<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ---------------
COMMISSION FILE NUMBER 000-26565
----------------------------------
LIBERATE TECHNOLOGIES
(Exact name of registrant as specified in its charter)
DELAWARE 94-3245315
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
2 CIRCLE STAR WAY, SAN CARLOS, CALIFORNIA 94070-6200
(Address of principal executive office) (Zip Code)
(650) 701-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
103,029,219 shares of the Registrant's common stock were outstanding as
of September 30, 2000.
--------------------------------------------------------------------------------
<PAGE>
LIBERATE TECHNOLOGIES
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at August 31, 2000 and
May 31, 2000..................................................................... 1
Condensed Consolidated Statements of Operations and Comprehensive Loss
for the Three Months Ended August 31, 2000 and 1999.............................. 2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
August 31, 2000 and 1999......................................................... 3
Notes to Condensed Consolidated Financial Statements................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................ 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 25
Item 2. Changes in Securities and Use of Proceeds............................................ 26
Item 3. Defaults in Securities............................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders.................................. 26
Item 5. Other Information.................................................................... 26
Item 6. Exhibits and Reports on Form 8-K..................................................... 26
Signature..................................................................................... 28
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
2000 2000
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 176,752 $ 132,962
Short-term investments............................................. 190,714 176,053
Accounts receivable, net .......................................... 4,681 3,058
Receivable from affiliate, net..................................... 576 543
Prepaid expenses and other current assets.......................... 9,469 6,054
-------------- --------------
Total current assets............................................. 382,192 318,670
Property and equipment, net........................................... 13,994 12,759
OTHER ASSETS:
Restricted cash.................................................... 8,788 8,788
Long-term investments.............................................. 144,215 121,607
Warrants........................................................... 100,406 106,127
Purchased intangibles, net......................................... 598,725 177,482
Other.............................................................. 619 754
-------------- --------------
Total assets................................................... $ 1,248,939 $ 746,187
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 2,240 $ 1,759
Accrued payroll and related expenses............................... 3,634 4,303
Accrued liabilities................................................ 16,445 10,290
Current portion of capital leases.................................. 594 607
Deferred revenues.................................................. 64,219 69,132
-------------- --------------
Total current liabilities...................................... 87,132 86,091
Capital lease obligations, net of current portion..................... 857 1,019
Long-term debt........................................................ 1,089 910
-------------- --------------
Total liabilities.............................................. 89,078 88,020
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY:
Common stock....................................................... 1,028 909
Contributed and paid-in capital.................................... 1,392,455 803,400
Warrants........................................................... 89,770 89,770
Deferred stock compensation........................................ (5,022) (5,583)
Stockholder notes receivable....................................... (8) (8)
Accumulated other comprehensive income............................. 340 162
Accumulated deficit................................................ (318,702) (230,483)
-------------- --------------
Total stockholders' equity .................................... 1,159,861 658,167
-------------- --------------
Total liabilities and stockholders' equity..................... $ 1,248,939 $ 746,187
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE>
LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
AUGUST 31, AUGUST 31,
2000 1999
-------------- ---------------
<S> <C> <C>
REVENUES:
License and royalty................................................ $ 4,576 $ 1,482
Service............................................................ 4,828 3,806
-------------- ---------------
Total revenues................................................... 9,404 5,288
-------------- ---------------
COST OF REVENUES:
License and royalty................................................ 611 522
Service............................................................ 5,333 5,562
-------------- ---------------
Total cost of revenues........................................... 5,944 6,084
-------------- ---------------
Gross margin..................................................... 3,460 (796)
-------------- ---------------
OPERATING EXPENSES:
Research and development........................................... 12,094 5,342
Sales and marketing................................................ 5,024 3,216
General and administrative......................................... 2,582 1,424
Amortization of purchased intangibles.............................. 50,261 1,521
Amortization of warrants........................................... 6,046 359
Amortization of deferred stock compensation........................ 499 504
Acquired in-process research and development....................... 22,425 --
-------------- ---------------
Total operating expenses......................................... 98,931 12,366
-------------- ---------------
Loss from operations............................................. (95,471) (13,162)
Interest income, net.................................................. 7,656 995
Other expenses, net................................................... (200) (298)
-------------- ---------------
Loss before income tax provision................................. (88,015) (12,465)
Income tax provision.................................................. 204 41
-------------- ---------------
Net loss......................................................... (88,219) (12,506)
Foreign currency translation adjustment............................... 178 (15)
-------------- ---------------
Comprehensive loss............................................... $ (88,041) $ (12,521)
============== ===============
Basic and diluted net loss per share.................................. $ (0.90) $ (0.45)
============== ===============
Shares used in computing basic and diluted net loss
per share........................................................ 98,464 27,553
============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
AUGUST 31, AUGUST 31,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... $ (88,219) $ (12,506)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 51,415 1,870
Amortization of warrants .................................................... 6,046 359
Provision for doubtful accounts ............................................. -- 75
Write-off of acquired in-process research and development ................... 22,425 --
Loss on disposal of property and equipment .................................. -- 300
Non-cash compensation expense ............................................... 499 504
Changes in operating assets and liabilities, net of acquisition:
(Increase) decrease in accounts receivable ................................ (1,624) 241
Increase in receivable from affiliate, net ................................ (33) (507)
Increase in prepaid expenses and other current assets ..................... (3,721) (612)
(Increase) decrease in other assets ....................................... 133 (544)
Increase (decrease) in accounts payable ................................... 481 (618)
Decrease in accrued liabilities ........................................... (2,268) (702)
Decrease in accrued payroll and related expenses .......................... (669) (92)
Decrease in deferred revenues ............................................. (4,913) (3,170)
Increase in other long-term liabilities ................................... 177 --
--------- ---------
Net cash used in operating activities ................................... (20,271) (15,402)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................................... (1,564) (2,515)
Proceeds from maturities of investments ....................................... 36,059 --
Purchase of investments ....................................................... (73,328) (44,145)
Cash acquired in MoreCom acquisition .......................................... 1,500 --
--------- ---------
Net cash used in investing activities .................................. (37,333) (46,660)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net .................................... -- 97,970
Proceeds from private placement, net .......................................... 100,000 12,125
Proceeds from exercise of stock options ....................................... 1,391 789
Principal payments on capital lease obligations ............................... (175) --
--------- ---------
Net cash provided by financing activities ............................... 101,216 110,884
--------- ---------
Effect of exchange rate changes on cash .......................................... 178 (15)
--------- ---------
Net increase in cash and cash equivalents ........................................ 43,790 48,807
Cash and cash equivalents, beginning of period ................................... 132,962 33,657
--------- ---------
Cash and cash equivalents, end of period ......................................... $ 176,752 $ 82,464
========= =========
SUPPLEMENTAL NON-CASH ACTIVITIES:
Conversion of debt and accrued interest to equity ................................ $ -- $ 4,343
========= =========
Deferred stock compensation ...................................................... $ -- $ 1,426
========= =========
Issuance of warrants for common stock in connection with network operator
agreements..................................................................... $ -- $ 2,165
========= =========
Issuance of stockholder notes receivable.......................................... $ -- $ 101
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest............................................................ $ 83 $ --
========= =========
Cash paid for income taxes....................................................... $ 204 $ 41
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Liberate Technologies ("Liberate" or "the Company") and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated. These financial statements have been prepared by Liberate,
without audit, and reflect all adjustments, which in the opinion of management
are necessary to present fairly the financial position and the results of
operations for the interim periods. These financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. However, they omit certain information and footnote
disclosures necessary to conform to generally accepted accounting principles.
These statements should be read in conjunction with the audited consolidated
financial statements and notes to consolidated financial statements included in
Liberate's Form 10-K filed with the Securities and Exchange Commission on August
25, 2000. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period.
RECENT ACCOUNTING PRONOUNCEMENTS. In March 2000, the FASB's Emerging
Issue Task Force ("EITF") reached a consensus on EITF 00-2, "Accounting for Web
Site Development Costs". EITF 00-2 discusses how an entity should account for
costs incurred to develop a web site. The EITF is effective in the second
quarter of fiscal 2001. The Company does not believe that the adoption of EITF
00-2 will have a material effect on its financial position or results of
operations.
NOTE 2. OFFERINGS OF COMMON STOCK
COMMON STOCK. On July 19, 2000, Cisco Systems purchased 3,963,780 shares
of the Company's common stock at approximately $25.23 per share, resulting in
aggregate cash proceeds to the Company of approximately $100.0 million.
During the quarter ended August 31, 2000, Liberate issued 657,191 shares
of common stock to employees, external consultants and other service providers
upon the exercise of stock options.
