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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 000-25687
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PHONE.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3219054
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
800 Chesapeake Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 562-0200
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $2,229,779 as of August 31, 1999, based upon the
closing sale price on the Nasdaq National Market reported for such date. Shares
of Common Stock held by each officer and director and by each person who owns
5% of more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
There were 31,259,864 shares of the registrant's Common Stock issued and
outstanding as of August 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company's 1999 Annual Meeting of
Stockholders to be filed hereafter (incorporated into Part III hereof).
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PART I
Item 1. Business.
We are a leading provider of software that enables the delivery of Internet-
based services to mass-market wireless telephones. Using our software, network
operators can provide Internet-based services to their wireless subscribers,
and wireless telephone manufacturers can turn their mass-market wireless
telephones into mobile Internet appliances. Wireless subscribers thus have
access to Internet- and corporate intranet-based services, including email,
news, stocks, weather, travel and sports. In addition, subscribers have access
via their wireless telephones to network operators' intranet-based telephony
services, which may include over-the-air activation, call management, billing
history information, pricing plan subscription and voice message management.
Our software platform consists of the UP.Link Server Suite, which is installed
on network operators' systems, and UP.Browser, which is embedded in wireless
telephones. As of August 1999, 31 network operators have licensed our software
and have commenced or announced commercial service or are in market or
laboratory trials. In addition, 25 wireless telephone manufacturers have
licensed UP.Browser.
In September 1999, we announced MyPhone, our mobile Internet portal platform
that enables network operators to rapidly deploy branded portal sites for their
wireless subscribers. With MyPhone, network operators can provide their
subscribers with a customized set of information services and applications that
are optimized for the mobile user, thereby enhancing subscriber loyalty and
capturing new revenue opportunities.
Industry Background
Growth of the Internet
The Internet has emerged as a global communications medium enabling millions
of people to share information and conduct business electronically.
International Data Corporation, or IDC, estimates that there were approximately
159 million users of the Internet worldwide at the end of 1998 and that the
number of users will grow to 410 million by the end of 2002. We cannot assure
you that this estimate will be achieved. The dramatic growth in the number of
business and consumer Internet users has led to a proliferation of useful
information and services on the Internet, including email, news, electronic
commerce, educational and entertainment applications and a multitude of other
value-added services. As a result, the Internet has become a primary and
ubiquitous daily resource for millions of people.
Growth of Wireless Telecommunications
Worldwide use of wireless telecommunications has grown rapidly as cellular
and other emerging wireless communications services have become more widely
available and affordable for the mass business and consumer markets. Advances
in technology, changes in telecommunications regulations and the allocation and
licensing of additional radio spectrum have contributed to this growth
worldwide. Dataquest estimates that there were approximately 187 million
digital wireless subscribers worldwide at the end of 1998 and that the number
of subscribers will grow to 590 million by the end of 2002. We cannot assure
you that this estimate will be achieved.
The Wireless Network Operator Environment
As a result of deregulation, new radio frequency spectrum licenses,
privatizations and rapid network expansion by new entrants, the competitive
environment among network operators in major markets worldwide has become
intense. Efforts to attract and retain subscribers have resulted in significant
price-based competition. Increased competition has in turn raised the costs
associated with acquiring new subscribers, has lowered average revenues per
subscriber, and has increased the propensity of subscribers to switch from one
network operator to another. For these reasons, network operators are looking
for new revenue sources in the form of value-added services they can deliver to
their wireless subscribers. They are also looking for ways to
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differentiate their product offerings in an effort to retain subscribers.
Finally, they are focused on finding and deploying solutions that enable them
to deliver and support their services in a more cost-effective manner.
The Convergence of the Internet and Mobile Telephony
As people have become increasingly dependent on email services, remote
access to corporate intranets, and other Internet-based services, mass-market
wireless telephones that provide mobile access to these resources have become
increasingly useful tools. Phone.com was a pioneer in the convergence of the
Internet and mobile telephony. In 1995, Phone.com developed its initial
technology, which enables the delivery of Internet-based services to wireless
telephones. In 1996, Phone.com introduced and deployed its first products based
on this technology.
To provide a worldwide open standard enabling the delivery of Internet-based
services to mass-market wireless telephones, Phone.com, Ericsson, Motorola and
Nokia formed the Wireless Application Protocol Forum. In 1998, the WAP Forum
published technical specifications for application and content development and
product interoperability based on Internet technology and standards. By
complying with WAP specifications, wireless telephone manufacturers, network
operators, content providers and application developers can provide Internet-
based products and services that are interoperable.
In 1998, the WAP Forum published the Wireless Markup Language, or WML. WML
is compliant with the Extensible Markup Language, or XML, specification
published by the World Wide Web Consortium. XML is a programming language that
provides a means of describing and exchanging data in an open format. Content
providers and application developers use WML to optimize the display of, and
interaction with, Web-based data on wireless telephones. Based substantially on
technology that Phone.com contributed to the public domain, WML is optimized
for delivery of Internet content to mass-market wireless telephones, which have
numeric keypads instead of full keyboards, small screens, and limited memory
capacity, processing power, battery life and bandwidth. In the same manner that
the programming language known as Hypertext Markup Language, or HTML, has
provided an open standard that has fueled the development of Internet
applications and content for personal computers, WML is designed to be an
industry standard that will encourage the development of Internet applications
and content for wireless telephones.
Leading network operators, telecommunications device and equipment
manufacturers, and software and services companies worldwide have sanctioned
the specifications promulgated by the WAP Forum. Charles Parrish, Executive
Vice President of Phone.com, currently serves as the Vice Chairman of the WAP
Forum, which has grown to over 150 members as of September 1999, including the
following companies:
Board Members
Phone.com Motorola
Alcatel Nokia Mobile Phones
CEGETEL/SFR (Societe Francaise du Radio NTT Mobile Communications Network
Telephone) (NTT DoCoMo)
DDI Corporation SBC Communications
Ericsson Mobile Communications AB Sprint PCS
IBM Telstra Corporation
Matsushita Communication Industrial
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Network Operators
AT&T Wireless Services Mannesmann
Bell Atlantic Mobile Nextel Communications
BellSouth Cellular Omnitel
Bouygues Telecom One 2 One
Cable & Wireless Orange Communications
Cellnet Communications Radiolinja
CoCoNet Global Interchange Rogers Cantel Mobile Communications
Connect Austria SK Telecom
Deutsche Telecom Mobilnet GmbH Sonera Corporation
FarEasTone Telecommunications SWISSCOM LTD.
Giesecke & Devrient Tokyo Digital Phone
Hongkong Telecom Mobile Services Telecom Italia Mobile
IDO Corporation Telenor Mobil Group
Japan Telecom TU-KA Cellular Tokyo
KPN Vodafone
LG TeleCom
Device and Equipment Manufacturers
Acer Peripherals ORGA Kartensysteme GmbH
Bosch Telecom Danmark A/S Philips Consumer Communications
Bull CP8 Pioneer
CMG Telecommunications & Utilities Qualcomm
De La Rue Card Systems RTS Wireless
DENSO Samsung Electronics
Gemplus Schlumberger Industries S.A.
Hewlett-Packard Sema Group Telecom
Hitachi Sharp
ICO Global Communications Siemens AG
Intel Corporation Sony International (Europe) GmbH
LG Information & Communications Tecnomen Oy
Logica Aldiscon Telital S.p.A.
Lucent Technologies Toshiba
Mitsubishi Wireless Communications Uniden
NEC Technologies (UK) Unisys
Nissan Communications Systems
Nortel
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Software and Services Companies
@MOTION M.D. Communications
Advance Systems Limited Merita Bank
Aether Systems Microsoft
Agency.com Mobile Services Group
ApiON Myalertcom
AU-System Mobile Oracle Corporation
Baltimore Technologies Peramon Technology
BEA Systems ProxiNet
Bussan Systems Integration Company Puma Technology
Certicom RSA Data Security
Charles Schwab & Co. Saraide
Comverse Network Systems Sendit AB
CCL (Computer & Communications Research Scandinavian Softline Technology Oy Softline
Laboratories, ITRI) Spyglass
CTC (Itochu Techno-Science Corporation) Symbian
CycleLogic Systems Engineering Consultants
Dr. Materna GmbH TANTAU Software
Digital Mobility Tegic Communications
Diversinet TWS
Dolphin Telecommunications Union Bank of Switzerland
Evolving Systems Usha Communications Technology
Fantastic Corporation VTT Information Technology
Fujitsu Software Corporation VeriSign
Geoworks Corporation Visa International
Glenayre Technologies WapIT
Lexacom Wireless Knowledge
LPG Innovations
MapQuest.com
The Market Opportunity
In response to an increasingly competitive environment, network operators
are seeking to deliver Internet-based services to their wireless subscribers as
a means to generate revenues from new sources, differentiate their service
offerings, and reduce subscriber turnover and operating costs. To do this,
network operators require a scalable turnkey software and services solution to
deliver Internet-based services and content to their wireless subscribers.
The Phone.com Solution
We provide a leading software infrastructure platform that enables the
delivery of Internet-based services to mass-market wireless telephones. Using
our scalable platform, network operators can provide Internet-based content,
applications and services to their wireless subscribers, and wireless telephone
manufacturers can turn their mass-market wireless telephones into mobile
Internet appliances. Wireless subscribers thus have access to Internet- and
corporate intranet-based services, including email, news, stocks, weather,
travel and sports. In addition, the MyPhone service, our mobile Internet portal
platform, is designed to enable network operators to rapidly deploy branded
portal sites for their wireless subscribers and deliver Internet content and
applications optimized for the mobile user.
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Our infrastructure platform consists of the UP.Link Server Suite and
UP.Browser software products. The UP.Link Server Suite includes:
. a means of exchanging data between the Internet and mass-market wireless
telephones, commonly referred to as a gateway;
. a service platform that performs subscriber management and service
provisioning functions, as well as communicating with the network
operator's customer care and billing systems; and
. Internet-based applications such as email and personal information
management software.
