuant to a revolving credit facility or
receivables facility or commercial paper facility in effect as of the date
hereof (including any replacement facilities), in the ordinary course of
business consistent with past practice;
(viii) settle any material claim (including any Tax claim), action or
proceeding involving money damages, except in the ordinary course of
business consistent with past practice;
(ix) make any material Tax election except in the ordinary course of
business and consistent with past practice;
(x) other than in the ordinary course of business or in connection with
acquisitions permitted by Section 4.1(a) of the Phone Disclosure Schedule,
enter into or terminate any material contract or agreement, or make any
change in any of its material leases or contracts, other than amendments or
renewals of contracts and leases without material adverse changes of terms;
(xi) except for increases in accordance with normal past practice,
increase in any manner the compensation or fringe benefits of any of its
officers or directors, or materially increase the foregoing in respect of
employees; enter into any commitment to pay any pension, retirement or
severance benefit to any such officers or directors, or make any material
commitment to pay the foregoing to any employees; commit itself to, or
enter into, any employment agreement involving compensation of more than
Two Hundred Thousand Dollars ($200,000.00) per year or a term other than
"at will;" adopt or commit itself to any new benefit, base salary or stock
option plan or arrangement; or amend, supplement, or accelerate the timing
of payments or vesting under, or otherwise materially amend or supplement
any existing benefit, stock option or compensation plan or arrangement
(other than as may be required by applicable law);
(xii) change any of the accounting methods used by Phone or any of its
subsidiaries unless required by generally accepted accounting principles or
take or knowingly allow to be taken any action which would jeopardize the
treatment of the Merger as a pooling of interests for accounting purposes;
or
(xiii) authorize, or commit or agree to take, any of the foregoing
actions; provided that the limitations set forth in this Section 4.1(a)
(other than clause (iii)) shall not apply to any transaction between Phone
and any wholly owned subsidiary or between any wholly owned subsidiaries of
Phone.
(b) Conduct of Business by Software.com.
Except as set forth in Section 4.1(b) of the Software.com Disclosure
Schedule, as otherwise expressly contemplated by this Agreement or as
consented to by Phone in writing, such consent not to be unreasonably withheld
or delayed, during the period from the date of this Agreement to the Effective
Time, Software.com shall, and shall cause its subsidiaries to, carry on their
respective businesses in the ordinary course consistent with past practice and
in compliance in all material respects with all applicable laws and
regulations and, to the extent consistent therewith, use all reasonable
efforts to preserve intact their current business organizations, use
reasonable efforts to keep available the services of their current officers
and other key employees and preserve their relationships with those persons
having business dealings with them to the end that their goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Without limiting the
generality of the foregoing (but subject to the above exceptions), during the
period from the date of this Agreement to the Effective Time, Software.com
shall not, and shall not permit any of other Software.com subsidiaries to:
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(i) other than dividends and distributions by a direct or indirect wholly
owned subsidiary of Software.com to its parent, or by a subsidiary that is
partially owned by Software.com or any of its subsidiaries, provided that
Software.com or any such subsidiary receives or is to receive its
proportionate share thereof, (x) declare, set aside or pay any dividends
on, make any other distributions in respect of, or enter into any agreement
with respect to the voting of, any of its capital stock or the capital
stock of any of its subsidiaries, (y) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or the capital stock of any of its subsidiaries, except for
issuances of Software.com Common Stock upon the exercise of Software.com
Options outstanding as of the date hereof in accordance with their present
terms (including cashless exercise) or issued pursuant to Section
4.1(b)(ii) or (z) purchase, redeem or otherwise acquire any shares of
capital stock of Software.com or any of its subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities (except, in the case of clause (z), for the
deemed acceptance of shares upon cashless exercise of Software.com Options,
or in connection with withholding obligations relating thereto);
(ii) except in connection with acquisitions permitted or contemplated by
clause (iv) of this Section 4.2(b), issue, deliver, sell, pledge or
otherwise encumber or subject to any Lien any shares of its capital stock,
any other voting securities or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, voting securities
or convertible securities (other than the issuance of Software.com Common
Stock upon the exercise of Software.com Options outstanding as of the date
hereof in accordance with their present terms or the issuance of
Software.com Options (and shares of Software.com Common Stock upon the
exercise thereof) granted after the date hereof in the ordinary course of
business consistent with past practice for employees (so long as such
additional amount of Software.com Common Stock subject to Software.com
Employee Stock Options issued to employees does not exceed four and one-
half million (4,500,000) shares of Software.com Common Stock in the
aggregate));
(iii) except as contemplated hereby, amend its certificate of
incorporation, by-laws or other comparable organizational documents;
(iv) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets or equity or other
securities of, or by any other manner, any business or any person, or,
except for transactions pursuant to contracts or agreements in force at the
date of this Agreement or acquisitions or investments permitted or
contemplated by Section 4.1(b) of the Software.com Disclosure Schedule,
make any material investment either by purchase of stock or securities,
contributions to capital, property transfers, or purchase of any property
or assets of any other individual, corporation or other entity other than a
subsidiary of Software.com;
(v) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets (including
securitizations), other than in the ordinary course of business consistent
with past practice, including, without limitation, in connection with
consolidation of acquired businesses or as would not have a material
adverse effect on Software.com;
(vi) take any action that would cause the representations and warranties
set forth in Section 3.2(g) and qualified as to materiality to be no longer
true and correct or, if not so qualified, to be no longer true and correct
in all material respects;
(vii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for the obligations of any person for
borrowed money, other than pursuant to a revolving credit facility or
receivables facility or commercial paper facility in effect as of the date
hereof (including any replacement facilities), in the ordinary course of
business consistent with past practice;
(viii) settle any claim (including any Tax claim), action or proceeding
involving money damages, except in the ordinary course of business
consistent with past practice;
(ix) make any material Tax election except in the ordinary course of
business and consistent with past practice;
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(x) other than in the ordinary course of business or in connection with
acquisitions permitted by Section 4.1(b) of the Software.com Disclosure
Schedule, enter into or terminate any material contract or agreement, or
make any change in any of its material leases or contracts, other than
amendments or renewals of contracts and leases without material adverse
changes of terms;
(xi) except for increases in accordance with normal past practice,
increase in any manner the compensation or fringe benefits of any of its
officers or directors, or materially increase the foregoing in respect of
employees; enter into any commitment to pay any pension, retirement or
severance benefit to any such officers or directors, or make any material
commitment to pay any of the foregoing to any employees; commit itself to,
or enter into, any employment agreement involving base salary of more than
Two Hundred Thousand Dollars ($200,000.00) per year or a term other than
"at will;" adopt or commit itself to any new benefit, compensation or stock
option plan or arrangement; or amend, supplement, or accelerate the timing
of payments or vesting under, or otherwise materially amend or supplement
any existing benefit, stock option or compensation plan or arrangement
(other than as may be required by applicable law);
(xii) change any of the accounting methods used by Software.com or any of
its subsidiaries unless required by generally accepted accounting
principles or take or knowingly allow to be taken any action which would
jeopardize the treatment of the Merger as a pooling of interests for
accounting purposes; or
(xiii) authorize, or commit or agree to take, any of the foregoing
actions; provided that the limitations set forth in this Section 4.1(b)
(other than clause (iii)) shall not apply to any transaction between
Software.com and any wholly owned subsidiary or between any wholly owned
subsidiaries of Software.com.
(c) Other Actions.
Except as required by law, Phone, Software.com and Merger Sub shall not, and
shall not permit any of their respective subsidiaries to, voluntarily take any
action that would, or that could reasonably be expected to, result in any of
the conditions to the Merger set forth in Article 6 not being satisfied.
(d) Advice of Changes.
Each of Phone, Software.com and Merger Sub shall promptly advise the other
parties orally and in writing to the extent it has knowledge of any change or
event which would cause a failure of any of the conditions set forth in
Article 6 to be satisfied; provided, however, that no such notification shall
affect the representations, warranties, covenants or agreements of the parties
(or remedies with respect thereto) or the conditions to the obligations of the
parties under this Agreement.
Section 4.2 No Solicitation by Phone.
(a) Phone shall not, nor shall it permit any of its subsidiaries to, nor
shall it authorize or permit any of its officers, directors or employees or
any investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its subsidiaries to, directly or
indirectly through another person, (i) solicit, initiate or encourage
(including by way of furnishing information), or take any other action
designed to facilitate, any inquiries or the making of any proposal the
consummation of which would constitute an Alternative Transaction (as
hereinafter defined) or (ii) participate in any discussions or negotiations
regarding any Alternative Transaction; provided, however, that if, at any time
prior to the adoption of this Agreement by the holders of Phone Common Stock,
the Board of Directors of Phone determines in good faith, after consultation
with outside counsel, that the failure to provide such information or
participate in such negotiations or discussions would result in a reasonable
possibility that the Board of Directors of Phone would breach its fiduciary
duties to Phone's stockholders under applicable law, Phone may, in response to
any such proposal that was not solicited by it or that did not otherwise
result from a breach of this Section 4.2(a), and subject to compliance with
Section 4.2(c), (x) furnish information with respect to Phone and its
subsidiaries to any person pursuant to a customary confidentiality agreement
containing terms as to confidentiality no less restrictive than the terms of
the confidentiality agreement, dated June 9, 2000, entered into between
Software.com and Phone (the "Confidentiality Agreement") and (y) participate
in negotiations regarding such proposal. For purposes of this
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Agreement "Alternative Transaction" means any of (i) a transaction or series
of transactions pursuant to which any person (or group of persons) other than
Software.com and its subsidiaries and other than Phone and its subsidiaries (a
"Third Party") acquires or would acquire, directly or indirectly, beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of more than
twenty percent (20%) of the outstanding shares of Software.com or Phone, as
the case may be, whether from Software.com or Phone or pursuant to a tender
offer or exchange offer or otherwise, (ii) any acquisition or proposed
acquisition of Software.com or any of its significant subsidiaries or Phone or
any of its significant subsidiaries, as the case may be, by a merger or other
business combination (including any so-called "merger of equals" and whether
or not Software.com or any of its significant subsidiaries or Phone or any of
its significant subsidiaries, as the case may be, is the entity surviving any
such merger or business combination) or (iii) any other transaction pursuant
to which any Third Party acquires or would acquire, directly or indirectly,
control of assets (including for this purpose the outstanding equity
securities of subsidiaries of Software.com or Phone, as the case may be, and
any entity surviving any merger or combination including any of them) of
Software.com or any of its subsidiaries or Phone or any of its subsidiaries,
as the case may be, for consideration equal to twenty percent (20%) or more of
the fair market value of all of the outstanding shares of Software.com Common
Stock or all of the outstanding shares of Phone Common Stock, as the case may
be, on the date prior to the date hereof.
(b) Neither the Board of Directors of Phone nor any committee thereof shall
(i) except as expressly permitted by this Section 4.2(b), withdraw, qualify or
modify, or propose publicly to withdraw, qualify or modify, in a manner
adverse to Software.com, the approval or recommendation by such Board of
Directors or such committee of the Merger, this Agreement, the issuance of
Phone Common Stock in connection with the Merger or the Charter Amendment,
(ii) approve or recommend, or propose publicly to approve or recommend, any
Alternative Transaction, or (iii) cause Phone to enter into any letter of
intent, agreement in principle, acquisition agreement or other similar
agreement related to any Alternative Transaction. Notwithstanding the
foregoing, in the event that prior to the adoption of this Agreement by the
holders of Phone Common Stock the Board of Directors of Phone determines in
good faith, after it has received a Phone Superior Proposal (as defined below)
and after consultation with outside counsel, that the failure to do so would
result in a reasonable possibility that the Board of Directors of Phone would
breach its fiduciary duties to Phone's stockholders under applicable law, the
Board of Directors of Phone may (subject to this and the following sentences)
inform Phone stockholders that it no longer believes that the Merger or this
Agreement is advisable and no longer recommends approval of the issuance of
shares of Phone Common Stock pursuant to this Agreement (a "Phone Subsequent
Determination"), but only at a time that is after the third business day
following Software.com's receipt of written notice advising Software.com that
the Board of Directors of Phone has received a Phone Superior Proposal
specifying the material terms and conditions of such Phone Superior Proposal,
identifying the person making such Phone Superior Proposal and stating that it
intends to make a Phone Subsequent Determination. For purposes of this
Agreement, a "Phone Superior Proposal" means any proposal (on its most
recently amended or modified terms, if amended or modified) made by a Third
Party to enter into an Alternative Transaction which the Board of Directors of
Phone determines in its good faith judgment (after consultation with a
financial advisor of nationally recognized reputation) to be more favorable to
Phone's stockholders than the Merger taking into account all relevant factors
(including whether, in the good faith judgment of the Board of Directors of
Phone, after consultation with a financial advisor of nationally recognized
reputation, the third party is reasonably able to finance the transaction).
Notwithstanding any other provision of this Agreement, Phone shall submit this
Agreement to its stockholders whether or not the Board of Directors of Phone
makes a Phone Subsequent Determination.
(c) In addition to the obligations of Phone set forth in paragraphs (a) and
(b) of this Section 4.2, and in any event within one (1) business day, Phone
shall promptly advise Software.com orally and in writing of any request for
information or of any proposal in connection with an Alternative Transaction,
the material terms and conditions of such request or proposal and the identity
of the person making such request or proposal. Phone will keep Software.com
reasonably informed of the status and details (including amendments or
proposed amendments) of any such request or proposal on a current basis.
(d) Nothing contained in this Section 4.2 shall prohibit Phone (i) from
taking and disclosing to its stockholders a position contemplated by Rule 14d-
9 or Rule 14e-2(a) promulgated under the Exchange Act or
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(ii) from making any disclosure to its stockholders if, in the good faith
judgment of the Board of Directors of Phone, after consultation with outside
counsel, failure so to disclose would be inconsistent with its fiduciary
duties to Phone's stockholders under applicable law.
Section 4.3 No Solicitation by Software.com.
(a) Software.com shall not, nor shall it permit any of its subsidiaries to,
nor shall it authorize or permit any of its officers, directors or employees
or any investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its subsidiaries to, directly or
indirectly through another person, (i) solicit, initiate or encourage
(including by way of furnishing information), or take any other action
designed to facilitate, any inquiries or the making of any proposal the
consummation of which would constitute an Alternative Transaction or (ii)
participate in any discussions or negotiations regarding any Alternative
Transaction; provided, however, that if, at any time prior to the adoption of
this Agreement by the holders of Software.com Common Stock, the Board of
Directors of Software.com determines in good faith, after consultation with
outside counsel, that the failure to provide such information or participate
in such negotiations or discussions would result in a reasonable possibility
that the Board of Directors of Software.com breach its fiduciary duties to
Software.com's stockholders under applicable law, Software.com may, in
response to any such proposal that was not solicited by it or which did not
otherwise result from a breach of this Section 4.3(a), and subject to
compliance with Section 4.3(c), (x) furnish information with respect to
Software.com and its subsidiaries to any person pursuant to a customary
confidentiality agreement containing terms as to confidentiality no less
restrictive than the Confidentiality Agreement, as amended pursuant to Section
8.6 hereof, and (y) participate in negotiations regarding such proposal.
(b) Neither the Board of Directors of Software.com nor any committee thereof
shall (i) except as expressly permitted by this Section 4.3(b), withdraw,
qualify or modify, or propose publicly to withdraw, qualify or modify, in a
manner adverse to Phone, the approval or recommendation by such Board of
Directors or such committee of the Merger, or this Agreement, (ii) approve or
recommend, or propose publicly to approve or recommend, any Alternative
Transaction, or (iii) cause Software.com to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement
related to any Alternative Transaction. Notwithstanding the foregoing, in the
event that prior to the adoption of this Agreement by the holders of
Software.com Common Stock the Board of Directors of Software.com determines in
good faith, after it has received a Software.com Superior Proposal (as defined
below) and after consultation with outside counsel, that the failure to do so
would result in a reasonable possibility that the Board of Directors of
Software.com would breach its fiduciary duties to Software.com's stockholders
under applicable law, the Board of Directors of Software.com may (subject to
this and the following sentences) inform Software.com stockholders that it no
longer believes that the Merger or this Agreement is advisable and no longer
recommends approval (a "Software.com Subsequent Determination"), but only at a
time that is after the third business day following Phone's receipt of written
notice advising Phone that the Board of Directors of Software.com has received
a Software.com Superior Proposal, specifying the material terms and conditions
of such Software.com Superior Proposal, identifying the person making such
Software.com Superior Proposal and stating that it intends to make a
Software.com Subsequent Determination. For purposes of this Agreement, a
"Software.com Superior Proposal" means any proposal (on its most recently
amended or modified terms, if amended or modified) made by a Third Party enter
into an Alternative Transaction on terms which the Board of Directors of
Software.com determines in its good faith judgment (after consultation with a
financial advisor of nationally recognized reputation) to be more favorable to
Software.com's stockholders than the Merger taking into account all relevant
factors (including whether, in the good faith judgment of the Board of
Directors of Software.com, after consultation with a financial advisor of
nationally recognized reputation, the third party is reasonably able to
finance the transaction). Notwithstanding any other provision of this
Agreement, Software.com shall submit this Agreement to its stockholders
whether or not the Board of Directors of Software.com make a Software.com
Subsequent Determination.
(c) In addition to the obligations of Software.com set forth in paragraphs
(a) and (b) of this Section 4.3, and in any event within one (1) business day,
Software.com shall promptly advise Phone orally and in writing of any request
for information or of any proposal in connection with an Alternative
Transaction, the material terms
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and conditions of such request or proposal and the identity of the person
making such request or proposal. Software.com will keep Phone reasonably
informed of the status and details (including amendments or proposed
amendments) of any such request or proposal on a current basis.
(d) Nothing contained in this Section 4.3 shall prohibit Software.com from
(i) taking and disclosing to its stockholders a position contemplated by Rule
14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or (ii) from making
any disclosure to its stockholders if, in the good faith judgment of the Board
of Directors of Software.com, after consultation with outside counsel, failure
so to disclose would be inconsistent with its fiduciary duties to
Software.com's stockholders under applicable law.
ARTICLE 5.
Additional Agreements
Section 5.1 Preparation of the Form S-4 and the Joint Proxy Statement;
Stockholders' Meetings.
(a) As soon as practicable following the date of this Agreement, Phone and
Software.com shall prepare and file with the SEC the Joint Proxy Statement,
and Phone shall prepare and file with the SEC the Form S-4, in which the Joint
Proxy Statement will be included as a prospectus. Each of Phone and
Software.com shall use commercially reasonable efforts to have the Form S-4
declared effective under the Securities Act as promptly as practicable after
such filing. Phone will use commercially reasonable efforts to cause the Joint
Proxy Statement to be mailed to Phone's stockholders, and Software.com will
use commercially reasonable efforts to cause the Joint Proxy Statement to be
mailed to Software.com's stockholders, in each case as promptly as practicable
after the Form S-4 is declared effective under the Securities Act. Phone shall
also take any action required to be taken under any applicable state
securities laws in connection with the issuance of shares of Phone Common
Stock in the Merger and the conversion of Software.com Options into options to
acquire Phone Common Stock, and Software.com shall furnish all information
concerning Software.com and the holders of Software.com Common Stock as may be
reasonably requested in connection with any such action. No filing of, or
amendment or supplement to, the Form S-4 or the Joint Proxy Statement will be
made by Phone without Software.com's prior consent and without providing
Software.com the opportunity to review and comment thereon. Phone will advise
Software.com promptly after it receives notice thereof, of the time when the
Form S-4 has become effective or any supplement or amendment has been filed,
the issuance of any stop order, the suspension of the qualification of the
Phone Common Stock issuable in connection with the Merger for offering or sale
in any jurisdiction, or any request by the SEC for amendment of the Joint
Proxy Statement or the Form S-4 or comments thereon and responses thereto or
requests by the SEC for additional information. If at any time prior to the
Effective Time any information relating to Phone or Software.com, or any of
their respective affiliates, officers or directors, should be discovered by
Phone or Software.com which should be set forth in an amendment or supplement
to any of the Form S-4 or the Joint Proxy Statement, so that any of such
documents would not include any misstatement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other parties hereto and
an appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated
to the stockholders of Phone and Software.com.
(b) Phone shall, as promptly as practicable after the Form S-4 is declared
effective under the Securities Act, duly give notice of, convene and hold a
meeting of its stockholders (the "Phone Stockholders' Meeting") in accordance
with the DGCL for the purpose of obtaining the Phone Stockholder Approval and
shall, subject to the provisions of Section 4.2(b) hereof, through its Board
of Directors, recommend to its stockholders the approval of the issuance of
the shares of Phone Common Stock in the Merger and the Phone Charter
Amendment.
(c) Software.com shall, as promptly as practicable after the Form S-4 is
declared effective under the Securities Act, duly give notice of, convene and
hold a meeting of its stockholders (the "Software.com
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Stockholders' Meeting") in accordance with the DGCL for the purpose of
obtaining the Software.com Stockholder Approval and shall, subject to the
provisions of Section 4.3(b) hereof, through its Board of Directors, recommend
to its stockholders the approval and adoption of this Agreement, the Merger
and the other transactions contemplated hereby.
(d) Software.com and Phone will use commercially reasonable efforts to hold
the Phone Stockholders' Meeting and the Software.com Stockholders' Meeting on
the same date and as soon as reasonably practicable after the date hereof.
Section 5.2 Pooling Letters.
Software.com shall use commercially reasonable efforts to obtain from
Software.com's accounting firm, Ernst & Young, a signed report in form and
substance reasonably satisfactory to Phone and dated not earlier than five (5)
days prior to the Closing Date, to the effect that, subject to customary
qualifications, such firm concurs with the conclusion of Software.com's
management that Software.com qualifies as a "combining company" in accordance
with the criteria set forth in paragraph 46 of APB 16 and has not violated the
criteria set forth in paragraphs 47c, 47d and 48c of APB 16 during the period
extending from two (2) years preceding the date of initiation to the date of
such report and Phone shall use commercially reasonable efforts to obtain from
Phone's accounting firm, KPMG LLP a signed report in form and substance
reasonably satisfactory to Phone and dated not earlier than five (5) days
prior to the Closing Date, to the effect that such firm concurs with the
conclusion of Phone's management that pooling of interests accounting for the
Merger under APB 16 is appropriate.
Section 5.3 Access to Information; Confidentiality.
Subject to the Confidentiality Agreement and subject to applicable law, each
of Phone and Software.com shall, and shall cause each of its respective
subsidiaries to, afford to the other party and to the officers, employees,
accountants, counsel, financial advisors and other representatives of such
other party, reasonable access during normal business hours during the period
prior to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records (provided that such access shall
not interfere with the business or operations of such party) and, during such
period, each of Phone and Software.com shall, and shall cause each of its
respective subsidiaries to, furnish promptly to the other party (a) a copy of
each report, schedule, registration statement and other document filed by it
during such period pursuant to the requirements of federal or state securities
laws and (b) all other information concerning its business, properties and
personnel as such other party may reasonably request. No review pursuant to
this Section 5.3 shall affect any representation or warranty given by the
other party hereto. Each of Phone and Software.com will hold, and will cause
its respective officers, employees, accountants, counsel, financial advisors
and other representatives and affiliates to hold, any nonpublic information in
accordance with the terms of the Confidentiality Agreements. Phone shall also
cooperate with Software.com and use its best efforts to obtain an estimate of
withdrawal liability from each multi-employer plan with respect to which Phone
contributes as of the date hereof.
Section 5.4 Commercially Reasonable Efforts.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use commercially reasonable efforts
to take, or cause to be taken, all actions, and to do, or cause to be done,
and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including (i) the obtaining of all necessary
actions or nonactions, waivers, consents and approvals from Governmental
Entities and the making of all necessary registrations and filings and the
taking of all steps as may be necessary to obtain an approval or waiver from,
or to avoid an action or proceeding by, any Governmental Entity, (ii) the
obtaining of all necessary consents, approvals or waivers, and any necessary
or appropriate financing arrangements, from third parties, (iii) the defending
of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated by this Agreement, including seeking to have any
stay or temporary restraining
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order entered by any court or other Governmental Entity vacated or reversed,
and (iv) the execution and delivery of any additional instruments necessary to
consummate the transactions contemplated by, and to fully carry out the
purposes of, this Agreement. Notwithstanding anything to the contrary in this
Agreement, neither Software.com nor Phone shall be required to hold separate
(including by trust or otherwise) or divest any of their respective businesses
or assets, or enter into any consent decree or other agreement that would
restrict either Software.com or Phone in the conduct of its business as
heretofore conducted.
