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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2001
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
OPENWAVE SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3219054
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Seaport Blvd.
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 480-8000
(Registrant's telephone number, including area code)
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
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 $5,602,699,094 as of June 30, 2001 based upon the
closing sale price on the Nasdaq National Market reported for such date. Shares
of Common Stock held by each officer and director have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 170,072,741 shares of the registrant's Common Stock issued and
outstanding as of June 30, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement relating to the Company's 2001
Annual Meeting of Stockholders to be filed hereafter incorporated by reference
into Part III hereof.
PART I
Forward-Looking Statements
In addition to historical information, this Annual Report contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements are based upon current expectations
and beliefs of our management and are subject to certain risks and
uncertainties, including economic and market variables. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions identify such forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward-
looking statements. Factors which could cause actual results to differ
materially include those set forth in the risks discussed below under the
subheading "Factors that may affect Future Results" under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this report. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements.
Readers should carefully review the risk factors described in this section
below and any subsequently filed reports.
Item 1. Business
We are a leading provider of infrastructure software, applications, and
services that enable the convergence of the Internet and wireless
communications. We were incorporated in Delaware in 1994. Our customers are
communication service providers, including wireless and wireline carriers,
Internet service providers, portals and broadband providers worldwide. Our
Openwave(TM) Services Operating System (Services OS) is a suite of Internet
protocol (IP) -based software products designed to be installed on
communication service providers' systems. Services OS(TM) is designed to
provide carrier-class scalability and reliability and work with industry
standards, such as WAP, XHTML, SyncML and VoiceXML, to allow our operator
customers to deploy our product modules and to integrate our offerings into
existing installed technology.
Using our software, communication service providers can offer Internet services
to their wireless and wireline subscribers, and wireless device manufacturers
can turn their mass-market mobile phones, personal digital assistants and other
wireless devices into mobile Internet appliances. Wireless subscribers thus can
gain access to Internet- and corporate intranet-based services, including e-
mail, news, stocks, weather, travel and sports. In addition, subscribers can
gain access via their wireless devices to communication service providers'
intranet-based telephony services, which can include over-the-air activation,
call management, billing history information, pricing plan subscription and
voice message management. As of June 30, 2001, over 85 communication service
providers have licensed our mobile Internet software, have commenced or
announced commercial service or are in market or laboratory trials.
Communication service providers using our software can also provide their
subscribers with a variety of messaging applications, including e-mail, mobile
e-mail, unified messaging (single inbox for e-mail, voice mail, and facsimile)
as well as short messaging services. As of June 2001, we had over 180 million
licensed mailbox seats and more than 35 predominantly wireline carriers with
licensed deployments of over one million mailboxes.
Our microbrowser software, Openwave Mobile Browser, is designed to be embedded
in wireless devices and to deliver the mobile Internet and the applications of
Services OS through a graphical user interface. As of June 30, 2001, over 134
million handsets have shipped with Mobile Browser embedded.
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Recent Events
On August 8, 2000, Phone.com, Inc. and Software.com, Inc, signed an agreement
to merge the two companies subject to stockholder approval, regulatory reviews
and other conditions. On November 17, 2000, pursuant to the agreement, a
wholly-owned subsidiary of Phone.com was merged with and into Software.com so
that Software.com became a wholly-owned subsidiary of Phone.com. At the same
time, Phone.com changed its name to Openwave Systems Inc. Under the terms of
the agreement, approximately 94.5 million shares of Openwave common stock were
issued in exchange for all the outstanding shares of Software.com common stock
based on an exchange ratio of 1.6105 Openwave shares for each Software.com
share. Following the exchange, former stockholders of Phone.com owned
approximately 51% of the combined company and former Software.com shareholders
owned approximately 49%. The merger was accounted for as a pooling-of-
interests.
In connection with the merger, Donald Listwin, formerly an Executive Vice
President of Cisco Systems, Inc., became the President and Chief Executive
Officer of the combined company. In June 2001, Mr. Listwin also became Chairman
of the Board, replacing Alain Rossmann who resigned from the Company that same
month.
Most recently, Kevin Kennedy, former senior vice president of Cisco Systems
joined the Company to fill the newly-created position of Chief Operating
Officer (COO). At the same time, John MacFarlane, the former Executive Vice
President of Product Development was appointed to the newly-created position of
Chief Technology Officer (CTO).