The UP.Browser is a browser and messaging software product that is designed
and optimized for mass-market wireless telephones. In addition, as of August
1999, approximately 10,700 third-party developers have registered to use our
UP.SDK software development kit, and a variety of third-party content is
currently available for wireless telephones equipped with UP.Browser, including
information from ABCNews.com, Bloomberg, Reuters, Quote.com and ESPN
Sportszone.
With the introduction of the next version of our software solution,
currently available as a beta release, our products will provide an open,
interoperable, WAP-compliant platform for the delivery of Internet-based
services. Our software solution supports all major digital wireless telephony
standards in use around the world:
. CDMA (Code Division
Multiple Access) .GSM (Global System for Mobile Communication)
. TDMA (Time Division
Multiple Access) .CDPD (Cellular Digital Packet Data)
. iDEN (Integrated Digital
Enhanced Network) .PDC (Personal Digital Cellular)
. PHS (Personal Handyphone
System)
The MyPhone service is complementary to our infrastructure platform and is
designed to allow network operators to rapidly deploy customized, branded
Internet portals for their wireless subscribers. MyPhone offers a framework for
the delivery of Internet applications, content and services optimized for
wireless telephones. Initial information services available through MyPhone
will include news feeds and financial information, as well as email, address
book and calendar functionality. The MyPhone service can be customized to
enable network operators to offer their wireless subscribers a branded portal
with a differentiated look and feel, content, customer care functionality and
other unique features. Wireless subscribers will also be able to access the
information services and applications available on MyPhone through a standard
PC web browser. MyPhone's extensible architecture is designed to facilitate the
development of new applications and services. MyPhone will be hosted by
Phone.com, and we expect to operate all back-end systems involved in offering
this service.
Key benefits of our products and services for network operators include the
following:
. Opportunity to generate incremental revenues. Network operators can
generate additional revenues by offering value-added Internet-based
services. They can also charge for the increased data and voice airtime
that these applications encourage. For example, a user can access an
email message via UP.Mail and initiate a voice call to any phone number
appearing in the message with the press of one button.
. Ability to differentiate services and improve subscriber retention. Using
our products and services, network operators can offer new Internet-based
services to wireless subscribers. In addition, by enabling wireless
subscribers to store personal contact information in their networks and
to personalize the selection and presentation of Internet content such as
stock quotes, sports scores and news, network operators can enhance
subscriber retention.
. Opportunity to reduce operating costs. Our UP.Link Server Suite can also
be used by network operators to reduce operating costs. For example,
network operators' call centers are burdened by high rates of calls from
subscribers inquiring about billing, service availability, usage and
other service-related matters. Our software platform enables network
operators to leverage standards-based Internet technology to allow
subscribers to make many of these inquiries using their wireless
telephones without
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assistance by customer care representatives. By bypassing the call center
infrastructure for these activities, network operators can reduce their
operating costs.
. Ability to rapidly deploy a branded mobile Internet portal site. MyPhone
is designed to allow network operators to rapidly deploy a customized and
branded Internet portal for its wireless subscribers. We believe that by
aggregating content and applications optimized for mobile users in a
customized, branded portal service, network operators will be able to
increase subscriber loyalty and generate new revenue opportunities.
MyPhone's extensible architecture will facilitate new application
development, allowing network operators to continue to deliver new and
enhanced services to their subscribers.
The Phone.com Strategy
Our objective is to be the leading supplier to network operators of software
and services that enable the convergence of the Internet and mobile telephony.
Key elements of our strategy include:
. Focus on Providing Products and Services to Network Operators. We focus
on providing comprehensive solutions that enable network operators to
deliver Internet-based services to their wireless subscribers. Our close
working relationships with network operators provide us with a valuable
understanding of our customers' technology and operations, which we
intend to leverage to accelerate time to market of our products and
identify new sales opportunities. In order to drive revenues from our
UP.Link Server software and related services, we utilize direct and
indirect sales channels. Our direct sales force focuses on selling
products and consulting services and assists our indirect channel
partners in selling our products and services. Our indirect sales channel
partners are currently Alcatel, Itochu Techno-Science Corporation, Sema
Group and Siemens. These partners sell our products and services as an
integral part of their product and service offerings to network operators
primarily in international markets. We intend to add new partners to our
indirect sales channel to serve customers in key markets and expect that
sales through our indirect sales channel partners will represent an
increasing portion of our revenues. In addition, we intend to invest
significantly in the development of new mobile Internet applications and
services for the MyPhone service.
. Continue to Invest in our Technology. Network operators have stringent
requirements for server software performance, scalability and
reliability. Extensive technical expertise is required to integrate these
solutions with the network operators' complex systems. We also expect
that network operators will demand regular upgrades that include new
functions and features. Consequently, we intend to continue to invest
heavily in research and product development. We also intend to maintain
our technology leadership by leveraging our role in prominent industry
standard-setting organizations such as the WAP Forum and the World Wide
Web Consortium.
. Drive the Sale and Development of Internet-Based Applications and
Services. Network operators that offer Internet-based services by using
our UP.Link Server Suite generally seek new value-added applications to
offer to their subscribers. We currently offer the following Internet-
based applications:
. Up.Mail, which delivers email to wireless telephones,
. Up.Organizer, a personal information management application, and
. Up.Web, which enables subscribers to access, manage and update their
personal information and configuration for UP.Mail and UP.Organizer
from their personal computers.
We are continuously enhancing our existing products and developing new
applications and services to provide additional functionality for
network operators and wireless subscribers. In September 1999, we
announced the MyPhone service, a turnkey solution designed to provide
network operators a means to rapidly deploy customized mobile Internet
portals. We intend to market this service aggressively through our
existing sales channels. We believe that the adoption of our MyPhone
service by network operators will accelerate the adoption by subscribers
of Internet-based services
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using their wireless telephones as well as the development of new WAP-
compatible information services and applications.
. Propagate Widespread Use of UP.Browser in Mass-Market Wireless
Telephones. We believe that increasing the number of wireless
telephone manufacturers that incorporate UP.Browser into their mass-
market wireless telephones enhances the attractiveness of our UP.Link
server software to network operators. Therefore, in order to drive
widespread adoption, we license UP.Browser to wireless telephone
manufacturers, free of per-unit royalties. As of September 1999, we
have licensed UP.Browser to 25 wireless telephone manufacturers.
. Promote the Development of Internet-Based Services Over Mass-Market
Wireless Telephones. To encourage the growth of our business, we
actively encourage Internet content and application developers to
create WML applications. In connection with this activity, we provide
our UP.SDK software development kit and support to Internet content and
application developers free of charge. As of August 1999, there were
approximately 10,700 registered developers in our Developer Program.
Internet content providers that currently deliver content for wireless
telephones equipped with UP.Browser include ABCNews.com, BizTravel.com,
Bloomberg, Data Broadcasting Corporation, ESPN Sportszone,
InfoSpace.com, Quote.com, Reuters and Sportsfeed.
Products and Services
Products
Our software products enable the delivery of Internet-based services to
mass-market wireless telephones. Our software products include:
. UP.Link Server Suite--a product that network operators use to connect
their subscribers' mass-market wireless telephones to Internet services
. UP.Browser--a browser that is embedded in mass-market wireless telephones
and enables wireless subscribers to access Internet services
. UP.Smart--a suite of software applications that delivers personal digital
assistant features to smartphones
. UP.SDK--a software development kit that Internet content providers and
third-party developers use to create WML-compliant applications
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UP.Link Server Suite
UP.Link Server Suite is a turnkey software solution with features and
applications that enable network operators to offer Internet-based services to
their wireless subscribers. UP.Link Server Suite connects data-enabled wireless
telephones to applications and content hosted by Web servers on the Internet or
private intranets. UP.Link Server Suite also provides network operators with
subscriber provisioning and network management functions on a robust and
scalable software platform. The UP.Link Server Suite consists of the following
components:
Components Description
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Gateway UP.Link Gateway provides the network-layer functions of the
UP.Link Server Suite, and connects Internet- and intranet-based
services to wireless networks and wireless telephones. UP.Link
Gateway connects the multiple protocols for wireless data
communications to the open standards of the Internet, thereby
enabling Web servers to recognize a wireless telephone as an
Internet standards-compliant client.
Administration The UP.Link administration component provides a Web-based
administration control system to keep the network operator's
Internet-based network components up and running, assess system
status and provision new subscribers.
The UP.Link Provisioning Application Programming Interface, or
PAPI, enables integration of UP.Link with the network
operator's existing customer care, help desk and billing
systems.
Services The services component provides an open application programming
framework with interfaces, or APIs, that standardize the way
that the services component interacts with applications. These
services include:
. Push Server--allows applications to push information to
wireless subscribers. For example, an email application can
use the Push Server to notify a wireless subscriber of new
messages.
. Fax Server--enables the forwarding of email attachments and
other data content to fax machines for printing.
. Identity Server--maintains a subscriber registry that retains
wireless subscribers' service settings and allows network
operators to track their subscribers' service usage.
. Content Translation Framework--provides forward and backward
compatibility of content formats between different
generations of browsers and wireless telephones. Translates
between international character sets in real-time. Also
translates standard HTML Web pages into WML pages for viewing
on wireless telephones.
. Application Registry--provides a structure for the
interoperability of different applications. For example,
third-party applications can retrieve and store contact
records in the UP.Organizer's address book or pass an email
address to UP.Mail.
Applications . UP.Applications is a suite of wireless Internet-based
applications, including:
. UP.Mail--provides access to the same email account through
both wireless telephones and personal computers.
. UP.Organizer--provides a suite of synchronized Internet-based
personal information management applications, including an
address book, calendar and to-do list.
. UP.Web--a Web-based user interface that allows subscribers to
use their personal computers to perform many of the same
tasks they perform on their wireless telephones with
UP.Organizer.