(b) In connection with and without limiting the foregoing, Phone and
Software.com shall (i) take all action necessary to ensure that no state
takeover statute or similar statute or regulation is or becomes applicable to
this Agreement, the Option Agreements, or any of the transactions contemplated
hereby and thereby and (ii) if any state takeover statute or similar statute
or regulation becomes applicable to such agreements or transactions, take all
action necessary to ensure that such transactions may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such statute or regulation on the Merger
and the other transactions contemplated by this Agreement.
Section 5.5 Indemnification, Exculpation and Insurance.
Phone agrees that at all times after the Effective Time, it shall indemnify,
and shall cause the Surviving Corporation to indemnify, each person who is
now, or has been at any time prior to the date hereof, a director or officer
of Software.com, any of its subsidiaries or affiliates, or of any of its
successors and assigns (individually an "Indemnified Party" and collectively
the "Indemnified Parties"), to the same extent and in the same manner as is
now provided in the certificate of incorporation or by-laws of Software.com or
otherwise in effect at the Effective Time (pursuant to an indemnification
agreement or otherwise), with respect to any claim, liability, loss, damage,
cost or expense (whenever asserted or claimed) based in whole or in part on,
or arising in whole or in part out of, any matter existing or occurring at or
prior to the Effective Time. Phone shall, or shall cause the Surviving
Corporation to, maintain in effect for not less than six (6) years after the
Effective Time the current policies of directors' and officers' liability
insurance maintained by Software.com on the date hereof (provided that Phone
or the Surviving Corporation may substitute therefor policies having at least
the same coverage and containing terms and conditions which are no less
advantageous to the persons currently covered by such policies as insured)
with respect to matters existing or occurring at or prior to the Effective
Time. Without limiting the foregoing, in the event any Indemnified Party
becomes involved in any capacity in any action, proceeding or investigation
based in whole or in part on, or arising in whole or in part out of, any
matter, including the transactions contemplated hereby, existing or occurring
at or prior to the Effective Time, then, following the Effective Time, to the
extent permitted by law Phone shall, or shall cause the Surviving Corporation
to, periodically advance to such Indemnified Party its legal and other
expenses (including the cost of any investigation and preparation incurred in
connection therewith), subject to the provision by such Indemnified Party of
an undertaking to reimburse the amounts so advanced in the event of a final
determination by a court of competent jurisdiction that such Indemnified Party
is not entitled thereto. Promptly after receipt by an Indemnified Party of
notice of the assertion (an "Assertion") of any claim or the commencement of
any action against him or her in respect to which indemnity or reimbursement
may be sought against Phone, the Surviving Corporation or a subsidiary of
Phone ("Indemnitors") hereunder, such Indemnified Party shall notify any
Indemnitor in writing of the Assertion, but the failure to so notify any
Indemnitor shall not relieve any Indemnitor of any liability it may have to
such Indemnified Party hereunder except to the extent such failure shall have
materially prejudiced Indemnitor in defending against such Assertion.
Indemnitors shall be entitled to participate in and, to the extent Indemnitors
(A) elect by written notice to such Indemnified Party within thirty (30) days
after receipt by any Indemnitor of notice of such Assertion and (B)
acknowledge in writing their obligation to indemnify the Indemnified Parties
in connection with such Assertion, to assume the defense of such Assertion, at
their own expense, with counsel chosen by Indemnitors and reasonably
satisfactory to such Indemnified Party. Notwithstanding that Indemnitors shall
have elected by such written notice to assume the defense of any Assertion,
such Indemnified Party shall have the right to participate in the
investigation and defense thereof, with separate counsel chosen by such
Indemnified Party, but in such event the fees and expenses of such counsel
shall be paid by such Indemnified Party, unless, in the opinion of such
separate counsel, (i) such Indemnified Party has available to him one or more
defenses to such Assertion that may not be available to the Indemnitors,
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(ii) there is otherwise a conflict of interest between the Indemnified Party,
on the one hand, and the Indemnitors, on the other hand, or (iii) the
Indemnitors fail to vigorously pursue the defense of the asserted claim. No
Indemnified Party shall settle any Assertion without the prior written consent
of Phone, nor shall any Indemnitor settle any Assertion without either (i) the
written consent of all Indemnified Parties against whom such Assertion was
made, or (ii) obtaining a general release from the party making the Assertion
for all Indemnified Parties as a condition of such settlement. The provisions
of this Section 5.5 are intended for the benefit of, and shall be enforceable
by, the respective Indemnified Parties. The provisions of this Section 5.5 are
not intended to constitute insurance. To the extent that any policy of
insurance shall provide all or any part of the indemnity owed to the
Indemnified Parties, or any of them, hereunder, the Indemnitors shall be
relieved of their obligation with regard thereto. No acceptance by an
Indemnified Party of any defense from any third party with respect to an
Assertion shall be deemed to constitute a waiver by such Indemnified Party of
its rights under this Section 5.5 or to receive the full measure of the
indemnity provided for hereby.
Section 5.6 Fees and Expenses.
Except as set forth in this Section 5.6 and in Section 7.2, all fees and
expenses incurred in connection with the Merger, this Agreement, the Option
Agreements and the transactions contemplated by this Agreement and the Option
Agreements shall be paid by the party incurring such fees or expenses, whether
or not the Merger are consummated, except that each of Software.com and Phone
shall bear and pay one-half of the costs and expenses (other than the fees and
expenses of each party's attorneys and accountants which shall be paid by the
party incurring such expenses) incurred by Phone, Merger Sub, or Software.com
in connection with (i) the filing, printing and mailing of the Form S-4 and
the Joint Proxy Statement (including SEC filing fees) and (ii) the filings of
the premerger notification and report forms under the HSR Act (including
filing fees). In addition, all transfer taxes incurred by Phone, Merger Sub or
Software.com in connection with the Merger arising on or after the Effective
Time shall be borne by Phone.
Section 5.7 Public Announcements.
Software.com and Phone will consult with each other and agree before
issuing, and provide each other the opportunity to review, comment upon and
concur with, and use reasonable efforts to agree on, any press release with
respect to the transactions contemplated by this Agreement, the Option
Agreements, including the Merger, and shall not issue any such press release
prior to such consultation and agreement, except as either party may determine
is required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange or stock market. The
parties agree that the initial press release to be issued with respect to the
transactions contemplated by this Agreement shall be in the form heretofore
agreed to by the parties.
Section 5.8 Affiliates.
(a) On or before the date hereof, Phone shall prepare and deliver a copy to
Software.com of a letter identifying all persons who may be deemed to be, at
the time this Agreement is submitted for approval and adoption by the
stockholders of Phone, "affiliates" of Phone for purposes of applicable SEC
accounting releases with respect to pooling of interests accounting treatment
and such list shall be updated as necessary to reflect changes from the date
hereof. Phone shall use commercially reasonable efforts to cause each person
identified on such list to deliver to Phone on or before the date hereof,
written agreements substantially in the form attached as Exhibit F hereto, and
in the event any other person becomes an affiliate of Phone thereafter to
cause such person to deliver such an agreement to Phone as soon as practicable
but in any event at Closing.
(b) On or before the date hereof, Software.com shall deliver to Phone a
letter identifying all persons who may be deemed to be, at the time this
Agreement is submitted for approval and adoption by the stockholders of
Software.com, "affiliates" of Software.com for purposes of Rule 145 under the
Securities Act and for purposes of applicable SEC accounting releases with
respect to pooling of interests accounting treatment and such list shall be
updated as necessary to reflect changes from the date hereof. Software.com
shall use commercially
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reasonable efforts to cause each person identified on such list to deliver to
Phone on or before the date hereof, written agreements substantially in the
form attached as Exhibit E or Exhibit H hereto, as applicable, and in the
event any other person becomes an affiliate of Software.com thereafter to
cause such person to deliver such an agreement to Phone as soon as practicable
but in any event at Closing.
Section 5.9 Nasdaq Listing.
Phone shall use commercially reasonable efforts to cause the Phone Common
Stock issuable under Article 2 to be approved for listing on the Nasdaq
National Market, subject to official notice of issuance, as promptly as
practicable after the date hereof, and in any event prior to the Closing Date.
Section 5.10 Tax and Accounting Treatment.
Each of Phone, Software.com and their respective subsidiaries shall use all
reasonable efforts to cause the Merger to qualify (i) for treatment as a
pooling of interests for accounting purposes and (ii) as a reorganization
within the meaning of section 368(a) of the Code, and to obtain the opinions
of counsel referred to in sections 6.2 and 6.3. Neither Phone, nor
Software.com, nor their respective subsidiaries, shall take any action to
cause the Merger to fail to qualify (i) for treatment as a pooling of
interests for accounting purposes or (ii) as a reorganization within the
meaning of section 368(a) of the Code.
Section 5.11 Post-Merger Operations.
Following the Effective Time, the headquarters of Phone and its subsidiaries
shall be located in Redwood City, California, until such time as the Board of
Directors of Phone otherwise determines.
Section 5.12 Conveyance Taxes.
Software.com and Phone shall cooperate in the preparation, execution and
filing of all returns, questionnaires, applications or other documents
regarding any real property transfer or gains, sales, use, transfer, value
added, stock transfer and stamp taxes, any transfer, recording, registration
and other fees or any similar taxes which become payable in connection with
the transactions contemplated by this Agreement that are required or permitted
to be filed on or before the Effective Time.
Section 5.13 Employee Benefits.
For a period of one (1) year after the Closing, Phone covenants that it
shall provide all active employees of Software.com and their dependants and
all qualified beneficiaries with coverage under one or more Phone welfare
benefit plans (each, a "Phone Welfare Benefit Plan"), including without
limitation health coverage (collectively, "Coverage"), which meet the
following requirements as of the Effective Time: (A) the Coverage is
comparable in the aggregate to that provided under the Software.com welfare
benefit plans listed in Section 5.13 of the Software.com Disclosure Schedule
(each, a "Software.com Scheduled Welfare Plan"), (B) service with Software.com
prior to the Effective Time shall be credited against all service and waiting
period requirements under the Phone Welfare Benefit Plans, (C) such Phone
Welfare Benefit Plans shall not provide for any pre-existing condition
exclusions other than any such exclusions existing under the Software.com
Scheduled Welfare Plans, and (D) the deductibles and/or copayments in effect
under the Phone Welfare Benefit Plans shall be credited with any applicable
deductibles and/or copayments paid by such individuals under the Software.com
Scheduled Welfare Plans for the plan year in which the Effective Time occurs.
Section 5.14 Consents of Accountants.
Phone and Software.com will each use all reasonable efforts to cause to be
delivered to each other consents from their respective independent auditors,
dated the date on which the Form S-4 shall become effective, in form
reasonably satisfactory to the recipient and customary in scope and substance
for consents delivered by independent public accountants in connection with
registration statements on Form S-4 under the Securities Act.
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Section 5.15 Phone Board and Officers.
(a) The Board of Directors of Phone shall take all action necessary so that
effective as of the Effective Time, the Board of Directors of Phone consists
of six members, three (3) of whom are members of the current Phone Board of
Directors designated by Phone (the "Phone Designees") and three (3) of whom
are members of the current Software.com Board of Directors designated by
Software.com (the "Software.com Designees") and that each of the three (3)
classes of Phone Directors includes one Phone Designee and one Software.com
Designee.
(b) The Board of Directors of Phone will take all necessary action to
appoint, effective as of the Effective Time, (i) Donald J. Listwin to the
position of President and Chief Executive Officer of Phone, (ii) Alain
Rossmann to the position of Executive Vice President and Chairman of the Board
of Directors of Phone, (iii) John L. MacFarlane to the position of Executive
Vice President of Phone and (iv) Alan S. Black to the position of Chief
Financial Officer of Phone. Phone shall take all action necessary to elect
such additional members of management and executive officers of Phone as the
Board of Directors of Phone may determine.
Section 5.16 Rights Plans.
(a) Phone shall not redeem the Phone Rights, or amend, modify (other than to
delay any "distribution date" therein) or terminate the Phone Rights Plan
prior to the Effective Time unless required to do so by order of a court of
competent jurisdiction.
(b) Software.com shall not redeem the Software.com Rights or amend, modify
(other than to delay any "distribution date" therein) or terminate the
Software.com Rights Plan prior to the Effective Time unless required to do so
by order of a court of competent jurisdiction.
Section 5.17 Action by Board of Directors.
Prior to the Effective Time, the board of directors of each of Phone and
Software.com shall comply as applicable with the provisions of the SEC's no-
action letter dated January 12, 1999, addressed to Skadden, Arps, Slate,
Meagher and Flom LLP relating to Rule 16b of the Exchange Act.
ARTICLE 6.
Conditions Precedent
Section 6.1 Conditions to Each Party's Obligation to Effect The Merger.
The respective obligation of each party to effect the Merger is subject to
the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approvals.
Each of the Phone Stockholder Approval and the Software.com Stockholder
Approval shall have been obtained.
(b) HSR Act.
The waiting period (and any extension thereof) applicable to the Merger
under the HSR Act shall have been terminated or shall have expired.
(c) Governmental and Regulatory Approvals.
Other than the filing of the Certificates of Merger provided for under
Section 1.3 and filings pursuant to the HSR Act (which are addressed in
Section 6.1(b)), all consents, approvals and actions of, filings with and
notices to any Governmental Entity required of Phone, Software.com or any
of their subsidiaries to consummate the Merger and the other transactions
contemplated hereby (together with the matters contemplated by Section
6.1(b), the "Requisite Regulatory Approvals") shall have been obtained.
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(d) No Injunctions or Restraints.
No judgment, order, decree, statute, law, ordinance, rule or regulation,
entered, enacted, promulgated, enforced or issued by any court or other
Governmental Entity of competent jurisdiction or other legal restraint or
prohibition (collectively, "Restraints") shall be in effect (i) preventing
the consummation of the Merger, or (ii) which otherwise is reasonably
likely to have a material adverse effect on Phone following the Effective
Time or the effective operation of the combined company following
consummation of the Merger.
(e) Form S-4.
The Form S-4 shall have become effective under the Securities Act prior
to the mailing of the Joint Proxy Statement by each of Phone and
Software.com to their respective stockholders and no stop order or
proceedings seeking a stop order shall be threatened by the SEC or shall
have been initiated by the SEC.
(f) Nasdaq Listings.
The shares of Phone Common Stock issuable to the stockholders of
Software.com as contemplated by Article 2 shall have been approved for
listing on the Nasdaq National Market, subject to official notice of
issuance.
Section 6.2 Conditions to Obligations of Software.com.
The obligation of Software.com to effect the Merger is further subject to
satisfaction or waiver of the following conditions:
(a) Representations and Warranties.
The representations and warranties of Phone and Merger Sub set forth
herein shall be true and correct both when made and at and as of the
Closing Date, as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date),
except where the failure of such representations and warranties (other than
those set forth in Section 3.1(c)) which shall be true and correct in all
material respects to be so true and correct (without giving effect to any
limitation as to "materiality" or "material adverse effect" set forth
therein) does not have, and is not likely to have, individually or in the
aggregate, a "material adverse effect" on Phone.
(b) Performance of Obligations of Phone and Merger Sub.
Each of Phone and Merger Sub shall have performed in all material
respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date.
(c) No Material Adverse Change.
At any time after the date of this Agreement there shall not have
occurred any material adverse change relating to Phone.
(d) Officer's Certificate.
Software.com shall have received an officer's certificate duly executed
by each of the Chief Executive Officer and Chief Financial Officer of Phone
to the effect that the conditions set forth in Sections 6.2(a), (b) and (c)
have been satisfied.
(e) Tax Opinion.
Software.com shall have received an opinion of Wilson, Sonsini, Goodrich
& Rosati, Professional Corporation, in form and substance reasonably
satisfactory to Software.com, dated as of the Effective Time, substantially
to the effect that, on the basis of facts, representations and assumptions
set forth in such opinion, for United States federal income tax purposes,
the Merger will constitute a "reorganization" within the meaning of section
368(a) of the Code.
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In rendering such opinion, Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation may receive and rely upon representations contained in
certificates of Software.com, Phone, Merger Sub and others, and the parties
agree to provide Wilson, Sonsini, Goodrich & Rosati, Professional Corporation
with such certificates as Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation may reasonably request in connection with rendering its opinion.
Section 6.3 Conditions to Obligations of Phone and Merger Sub.
The obligations of Phone and Merger Sub to effect the Merger are further
subject to satisfaction or waiver of the following conditions:
(a) Rpresentations and Warranties.
The representations and warranties of Software.com set forth herein shall
be true and correct both when made and at and as of the Closing Date, as if
made at and as of such time (except to the extent expressly made as of an
earlier date, in which case as of such date), except where the failure of
such representations and warranties (other than those set forth in Section
3.2(c)) which shall be true and correct in all material respects to be so
true and correct (without giving effect to any limitation as to
"materiality," or "material adverse effect" set forth therein) does not
have, and is not likely to have, individually or in the aggregate, a
material adverse effect on Software.com.
(b) Performance of Obligations of Software.com.
Software.com shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Closing Date.
(c) No Material Adverse Change.
At any time after the date of this Agreement there shall not have
occurred any material adverse change relating to Software.com.
(d) Officer's Certificate.
Phone shall have received an officer's certificate duly executed by each
of the Chief Executive Officer and Chief Financial Officer of Software.com
to the effect that the conditions set forth in Sections 6.3(a), (b) and (c)
have been satisfied.
(e) Tax Opinion.
Phone shall have received an opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, in form and substance reasonably satisfactory to Phone, dated as
of the Effective Time, substantially to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, for
United States federal income tax purposes, the Merger will constitute a
"reorganization" within the meaning of section 368(a) of the Code.
In rendering such opinion, Skadden, Arps, Slate, Meagher & Flom LLP may
receive and rely upon representations contained in certificates of Phone,
Merger Sub, Software.com and others, and the parties agree to provide Skadden,
Arps, Slate, Meagher & Flom LLP with such certificates as Skadden, Arps,
Slate, Meagher & Flom LLP may reasonably request in connection with rendering
its opinion.
ARTICLE 7.
Termination, Amendment and Waiver
Section 7.1 Termination.
This Agreement may be terminated at any time prior to the Effective Time,
and (except in the case of 7.1(e) or 7.1(f)) whether before or after the Phone
Stockholder Approval or the Software.com Stockholder Approval:
(a) by mutual written consent of Software.com and Phone, if the Board of
Directors of each so determines by a vote of a majority of its entire
board;
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<PAGE>
(b) by either the Board of Directors of Software.com or the Board of
Directors of Phone:
(i) if the Merger shall not have been consummated by March 31, 2001
(the "Outside Date") unless such termination right has been expressly
restricted in writing by the Board of Directors of Software.com or
Phone, as the case may be; provided, however, that the right to
terminate this Agreement pursuant to this Section 7.1(b)(i) shall not
be available to any party whose failure to perform any of its
obligations under this Agreement results in the failure of the Merger
to be consummated by such time; provided, however, that in the event
either Phone or Software.com has received a request, demand or legal
order from a Governmental Entity with responsibility for administering
antitrust, competition or other similar foreign rules, regulations or
laws for additional documentation or other information, the Outside
Date shall be extended to June 30, 2001;
(ii) if the Phone Stockholder Approval shall not have been obtained
at a Phone Stockholders' Meeting duly convened therefor or at any
adjournment or postponement thereof;
(iii) if the Software.com Stockholder Approval shall not have been
obtained at a Software.com Stockholders' Meeting duly convened therefor
or at any adjournment or postponement thereof;
(iv) if any Restraint having any of the effects set forth in Section
6.1(d) shall be in effect and shall have become final and
nonappealable, or if any Governmental Entity that must grant a
Requisite Regulatory Approval has denied approval of the Merger and
such denial has become final and nonappealable;
(c) by the Board of Directors of Software.com if either of Phone or
Merger Sub shall have breached or failed to perform any of its
representations, warranties, covenants or other agreements contained in
this Agreement, which breach or failure to perform (A) would give rise to
the failure of a condition set forth in Section 6.2(a) or (b), and (B) is
incapable of being cured by Phone or is not cured within fifteen (15)
business days of written notice thereof;
(d) by the Board of Directors of Phone, if Software.com shall have
breached or failed to perform in any material respect any of its
representations, warranties, covenants or other agreements contained in
this Agreement, which breach or failure to perform (A) would give rise to
the failure of a condition set forth in Section 6.3(a) or (b), and (B) is
incapable of being cured by Software.com or is not cured within fifteen
(15) business days of written notice thereof;
(e) by the Board of Directors of Software.com, at any time prior to the
Phone Stockholders' Meeting, if (i) the Phone Board of Directors shall have
(A) failed to include in the Joint Proxy Statement to the stockholders of
Phone, its recommendation without modification or qualification that such
stockholders approve the issuance of Phone Common Stock in the Merger and
the Charter Amendment, (B) subsequently withdrawn such recommendation, (C)
modified or qualified such recommendation in a manner adverse to the
interests of Software.com or (D) failed to reconfirm such recommendation
within ten (10) business days of receipt of a written request from
Software.com to do so or (ii) Phone shall have materially breached the
provisions of Section 4.2 of this Agreement;
(f) by the Board of Directors of Phone, at any time prior to the
Software.com Stockholders' Meeting, if (i) the Software.com Board of
Directors shall have (A) failed to include in the Joint Proxy Statement to
the stockholders of Software.com, its recommendation without modification
or qualification that such stockholders approve this Agreement and the
transaction contemplated hereby, or (B) subsequently withdrawn such
recommendation, or (C) modified or qualified such recommendation in a
manner adverse to the interests of Phone, or (D) failed to reconfirm such
recommendation within ten (10) business days of receipt of a written
request from Phone to do so or (ii) Software.com shall have materially
breached the provisions of Section 4.3 of this Agreement.
Section 7.2 Effect of Termination.
(a) In the event of termination of this Agreement as provided in Section 7.1
hereof, and subject to the provisions of Section 8.1 hereof, this Agreement
shall forthwith become void and there shall be no liability on
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<PAGE>
the part of any of the parties, except (i) as set forth in this Section 7.2
and in Sections 5.3, 5.6, 3.1(n) and 3.2(n) hereof, and (ii) nothing herein
shall relieve any party from liability for any willful breach hereof.
(b) (1) If this Agreement is terminated by Software.com or Phone pursuant to
Section 7.1(b)(ii) hereof because of the failure to obtain the required
approval from the Phone stockholders and at the time of such termination or
prior to the meeting of Phone's stockholders there shall have been a publicly-
announced and not irrevocably and unconditionally withdrawn offer or proposal
for, or any agreement with respect to, a transaction that would constitute an
Alternative Transaction (as defined in Section 4.2(a) hereof, except that for
purposes of this Section 7.2(b), the applicable percentage of clause (i) of
such definition shall be fifty percent (50%)) involving Phone or any of the
Phone subsidiaries (whether or not such offer, proposal, announcement or
agreement shall have been rejected prior to the time of such termination or of
the meeting), Phone shall pay to Software.com an amount equal to
Software.com's actual out-of-pocket fees, costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby (the
"Software.com Expenses").
(2) If, within twelve (12) months following a termination contemplated by
(1) above, (x) Phone consummates an Alternative Transaction or (y) Phone
enters into an agreement or binding letter of intent providing for an
Alternative Transaction, then Phone shall pay to Software.com a termination
fee equal to One Hundred Ninety-Five Million Dollars ($195,000,000.00) (the
"Termination Fee") minus the Software.com Expenses already paid pursuant to
(1) above.
(3) If this Agreement is terminated (i) by Software.com as a result of
Phone's material breach of Section 5.1(b) hereof, which is not cured within
thirty (30) days after notice thereof to Phone, or (ii) by Software.com
pursuant to Section 7.1(e) hereof, Phone shall pay to Software.com an amount
equal to the Termination Fee.