WARRANTS. In fiscal year 1999, the Company entered into letter agreements
with several network operators whereby it agreed to issue warrants to purchase
up to an aggregate of 4,599,992 shares of common stock which are exercisable if
those network operators satisfy certain milestones. The value of the warrants is
estimated using the Black-Scholes model as of the earlier of the grant date or
the date that it becomes probable that the warrants will be earned. Pursuant to
the requirements of Emerging Issues Task Force No. 96-18, the warrants will
continue to be revalued in situations where they are granted prior to the
establishment of a performance commitment. The value of the warrants is recorded
primarily as a noncurrent asset on the accompanying condensed consolidated
balance sheet and will be amortized over the estimated economic life of the
arrangements with the network operators.
As of August 31, 2000, warrants to purchase up to 2,336,660 shares of the
Company's common stock were earned by these network operators. The fair market
value of these warrants at the time they were earned was $117.2 million.
Amortization of warrants was approximately $360,000 and $6.0 million for the
quarters ended August 31, 1999 and 2000, respectively. This increase was
primarily due to amortization related to additional warrants earned since the
quarter ended August 31, 1999.
If the remaining warrants are earned, the Company will be required to
record significant non-cash accounting expenses related to these warrants. As a
result, the Company could incur net losses or increased net losses for a given
period and this could seriously harm the operating results and stock price of
the Company.
4
<PAGE>
NOTE 3. SEGMENT INFORMATION
The Company operates solely in one segment - the development,
manufacturing and sale of information appliance software for consumer, corporate
and educational marketplaces. As of August 31, 2000, the Company's long-term
assets were located primarily in the United States. The Company's revenues by
geographic area are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
AUGUST 31, AUGUST 31,
2000 1999
-------------- --------------
(in thousands)
<S> <C> <C>
United States...................................................... $ 3,971 $ 2,782
England............................................................ 3,297 960
Japan.............................................................. 521 797
Canada............................................................. 435 53
Other.............................................................. 1,180 696
------------- --------------
Total revenues..................................................... $ 9,404 $ 5,288
============== ==============
</TABLE>
International revenues consist of sales to customers incorporated in
foreign countries. International revenues were 58% and 47% of total revenues for
each of the three months ended August 31, 2000 and August 31, 1999.
For the three months ended August 31, 2000, three customers each provided
for 10% or more of the Company's total revenues - Cable & Wireless, America
Online and Telewest. For the three months ended August 31, 1999, four customers
each provided for 10% or more of the Company's total revenues - Wind River,
Cable & Wireless, US West and Intel.
NOTE 4. CALCULATION OF NET LOSS PER SHARE
Shares used in computing basic and diluted net loss per share are based
on the weighted average shares outstanding in each period. The effect of
outstanding stock options and warrants are excluded from the calculation of
diluted net loss per share, as their inclusion would be antidilutive. Previously
issued preferred stock, which converted to common stock, is weighted from the
time the shares were converted. At August 31, 2000, options to purchase
16,430,673 shares of common stock and warrants to purchase 2,103,328 shares of
common stock were outstanding and were excluded from the calculation of net loss
per share.
NOTE 5. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. In June 2000, the Company acquired MoreCom, Inc. At the
closing of the acquisition, the Company assumed MoreCom's obligations under an
office lease for approximately 16,000 square feet of office space in Horsham,
Pennsylvania. Future minimum lease payments as of August 31, 2000 are
approximately $316,000.
The Company also entered into an additional facility lease for
approximately 10,000 square feet in Salt Lake City, Utah. Future minimum
lease payments are approximately $786,000. Upon commencement of this lease in
October 2000, the Company intends to sublease its current 5,000 square feet
facility in Salt Lake City, Utah.
In addition, the Company committed to a lease in London, United
Kingdom, for approximately 4,700 square feet. The lease is expected to be
effective December 2000. Upon commencement of this new lease, the Company
will terminate its current London, United Kingdom facility lease. Future
minimum lease payments are expected to be approximately $1.7 million,
excluding potential rent increases and any effect on foreign currency
exchange rates.
5
<PAGE>
SUBLEASES. In July 2000, the Company signed an agreement with a third
party to sublease approximately 25,000 square feet in the Company's headquarters
building located in San Carlos, California. The sublease is for 13 months and
commenced in July 2000. Total future minimum sublease income under this
agreement is approximately $2.2 million. As part of this same facility lease,
the Company is also leasing furniture and office equipment with future minimum
lease income of approximately $277,000.
LITIGATION. As part of the Company's acquisition of the Virtual Modem
software product and related assets and technology of SourceSuite LLC, the
Company acquired certain patents that were the subject of a patent
infringement lawsuit. This lawsuit was initially brought by Interactive
Channel Technologies, Inc. and SMI Holdings, Inc., affiliated companies of
SourceSuite LLC, against Worldgate Communications, Inc. in May 1998. The
patent infringement claims have been assigned to the Company as a result of
the merger with SourceSuite LLC. In June 1998, Worldgate filed a counterclaim
against the plaintiffs and Source Media, Inc., a shareholder of SourceSuite
LLC, alleging among others, violations of the Lanham Act and Delaware's
Uniform Deceptive Trade Practices Act, common law unfair competition,
tortious interference with existing and prospective business relationships
and misappropriation of confidential information and trade secrets. The case
is still in the discovery stage. Briefing on the patent claim construction
issues has been completed. The Company believes that the patent infringement
claims against Worldgate are valid and intends to continue to vigorously
prosecute this action. In addition, the Company has agreed to defend
Interactive Channel, SMI Holdings and Source Media against the
cross-complaint brought by Worldgate.
NOTE 6. OTHER
ACQUISITION OF MORECOM. In June 2000, the Company acquired MoreCom. In
connection with the acquisition, the Company issued an aggregate of 7,310,830
shares of common stock in exchange for all of the outstanding stock of MoreCom
and assumed all of MoreCom's stock options. The acquisition was accounted for as
a purchase. The fair market value of the equity securities issued in the
acquisition was approximately $459.0 million.
The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technological
feasibility has not been established. The value was determined by estimating the
costs to develop the acquired in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present values. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the acquired in-process technology. If these projects
are not successfully developed, future revenue and profitability of the Company
may be adversely affected. Additionally, the value of the other purchased
intangible assets may be impaired.
In connection with the acquisition, net assets acquired were as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Purchased intangibles, including in-process technology.............. $471,202
Property, plant and equipment and other noncurrent assets........... 842
Cash, receivables and other current assets.......................... 1,500
Current liabilities assumed......................................... (550)
-----------------
Net assets acquired................................................. $472,994
=================
</TABLE>
The following table presents the unaudited pro forma results assuming
that the Company had merged with MoreCom at the beginning of fiscal year
2000. Net income has been adjusted to exclude the write-off of acquired
in-process research and development of $22.4 million and includes
amortization of purchased intangibles of approximately $39.3 million for each
of the quarters ended August 31, 1999 and 2000. This information may not
necessarily be indicative of the future combined results of operations of the
Company.
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
AUGUST 31, AUGUST 31,
1999 2000
--------------- ---------------
(in thousands, except
per share data)
<S> <C> <C>
Revenues.................................................................. $ 5,288 $ 9,404
Net loss.................................................................. $(52,729) $(128,037)
Basic net loss per share.................................................. $ (1.51) $ (1.28)
</TABLE>
Also in connection with the acquisition, the Company expensed
approximately $22.4 million of acquired in-process research and development,
which in the opinion of the Company's management, has not reached
technological feasibility and has no alternative future use. The Company also
recorded goodwill and other intangibles of approximately $471.5 million to be
amortized over an estimated economic life of three years.
LONG-TERM INVESTMENT. In August 2000, the Company made a strategic
investment of approximately $3.0 million in Everypath, Inc. in exchange for
179,425 shares of Series C preferred stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 23E of the
Securities Act of 1934, as amended. These statements relate to future events or
our future financial performance. Any statements contained in this document that
are not statements of historical fact may be deemed to be forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"intend," "believe," "estimate," "predict," "potential" or "continue," or the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we, nor any
other person, assume responsibility for the accuracy and completeness of the
forward-looking statements. We are under no obligation to update any of the
forward-looking statements after the filing of this Form 10-Q to conform such
statements to actual results or to changes in our expectations.
The following discussion should be read in conjunction with our financial
statements, related notes and the other financial information appearing
elsewhere in this Form 10-Q. Readers are also urged to carefully review and
consider the various disclosures made by us which attempt to advise interested
parties of the factors which affect our business, including without limitation,
the disclosures made under the caption "Risk Factors," and the factors and risks
discussed in our Form 10-K filed on August 25, 2000.
OVERVIEW
Liberate is a leading provider of a comprehensive software platform for
delivering content, services and applications to a broad range of information
appliances, such as television set-top boxes, game consoles and personal digital
assistants. We began operations in December 1995 as a division of Oracle to
develop server and client software for the consumer, corporate and educational
markets and began shipping our initial products and generating revenues in the
last quarter of fiscal 1997. In April 1996, we were incorporated as a Delaware
corporation.