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UP.Browser
UP.Browser is a browser and messaging software product that is designed and
optimized for mass-market wireless telephones. Using UP.Browser, subscribers
can access Web-based information and services that are hosted on network
operators' or third-party Web servers. Due to its open and highly portable
architecture, UP.Browser can be embedded into different types of wireless
telephones and utilize each telephone's specific display and input
characteristics, such as graphical displays and programmable keys. Key features
of UP.Browser include:
Features Description
- ----------------- ------------------------------------------------------------------------------
Browsing UP.Browser displays WML-designed pages from any Web or intranet site. In
addition, UP.Browser incorporates text-input software from Tegic
Communications.
Universal Inbox Notifies subscribers with a visual or audible indication when a Web page or
other data has been proactively "pushed" to their wireless telephones.
Universal Inbox also integrates in a single local mailbox diverse alert types,
including email and voice mail, as well as Web-based content such as stock
quotes, traffic alerts and flight information.
Local Application Allows access to important information when out of network coverage.
Environment Increases efficiency of applications and minimizes perceived delay when used
over bandwidth-constrained networks.
Security UP.Browser employs the same encryption technology used by many
commercial Web sites. Consequently, all interaction between the wireless
telephone and a Web site can be authenticated and encrypted.
UP.Smart
UP.Smart is a suite of software applications that augments UP.Browser with a
set of popular functions commonly found on personal digital assistants.
UP.Smart includes address book, calendar, to-do list and memo functions.
UP.Smart also utilizes Puma Technology's synchronization software to enable a
user to synchronize UP.Smart with PC-based personal information management
applications by connecting the UP.Smart-equipped wireless telephone to a
personal computer through a serial cable. The information is stored both on the
wireless telephone and personal computer, making it accessible even when the
wireless telephone is not connected to the network.
UP.SDK
Our software development kit, known as UP.SDK, provides tools and
documentation for Internet content providers and developers to create and
maintain WML-based Internet services. UP.SDK consists of the following
components:
. The UP.Simulator, a Windows-based application that simulates the behavior
of UP.Browser-equipped wireless telephones, allowing developers to more
easily test WML services.
. Specialized functions and libraries that simplify the process of
generating WML applications.
. Tools for establishing secure communications between WML applications and
UP.Link Servers.
. Sample WML files and application source code.
Services
We offer consulting services to network operators and wireless telephone
manufacturers. Our consulting services help us to shorten our software license
sales cycle, accelerate deployment of our technology and
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deepen our understanding of our customers' networks. We also provide both
customer support and custom software development services for network
operators, as well as software consulting services to wireless telephone
manufacturers that license UP.Browser.
New Services and Products under Development
MyPhone
In September 1999, we announced the MyPhone service, our mobile portal
platform that is complementary to our existing business. The MyPhone service
enables network operators to rapidly deploy branded portal sites for their
wireless subscribers. With MyPhone, network operators can provide their
subscribers with a customized set of information services and applications that
are optimized for the mobile user, thereby enhancing subscriber loyalty and
capturing new revenue opportunities. MyPhone offers a framework for the
delivery of Internet applications, content and services optimized for wireless
telephones. Initial information services available through MyPhone will include
news feeds and financial information, as well as email, address book and
calendar functionality. The MyPhone service can be customized to enable network
operators to offer their wireless subscribers a branded portal with a
differentiated look and feel, content, customer care functionality and other
unique features. Wireless subscribers will also be able to access the
information services and applications available on MyPhone through a standard
PC web browser. MyPhone's extensible architecture is designed to facilitate the
development of new applications and services. MyPhone will be hosted by
Phone.com, and we expect to operate all back-end systems involved in offering
this service.
Over-the-Air Provisioning
In July 1999, we announced a collaborative effort with Bell Atlantic Mobile
and Motorola to develop WAP-based over-the-air provisioning technology. Through
this collaboration, we are designing a system capable of delivering
provisioning information as well as electronic customer care to Bell Atlantic
Mobile's subscribers via CDMA wireless telephones. The system is being designed
to automatically update wireless telephones with current versions of network
information such as roaming lists, area code information, and other data
parameters. In addition, the system is being designed to enable subscribers to
check their bill and interactively manage their individual account features
directly from their wireless telephones.
Customers
Wireless Network Operators
We sell our UP.Link Server Suite and related technical support to network
operators worldwide to enable them to offer a variety of wireless Internet
services to their subscribers. These network operators have licensed our
software and have either announced a commercial service launch or are in a
market or laboratory trial phase.
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As of August 1999, 31 network operators, including the following companies,
have licensed our software:
Name Stage Technology Country
- ---- ----- ---------- -------
AT&T Wireless Services Deployed in July 1996 CDPD USA
Bell Atlantic Mobile Deployed in September 1996 CDPD USA
GTE Wireless Deployed in May 1997 CDPD USA
SFR/CEGETEL Deployed in March 1999 GSM France
DDI Corporation Deployed in April 1999 CDMA Japan
IDO Corporation Deployed in April 1999 CDMA Japan
Bell Mobility Deployed in May 1999 CDMA Canada
LG Telecom Deployed in June 1999 CDMA South Korea
Omnitel Deployed in June 1999 GSM Italy
Sprint PCS Announced Commercial Launch CDMA USA
(expected fall 1999)
Mannesmann Mobilfunk (D2) Announced Commercial Launch GSM Germany
(expected fall 1999)
Nextel Communications Announced Commercial Launch iDEN USA
(expected fall 1999)
Southern LINC Announced Commercial Launch iDEN USA
(expected fall 1999)
Shinsegi Telecom Announced Commercial License CDMA Korea
US West Announced Commercial License CDMA USA
Telstra Corporation Announced Commercial License GSM Australia
Deutsche Telekom Mobilnet Trial GSM Germany
GmbH (T-Mobile)
France Telecom Mobile Trial GSM France
Telecom Italia Mobile Trial GSM Italy
We also provide our network operator customers with consulting services
that enable them to rapidly adopt our technology and bring wireless Internet-
based services to market. Our consulting services focus on those areas where
our products interface with the network operators' internal systems such as
billing, provisioning and customer care. We also provide our network operator
customers with assistance in choosing the appropriate content and applications
for their subscribers and creating the promotion and pricing strategies for
their service.
Our agreements with network operators provide these customers with a non-
exclusive license to use our UP.Link Server Suite software in connection with
providing Internet-based services to their subscribers. Pricing and payment
terms for these licenses are negotiated with the customer based on the number
of subscriber licenses purchased by the network operator, and the licenses can
be purchased on an as-deployed basis or on a prepaid basis. While these
agreements do not provide for a right of return, these agreements typically
provide for a six-month warranty, indemnification against intellectual
property infringement claims, a commitment to provide standards-compliant
products, and a source code escrow. In addition, we typically provide fee-
based maintenance and support services to these customers, under which they
receive error corrections and remote support. They can also elect to receive
new releases of UP.Link Server Suite for an additional fee.
Wireless Telephone Manufacturers
We license our UP.Browser software to wireless telephone manufacturers, who
embed UP.Browser into their products. In order to encourage these
manufacturers to include UP.Browser in their wireless telephone models, no
per-unit royalty is charged. In addition, we provide engineering and support
services to accelerate the introduction of new wireless telephone models that
contain UP.Browser. These services are provided to manufacturers on an annual
flat-fee basis per digital wireless telephony standard.
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As of September 1999, 25 wireless telephone manufacturers have licensed
UP.Browser, and the following manufacturers have publicly announced products
that will include UP.Browser:
. Alcatel .Nokia
. Bosch .Panasonic (Matsushita)
. Casio .Philips
. Hitachi .Qualcomm
. Hyundai Electronics .Sagem
. IGS .Samsung Electronics
. Kyocera .Sharp
. LG Information & Communications .Siemens
. Mitsubishi .Sony
. Motorola .Toshiba
. NEC .3Com (Palm Computing division)
. Neopoint
Additionally, Ericsson has announced that it will introduce wireless
telephones that will be compatible with our UP.Link Server Suite. As of
September 1999, ten wireless telephone manufacturer customers had made
commercial shipments of telephones with the UP.Browser embedded. In addition,
we are currently providing engineering support services in connection with 60
browser integration projects.
Our agreements with wireless telephone manufacturers generally provide these
customers with a non-exclusive, royalty-free license to sell wireless
telephones containing UP.Browser. These agreements typically provide for a 90-
day warranty, indemnification against intellectual property infringement claims
and a source code escrow. In addition, customers can elect to receive varying
levels of maintenance and support services for a fee.
For the year ended June 30, 1999, AT&T Wireless Services and DDI Corporation
accounted for approximately 17% and 14%, respectively, of our total revenues.
For the year ended June 30, 1998, AT&T Wireless Services and Matsushita
Communication Industrial accounted for approximately 22% and 18%, respectively,
of our total revenues. The foregoing calculations are based on revenues derived
from direct and indirect sales to these customers.
Research and Product Development
We continue to enhance the features and performance of our existing products
and introduce new products. For example, we have recently released in beta
version the fourth generation of our UP.Link Server Suite and UP.Browser
products. These products are expected to be compliant with version 1.1 of the
specifications promulgated by the WAP Forum. We are currently developing other
applications, including a secure provisioning server, which enables network
operators to automate customer provisioning, and compatibility with two-way
short messaging service systems. In addition, we continue to develop the
MyPhone service to provide outsourced application development and services to
our network operator customers.
Our success depends on a number of factors, which include our ability to
identify and respond to emerging technological trends in our target markets,
develop and maintain competitive products, enhance our existing products by
adding features and functionality that differentiate them from those of our
competitors and bring products to market on a timely basis and at competitive
prices. As a result, we have made, and we intend to continue to make,
significant investments in research and product development. Our research and
development expenses were $4.0 million, $5.7 million and $13.1 million for the
years ended June 30, 1997, 1998 and 1999, respectively. As of August 31, 1999,
we had 129 employees engaged in research and product development activities. We
are recruiting additional skilled engineers for research and product
development, and our business could be adversely affected if we are unable to
hire these engineers on a timely basis.