(c) (1) If this Agreement is terminated by Software.com or Phone pursuant to
Section 7.1(b)(iii) hereof because of the failure to obtain the required
approval from the Software.com stockholders and at the time of such
termination or prior to the meeting of Software.com's stockholders there shall
have been a publicly-announced and not irrevocably and unconditionally
withdrawn offer or proposal for, or any agreement with respect to, a
transaction that would constitute an Alternative Transaction (as defined in
Section 4.2(a) hereof, except that for purposes of this Section 7.2(c), the
applicable percentage of clause (i) of such definition shall be fifty percent
(50%)) involving Software.com or any of the Software.com subsidiaries (whether
or not such offer, proposal, announcement or agreement shall have been
rejected prior to the time of such termination or of the meeting),
Software.com shall pay to Phone an amount equal to Phone's actual out-of-
pocket fees, costs and expenses incurred in connection with this Agreement and
the transactions contemplated hereby (the "Phone Expenses").
(2) If, within twelve (12) months following a termination contemplated by
(1) above, (x) Software.com consummates an Alternative Transaction or (y)
Software.com enters into an agreement or binding letter of intent providing
for an Alternative Transaction, then Software.com shall pay to Phone a
termination fee equal to the Termination Fee minus the Phone Expenses already
paid pursuant to (1) above.
(3) If this Agreement is terminated (i) by Phone as a result of
Software.com's material breach of Section 5.1(c) hereof which is not cured
within thirty (30) days after notice thereof to Software.com, or (ii) by Phone
pursuant to Section 7.1(f) hereof, Software.com shall pay to Phone an amount
equal to the Termination Fee.
(d) Each payment of Software.com Expenses, Phone Expenses or the Termination
Fee payable under Sections 7.2(b)(1) , 7.2(b)(2), 7.2 (c)(1) or 7.2(c)(2)
above shall be payable in cash, payable no later than one (1) business day
following the delivery of notice of termination to the other party.
(e) Each Termination Fee payable under Section 7.2(b)(3) shall be payable in
cash and shares of Phone Common Stock, in such combination as Phone may elect
(provided that the cash component must be at least Forty Million Dollars
($40,000,000.00)) with an aggregate value (for all purposes of this Section
7.2(e), such shares of Phone Common Stock shall be valued at a price per share
equal to the average closing price per share
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<PAGE>
of Phone Common Stock for the five (5) most recent trading days that Phone
Common Stock has traded ending on the trading day immediately prior to the
termination date, as reported on the Nasdaq National Market) equal to the
Termination Fee, payable no later than three (3) business days following the
delivery of notice of termination to the other party. If Phone satisfies its
obligation to pay the Termination Fee in part by issuing shares of Phone
Common Stock (the "Phone Termination Fee Shares"), then Software.com shall be
entitled to registration rights with respect to such shares as described in
the Phone Stock Option Agreement (treating Phone Termination Fee Shares for
all purposes of Section 7 of the Phone Stock Option Agreement as if they were
Option Shares (as defined in the Phone Stock Option Agreement)).
(f) Each Termination Fee payable under Section 7.2(c)(3) shall be paid in
cash and shares of Software.com Common Stock, in such combination as
Software.com may elect (provided that the cash component must be at least
Forty Million Dollars ($40,000,000.00)) with an aggregate value (for all
purposes of this Section 7.2(e), such shares of Software.com Common Stock to
be valued at a price per share equal to the average closing price per share of
Software.com Common Stock for the five (5) most recent trading days that
Software.com Common Stock has traded ending on the trading day immediately
prior to the termination date, as reported on the Nasdaq National Market)
equal to the Termination Fee, payable no later than three (3) business days
following the delivery of notice of termination to the other party. If
Software.com satisfies its obligation to pay the Termination Fee in part by
issuing shares of Software.com Common Stock (the "Software.com Termination Fee
Shares"), then Phone shall be entitled to registration rights with respect to
such shares as described in the Software.com Stock Option Agreement (treating
Software.com Termination Fee Shares for all purposes of Section 7 of the
Software.com Stock Option Agreement as if they were Option Shares (as defined
in the Software.com Stock Option Agreement)).
(g) Software.com and Phone agree that the agreements contained in Sections
7.2(b) and (c) above are an integral part of the transaction contemplated by
this Agreement and constitute liquidated damages and not a penalty. If one
party fails to promptly pay to the other any fee due under such Sections
7.2(b) and (c), the defaulting party shall pay the costs and expenses
(including legal fees and expenses) in connection with any action, including
the filing of any lawsuit or other legal action, taken to collect payment.
Section 7.3 Amendment.
Subject to compliance with applicable law, this Agreement may be amended by
the parties at any time before or after the Phone Stockholder Approval or the
Software.com Stockholder Approval; provided, however, that after any such
approval, there may not be, without further approval of such the stockholders
of Phone (in the case of the Phone Stockholder Approval) and the stockholders
of Software.com (in the case of the Software.com Stockholder Approval), any
amendment of this Agreement that changes the amount or the form of the
consideration to be delivered to the holders of Software.com Common Stock
hereunder, or which by law otherwise expressly requires the further approval
of such stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto and duly
approved by the parties' respective Boards of Directors or a duly designated
committee thereof.
Section 7.4 Extension; Waiver.
At any time prior to the Effective Time, a party may, subject to the proviso
of Section 7.3 (and for this purpose treating any waiver referred to below as
an amendment), (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) waive
compliance by the other party with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Any extension or waiver given in
compliance with this Section 7.4 or failure to insist on strict compliance
with an obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
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<PAGE>
ARTICLE 8.
General Provisions
Section 8.1 Nonsurvival of Representations and Warranties.
None of the representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time. This Section 8.1 shall not limit any covenant or agreement of the
parties that by its terms contemplates performance after the Effective Time.
Section 8.2 Notices.
All notices, requests, claims, demands, and other communications under this
Agreement shall be in writing and shall be deemed given if delivered
personally, telecopied or faxed (which is confirmed) or sent by overnight
courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Software.com to:
Software.com, Inc.
525 Anacapa Street
Santa Barbara, CA 93101
Attention: General Counsel
Facsimile: (805) 957-1532
with copies to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
Attention: Elizabeth R. Flint, Esq.
Facsimile: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
Spear Street Tower, Suite 3300
One Market Plaza
San Francisco, CA 94105
Attention: Steve L. Camahort, Esq.
Facsimile: (415) 947-2099
(b) if to Phone or Merger Sub, to it at:
Phone.com, Inc.
800 Chesapeake Drive
Redwood City, CA 94063
Attention: General Counsel
Facsimile: (650) 817-7190
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue, Suite 220
Palo Alto, CA 94301
Attention: Kenton J. King, Esq.
Facsimile: (650) 470-4570
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<PAGE>
Section 8.3 Definitions.
For purposes of this Agreement:
(a) An "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person, where "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of a person, whether through the
ownership of voting securities, by contract, as trustee or executor, or
otherwise;
(b) "material adverse change" or "material adverse effect" means, when
used in connection with Phone or Software.com, any change, effect, event,
occurrence or state of facts that is or could reasonably be expected to be
materially adverse to the business, financial condition or results of
operations of such party and its subsidiaries taken as a whole, it being
understood that none of the following shall be deemed by itself or by
themselves, either alone or in combination, to constitute a material
adverse effect: (i) a change in the market price or trading volume of
Software.com Common Stock or Phone Common Stock, as the case may be or (ii)
conditions affecting the U.S. economy as a whole;
(c) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity;
(d) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests
of which is sufficient to elect at least a majority of its Board of
Directors or other governing body (or, if there are no such voting
interests, fifty percent (50%) or more of the equity interests of which) is
owned directly or indirectly by such first person; and
(e) "knowledge" of any person which is not an individual means the
knowledge of such person's executive officers or senior management of such
person's operating divisions and segments.
Section 8.4 Interpretation.
When a reference is made in this Agreement to an Article, Section or
Exhibit, such reference shall be to an Article or Section of, or an Exhibit
to, this Agreement unless otherwise indicated. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation." The words "hereof," "herein"
and "hereunder" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement. All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant
hereto unless otherwise defined therein. The definitions contained in this
Agreement are applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter genders of
such term. Any agreement, instrument or statute defined or referred to herein
or in any agreement or instrument that is referred to herein means such
agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver
or consent and (in the case of statutes) by succession of comparable successor
statutes and references to all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns.
Section 8.5 Counterparts.
This Agreement may be executed in two or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other parties.
Section 8.6 Entire Agreement; No Third-Party Beneficiaries.
This Agreement (including the documents and instruments referred to herein),
the Option Agreements, the Voting Agreements and the Confidentiality Agreement
(a) constitute the entire agreement, and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of
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<PAGE>
this Agreement and (b) except for the provisions of Section 5.5, are not
intended to confer upon any person other than the parties any rights or
remedies.
Section 8.7 Governing Law.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflict of laws thereof.
Section 8.8 Assignment.
Neither this Agreement nor any of the rights, interests or obligations under
this Agreement shall be assigned, in whole or in part, by operation of law or
otherwise by either of the parties hereto without the prior written consent of
the other party. Any assignment in violation of the preceding sentence shall
be void. Subject to the preceding two sentences, this Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and assigns.
Section 8.9 Consent to Jurisdiction.
Each of the parties hereto (a) consents to submit itself to the personal
jurisdiction of any federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated by this Agreement, (b) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or
other request for leave from any such court, and (c) agrees that it will not
bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a federal court sitting
in the State of Delaware or a Delaware state court.
Section 8.10 Headings, etc.
The headings and table of contents contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 8.11 Severability.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect, insofar as the foregoing can be accomplished without
materially affecting the economic benefits anticipated by the parties to this
Agreement. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible to the fullest extent permitted
by applicable law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.
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<PAGE>
IN WITNESS WHEREOF, Software.com, Phone.com and Merger Sub have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
Software.com, Inc.
By: _________________________________
Name:
Title:
Phone.com, Inc.
/s/ Alain Rossmann
By: _________________________________
Name: Alain Rossmann
Title:Chief Exercutive Officer
Silver Merger Sub Inc.
By: _________________________________
Name:
Title:
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<PAGE>
IN WITNESS WHEREOF, Software.com, Phone.com and Merger Sub have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
Software.com, Inc.
By: _________________________________
Name:
Title:
Phone.com, Inc.
By: _________________________________
Name:
Title:
Silver Merger Sub Inc.
/s/ Kennen J. Hagen
By: _________________________________
Name: Kennen J. Hagen
Title:Vice President--Corp.
Development
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<PAGE>
IN WITNESS WHEREOF, Software.com, Phone.com and Merger Sub have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
Software.com, Inc.
/s/ John L. MacFarlane
By: _________________________________
Name: John L. MacFarlane
Title:CEO
Phone.com, Inc.
By: _________________________________
Name:
Title:
Silver Merger Sub Inc.
By: _________________________________
Name:
Title:
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<PAGE>
ANNEX B
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
STOCK OPTION AGREEMENT
(PHONE.COM, INC. SHARES)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
STOCK OPTION AGREEMENT
(PHONE.COM, INC. SHARES)
THIS STOCK OPTION AGREEMENT (this "AGREEMENT"), dated August 8, 2000,
between Phone.com, Inc., a Delaware corporation ("Issuer"), and Software.com,
Inc., a Delaware corporation ("Grantee").
WITNESSETH:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger, dated as of August 8, 2000 (the "Merger Agreement"), which provides,
among other things, for the merger of Merger Sub with and into Grantee with
Grantee continuing as the surviving corporation upon the terms and subject to
the conditions set forth in the Merger Agreement (capitalized terms used
herein without definition shall have the respective meanings specified in the
Merger Agreement); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement and
in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, and intending to
be legally bound hereby, the parties hereto agree as follows:
1. Grant of Option. Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof,
sixteen million five hundred sixteen thousand four hundred ninety-five
(16,516,495) shares of fully paid and nonassessable common stock of the
Issuer, par value $.001 per share ("Common Stock"), equal to and in no event
exceeding nineteen and nine-tenths percent (19.9%) of the shares of Common
Stock outstanding as of July 31, 2000 the date hereof, at a purchase price of
$78.0625 per share of Common Stock as adjusted in accordance with the
provisions of Section 6 of this Agreement (such price, as adjusted if
applicable, the "Option Price").
2. Exercise of Option.
(a) Grantee may exercise the Option, in whole or part, and from time to
time, if, but only if, a Triggering Event (as hereinafter defined) shall have
occurred prior to the occurrence of an Option Termination Event (as
hereinafter defined), provided that Grantee shall have sent the written notice
of such exercise (as provided in subsection (e) of this Section 2) on or prior
to the last date of the six (6)-month period following such Triggering Event
(the "Option Expiration Date").
(b) The term "Option Termination Event" shall mean the first day after the
earliest to occur of the following dates: (i) the date on which the Effective
Time of the Merger occurs; (ii) the last date of the twelve (12) month period
beginning on the date of termination of the Merger Agreement pursuant to
Section 7.1(b)(ii); provided, that such termination has given rise to the
right of Grantee to receive payment of Software.com Expenses pursuant to
Section 7.2(b)(1) of the Merger Agreement; provided, that subsequent to such
termination, if an event occurs that gives rise to the obligation of Issuer to
pay the Termination Fee pursuant to Section 7.2(b)(2) of the Merger Agreement,
then the last date of the six (6) month period beginning on the date of actual
payment of the Termination Fee by Issuer to Grantee pursuant to Section
7.2(b)(2) of the Merger Agreement; (iii) the date of termination of the Merger
Agreement by either party pursuant to the provisions of any section of the
Merger Agreement other than Sections 7.1(b)(ii) (other than as provided in
clause (ii) above); provided, that such termination occurs prior to the
occurrence of a Triggering Event; and (iv) the last date of the six (6) month
period beginning on the date of the first occurrence of a Triggering Event;
provided, however, that if the Option cannot be exercised as of any such date
by reason of any applicable judgment, decree, law, regulation or order (each,
an "Impediment"), or by reason of the waiting period under the HSR Act, then
the Option Termination
B-1
<PAGE>
Event shall be delayed until the date which is thirty (30) days after such
Impediment has been removed or such waiting period has expired.
(c) Triggering Event. The term "Triggering Event" shall mean any termination
of the Merger Agreement which entitles Grantee to receive payment of the
Termination Fee from Issuer pursuant to Section 7.2 of the Merger Agreement.
(d) Notice of Triggering Event. Issuer shall notify Grantee promptly in
writing of the occurrence of any Triggering Event, and in any event within
twenty-four (24) hours, it being understood that the giving of such notice by
Issuer shall not be a condition to the right of Grantee to exercise the Option
or for a Triggering Event to have occurred.
(e) Notice of Exercise; Closing. In the event Grantee is entitled to and
wishes to exercise the Option, it shall send to Issuer a written notice (the
date of which being herein referred to as the "Notice Date") specifying (i)
the total number of shares it will purchase pursuant to such exercise and (ii)
a place and date which shall be a business day not earlier than three (3)
business days nor later than sixty (60) business days from the Notice Date for
the closing of such purchase (the "Closing Date"); provided, that if the
closing of the purchase and sale pursuant to the Option (the "Closing") cannot
be consummated, in the reasonable opinion of Grantee, by reason of any
applicable judgment, decree, order, law or regulation, the period of time that
otherwise would run pursuant to this sentence shall run instead from the date
on which such restriction on consummation has expired or been terminated; and
provided further, without limiting the foregoing, that if, in the reasonable
opinion of Grantee, prior notification to or approval of any regulatory agency
is required in connection with such purchase, Grantee shall promptly file the
required notice or application for approval and shall expeditiously process
the same and the period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained
and any requisite waiting period or periods shall have passed. Any exercise of
the Option shall be deemed to occur on the Closing Date relating thereto.
(f) Purchase Price. At the Closing referred to in subsection (e) of this
Section 2, Grantee shall pay to Issuer the aggregate purchase price for the
shares of Common Stock purchased pursuant to the exercise of the Option in
immediately available funds by wire transfer to a bank account designated by
Issuer, provided that failure or refusal of Issuer to designate such a bank
account shall not preclude Grantee from exercising the Option.
(g) Issuance of Common Stock. At such Closing, simultaneously with the
delivery of immediately available funds as provided in subsection (f) of this
Section 2, Issuer shall deliver to Grantee a certificate or certificates
representing the number of shares of Common Stock purchased by the Grantee
and, if the Option should be exercised in part only, a new Option evidencing
the rights of Grantee thereof to purchase the balance of the shares
purchasable hereunder, and the Grantee shall deliver to Issuer this Agreement
and a letter agreeing that Grantee will not offer to sell or otherwise dispose
of such shares in violation of applicable law or the provisions of this
Agreement.
(h) Legend. Certificates for Common Stock delivered at a Closing hereunder
may be endorsed with a restrictive legend that shall read substantially as
follows:
"THE TRANSFER AND VOTING OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO CERTAIN PROVISIONS OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER
HEREOF AND ISSUER AND TO RESALE RESTRICTIONS ARISING UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. A COPY OF SUCH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF ISSUER AND WILL BE PROVIDED TO THE HOLDER HEREOF
WITHOUT CHARGE UPON RECEIPT BY ISSUER OF A WRITTEN REQUEST THEREFOR."
It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "Securities Act"),
in the above legend shall be removed by delivery of substitute certificate(s)
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without such reference if Grantee shall have delivered to Issuer a copy of a
letter from the staff of the SEC, or an opinion of counsel, in form and
substance reasonably satisfactory to Issuer, to the effect that such legend is
not required for purposes of the Securities Act; (ii) the reference to the
provisions of this Agreement in the above legend shall be removed by delivery
of substitute certificate(s) without such reference if the shares have been
sold or transferred in compliance with the provisions of this Agreement and
under circumstances that do not require the retention of such reference; and
(iii) the legend shall be removed in its entirety if the conditions in the
preceding clauses (i) and (ii) and both satisfied. In addition, such
certificates shall bear any other legend as may be required by law.
(i) Record Holder; Expenses. Upon the Closing, Grantee shall be deemed to be
the holder of record of the shares of Common Stock issuable upon such
exercise, notwithstanding that the stock transfer books of Issuer shall then
be closed or that certificates representing such shares of Common Stock shall
not then be actually delivered to Grantee or the Issuer shall have failed or
refused to designate the bank account described in subsection (f) of this
Section 2. Issuer shall pay all expenses, and any and all United States
federal, state and local taxes and other charges that may be payable in
connection with the preparation, issuance and delivery of stock certificates
under this Section 2 in the name of Grantee or its assignee, transferee or
designee.
3. Conditions to Delivery of Option Shares. The obligation of Issuer to
deliver Option Shares upon any exercise of the Option is subject to the
satisfaction of the following conditions:
(a) All waiting periods, if any, under the HSR Act applicable to the
issuance of Option Shares hereunder shall have expired or been terminated;
and
(b) There shall be no preliminary or permanent injunction or other order
issued by any court of competent jurisdiction preventing or prohibiting
such exercise of the Option or the delivery of the Option Shares in respect
of such exercise.
4. Reservation of Shares. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but unissued or
treasury shares of Common Stock (and other securities issuable pursuant to
Section 6) so that the Option may be exercised without additional
authorization of Common Stock (or such other securities) after giving effect
to all other options, warrants, convertible securities and other rights to
purchase Common Stock (or such other securities); (ii) that it will not, by
charter amendment or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act avoid or seek to
avoid the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Issuer; (iii) promptly to
take all action as may from time to time be required (including without
limitation complying with all premerger notification, reporting and waiting
periods in the HSR Act and the rules and regulations thereunder) in order to
permit Grantee to exercise the Option and the Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take all
action provided herein to protect the rights of Grantee against dilution.
5. Lost Options. Upon receipt by Issuer of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Agreement, and (in
the case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Agreement, if
mutilated, Issuer will execute and deliver a new Agreement of like tenor and
date.
6. Adjustment Upon Changes in Capitalization. The number of shares of Common
Stock purchasable upon the exercise of the Option shall be subject to
adjustment from time to time as provided in this Section 6.
(a) In the event that any additional shares of Common Stock are issued or
otherwise become outstanding after the date hereof (other than by reason of
subsection (b) of this Section 6), the number of shares of Common Stock
subject to the Option shall be increased so that, after such issuance of
additional shares, such number of shares then remaining subject to the
Option, together with shares theretofore issued pursuant to the Option,
equals nineteen and nine-tenths percent (19.9%) of the number of such
shares of Common Stock then issued and outstanding.
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(b) In the event of any change in Common Stock by reason of stock
dividends, other dividends on the Common Stock payable in securities or
other property (other than regular cash dividends), stock splits, merger,
recapitalization, combinations, subdivisions, conversions, exchanges of
shares or other similar transactions, then the type and number of shares of
Common Stock purchasable upon exercise hereof shall be appropriately
adjusted, and proper provision will be made in the agreements governing
such transaction so that Grantee shall receive upon exercise of the Option
and payment of the aggregate Option Price hereunder the number and class of
shares or other securities or property that Grantee would have received in
respect of Common Stock if the Option had been exercised in full
immediately prior to such event, or the record date therefor, as
applicable.
(c) Whenever the number of shares of outstanding Common Stock changes
after the date hereof as a result of the events described in clause (b)
hereof (but not the events described in clause (a) hereof), the Option
Price shall be adjusted by multiplying the Option Price by a fraction the
numerator of which shall be equal to the aggregate number of shares of
Common Stock purchasable prior to the adjustment and the denominator of
which shall be equal to the aggregate number of shares of Common Stock
purchasable immediately after the adjustment.
(d) No adjustment made in accordance with this Section 6 shall constitute
or be deemed a waiver of any breach of any of Issuer's representations,
warranties, covenants, agreements or obligations contained in the Merger
Agreement.
(e) If the Issuer satisfies a portion of its obligation to pay Grantee a
termination fee as permitted by Section 7.2 of the Merger Agreement by
issuing to Grantee shares of Common Stock (the "Termination Fee Shares"),
then the number of shares of Common Stock subject to the Option (including
those Option Shares which may have already been exercised) will be adjusted
so that the sum of the number of shares of Common Stock subject to the
Option and the number of Termination Fee Shares equals nineteen and nine-
tenths percent (19.9%) of the number of shares of Common Stock then issued
and outstanding, without giving effect to any Option Shares or Termination
Fee Shares.
7. Registration Rights.
(a) As used in this Agreement, "Registrable Securities" means each of the
Option Shares issued to Grantee hereunder and any other securities issued in
exchange for, or issued as dividends or otherwise on or in respect of, any of
such Option Shares.
(b) At any time or from time to time within three (3) years of the first
Closing, Grantee may make a written request to Issuer for registration under
and in accordance with the provisions of the Securities Act with respect to
all or any part of the Registrable Securities (a "Demand Registration"). A
Demand Registration may be, at the option of Grantee, a shelf registration or
a registration involving an underwritten offering. As soon as reasonably
practicable after Grantee's request for a Demand Registration, Issuer shall
file one or more registration statements on any appropriate form with respect
to all of the Registrable Securities requested to be so registered; provided
that Issuer will not be required to file any such registration statement
during any period of time (not to exceed sixty (60) days after such request in
the case of clause (i) below or ninety (90) days in the case of clauses (ii)
or (iii) below) when (i) Issuer is in possession of material non-public
information which it reasonably believes would be detrimental to be disclosed
at such time, (ii) Issuer is required under the Securities Act to include
audited financial statements for any period in such registration statement
that are not yet available for inclusion therein, or (iii) Issuer determines,
in its reasonable judgment, that such registration would interfere with any
financing, acquisition or other material transaction involving Issuer or any
of its affiliates. Issuer shall use its best efforts to have the Demand
Registration declared effective as soon as reasonably practicable after such
filing and to keep the Demand Registration continuously effective for a period
of at least sixty (60) days following the date on which the Demand
Registration is declared effective, in the case of an underwritten offering,
or at least one hundred twenty (120) days following the date on which the
Demand Registration is declared effective, in the case of a shelf
registration; provided that, if for any reason the effectiveness of any Demand
Registration is suspended, the required period of effectiveness shall be
extended by the aggregate
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number of days of each such suspension; and provided, further, that the
effectiveness of any Demand Registration may be terminated if and when all of
the Registrable Securities covered thereby shall have been sold. Grantee shall
be entitled to two (2) Demand Registrations: provided, that only requests
relating to a registration statement that has become effective under the
Securities Act shall be counted for purposes of determining the number of
Demand Registrations made. If any Demand Registration involves an underwritten
offering, (i) Issuer shall have the right to select the managing underwriter,
which shall be reasonably acceptable to Grantee and (ii) Issuer shall enter
into an underwriting agreement in customary form.