Industry Background
Growth of the Internet, Messaging and Wireless Telecommunications
Use of the Internet and wireless telecommunications has grown rapidly in the
past few years. International Data Corporation estimates that from the end of
2000 to the end of 2005, the number of users of the Internet worldwide will
increase from 318 million to 717 million and the number of email mailboxes will
increase from 505 million to 1.2 billion. Industry analysts estimate that there
were approximately 750 million digital wireless subscribers worldwide at the
end of 2000, and the number of subscribers will grow to approximately 1.4
billion by the end of 2004. We cannot assure you that these estimates will be
achieved.
The Convergence of the Internet and Mobile Telephony
As people have become increasingly dependent on e-mail services, remote access
to corporate intranets, and other Internet-based services, mass-market wireless
devices that provide mobile access to these resources have become increasingly
useful tools. Openwave pioneered the convergence of the Internet and mobile
telephony. In 1993, we developed our first e-mail messaging server. In 1995, we
developed our initial mobile Internet technology which enables the delivery of
Internet-based services to wireless devices. In 1996, we introduced and
deployed our first products based on our mobile Internet technology.
To create a worldwide open standard enabling the delivery of Internet-based
services to mass-market wireless devices, we co-founded the Wireless
Application Protocol (WAP) Forum in 1997. A year later, 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 device manufacturers, communication service
providers, content providers and application developers can provide Internet-
based products and services that are interoperable.
In 1998, the WAP Forum also published the Wireless Markup Language, or WML. WML
is compliant with the Extensible Markup Language, or XML, specification
published by the World Wide Web Consortium, or W3C.
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Content providers and application developers use WML to optimize the display
of, and interaction with, Web-based data on wireless devices. Based
substantially on technology that Openwave contributed to the public domain,
WML is optimized for delivery of Internet content to mass-market wireless
devices, which have numeric keypads instead of full keyboards, small screens,
and limited memory capacity, processing power, battery life and bandwidth. In
2001, the WAP Forum published its WAP 2.0 specifications, to provide full
compatibility with the emerging W3C XHTML standards for Web content authoring.
The Market Opportunity
In response to an increasingly competitive environment, communication service
providers which own wireless, wireline, portal and Internet service provider
(ISP) businesses, seek to deliver Internet-based information, entertainment
and messaging services to their subscribers as a means to generate revenues
from new sources, differentiate their service offerings and reduce subscriber
turnover and operating costs. To do this, communication service providers
require a scalable software and services platform. Our Services OS and unified
messaging application allow our customers to offer common services across
their wireless, wireline, and ISP businesses, thereby improving their
efficiency and overall economies of scale.
The Openwave Systems Solution
We provide applications and services that enable the delivery of Internet-
based services to mass-market wireless telephones and other mobile devices, as
well as personal computers. Using our scalable products, communication
services providers can provide Internet-based content, applications and
services to their wireless subscribers and offer new revenue-generating
services across their wireless and wireline businesses. In addition, wireless
device manufacturers can turn their mass-market wireless devices into mobile
Internet appliances.
With our technology, wireless subscribers have access to advanced
communication services, Internet-based content and services and corporate
intranet-based services; in addition, subscribers have the ability to use a
single inbox for wireless and wireline voice messages, e-mails and facsimiles.
Existing carrier deployments, built on our platform, include such services as
unified messaging, e-mail, news, stock trading, weather, travel, sports,
commerce and calendaring. Our strategy is to design products that help our
customers derive incremental subscriber revenues and increase subscriber
loyalty.
Products and Services
Our software product suite, called Services OS, is an open, standards-based
suite of mobile Internet infrastructure software that is intended to enable
communication service providers to rapidly create, deploy and manage revenue-
generating services. Services OS consists of products in five broad
categories: Communication Services, Platform Services, Mobile Services
Infrastructure, Device Products and Developer Products.
Communication Services
. Openwave Email--an Internet-based, carrier-class e-mail messaging
application with high scalability, performance and features to achieve
reliable operation, smooth administration and integration with existing
systems and services.
. Openwave Mobile Email--a mobile messaging application that provides
subscribers with access to e-mail from wireless devices and PC's,
personal address book and instant, flexible notification of new
messages.