13
Technology
Our technology has contributed both to driving open standards for the
delivery of Internet-based services to mass-market wireless telephones and to
providing network operators and wireless telephone manufacturers with software
solutions that are robust and scalable, and take into account the specific
characteristics of wireless telephony networks and telephones.
Wireless Application Protocol and Wireless Markup Language
Phone.com, along with Ericsson, Motorola and Nokia, founded the WAP Forum in
1997, and published open standards-based technical specifications for
application and content development, as well as product interoperability based
on Internet technology and standards. Leading network operators,
telecommunications device and equipment manufacturers, and software companies
worldwide have joined the WAP Forum, which has grown to over 150 members as of
September 1999.
The WAP specifications consist of the following components:
. A Transport Specification, which defines the way in which data is
exchanged between the network operator's server and the wireless
telephone. The WAP Transport Specification mirrors the Internet-standard
secure HTTP protocol, but is optimized for wireless telephone networks.
For example, on a typical PC-based Internet connection, all functions
such as security provisioning and application downloading and
interaction are performed on the PC. In the WAP Transport Specification,
functions are divided between the wireless telephone and the network
operator's server because of the bandwidth constraints over the wireless
network and the wireless telephone's limited processing power.
. A Wireless Markup Language (WML), which optimizes the display of and
interaction with Web-based content on wireless telephones and allows
Internet applications to take advantage of the voice capabilities of the
wireless telephony network. WML is compliant with the Extensible Markup
Language, or XML, specification published by the World Wide Web
Consortium.
. WML Script, which enables a developer to add procedural logic to WML
pages.
In order to implement interoperability with Internet-based content, the WAP
Transport Specification and WML use the open standards-based Internet model of
interaction, in which content and applications reside on Web servers that are
physically distributed, and requests for the data on these servers are sent via
open-standard Internet addresses, commonly known as URLs.
On standard Internet Web servers, content typically resides in databases,
but is provided to users via a number of content formats, including HTML and
Java. WML and WML Script function as standard content formats, so Internet
content providers can add WML and WML Script access to their servers without
having to change the underlying data. WML and WML Script applications deliver
content in a format that is optimized for wireless telephone interfaces.
Components of UP.Link Technology
Our UP.Link Server Suite is designed to be modular, expandable, flexible,
scalable and reliable. Using an architecture based on scalable, object-oriented
technology, the UP.Link Server Suite typically runs on a large, distributed set
of servers. The UP.Link Server Suite, which runs on Sun Microsystems' Solaris
operating system, is designed to meet the stringent performance, scalability
and reliability requirements of network operators.
Server Side Agents. Since wireless networks have limited bandwidth and
wireless telephones have limited processing power and memory, programs called
agents that reside on the server are used to provide processing power and other
computing resources to UP.Browser-enabled wireless telephones. These agents
14
allow some operations to be offloaded from the wireless telephone to the
UP.Link server. This means that the duties that are typically performed by the
Web browser on standard personal computers can be divided between the browser
on the wireless telephone and a "proxy" running in the agent. The exact split
of functionality can vary depending on the particular capabilities of the
wireless telephone. The agent can perform many functions, including translating
wireline Internet protocols such as HTTP to wireless Internet protocols such as
WAP, as well as compiling Internet content so that it is more compact to
transmit and easier to display on the wireless telephone.
Dispatcher. At the core of our scalable server architecture is a dispatcher
that dynamically load balances user proxies between a number of agents. The
dispatcher is much like the line at a bank that funnels a queue of customers to
the next available teller. The dispatcher also provides a basic level of
protection against faults by automatically rerouting subscriber requests if a
proxy server malfunctions.
Messenger. The UP.Link messenger server provides store-and-forward messaging
capabilities from Web servers to UP.Browser-enabled wireless telephones over a
wide range of wireless protocols such as Short Message Service and Cellular
Digital Packet Data. Store-and-forward means that if a wireless telephone is
turned off or out of its coverage area, the message will be stored and
delivered once the wireless telephone is connected to the network. The
messenger accepts data through standard Web interfaces such as HTTP and
converts the data for transmittal over the wireless network without requiring
modifications to the Web server.
Narrow Band Router. The Narrow Band Router provides a common interface to a
wide range of narrow band, or low-bandwidth, wireless networks. This feature
makes the protocol-specific components of message addressing, routing and
delivery transparent to Internet applications, enabling developers to easily
create applications for wireless networks without customizing their
applications to work with each individual protocol. Thus the same application
can work across a number of wireless data networks and protocols in a
transparent manner.
Translation Framework. Wireless telephones are different than personal
computers in that they are mass-market consumer devices with software that is
embedded in the wireless telephone at the factory and very difficult and costly
to modify in the field. The WML specification, however, is regularly evolving
as features and functionality are introduced and refined. To address this
issue, the translation framework enables the translation of content in real-
time. Software translators can be implemented that transparently translate
content based on newer versions of WML to make it compatible with wireless
telephones that contain older versions of UP.Browser, or vice versa.
Sales and Marketing
We sell our products through both a direct sales force and third-party
resellers, currently Alcatel, Itochu Techno Science Corporation, Sema Group and
Siemens. In addition, we have a joint sales and marketing relationship with
Lucent Technologies. As of August 31, 1999, we had 47 persons in sales and
marketing serving the United States market, and 20 persons in sales and
marketing outside the United States. We plan to significantly expand this group
over the next 12 months. In addition, we have offices in London and Tokyo. Our
direct sales force focuses on selling products and consulting services and
assists our indirect channel partners in selling our products and services.
International sales of products and services accounted for 44% and 66% of our
total revenues for the years ended June 30, 1998 and 1999, respectively. We
expect international revenues to continue to account for a significant portion
of our revenues, although the percentage of our total revenues derived from
international sales may vary. Our international sales strategy is to partner
with leading distributors and systems integrators that have strong industry
backgrounds and market presence in their respective markets and geographic
regions.
Our success depends in part on our ability to increase sales of our products
and services through value-added resellers and to expand our indirect
distribution channels. Under the arrangements that we make with our value-added
resellers, a value-added reseller sells, installs and services our products to
wireless network
15
operators. These agreements are not exclusive and do not have territorial
restrictions. Our value-added resellers generally are not restricted from
selling products that are competitive with our products, and each of our
partners can cease marketing our products and services at their option.
We believe that customer service and ongoing technical support is an
essential part of the sales process in the wireless communications industry. In
order to provide high levels of customer service, senior management and
assigned account managers play a role in ongoing account management and
relationships. We believe these customer relationships enable us to improve
customer satisfaction and develop products to meet specific customer needs. Our
agreements with our network operator customers provide for 24 hour per day
support seven days per week.
We actively recruit content and application developers to our platform and
provide to them free of charge our software developer's kit, UP.SDK. We also
provide them with free membership in our Developer Program, free email-based
support and the opportunity to participate in our Alliances Program. As of
August 1999, approximately 10,700 registered developers in our Developer
Program have downloaded UP.SDK, including:
. 724 Solutions .Lotus
. biztravel.com .Mapquest.com
. BroadVision .NewsAlert
. CableData .Reuters
. Comverse Network Systems .SmartServOnline
. Data Broadcasting Corporation .Sportsfeed.com
. eDispatch.com .StockTips
. InfoSpace.com .Vantive
. Internet Travel Network .The Weather Underground
. KLELine .Webraska Mobile Technologies
. Lightbridge
Our Alliances Program is comprised of a select group of our content and
application developers. We screen applications to our Alliances Program based
on the availability and quality of the content or applications produced by the
partner. We perform joint marketing activities with the partner, as well as
provide introductions between our wireless network operators and our Alliances
Program members.
Competition
The market for our products and services is becoming increasingly
competitive. The widespread adoption of open industry standards such as the WAP
specifications may make it easier for new market entrants and existing
competitors to introduce products that compete with our software products. In
addition, a number of our competitors, including Nokia, have announced or are
expected to announce enhanced features and functionality as proprietary
extensions to the WAP protocol. Furthermore, some of our competitors have
introduced or may introduce services based on proprietary wireless protocols
that are not compliant with the WAP specifications.
We expect that we will compete primarily on the basis of price, time-to-
market, functionality, quality and breadth of product and service offerings.
Our current and potential competitors include the following:
. Wireless equipment manufacturers, such as Ericsson and Nokia, which are
developing and marketing competitive server, browser and application
software products. These companies already sell billions of dollars of
wireless telephones and other telecommunications products to network
operators which are our existing and potential customers.
. Microsoft, which recently announced plans to deliver a wireless portal
designed to work with handheld devices, wireless telephones and
interactive pagers via Microsoft's MSN network of Internet services.
Nextel is Microsoft's first customer for these services. Nextel plans to
use a co-branded version of
16
Microsoft's MSN portal to enable Nextel customers to access a customized
set of Internet services. This arrangement also provides for Microsoft to
invest $600 million in Nextel to support Nextel's development of wireless
Internet services. In addition, Microsoft has announced that it intends to
enable its Windows CE operating system to run on wireless handheld
devices, including wireless telephones, and to develop and market its own
browser for these devices.
. Wireless Knowledge, a joint venture of Microsoft and Qualcomm, which has
announced its intention to introduce products and services that may
compete directly with our UP.Link and UP.Browser products, as well as our
UP.Applications.
. Systems integrators, such as CMG and APiON, and software companies, such
as Oracle Corporation, which are developing and marketing server software
that is compliant with the specifications promulgated by the WAP Forum.
. Providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions, any of whom could offer products and services that compete
with ours.
As we enter new markets and introduce new services, such as the MyPhone
service, we will face additional competitors. These competitors may include
telecommunications companies such as Lucent Technologies, traditional Internet
portals such as AOL, InfoSpace, Microsoft and Yahoo!, Internet infrastructure
software companies and several private mobile Internet portal companies.
Many of our existing competitors as well as potential competitors have
substantially greater financial, technical, marketing and distribution
resources than we do. Several of these companies also have greater name
recognition and more well-established relationships with our target customers.