(c) If at any time within two (2) years of the first Closing, Issuer
proposes to file a registration statement under the Securities Act with
respect to any shares of any class of its equity securities to be sold for the
account of Issuer (other than a registration statement on Form S-4 or Form S-8
or any successor form), and the registration form to be used may be used for
the registration of Registrable Securities, then Issuer shall in each case
give written notice of such proposed filing to Grantee at least twenty (20)
days before the anticipated filing date, and Grantee shall have the right to
include in such registration such number of Registrable Securities as Grantee
may request (such request to be made by written notice to Issuer within
fifteen (15) days following Grantee's receipt from Issuer of such notice of
proposed filing) (an "Incidental Registration"). Issuer shall use its
commercially reasonable efforts to cause the managing underwriter of any
proposed underwritten offering to permit Grantee to include in such offering
all Registrable Securities requested by Grantee to be included in the
registration for such offering on the same terms and conditions as any similar
securities of Issuer included therein. Notwithstanding the foregoing, if the
managing underwriter of such offering advises Grantee that, in the reasonable
opinion of such underwriter, the amount of Registrable Securities which
Grantee requests to be included in such offering would materially and
adversely affect the success of such offering, then the amount of Registrable
Securities to be offered shall be reduced to the extent necessary to reduce
the total amount of securities to be included in such offering to the amount
recommended by such underwriter; provided that if the amount of Registrable
Securities shall be so reduced, Issuer shall include in such offering (i)
first all shares proposed to be included therein by the Issuer and (ii) second
the shares requested to be included therein by Grantee pro rata with the
shares intended to be included therein by any other stockholder of the Issuer.
Participation by Grantee in any Incidental registration shall not affect the
obligation of the Company to effect Demand Registrations under this Section
4.1. The issuer may withdraw any registration under the Securities Act that
gives rise to an Incidental Registration without consent of Grantee.
(d) In the event that Registrable Securities are included in a "piggyback"
registration statement pursuant to Section 7(c) hereof, Grantee agrees not to
effect any public sale or distribution of the issue being registered or a
similar security of Issuer, or any securities convertible into or exchangeable
or exercisable for such securities, including a sale pursuant to Rule 144
under the Securities Act, during the ten (10) business days prior to, and
during the ninety (90)-day period beginning on, the effective date of such
registration statement (except as part of such registration), if and to the
extent timely notified in writing by Issuer, in the case of a non-underwritten
public offering, or by the managing underwriter, in the case of an
underwritten public offering. In the event that Grantee requests a Demand
Registration or if Registrable Securities are included in a "piggyback"
registration pursuant to Section 7(c) hereof, Issuer agrees not to effect any
public sale or distribution of the issue being registered or a similar
security of Issuer, or any securities convertible into or exchangeable or
exercisable for such securities, during the period from such request until
ninety (90) days after the effective date of such registration statement
(except as part of such registration or pursuant to a registration of
securities on Form S-4 or Form S-8 or any successor form).
(e) Notwithstanding anything to the contrary contained herein, in the event
that Grantee requests a Demand Registration or a "piggyback" registration of
Registrable Securities pursuant to Section 7(b) or 7(c) hereof, respectively,
Issuer shall have the right to purchase all, but not less than all, of the
Registrable Securities requested to be so registered, upon the terms and
subject to the conditions set forth in this Section 7(e). If Issuer wishes to
exercise such purchase right, then within two (2) business days following
receipt of a request for a Demand Registration or a "piggyback" registration,
Issuer shall send a written notice (a "Repurchase Notice") to Grantee
specifying that Issuer wishes to exercise such purchase right, a date for the
closing of such purchase,
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which shall not be more than five (5) business days after delivery of such
Repurchase Notice, and a place for the closing of such purchase (a "Repurchase
Closing"). Upon delivery of a Repurchase Notice subject to applicable Delaware
law, a binding agreement shall be deemed to exist between Grantee and Issuer
providing for the purchase by Issuer of the Registrable Securities requested
to be registered by Grantee, upon the terms and subject to the conditions set
forth in this Section 7(e). The purchase price per share or other unit of
Registrable Securities (the "Repurchase Price") shall equal the average per
share or per unit closing price as quoted on the Nasdaq (or if not then quoted
thereon, on such other exchange or quotation system on which the Registrable
Securities are quoted) for the period of five (5) trading days ending on the
trading day immediately prior to the day on which Grantee requests a Demand
Registration or a "piggyback" registration of the Registrable Securities which
Issuer subsequently elects to purchase. Grantee's obligation to deliver any
Registrable Securities at a Repurchase Closing shall be subject to the
condition that, at such Repurchase Closing, Issuer shall have delivered to
Grantee a certificate signed on behalf of Issuer by Issuer's chief executive
officer and chief financial officer, which certificate shall be satisfactory
in form and substance to Grantee, to the effect that the purchase by Issuer of
such Registrable Securities (i) is permitted under applicable Delaware
corporate law and under the fraudulent conveyance provisions of the federal
bankruptcy code and (ii) does not violate any material agreement to which
Issuer or any of its subsidiaries is a party or by which any of their
properties or assets is bound. At any Repurchase Closing, Issuer shall pay to
Grantee the aggregate Repurchase Price for the Registrable Securities being
purchased by wire transfer of immediately available funds or by delivering to
Grantee a certified or bank check payable to or on the order of Grantee in an
amount equal to such aggregate Repurchase Price, and Grantee will surrender to
Issuer a certificate or certificates evidencing such Registrable Securities. A
purchase of Registrable Securities by Issuer pursuant to this Section 7(e)
shall be considered a Demand Registration for purposes of Section 7(b) hereof.
(f) The registrations effected under this Section 7 shall be effected at
Issuer's expense except for underwriting commissions allocable to the
Registrable Securities. Issuer shall indemnify and hold harmless Grantee, its
affiliates and controlling persons and their respective officers, directors,
agents and representatives from and against any and all losses, claims,
damages, liabilities and expenses (including, without limitation, all out-of-
pocket expenses, investigation expenses, expenses incurred with respect to any
judgment and fees and disbursements of counsel and accountants) arising out of
or based upon any statements contained in, or omissions or alleged omissions
from, each registration statement (and related prospectus) filed pursuant to
this Section 7; provided, however, that Issuer shall not be liable in any such
case to Grantee or any affiliate or controlling person of Grantee or any of
their respective officers, directors, agents or representatives to the extent
that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of or is based upon an untrue statement
or omission or alleged omission made in such registration statement or
prospectus in reliance upon, and in conformity with, written information
furnished to Issuer specifically for use in the preparation thereof by Grantee
such affiliate, controlling person, officer, director, agent or
representative, as the case may be.
8. Repurchase of Option and Option Shares.
(a) At the request of and upon notice by Grantee (the "Put Notice") at any
time during the period during which the Option is exercisable pursuant to
Section 2 (the "Purchase Period"), the Issuer (or any successor entity
thereof) will purchase from Grantee all or any portion of the Option, to the
extent not previously exercised, at the price set forth in subparagraph (i)
below, and all or any portion of the Option Shares, if any, acquired by
Grantee pursuant thereto, at the price set forth in subparagraph (ii) below:
(i) the difference between the "Market/Tender Offer Price" for the Common
Stock as of the date Grantee gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any Acquisition
Proposal which was made prior to such date and (B) the average closing sale
price of Common Stock then on the Nasdaq National Market during the five
(5) trading days ending on the trading day immediately preceding such date)
and the Exercise Price, multiplied by the number of Common Stock
purchasable pursuant to the Option, but only if the Market/Tender Offer
Price is greater than the Exercise Price. For purposes of determining the
highest price offered pursuant to any Acquisition Proposal which involves
consideration other than cash, the value
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of such consideration will be equal to the higher of (x) if securities of
the same class of the proponent as such considerations are traded on any
national securities exchange or by any registered securities association, a
value based on the closing sale price or asked price for such securities on
their principal trading market on such date and (y) the value ascribed to
such consideration by the proponent of such Acquisition Proposal, or if no
such value is ascribed, a value determined in good faith by the Board of
Directors of the Issuer.
(ii) The Market/Tender Offer Price multiplied by the number of shares of
Common Stock so purchased.
9. Representations and Warranties of the Issuer. Issuer hereby represents
and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of Issuer and no other corporate proceedings on the
part of Issuer are necessary to authorize this Agreement or to consummate
the transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Issuer. This Agreement is the valid and legally
binding obligation of Issuer, enforceable against Issuer in accordance with
its terms.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will
have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common
Stock at any time and from time to time issuable hereunder, and all such
shares, upon issuance pursuant hereto, will be duly authorized, validly
issued, fully paid, nonassessable, and will be delivered free and clear of
all claims, liens, encumbrance and security interests and not subject to
any preemptive rights.
(c) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not (i) conflict
with, or result in any violation or breach of any provision of the
Certificate of Incorporation, as amended to date, or Bylaws, as amended to
date, of Issuer, (ii) result in any violation or breach of, or constitute
(with or without notice or lapse of time, or both) a default (or give rise
to a right of termination, cancellation or acceleration of any obligation
or loss of any benefit) under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or obligation to which the Issuer or any of its Subsidiaries is
a party or by which any of them or any of their properties or assets may be
bound, or (iii) conflict or violate any permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Issuer or any of its Subsidiaries or any of its or
their properties or assets, except in the case of (ii) and (iii) for any
such violations, breaches, defaults, terminations, cancellations,
accelerations or conflicts which could not, individually or in the
aggregate, have a material adverse effect (as defined in the Merger
Agreement) on Issuer and its Subsidiaries, taken as a whole, or impair the
ability of Issuer to consummate the transactions contemplated by this
Agreement.
(d) The Issuer has taken, and will in the future take, all steps
necessary to irrevocably exempt the transactions contemplated by this
Agreement from any applicable state takeover law and from any applicable
charter or contractual provision containing change of control or anti-
takeover provisions.
10. Representations and Warranties of the Grantee. Grantee hereby represents
and warrants to Issuer as follows:
(a) Grantee has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of Grantee and no other corporate proceedings on the
part of Grantee are necessary to authorize this Agreement or to consummate
the transactions so contemplated. This Agreement has been duly and
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validly executed and delivered by Grantee. This Agreement is the valid and
legally binding obligation of Grantee, enforceable against Grantee in
accordance with its terms.
(b) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not (i) conflict
with, or result in any violation or breach of any provision of the
Certificate of Incorporation, as amended to date, or Bylaws, as amended to
date, of Grantee, (ii) result in any violation or breach of, or constitute
(with or without notice or lapse of time, or both) a default (or give rise
to a right of termination, cancellation or acceleration of any obligation
or loss of any benefit) under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or obligation to which the Grantee or any of its Subsidiaries is
a party or by which any of them or any of their properties or assets may be
bound, or (iii) conflict or violate any permit, concession, franchise,
license, judgment, order, degree, statute, law, ordinance, rule or
regulation applicable to Grantee or any of its Subsidiaries or any of its
or their properties or assets, except in the case of (ii) and (iii) for any
such violations, breaches, defaults, terminations, cancellations,
accelerations or conflicts which could not, individually or in the
aggregate, have a material adverse effect (as defined in the Merger
Agreement) on Grantee and its Subsidiaries, taken as a whole, or impair the
ability of Grantee to consummate the transactions contemplated by this
Agreement.
(c) The Grantee has taken, and will in the future take, all steps
necessary to irrevocably exempt the transactions contemplated by this
Agreement from any applicable state takeover law and from any applicable
charter or contractual provision containing change of control or anti-
takeover provisions.
11. Grantee Compliance. Grantee shall acquire the Option Shares for
investment purposes only and not with a view to any distribution thereof in
violation of the Securities Act, and shall not sell any Option Shares
purchased pursuant to this Agreement except in compliance with the Securities
Act.
12. Assignment of Option by Grantee. Neither of the parties hereto may
assign any of its rights or obligations under this Option Agreement or the
Option created hereunder to any other person, without the express written
consent of the other party.
13. Limitation of Grantee Profit.
(a) Notwithstanding any other provision of this Agreement, in no event shall
the Grantee's Total Profit (as hereinafter defined) exceed Two Hundred Thirty
Million Four Hundred Fifty-Four Thousand Five Hundred Forty-Five dollars
($230,454,545.00) (the "Profit Cap") and, if it otherwise would exceed such
amount, the Grantee, at its sole election, shall either (i) reduce the number
of shares of Common Stock subject to this Option, (ii) deliver to the Issuer
for cancellation Option Shares previously purchased by, or Termination Fee
Shares (or other securities into which such Termination Fee Shares are
converted or exchanged) to Grantee (valued, for the purposes of this Section
12(a) at the average closing sales price per share of Common Stock (or if
there is no sale on such date then the average between the closing bid and ask
prices on any such day) as reported by the Nasdaq National Market for the five
(5) consecutive trading days preceding the day on which the Grantee's Total
Profit exceeds the Profit Cap, (iii) pay cash to the Issuer, (iv) reduce the
number of Termination Fee Shares to be paid by the Grantee or (v) any
combination thereof, so that Grantee's actually realized Total Profit shall
not exceed the Profit Cap after taking into account the foregoing actions.
(b) As used herein, the term "Total Profit" shall mean the amount (before
taxes) of the following: (a) the aggregate amount of (i) (x) the net cash
amounts received by Grantee pursuant to the sale of Option Shares or
Termination Fee Shares (or any other securities into which such Option Shares
or Termination Fee Shares are converted or exchanged) to any unaffiliated
party or to Issuer pursuant to this Agreement, less (y) the Grantee's purchase
price of such Option Shares or other securities, (ii) any amounts received by
Grantee on the transfer of the Option (or any portion thereof), if permitted
hereunder, and (iii) the amount received by Grantee pursuant to Section 7.2 of
the Merger Agreement; minus (b) the amount of cash theretofore paid to the
Issuer pursuant to this Section 12 plus the value of the Option Shares or
Termination Fee Shares or other securities theretofore delivered to the Issuer
for cancellation pursuant to this Section 12.
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(c) Notwithstanding any other provision of this Agreement, nothing in this
Agreement shall affect the ability of Grantee to receive nor relieve Issuer's
obligation to pay a fee pursuant to Section 7.2 of the Merger Agreement;
provided that if Total Profit received by Grantee would exceed the Profit Cap
following the receipt of such fee, Grantee shall be obligated to comply with
the terms of Section 12(a) within five (5) days of the later of (i) the date
of receipt of such fee and (ii) the date of receipt of the net cash by Grantee
pursuant to the sale of Option Shares or Termination Fee Shares (or, any other
securities into which such Option Shares or Termination Fee Shares are
converted or exchanged) pursuant to this Agreement.
(d) Notwithstanding any other provision of this Agreement, the Option may
not be exercised for a number of Option Shares that would, as of the Notice
Date, result in a Notional Total Profit (as defined below) of more than the
Profit Cap; provided; however, that Grantee may indicate in its notice of
exercise that Grantee is taking any of the actions described in subsection (a)
hereof so as to reduce the Notional Total Profit to not more than the Profit
Cap and preserve its rights to exercise the Option for the resulting number of
Option Shares. "Notional Total Profit" shall mean, with respect to any number
of Option Shares as to which the Grantee may propose to exercise the Option,
the Total Profit determined as of the Notice Date assuming that the Option was
exercised on such date for such number of Option Shares and assuming such
Option Shares, together with all other Option Shares held by the Grantee and
its affiliates as of such date, were sold for cash at the closing sales price
for Common Stock as of the close of business on the preceding trading day.
(e) For purposes of Section 11(a) and clause (iii) of Section 11(b), the
value of any Option Shares delivered by Grantee to the Issuer shall be the
average closing sales price per share of Common Stock (or if there is no sale
on such date then the average between the closing bid and ask prices on any
such day) as reported by the Nasdaq National Market for the five (5)
consecutive trading days preceding the day the Grantee's Total Profit exceeds
the Profit Cap.
14. Application for Regulatory Approval. Each of Grantee and Issuer will use
its commercially reasonable efforts to make all filings with, and to obtain
consents of, all third parties and governmental authorities necessary to the
consummation of the transactions contemplated by this Agreement, including
without limitation making application to list the shares of Common Stock
issuable hereunder on the Nasdaq National Market upon official notice of
issuance.
15. Specific Performance. The parties hereto acknowledge that damages would
be an inadequate remedy for a breach of this Agreement by either party hereto
and that the obligations of the parties hereto shall be enforceable by either
party hereto through injunctive or other equitable relief.
16. Separability of Provisions. If any term, provision, covenant or
restriction contained in this Agreement is held by a court or a federal or
state regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and
effect, and shall in no way be affected, impaired or invalidated.
17. Notices. All notices, claims, demands and other communications hereunder
shall be deemed to have been duly given or made when delivered in person, by
overnight courier or by facsimile at the respective addresses of the parties
set forth in the Merger Agreement.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws
thereof.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed to be an original, but all of which
shall constitute one and the same agreement.
20. Expenses. Except as otherwise expressly provided herein or in the Merger
Agreement, each of the parties hereto shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with the
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transactions contemplated hereunder, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
21. Entire Agreement. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement between the
parties with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereof, written or
oral. The terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing in this Agreement, expressed or implied, is
intended to confer upon any party, other than the parties hereto, and their
respective successors except as assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
herein. Any provision of this Agreement may be waived only in writing at any
time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
22. Further Assurances. In the event of any exercise of the Option by
Grantee, Issuer and Grantee shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise. Nothing
contained in this Agreement shall be deemed to authorize Issuer or Grantee to
breach any provision of the Merger Agreement.
23. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
Software.Com, Inc.
By: _________________________________
Name:
Title:
Phone.Com, Inc.
/s/ Alain Rossmann
By: _________________________________
Name:Alain Rossmann
Title:CEO
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<PAGE>
IN WITNESS WHEREOF, Issuer and Grantee have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
Software.Com, Inc.
/s/ John L. MacFarlane
By: _________________________________
Name:John L. MacFarlane
Title:CEO
Phone.Com, Inc.
By: _________________________________
Name:
Title:
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<PAGE>
ANNEX C
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STOCK OPTION AGREEMENT
(SOFTWARE.COM, INC. SHARES)
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<PAGE>
STOCK OPTION AGREEMENT
(SOFTWARE.COM, INC. SHARES)
THIS STOCK OPTION AGREEMENT (this "AGREEMENT"), dated August 8, 2000,
between Software.com, Inc., a Delaware corporation ("Issuer"), and Phone.com,
Inc., a Delaware corporation ("Grantee"),
WITNESSETH:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger, dated as of August 8, 2000 (the "Merger Agreement"), which provides,
among other things, for the merger of Merger Sub with and into Issuer with
Issuer continuing as the surviving corporation upon the terms and subject to
the conditions set forth in the Merger Agreement (capitalized terms used
herein without definition shall have the respective meanings specified in the
Merger Agreement); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement and
in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, and intending to
be legally bound hereby, the parties hereto agree as follows:
1. Grant of Option. Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof,
nine million seven hundred twenty-four thousand four hundred sixty (9,724,460)
shares of fully paid and nonassessable common stock of the Issuer, par value
$.001 per share ("Common Stock"), equal to and in no event exceeding nineteen
and nine-tenths percent (19.9%) of the shares of Common Stock outstanding as
of the date hereof, at a purchase price of $125.7197 per share of Common Stock
as adjusted in accordance with the provisions of Section 6 of this Agreement
(such price, as adjusted if applicable, the "Option Price").
2. Exercise of Option.
(a) Grantee may exercise the Option, in whole or part, and from time to
time, if, but only if, a Triggering Event (as hereinafter defined) shall have
occurred prior to the occurrence of an Option Termination Event (as
hereinafter defined), provided that Grantee shall have sent the written notice
of such exercise (as provided in subsection (e) of this Section 2) on or prior
to the last date of the six (6)-month period following such Triggering Event
(the "Option Expiration Date").
(b) The term "Option Termination Event" shall mean the first day after the
earliest to occur of the following dates: (i) the date on which the Effective
Time of the Merger occurs; (ii) the last date of the twelve (12) month period
beginning on the date of termination of the Merger Agreement pursuant to
Section 7.1(b)(iii); provided, that such termination has given rise to the
right of Grantee to receive payment of Software.com Expenses pursuant to
Section 7.2(c)(1) of the Merger Agreement; provided, that subsequent to such
termination, if an event occurs that gives rise to the obligation of Issuer to
pay the Termination Fee pursuant to Section 7.2(c)(2) of the Merger Agreement,
then the last date of the six (6) month period beginning on the date of actual
payment of the Termination Fee by Issuer to Grantee pursuant to Section
7.2(c)(2) of the Merger Agreement; (iii) the date of termination of the Merger
Agreement by either party pursuant to the provisions of any section of the
Merger Agreement other than Sections 7.1(b)(iii) (other than as provided in
clause (ii) above); provided, that such termination occurs prior to the
occurrence of a Triggering Event; and (iv) the last date of the six (6) month
period beginning on the date of the first occurrence of a Triggering Event;
provided, however, that if the Option cannot be exercised as of any such date
by reason of any applicable judgment, decree, law, regulation or order
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(each, an "Impediment"), or by reason of the waiting period under the HSR Act,
then the Option Termination Event shall be delayed until the date which is
thirty (30) days after such Impediment has been removed or such waiting period
has expired.
(c) Triggering Event. The term "Triggering Event" shall mean any termination
of the Merger Agreement which entitles Grantee to receive payment of the
Termination Fee from Issuer pursuant to Section 7.2 of the Merger Agreement.
(d) Notice of Triggering Event. Issuer shall notify Grantee promptly in
writing of the occurrence of any Triggering Event, and in any event within
twenty-four (24) hours, it being understood that the giving of such notice by
Issuer shall not be a condition to the right of Grantee to exercise the Option
or for a Triggering Event to have occurred.
(e) Notice of Exercise; Closing. In the event Grantee is entitled to and
wishes to exercise the Option, it shall send to Issuer a written notice (the
date of which being herein referred to as the "Notice Date") specifying (i)
the total number of shares it will purchase pursuant to such exercise and (ii)
a place and date which shall be a business day not earlier than three (3)
business days nor later than sixty (60) business days from the Notice Date for
the closing of such purchase (the "Closing Date"); provided, that if the
closing of the purchase and sale pursuant to the Option (the "Closing") cannot
be consummated, in the reasonable opinion of Grantee, by reason of any
applicable judgment, decree, order, law or regulation, the period of time that
otherwise would run pursuant to this sentence shall run instead from the date
on which such restriction on consummation has expired or been terminated; and
provided further, without limiting the foregoing, that if, in the reasonable
opinion of Grantee, prior notification to or approval of any regulatory agency
is required in connection with such purchase, Grantee shall promptly file the
required notice or application for approval and shall expeditiously process
the same and the period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained
and any requisite waiting period or periods shall have passed. Any exercise of
the Option shall be deemed to occur on the Closing Date relating thereto.
(f) Purchase Price. At the Closing referred to in subsection (e) of this
Section 2, Grantee shall pay to Issuer the aggregate purchase price for the
shares of Common Stock purchased pursuant to the exercise of the Option in
immediately available funds by wire transfer to a bank account designated by
Issuer, provided that failure or refusal of Issuer to designate such a bank
account shall not preclude Grantee from exercising the Option.
(g) Issuance of Common Stock. At such Closing, simultaneously with the
delivery of immediately available funds as provided in subsection (f) of this
Section 2, Issuer shall deliver to Grantee a certificate or certificates
representing the number of shares of Common Stock purchased by the Grantee
and, if the Option should be exercised in part only, a new Option evidencing
the rights of Grantee thereof to purchase the balance of the shares
purchasable hereunder, and the Grantee shall deliver to Issuer this Agreement
and a letter agreeing that Grantee will not offer to sell or otherwise dispose
of such shares in violation of applicable law or the provisions of this
Agreement.