3
. Openwave Unified Messaging--a messaging application that delivers voice
mail, e-mail and facsimile in a single inbox, accessible through the
telephony user interface on any telephone, or the graphical user
interface on any wireless telephone or PC. Based on the VoiceXML
standard, our unified messaging solution is designed to be highly
scalable, flexible and extensible.
Platform Services
. Openwave Provisioning Manager--a flexible, extensible, centralized
provisioning solution for over-the-air provisioning of wireless
handsets, mobile Internet infrastructure and applications.
. Openwave Download Fun--a content delivery solution that provides a
platform for communication service providers to offer subscribers the
capability to download a wide variety of media objects to their mobile
handsets.
. Openwave M-Services Suite--a product bundle currently consisting of
Download Fun, Provisioning Manager and Mobile Access Gateway. We expect
that this bundle will enable GSM communication service providers to meet
the goal of the GSM Association's Mobile Services initiative to deliver
compelling, revenue-generating subscriber services.
Mobile Services Infrastructure
. Openwave Mobile Access Gateway--carrier-class infrastructure software
for exchanging data between the wireline Internet and wireless devices.
Our market-leading gateway includes advanced features such as security,
billing support and differentiated classes of service.
. Openwave Mobile Messaging Gateway--an IP-based solution for Short
Messaging System.
Device Products
. Openwave Mobile Browser--microbrowser software that is designed and
optimized for wireless devices and that we believe provides a rich,
easy-to-use subscriber experience.
. Openwave Device Applications--software applications for wireless
telephones and other wireless devices for mobile services such as
messaging, content download and synchronization.
Developer Products
. Openwave SDK--Software Development Kit for developers and content
providers seeking to build applications and content for the mobile
Internet.
Services
We also provide maintenance and engineering support services to wireless
device manufacturers who have ported our Mobile Browser and other device
applications to their telephones. In addition, we provide consulting
services to communication service providers who license our mobile Internet
platform software and engage us to perform integration services relating to
commercial launches of our technology.
New Products and Services under Development
We have released a suite of messaging products that includes e-mail and
unified messaging. This platform is built on Openwave Email messaging
products. We continue to focus resources on enhancing these products and
utilize technology obtained from various acquisitions, as well as technology
developed in-house.
We are continuously improving our software products for mobile telephones and
other personal mobile devices, including the ongoing enhancement of Mobile
Browser. Ongoing developments include an improved graphical
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user interface and the addition of new functionality relating to WAP 2.0 and
over-the-air synchronization of data. We are also developing new messaging
applications for mobile devices.
Communication service providers around the world are rapidly deploying 2.5G
networks and preparing to deploy third-generation, or 3G, networks. We are
working together with our partners and customers to ensure successful
deployment of our products on 2.5G networks. We are engaged in ongoing testing
of our products to ensure that they will fully support 3G deployments in the
future. Currently, all of our products support IP transport, which is used by
3G networks.
Customers
Communication Service Providers
We sell our software products worldwide, primarily to communication service
providers, including wireless and traditional telecommunications carriers, and
also to Internet service providers, cable-based Internet access providers and
Internet portals.
We also provide our communication service provider customers with professional
services that enable them to rapidly adopt our technology and bring wireless
and wireline Internet-based services and applications to market. Our
professional services focus on those areas where our products interface with
our customers' internal systems such as billing, provisioning and customer
care.
Our agreements with our communication service provider customers grant them
non-exclusive licenses to use our Services OS software in connection with
providing Internet-based services to their subscribers. Pricing and payment
terms for licenses are negotiated with each customer based upon subscriber
count or transaction capacity. Products are licensed under either a perpetual
license model or under a monthly or quarterly time-based license model.
Although these agreements do not provide for a right of return, we typically
provide a limited warranty and indemnify customers, subject to certain
limitations, against intellectual property infringement claims. In addition, we
typically provide fee-based maintenance and support services to our customers,
under which they receive error corrections and remote support. Our customers
can also purchase new version coverage to receive new releases of our products
for a specified term. The Notes to Consolidated Financial Statements (See Note
8) quantify customers that represent more than 10% of revenues.
Wireless Device Manufacturers
We license our Mobile Browser software to wireless device manufacturers, who
embed it into their wireless device products. To encourage these manufacturers
to include Mobile Browser in their wireless device models, generally we do not
charge a per-unit royalty. In addition, we provide engineering and support
services to accelerate the introduction of new wireless device models that
contain Mobile Browser. These services typically are provided to manufacturers
on an annual flat-fee basis per digital wireless telephony standard.