Furthermore, these competitors may be able to adopt more aggressive pricing
policies and offer more attractive terms to customers than we can. We may face
increasing price pressure from our network operator customers. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to compete
more effectively. Finally, existing and potential competitors may develop
enhancements to, or future generations of, competitive products that will have
better performance features than our products.
Intellectual Property Rights
Our performance depends significantly on our ability to protect our
proprietary rights to the technologies used in our products. If we are not
adequately protected, our competitors could use the intellectual property that
we have developed to enhance their products and services, which could harm our
business. As of August 1999, we had three issued United States patents. We
also had one United States patent application with allowed claims and 73
pending United States patent applications, as well as foreign counterparts
with respect to many of these applications. In addition, we rely on a
combination of copyright and trademark laws, trade secrets, confidentiality
provisions and other contractual provisions to protect our proprietary rights,
but these legal means afford only limited protection. Despite any measures
taken to protect our intellectual property, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we
regard as proprietary. In addition, the laws of some foreign countries may not
protect our proprietary rights as fully as do the laws of the United States.
Thus, the measures we are taking to protect our proprietary rights in the
United States and abroad may not be adequate. Finally, our competitors may
independently develop similar technologies.
The telecommunications and Internet software industries are characterized
by the existence of a large number of patents and frequent litigation based on
allegations of patent infringement. As the number of entrants into our market
increases, the possibility of an infringement claim against us grows. For
example, we may be
17
inadvertently infringing a patent of which we are unaware. In addition, because
patent applications can take many years to issue, there may be a patent
application now pending of which we are unaware, which will cause us to be
infringing when it issues in the future. To address any patent infringement
claims, we may have to enter into royalty or licensing agreements on
disadvantageous commercial terms. A successful claim of product infringement
against us, and our failure to license the infringed or similar technology,
would harm our business. In addition, any infringement claims, with or without
merit, would be time-consuming and expensive to litigate or settle and could
divert management attention from administering our core business.
We rely on a license of encryption technology from RSA Data Security, Inc.
The license from RSA is perpetual unless terminated by either party as the
result of a material breach or insolvency or, at our election, for convenience.
As a member of the WAP Forum, we have agreed to license our intellectual
property to other WAP members on fair and reasonable terms to the extent that
the license is required to develop noninfringing products under the
specifications promulgated by the WAP Forum. Each other member of the WAP Forum
has entered into a reciprocal agreement.
Employees
As of August 31, 1999, we had a total of 233 employees. None of our
employees is covered by any collective bargaining agreements. We believe that
our relations with our employees are good.
Item 2. Properties.
Our principal offices are located in Redwood City, California in two
buildings aggregating 65,000 square feet under a lease expiring in May 2006,
with a renewal option for an additional five-year term. We also lease space for
our offices in London and Tokyo.
Item 3. Legal Proceedings.
We are not currently subject to any material legal proceedings; however, we
may from time to time become a party to various legal proceedings arising in
the ordinary course of our business.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 19, 1999, we held our 1999 annual meeting of stockholders. The
following summarizes the matters submitted to a vote of our stockholders:
1. The election of the following nominees to serve as members of the Board
of Directors:
Nominee In Favor Withheld
- ------- ---------- --------
Alain Rossmann.............................................. 20,963,836 --
Charles Parrish............................................. 20,963,836 --
Roger Evans................................................. 20,963,836 --
Reed Hundt.................................................. 20,963,836 --
David Kronfeld.............................................. 20,963,836 --
Andrew Verhalen............................................. 20,963,836 --
2. The amendment of our amended and restated certificate of incorporation to
effect a two-for-three reverse split of our outstanding Common Stock:
In Favor Opposed
-------- -------
20,940,487......................................................... 23,349
18
3. The approval of our amended and restated certificate of incorporation and
amended and restated bylaws, effective upon completion of our initial public
offering
In Favor Opposed
-------- -------
20,963,836......................................................... --
4. The amendment of our 1996 Stock Plan to increase the number of shares
reserved for issuance thereunder by 4,250,000 shares and to provide for
automatic annual increases, beginning on July 1, 2000, to the number of shares
reserved for issuance thereunder by the lesser of (a) 1,500,000 shares, (b) 4%
of the total shares outstanding on the last day of the preceding fiscal year,
or (c) such lesser number of shares as is determined by the Board of Directors:
In Favor Opposed
-------- -------
20,803,421......................................................... 160,415
5. The adoption of the 1999 Directors' Stock Option Plan and the reservation
of 600,000 shares of Common Stock for issuance thereunder:
In Favor Opposed
-------- -------
20,386,380......................................................... 577,456
6. The adoption of the 1999 Employee Stock Purchase Plan and the reservation
of 600,000 shares of Common Stock for issuance thereunder, as well as automatic
annual increases on the first day of each of the fiscal years beginning in
2000, 2001, 2002, 2003 and 2004 equal to the lesser of (a) 500,000 shares or
(b) 1% of the total shares outstanding on the last day of the preceding fiscal
year:
In Favor Opposed
-------- -------
20,952,674......................................................... 11,162
7. The ratification of the appointment of KPMG LLP as the Company's
independent auditors for the fiscal years ending June 30, 1999 and June 30,
2000:
In Favor Opposed
-------- -------
20,936,836......................................................... --
The above share amounts have been adjusted to reflect our two-for-three
reverse stock split and the conversion of the outstanding Preferred Stock into
Common Stock upon completion of the initial public offering in June 1999.
19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
Our Common Stock has been listed for quotation on the Nasdaq National Market
under the symbol "PHCM" since our initial public offering on June 11, 1999. The
following table shows the high and low sales prices of our Common Stock as
reported by the Nasdaq National Market for the period indicated.
1999 High Low
---- -------- ------
Quarter ended June 30, 1999 (from June 11, 1999)............ $65.5625 $16.00
The closing sale price of the Common Stock as reported on the Nasdaq
National Market on September 22, 1999 was $160.875 per share. As of that date
there were 146 holders of record of the Common Stock. This does not include the
number of persons whose stock is in nominee or "street name" accounts through
brokers.
The market price of the Common Stock has been and may continue to be subject
to wide fluctuations in response to a number of events and factors, such as
quarterly variations in our operating results, announcements of technological
innovations or new products by us or its competitors, changes in financial
estimates and recommendations by securities analysts, the operating and stock
performance of other companies that investors may deem comparable to us, and
news reports relating to trends in our markets. In addition, the stock market
in recent years has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many high technology and Internet-
related companies that have often been unrelated or disproportionate to the
operating performance of companies. These fluctuations, as well as general
economic and market conditions, may adversely affect the market price for the
Common Stock.
Dividend Policy
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future. In addition, the terms of our current equipment loan
prohibit us from paying dividends without our lender's consent.
Use of Proceeds
On June 10, 1999, in connection with the Company's initial public offering,
a Registration Statement on Form S-1 (No. 333-75219) was declared effective by
the Securities and Exchange Commission, pursuant to which 4,600,000 shares of
the Company's Common Stock were offered and sold for the account of the Company
at a price of $16.00 per share, generating aggregate gross proceeds of $73.6
million. The managing underwriters were Credit Suisse First Boston Corporation,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp
Piper Jaffray Inc. After deducting approximately $6.8 million in underwriting
discounts and other related expenses, the net proceeds of the offering were
approximately $66.8 million. As of June 30, 1999, the Company has not used any
of the net proceeds. The net proceeds of the offering have been invested in
short-term, investment grade, interest bearing securities. The Company intends
to use such proceeds for capital expenditures, and for general corporate
purposes, including working capital to fund anticipated operating losses.
20
Item 6. Selected Consolidated Financial Data.
The tables that follow present portions of our consolidated financial
statements and are not complete. You should read the following selected
consolidated financial data in conjunction with our consolidated financial
statements and related notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Form 10-K. The consolidated statements of operations data for the years
ended June 30, 1997, 1998 and 1999, and the consolidated balance sheet data as
of June 30, 1998 and 1999 are derived from our consolidated financial
statements that have been audited by KPMG LLP, independent auditors, which are
included elsewhere in this Form 10-K. The consolidated statements of operations
data for the period from December 16, 1994 (inception) to June 30, 1995 and for
the year ended June 30, 1996, and the consolidated balance sheet data as of
June 30, 1995, 1996 and 1997 are derived from audited consolidated financial
statements that are not included in this Form 10-K. The historical results
presented below are not necessarily indicative of the results to be expected
for any future fiscal year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
December 16, Year Ended June 30,
1994 (Inception) ------------------------------------
to June 30, 1995 1996 1997 1998 1999
---------------- ------- ------- -------- --------
(In thousands, except per share data)
Consolidated Statements
of Operations Data:
Revenues:
License................ $ -- $ -- $ 80 $ 522 $ 5,229
Maintenance and
support services...... -- -- 212 1,683 5,921
Consulting services.... -- -- -- -- 2,292
------ ------- ------- -------- --------
Total revenues....... -- -- 292 2,205 13,442
------ ------- ------- -------- --------
Cost of revenues:
License................ -- -- 87 95 371
Maintenance and
support services...... -- -- 266 1,063 3,022
Consulting services.... -- -- -- -- 1,146
------ ------- ------- -------- --------
Total cost of
revenues............ -- -- 353 1,158 4,539
------ ------- ------- -------- --------
Gross profit (loss).. -- -- (61) 1,047 8,903
------ ------- ------- -------- --------
Operating expenses:
Research and
development........... 92 1,387 3,959 5,732 13,082
Sales and marketing.... 6 757 3,198 5,011 10,840
General and
administrative........ 5 522 1,237 1,801 4,432
Stock-based
compensation.......... -- -- -- 108 1,011
------ ------- ------- -------- --------
Total operating
expenses............ 103 2,666 8,394 12,652 29,365
------ ------- ------- -------- --------
Operating loss....... (103) (2,666) (8,455) (11,605) (20,462)
Interest income, net.... -- 196 464 982 1,803
------ ------- ------- -------- --------
Loss before income
taxes............... (103) (2,470) (7,991) (10,623) (18,659)
Income taxes............ -- -- -- -- 2,104
------ ------- ------- -------- --------
Net loss............. $ (103) $(2,470) $(7,991) $(10,623) $(20,763)
====== ======= ======= ======== ========
Basic and diluted net
loss per share......... $(0.02) $ (0.53) $ (1.67) $ (2.03) $ (2.98)
====== ======= ======= ======== ========
Shares used in computing
basic and diluted net
loss per share......... 4,671 4,704 4,776 5,221 6,966
====== ======= ======= ======== ========
As of June 30,
-------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------- --------
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................ $2,300 $5,848 $8,014 $33,464 $113,086
Total assets............................ 2,315 6,767 9,759 39,144 138,933
Equipment loan and capital lease
obligations, less current portion...... -- -- -- 915 498
Total stockholders' equity.............. 2,243 6,464 8,125 28,393 92,292
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This section of this Form 10-K includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipates," "believes,"
"expects," "future," and "intends," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-K.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from historical results or our
predictions. These risks are described in "Risk Factors" and elsewhere in this
Form 10-K.