(h) Legend. Certificates for Common Stock delivered at a Closing hereunder
may be endorsed with a restrictive legend that shall read substantially as
follows:
"THE TRANSFER AND VOTING OF THE SHARES REPRESENTED BY THIS CERTIFICATE
IS SUBJECT TO CERTAIN PROVISIONS OF AN AGREEMENT BETWEEN THE REGISTERED
HOLDER HEREOF AND ISSUER AND TO RESALE RESTRICTIONS ARISING UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. A COPY OF SUCH AGREEMENT IS ON FILE
AT THE PRINCIPAL OFFICE OF ISSUER AND WILL BE PROVIDED TO THE HOLDER
HEREOF WITHOUT CHARGE UPON RECEIPT BY ISSUER OF A WRITTEN REQUEST
THEREFOR."
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It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "Securities Act"),
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if Grantee shall have delivered to Issuer a copy of a
letter from the staff of the SEC, or an opinion of counsel, in form and
substance reasonably satisfactory to Issuer, to the effect that such legend is
not required for purposes of the Securities Act; (ii) the reference to the
provisions of this Agreement in the above legend shall be removed by delivery
of substitute certificate(s) without such reference if the shares have been
sold or transferred in compliance with the provisions of this Agreement and
under circumstances that do not require the retention of such reference; and
(iii) the legend shall be removed in its entirety if the conditions in the
preceding clauses (i) and (ii) and both satisfied. In addition, such
certificates shall bear any other legend as may be required by law.
(i) Record Holder; Expenses. Upon the Closing, Grantee shall be deemed to
be the holder of record of the shares of Common Stock issuable upon such
exercise, notwithstanding that the stock transfer books of Issuer shall
then be closed or that certificates representing such shares of Common
Stock shall not then be actually delivered to Grantee or the Issuer shall
have failed or refused to designate the bank account described in
subsection (f) of this Section 2. Issuer shall pay all expenses, and any
and all United States federal, state and local taxes and other charges that
may be payable in connection with the preparation, issuance and delivery of
stock certificates under this Section 2 in the name of Grantee or its
assignee, transferee or designee.
3. Conditions to Delivery of Option Shares. The obligation of Issuer to
deliver Option Shares upon any exercise of the Option is subject to the
satisfaction of the following conditions:
(a) All waiting periods, if any, under the HSR Act applicable to the
issuance of Option Shares hereunder shall have expired or been terminated;
and
(b) There shall be no preliminary or permanent injunction or other order
issued by any court of competent jurisdiction preventing or prohibiting
such exercise of the Option or the delivery of the Option Shares in respect
of such exercise.
4. Reservation of Shares. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but unissued or
treasury shares of Common Stock (and other securities issuable pursuant to
Section 6) so that the Option may be exercised without additional
authorization of Common Stock (or such other securities) after giving effect
to all other options, warrants, convertible securities and other rights to
purchase Common Stock (or such other securities); (ii) that it will not, by
charter amendment or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act avoid or seek to
avoid the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Issuer; (iii) promptly to
take all action as may from time to time be required (including without
limitation complying with all premerger notification, reporting and waiting
periods in the HSR Act and the rules and regulations thereunder) in order to
permit Grantee to exercise the Option and the Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take all
action provided herein to protect the rights of Grantee against dilution.
5. Lost Options. Upon receipt by Issuer of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Agreement, and (in
the case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Agreement, if
mutilated, Issuer will execute and deliver a new Agreement of like tenor and
date.
6. Adjustment upon Changes in Capitalization. The number of shares of Common
Stock purchasable upon the exercise of the Option shall be subject to
adjustment from time to time as provided in this Section 6.
(a) In the event that any additional shares of Common Stock are issued or
otherwise become outstanding after the date hereof (other than by reason of
subsection (b) of this Section 6), the number of shares of Common Stock
subject to the Option shall be increased so that, after such issuance of
additional
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<PAGE>
shares, such number of shares then remaining subject to the Option,
together with shares theretofore issued pursuant to the Option, equals
nineteen and nine-tenths percent (19.9%) of the number of such shares of
Common Stock then issued and outstanding.
(b) In the event of any change in Common Stock by reason of stock
dividends, other dividends on the Common Stock payable in securities or
other property (other than regular cash dividends), stock splits, merger,
recapitalization, combinations, subdivisions, conversions, exchanges of
shares or other similar transactions, then the type and number of shares of
Common Stock purchasable upon exercise hereof shall be appropriately
adjusted, and proper provision will be made in the agreements governing
such transaction so that Grantee shall receive upon exercise of the Option
and payment of the aggregate Option Price hereunder the number and class of
shares or other securities or property that Grantee would have received in
respect of Common Stock if the Option had been exercised in full
immediately prior to such event, or the record date therefor, as
applicable.
(c) Whenever the number of shares of outstanding Common Stock changes
after the date hereof as a result of the events described in clause (b)
hereof (but not the events described in clause (a) hereof), the Option
Price shall be adjusted by multiplying the Option Price by a fraction the
numerator of which shall be equal to the aggregate number of shares of
Common Stock purchasable prior to the adjustment and the denominator of
which shall be equal to the aggregate number of shares of Common Stock
purchasable immediately after the adjustment.
(d) No adjustment made in accordance with this Section 6 shall constitute
or be deemed a waiver of any breach of any of Issuer's representations,
warranties, covenants, agreements or obligations contained in the Merger
Agreement.
(e) If the Issuer satisfies a portion of its obligation to pay Grantee a
termination fee as permitted by Section 7.2 of the Merger Agreement by
issuing to Grantee shares of Common Stock (the "Termination Fee Shares"),
then the number of shares of Common Stock subject to the Option (including
those Option Shares which may have already been exercised) will be adjusted
so that the sum of the number of shares of Common Stock subject to the
Option and the number of Termination Fee Shares equals nineteen and nine-
tenths percent (19.9%) of the number of shares of Common Stock then issued
and outstanding, without giving effect to any Option Shares or Termination
Fee Shares.
7. Registration Rights.
(a) As used in this Agreement, "Registrable Securities" means each of the
Option Shares issued to Grantee hereunder and any other securities issued in
exchange for, or issued as dividends or otherwise on or in respect of, any of
such Option Shares.
(b) At any time or from time to time within three (3) years of the first
Closing, Grantee may make a written request to Issuer for registration under
and in accordance with the provisions of the Securities Act with respect to
all or any part of the Registrable Securities (a "Demand Registration"). A
Demand Registration may be, at the option of Grantee, a shelf registration or
a registration involving an underwritten offering. As soon as reasonably
practicable after Grantee's request for a Demand Registration, Issuer shall
file one or more registration statements on any appropriate form with respect
to all of the Registrable Securities requested to be so registered; provided
that Issuer will not be required to file any such registration statement
during any period of time (not to exceed sixty (60) days after such request in
the case of clause (i) below or ninety (90) days in the case of clauses (ii)
or (iii) below) when (i) Issuer is in possession of material non-public
information which it reasonably believes would be detrimental to be disclosed
at such time, (ii) Issuer is required under the Securities Act to include
audited financial statements for any period in such registration statement
that are not yet available for inclusion therein, or (iii) Issuer determines,
in its reasonable judgment, that such registration would interfere with any
financing, acquisition or other material transaction involving Issuer or any
of its affiliates. Issuer shall use its best efforts to have the Demand
Registration declared effective as soon as reasonably practicable after such
filing and to keep the Demand Registration continuously effective for a period
of at least sixty (60) days following the date on which the Demand
Registration is declared effective, in the case of an underwritten
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offering, or at least one hundred twenty (120) days following the date on
which the Demand Registration is declared effective, in the case of a shelf
registration; provided that, if for any reason the effectiveness of any Demand
Registration is suspended, the required period of effectiveness shall be
extended by the aggregate number of days of each such suspension; and
provided, further, that the effectiveness of any Demand Registration may be
terminated if and when all of the Registrable Securities covered thereby shall
have been sold. Grantee shall be entitled to two (2) Demand Registrations;
provided, that only requests relating to a registration statement that has
become effective under the Securities Act shall be counted for purposes of
determining the number of Demand Registrations made. If any Demand
Registration involves an underwritten offering, (i) Issuer shall have the
right to select the managing underwriter, which shall be reasonably acceptable
to Grantee and (ii) Issuer shall enter into an underwriting agreement in
customary form.
(c) If at any time within two (2) years of the first Closing, Issuer
proposes to file a registration statement under the Securities Act with
respect to any shares of any class of its equity securities to be sold for the
account of Issuer (other than a registration statement on Form S-4 or Form S-8
or any successor form), and the registration form to be used may be used for
the registration of Registrable Securities, then Issuer shall in each case
give written notice of such proposed filing to Grantee at least twenty (20)
days before the anticipated filing date, and Grantee shall have the right to
include in such registration such number of Registrable Securities as Grantee
may request (such request to be made by written notice to Issuer within
fifteen (15) days following Grantee's receipt from Issuer of such notice of
proposed filing) (an "Incidental Registration"). Issuer shall use its
commercially reasonable efforts to cause the managing underwriter of any
proposed underwritten offering to permit Grantee to include in such offering
all Registrable Securities requested by Grantee to be included in the
registration for such offering on the same terms and conditions as any similar
securities of Issuer included therein. Notwithstanding the foregoing, if the
managing underwriter of such offering advises Grantee that, in the reasonable
opinion of such underwriter, the amount of Registrable Securities which
Grantee requests to be included in such offering would materially and
adversely affect the success of such offering, then the amount of Registrable
Securities to be offered shall be reduced to the extent necessary to reduce
the total amount of securities to be included in such offering to the amount
recommended by such underwriter; provided that if the amount of Registrable
Securities shall be so reduced, Issuer shall include in such offering (i)
first all shares proposed to be included therein by the Issuer and (ii) second
the shares requested to be included therein by Grantee pro rata with the
shares intended to be included therein by any other stockholder of the Issuer.
Participation by Grantee in any Incidental registration shall not affect the
obligation of the Company to effect Demand Registrations under this Section
4.1. The issuer may withdraw any registration under the Securities Act that
gives rise to an Incidental Registration without consent of Grantee.
(d) In the event that Registrable Securities are included in a "piggyback"
registration statement pursuant to Section 7(c) hereof, Grantee agrees not to
effect any public sale or distribution of the issue being registered or a
similar security of Issuer, or any securities convertible into or exchangeable
or exercisable for such securities, including a sale pursuant to Rule 144
under the Securities Act, during the ten (10) business days prior to, and
during the ninety (90)-day period beginning on, the effective date of such
registration statement (except as part of such registration), if and to the
extent timely notified in writing by Issuer, in the case of a non-underwritten
public offering, or by the managing underwriter, in the case of an
underwritten public offering. In the event that Grantee requests a Demand
Registration or if Registrable Securities are included in a "piggyback"
registration pursuant to Section 7(c) hereof, Issuer agrees not to effect any
public sale or distribution of the issue being registered or a similar
security of Issuer, or any securities convertible into or exchangeable or
exercisable for such securities, during the period from such request until
ninety (90) days after the effective date of such registration statement
(except as part of such registration or pursuant to a registration of
securities on Form S-4 or Form S-8 or any successor form).
(e) Notwithstanding anything to the contrary contained herein, in the event
that Grantee requests a Demand Registration or a "piggyback" registration of
Registrable Securities pursuant to Section 7(b) or 7(c) hereof, respectively,
Issuer shall have the right to purchase all, but not less than all, of the
Registrable Securities requested to be so registered, upon the terms and
subject to the conditions set forth in this Section 7(e). If Issuer wishes to
exercise such purchase right, then within two (2) business days following
receipt of a request for a
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Demand Registration or a "piggyback" registration, Issuer shall send a written
notice (a "Repurchase Notice") to Grantee specifying that Issuer wishes to
exercise such purchase right, a date for the closing of such purchase, which
shall not be more than five (5) business days after delivery of such
Repurchase Notice, and a place for the closing of such purchase (a "Repurchase
Closing"). Upon delivery of a Repurchase Notice subject to applicable Delaware
law, a binding agreement shall be deemed to exist between Grantee and Issuer
providing for the purchase by Issuer of the Registrable Securities requested
to be registered by Grantee, upon the terms and subject to the conditions set
forth in this Section 7(e). The purchase price per share or other unit of
Registrable Securities (the "Repurchase Price") shall equal the average per
share or per unit closing price as quoted on the Nasdaq (or if not then quoted
thereon, on such other exchange or quotation system on which the Registrable
Securities are quoted) for the period of five (5) trading days ending on the
trading day immediately prior to the day on which Grantee requests a Demand
Registration or a "piggyback" registration of the Registrable Securities which
Issuer subsequently elects to purchase. Grantee's obligation to deliver any
Registrable Securities at a Repurchase Closing shall be subject to the
condition that, at such Repurchase Closing, Issuer shall have delivered to
Grantee a certificate signed on behalf of Issuer by Issuer's chief executive
officer and chief financial officer, which certificate shall be satisfactory
in form and substance to Grantee, to the effect that the purchase by Issuer of
such Registrable Securities (i) is permitted under applicable Delaware
corporate law and under the fraudulent conveyance provisions of the federal
bankruptcy code and (ii) does not violate any material agreement to which
Issuer or any of its subsidiaries is a party or by which any of their
properties or assets is bound. At any Repurchase Closing, Issuer shall pay to
Grantee the aggregate Repurchase Price for the Registrable Securities being
purchased by wire transfer of immediately available funds or by delivering to
Grantee a certified or bank check payable to or on the order of Grantee in an
amount equal to such aggregate Repurchase Price, and Grantee will surrender to
Issuer a certificate or certificates evidencing such Registrable Securities. A
purchase of Registrable Securities by Issuer pursuant to this Section 7(e)
shall be considered a Demand Registration for purposes of Section 7(b) hereof.
(f) The registrations effected under this Section 7 shall be effected at
Issuer's expense except for underwriting commissions allocable to the
Registrable Securities. Issuer shall indemnify and hold harmless Grantee, its
affiliates and controlling persons and their respective officers, directors,
agents and representatives from and against any and all losses, claims,
damages, liabilities and expenses (including, without limitation, all out-of-
pocket expenses, investigation expenses, expenses incurred with respect to any
judgment and fees and disbursements of counsel and accountants) arising out of
or based upon any statements contained in, or omissions or alleged omissions
from, each registration statement (and related prospectus) filed pursuant to
this Section 7; provided, however, that Issuer shall not be liable in any such
case to Grantee or any affiliate or controlling person of Grantee or any of
their respective officers, directors, agents or representatives to the extent
that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of or is based upon an untrue statement
or omission or alleged omission made in such registration statement or
prospectus in reliance upon, and in conformity with, written information
furnished to Issuer specifically for use in the preparation thereof by Grantee
such affiliate, controlling person, officer, director, agent or
representative, as the case may be.
8. Repurchase of Option and Option Shares.
(a) At the request of and upon notice by Grantee (the "Put Notice") at any
time during the period during which the Option is exercisable pursuant to
Section 2 (the "Purchase Period"), the Issuer (or any successor entity
thereof) will purchase from Grantee all or any portion of the Option, to the
extent not previously exercised, at the price set forth in subparagraph (i)
below, and all or any portion of the Option Shares, if any, acquired by
Grantee pursuant thereto, at the price set forth in subparagraph (ii) below:
(i) The difference between the "Market/Tender Offer Price" for the Common
Stock as of the date Grantee gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any Acquisition
Proposal which was made prior to such date and (B) the average closing sale
price of Common Stock then on the Nasdaq National Market during the five
(5) trading days ending on the trading day immediately preceding such
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date) and the Exercise Price, multiplied by the number of Common Stock
purchasable pursuant to the Option, but only if the Market/Tender Offer
Price is greater than the Exercise Price. For purposes of determining the
highest price offered pursuant to any Acquisition Proposal which involves
consideration other than cash, the value of such consideration will be
equal to the higher of (x) if securities of the same class of the proponent
as such considerations are traded on any national securities exchange or by
any registered securities association, a value based on the closing sale
price or asked price for such securities on their principal trading market
on such date and (y) the value ascribed to such consideration by the
proponent of such Acquisition Proposal, or if no such value is ascribed, a
value determined in good faith by the Board of Directors of the Issuer.
(ii) The Market/Tender Offer Price multiplied by the number of shares of
Common Stock so purchased.
9. Representations and Warranties of the Issuer. Issuer hereby represents
and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Issuer. This Agreement is the valid and legally
binding obligation of Issuer, enforceable against Issuer in accordance with
its terms.
(b) Issuer has taken all necessary corporate action to authorize and reserve
and to permit it to issue, and at all times from the date hereof through the
termination of this Agreement in accordance with its terms will have reserved
for issuance upon the exercise of the Option, that number of shares of Common
Stock equal to the maximum number of shares of Common Stock at any time and
from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not (i) conflict
with, or result in any violation or breach of any provision of the Certificate
of Incorporation, as amended to date, or Bylaws, as amended to date, of
Issuer, (ii) result in any violation or breach of, or constitute (with or
without notice or lapse of time, or both) a default (or give rise to a right
of termination, cancellation or acceleration of any obligation or loss of any
benefit) under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which the Issuer or any of its Subsidiaries is a party or by
which any of them or any of their properties or assets may be bound, or (iii)
conflict or violate any permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Issuer or any of its Subsidiaries or any of its or their properties or assets,
except in the case of (ii) and (iii) for any such violations, breaches,
defaults, terminations, cancellations, accelerations or conflicts which could
not, individually or in the aggregate, have a material adverse effect (as
defined in the Merger Agreement) on Issuer and its Subsidiaries, taken as a
whole, or impair the ability of Issuer to consummate the transactions
contemplated by this Agreement.
(d) The Issuer has taken, and will in the future take, all steps necessary
to irrevocably exempt the transactions contemplated by this Agreement from any
applicable state takeover law and from any applicable charter or contractual
provision containing change of control or anti-takeover provisions.
10. Representations and Warranties of the Grantee. Grantee hereby represents
and warrants to Issuer as follows:
(a) Grantee has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the
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consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of Grantee and no other
corporate proceedings on the part of Grantee are necessary to authorize
this Agreement or to consummate the transactions so contemplated. This
Agreement has been duly and validly executed and delivered by Grantee. This
Agreement is the valid and legally binding obligation of Grantee,
enforceable against Grantee in accordance with its terms.
(b) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not (i) conflict
with, or result in any violation or breach of any provision of the
Certificate of Incorporation, as amended to date, or Bylaws, as amended to
date, of Grantee, (ii) result in any violation or breach of, or constitute
(with or without notice or lapse of time, or both) a default (or give rise
to a right of termination, cancellation or acceleration of any obligation
or loss of any benefit) under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or obligation to which the Grantee or any of its Subsidiaries is
a party or by which any of them or any of their properties or assets may be
bound, or (iii) conflict or violate any permit, concession, franchise,
license, judgment, order, degree, statute, law, ordinance, rule or
regulation applicable to Grantee or any of its Subsidiaries or any of its
or their properties or assets, except in the case of (ii) and (iii) for any
such violations, breaches, defaults, terminations, cancellations,
accelerations or conflicts which could not, individually or in the
aggregate, have a material adverse effect (as defined in the Merger
Agreement) on Grantee and its Subsidiaries, taken as a whole, or impair the
ability of Grantee to consummate the transactions contemplated by this
Agreement.
(c) The Grantee has taken, and will in the future take, all steps
necessary to irrevocably exempt the transactions contemplated by this
Agreement from any applicable state takeover law and from any applicable
charter or contractual provision containing change of control or anti-
takeover provisions.
11. Grantee Compliance. Grantee shall acquire the Option Shares for
investment purposes only and not with a view to any distribution thereof in
violation of the Securities Act, and shall not sell any Option Shares
purchased pursuant to this Agreement except in compliance with the Securities
Act.
12. Assignment of Option by Grantee. Neither of the parties hereto may
assign any of its rights or obligations under this Option Agreement or the
Option created hereunder to any other person, without the express written
consent of the other party.
13. Limitation of Grantee Profit.
(a) Notwithstanding any other provision of this Agreement, in no event shall
the Grantee's Total Profit (as hereinafter defined) exceed Two Hundred Thirty
Million Four Hundred Fifty-Four Thousand Five Hundred Forty-Five dollars
($230,454,545.00) (the "Profit Cap") and, if it otherwise would exceed such
amount, the Grantee, at its sole election, shall either (i) reduce the number
of shares of Common Stock subject to this Option, (ii) deliver to the Issuer
for cancellation Option Shares previously purchased by, or Termination Fee
Shares (or other securities into which such Termination Fee Shares are
converted or exchanged) to Grantee (valued, for the purposes of this Section
12(a) at the average closing sales price per share of Common Stock (or if
there is no sale on such date then the average between the closing bid and ask
prices on any such day) as reported by the Nasdaq National Market for the five
(5) consecutive trading days preceding the day on which the Grantee's Total
Profit exceeds the Profit Cap, (iii) pay cash to the Issuer, (iv) reduce the
number of Termination Fee Shares to be paid by the Grantee or (v) any
combination thereof, so that Grantee's actually realized Total Profit shall
not exceed the Profit Cap after taking into account the foregoing actions.
(b) As used herein, the term "Total Profit" shall mean the amount (before
taxes) of the following: (a) the aggregate amount of (i) (x) the net cash
amounts received by Grantee pursuant to the sale of Option Shares or
Termination Fee Shares (or any other securities into which such Option Shares
or Termination Fee Shares are converted or exchanged) to any unaffiliated
party or to Issuer pursuant to this Agreement, less (y) the Grantee's purchase
price of such Option Shares or other securities, (ii) any amounts received by
Grantee on the transfer of the Option (or any portion thereof), if permitted
hereunder, and (iii) the amount received by Grantee pursuant to
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Section 7.2 of the Merger Agreement; minus (b) the amount of cash theretofore
paid to the Issuer pursuant to this Section 12 plus the value of the Option
Shares or Termination Fee Shares or other securities theretofore delivered to
the Issuer for cancellation pursuant to this Section 12.
(c) Notwithstanding any other provision of this Agreement, nothing in this
Agreement shall affect the ability of Grantee to receive nor relieve Issuer's
obligation to pay a fee pursuant to Section 7.2 of the Merger Agreement;
provided that if Total Profit received by Grantee would exceed the Profit Cap
following the receipt of such fee, Grantee shall be obligated to comply with
the terms of Section 12(a) within five (5)days of the later of (i) the date of
receipt of such fee and (ii) the date of receipt of the net cash by Grantee
pursuant to the sale of Option Shares or Termination Fee Shares (or, any other
securities into which such Option Shares or Termination Fee Shares are
converted or exchanged) pursuant to this Agreement.
(d) Notwithstanding any other provision of this Agreement, the Option may
not be exercised for a number of Option Shares that would, as of the Notice
Date, result in a Notional Total Profit (as defined below) of more than the
Profit Cap; provided, however, that Grantee may indicate in its notice of
exercise that Grantee is taking any of the actions described in subsection (a)
hereof so as to reduce the Notional Total Profit to not more than the Profit
Cap and preserve its rights to exercise the Option for the resulting number of
Option Shares. "Notional Total Profit" shall mean, with respect to any number
of Option Shares as to which the Grantee may propose to exercise the Option,
the Total Profit determined as of the Notice Date assuming that the Option was
exercised on such date for such number of Option Shares and assuming such
Option Shares, together with all other Option Shares held by the Grantee and
its affiliates as of such date, were sold for cash at the closing sales price
for Common Stock as of the close of business on the preceding trading day.
(e) For purposes of Section 11(a) and clause (iii) of Section 11(b), the
value of any Option Shares delivered by Grantee to the Issuer shall be the
average closing sales price per share of Common Stock (or if there is no sale
on such date then the average between the closing bid and ask prices on any
such day) as reported by the Nasdaq National Market for the five (5)
consecutive trading days preceding the day the Grantee's Total Profit exceeds
the Profit Cap.
14. Application for Regulatory Approval. Each of Grantee and Issuer will use
its commercially reasonable efforts to make all filings with, and to obtain
consents of, all third parties and governmental authorities necessary to the
consummation of the transactions contemplated by this Agreement, including
without limitation making application to list the shares of Common Stock
issuable hereunder on the Nasdaq National Market upon official notice of
issuance.
15. Specific Performance. The parties hereto acknowledge that damages would
be an inadequate remedy for a breach of this Agreement by either party hereto
and that the obligations of the parties hereto shall be enforceable by either
party hereto through injunctive or other equitable relief.