Our agreements with wireless device manufacturers generally provide these
customers with a non-exclusive, royalty-free license to include the Mobile
Browser in the wireless devices that they sell. Under these agreements, we
typically indemnify our customers, subject to certain limitations, against
intellectual property infringement claims. In addition, customers can elect to
receive varying levels of fee-based maintenance and support services.
5
Research and Product Development
Our ability to meet our customer's expectation of innovation and enhancement
depends on a number of factors, including our ability to identify and respond
to emerging technological trends in our target markets, develop and maintain
competitive products, enhance our existing products by adding features and
functionality that differentiate them from those of our competitors and bring
products to market on a timely basis and at competitive prices. Consequently,
we continue to enhance the features and performance of our existing products
and have made and intend to continue to make, significant investments in
research and product development. Our research and development expenses were
$135.8 million, $59.9 million and $28.9 million for the years ended June 30,
2001, 2000 and 1999, respectively. As of June 30, 2001, we had 808 employees
engaged in research and product development activities. We continue to hire
skilled engineers for research and product development, and our business could
be adversely affected if we are unable to hire these engineers in a timely
basis.
Technology
Technology and innovation are core elements of our Company's value. We have
contributed significantly to the development of the mobile Internet and its
emergence as a viable technology. Our messaging products have substantial
innovation and technology dedicated to the unique and stringent needs of the
service provider marketplace. Our products are based on open standards, and we
contribute significantly to the development of such standards, in particular
in the areas of mobile Internet protocols, messaging, mobile Internet
technology and enabling technologies for 2.5G and 3G networks.
Our technology is designed for deployment on very large-scale networks. Our
customers require highly scalable systems, tools for monitoring and managing
systems and other features unique to the size, scale and performance
characteristics of their networks and service offerings. Our technology is
designed with these requirements in mind and includes features such as:
. The ability to segment and structure data for high performance access,
enabling a much larger number of supported users
. The ability to replicate directory information for increased performance
and reliability
. The ability to perform certain management and operations activities on
the systems without downtime
. Implementation techniques that utilize so-called multi-threaded
architectures, to enable efficient utilization of multiple CPU Unix
servers
Mobile Access Gateway Technology
We have designed our Mobile Access Gateway to be modular, expandable,
flexible, scalable and reliable. Using an architecture based on scalable,
object-oriented technology, the Mobile Access Gateway typically runs on a
large, distributed set of servers. Mobile Access Gateway is intended to meet
the stringent performance, scalability and reliability requirements of
communication service providers. The Mobile Access Gateway implements WAP
Forum specifications for communications with mobile WAP phones and other
mobile terminals.
Mobile Device Software Technology
Our mobile device software technology is designed to be embedded in limited-
function devices, such as wireless devices, and has minimum hardware resource
requirements. The technology includes multiple applications, such as browsing
and messaging, and platform support to enable the correct and efficient
operation of these applications in a wide variety of mobile devices.
6
Internet Messaging Technology
We have developed a scalable platform for building messaging and other
Internet-standard, data intensive applications. Our platform is based on a
partitioned cluster architecture, which enables excellent scalability and
performance across a wide variety of configurations. Our Internet messaging
technology implements a wide variety of messaging standards, including SMTP,
MIME, IMAP4 and POP3. The message storage subsystem reliably and efficiently
stores, organizes and retrieves a variety of messaging media types, including
text, graphics, voice, audio, video and facsimile.
Unified Messaging Technology
Our Unified Messaging technology utilizes an IP-based architecture to provide a
single inbox for e-mail, voice mail and facsimile. Users can interact with the
e-mail, voice mail and facsimile messages in their inbox from any device,
including a PC, PDA, mobile phone or voice telephone. Edge voice servers, from
companies such as Cisco, can be used to link the telephone network with our
Unified Messaging technology using VoiceXML, a W3C standard markup language
designed for voice applications.
Directory Technology
Many of our products require access to common information, such as a user name,
password, phone number or e-mail address. Our directory technology has a core
database that contains the common information, and a set of high-speed replicas
of that information. By using multiple replicas, the common information can be
repeatedly accessed in a reliable and efficient manner. The replicas support
the industry-standard Lightweight Directory Access Protocol (LDAP), so that
third-party applications can access the information contained within the
directory by using this standard format.