Overview
We were incorporated in December 1994 and, from inception until June 1996,
our operations consisted primarily of various start-up activities, including
development of technologies central to our business, recruiting personnel and
raising capital. In 1995, we developed our initial technology, which enables
the delivery of Internet-based services to wireless telephones. In 1996, we
introduced and deployed our first products based on this technology. We first
recognized license revenues in August 1996, and generated license revenues of
approximately $80,000, $522,000 and $5.2 million for the fiscal years ended
June 30, 1997, 1998 and 1999, respectively. We incurred net losses of
approximately $8.0 million, $10.6 million and $20.8 million for the fiscal
years ended June 30, 1997, 1998 and 1999, respectively. As of June 30, 1999, we
had an accumulated deficit of approximately $42.0 million.
To provide a worldwide standard for the delivery of Internet-based services
over mass-market wireless telephones, we formed the WAP Forum in close
cooperation with Ericsson, Motorola and Nokia, the world's three largest
manufacturers of wireless telephones. In February 1998, the WAP Forum published
technical specifications for application development and product
interoperability based substantially on Phone.com's technology and on Internet
standards. Leading network operators, telecommunications device and equipment
manufacturers and software companies worldwide have sanctioned the
specifications promulgated by the WAP Forum.
We generate revenues from licenses, maintenance and support services and
consulting services. We receive license revenues from licensing our UP.Link
Server Suite software directly to network operators and indirectly through
value-added resellers. From our inception through June 30, 1999, cumulative
revenues from licensing our UP.Link Server Suite software represented 51% of
total cumulative revenues, inclusive of installation, training and support
services provided to network operators. Maintenance and support services
revenues also include engineering and support services provided to wireless
telephone manufacturers. Cumulative engineering and support services fees from
UP.Browser agreements with wireless telephone manufacturers represented 34% of
our total cumulative revenues from inception through June 30, 1999. Consulting
services revenues are derived from consulting services provided to network
operator customers either directly by us or indirectly through resellers.
In September 1999, we announced MyPhone, our mobile Internet portal
platform. We expect to incur significant additional expenses in developing and
commercializing the MyPhone service, including costs relating to operating the
portal, as well as sales and marketing and research and development expenses.
We expect to incur these costs and expenses in advance of generating revenues
from this service and cannot be certain that our business model for the MyPhone
service will result in significant revenues or profitability.
Our future success depends on our ability to increase revenues from sales of
products and services to new and existing network operator customers. If the
market for Internet-based services via wireless telephones fails to develop or
develops more slowly than expected, then our business would be materially and
adversely affected. In addition, because there is a relatively small number of
network operators worldwide, any failure to sell our products to network
operator customers successfully could result in a shortfall in revenues that
could not be readily offset by other revenue sources. We also anticipate that
network operators may defer commercial launches of services based on our
product and services as they divert their resources and efforts to ensure year
2000 compliance.
22
Our business strategy also relies to a significant extent on the widespread
propagation of UP.Browser-enabled telephones through our relationships with
network operators and wireless telephone manufacturers. In order to encourage
adoption of UP.Browser-enabled wireless telephones, we license our UP.Browser
software to wireless telephone manufacturers free of per-unit royalties and
other license fees and provide maintenance and support services for an annual
flat fee. As of September 1999, we had licensed UP.Browser to 25 wireless
telephone manufacturers. As of September 1999, 10 wireless telephone
manufacturer customers had made commercial shipments of telephones with the
UP.Browser embedded. In addition, as of September 1999, we are currently
providing engineering support services in connection with 60 browser
integration projects.
During the year ended June 30, 1998, AT&T Wireless Services, which owned
approximately 2.5% of our common stock as of June 30, 1999, and Matsushita
Communication Industrial accounted for approximately 22% and 18%, respectively,
of our total revenues. For the year ended June 30, 1999, AT&T Wireless Services
accounted for approximately 17% of our total revenues, and DDI Corporation,
which owned approximately 0.6% of our common stock as of June 30, 1999,
accounted for approximately 14% of our total revenues. The foregoing
calculations are based on revenues derived from direct and indirect sales to
these customers.
For agreements entered into prior to July 1, 1998, we recognized revenues in
accordance with the provisions of the American Institute of Certified Public
Accountants' Statement of Position No. 91-1, Software Revenue Recognition.
Effective July 1, 1998, we adopted SOP 97-2, Software Revenue Recognition, as
amended. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of the elements.
We license our UP.Link Server Suite products to network operators through
our direct sales force and indirectly through our channel partners. Our license
agreements do not provide for a right of return. Allowances for future
estimated warranty costs are provided at the time revenue is recognized.
Licenses can be purchased on an as-deployed basis or on a prepaid basis. For
licenses purchased on an as-deployed basis, license revenue is recognized as
subscribers are activated to use the services that are based on our UP.Link
Server Suite products. We have no obligation to provide standards-compliant
products once a subscriber has been activated. For licenses purchased on a
prepaid basis, prepaid license fees are recognized under subscription
accounting due to our commitment to provide standards-compliant products for
each license covered by the prepaid arrangement. This subscription revenue is
recognized ratably over the contractual term of the prepaid arrangement (i.e.,
the date the prepaid licenses expire if not used), commencing at the beginning
of the month in which delivery and acceptance occur by the network operator.
The prepaid license period is generally twelve to thirty months. Licenses
expire if not activated prior to the end of the prepaid license term. We
recognize revenues from maintenance and support services provided to network
operators ratably over the term of the agreement, generally one year, and
recognize revenues from consulting services provided to network operators as
the services are performed.
We recognize revenues from UP.Browser agreements with wireless telephone
manufacturers ratably over the period during which the services are performed,
generally one year. We provide our wireless telephone manufacturer customers
with support associated with their efforts to port our UP.Browser software to
their wireless telephones, software error corrections and new releases as they
become commercially available.
Deferred revenue was $36.8 million as of June 30, 1999, comprised of $33.6
million in prepaid fees charged to wireless network operators and $3.2 million
in prepaid maintenance and other service fees charged to wireless telephone
manufacturers. We expect that deferred revenue will decline in the long term as
network operators deploy services based on our products. In particular, we
began recognizing license revenue in the third quarter of fiscal 1999 in
connection with the launch by CEGETEL/SFR of commercial services based on our
products and the acceptance of our products by DDI Corporation. Relating to our
sales to CEGETEL/SFR, we recognized previously deferred license revenues of
$541,000 for the year ended June 30, 1999 and will recognize approximately
$400,000 in each of the quarters ending September 30, 1999, December 31, 1999
and March 31, 2000. With regard to sales to DDI Corporation, we recognized
license revenues of $1.5 million for
23
the year ended June 30, 1999, and will recognize approximately $2.4 million in
each of the quarters ending September 30, 1999 and December 31, 1999, and $1.6
million in each of the quarters ending March 31, 2000 through March 31, 2001,
and $1.1 million in the quarter ending June 30, 2001. The revenues recognized
and deferred for DDI Corporation include direct sales and sales through an
indirect channel partner, Itochu Techno Science Corporation. We also began
recognizing license revenue in the fourth quarter of fiscal 1999 in connection
with the launches by two other wireless network operator customers. With
respect to these customers, we recognized license revenue of $441,000 in the
fourth quarter of fiscal 1999, and will recognize substantially all of the
remaining deferred revenue by September 30, 2001.
Under an agreement with AT&T Wireless Services, initially entered into in
May 1996, AT&T Wireless Services prepaid $4.7 million for the right to deploy
up to a fixed number of licenses through December 1999. Due to the early nature
of the commercial deployments of our products by network operators and because
we believed we would assume additional obligations to assist AT&T Wireless
Services in deploying the software licenses if difficulties were encountered
during the deployment, the license portion of the prepaid fee was recognized as
licenses were deployed. Between August 1997 and December 1998, $484,000 was
recognized relating to this prepayment. In connection with an amendment to the
agreement entered into in March 1999, AT&T Wireless Services agreed that we
would not be further obligated to assist them in the deployment of the prepaid
licenses discussed above. Therefore, the remaining deferred revenue of
approximately $4.2 million as of the date of the contract amendment in March
1999 that related to the prepayment is being recognized as revenue ratably over
the remaining contractual term of the prepaid arrangement. Accordingly, we
recognized revenue of $1.9 million for the year ending June 30, 1999 and will
recognize approximately $1.25 million in each of the quarters ending September
30, 1999, and December 31, 1999, associated with the prepayment.
We expect that our gross profit on revenues derived from sales through
indirect channel partners will be less than the gross profit on revenues from
direct sales. Our success, in particular in international markets, depends in
part on our ability to increase sales of our products and services through
value-added resellers and to expand our indirect distribution channels. In
addition, our agreements with our distribution partners generally do not
restrict the sale of products that are competitive with our products and
services, and each of our partners can cease marketing our products and
services at their option.