16. Separability of Provisions. If any term, provision, covenant or
restriction contained in this Agreement is held by a court or a federal or
state regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and
effect, and shall in no way be affected, impaired or invalidated.
17. Notices. All notices, claims, demands and other communications hereunder
shall be deemed to have been duly given or made when delivered in person, by
overnight courier or by facsimile at the respective addresses of the parties
set forth in the Merger Agreement.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws
thereof.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed to be an original, but all of which
shall constitute one and the same agreement.
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20. Expenses. Except as otherwise expressly provided herein or in the Merger
Agreement, each of the parties hereto shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated hereunder, including fees and expenses of its own financial
consultants, investment bankers, accountants and counsel.
21. Entire Agreement. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement between the
parties with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereof, written or
oral. The terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing in this Agreement, expressed or implied, is
intended to confer upon any party, other than the parties hereto, and their
respective successors except as assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
herein. Any provision of this Agreement may be waived only in writing at any
time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
22. Further Assurances. In the event of any exercise of the Option by
Grantee, Issuer and Grantee shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise. Nothing
contained in this Agreement shall be deemed to authorize Issuer or Grantee to
breach any provision of the Merger Agreement.
23. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
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IN WITNESS WHEREOF, Issuer and Grantee have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
Software.com, Inc.
By: _________________________________
Name:
Title:
Phone.com, Inc.
/s/ Alain Rossmann
By: _________________________________
Name: Alain Rossmann
Title:Chief Executive Officer
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IN WITNESS WHEREOF, Issuer and Grantee have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
Software.com, Inc.
/s/ John L MacFarlane
By: _________________________________
Name: John L MacFarlane
Title:CEO
Phone.com, Inc.
By: _________________________________
Name:
Title:
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ANNEX D
FORM OF PHONE.COM VOTING AGREEMENT
VOTING AGREEMENT (this "Voting Agreement"), dated as of August 8, 2000, by
and between Software.com, Inc., a Delaware corporation ("Software.com") and
(the "Stockholder").
RECITALS:
WHEREAS, concurrently with the execution of this Voting Agreement,
Phone.com, Inc., a Delaware corporation (the "Company") and Software.com have
entered into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which the parties have agreed, upon the terms and subject to the
conditions set forth in the Merger Agreement, to a strategic combination of
Phone and Software.com (the "Merger");
WHEREAS, as of the date hereof, Stockholder is the record and Beneficial
Owner (as defined hereinafter) of Existing Shares (as defined
hereinafter) of the Common Stock, $0.001 par value, of the Company (the
"Company Common Stock");
WHEREAS, as inducement and a condition to entering into the Merger
Agreement, Software.com has required Stockholder to agree, and Stockholder has
agreed, to enter into this Voting Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties, covenants and agreements contained in
this Voting Agreement, the parties, intending to be legally bound, agree as
follows:
Section 1. Certain Definitions. In addition to the terms defined elsewhere
in this Voting Agreement, capitalized terms used and not defined in this
Voting Agreement have the respective meanings ascribed to them in the Merger
Agreement. For purposes of this Voting Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Without duplicative counting of the
same securities by the same holder, securities Beneficially Owned by a
person include securities Beneficially Owned by all other persons with whom
such person would constitute a "group" within the meaning of Section 13(d)
of the Exchange Act with respect to securities of the same issuer.
(b) "Existing Shares" means shares of Company Common Stock Beneficially
Owned by Stockholder as of the date of this Voting Agreement provided that,
in the event of a stock dividend or distribution, or any change in the
Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, other than
pursuant to the Merger, the term "Existing Shares" will be deemed to refer
to and include the shares of Company Common Stock as well as all such stock
dividends and distributions and any shares into which or for which any or
all of the Securities (as defined hereinafter) may be changed or exchanged
and appropriate adjustments shall be made to the terms and provisions of
this Voting Agreement.
(c) "Securities" means the Existing Shares together with any shares of
Company Common Stock or other securities of the Company acquired by
Stockholder in any capacity after the date of this Voting Agreement and
prior to its termination whether upon the exercise of options, warrants, or
rights, the conversion or exchange of convertible or exchangeable
securities, or by means of purchase, dividend, distribution, split-up,
recapitalization, combination, exchange of shares, or the like, gift,
bequest, inheritance, or as a successor in interest in any capacity, or
otherwise.
Section 2. Representations and Warranties of Stockholder. Stockholder
represents and warrants to Software.com as follows:
(a) Ownership of Shares. Stockholder is the sole record and Beneficial
Owner of Existing Shares. On the date of this Voting Agreement, the
Existing Shares constitute all of the shares of
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Company Common Stock owned of record or Beneficially Owned by Stockholder.
There are no outstanding options or other rights to acquire from
Stockholder or obligations of Stockholder to sell or to acquire, any shares
of Company Common Stock. Stockholder has sole voting power and sole power
to issue instructions with respect to the matters set forth in Sections 5,
6 and 7 hereof, sole power of disposition, sole power of conversion, sole
power to demand appraisal rights and sole power to agree to all of the
matters set forth in this Voting Agreement, in each case with respect to
all of the Existing Shares with no limitations, qualifications, or
restrictions on such rights, subject to applicable securities laws and the
terms of this Voting Agreement.
(b) Power; Binding Agreement. Stockholder has the legal capacity, power
and authority to enter into and perform all of Stockholder's obligations
under this Voting Agreement. This Voting Agreement has been duly and
validly executed and delivered by Stockholder and constitutes a valid and
binding agreement of Stockholder, enforceable against Stockholder in
accordance with its terms except that (i) such enforcement may be subject
to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
(c) No Conflicts. Except for filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the
Exchange Act, no filing with, and no permit, authorization, consent, or
approval of, any state or federal public body or authority ("Governmental
Entity") is necessary for the execution of this Voting Agreement by
Stockholder and the consummation by Stockholder of the transactions
contemplated by this Voting Agreement. None of the execution and delivery
of this Voting Agreement by Stockholder, the consummation by Stockholder of
the transactions contemplated by this Voting Agreement or compliance by
Stockholder with any of the provisions of this Voting Agreement shall (i)
conflict with or result in any breach of any organizational documents
applicable to Stockholder, (ii) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or
give rise to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or
provisions of any note, loan agreement, bond, mortgage, indenture, license,
contract, commitment, arrangement, understanding, agreement, or other
instrument or obligation of any kind to which Stockholder is a party or by
which Stockholder or any of its properties or assets may be bound, or (iii)
violate any order, writ, injunction, decree, judgment, order, statute,
rule, or regulation applicable to Stockholder or any of Stockholder's
properties or assets.
(d) No Encumbrance. Except as permitted by this Voting Agreement, the
Existing Shares are now and, at all times during the term of this Voting
Agreement, held by Stockholder, or by a nominee or custodian for the
benefit of Stockholder, free and clear of all mortgages, claims, charges,
liens, security interests, pledges or options, proxies, voting trusts or
agreements, understandings or arrangements, or any other rights whatsoever
("Encumbrances"), except for any such Encumbrances arising hereunder.
(e) No Finder's Fees. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial adviser's or
other similar fee or commission in connection with the transactions
contemplated by this Voting Agreement based upon arrangements made by or on
behalf of Stockholder.
(f) Reliance by Software.com. Stockholder understands and acknowledges
that Software.com is entering into the Merger Agreement in reliance upon
Stockholder's execution and delivery of this Voting Agreement.
Section 3. Representations and Warranties of Software.com. Software.com
represents and warrants to Stockholder as follows:
(a) Power; Binding Agreement. Software.com has the corporate power and
authority to enter into and perform all of its obligations under this
Voting Agreement. This Voting Agreement has been duly and validly
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executed and delivered by Software.com and constitutes a valid and binding
agreement of Software.com, enforceable against Software.com in accordance
with its terms, except that (i) such enforcement may be subject to
applicable bankruptcy, insolvency or other similar laws, now or hereafter
in effect, affecting creditors' rights generally, and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(b) No Conflicts. Except for filings under the HSR Act and the Exchange
Act, no filing with, and no permit, authorization, consent, or approval of,
any Governmental Entity is necessary for the execution of this Voting
Agreement by Software.com and the consummation by Software.com of the
transactions contemplated by this Voting Agreement. None of the execution
and delivery of this Voting Agreement by Software.com, the consummation by
Software.com of the transactions contemplated by this Voting Agreement, or
compliance by Software.com with any of the provisions of this Voting
Agreement shall (i) conflict with or result in any breach of any
organizational documents applicable to either Software.com, (ii) result in
a violation or breach of, or constitute (with or without notice or lapse of
time or both) a default (or give rise to any third party right of
termination, cancellation, material modification or acceleration) under any
of the terms, conditions or provisions of any note, loan agreement, bond,
mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind to
which either Software.com is a party or by which either Software.com or any
of its properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, judgment, order, statute, rule, or regulation
applicable to Software.com or any of its properties or assets.
Section 4. Disclosure. Stockholder agrees to permit Software.com to publish
and disclose in all documents and schedules filed with the Securities and
Exchange Commission, and any press release or other disclosure document that
Software.com, in its sole discretion, determines to be necessary or desirable
in connection with the Merger and any transactions related to the Merger,
Stockholder's identity and ownership of Company Common Stock and the nature of
Stockholder's commitments, arrangements and understandings under this Voting
Agreement.
Section 5. Certain Restrictions.
(a) No Solicitation. Stockholder in his, her or its capacity as such will
not, and will cause its subsidiaries, partners, investment bankers, attorneys,
accountants, and other agents and representatives of Stockholder (such
subsidiaries, partners, investment bankers, attorneys, accountants, agents and
representatives of any person are collectively referred to as the
"Representatives" of such person) not to, directly or indirectly (i) initiate,
solicit or encourage, or take any action to facilitate the making of, any
offer or proposal which constitutes or is reasonably likely to lead to any
Alternative Transaction (as defined in the Merger Agreement) or any inquiry
with respect thereto or (ii) in the event of any unsolicited Alternative
Transaction for the Company or any affiliate of the Company, engage in
negotiations or discussions with, or provide any information or data to, any
person (other than Software.com, any of its affiliates or representatives)
relating to any Alternative Transaction; provided, that Stockholder may engage
in negotiations or discussions with or provide any information or data to, any
such person relating to an Alternative Transaction to the extent that Phone is
permitted to engage in such activities pursuant to Section 4.2(a) of the
Merger Agreement. Stockholder will, notify Software.com orally and in writing
of any such offers, proposals, or inquiries relating to the purchase or
acquisition by any person of Securities (including, without limitation, the
terms and conditions thereof and the identity of the person making it), within
24 hours of the receipt of such offers. Stockholder will, and will cause its
Representatives to, immediately cease and cause to be terminated any and all
existing activities, discussions or negotiations, if any, with any parties
conducted prior to the date of this Voting Agreement without respect to any
Alternative Transaction relating to the Company, other than discussions or
negotiations with Software.com and its affiliates and their Representatives.
(b) Certain Actions. Prior to the termination of this Voting Agreement,
Stockholder agrees not to, directly or indirectly, take any other action that
would make any representation or warranty of Stockholder contained herein
untrue or incorrect.
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Section 6. Voting of Company Common Stock. Stockholder, in his, her or its
capacity as such, hereby agrees that, during the period commencing on the date
thirty (30) days prior to the EffectiveTime (as defined in the Merger
Agreement) and continuing until the first to occur of (a) the Effective Time
(as defined in the Merger Agreement) or (b) termination of this Voting
Agreement in accordance with its terms, (i) Stockholder will not sell or
transfer any Securities or any interest therein to any person unless each
person to which any Securities, or any interest in any of such Securities, is
or may be transferred shall have (x) executed a counterpart of this Voting
Agreement (with such modifications as Software.com may reasonably request) and
(y) agreed in writing to hold such Securities (or interest in such Securities)
subject to all of the terms and provisions of this Voting Agreement.
Stockholder, in his, her or its capacity as such, hereby agrees that, during
the period commencing on the date hereof and continuing until the first to
occur of (a) the Effective Time (as defined in the Merger Agreement) or (b)
termination of this Voting Agreement in accordance with its terms, at any
meeting (whether annual or special and whether or not an adjourned or
postponed meeting) of the holders of Company Common Stock, however called, or
in connection with any written consent of the holders of Company Common Stock,
Stockholder will appear at the meeting or otherwise cause the Securities to be
counted as present at the meeting for purposes of establishing a quorum and
vote or consent (or cause to be voted or consented) the Securities in favor of
the issuance of Company Common Stock in the Merger and an amendment to the
Company's certificate of incorporation to change the name of the Company as
provided in the Merger Agreement.
Section 7. Directors and Officers. Notwithstanding any provision of this
Voting Agreement to the contrary, nothing in this Voting Agreement shall limit
or restrict Stockholder from acting in Stockholder's capacity as a director or
officer of the Company (it being understood that this Voting Agreement shall
apply to Stockholder solely in Stockholder's capacity as a stockholder of the
Company) or voting in Stockholder's sole discretion on any matter other than
those matters referred to in Section 6(ii).
Section 8. Proxy
(a) Stockholder hereby irrevocably grants to, and appoints, John L.
MacFarlane and Craig A. Shelburne or either of them in their respective
capacities as officers of Software.com and any individual who shall hereafter
succeed to any such office of Software.com and each of them individually, such
Stockholder's proxy and attorney-in-fact (with full power of substitution),
for and in the name, place and stead of Stockholder, to vote the Securities,
or grant a consent or approval in respect of the Securities, in favor of the
Merger, as specified in Section 6.
(b) Stockholder represents that any proxies given prior to this Voting
Agreement regarding the Existing Shares are not irrevocable, and that such
proxies are revoked.
(c) Stockholder affirms that the irrevocable proxy set forth in this Section
8 is given in connection with the execution of the Merger Agreement, and that
such irrevocable proxy is given to secure the performance of the duties of
Stockholder under this Voting Agreement. Stockholder further affirms that the
irrevocable proxy is coupled with an interest and may under no circumstances
be revoked. Stockholder ratifies and confirms all that such irrevocable proxy
may lawfully do or cause to be done by virtue hereof.
Section 9. Consents and Waivers. Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreements to which the Stockholder is a party or pursuant to
any rights Stockholder may have.
Section 10. Commercially Reasonable Efforts. Subject to the terms and
conditions of this Voting Agreement, the Stockholder agrees to use
commerically reasonable efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, all things necessary under applicable laws and
regulations to consummate the transactions contemplated by this Voting
Agreement. Stockholder shall at all times publicly support the Merger;
provided, however, that in the event of a Phone Subsequent Determination, the
Stockholder shall have no obligation pursuant to this Section 10 other than to
comply with the Stockholder's obligations under Section 6 hereof.
Notwithstanding the foregoing, (i) if Stockholder is a director or officer of
the Company, nothing contained in this Voting Agreement shall prohibit such
director or officer from taking such action as a director or
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officer of the Company that may be required on the part of such person as a
director or officer of the Company; and (ii) except as provided in Section 6
hereof, nothing contained in this Voting Agreement shall prohibit the
Stockholder from exercising the voting rights of a stockholder of the Company.
Section 11. Termination. This Voting Agreement and the proxy granted herein
shall terminate on the earliest of (i) the termination of the Merger
Agreement, (ii) the agreement of the parties hereto to terminate this Voting
Agreement, or (iii) the consummation of the Merger.
Section 12. Miscellaneous.
(a) Entire Agreement. This Voting Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter of
this Voting Agreement.
(b) Successors and Assigns. This Voting Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties. This Voting Agreement shall be binding upon, inure to the benefit of,
and be enforceable by each party and each party's respective heirs,
beneficiaries, executors, representatives, and permitted assigns.
(c) Amendment and Modification. This Voting Agreement may not be amended,
altered, supplemented, or otherwise modified or terminated except upon the
execution and delivery of a written agreement executed by the parties hereto.
(d) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given upon (i) transmitter's confirmation of a
receipt of a facsimile transmission, (ii) confirmed delivery by a standard
overnight carrier or when delivered by hand, or (iii) the expiration of five
business days after the day when mailed by certified or registered mail,
postage prepaid, addressed at the following addresses (or at such other
address for a party as shall be specified by like notice):
If to Software.com to:
Software.com, Inc.
525 Anacapa Street
Santa Barbara, CA 93101
Attention: General Counsel
with a copy to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
Attention: Elizabeth R. Flint, Esq.
Telecopy No.: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
One Market
Spear Tower, Suite 3300
San Francisco, CA 94105
Attention: Steve L. Camahort, Esq.
Telecopy No.: (415) 947-2099
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<PAGE>
If to Stockholder, to:
with a copy to:
(e) Severability. Any term or provision of this Voting Agreement which is
held to be invalid, illegal or unenforceable in any respect in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Voting Agreement or affecting the
validity or enforceability of any of the terms or provisions of this Voting
Agreement in any other jurisdiction. If any provision of this Voting Agreement
is so broad as to be unenforceable, the provision shall be interpreted to be
only so broad as is enforceable.
(f) Specific Performance. Each of the parties recognizes and acknowledges a
breach by it of any covenants or agreements contained in this Voting Agreement
will cause the other party to sustain damages for which it would not have an
adequate remedy at law for money, damages, and therefore in the event of any
such breach the aggrieved party shall be entitled to the remedy of specified
performance of such covenants and agreements and injunctive and other
equitable relief in addition to any other remedy to which it may be entitled,
at law or in equity.
(g) No Waiver. The failure of any party to exercise any right, power or
remedy provided under this Voting Agreement or otherwise available in respect
of this Voting Agreement at law or in equity, or to insist upon compliance by
any other party with its obligation under this Voting Agreement, and any
custom or practice of the parties at variance with the terms of this Voting
Agreement, will not constitute a waiver by such party of its right to exercise
any such or other right, power or remedy or to demand such compliance.
(h) No Third Party Beneficiaries. This Voting Agreement is not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder.
(i) Governing Law. This Voting Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to
the principles of conflict of law thereof.
(j) Descriptive Heading. The descriptive headings used herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Voting Agreement.
(k) Expenses. All costs and expenses incurred in connection with this Voting
Agreement and the transactions contemplated hereby shall be paid by the party
incurring the expenses.
(l) Further Assurances. From time to time, at any other party's request and
without further consideration, each party shall execute and deliver any
additional documents and take any further lawful action as may be necessary or
desirable to consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated by this Voting Agreement.
(m) Counterparts. This Voting Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, Software.com and Stockholder have caused this Voting
Agreement to be duly executed as of the day and year first written above.
Software.com, Inc.
By: _________________________________
Name:
Title:
Stockholder:
_____________________________________
Name:
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<PAGE>
ANNEX E
FORM OF SOFTWARE.COM VOTING AGREEMENT
VOTING AGREEMENT (this "Voting Agreement"), dated as of August 8, 2000, by
and between Phone.com, Inc., a Delaware corporation ("Phone") and
(the "Stockholder").
RECITALS:
WHEREAS, concurrently with the execution of this Voting Agreement,
Software.com, Inc., a Delaware corporation (the "Company") and Phone have
entered into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which the parties have agreed, upon the terms and subject to the
conditions set forth in the Merger Agreement, to a strategic combination of
Phone and the Company (the "Merger");
WHEREAS, as of the date hereof, Stockholder is the record and Beneficial
Owner (as defined hereinafter) of Existing Shares (as defined
hereinafter) of the Common Stock, $0.001 par value, of the Company (the
"Company Common Stock");
WHEREAS, as inducement and a condition to entering into the Merger
Agreement, Phone has required Stockholder to agree, and Stockholder has
agreed, to enter into this Voting Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties, covenants and agreements contained in
this Voting Agreement, the parties, intending to be legally bound, agree as
follows:
Section 1. Certain Definitions. In addition to the terms defined elsewhere
in this Voting Agreement, capitalized terms used and not defined in this
Voting Agreement have the respective meanings ascribed to them in the Merger
Agreement. For purposes of this Voting Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Without duplicative counting of the
same securities by the same holder, securities Beneficially Owned by a
person include securities Beneficially Owned by all other persons with whom
such person would constitute a "group" within the meaning of Section 13(d)
of the Exchange Act with respect to securities of the same issuer.
(b) "Existing Shares" means shares of Company Common Stock Beneficially
Owned by Stockholder as of the date of this Voting Agreement provided that,
in the event of a stock dividend or distribution, or any change in the
Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, other than
pursuant to the Merger, the term "Existing Shares" will be deemed to refer
to and include the shares of Company Common Stock as well as all such stock
dividends and distributions and any shares into which or for which any or
all of the Securities (as defined hereinafter) may be changed or exchanged
and appropriate adjustments shall be made to the terms and provisions of
this Voting Agreement.
(c) "Securities" means the Existing Shares together with any shares of
Company Common Stock or other securities of the Company acquired by
Stockholder in any capacity after the date of this Voting Agreement and
prior to its termination whether upon the exercise of options, warrants, or
rights, the conversion or exchange of convertible or exchangeable
securities, or by means of purchase, dividend, distribution, split-up,
recapitalization, combination, exchange of shares, or the like, gift,
bequest, inheritance, or as a successor in interest in any capacity, or
otherwise.
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Section 2. Representations and Warranties of Stockholder. Stockholder
represents and warrants to Phone as follows:
(a) Ownership of Shares. Stockholder is the sole record and Beneficial
Owner of Existing Shares. On the date of this Voting Agreement, the
Existing Shares constitute all of the shares of Company Common Stock owned
of record or Beneficially Owned by Stockholder. There are no outstanding
options or other rights to acquire from Stockholder or obligations of
Stockholder to sell or to acquire, any shares of Company Common Stock.
Stockholder has sole voting power and sole power to issue instructions with
respect to the matters set forth in Sections 5, 6 and 7 hereof, sole power
of disposition, sole power of conversion, sole power to demand appraisal
rights and sole power to agree to all of the matters set forth in this
Voting Agreement, in each case with respect to all of the Existing Shares
with no limitations, qualifications, or restrictions on such rights,
subject to applicable securities laws and the terms of this Voting
Agreement.
(b) Power; Binding Agreement. Stockholder has the legal capacity, power
and authority to enter into and perform all of Stockholder's obligations
under this Voting Agreement. This Voting Agreement has been duly and
validly executed and delivered by Stockholder and constitutes a valid and
binding agreement of Stockholder, enforceable against Stockholder in
accordance with its terms except that (i) such enforcement may be subject
to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
(c) No Conflicts. Except for filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the
Exchange Act, no filing with, and no permit, authorization, consent, or
approval of, any state or federal public body or authority ("Governmental
Entity") is necessary for the execution of this Voting Agreement by
Stockholder and the consummation by Stockholder of the transactions
contemplated by this Voting Agreement. None of the execution and delivery
of this Voting Agreement by Stockholder, the consummation by Stockholder of
the transactions contemplated by this Voting Agreement or compliance by
Stockholder with any of the provisions of this Voting Agreement shall (i)
conflict with or result in any breach of any organizational documents
applicable to Stockholder, (ii) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or
give rise to any third party right of termination, cancellation,
material modification or acceleration) under any of the terms, conditions
or provisions of any note, loan agreement, bond, mortgage, indenture,
license, contract, commitment, arrangement, understanding, agreement, or
other instrument or obligation of any kind to which Stockholder is a party
or by which Stockholder or any of its properties or assets may be bound, or
(iii) violate any order, writ, injunction, decree, judgment, order,
statute, rule, or regulation applicable to Stockholder or any of
Stockholder's properties or assets.
(d) No Encumbrance. Except as permitted by this Voting Agreement, the
Existing Shares are now and, at all times during the term of this Voting
Agreement, held by Stockholder, or by a nominee or custodian for the
benefit of Stockholder, free and clear of all mortgages, claims, charges,
liens, security interests, pledges or options, proxies, voting trusts or
agreements, understandings or arrangements, or any other rights whatsoever
("Encumbrances"), except for any such Encumbrances arising hereunder.
(e) No Finder's Fees. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial adviser's or
other similar fee or commission in connection with the transactions
contemplated by this Voting Agreement based upon arrangements made by or on
behalf of Stockholder.
(f) Reliance by Phone. Stockholder understands and acknowledges that
Phone is entering into the Merger Agreement in reliance upon Stockholder's
execution and delivery of this Voting Agreement.