We generate revenues by licensing our server and client products and
providing related services to network operators and information appliance
manufacturers. In addition, service revenues are generated from consulting,
training and maintenance provided in connection with client and server licenses.
License revenues consist principally of fees earned from the licensing of
our software, as well as royalty fees earned upon the shipment or activation of
products which incorporate our software. Revenues from up-front software license
fees are typically recognized upon final delivery of the licensed product, when
collection is probable and when the fair market value and the fee for each
element of the transaction is fixed and determinable. In addition to up-front
license fees, network operators typically pay per subscriber server royalty
fees. We recognize revenue on these server subscriber fees when a network
operator reports to us that a user of an information appliance has activated the
operators' service. We also license our client software to either network
operators or information appliance manufacturers. They typically pay us client
royalties on a per unit basis. We typically recognize revenue when they report
to us that an information appliance owner has activated the operators' service,
or in the case of an information appliance manufacturer, we generally recognize
these fees upon shipment of the device by the manufacturer.
Service revenues consist of consulting, engineering, training and
maintenance services. Maintenance services include both updates and technical
support. Consulting, engineering and training revenues are generally recognized
as services are performed. Maintenance revenue is recognized ratably over the
term of the agreement and typically ranges from 17% to 25% of annual license
fees and activation royalties. In instances where software license agreements
include a combination of consulting services, training, and maintenance, these
separate elements are unbundled from the arrangement based on each element's
relative fair value. For the quarter ended August 31, 2000, total service
revenues were $4.8 million, representing 51% of our total revenues. We expect
service revenues to continue to account for a significant portion of total
8
<PAGE>
revenues until customers begin deploying services and information appliances
incorporating our software on a large scale.
A significant event in our history was the acquisition of Navio
Communications in August 1997. Navio was a development stage company involved in
designing Internet application and server software for the consumer market. In
connection with the acquisition, we changed our strategic direction and
restructured our operations. Prior to the acquisition, we focused on selling
software to original equipment manufacturers of network computer products for
corporate customers. Following the acquisition, we focused our development and
marketing efforts on fewer products targeted primarily at the consumer
information appliance market and aggressively pursued sales to a limited number
of large network operators and information appliance manufacturers. As a result
of this strategic shift, we significantly reduced our sales and engineering
operations for corporate products and increased investment in the development of
client and server software for the consumer market.
To more closely align our product offerings with this strategic shift
in direction, we entered into an agreement with Sun Microsystems in May 1999
to transfer our corporate network computer technology to Sun while retaining
the right to ship, support and maintain these products for existing customers
using this technology. In addition, we have agreed not to compete in the
corporate network computer market and, specifically, network computers
intended to displace personal computers or terminals until May 2002. However,
outside of this market, we intend to continue developing new products based
on network computer technology. Sales of our corporate network computer products
and related services accounted for approximately $211,000 and $466,000 of our
total revenues for the quarters ended August 31, 2000 and 1999, respectively.
We have also agreed with Sun to co-develop television set-top box
technology. We will distribute the co-developed technology pursuant to a
non-exclusive license with Sun. In addition, under this license, we have agreed
to incorporate Sun's Personal Java technology, television interface software and
Jini technology in our software products and to pay Sun a royalty. Sun has also
agreed to promote us as one of its preferred channel partners within the TV
devices market. We believe this relationship will result in co-marketing and
co-selling efforts with Sun of the jointly-developed technology on a worldwide
basis.
To date, we have completed three acquisitions. They are as follows:
- Navio in August 1997 (as mentioned above)
- The Virtual Modem assets of SourceSuite in March 2000
- MoreCom in June 2000 (see below)
In June 2000, we acquired MoreCom. In connection with the acquisition, we
issued an aggregate of 7,310,830 shares of common stock in exchange for all of
the outstanding stock of MoreCom and assumed all of MoreCom's stock options. The
acquisition was accounted for as a purchase. The fair market value of the equity
securities issued in the acquisition was approximately $459.0 million.
Also in connection with the acquisition, we expensed approximately $22.4
million of acquired in-process research and development, which in the opinion of
our management, had not reached technological feasibility and had no alternative
future use. We also recorded goodwill and other intangibles of approximately
$471.5 million to be amortized over an economic useful life of three years.
In July 2000, Cisco Systems purchased 3,963,780 shares of our common
stock at approximately $25.23 per share, resulting in aggregate cash proceeds to
us of approximately $100.0 million.
Deferred revenues consist primarily of payments received from customers
for prepaid license and royalty fees and prepaid services for undelivered
product and services. Deferred revenues decreased from $69.1 million at May 31,
2000 to $64.2 million at August 31, 2000. The majority of this decrease
represents recognition of revenues related to both customer deployments and
performance of services. We expect this downward trend to continue in future
quarters as our customers begin to deploy. Deferred revenues can
9
<PAGE>
fluctuate significantly. These fluctuations are the result of when a contract is
signed, when services are performed, when deployments occur and when
prepayments, if any, are made.
In fiscal year 1999, we entered into letter agreements with several
network operators whereby we agreed to issue warrants to purchase up to an
aggregate of 4,599,992 shares of common stock which are exercisable if those
network operators satisfy certain milestones. The value of the warrants is
estimated using the Black-Scholes model as of the earlier of the grant date
or the date that it becomes probable that the warrants will be earned.
Pursuant to the requirements of Emerging Issues Task Force No. 96-18, the
warrants will continue to be revalued in situations where they are granted
prior to the establishment of a performance commitment. The value of the
warrants is recorded primarily as a noncurrent asset on the accompanying
condensed consolidated balance sheet and will be amortized over the estimated
economic life of the arrangements with the network operators. As of August
31, 2000, warrants to purchase up to 2,336,660 shares of our common stock
were earned by these network operators. The fair market value of these
warrants at the time they were earned was $117.2 million. As of August 31,
2000, accumulated amortization for the warrants was $16.8 million. If the
remaining warrants are earned, we will be required to record significant
non-cash accounting expenses related to these warrants. As a result, we could
incur net losses or increased net losses for a given period and this could
seriously harm our operating results and stock price.
Since inception, we have incurred net losses of $318.7 million. These
losses include write-offs totaling $82.5 million of acquired in-process research
and development related to our acquisitions, $109.7 million of research and
development expenditures, $83.0 million of amortization of purchased
intangibles, $16.8 million of amortization of warrants and $3.1 million of
amortization of deferred compensation. We anticipate incurring significant
operating losses for the foreseeable future as we:
- continue to invest in research and development and professional
and engineering services to support new devices for our software
platform and large-scale deployments by our network operator
customers
- record non-cash expenses related to the acquired in-process
research and development and amortization of purchased intangibles
associated with our acquisitions, amortization of deferred
compensation and amortization of warrant expense associated with
the issuance of warrants
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RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 2000
REVENUES
Total revenues increased 78% from $5.3 million for the three months
ended August 31, 1999 to $9.4 million for the three months ended August 31,
2000.
LICENSE AND ROYALTY. License and royalty revenues increased 209% from
$1.5 million for the three months ended August 31, 1999 to $4.6 million for the
three months ended August 31, 2000. The increase was primarily due to increased
deployments to end-users, as well as an increase in server licenses and software
development tools recognized. We expect license and royalty revenue growth may
be modest in the next few fiscal quarters as many of our recent network operator
wins continue to be in the design, implementation and trial phases.
SERVICE. Service revenues increased 27% from $3.8 million for the three
months ended August 31, 1999 to $4.8 million for the three months ended August
31, 2000. The increase was primarily due to the continued growth in our
professional services organization, offset slightly by a decrease in the number
of custom development projects as our product continues to mature.
COST OF REVENUES
Total cost of revenues decreased 2% from $6.1 million for the three
months ended August 31, 1999 to $5.9 million for the three months ended August
31, 2000. We anticipate that total cost of revenues will increase in absolute
dollar amounts in future periods as we provide continued services to support
customer implementations and as we experience higher third party license costs
as deployments increase.
LICENSE AND ROYALTY. Cost of license and royalty revenues increased 17%
from $522,000 for the three months ended August 31, 1999 to $611,000 for the
three months ended August 31, 2000. These amounts represented 35% and 13% of
license and royalty revenues in the respective periods. The increase in cost of
license and royalty revenues in absolute dollar amounts was primarily due to
expenses related to additional third party license agreements. We expect the
cost of license and royalty revenues, as a percentage of license and royalty
revenues, to fluctuate in future periods. Certain previously capitalized third
party costs that have been fully amortized may have the effect of decreasing
license and royalty costs as a percentage of related revenues. However,
introduction of new third party technology may offset the effect of the
amortized costs or increase license and royalty cost as a percentage of related
revenues.