Sales and Marketing
We sell our products through both a direct sales force and third-party
resellers. As of June 30, 2001, we had 579 people in Sales and Marketing
worldwide. Our sales force focuses on selling products and related professional
services and provides some assistance to our third-party resellers. Our third-
party resellers are telephony infrastructure companies such as Siemens, systems
integrators such as Itochu Techno-Science Corporation and systems providers
such as Sun Japan.
International sales of products and services accounted for 64%, 62% and 66% of
our total revenues for our fiscal years ended June 30, 2001, 2000 and 1999,
respectively. We expect international revenues to continue to account for a
significant portion of our revenues. Our international sales strategy is to
sell directly to large carriers and to partner with leading distributors and
systems integrators who have strong industry backgrounds and market presence in
their respective markets and geographic regions.
We believe that customer service and ongoing technical support are an essential
part of the sales process in the wireless communications industry. To provide
high levels of customer service, we established our Customer Advocacy
organization which is dedicated to the success and satisfaction of customers.
Senior management and assigned account managers play a role in ongoing account
management and relationships. We believe these customer relationships will
enable us to improve customer satisfaction and develop products to meet
specific customer needs.
We actively recruit content and application developers to our platform and
provide to them free of charge our software development kit, Openwave SDK. We
also provide them with free membership in the Openwave Developer Program, free
e-mail-based support and the opportunity to participate in the Openwave
Alliances Program.
7
The Openwave Developer Alliance Program has a select group of our content and
application developers as members. We screen applications to the Developer
Alliance Program based on the availability and quality of the content or
applications produced by the applicants. We perform joint marketing activities
with Alliance partners, as well as provide introductions between our wireless
communication service providers and our Developer Alliance Program members.
Standards
We believe the growth and development of standards is key to the success of
our industry and our Company. Therefore, we take an active role in a number of
industry standards organizations including the WAP Forum (which we co-founded
in 1997) the World Wide Web Consortium (W3C), CDMA Developer Group, SyncML
Consortium and Internet Engineering Task Force among others. To facilitate
success of the GSM Mobile Services Initiative, we have agreed to license
certain intellectual property rights on a royalty-free basis to mobile handset
vendors. We intend to continue to work closely with key standard
organizations.
Competition
The market for wireless and wireline Internet standards-based infrastrucure
and applications software products and services continues to be intensely
competitive. The widespread adoption of open industry standards 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
standard. 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 continue to compete primarily on the basis of quality,
breadth of product and service offerings, functionality, price and time-to-
market.
Our current and potential competitors include the following:
. Wireless equipment manufacturers, such as Ericsson and Nokia, which are
developing and marketing competitive server, browser and application
software products. These companies already sell billions of dollars
worth of wireless devices and other telecommunications products to
communication service providers which are our existing and potential
customers.
. Microsoft, which has produced a Mobile Explorer microbrowser to run on
wireless handheld devices, including wireless telephones. This system is
currently featured on handsets being marketed in the United Kingdom by
Sony.
. Comverse, a telecommunications messaging provider of voice mail, which
has extended its product offerings to include unified messaging,
personal information management software solutions and other advanced
communications applications.
. Software companies, such as Oracle Corporation, which are marketing
portal platform software that is compliant with the specifications
promulgated by the WAP Forum. Oracle has additionally launched a
separate Oracle Mobile division which supplies consumers with mobile
information services.
. NTT DoCoMo, a customer of ours, is pursuing a strategy to become a
global wireless carrier. As part of that strategy, NTT DoCoMo, through
an agreement with its MID subsidiary, may seek to offer or sublicense
its iMode service to other wireless service providers in a manner that
would be competitive with our wireless Internet service offerings.
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Many of our existing competitors, as well as potential competitors, have
substantially greater financial, technical, marketing and distribution
resources than we have. Several of these companies also have greater name
recognition and better established relationships with our target customers.
Furthermore, these competitors may be able to adopt more aggressive pricing
policies and offer more attractive terms to customers than we can. We may face
increasing price pressure from our communication service provider 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.