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<PAGE>
Section 3. Representations and Warranties of Phone. Phone represents and
warrants to Stockholder as follows:
(a) Power; Binding Agreement. Phone has the corporate power and authority
to enter into and perform all of its obligations under this Voting
Agreement. This Voting Agreement has been duly and validly executed and
delivered by Phone and constitutes a valid and binding agreement of Phone,
enforceable against Phone in accordance with its terms, except that (i)
such enforcement may be subject to applicable bankruptcy, insolvency or
other similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought.
(b) No Conflicts. Except for filings under the HSR Act and the Exchange
Act, no filing with, and no permit, authorization, consent, or approval of,
any Governmental Entity is necessary for the execution of this Voting
Agreement by Phone and the consummation by Phone of the transactions
contemplated by this Voting Agreement. None of the execution and delivery
of this Voting Agreement by Phone, the consummation by Phone of the
transactions contemplated by this Voting Agreement, or compliance by Phone
with any of the provisions of this Voting Agreement shall (i) conflict with
or result in any breach of any organizational documents applicable to
either Phone, (ii) result in a violation or breach of, or constitute (with
or without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of
any kind to which either Phone is a party or by which either Phone or any
of its properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, judgment, order, statute, rule, or regulation
applicable to Phone or any of its properties or assets.
Section 4. Disclosure. Stockholder agrees to permit Phone to publish and
disclose in all documents and schedules filed with the Securities and Exchange
Commission, and any press release or other disclosure document that Phone, in
its sole discretion, determines to be necessary or desirable in connection
with the Merger and any transactions related to the Merger, Stockholder's
identity and ownership of Company Common Stock and the nature of Stockholder's
commitments, arrangements and understandings under this Voting Agreement.
Section 5. Certain Restrictions.
(a) No Solicitation. Stockholder (in his, her or its capacity as such) will
not, and will cause its subsidiaries, partners, investment bankers, attorneys,
accountants, and other agents and representatives of Stockholder (such
subsidiaries, partners, investment bankers, attorneys, accountants, agents and
representatives of any person are collectively referred to as the
"Representatives" of such person) not to, directly or indirectly (i) initiate,
solicit or encourage, or take any action to facilitate the making of, any
offer or proposal which constitutes or is reasonably likely to lead to any
Alternative Transaction (as defined in the Merger Agreement) or any inquiry
with respect thereto or (ii) in the event of any unsolicited Alternative
Transaction for the Company or any affiliate of the Company, engage in
negotiations or discussions with, or provide any information or data to, any
person (other than Phone, any of its affiliates or representatives) relating
to any Alternative Transaction; provided, that Stockholder may engage in
negotiations or discussions with or provide any information or data to, any
such person relating to an Alternative Transaction to the extent that the
Company is permitted to engage in such activities pursuant to Section 4.2(a)
of the Merger Agreement. Stockholder will, notify Phone orally and in writing
of any such offers, proposals, or inquiries relating to the purchase or
acquisition by any person of Securities (including, without limitation, the
terms and conditions thereof and the identity of the person making it), within
24 hours of the receipt of such offers. Stockholder will, and will cause its
Representatives to, immediately cease and cause to be terminated any and all
existing activities, discussions or negotiations, if any, with any parties
conducted prior to the date of this Voting Agreement without respect to any
Alternative
E-3
<PAGE>
Transaction relating to the Company, other than discussions or negotiations
with Phone and its affiliates and their Representatives.
(b) Certain Actions. Prior to the termination of this Voting Agreement,
Stockholder agrees not to, directly or indirectly, take any other action that
would make any representation or warranty of Stockholder contained herein
untrue or incorrect.
Section 6. Voting of Company Common Stock. Stockholder, in his, her or its
capacity as such, hereby agrees that, during the period commencing on the date
thirty (30) days prior to the Effective Time (as defined in the Merger
Agreement) and continuing until the first to occur of (a) the Effective Time
(as defined in the Merger Agreement) or (b) termination of this Voting
Agreement in accordance with its terms, Stockholder will not sell or transfer
any Securities or any interest therein to any person unless each person to
which any Securities, or any interest in any of such Securities, is or may be
transferred shall have (x) executed a counterpart of this Voting Agreement
(with such modifications as Phone may reasonably request) and (y) agreed in
writing to hold such Securities (or interest in such Securities) subject to
all of the terms and provisions of this Voting Agreement. Stockholder, in his,
her or its capacity as such, hereby agrees that, during the period commencing
on the date hereof and continuing until the first to occur of (a) the
Effective Time (as defined in the Merger Agreement) or (b) termination of this
Voting Agreement in accordance with its terms, at any meeting (whether annual
or special and whether or not an adjourned or postponed meeting) of the
holders of Company Common Stock, however called, or in connection with any
written consent of the holders of Company Common Stock, Stockholder will
appear at the meeting or otherwise cause the Securities to be counted as
present at the meeting for purposes of establishing a quorum and vote or
consent (or cause to be voted or consented) the Securities in favor of the
adoption of the Merger Agreement and the approval of other actions
contemplated by the Merger Agreement.
Section 7. Directors and Officers. Notwithstanding any provision of this
Voting Agreement to the contrary, nothing in this Voting Agreement shall limit
or restrict Stockholder from acting in Stockholder's capacity as a director or
officer of the Company (it being understood that this Agreement shall apply to
Stockholder solely in Stockholder's capacity as a stockholder of the Company)
or voting in Stockholder's sole discretion on any matter other than those
matters referred to in Section 6(ii).
Section 8. Proxy
(a) Stockholder hereby irrevocably grants to, and appoints, Alan Black and
Steve Peters or either of them in their respective capacities as officers of
Phone and any individual who shall hereafter succeed to any such office of
Phone and each of them individually, such Stockholder's proxy and attorney-in-
fact (with full power of substitution), for and in the name, place and stead
of Stockholder, to vote the Securities, or grant a consent or approval in
respect of the Securities, in favor of the Merger, as specified in Section 6.
(b) Stockholder represents that any proxies given prior to this Voting
Agreement regarding the Existing Shares are not irrevocable, and that such
proxies are revoked.
(c) Stockholder affirms that the irrevocable proxy set forth in this
Section 8 is given in connection with the execution of the Merger Agreement,
and that such irrevocable proxy is given to secure the performance of the
duties of Stockholder under this Voting Agreement. Stockholder further affirms
that the irrevocable proxy is coupled with an interest and may under no
circumstances be revoked. Stockholder ratifies and confirms all that such
irrevocable proxy may lawfully do or cause to be done by virtue hereof.
Section 9. Consents and Waivers. Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreements to which the Stockholder is a party or pursuant to
any rights Stockholder may have.
Section 10. Commercially Reasonable Efforts. Subject to the terms and
conditions of this Voting Agreement, the Stockholder agrees to use
commercially reasonable efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, all things necessary under applicable laws and
regulations to
E-4
<PAGE>
consummate the transactions contemplated by this Voting Agreement. Stockholder
shall at all times publicly support the Merger; provided, however, that in the
event of a Phone Subsequent Determination (as defined in the Merger
Agreement), the Stockholder shall have no obligation pursuant to this Section
10 other than to comply with the Stockholder's obligations under Section 6
hereof. Notwithstanding the foregoing, (i) if Stockholder is a director or
officer of the Company, nothing contained in this Voting Agreement shall
prohibit such director or officer from taking such action as a director or
officer of the Company that may be required on the part of such person as a
director or officer of the Company; and (ii) except as provided in Section 6
hereof, nothing contained in this Voting Agreement shall prohibit the
Stockholder from exercising the voting rights of a stockholder of the Company.
Section 11. Termination. This Voting Agreement and the proxy granted herein
shall terminate on the earliest of (i) the termination of the Merger
Agreement, (ii) the agreement of the parties hereto to terminate this Voting
Agreement, or (iii) the consummation of the Merger.
Section 12. Miscellaneous.
(a) Entire Agreement. This Voting Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter of
this Voting Agreement.
(b) Successors and Assigns. This Voting Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties. This Voting Agreement shall be binding upon, inure to the benefit of,
and be enforceable by each party and each party's respective heirs,
beneficiaries, executors, representatives, and permitted assigns.
(c) Amendment and Modification. This Voting Agreement may not be amended,
altered, supplemented, or otherwise modified or terminated except upon the
execution and delivery of a written agreement executed by the parties hereto.
(d) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given upon (i) transmitter's confirmation of a
receipt of a facsimile transmission, (ii) confirmed delivery by a standard
overnight carrier or when delivered by hand, or (iii) the expiration of five
business days after the day when mailed by certified or registered mail,
postage prepaid, addressed at the following addresses (or at such other
address for a party as shall be specified by like notice):
If to Phone to:
Phone.com, Inc.
800 Chesapeake Drive
Redwood City, CA 94603
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue
Palo Alto, CA 94301
Attention: Kenton J. King, Esq.
Telecopy No.: (650) 470-4570
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<PAGE>
If to Stockholder, to:
with a copy to:
(e) Severability. Any term or provision of this Voting Agreement which is
held to be invalid, illegal or unenforceable in any respect in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Voting Agreement
or affecting the validity or enforceability of any of the terms or
provisions of this Voting Agreement in any other jurisdiction. If any
provision of this Voting Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
(f) Specific Performance. Each of the parties recognizes and acknowledges
a breach by it of any covenants or agreements contained in this Voting
Agreement will cause the other party to sustain damages for which it would
not have an adequate remedy at law for money, damages, and therefore in the
event of any such breach the aggrieved party shall be entitled to the
remedy of specified performance of such covenants and agreements and
injunctive and other equitable relief in addition to any other remedy to
which it may be entitled, at law or in equity.
(g) No Waiver. The failure of any party to exercise any right, power or
remedy provided under this Voting Agreement or otherwise available in
respect of this Voting Agreement at law or in equity, or to insist upon
compliance by any other party with its obligation under this Voting
Agreement, and any custom or practice of the parties at variance with the
terms of this Voting Agreement, will not constitute a waiver by such party
of its right to exercise any such or other right, power or remedy or to
demand such compliance.
(h) No Third Party Beneficiaries. This Voting Agreement is not intended
to confer upon any person other than the parties hereto any rights or
remedies hereunder.
(i) Governing Law. This Voting Agreement shall be governed and construed
in accordance with the laws of the State of Delaware, without giving effect
to the principles of conflict of law thereof.
(j) Descriptive Heading. The descriptive headings used herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Voting Agreement.
(k) Expenses. All costs and expenses incurred in connection with this
Voting Agreement and the transactions contemplated hereby shall be paid by
the party incurring the expenses.
(l) Further Assurances. From time to time, at any other party's request
and without further consideration, each party shall execute and deliver any
additional documents and take any further lawful action as may be necessary
or desirable to consummate and make effective, in the most expeditious
manner practicable, the transactions contemplated by this Voting Agreement.
(m) Counterparts. This Voting Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, Phone.com and Stockholder have caused this Voting
Agreement to be duly executed as of the day and year first written above.
Phone.Com, Inc.
By: _________________________________
Name:
Title:
Stockholder:
_____________________________________
Name:
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<PAGE>
ANNEX F
FORM OF PHONE.COM AFFILIATE LETTER
Software.com, Inc.
525 Anacapa Street
Santa Barbara, California 93101
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Phone.com, Inc., a Delaware corporation ("Phone"), as the
term "affiliate" is used in and for purposes of Accounting Series, Releases
130 and 135, as amended, of the Securities and Exchange Commission (the
"Commission"). Pursuant to the terms of the Agreement and Plan of Merger dated
as of August 8, 2000 (the "Merger Agreement"), among Phone, Silver Merger Sub
Inc., a Delaware corporation and a wholly owned subsidiary of Phone ("Merger
Sub"), and Software.com, Inc., a Delaware corporation ("Software"), Merger Sub
will be merged with and into Software (the "Merger").
I understand that in order for the Merger to be accounted for as a pooling
of interests, affiliates of Phone and Software must not reduce their interests
in or risk relative to their ownership of the shares of capital stock of
either Phone or Software owned by them for a certain time period prior to and
following the Merger.
As an inducement to Software to consummate the Merger, I represent to and
covenant with Software that I will not, from the date thirty (30) days prior
to the Effective Time (as defined in the Merger Agreement), sell, transfer or
otherwise dispose of or reduce my risk (as contemplated by the SEC Accounting
Series Release No. 135) with respect to any shares of the capital stock of
either Software or Phone that I may hold and I will not sell, transfer or
otherwise dispose of or reduce my risk (as contemplated by SEC Accounting
Series Release No. 135) with respect to any shares of the capital stock of
Phone until after such time as combined financial results (including combined
sales and net income) covering at least 30 days of combined operations of
Software and Phone have been published by Phone, in the form of a quarterly
earnings report, an effective registration statement filed with the
Commission, a report to the Commission on Form 10-K, 10-Q, or 8-K, or any
other public filing or announcement which includes such combined results of
operations (such period is referred to herein as the "Pooling Period").
Notwithstanding the foregoing, I understand that during the Pooling Period,
subject to obtaining the prior written consent of Phone, I will not be
prohibited from selling up to 10% of the shares of Phone Common Stock (the
"10% Shares") owned by me, or making charitable contributions or bona fide
gifts of the shares of Phone Common Stock owned by me, subject to the same
restrictions; provided, however, that all holders of Phone Common Stock, as a
group, and all holders of Software Common Stock, as a group, shall not be
permitted to sell, in the aggregate, in excess of one percent (1%) of the
total number of shares exchanged in the Merger (the "Threshold"). The 10%
Shares shall be calculated in accordance with SEC Accounting Series Release
135, as amended, by Staff Accounting Bulletin No. 76. I covenant with Software
that I will not sell, transfer or otherwise dispose of any 10% Shares during
the period commencing from the Effective Time (as defined in the Merger
Agreement) and ending on the last day of the Pooling Period except in
compliance with Rule 145(d)(i) under the Act or pursuant to charitable
contributions or bona fide gifts. I understand that Phone shall not withhold
its consent to such disposition so long as such disposition is within the
Threshold.
If at any time, Phone determines that the Merger may not be accounted for as
a "pooling of interests," then the restrictions in the preceding paragraph
shall terminate 45 days from the later of (i) the Effective Time and (ii) the
date on which it is determined that the Merger may not be accounted for as a
"pooling of interests."
I understand that, if at any time prior to the commencement of the Pooling
Period I cease to be an "affiliate" of Phone, I may request in writing to
Phone that I be released from my obligations hereunder and Phone shall grant
such request if, in Phone's good faith judgment, Phone determines that I am,
in fact, no longer an "affiliate" of Phone and such release would not
otherwise prevent the Merger from being accounted for as a "pooling of
interests."
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<PAGE>
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of Phone as described in the first paragraph of this
letter, or as a waiver of any rights I may have to object to any claim that I
am such an affiliate on or after the date of this letter.
Very truly yours,
_____________________________________
Name:
Accepted this day of , 2000 by
Software.com, Inc.
By __________________________________
Name:
Title:
F-2
<PAGE>
ANNEX G
FORM OF SOFTWARE.COM AFFILIATE LETTER
Phone.com, Inc.
800 Chesapeake Drive
Redwood City, CA 94603
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Sofware.com, Inc., a Delaware corporation ("Software.com"),
as the term "affiliate" is used in and for purposes of Accounting Series,
Releases 130 and 135, as amended, of the Securities and Exchange Commission
(the "Commission"). Pursuant to the terms of the Agreement and Plan of Merger
dated as of August 8, 2000 (the "Merger Agreement"), among Phone.com, Inc., a
Delaware corporation ("Phone"), Silver Merger Sub Inc., a Delaware corporation
and a wholly owned subsidiary of Phone ("Merger Sub"), and Software.com,
Merger Sub will be merged with and into Software.com (the "Merger").
As a result of the Merger, I may receive shares of common stock, par value
$0.001 per share, of Phone (the "Phone Securities") in exchange for shares
owned by me of common stock, par value $0.001 per share, of Software.com (or
upon the exercise of options for such shares).
I hereby represent, warrant, and covenant to Phone that in the event I
receive any Phone Securities as a result of the Merger:
A. I shall not make any sale, transfer, or other disposition of the Phone
Securities in violation of the Securities Act of 1933, as amended (the
"Act") or the rules and regulations (the "Rules and Regulations") of the
Commission under the Act.
B. I have carefully read this letter and the Merger Agreement and
discussed the requirements of such documents and other applicable
limitations upon my ability to sell, transfer, or otherwise dispose of the
Phone Securities, to the extent I felt necessary, with my counsel or
counsel for Software.com.
C. I have been advised that the issuance of Phone Securities to me
pursuant to the Merger will be registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger is submitted for a vote of the
stockholders of Software.com, (i) I may be deemed to be an affiliate of
Software.com and (ii) the distribution by me of the Phone Securities has
not been registered under the Act, I may not sell, transfer or otherwise
dispose of the Phone Securities issued to me in the Merger unless (x) such
sale, transfer or other disposition has been registered under the Act, (y)
such sale, transfer or other disposition is made in conformity with Rule
145 (as such rule may be hereafter from time to time amended) promulgated
by the Commission under the Act, or (z) in the opinion of counsel
reasonably acceptable to Phone, or a "no action" letter obtained by me from
the staff of the Commission, such sale, transfer or other disposition is
otherwise exempt from registration under the Act.
D. I understand that Phone is under no obligation to register the sale,
transfer, or other disposition of the Phone Securities by me or on my
behalf under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available.
E. I also understand that stop transfer instructions will be given to
Phone's transfer agents with respect to the Phone Securities and that there
will be placed on the certificates for the Phone Securities issued to me,
or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES,
G-1
<PAGE>
AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IN COMPLIANCE WITH THE
REQUIREMENTS OF RULE 145 OR PURSUANT TO A REGISTRATION STATEMENT UNDER
THAT ACT OR AN EXEMPTION FROM SUCH REGISTRATION."
F. I also understand that unless the transfer by me of my Phone
Securities has been registered under the Act or is a sale made in
conformity with the provisions of Rule 145, Phone reserves the right to put
the following legend on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this
Agreement. It is understood and agreed that such legends and the stop orders
referred to above will be removed if (i) evidence or representations
satisfactory to Phone that the Phone Securities represented by such
certificates are being or have been sold in a transaction made in conformity
with the provisions of Rule 145(d) (as such rule may be hereafter from time to
time amended) or (ii) Phone has received either an opinion of counsel, which
opinion and counsel shall be reasonably satisfactory to Phone, or a "no
action" letter obtained by me from the staff of the Commission, to the effect
that the restrictions imposed by Rule 145 under the Act no longer apply to me.
I further represent to and covenant with Phone that I will not, from the
date thirty (30) days prior to the Effective Time (as defined in the Merger
Agreement), sell, transfer or otherwise dispose of or reduce my risk (as
contemplated by the SEC Accounting Series Release No. 135) with respect to any
Software.com shares or shares of the capital stock of Phone that I may hold
and I will not sell, transfer or otherwise dispose of or reduce my risk (as
contemplated by SEC Accounting Series Release No. 135) with respect to any
Phone Securities received by me in the Merger or any other shares of the
capital stock of Phone until after such time as combined financial results
(including combined sales and net income) covering at least 30 days of
combined operations of Software.com and Phone have been published by Phone, in
the form of a quarterly earnings report, an effective registration statement
filed with the Commission, a report to the Commission on Form 10-K, 10-Q or 8-
K, or any other public filing or announcement which includes such combined
results of operations (such period is referred to herein as the "Pooling
Period"). Notwithstanding the foregoing, I understand that during the Pooling
Period, subject to obtaining the prior written consent of Phone, I will not be
prohibited from selling up to 10% of the shares of Phone Common Stock (the
"10% Shares") received by me or shares of Phone Common Stock owned by me or
making charitable contributions or bona fide gifts of the shares of Phone
Common Stock received by me or shares of Phone Common Stock owned by me,
subject to the same restrictions; provided, however, that all holders of Phone
Common Stock, as a group, and all holders of Software.com Common Stock, as a
group, shall not be permitted to sell, in the aggregate, in excess of one
percent (1%) of the total number of shares exchanged in the Merger (the
"Threshold"). The 10% Shares shall be calculated in accordance with SEC
Accounting Series Release 135, as amended, by Staff Accounting Bulletin No.
76. I covenant with Phone that I will not sell, transfer or otherwise dispose
of any 10% Shares during the period commencing from the Effective Time (as
defined in the Merger Agreement) and ending on the last day of the Pooling
Period except in compliance with Rule 145(d)(i) under the Act or pursuant to
charitable contributions or bona fide gifts. I understand that Phone shall not
withhold its consent to such disposition so long as such disposition is within
the Threshold.
G-2
<PAGE>
If at any time, Phone determines that the Merger may not be accounted for as
a "pooling of interests," then the restrictions in the preceding paragraph
shall terminate 45 days from the date on which it is determined that the
Merger may not be accounted for as a "pooling of interests."
I understand that, if at any time prior to the commencement of the Pooling
Period I cease to be an "affiliate" of Software.com, I may request in writing
to Phone that I be released from my obligations hereunder and Phone shall
grant such request if, in Phone's good faith judgment, Phone determines that I
am, in fact, no longer an "affiliate" of Software.com and such release would
not otherwise prevent the Merger from being accounted for as a "pooling of
interests."
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of Software.com as described in the first paragraph
of this letter, or as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
Very truly yours,
_____________________________________
Name:
Accepted this day of , 2000 by
Phone.com, Inc.
By __________________________________
Name:
Title:
G-3
<PAGE>
ANNEX H
FORM OF SOFTWARE.COM SPECIAL AFFILIATE LETTER
Phone.com, Inc.
800 Chesapeake Drive
Redwood City, CA 94603
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Software.com, Inc., a Delaware corporation ("Software.com"),
as the term "affiliate" (i) is defined for purposes of paragraphs (c) and (d)
of Rule 145 of the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act") or (ii) used in and for purposes of Accounting
Series, Releases 130 and 135, as amended, of the Commission. Pursuant to the
terms of the Agreement and Plan of Merger dated as of August 8, 2000 (the
"Merger Agreement"), among Phone.com, Inc., a Delaware corporation ("Phone"),
Silver Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary
of Phone ("Merger Sub"), and Software.com, Merger Sub will be merged with and
into Software.com (the "Merger").
As a result of the Merger, I may receive shares of common stock, par value
$0.001 per share, of Phone (the "Phone Securities") in exchange for shares
owned by me of common stock, par value $0.001 per share, of Software.com (or
upon the exercise of options for such shares).
I hereby represent, warrant, and covenant to Phone that in the event I
receive any Phone Securities as a result of the Merger:
A. I shall not make any sale, transfer, or other disposition of the Phone
Securities in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Merger Agreement and
discussed the requirements of such documents and other applicable
limitations upon my ability to sell, transfer, or otherwise dispose of the
Phone Securities, to the extent I felt necessary, with my counsel or
counsel for Software.com.
C. I have been advised that the issuance of Phone Securities to me
pursuant to the Merger will be registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger is submitted for a vote of the
stockholders of Software.com, (i) I may be deemed to be an affiliate of
Software.com and (ii) the distribution by me of the Phone Securities has
not been registered under the Act, I may not sell, transfer or otherwise
dispose of the Phone Securities issued to me in the Merger unless (x) such
sale, transfer or other disposition has been registered under the Act, (y)
such sale, transfer or other disposition is made in conformity with Rule
145 (as such rule may be hereafter from time to time amended) promulgated
by the Commission under the Act, or (z) in the opinion of counsel
reasonably acceptable to Phone, or a "no action" letter obtained by me from
the staff of the Commission, such sale, transfer or other disposition is
otherwise exempt from registration under the Act.
D. I understand that Phone is under no obligation to register the sale,
transfer, or other disposition of the Phone Securities by me or on my
behalf under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available.
E. I also understand that stop transfer instructions will be given to
Phone's transfer agents with respect to the Phone Securities and that there
will be placed on the certificates for the Phone Securities issued to me,
or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES,
H-1
<PAGE>
AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IN COMPLIANCE WITH THE
REQUIREMENTS OF RULE 145 OR PURSUANT TO A REGISTRATION STATEMENT UNDER
THAT ACT OR AN EXEMPTION FROM SUCH REGISTRATION."