SERVICE. Cost of service revenues decreased 4% from $5.6 million for the
three months ended August 31, 1999 to $5.3 million for the three months ended
August 31, 2000. These amounts represented 146% and 110% of service revenues in
the respective periods. The decrease in absolute dollar amounts was primarily
due to the maturity of our product which results in less custom development
work; however, this was offset slightly by increases in professional services
expenses to implement and integrate these products to our growing customer base.
We expect cost of service revenues to increase in absolute dollar amounts to the
extent existing and new customers install and deploy our products. We also
expect the cost of service revenues, as a percentage of service revenues, to
fluctuate in future periods. These costs may increase in the near term due to
continued expansion of services as existing and new customers install and deploy
our products and we continue to provide and support limited trial installations
of our products at discounted prices to network operators in order to continue
to increase our market share.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salary and other related costs for personnel and external
consultants as well as costs related to outsourced development projects to
support product development. Research and development expenses increased 126%
from $5.3 million for the three months ended August 31, 1999 to $12.1 million
for the three months ended August 31, 2000. These amounts represented 101% and
129% of total revenues over the respective periods. The
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increase in both absolute dollar amounts and as a percentage of total revenues
was primarily due to increases in staffing and employee-related expenses, mainly
due to the SourceSuite and MoreCom acquisitions, offset slightly by less custom
development projects. We expect research and development expenses to increase in
absolute dollar amounts in future periods as we fully integrate MoreCom, as well
as continue to pursue our strategic objectives.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, public relations, marketing materials and tradeshows. Sales
and marketing expenses increased 56% from $3.2 million for the three months
ended August 31, 1999 to $5.0 million for the three months ended August 31,
2000. These amounts represented 61% and 53% of total revenues over the
respective periods. The increase in absolute dollar amounts was primarily due to
increased staffing and employee-related expenses, including international
growth. We believe sales and marketing expenses will increase in absolute dollar
amounts in future periods as we expand our direct sales and marketing efforts
both domestically and abroad.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related costs for corporate development,
finance, human resources and legal employees, as well as outside legal and other
professional services. General and administrative expenses increased 81% from
$1.4 million for the three months ended August 31, 1999 to $2.6 million for the
three months ended August 31, 2000. These amounts represented 27% of total
revenues for each of the respective periods. The increase in absolute dollar
amounts was primarily due to increased staffing and the establishment of the
infrastructure necessary to support our continuing international expansion as
well as to support our increased obligations as a public company. We expect that
these expenses will continue to grow modestly in absolute dollars in future
quarters.
AMORTIZATION OF PURCHASED INTANGIBLES. Purchased intangibles represent
the purchase price of Navio, SourceSuite and MoreCom in excess of identified
tangible assets and are amortized over three years. In August 1997, we
recorded approximately $18.3 million of purchased intangibles, related to the
Navio acquisition. In March 2000, we recorded approximately $192.0 million of
purchased intangibles related to the SourceSuite acquisition. In June 2000,
we recorded approximately $471.5 million of purchased intangibles related to
the MoreCom acquisition. We recorded approximately $1.5 million of
amortization expense for the three months ended August 31, 1999 and
approximately $50.3 million for the three months ended August 31, 2000.
AMORTIZATION OF WARRANTS. As of August 31, 2000, warrants to purchase up
to 2,336,660 shares of common stock were earned by network operators. The fair
market value of these warrants at the time they were earned was $117.2 million.
Amortization of warrants was approximately $360,000 and $6.0 million for the
quarters ended August 31, 1999 and 2000, respectively. This increase was
primarily due to amortization related to additional warrants earned since the
quarter ended August 31, 1999. We expect warrant amortization to continue to
increase as additional warrants are earned. If the remaining warrants are
earned, we will be required to record significant non-cash accounting expenses
related to these warrants. As a result, we could incur net losses or increased
net losses for a given period and this could seriously harm our operating
results and stock price.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Deferred stock compensation
represents the difference between the estimated fair value of our common stock
for accounting purposes and the option exercise price of such options at the
grant date. In fiscal 1999, we began recording deferred stock compensation for
stock options granted to employees and others. These amounts are amortized on a
straight-line basis over the 48-month vesting period of such options.
Amortization of deferred stock compensation was approximately $499,000 for the
three months ended August 31, 2000, compared to amortization of deferred stock
compensation of $504,000 for the three months ended August 31, 1999. We
anticipate that deferred stock compensation expense will remain relatively
stable from year to year, with decreases resulting from the effect of employee
terminations.
INTEREST INCOME, NET
Net interest income consists of interest earned on our cash, cash
equivalents, short-term and long-term investments, partially offset by interest
expense related to capital leases. Net interest income was $7.7
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million for the three months ended August 31, 2000 compared to $1.0 million for
the three months ended August 31, 1999. The increase was due to interest income
on proceeds from our initial public offering of common stock in August 1999, our
secondary offering in February 2000 and the purchase of our common stock by
Cisco Systems in July 2000.
OTHER EXPENSES, NET
Net other expenses include bank charges, losses on disposals of fixed
assets and foreign exchange gains and losses. Net other expenses were $200,000
for the three months ended August 31, 2000 compared to net expenses of $298,000
for the three months ended August 31, 1999. The decrease was primarily due to
losses resulting from disposals of fixed assets for the quarter ended August 31,
1999. There were no disposals of fixed assets for the quarter ended August 31,
2000.
INCOME TAX PROVISION
Income tax provision includes foreign withholding tax expense. Income tax
provision of approximately $204,000 and $41,000 for the three months ended
August 31, 2000 and 1999, respectively, consisted primarily of foreign
withholding tax expense for license and royalty revenues.
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LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity was cash, cash equivalents and
short-term investments, which were approximately $367.5 million as of August 31,
2000. Additionally, we had approximately $144.2 in long-term investments.
Cash used in operating activities was approximately $20.3 million and
$15.4 million for the quarters ended August 31, 2000 and 1999, respectively, an
increase of approximately $4.9 million from year to year. This increase was
primarily due to a higher net loss related primarily to acquisitions and
increased staffing, partially offset by an increase in depreciation and
amortization, as well as the write-off of acquired in-process research and
development related to the MoreCom acquisition for the quarter ended August 31,
2000.
Net cash used in investing activities was approximately $38.8 million and
$46.7 million for the quarters ended August 31, 2000 and 1999, respectively, a
decrease of approximately $7.9 million from year to year. This decrease was
primarily due to the purchase of investments, partially offset by maturities of
investments.
Net cash provided by financing activities was approximately $102.7
million and $110.9 million for the quarters ended August 31, 2000 and 1999,
respectively, a decrease of approximately $8.2 million from year to year. This
decrease was primarily due to the fact that our net proceeds from our initial
public offering and a private placement of our preferred stock in May 1999 were
greater than the net proceeds received by us from the sale of our common stock
to Cisco Systems in July 2000.
At August 31, 2000, we had approximately $176.8 million in cash and cash
equivalents and did not have any material commitments for capital expenditures,
other than a capital lease. At August 31, 2000, we also had approximately $190.7
million in short-term investments and $8.8 million in restricted cash.
Under a development agreement entered into with General Instrument
(recently acquired by Motorola) in April 1999, we are committed to pay $10.0
million in development fees for certain services to be provided by General
Instrument. These fees will be paid out over a three-year period, of which none
was paid for the quarter ended August 31, 2000. Approximately $677,000 was paid
for the quarter ended August 31, 1999.
During the first quarter of fiscal 2000, we signed an amendment to the
Technology License and Distribution Agreement with Sun Microsystems. This
amendment called for us to pay certain minimum royalties and support fees in
exchange for the right to certain Sun technology and to maintain the status as a
preferred vendor of Sun. Minimum guaranteed royalties and support fees of
approximately $3.8 million are to be paid to Sun through the period ended
December 31, 2004. To date, no significant royalty payments have been made.
Support payments are due annually; however, no payments have been made for the
quarter ended August 31, 2000.
We believe that the net proceeds from our various offerings, together
with cash and cash equivalents generated from operations, will be sufficient to
meet our working capital requirements for at least the next 12 months. If our
cash balances and cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to raise such additional funds through
public or private equity or debt financings. If additional funds are raised
through the issuance of debt securities, these securities could have certain
rights, preferences, and privileges senior to holders of common stock, and the
terms of such debt could impose restrictions on our operations. The sale of
additional equity or debt securities could result in additional dilution to our
stockholders. Additional financing may not be available at all and, if
available, such financing may not be obtainable on terms favorable to us. If we
are unable to obtain this additional financing, we may be required to reduce the
scope of our planned product development and marketing efforts, which could
seriously harm our business.