International sales of products and services accounted for 7%, 44% and 66%
of our total revenues in the years ended June 30, 1997, 1998 and 1999,
respectively. We expect international sales to continue to account for a
significant portion of our revenues, although the percentage of our total
revenues derived from international sales may vary. In particular, a number of
manufacturers have delayed commercial release of WAP-compliant wireless
telephones, particularly affecting European and other markets based on the GSM
standard. Risks inherent in our international business activities, include:
. failure by us and/or third parties to develop localized content and
applications that are used with our products;
. costs of localizing our products for foreign markets;
. difficulties in staffing and managing foreign operations;
. longer accounts receivable collection time;
. political and economic instability;
. fluctuations in foreign currency exchange rates;
. reduced protection of intellectual property rights in some foreign
countries;
. contractual provisions governed by foreign laws;
. export restrictions on encryption and other technologies;
. potentially adverse tax consequences; and
. the burden of complying with complex and changing regulatory
requirements.
24
Since early 1997, we have invested substantially in research and
development, marketing, domestic and international sales channels, professional
services and our general and administrative infrastructure. These investments
have significantly increased our operating expenses, contributing to net losses
in each fiscal quarter since our inception. Our limited operating history makes
it difficult to forecast future operating results. Although our revenues have
grown in recent quarters, our revenues may not increase at a rate sufficient to
achieve and maintain profitability, if at all. We anticipate that our operating
expenses will increase substantially in absolute dollars for the foreseeable
future as we expand our product development, sales and marketing, professional
services and administrative staff. Even if we were to achieve profitability in
any period, we may not sustain or increase profitability on a quarterly or
annual basis.
Fiscal Years Ended June 30, 1997, 1998 and 1999
License Revenues
License revenues increased from $80,000 in the fiscal year ended June 30,
1997 to $522,000 in the fiscal year ended June 30, 1998, and $5.2 million in
the fiscal year ended June 30, 1999. The increase in license revenues was due
primarily to the launch of wireless Internet-based services by network
operators. The increase in license revenues in fiscal 1999 was due primarily to
the launch by CEGETEL/SFR, DDI and other network operators of commercial
services based on our products and the satisfaction of our deployment
obligations related to AT&T. License revenues recognized in fiscal 1999 with
respect to these three customers were $709,000, $1.5 million and $1.6 million,
respectively.
Maintenance and Support Services Revenues
Maintenance and support services revenues increased from $212,000 in the
fiscal year ended June 30, 1997 to $1.7 million in the fiscal year ended June
30, 1998, and $5.9 million in the fiscal year ended June 30, 1999. The increase
in maintenance and support services revenues reflects an increase in services
provided to wireless telephone manufacturers and increased installation and
support fees from network operators. Of the increase from fiscal 1998 to fiscal
1999, approximately $3.1 million was attributable primarily to increased demand
for maintenance and engineering support services by wireless telephone
manufacturers, and approximately $1.1 million was attributable to trials of our
UP.Link Server Suite software by wireless network operators.
Consulting Services Revenues
Consulting services revenues were $2.3 million for the fiscal year ended
June 30, 1999. No consulting services were performed in fiscal 1997 or fiscal
1998.
Cost of License Revenues
Cost of license revenues consists primarily of third-party license and
support fees. Cost of license revenues increased from $87,000 in the fiscal
year ended June 30, 1997 to $95,000 in the fiscal year ended June 30, 1998, and
$371,000 in the fiscal year ended June 30, 1999. As a percentage of license
revenues, cost of license revenues in the fiscal years ended June 30, 1997,
1998 and 1999 was 109%, 18% and 7%, respectively. Costs of license revenues in
the fiscal year ended June 30, 1997 included $74,000 attributable to non-
recurring third-party software license and software customization fees. The
decrease as a percentage of license revenues for fiscal 1999 was attributable
primarily to higher license revenues for fiscal 1999 and to the amortization of
fixed maintenance fees relating to third party software licenses. We expect
that cost of license revenues will vary as a percentage of license revenues
from period to period.
Cost of Maintenance and Support Services Revenues
Cost of maintenance and support services revenues consists of compensation
and related overhead costs for personnel engaged in the delivery of
installation, training and support services to network operators and
engineering and support services to wireless telephone manufacturers. The
engineering and support services
25
performed for wireless telephone manufacturers include assistance relating to
integrating our UP.Browser software into the manufacturers' wireless
telephones. Cost of maintenance and support services revenues increased from
$266,000 in the fiscal year ended June 30, 1997 to $1.1 million in the fiscal
year ended June 30, 1998, and $3.0 million in the fiscal year ended June 30,
1999. As a percentage of maintenance and support services revenues, cost of
maintenance and support services revenues in the fiscal years ended June 30,
1997, 1998 and 1999 was 125%, 63% and 51%, respectively. The growth in cost of
maintenance and support services revenues was attributable primarily to an
increase in personnel dedicated to support a larger number of wireless
telephone manufacturer customers, which increased costs by approximately $1.1
million from fiscal 1998 to fiscal 1999, and increased staffing in anticipation
of growth in the number of network operator customers, which increased costs by
approximately $824,000 during the same period. Gross profit on maintenance and
support services increased from fiscal 1998 to fiscal 1999 due to the increase
in the number of browser integration assignments for wireless telephone
manufacturers, which had the effect of spreading our costs over a greater
revenue base. In addition, the number of trials in progress by network
operators increased during this period. We anticipate that the cost of
maintenance and support services revenues will increase in absolute dollars in
future operating periods.
Cost of Consulting Services Revenues
Cost of consulting services revenues consists of compensation and
independent consultant costs for personnel engaged in our consulting services
operations and related overhead. We commenced our consulting operations in
fiscal 1999. Cost of consulting services revenues for the fiscal year ended
June 30, 1999 was $1.1 million. No consulting services were performed in fiscal
1997 or fiscal 1998. As a percentage of consulting services revenues, cost of
consulting services revenues for the fiscal year ended June 30, 1999 was 50%.
Gross profit on consulting services revenues is impacted by the mix of company
personnel and independent consultants assigned to projects. The gross profit we
achieve is also impacted by the contractual terms of the consulting assignments
we undertake, and the gross profit on fixed price contracts typically is more
susceptible to fluctuation than contracts performed on a time-and-materials
basis. We anticipate that the cost of consulting services revenues will
increase in absolute dollars as we continue to invest in the growth of our
consulting services operations.
Research and Development Expenses
Research and development expenses consist primarily of compensation and
related costs for research and development personnel. Research and development
expenses increased 45% from $4.0 million in the fiscal year ended June 30, 1997
to $5.7 million in the fiscal year ended June 30, 1998 and increased 128% to
$13.1 million in the fiscal year ended June 30, 1999. The increases were
attributable primarily to the addition of personnel in our research and
development organization associated with product development. We expect to
continue to make substantial investments in research and development and
anticipate that research expenses will continue to increase in absolute
dollars.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, sales commissions, marketing programs,
public relations, promotional materials, travel expenses and trade show exhibit
expenses. Sales and marketing expenses increased 57% from $3.2 million in the
fiscal year ended June 30, 1997 to $5.0 million in the fiscal year ended June
30, 1998 and increased 116% to $10.8 million in the fiscal year ended June 30,
1999. The increases reflected the addition of personnel in our sales and
marketing organizations, as well as costs associated with increased selling
efforts to develop market awareness of our products and services. We anticipate
that sales and marketing expenses will increase in absolute dollars as we
increase our investment in these areas.
26
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related expenses, accounting, legal and administrative expenses, professional
service fees and other general corporate expenses. General and administrative
expenses increased 46% from $1.2 million in the fiscal year ended June 30, 1997
to $1.8 million in the fiscal year ended June 30, 1998 and increased 146% to
$4.4 million in the fiscal year ended June 30, 1999. The increases were due
primarily to the addition of personnel performing general and administrative
functions and, to a lesser extent, legal expenses associated with increased
product licensing and patent activity. We expect general and administrative
expenses to increase in absolute dollars as we add personnel and incur
additional expenses related to the anticipated growth of our business and
operation as a public company.
Stock-Based Compensation
Some stock options granted and restricted stock sold during the fiscal years
ended June 30, 1998 and 1999 have been deemed to be compensatory. Total
deferred stock-based compensation associated with these equity arrangements
through June 30, 1999 amounted to $2.4 million related to stock options granted
and restricted stock issued from October 1997 through March 1999. These amounts
are being amortized over the respective vesting periods of these equity
arrangements in a manner consistent with Financial Accounting Standards Board
Interpretation No. 28. Of the total deferred stock-based compensation, $108,000
and $1.0 million was amortized in the fiscal years ended June 30, 1998 and
1999, respectively. We expect amortization of approximately $696,000, $375,000,
$185,000 and $62,000 in the fiscal years ending June 30, 2000, 2001, 2002 and
2003, respectively. We anticipate that we may issue stock options with exercise
prices below the then fair market value, which would increase deferred stock-
based compensation in the future. We recorded no deferred stock based
compensation for the fiscal year ended June 30, 1997.
Interest Income, Net
Net interest income was $464,000, $982,000 and $1.8 million in the fiscal
years ended June 30, 1997, 1998 and 1999, respectively. The year-to-year
increases resulted primarily from earnings on rising cash, cash equivalent and
short-term investment balances as a result of our private placement financings
in February 1998 and March 1999 and our initial public offering in June 1999,
partially offset in the fiscal years ended June 30, 1998 and 1999 by interest
expense related to obligations under capital leases and our equipment loan.
Income Taxes
Income tax expense of $2.1 million for the fiscal year ended June 30, 1999,
consisted of foreign withholding taxes. Since inception, we have incurred net
losses for federal and state tax purposes and have not recognized any tax
provision or benefit. As of June 30, 1999, we had net operating loss
carryforwards of approximately $36.0 million, for both federal and California
income tax purposes. These carryforwards, if not utilized, expire beginning in
the year 2004 through 2019. We also had research and development credit
carryforwards of approximately $400,000 and $303,000 for federal and California
income tax purposes, respectively. We also have a foreign tax credit
carryforward of $2.0 million, which expires in 2004. Federal and California tax
laws impose significant restrictions on the utilization of net operating loss
carryforwards in the event of a shift in our ownership that constitutes an
"ownership change," as defined in Section 382 of the Internal Revenue Code. If
we have an ownership change, the ability to utilize the stated carryforwards
could be significantly reduced. See Note 6 of Notes to Consolidated Financial
Statements.