F. I also understand that unless the transfer by me of my Phone
Securities has been registered under the Act or is a sale made in
conformity with the provisions of Rule 145, Phone reserves the right to put
the following legend on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this
Agreement. It is understood and agreed that such legends and the stop orders
referred to above will be removed if (i) evidence or representations
satisfactory to Phone that the Phone Securities represented by such
certificates are being or have been sold in a transaction made in conformity
with the provisions of Rule 145(d) (as such rule may be hereafter from time to
time amended) or (ii) Phone has received either an opinion of counsel, which
opinion and counsel shall be reasonably satisfactory to Phone, or a "no
action" letter obtained by me from the staff of the Commission, to the effect
that the restrictions imposed by Rule 145 under the Act no longer apply to me.
I further represent to and covenant with Phone that I will not, from the
date thirty (30) days prior to the Effective Time (as defined in the Merger
Agreement), sell, transfer or otherwise dispose of or reduce my risk (as
contemplated by the SEC Accounting Series Release No. 135) with respect to any
Software.com shares or shares of the capital stock of Phone that I may hold
and I will not sell, transfer or otherwise dispose of or reduce my risk (as
contemplated by SEC Accounting Series Release No. 135) with respect to any
Phone Securities received by me in the Merger or any other shares of the
capital stock of Phone until after such time as combined financial results
(including combined sales and net income) covering at least 30 days of
combined operations of Software.com and Phone have been published by Phone, in
the form of a quarterly earnings report, an effective registration statement
filed with the Commission, a report to the Commission on Form 10-K, 10-Q or 8-
K, or any other public filing or announcement which includes such combined
results of operations (such period is referred to herein as the "Pooling
Period"). Notwithstanding the foregoing, I understand that during the Pooling
Period, subject to obtaining the prior written consent of Phone, I will not be
prohibited from selling up to 10% of the shares of Phone Common Stock (the
"10% Shares") received by me or shares of Phone Common Stock owned by me or
making charitable contributions or bona fide gifts of the shares of Phone
Common Stock received by me or shares of Phone Common Stock owned by me,
subject to the same restrictions; provided, however, that all holders of Phone
Common Stock, as a group, and all holders of Software.com Common Stock, as a
group, shall not be permitted to sell, in the aggregate, in excess of one
percent (1%) of the total number of shares exchanged in the Merger (the
"Threshold"). The 10% Shares shall be calculated in accordance with SEC
Accounting Series Release 135, as amended, by Staff Accounting Bulletin No.
76. I covenant with Phone that I will not sell, transfer or otherwise dispose
of any 10% Shares during the period commencing from the Effective Time (as
defined in the Merger Agreement) and ending on the last day of the Pooling
Period except in compliance with Rule 145(d)(i) under the Act or pursuant to
charitable contributions or bona fide gifts. I understand that Phone shall not
withhold its consent to such disposition so long as such disposition is within
the Threshold.
H-2
<PAGE>
If at any time, Phone determines that the Merger may not be accounted for as
a "pooling of interests," then the restrictions in the preceding paragraph
shall terminate 45 days from the later of (i) the Effective Time and (ii) the
date on which it is determined that the Merger may not be accounted for as a
"pooling of interests."
I understand that, if at any time prior to the commencement of the Pooling
Period I cease to be an "affiliate" of Software.com, I may request in writing
to Phone that I be released from my obligations hereunder and Phone shall
grant such request if, in Phone's good faith judgment, Phone determines that I
am, in fact, no longer an "affiliate" of Software.com and such release would
not otherwise prevent the Merger from being accounted for as a "pooling of
interests."
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of Software.com as described in the first paragraph
of this letter, or as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
Very truly yours,
_____________________________________
Name:
Accepted this day of , 2000 by
Phone.com
By __________________________________
Name:
Title:
H-3
<PAGE>
ANNEX I
MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding ("MOU") is entered into as of August 8,
2000 (the "Effective Date"), be and between Phone.com, Inc., a Delaware
corporation with its principal place of business at 800 Chesapeake Drive,
Redwood City, California 94063, U.S.A. ("Phone.com") and Software.com, Inc., a
Delaware corporation, with its principal place of business at 525 Anacapa
Street, Santa Barbara, California 93101 ("Software.com").
1. Each party desires to license, distribute, resell, sublicense, use and
test all products which are commercially generally available of the other
party (the "Transactions").
2. The parties desire to enter into a definitive Reseller License and
Services Agreement ("Definitive Agreement") to document the Transactions and
the parties rights and obligations with respect thereto. Except for Paragraphs
3 through 9 below, this MOU is not binding on the parties and neither party
shall be bound by any written or oral representations or negotiations between
them, directly or indirectly; it being intended that only by entering into the
Definitive Agreement shall the parties be bound.
3. The parties agree to use good faith efforts to enter into a Definitive
Agreement within ten (10) days from the Effective Date of this MOU.
4. Any expenses incurred by either party in connection with the preparation
and/or execution of this MOU and/or the Definitive Agreement, or in connection
with the performance of any activities described hereunder, shall be borne by
each party, respectively.
5. Any and all confidential information exchanged between the parties
hereunder shall be subject to the same terms and conditions contained in the
Confidentiality Agreement, dated as of June 2000, between the parties.
6. This MOU shall be construed and governed in accordance with the laws of
the State of California without regard to conflict of laws rules.
7. This MOU will cease and terminate upon the occurrence of the earliest of
the following:
(a) the parties enter into the Definitive Agreement; or
(b) the passage of thirty (30) days from the Effective Date of this MOU.
8. The parties agree to issue a mutually agreeable press release regarding
their intent to enter into the Transactions.
9. This MOU constitutes the entire agreement of the parties with respect to
the subject matter hereof. No modification of this MOU will be binding on the
parties unless it is in writing and signed by authorized representatives of
both parties. Nothing herein contained shall be construed to create a joint
venture, agency or partnership, or to authorize any party to act as an agent
or representative for the other party. Neither party may assign this MOU, or
its limited rights or obligations hereunder, to any third party without the
prior written consent of the other party.
PHONE.COM SOFTWARE.COM, INC.
/s/ Alain Rossmann /s/ Valdur Koha
By: _______________________________ By: _________________________________
Alain Rossmann Valdur Koha
Print Name: _______________________ Print Name: _________________________
Chairman of the Board--CEO President
Title: ____________________________ Title: ______________________________
August 8, 2000 August 8, 2000
Date: _____________________________ Date: _______________________________
I-1
<PAGE>
ANNEX J
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
August 8, 2000
Board of Directors
Phone.com, Inc.
800 Chesapeake Drive
Redwood City, California 94063
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to Phone.com, Inc. ("Phone.com") of the Exchange
Ratio (as defined below) set forth in the Agreement and Plan of Merger, dated
as of August 8, 2000 (the "Merger Agreement"), by and among Phone.com, Silver
Merger Sub Inc., a wholly owned subsidiary of Phone.com ("Merger Sub"), and
Software.com, Inc. ("Software.com"). The Merger Agreement provides for, among
other things, the merger (the "Merger") of Merger Sub with and into
Software.com pursuant to which each outstanding share of the common stock, par
value $0.001 per share, of Software.com ("Software.com Common Stock") will be
converted into the right to receive 1.6105 (the "Exchange Ratio") shares of
the common stock, par value $0.001 per share, of Phone.com ("Phone.com Common
Stock").
In arriving at our opinion, we have reviewed the Merger Agreement and
certain publicly available business and financial information relating to
Phone.com and Software.com. We also have reviewed certain other information
relating to Phone.com and Software.com, including certain publicly available
financial forecasts, provided to or discussed with us by Phone.com and
Software.com, and have met with the managements of Phone.com and Software.com
to discuss the businesses and prospects of Phone.com and Software.com and
potential synergies that might be achieved in the Merger. We also have
considered certain financial and stock market data of Phone.com and
Software.com, and we have compared those data with similar data for publicly
held companies in businesses similar to those of Phone.com and Software.com,
and we have considered, to the extent publicly available, the financial terms
of certain other business combinations and other transactions which have
recently been effected. We also considered such other information, financial
studies, analyses and investigations and financial, economic and market
criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
on such information being complete and accurate in all material respects. With
respect to the financial forecasts for Phone.com and Software.com referred to
above, we assumed, with the consent of the managements of Phone.com and
Software.com, that such forecasts represent reasonable estimates and judgments
as to the future financial performance of Phone.com and Software.com. In
addition, we have relied, without independent verification, upon the
assessments of the managements of Phone.com and Software.com as to (i) the
strategic benefits anticipated to result from the Merger, (ii) the existing
and future technology and products of Phone.com and Software.com and the risks
associated with such technology and products, (iii) their ability to integrate
the businesses of Phone.com and Software.com and (iv) their ability to retain
key employees of Phone.com and Software.com. We also have assumed, with your
consent, that the Merger will be treated as a tax-free reorganization for
federal income tax purposes. In addition, we have not been requested to make,
and have not made, an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Phone.com or Software.com, nor have
we been furnished with any such evaluations or appraisals. Our opinion is
necessarily based upon information available to us, and financial, economic,
market and other conditions as they exist and can be evaluated, on the date
hereof. We are not expressing any opinion as to what the value of the
Phone.com Common Stock actually will be when issued pursuant to the Merger or
the prices at which the Phone.com Common Stock will trade subsequent to the
Merger.
J-1
<PAGE>
Board of Directors
Phone.com, Inc.
August 8, 2000
Page 2
We have acted as financial advisor to Phone.com in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. We also will receive a fee
upon delivery of this opinion. We and our affiliates have in the past provided
financial services to Phone.com and Software.com, and may in the future
provide financial services to Phone.com, unrelated to the proposed Merger, for
which services we have received and will receive compensation. In the ordinary
course of business, we and our affiliates may actively trade the debt and
equity securities of Phone.com and Software.com for our and such affiliates'
accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Phone.com in connection with its evaluation of the Merger and
does not constitute a recommendation to any stockholder as to how such
stockholder should vote with respect to any matter relating to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to Phone.com from a financial point of
view.
Very truly yours,
/s/ CREDIT SUISSE FIRST BOSTON CORPORATION
CREDIT SUISSE FIRST BOSTON CORPORATION
J-2
<PAGE>
ANNEX K
[LETTERHEAD OF MORGAN STANLEY & CO. INCORPORATED]
August 8, 2000
Board of Directors
Software.com, Inc.
525 Anacapa Street,
Santa Barbara, CA 93101
Members of the Board:
We understand that Software.com, Inc. ("Software.com" or the "Company"),
Phone.com, Inc. ("Phone.com"), and Phone.com Subsidiary, Inc. ("Merger Sub"),
a wholly-owned subsidiary of Phone.com, propose to enter into an Agreement and
Plan of Merger, substantially in the form of the draft dated August 8, 2000
(the "Merger Agreement") which provides, among other things, for the merger
(the "Merger") of Merger Sub with and into Software.com. Pursuant to the
Merger, Software.com will become a wholly-owned subsidiary of Phone.com and
each outstanding share of common stock, $0.001 par value per share (the
"Software.com Common Stock") of Software.com, other than shares held in
treasury or held by Phone.com or any affiliates of Software.com or Phone.com
will be converted into the right to receive 1.6105 shares (the "Exchange
Ratio") of common stock, $0.001 par value per share (the "Phone.com Common
Stock") of Phone.com. The terms and conditions of the Merger are more fully
set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to the holders of
shares of Software.com Common Stock.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Software.com and Phone.com, respectively;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning Software.com and Phone.com, prepared by the
managements of Software.com and Phone.com, respectively;
(iii) reviewed certain financial projections prepared by the managements of
Software.com and Phone.com;
(iv) reviewed the pro forma impact of the Merger on certain operational and
financial metrics for the combined company;
(v) discussed the past and current operations and financial condition and
the prospects of Software.com and Phone.com, including a review of
publicly available projections from equity research analyst estimates
and information relating to certain strategic, financial and
operational benefits anticipated from the Merger, with senior
executives of Software.com and Phone.com, respectively;
(vi) reviewed the reported prices and trading activity for the Software.com
Common Stock and Phone.com Common Stock;
(vii) compared the financial performance of Software.com and Phone.com and
the prices and trading activity of the Software.com Common Stock and
Phone.com Common Stock with that of certain other publicly-traded
companies comparable to Software.com and Phone.com, respectively, and
their securities;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger transactions;
(ix) reviewed and discussed with the senior managements of Software.com and
Phone.com their strategic rationales for the Merger;
(x) participated in discussions and negotiations among representatives of
Software.com, Phone.com and their financial and legal advisors;
(xi) reviewed the draft Merger Agreement and certain related documents; and
(xii) performed such other analyses and considered such other factors as
Morgan Stanley deemed appropriate.
K-1
<PAGE>
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial projections and information
relating to the strategic, financial and operational benefits anticipated from
the Merger, we have assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and judgements of the future
financial performance of Software.com and Phone.com, respectively. In
addition, we have assumed that the Merger will be consummated in accordance
with the terms set forth in the Merger Agreement and will be treated as a tax-
free reorganization pursuant to Section 368(a) of the Internal Revenue Code of
1986. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
We have relied upon the assessment by the managements of Software.com and
Phone.com of their ability to retain key employees of Software.com and
Phone.com, respectively. We have also relied upon, without independent
verification, the assessment by the managements of Software.com and Phone.com
of: (i) the strategic, financial and other benefits expected to result from
the Merger; (ii) the timing and risks associated with the integration of
Software.com and Phone.com; and (iii) the validity of, and risks associated
with, Software.com's and Phone.com's existing and future technologies,
services or business models. We have not made any independent valuation or
appraisal of the assets or liabilities or technology of Software.com and
Phone.com, nor have we been furnished with any such appraisals.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to an acquisition, business
combination or other extraordinary transaction involving Software.com.
We have acted as financial advisor to the Board of Directors of Software.com
in connection with this transaction and will receive a fee for our services.
In the ordinary course of our business we may actively trade the securities of
Software.com and Phone.com for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this letter is for the information of the Board of
Directors of Software.com and may not be used for any other purpose without
our prior written consent, except that this opinion may be included in its
entirety, if required, in any filing of a proxy or registration statement with
the Securities and Exchange Commission made by Software.com in respect of this
transaction. In addition, this opinion does not in any manner address the
prices at which the Software.com Common Stock or the Phone.com Common Stock
will trade following the consummation of the Merger, and Morgan Stanley & Co.
Incorporated expresses no opinion or recommendation as to how the stockholders
of Software.com should vote at the stockholders' meeting to be held in
connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the holders of shares of Software.com Common Stock.
Very truly yours,
Morgan Stanley & Co. Incorporated
/s/ Nicholas deJ. Osborne
By: _________________________________
Nicholas deJ. Osborne
Managing Director
K-2
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 102 of the Delaware General Corporation Law, or the DGCL, as
amended, allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages
for a breach of fiduciary duty as a director, except where the director
knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an
improper personal benefit.
Section 145 of the DGCL provides, among other things, the Phone.com may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of Phone.com) by reason of the fact that the
person is or was a director, officer, agent or employee of Phone.com or is or
was serving at Phone.com's request as a director, officer, agent, or employee
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgment, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection
with the action, suit or proceeding. The power to indemnify applies (a) if the
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if the person acted in good faith and in a manner he or
she reasonably believes to be in the best interest, or not opposed to the best
interest, of Phone.com, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his or her conduct was unlawful. The power
to indemnify applies to actions brought by or in the right of Phone.com as
well, but only to the extent of defense expenses (including attorneys' fees
but excluding amounts paid in settlement) actually and reasonably incurred and
not to any satisfaction of judgment or settlement of the claim itself, and
with the further limitation that in these actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct in the
performance of his or her duties to Phone.com, unless the court believes that
in light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for these actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her dissent to
these actions to be entered in the books containing the minutes of the
meetings of the board of directors at the time the action occurred or
immediately after the absent director receives notice of the unlawful acts.
Phone.com's Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach of fiduciary duty as a director.
Phone.com's Amended and Restated Bylaws provide that:
. it must indemnify its directors and officers to the fullest extent
permitted by Delaware law;
. it may indemnify its other employees and agents to the same extent that
it indemnifies its officers and directors; and
. it must advance expenses, as incurred, to its directors and executive
officers, and its other employees or agents following authorization of
indemnification of such employees or agents, in connection with a legal
proceeding to the fullest extent permitted by Delaware law.
The indemnification provisions contained in Phone.com's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws are not exclusive
of any other rights to which a person may be entitled by law, agreement, vote
of stockholders or disinterested directors or otherwise. In addition,
Phone.com may maintain insurance on behalf of its directors and executive
officers insuring them against any liability asserted against them in their
capacities as directors or officers or arising out of this status.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits. The following is a complete list of Exhibits filed as part of
the Registration Statement, which are incorporated herein:
<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
Phone.com, 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 between 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 Company 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 Company 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.
3.6 Certificate of Amendment of Certificate of Incorporation of
Registrant.
4.1* Form of the Registrant's Common Stock Certificate.
4.2 Rights Agreement dated as of August 8, 2000 between the Registrant and
U.S. Stock Transfer Corporation as Rights Agent (incorporated by
reference to Exhibit 1 to the Registrant's Registration Statement on
Form 8-A12R dated August 17, 2000).
5.1*** Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to the legality
of the securities being registered.
8.1*** Opinion of Skadden, Arps, Slate & Flom LLP as to tax matters.
8.2*** Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation as to tax matters.
10.1* Form of Indemnification Agreement.
10.2* 1995 Stock Plan, as amended, and form of stock option agreement and
restricted stock purchase agreement.
10.3* 1996 Stock Plan and form of stock option agreement and restricted
stock purchase agreement.
10.4* 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.5* 1999 Directors' Stock Option Plan and form of stock option agreement.
10.6* Fourth Amended and Restated Investor Rights Agreement dated March 12,
1999.
10.7* Voting Agreement dated January 23, 1998 and amendment thereto.
10.8* Lease Agreement dated March 10, 1998 for offices at 800 Chesapeake by
and between Registrant and Seaport Centre Associates, LLC.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.9* Form of Change of Control Severance Agreement between the Registrant
and certain of 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 Registrant
and Mike Mulica.
10.20** Amendment to 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.
10.22 Stock Option Agreement, dated August 8, 2000, between the Registrant
and Software.com, Inc. (incorporated by reference to Exhibit 99.1 to
the Registrant's current report on Form 8-K dated August 17, 2000).
10.23 Stock Option Agreement, dated August 8, 2000 between Software.com,
Inc. and the Registrant (incorporated by reference to Exhibit 99.2 to
the Registrant's current report on Form 8-K dated August 17, 2000).
21.1** Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, independent auditors, with respect to Phone.com,
Inc.
23.2 Consent of Ernst & Young, LLP, independent auditors, with respect to
Software.com, Inc., Telarc, Inc. and bCandid Corporation.
23.3 Consent of PricewaterhouseCoopers, independent auditors, with respect
to the WAP business of APiON.
23.4 Consent of Ernst & Young LLP, independent auditors, with respect to
AtMotion, Inc.
23.5 Consent of Ernst & Young, independent auditors, with respect to
Paragon Software (Holdings) Limited.
23.6 Consent of Ernst & Young LLP, independent auditors, with respect to
Onebox.com, Inc.
23.7 Consent of KPMG LLP, independent auditors, with respect to Highwind
Software, Inc.
24.1 Power of Attorney (included on signature page II-6 of this
Registration Statement).
27.1** Financial Data Schedule.
99.1 Consent of Donald J. Listwin, as a person designated to become a
director.
99.2 Consent of John L. MacFarlane, as a person designated to become a
director.
99.3 Consent of Bernard Puckett, as a person designated to become a
director.
99.4*** Form of Phone.com proxy card.
99.5*** Form of Software.com proxy card.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
99.6 Consent of Morgan Stanley & Co. Incorporated.
99.7 Consent of Credit Suisse First Boston Corporation.
</TABLE>
--------
* Incorporated herein by reference to the exhibit filed with the
Registrant's Registration Statement on Form S-1 (Commission File No. 333-
75219).
** Incorporated herein by reference to the exhibits filed with the
Registrant's annual report on Form 10-K for the year ended June 30, 2000
(Commission File No. 000-25687).
*** To be filed by amendment.
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in these exhibits.
(b) Financial Statement Schedules
See financial statement schedules listed at F-1.
(c) Reports, Opinions or Appraisals
None.
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(a)(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) that every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933, as amended, and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, as amended,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, as
amended, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(c) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
Form S-4 within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information
II-4
<PAGE>
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(d) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of Redwood
City, State of California, on 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
Registration Statement on Form S-4, 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 1933, as
amended, this registration statement has been signed by the following persons
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
/s/ David Kronfeld Director August 30, 2000
____________________________________
David Kronfeld
/s/ Andrew Verhalen Director August 30, 2000
____________________________________
Andrew Verhalen
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<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
Phone.com, 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 between 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 Company 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 Company 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.
3.6 Certificate of Amendment of Certificate of Incorporation of
Registrant.
4.1* Form of the Registrant's Common Stock Certificate.
4.2 Rights Agreement dated as of August 8, 2000 between the Registrant and
U.S. Stock Transfer Corporation as Rights Agent (incorporated by
reference to Exhibit 1 to the Registrant's Registration Statement on
Form 8-A12R dated August 17, 2000).
5.1*** Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to the legality
of the securities being registered.
8.1*** Opinion of Skadden, Arps, Slate & Flom LLP as to tax matters.
8.2*** Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation as to tax matters.
10.1* Form of Indemnification Agreement.
10.2* 1995 Stock Plan, as amended, and form of stock option agreement and
restricted stock purchase agreement.
10.3* 1996 Stock Plan and form of stock option agreement and restricted
stock purchase agreement.
10.4* 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.5* 1999 Directors' Stock Option Plan and form of stock option agreement.
10.6* Fourth Amended and Restated Investor Rights Agreement dated March 12,
1999.
10.7* Voting Agreement dated January 23, 1998 and amendment thereto.
10.8* Lease Agreement dated March 10, 1998 for offices at 800 Chesapeake by
and between Registrant and Seaport Centre Associates, LLC.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.9* Form of Change of Control Severance Agreement between the Registrant
and certain of 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 Registrant
and Mike Mulica.
10.20** Amendment to 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.
10.22 Stock Option Agreement, dated August 8, 2000, between the Registrant
and Software.com, Inc. (incorporated by reference to Exhibit 99.1 to
the Registrant's current report on Form 8-K dated August 17, 2000).
10.23 Stock Option Agreement, dated August 8, 2000 between Software.com,
Inc. and the Registrant (incorporated by reference to Exhibit 99.2 to
the Registrant's current report on Form 8-K dated August 17, 2000).
21.1** Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, independent auditors, with respect to Phone.com,
Inc.
23.2 Consent of Ernst & Young, LLP, independent auditors, with respect to
Software.com, Inc., Telarc, Inc. and bCandid Corporation.
23.3 Consent of PricewaterhouseCoopers, independent auditors, with respect
to the WAP business of APiON.
23.4 Consent of Ernst & Young LLP, independent auditors, with respect to
AtMotion, Inc.
23.5 Consent of Ernst & Young, independent auditors, with respect to
Paragon Software (Holdings) Limited.
23.6 Consent of Ernst & Young LLP, independent auditors, with respect to
Onebox.com, Inc.
23.7 Consent of KPMG LLP, independent auditors, with respect to Highwind
Software, Inc.
24.1 Power of Attorney (included on signature page II-6 of this
Registration Statement).
27.1** Financial Data Schedule.
99.1 Consent of Donald J. Listwin, as a person designated to become a
director.
99.2 Consent of John L. MacFarlane, as a person designated to become a
director.
99.3 Consent of Bernard Puckett, as a person designated to become a
director.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
99.4*** Form of Phone.com proxy card.
99.5*** Form of Software.com proxy card.
99.6 Consent of Morgan Stanley & Co. Incorporated.
99.7 Consent of Credit Suisse First Boston Corporation.
</TABLE>
--------
* Incorporated herein by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (Commission File No. 333-75219).
** Incorporated herein by reference to the exhibits filed with the
Registrant's annual report on Form 10-K for the year ended June 30, 2000
(Commission File No. 000-25687).
*** To be filed by amendment.
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in these exhibits.