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RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT
We were incorporated in April 1996 and began shipping our initial
products to customers in the last quarter of fiscal 1997. Our limited operating
history makes evaluation of our business and prospects difficult. Companies in
an early stage of development frequently encounter heightened risks and
unexpected expenses and difficulties. For us, these risks include:
- The limited number of network operators who have deployed products
and services incorporating our technology
- The limited number of information appliance manufacturers who have
incorporated our technology into their products
- Delays in deployment of high speed networks and Internet-enhanced
services and applications by our network operator customers
- Our unproven long-term business model, which depends on generating
the majority of our revenues from royalty fees paid by network
operators and information appliance manufacturers
These risks and difficulties apply particularly to us because our market, the
information appliance software market, is new and rapidly evolving.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE
We incurred net losses of approximately $3.3 million in fiscal 1996,
$19.0 million in fiscal 1997, $94.4 million in fiscal 1998, $33.1 million in
fiscal 1999, $80.8 million in fiscal 2000 and $88.2 million for the quarter
ended August 31, 2000. Our net losses of $94.4 million in fiscal 1998 included a
$58.1 million charge for the Navio acquisition related to acquired in-process
research and development. Our net losses of $80.8 million in fiscal 2000
included a $1.9 million charge for the SourceSuite acquisition related to
acquired in-process research and development, amortization of purchased
intangibles of $22.1 million and warrant amortization of $10.8 million. Our net
losses of $88.2 million in the quarter ended August 31, 2000 included a $22.4
million charge for the MoreCom acquisition related to the acquired in-process
research and development, amortization of purchased intangibles of $50.3 million
and warrant amortization of $6.0 million. As of August 31, 2000, we had an
accumulated deficit of approximately $318.7 million.
Since our inception, we have not had a profitable quarter and may never
achieve or sustain profitability. Although our revenues increased for each of
the last three fiscal years, we may not be able to sustain our historical
revenue growth rates. We also expect to continue to incur increasing cost of
revenues, research and development, sales and marketing and general and
administrative expenses. If we are to achieve profitability given our planned
expenditure levels, we will need to generate and sustain substantially increased
license and royalty revenues; however, we are unlikely to be able to do so for
the foreseeable future. As a result, we expect to incur significant and
increasing losses and negative cash flows for the foreseeable future. In
addition, from the beginning of fiscal 1997 through August 31, 2000,
approximately 62% of our revenues have been derived from services provided by us
and not from license and royalty fees paid by network operators and information
appliance manufacturers in conjunction with the deployment of products and
services incorporating our software products. If we are unable to derive a
greater proportion of our revenues from these license and royalty fees, our
losses will likely continue indefinitely.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE
Our quarterly operating results have varied in the past and are likely to
vary significantly from quarter to quarter. As a result, we believe that period
to period comparisons of our operating results are not
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a good indication of our future performance. Moreover, we expect to derive
substantially all of our revenues for the near term from license fees and
related consulting and support services. Over the longer term, to the extent
deployments increase, we expect to derive an increasing portion of our revenues
from royalties paid by network operators and information appliance
manufacturers. If deployments do not increase or this transition otherwise does
not occur, we are unlikely to be able to generate or sustain substantially
increased revenue, and our operating results will be seriously harmed.
In the short term, we expect our quarterly revenues to be significantly
dependent on a small number of relatively large orders for our products and
services, which generally have a long sales cycle. As a result, our quarterly
operating results may fluctuate significantly if we are unable to complete one
or more substantial sales in any given quarter. In some cases, we recognize
revenues from services on a percentage of completion basis. Our ability to
recognize these revenues may be delayed if we are unable to meet service
milestones on a timely basis. Moreover, because our expenses are relatively
fixed in the near term, any shortfall from anticipated revenues could result in
losses for the quarter.
Although we have limited historical financial data, in the past we have
experienced seasonality in our quarter ending August 31. These seasonal trends
may continue to affect our quarter to quarter revenues.
THE MARKET FOR INFORMATION APPLIANCES IS NEW AND MAY NOT DEVELOP AS WE
ANTICIPATE
Because the information appliance market is newly emerging, the potential
size of this new market opportunity and the timing of its development are
uncertain. As a result, our profit potential is unproven. We are dependent upon
the commercialization and broad acceptance by consumers and businesses of a wide
variety of information appliances including, among others, television set-top
boxes, game consoles and personal digital assistants. Initial commercialization
efforts in this industry have been primarily focused on television set-top
boxes. Broad acceptance of all information appliances, particularly television
set-top boxes, will depend on many factors. These factors include:
- The willingness of large numbers of consumers to use devices other
than personal computers to access the Internet
- The development of content and applications for information
appliances
- The emergence of industry standards that facilitate the
distribution of content over the Internet to these devices
If the market for information appliances does not develop or develops more
slowly than we anticipate, our revenues will not grow as fast as anticipated, if
at all.
OUR SUCCESS DEPENDS ON NETWORK OPERATORS INTRODUCING, MARKETING AND PROMOTING
PRODUCTS AND SERVICES FOR INFORMATION APPLIANCES BASED ON OUR TECHNOLOGY
Our success depends on large network operators introducing, marketing and
promoting products and services based on our technology. There are, however,
only a limited number of large network operators worldwide. Moreover, only a
limited number of network operators have introduced or are in the process of
deploying products and services incorporating our technology and services for
information appliances. In addition, none of our network operator customers is
contractually obligated to introduce, market or promote products and services
incorporating our technology, nor are any of our network operator customers
contractually required to achieve any specific introduction schedule.
Accordingly, even if a network operator initiates a customer trial of products
incorporating our technology, that operator is under no obligation to continue
its relationship with us or to launch a full-scale deployment of these products.
Further, our agreements with network operators are not exclusive, so network
operators with whom we have agreements may enter into similar license agreements
with one or more of our competitors.
Moreover, because the large scale deployment of products and services
incorporating our technology by network operators is complex, time consuming and
expensive, each deployment of these products and services requires our
expertise. This customization process requires a lengthy and significant
commitment of resources by our customers and us. This commitment of resources
may slow deployment,
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which could, in turn, delay market acceptance of these products and services.
Unless network operators introduce, market and promote products and services
incorporating our technology in a successful and timely manner, our software
platform will not achieve widespread acceptance, information appliance
manufacturers will not use our software in their products and our revenues will
not grow as fast as anticipated, if at all.
IF INFORMATION APPLIANCE MANUFACTURERS DO NOT MANUFACTURE PRODUCTS THAT
INCORPORATE OR OPERATE WITH OUR TECHNOLOGY, OR IF THESE PRODUCTS DO NOT ACHIEVE
ACCEPTANCE, WE MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS
We do not manufacture hardware components that incorporate our
technology. Rather, we license software technology to information appliance
manufacturers or work with them to ensure that our products operate together.
Accordingly, our success will depend, in part, upon our ability to convince a
number of information appliance manufacturers to manufacture products that
incorporate or operate with our technology and the successful introduction and
commercial acceptance of these products. Our efforts also significantly depend
on network operators deploying services using our server software.
While we have entered into a number of agreements with information
appliance manufacturers, none of these manufacturers is contractually obligated
to introduce or market information appliances incorporating our technology, nor
is any of them contractually required to achieve any specific production
schedule. Moreover, our agreements with information appliance manufacturers are
not exclusive, so information appliance manufacturers with whom we have
agreements may enter into similar license agreements with one or more of our
competitors. Our failure to convince information appliance manufacturers to
incorporate our software platform into their products or modify their products
to operate with our software, or the failure of these products to achieve broad
acceptance with consumers and businesses, will result in revenues that do not
grow as fast as expected, if at all.
COMPETITION FROM BIGGER, BETTER CAPITALIZED COMPETITORS COULD RESULT IN PRICE
REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE
Competition in the information appliance software market is intense. Our
principal competitors on the client software side include Microsoft, OpenTV
(which recently acquired another former competitor, Spyglass), Canal +
Technologies and PowerTV. On the server side, our primary competitor is
Microsoft. We expect additional competition from other established and emerging
companies. We expect competition to persist and intensify as the information
appliance market develops and competitors focus on additional product and
service offerings. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins, longer sales cycles, reduced revenues
and loss of market share.
Many of our existing and potential competitors, particularly Microsoft,
have longer operating histories, a larger customer base, greater name
recognition and significantly greater financial, technical, sales and marketing
and other resources than we do. This may place us at a disadvantage in
responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives. In
addition, many of our competitors have well-established relationships with our
current and potential customers. Moreover, some of our competitors, particularly
Microsoft, have significant financial resources, which have enabled them in the
past and may enable them in the future to make large strategic investments in
our current and potential customers. Such investments may enable competitors to
strengthen existing relationships or quickly establish new relationships with
our current or potential customers. For example, as a result of an investment in
AT&T, Microsoft obtained a nonexclusive licensing agreement under which AT&T
will purchase up to 7.5 million licenses of Microsoft software for television
set-top boxes. Investments such as this may discourage our potential or current
customers who receive these investments from deploying our information appliance
software, regardless of their views of the relative merits of our products and
services.