We rely on a combination of copyright, trademark, trade secret laws,
confidentiality provisions and other contractual provisions to protect our
proprietary rights, but these legal means afford only limited protection.
Despite the measures we take to protect our intellectual property, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information which we regard as proprietary. In addition, the laws of some
foreign countries may not protect our proprietary rights as fully as do the
laws of the United States. Thus, the measures we take to protect our
proprietary rights in the United States and abroad may not be adequate. In
addition, our competitors may independently develop similar technologies.
The market for wireless communications and the delivery of Internet-based
services 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 infringement claims
against us grows. For example, we inadvertently may be infringing a patent of
which we are unaware. In addition, because patents can take many years to
issue, there may be one or more patent applications now pending of which we are
unaware, and which we may be accused of infringing when patent(s) issue from
the application(s) in the future. To address any patent infringement claims, we
may need to enter into royalty or licensing agreements on disadvantageous
commercial terms. We may also have to incur significant legal expenses to
ascertain the risk of infringing a patent and the likelihood of that patent
being valid. A successful claim of patent infringement against us, and our
failure to license the infringed or similar technology, could 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. As of June 30, 2001, the
Company is involved in certain legal proceedings that involve patents and
trademarks (see Item 3, Legal Proceedings).
As a member of several groups involved in setting standards for the industry,
the WAP Forum, for example, we have agreed to license our intellectual property
to other members of those groups on fair and reasonable terms to the extent
that the intellectual property is essential to implementing the specifications
promulgated by those groups. Each other member of the groups has entered into a
reciprocal agreement.
9
Employees
As of June 30, 2001, we had approximately 2,200 employees. None of our
employees is covered by any collective bargaining agreements, except for
certain employees located in Europe. We believe that our relations with our
employees are good.
Item 2. Properties.
Our principal office is located in Redwood City, California, where we occupy a
280,000 square foot building that is leased for a period of 12 years,
commencing in the fourth quarter of the fiscal year ended June 30, 2001. In
addition, we have two options to extend the lease for five years each. We also
have numerous other facility leases in other locations in the United States and
throughout the world.
Item 3. Legal Preceedings.
On February 2, 2001, a complaint, Leon Stambler v. RSA Security Inc., Verisign
Inc., First Data Corporation, Openwave Systems Inc. and Omnisky Corporation,
Civil Action No. 01-00065, was filed in the U.S. District Court for the
district of Delaware against us and certain other companies. The complaint
alleges that the defendants have infringed claims of one or more patents that
Mr. Stambler asserts have been granted to him. On March 26, 2001, we responded
to the complaint. We denied the allegations that we have infringed any claim in
either of the patents asserted against us. In addition, we asserted
counterclaims against Mr. Stambler seeking a declaratory judgment that the
asserted patents are not infringed by us and that the patents are also invalid
and unenforceable. Although the parties have exchanged some written discovery,
discovery is still in its initial stages and no trial date has been set. Based
on the facts known to date, we believe that we have meritorious defenses and
claims. We are unable to estimate the range of potential loss, if any.
On April 30, 2001, a complaint, Opuswave Networks, Inc. v. Openwave Systems
Inc. and Alain Rossmann, Civil Action No. 01-1681, was filed in the U.S.
District Court for the Northern District of California against us and a former
affiliate. The complaint alleges that the defendents have infringed claims of a
common law trademark that plaintiff asserts it has acquired. On June 5, 2001,
we responded to the complaint. We denied allegations that we have infringed any
trademark rights asserted against us. In addition, we asserted a counterclaim
against Opuswave Networks seeking a declaratory judgment that the asserted
trademark rights are not infringed by us. On June 13, 2001, Opuswave Networks
responded to the counterclaims denying its allegations. Discovery has not
commenced and no trial date has been set. Based on the facts known to date, we
believe that we have meritorious defenses and intend to defend this suit. We
are unable to estimate the range of potential loss, if any.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
Our common stock has been listed for quotations on the National Association of
Securities Dealers, Inc. Automated Quotation System, under the symbol OPWV
since the merger of Phone.com, Inc. and Software.com, Inc. on November 17,
2000. The following table sets forth the fiscal periods indicating the high and
low closing sales prices for our common stock.