As of June 30, 1999, we had deferred tax assets of $19.2 million, which were
fully offset by a valuation allowance. Deferred tax assets consist principally
of the federal and state net operating loss carryforwards, capitalized start-up
expenditures, accruals and reserves not currently deductible for tax purposes,
research and development credits and foreign tax credit carryforwards. We have
provided a valuation allowance due to the uncertainty of generating future
profits that would allow for the realization of these deferred tax assets.
Accordingly, no tax benefit was recorded in the accompanying consolidated
statements of operations.
27
Liquidity and Capital Resources
Since inception, we have financed our operations through private sales of
convertible preferred stock which totaled $66.0 million in aggregate net
proceeds through March 31, 1999, through our initial public offering in June
1999 which generated net proceeds of $66.8 million, and through an equipment
loan and a capitalized lease, which totaled $922,000 in principal amount
outstanding at June 30, 1999. As of June 30, 1999, we had $79.8 million of cash
and cash equivalents and $33.3 million of short-term investments, and working
capital of $88.3 million.
Net cash used for operating activities was $6.6 million, $5.1 million and
$917,000 for the fiscal years ended June 30, 1997, 1998 and 1999, respectively.
For each of the fiscal years ended June 30, 1997, 1998 and 1999, cash used for
operating activities was attributable primarily to net losses and an increase
in accounts receivable offset in part by depreciation and amortization,
increases in accounts payable and accrued liabilities, and increases in
deferred revenue. For the fiscal year ended June 30, 1999, accounts receivable
increased by approximately $17.8 million. This increase was due to increased
sales to both wireless telephone manufacturers and network operators. To date,
we have had no write-offs of accounts receivable and we have not recorded any
allowance for doubtful accounts. Accrued liabilities increased by approximately
$5.3 million for the fiscal year ended June 30, 1999, which was primarily due
to an increase of $1.3 million in accruals of incentive compensation for sales
personnel reflective of the increased billings of license prepayments from
network operators and increased fees from wireless telephone manufacturers in
the quarter ended June 30, 1999, the accrual of approximately $471,000 of costs
associated with the initial public offering completed in June 1999 and an
increase in accrued consulting costs of approximately $1.0 million. Deferred
revenue increased by approximately $29.8 million for the fiscal year ended June
30, 1999, as a result of increased deferred license prepayments by network
operators of approximately $27.5 million and increased deferred fees from
wireless telephone manufacturers of approximately $2.3 million.
Net cash used for investing activities was $4.8 million, $18.0 million and
$15.2 million for the fiscal years ended June 30, 1997, 1998 and 1999,
respectively. For each of the fiscal years, cash used in investing activities
reflects purchases of property and equipment, with increased purchases of
short-term investments in the fiscal years ended June 30, 1997, 1998 and 1999.
Net cash provided by financing activities was $9.7 million, $31.7 million
and $83.2 million for the fiscal years ended June 30, 1997, 1998 and 1999,
respectively. Cash provided by financing activities in fiscal 1997 and 1998 was
attributable to proceeds from the issuance of preferred stock, and for the
fiscal year ended June 30, 1998, cash provided by financing activities also was
attributable in part to proceeds from our equipment loan. In March 1999 we
completed the sale of 2,458,543 shares of Series E convertible preferred stock
at a purchase price of $7.24 per share, which resulted in net proceeds to us of
approximately $16.7 million. In June 1999, we completed an initial public
offering of 4,600,000 shares of our common stock at a public offering price of
$16.00 per share, which resulted in net proceeds to us of approximately
$66.8 million. All of the outstanding shares of convertible preferred stock
were automatically converted into shares of common stock upon the closing of
the initial public offering in June 1999.
As of June 30, 1999, our principal commitments consisted of obligations
outstanding under operating leases, our equipment loan and capitalized lease
obligations. Although we have no material commitments for capital expenditures,
we expect to increase capital expenditures and lease commitments consistent
with our anticipated growth in operations, infrastructure and personnel. We
also may increase our capital expenditures as we expand into additional
international markets. See Notes 3, 4 and 5 of Notes to Consolidated Financial
Statements.
We believe that our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. If cash
generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or to
obtain a credit facility. If additional funds are raised through the
28
issuance of debt securities, these securities could have rights, preferences
and privileges senior to holders of common stock, and the terms of any debt
could impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and additional financing may not be available in amounts or on
terms acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial
condition and operating results.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These systems and
software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. This problem may result in software
failures or the creation of erroneous results.
We have conducted a year 2000 readiness review for the current versions of
our products. The review includes assessment, implementation (including
remediation, upgrading and replacement of some product versions), validation
testing, and contingency planning.We have largely completed all phases of this
plan, except for contingency planning, for the current versions of our
products. As a result, we believe all current versions of our products are
capable of properly distinguishing between 20th and 21st century dates, when
configured and used in accordance with the related documentation, and provided
that the underlying operating system of the host machine and any other software
used with our products are also capable of properly distinguishing between 20th
and 21st century dates. We have not tested all noncurrent versions of our
products and do not intend to do so. However, we have delivered software
releases containing corrections to all identified year 2000 errors in our
UP.Link Server Suite software to our network operator customers with our
software in production and expect that those releases will be implemented by
our customers prior to December 31, 1999.
We are testing software obtained from third parties (licensed software,
shareware, and freeware) that is incorporated into our products, and we have
contacted our vendors to confirm that licensed software is capable of properly
distinguishing between 20th and 21st century dates. We have been informed by
many of our vendors that their products that we use are capable of properly
distinguishing between 20th and 21st century dates. Despite testing by us and
by current and potential customers, and assurances from developers of products
incorporated into our products, our products may contain undetected errors or
defects associated with year 2000 date functions. Known or unknown errors or
defects in our products could result in delay or loss of revenues, diversion of
development resources, damage to our reputation, or increased service and
warranty costs, any of which could materially and adversely affect our
business, operating results or financial condition. Some commentators have
predicted significant litigation regarding year 2000 compliance issues, and we
are aware of lawsuits against other software vendors. Because of the
unprecedented nature of this litigation, it is uncertain whether or to what
extent we may be affected by it.
Our internal systems include our information technology, or IT, non-IT
systems and embedded systems. We have completed an assessment of our material
internal IT, non-IT and embedded systems, including both our own software
products and third-party software and hardware technology. We expect to
complete validation testing of our IT systems and related contingency planning
by October 1999. To the extent that we are not able to test the technology
provided by third-party vendors, we are seeking assurances from vendors that
their systems are year 2000 compliant. We are not currently aware of any
material operational issues associated with preparing our internal IT, non-IT
and embedded systems for the year 2000. However, we may experience material
unanticipated problems or additional costs caused by undetected errors or
defects in the technology used in our internal IT, non-IT and embedded systems.
We do not currently have any information concerning the year 2000 compliance
status of our customers. Our network operator customers face implementation and
support challenges in introducing Internet-based services via wireless
telephones. Historically, network operators have been relatively slow to
implement new complex services, such as Internet-based services, and year 2000
compliance issues could slow adoption or implementation of our products. If our
current or future customers fail to achieve year 2000 compliance or if they
divert technology expenditures, especially technology expenditures that were
earmarked for our products, to address year 2000 compliance problems, our
business could suffer.
29
We have funded our year 2000 plan from available cash and have not
separately accounted for these expenses in the past. To date, these expenses
have not been material. Most of our expenses have related to, and are expected
to continue to relate to, the operating costs associated with time spent by
employees and management consultants in the evaluation process and year 2000
compliance matters generally. We expect to incur approximately $500,000 to
verify that our IT, non-IT and embedded systems are capable of properly
distinguishing between 20th century and 21st century dates. In addition, we may
experience material problems and expenses associated with year 2000 compliance
that could adversely affect our business, results of operations, and financial
condition. Finally, we are also subject to external forces that might generally
affect industry and commerce, such as year 2000 compliance failures by utility
or transportation companies and related service interruptions.
30
RISK FACTORS
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company's business and
prospects:
Our future profitability is uncertain because we have a limited operating
history.
Because we commenced operations in December 1994 and commercially released
our first products in June 1996, we only have a limited operating history on
which you can base your evaluation of our business. We may not continue to grow
or achieve profitability. We face a number of risks encountered by early stage
companies in the wireless telecommunications and Internet software industries,
including:
. our need for network operators to launch and maintain commercial services
utilizing our products;
. the uncertainty of market acceptance of commercial services utilizing our
products;
. our substantial dependence on products with only limited market
acceptance to date;
. our need to introduce reliable and robust products that meet the
demanding needs of network operators and wireless telephone
manufacturers;
. our need to expand our marketing, sales, consulting and support
organizations, as well as our distribution channels;
. our ability to anticipate and respond to market competition;
. our need to manage expanding operations; and
. our dependence upon key personnel.
Our business strategy may not be successful, and we may not successfully
address these risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
We may not achieve or sustain our revenue or profit goals.
Because we expect to continue to incur significant product development,
sales and marketing, and administrative expenses, we will need to generate
significant revenues to become profitable and sustain profitability on a
quarterly or annual basis. We may not achieve or sustain our revenue or profit
goals, and our ability to do so depends on a number of factors outside of our
control, including the extent to which:
. there is market acceptance of commercial services utilizing our products;
. our competitors announce and develop, or lower the prices of, competing
products; and
. our strategic partners dedicate resources to selling our products and
services.
As a result, we may not be able to increase revenue or achieve profitability
on a quarterly or annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
Our quarterly operating results are subject to significant fluctuations, and
our stock price may decline if we do not meet expectations of investors and
analysts.
Our quarterly rev