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ORACLE'S OWNERSHIP OF OUR STOCK AND OTHER RELATIONSHIPS WITH US COULD LIMIT THE
ABILITY OF OTHER STOCKHOLDERS TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND
OTHER TRANSACTIONS SUBMITTED FOR A VOTE OF OUR STOCKHOLDERS
Based on 102,842,188 shares outstanding on August 31, 2000, Oracle
beneficially owns 35,374,843 shares, approximately 34% of our outstanding common
stock. In addition, Comcast, Cox, MediaOne - each a network operator and an
investor in us - and Oracle have agreed to vote the shares of our common stock
held by them to elect a representative designated by Oracle to our Board of
Directors. However, no Oracle designee currently serves on our Board of
Directors. Oracle, through its ownership of our capital stock, may exert
significant influence over us, including: influence over matters that require
stockholder approval; the election of directors; significant corporate
transactions, such as acquisitions; and efforts to block an unsolicited tender
offer. This concentration of ownership could also have the effect of delaying or
preventing a third party from acquiring control over us at a premium above the
then current market price of our common stock.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES
We currently derive, and we expect to continue to derive, a significant
portion of our revenues from a limited number of customers. For the quarter
ended August 31, 2000, our three largest customers accounted for approximately
45% of our revenues, with Cable & Wireless accounting for 20% of our total
revenues, America Online accounting for 13% of our total revenues and Telewest
accounting for 12% of our total revenues. For the quarter ended August 31, 1999,
our four largest customers accounted for approximately 55% of our total
revenues, with Wind River Systems accounting for 20% of our total revenues,
Cable & Wireless accounting for 13% of our total revenues, US West accounting
for 12% of our total revenues and Intel accounting for 10% of our total
revenues. We expect that we will continue to be dependent upon a limited number
of customers for a significant portion of our revenues in future periods,
although the customers may vary from period to period. As a result, if we fail
to successfully sell our products and services to one or more customers in any
particular period, or a large customer purchases fewer of our products or
services, defers or cancels orders, or terminates its relationship with us, our
revenues could decline significantly.
OUR LENGTHY SALES CYCLE MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE
We believe that the purchase of our products and services involves a
significant commitment of capital and other resources by a customer. In many
cases, the decision for our customers to use our products and services requires
them to change their established business practices and conduct their business
in new ways. As a result, we may need to educate our potential customers on the
use and benefits of our products and services. In addition, our customers
generally must consider a wide range of other issues before committing to
purchase and incorporate our technology into their offerings. As a result of
these and other factors, including the approval at a number of levels of
management within a customer's organization, our sales cycle averages from six
to twelve months and may sometimes be significantly longer. Because of the
length of our sales cycle, we have a limited ability to forecast the timing and
amount of specific sales.
In addition, we base our quarterly revenue projections, in part, upon our
expectation that specific sales will occur in a particular quarter. In the past,
our sales have occurred in quarters other than those anticipated by us. If our
expectations, and thus our revenue projections, are not accurate for a
particular quarter, our actual operating results for that quarter could fall
below the expectations of financial analysts and investors resulting in a
potential decline in our stock price.
DEMAND FOR OUR PRODUCTS AND SERVICES WILL DECLINE SIGNIFICANTLY IF OUR SOFTWARE
CANNOT SUPPORT AND MANAGE A SUBSTANTIAL NUMBER OF USERS
Despite frequent testing of our software's scalability in a laboratory
environment, the ability of our software platform to support and manage a
substantial number of users in an actual deployment is
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uncertain. If our software platform does not efficiently scale to support and
manage a substantial number of users while maintaining a high level of
performance, demand for our products and services and our ability to sell
additional products to our existing customers will be significantly reduced.
INTERNATIONAL REVENUES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES;
ACCORDINGLY, IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS IN A TIMELY
MANNER, OUR FINANCIAL RESULTS WILL BE HARMED
International revenues accounted for approximately 58% of our total
revenues for the quarter ended August 31, 2000 and approximately 47% for the
quarter ended August 31, 1999. We anticipate that a significant portion of our
revenues for the foreseeable future will be derived from sources outside the
United States, especially as we increase our sales and marketing activities with
respect to international licensing of our technology. Accordingly, our success
will depend, in part, upon international economic conditions and upon our
ability to manage international sales and marketing operations. To successfully
expand international sales, we must establish additional foreign operations,
hire additional personnel and increase our foreign direct and indirect sales
forces. This expansion will require significant management attention and
resources, which could divert attention from other aspects of our business. To
the extent we are unable to expand our international operations in a timely
manner, our growth in international sales, if any, will be limited.
Moreover, substantially all of our revenues and costs to date have been
denominated in U.S. dollars. However, expanded international operations may
result in increased foreign currency payables. Although we may from time to time
undertake foreign exchange hedging transactions to cover a portion of our
foreign currency transaction exposure, we do not currently attempt to cover
potential foreign currency exposure. Accordingly, any fluctuation in the value
of foreign currency could seriously harm our ability to increase international
revenues.
WE MAY HAVE TO CEASE OR DELAY PRODUCT SHIPMENTS IF WE ARE UNABLE TO OBTAIN KEY
TECHNOLOGY FROM THIRD PARTIES
We rely on technology licensed from third parties, including applications
that are integrated with internally developed software and used in our products.
Most notably, we license certain technologies from Sun Microsystems, Wind River
Systems, BitStream, RealNetworks and RSA. These third party technology licenses
may not continue to be available to us on commercially reasonable terms, or at
all, and we may not be able to obtain licenses for other existing or future
technologies that we desire to integrate into our products. If we cannot
maintain existing third party technology licenses or enter into licenses for
other existing or future technologies needed for our products we would be
required to cease or delay product shipments while we seek to develop
alternative technologies.
WE DO NOT CURRENTLY HAVE LIABILITY INSURANCE TO PROTECT AGAINST THIRD PARTY
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE EXPENSIVE TO DEFEND
We expect that, like other software product developers, we will
increasingly be subject to infringement claims as the number of products and
competitors developing information appliance software grows and the
functionality of products in different industry segments overlaps. From time to
time, we hire or retain employees or external consultants who have worked for
independent software vendors or other companies developing products similar to
those offered by us. These prior employers may claim that our products are based
on their products and that we have misappropriated their intellectual property.
We cannot guarantee that:
- An infringement claim will not be asserted against us in the
future
- The assertion of such a claim will not result in litigation
- We would prevail in such litigation
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- We would be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially
reasonable terms, or at all
We currently do not have liability insurance to protect against the risk
that licensed third party technology infringes the intellectual property of
others. Any claims relating to our intellectual property, regardless of their
merit, could seriously harm our ability to develop and market our products and
manage our day to day operations because they could:
- Be time consuming and costly to defend
- Divert management's attention and resources
- Cause product shipment delays
- Require us to redesign our products
- Require us to enter into royalty or licensing agreements
WE COULD SUFFER LOSSES AND NEGATIVE PUBLICITY IF OUR TECHNOLOGY CAUSES A FAILURE
OF OUR NETWORK OPERATOR CUSTOMERS' SYSTEMS
Our technology is integrated into the products and services of our
network operator customers. Accordingly, a defect, error or performance problem
with our technology could cause our customers' telecommunication, cable and
satellite television or Internet service systems to fail for a period of time.
Any such failure will cause severe customer service and public relations
problems for our customers. As a result, any failure of our network operator
customers' systems caused by our technology could result in:
- Delayed or lost revenue due to adverse customer reaction
- Negative publicity regarding us and our products and services
- Claims for substantial damages against us, regardless of our
responsibility for such failure
Any claim could be expensive and require the expenditure of a significant amount
of resources regardless of whether we prevail. We currently do not have
liability insurance to protect against this risk.
OUR SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH THE LATEST TECHNOLOGICAL
CHANGES BUT WE HAVE EXPERIENCED AND MAY IN THE FUTURE EXPERIENCE DELAYS IN
COMPLETING DEVELOPMENT AND INTRODUCTION OF NEW SOFTWARE PRODUCTS
The market for information appliance software is characterized by
evolving industry standards, rapid technological change and frequent new product
introductions and enhancements. Our technology enables network operators to
deliver content and applications to information appliances over the Internet.