Stock price by quarter High Low
---------------------- ------- -------
Fiscal year ended June 30, 2000:
First quarter............................................. $ 92.66 $ 22.69
Second quarter............................................ $170.00 $ 74.81
Third quarter............................................. $208.00 $102.00
Fourth quarter............................................ $160.63 $ 50.22
Fiscal year ended June 30, 2001:
First quarter............................................. $126.88 $ 60.50
Second quarter............................................ $116.88 $ 37.00
Third quarter............................................. $ 76.19 $ 15.96
Fourth quarter............................................ $ 46.90 $ 13.51
As of August 24, 2001, there were 899 holders of record of our common stock. We
have not paid any dividends and currently intend to retain future earnings for
reinvestment in our business or the repurchase of outstanding shares of our
common stock. Therefore, we do not anticipate paying cash dividends in the
foreseeable future.
Item 6. Selected 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, 2001, 2000 and 1999, and the consolidated balance sheet data as
of June 30, 2001 and 2000 are derived from our financial statements which have
been audited by KPMG LLP. The consolidated statements of operations for the
years ended June 30, 1998 and 1997, and the consolidated balance sheet data as
of June 30, 1999, 1998 and 1997 represent information that is unaudited. The
information is presented for illustrative purposes only and is not necessarily
indicative of the periods shown, nor is it necessarily indicative of future
results or financial position.
You should also consider that on November 17, 2000, we merged with
Software.com, Inc. in a transaction that was accounted for as a pooling-of-
interests. In recording the pooling-of-interests combination, Software.com,
Inc.'s consolidated financial statements for the year ended December 31, 1999,
1998 and 1997 were combined with our consolidated financial statements for the
years ended June 30, 1999, 1998 and 1997. As of the merger date, Software.com
changed its fiscal year end to June 30 to conform to our fiscal year end.
Software.com's consolidated financial statements for the twelve months ended
June 30, 2000 were combined with our consolidated financial statements for the
same period. Software.com's unaudited results of operations for the six months
ended December 31, 1999 included revenues of $29.0 million, expenses of
$37.2 million and net loss of $8.2 million. An adjustment has been made in
stockholders' equity as of June 30, 2000 to eliminate the effect of including
Software.com's unaudited results of operations for the six months ended
December 31, 1999 in both the years ended June 30, 2000 and 1999.
11
Years ended June 30,
---------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- -------- -------- --------
(in thousands except per share data)
Consolidated Statements of
Operations Data:
Revenues:
License.................. $ 344,990 $ 93,126 $ 32,076 $ 17,984 $ 7,939
Maintenance and support
services................ 60,264 25,835 13,507 4,396 212
Professional services.... 60,004 27,447 14,800 6,558 2,963
---------- --------- -------- -------- --------
Total revenues......... 465,258 146,408 60,383 28,938 11,114
---------- --------- -------- -------- --------
Cost of revenues:
License.................. 21,945 6,742 3,046 1,663 776
Maintenance and support
services................ 28,875 14,889 5,797 2,700 266
Professional services.... 36,950 16,971 8,685 5,161 1,915
---------- --------- -------- -------- --------
Total cost of
revenues.............. 87,770 38,602 17,528 9,524 2,957
---------- --------- -------- -------- --------
Gross profit........... 377,488 107,806 42,855 19,414 8,157
---------- --------- -------- -------- --------
Operating expenses:
Research and
development............. 135,768 59,889 28,934 17,822 10,669
Sales and marketing...... 148,811 68,421 33,597 19,541 12,786
General and
administrative.......... 59,320 24,061 12,099 7,277 5,742
Stock-based
compensation............ 10,223 10,184 2,236 335 --
Amortization of goodwill
and other intangible
assets.................. 636,282 216,614 329 -- --
In-process research and
development............. -- 27,700 3,210 -- --
Merger, acquisition, and
integration-related
costs................... 88,850 10,395 -- -- --
---------- --------- -------- -------- --------
Total operating
expenses.............. 1,079,254 417,264 80,405 44,975 29,197
---------- --------- -------- -------- --------
Operating loss......... (701,766) (309,458) (37,550) (25,561) (21,040)
Interest and other, net... 24,760 23,220 2,829 446 736
---------- --------- -------- -------- --------
Loss before income
taxes................. (677,006) (286,238) (34,721) (25,115) (20,304)
Income taxes.............. (12,988) (2,019) (2,316) (446) (1)
---------- --------- -------- -------- --------
Net loss............... (689,994) (288,257) (37,037) (25,561) (20,305)