Accordingly, our success will depend in large part upon our ability to adhere to
and adapt our products to evolving Internet protocols and standards. Therefore,
we will need to develop and introduce new products that meet changing customer
requirements and emerging industry standards on a timely basis. In the past, we
have experienced delays in completing the development and introduction of new
software products. We may encounter such delays in the development and
introduction of future products as well. In addition, we may:
- Fail to design our current or future products to meet customer
requirements
- Fail to develop and market products and services that respond to
technological changes or evolving industry standards in a timely
or cost effective manner
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- Encounter products, capabilities or technologies developed by
others that render our products and services obsolete or
noncompetitive or that shorten the life cycles of our existing
products and services
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
MAY HARM OUR COMPETITIVENESS
Our ability to compete and continue to provide technological innovation
is substantially dependent upon internally developed technology. We rely
primarily on a combination of patents, trademark laws, copyright laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technology. While we have numerous patent applications pending,
patents may not issue from these or any future applications. In addition, our
existing and future patents may not survive a legal challenge to their validity
or provide significant protection for us.
The steps we have taken to protect our proprietary rights may not be
adequate to prevent misappropriation of our proprietary information. Further, we
may not be able to detect unauthorized use of, or take appropriate steps to
enforce, our intellectual property rights. Our competitors may also
independently develop similar technology. In addition, the laws of many
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. Any failure by us to meaningfully protect our
intellectual property could result in competitors offering products that
incorporate our most technologically advanced features, which could seriously
reduce demand for our products and services.
FAILURE TO MANAGE OUR GROWTH MAY SERIOUSLY HARM OUR ABILITY TO DELIVER PRODUCTS
IN A TIMELY MANNER, FULFILL EXISTING CUSTOMER COMMITMENTS AND ATTRACT AND RETAIN
NEW CUSTOMERS
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources,
especially as more network operators and information appliance manufacturers
incorporate our software into their products and services. This potential for
rapid growth is particularly significant in light of the large customer bases of
network operators and information appliance manufacturers and the frequent need
to tailor our products and services to our customers' unique needs. To the
extent we add several customers simultaneously or add customers whose product
needs require extensive customization, we may need to significantly expand our
operations. Moreover, we expect to significantly expand our domestic and
international operations by, among other things, expanding the number of
employees in professional services, research and development and sales and
marketing.
This additional growth will place a significant strain on our limited
personnel, financial and other resources. Our future success will depend, in
part, upon the ability of our senior management to manage growth effectively.
This will require us to implement additional management information systems, to
further develop our operating, administrative, financial and accounting systems
and controls, to hire additional personnel, to develop additional levels of
management within the corporation, to locate additional office space in the
United States and internationally and to maintain close coordination among our
research and development, sales and marketing, services and support and
administrative organizations. Failure to accomplish any of these requirements
would seriously harm our ability to deliver products in a timely fashion,
fulfill existing customer commitments and attract and retain new customers.
THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD HARM OUR COMPETITIVENESS
We believe that our success will depend on the continued employment of
our senior management team and key technical personnel, none of whom, except
Mitchell E. Kertzman, our President and Chief Executive Officer, Coleman Sisson,
our Chief Operating Officer, and Philip A. Vachon, our Senior Vice President of
Worldwide Sales, has an employment agreement with us. If one or more members of
our senior management team or key technical personnel were unable or unwilling
to continue in their present positions, these individuals would be very
difficult to replace and our ability to manage day to day operations, develop
and deliver new technologies, attract and retain customers, attract and retain
other employees and generate revenues, would be seriously harmed.
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OUR PLANNED EXPANSION OF OUR INDIRECT DISTRIBUTION CHANNELS WILL BE EXPENSIVE
AND MAY NOT SUCCEED
To date, we have sold our products and services principally through our
direct sales force. In the future, we intend to expand the number and reach of
our indirect channel partners, primarily overseas, through distribution
agreements. The development of these indirect channels will require the
investment of significant company resources, which could seriously harm our
business if our efforts do not generate significant revenues. Moreover, we may
not be able to attract indirect channel partners that will be able to
effectively market our products and services. The failure to recruit indirect
channel partners that are able to successfully market our products and services
could seriously hinder the growth of our business.
WE MAY NEED TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN OUR MARKET
AND ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND
DILUTE STOCKHOLDER VALUE
We may acquire other businesses in the future in order to remain
competitive or to acquire new technologies. As a result of future acquisitions,
we may need to integrate product lines, technologies, widely dispersed
operations and distinct corporate cultures. In addition, the product lines or
technologies of future acquisitions may need to be altered or redesigned in
order to be made compatible with our software products or the software
architecture of our customers. These integration efforts may not succeed or may
distract our management from operating our existing business. Our failure to
successfully manage future acquisitions could seriously harm our operating
results. In addition, our stockholders would be diluted if we finance
acquisitions by incurring convertible debt or issuing equity securities.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE ACQUISITIONS INTO OUR BUSINESS OR
ACHIEVE THE EXPECTED BENEFITS OF THE ACQUISITIONS
Our acquisitions of SourceSuite and MoreCom will continue to require
integrating our business with their businesses, including integrating product
lines, technologies, widely-dispersed operations and distinct corporate
cultures. We may not be able to successfully assimilate the personnel,
operations and customers of these acquired companies into our business.
Additionally, we may fail to achieve the anticipated synergies from these
acquisitions, including product development and other operational synergies. The
integration process may further strain our existing financial and managerial
controls and reporting systems and procedures. This may result in the diversion
of management and financial resources from our core business objectives. In
addition, we are not experienced in managing significant facilities or
operations in geographically distant areas. Further, we may not be able to
retain various individuals who provide services to these acquired companies that
we have hired in connection with these acquisitions. Our failure to successfully
manage these acquired companies could seriously harm our operating results.
WE MAY INCUR NET LOSSES OR INCREASED NET LOSSES IF WE ARE REQUIRED TO RECORD A
SIGNIFICANT ACCOUNTING EXPENSE RELATED TO THE ISSUANCE OF WARRANTS
In fiscal year 1999, we entered into letter agreements with several
network operators whereby we agreed to issue warrants to purchase up to an
aggregate of 4,599,992 shares of common stock which are exercisable if those
network operators satisfy certain milestones. The value of the warrants is
estimated using the Black-Scholes model as of the earlier of the grant date
or the date that it becomes probable that the warrants will be earned.
Pursuant to the requirements of Emerging Issues Task Force No. 96-18, the
warrants will continue to be revalued in situations where they are granted
prior to the establishment of a performance commitment. The value of the
warrants is recorded primarily as a noncurrent asset on the accompanying
condensed consolidated balance sheets and will be amortized over the
estimated economic life of the arrangements with the network operators.
As of August 31, 2000, warrants to purchase up to 2,336,660 shares of our
common stock were earned by these network operators. The fair market value of
these warrants at the time they were earned was $117.2 million. As of August 31,
2000, accumulated amortization for the warrants was $16.8 million.
If the remaining warrants are earned, we will be required to record
significant non-cash accounting expenses related to these warrants. As a result,
we could incur net losses or increased net losses for a given period and this
could seriously harm our operating results and stock price.
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DEMAND FOR OUR PRODUCTS AND SERVICES WILL NOT INCREASE IF THE INTERNET DOES NOT
CONTINUE TO GROW AND IMPROVE
Acceptance of our software platform depends substantially upon the
widespread adoption of the Internet for commerce, communications and
entertainment. As is typical in the case of an emerging industry characterized
by rapidly changing technology, evolving industry standards and frequent new
product and service introductions, demand for and acceptance of recently
introduced Internet products and services are subject to a high level of
uncertainty. In addition, critical issues concerning the commercial use of the
Internet remain unresolved and may affect the growth of Internet use, especially
in the consumer markets we target. The adoption of the Internet for commerce,
communications and access to content and applications, particularly by those
that have historically relied upon alternative means of commerce, communications
and access to content and applications, generally requires understanding and
acceptance of a new way of conducting business and exchanging information.
Moreover, widespread application of the Internet outside of the United States
will require reductions in the cost of Internet access to prices affordable to
the average consumer.
To the extent that the Internet continues to experience an increase in
users, an increase in frequency of use or an increase in the amount of data
transmitted by users, we cannot guarantee that the Internet infrastructure will
be able to support the demands placed upon it. In addition, the Internet could
lose its viability as a commercial medium due to delays in development or
adoption of new standards or protocols required to handle increased levels of
Internet activity, or due to increased government regulation. Changes in, or
insufficient availability of, telecommunications or similar services to support
the Internet could also result in slower response times and could adversely
impact use of the Internet generally. If use of the Internet does not continue
to grow or grows more slowly than expected, or if the Internet infrastructure,
standards, protocols or complementary products, services or facilities do not
effectively support any growth that may occur, demand for our products and
services will decline significantly.
INCREASING GOVERNMENT REGULATION COULD CAUSE DEMAND FOR OUR PRODUCTS AND
SERVICES TO DECLINE SIGNIFICANTLY
We are subject not only to regulations applicable to businesses
generally, but also laws and regulations directly applicable to the Internet.
Although there are currently few such laws and regulations, state, federal and
foreign governments may adopt a number of these laws and regulations governing
any of the following issues:
- User privacy
- Copyrights
- Consumer protection
- Taxation of e-commerce
- The online distribution of specific material or content
- The characteristics and quality of online products and services
We do not engage in e-commerce, nor do we distribute content over the
Internet. However, one or more states or the federal government could enact
regulations aimed at companies, like us, which provide software that facilitates
e-commerce and the distribution of content over the Internet. The likelihood of
such regulation being enacted will increase as the Internet becomes more
pervasive and extends to more people's daily lives. Any such legislation or
regulation could dampen the growth of the Internet and decrease its acceptance
as a communications and commercial medium. If such a reduction in growth occurs,
demand for our products and services will decline significantly.
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WE EXPECT OUR OPERATIONS TO CONTINUE TO PRODUCE NEGATIVE CASH FLOW;
CONSEQUENTLY, IF WE CANNOT RAISE ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO FUND
OUR CONTINUED OPERATIONS
Since our inception, cash used in our operations has substantially
exceeded cash received from our operations, and we expect this trend to continue
for the foreseeable future. We believe that our existing cash balances will be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds, and
we cannot be certain that we will be able to obtain additional financing on
favorable terms, or at all. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to, among other things:
- Develop or enhance our products and services
- Acquire complementary technologies, products or businesses
- Open new offices, in the United States or internationally
- Hire, train and retain employees
- Respond to competitive pressures or unanticipated requirements
PROVISIONS OF OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DETER TAKEOVERS AND
PREVENT YOU FROM RECEIVING A PREMIUM FOR YOUR SHARES
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a change in control of our company that a
stockholder may consider favorable. These provisions include:
- Authorizing the issuance of "blank check" preferred stock that
could be issued by our Board of Directors to increase the number
of outstanding shares and thwart a takeover attempt
- Requiring super-majority voting to effect certain amendments to
our certificate of incorporation and bylaws
- Limitations on who may call special meetings of stockholders
- Prohibiting stockholder action by written consent, which requires
all actions to be taken at a meeting of the stockholders
- Establishing advance notice requirements for nominations of
candidates for election to the Board of Directors or for proposing
matters that can be acted upon by stockholders at stockholder
meetings
In addition, Section 203 of the Delaware General Corporation Law and
provisions in our stock incentive plans may discourage, delay or prevent a
change in control of our company.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. This risk is especially acute for us because technology companies
have experienced greater than average stock price volatility in recent years
and, as a result, have been subject to, on average, a greater number of
securities class action claims than companies in other industries. Due to the
potential volatility of our stock price, we may in the future be the target of
similar litigation. Securities litigation could result in substantial costs and
divert management's attention and resources.
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OUR STOCK PRICE COULD DECLINE BY SHARES BECOMING AVAILABLE FOR SALE IN THE
FUTURE
Shares of our common stock that are restricted, either by law or
otherwise, will become available for resale in the future. This includes the
eligibility for sale of 3,963,780 shares on July 19, 2001, pursuant to Rule 144,
upon the satisfaction of the Rule 144 holding period. These resales could
adversely affect the market price of our common stock and could impair our
ability to raise capital through the sale of additional equity securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
As of August 31, 2000, our investment portfolio includes $384.3 million
of U.S. government obligations, commercial paper and other corporate securities
which are subject to no interest rate risk when held to maturity but may
increase or decrease in value if interest rates change prior to maturity. We do
not use derivative financial instruments in our investment portfolio. We place
our investments with high credit quality issuers and, by policy, limit the
amount of credit exposure to any one issuer. As stated in our policy, we are
averse to principal loss and seek to preserve our invested funds by limiting the
fault risk, market risk and reinvestment risk. We currently maintain sufficient
cash and cash equivalent balances to typically hold our investments to maturity.
An immediate 10% change in interest rates would be immaterial to our financial
condition or results of operations.
FOREIGN CURRENCY/EXCHANGE RATE RISK
We transact business in various foreign currencies and, accordingly, we
are subject to exposure from adverse movements in foreign currency exchange
rates. To date, the effect of changes in foreign currency exchange rates on
revenues and operating expenses have not been material. Substantially all of our
revenues are earned in U.S. dollars. Operating expenses incurred by our foreign
subsidiaries are denominated primarily in European currencies. We currently do
not use financial instruments to hedge these operating expenses. We intend to
assess the need to utilize financial instruments to hedge currency exposures on
an ongoing basis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As part of our acquisition of the Virtual Modem software product and
related assets and technology of SourceSuite, we acquired certain patents
that were the subject of a patent infringement lawsuit. This lawsuit was
initially brought by Interactive Channel Technologies and SMI Holdings,
affiliated companies of SourceSuite, against Worldgate Communications in May
1998. The patent infringement claims have been assigned to us as a result of
our merger with SourceSuite. In June 1998, Worldgate filed a counterclaim
against the plaintiffs and Source Media, a shareholder of SourceSuite,
alleging among others, violations of the Lanham Act and Delaware's Uniform
Deceptive Trade Practices Act, common law unfair competition, tortious
interference with existing and prospective business relationships and
misappropriation of confidential information and trade secrets. The case is
still in the discovery stage. Briefing on the patent claim construction issues
has been completed. We believe that the patent infringement claims against
Worldgate are valid and intend to continue to vigorously prosecute this
action. In addition, we have agreed to defend Interactive Channel, SMI
Holdings and Source Media against the cross-complaint brought by Worldgate.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) CHANGES IN SECURITIES
On July 19, 2000, we agreed to issue 3,963,780 shares of common stock to
Cisco Systems, resulting in aggregate cash proceeds of approximately $100.0
million. The issuance of these shares was deemed to be exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of the Securities
Act of 1933, as amended.
On June 22, 2000, we issued an aggregate of 7,310,830 shares of common
stock in exchange for all of the outstanding stock of MoreCom and assumed all of
MoreCom's stock options. The issuance of these shares was deemed to be exempt
from registration under the Securities Act of 1933 in reliance on Section
3(a)(10) of the Securities Act of 1933, as amended. The terms and conditions of
such issuance were approved after a hearing upon the fairness of such terms and
conditions by a government authority expressly authorized by law to grant such
approval.
(d) USE OF PROCEEDS
On July 19, 2000 we agreed to issue 3,963,780 shares of common stock
to Cisco Systems at approximately $25.23 per share. Aggregate cash proceeds
from this transaction were approximately $100.0 million. The net proceeds
will be used and have been applied to working capital and were predominantly
held in cash, cash equivalents and short-term investments at August 31, 2000.
ITEM 3. DEFAULTS IN SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
-------
NO. EXHIBIT
--- -------
<S> <C>
2.3 Plan and Agreement of Reorganization with MoreCom, Inc., dated March
27, 2000. (Incorporated by reference to similarly numbered exhibit
to the Form 8-K filed by the Registrant on July 7, 2000).
2.4 Amendment No. 1 to Plan and Agreement of Reorganization with
MoreCom, Inc. (Incorporated by reference to similarly numbered
exhibit to the Form 8-K filed by the Registrant on July 7, 2000).
3.1 Amended and Restated Bylaws of Liberate. (Incorporated by reference
to Exhibit 3.4 to the Registration Statement on Form S-1 filed by
the Registrant (Reg. No. 333-78781).)
3.2 Sixth Amended and Restated Certificate of Incorporation of Liberate.
(Incorporated by reference to Exhibit 3.5 to the Registration
Statement on Form S-1 filed by the Registrant (Reg. No. 333-78781).)
4.1 Specimen Certificate of Liberate's common stock. (Incorporated by
reference to similarly numbered exhibit to the Registration
Statement on Form S- 1 filed by the Registrant (Reg. No.
333-78781).)
27.1 Financial Data Schedule.
</TABLE>
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(b) REPORTS ON FORM 8-K
(1) On July 7, 2000, Liberate filed a report on Form 8-K relating to the
acquisition of MoreCom, Inc., a leading provider of standards based
interactive television infrastructure based in Horsham,
Pennsylvania.
(2) On July 14, 2000, Liberate filed a report on Form 8-K/A relating to
the financial statements of MoreCom, Inc.
(3) On July 28, 2000, Liberate filed a report on Form 8-K relating to
Cisco Systems' investment in Liberate Technologies.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
undersigned, thereunto duly authorized.
Liberate Technologies
Date: October 12, 2000 by: /s/ Nancy J. Hilker
----------------------
Nancy J. Hilker,
Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
28