Accretion on redeemable
convertible preferred
stock.................... -- -- (403) (825) (730)
---------- --------- -------- -------- --------
Net loss attributable
to common
stockholders.......... (689,994) $(288,257) $(37,440) $(26,386) $(21,035)
========== ========= ======== ======== ========
Basic and diluted net loss
attributable to common
stockholders per share... $ (4.17) $ (2.06) $ (0.52) $ (0.47) $ (0.38)
========== ========= ======== ======== ========
Shares used in computing
basic and diluted net
loss attributable to
common stockholders per
share.................... 165,426 139,921 71,514 56,617 54,838
========== ========= ======== ======== ========
June 30,
----------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- -------- ------- -------
(in thousands)
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short-term investments........ $ 348,493 $ 523,007 $186,009 $40,222 $11,182
Total assets................... 1,725,715 2,361,225 250,825 60,892 28,637
Capital lease obligations and
long-term debt, less current
portion....................... 754 3,319 6,254 4,030 552
Total stockholders' equity..... 1,557,953 2,192,376 177,456 15,324 2,535
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Fiscal Years Ended June 30, 2001, 2000 and 1999
Revenues
We produce three different types of revenue. License revenues are primarily
associated with licensing our product to communication service providers;
maintenance and support revenues are derived from providing support services to
wireless device manufacturers and communication services providers; and
professional services revenues, which are primarily a result of consultants
providing deployment and integration services to the communication service
providers.
License Revenues
License revenues increased from $32.1 million in the fiscal year ended June 30,
1999 to $93.1 million in the fiscal year ended June 30, 2000 and $345.0 million
for the fiscal year ended June 30, 2001. The increase in license revenues is
due to an increase in our customer base and the wider adoption of wireless and
wireline data services generally, which resulted in a higher number of active
subscribers using our applications and infrastructure software. License
revenues represented 74%, 64% and 53% of total revenues for fiscal years ended
June 30, 2001, 2000 and 1999, respectively.
Maintenance and Support Services Revenues
Maintenance and support services revenues increased from $13.5 million in the
fiscal year ended June 30, 1999 to $25.8 million in the fiscal year ended June
30, 2000 and $60.3 million for the year ended June 30, 2001. The increase in
maintenance and support services revenues reflects an increase in services
provided to wireless device manufacturers and increased support fees from
communication service providers. Maintenance and support services as a percent
of total revenues represented 13%, 18% and 22% for fiscal years ended June 30,
2001, 2000 and 1999, respectively.
Professional Services Revenues
Professional services revenues increased from $14.8 million in the fiscal year
ended June 30, 1999 to $27.4 million in the fiscal year ended June 30, 2000 and
$60.0 million in the fiscal year ended June 30, 2001. The increase in
professional services revenue was primarily due to higher billable hours as a
result of the increased number of communication service providers who have
licensed our products and engaged us to perform integration services relating
to the deployment of those products. Professional services as of percent of
total revenues represented 13%, 18% and 25% for fiscal years ended June 30,
2001, 2000 and 1999, respectively.
Cost of License Revenues
Cost of license revenues consists primarily of third-party license and related
support fees, as well as costs associated with our Applications Service
Provider (ASP) model. Cost of licenses increased from $3.0 million for the
fiscal year ended June 30, 1999 to $6.7 million for the fiscal year ended June
30, 2000 and $21.9 million for the fiscal year ended June 30, 2001. As a
percentage of license revenues, costs of license revenues represented 6%, 7%
and 9% in the fiscal years ended June 30, 2001, 2000 and 1999, respectively.
The $3.7 million and $15.2 million increase in cost of license revenues for
fiscal year 1999 compared to fiscal year 2000 and fiscal year 2000 compared to
fiscal year
13
2001, respectively, was attributed to increased cost related to the ASP model
of Onebox.com, which was acquired in April 2000. Under an ASP model, certain
costs such as the depreciation costs associated with operating a data center
are charged to cost of license revenues. In addition, amortization of software
licenses that were purchased during the last quarter of fiscal year ended 2001,
contributed to increased cost of licenses for fiscal year 2001. In May 2001, we
subcontracted the Onebox ASP services to iBasis, Inc. As a result of this
arrangement and the continuing growth of revenue, we anticipate the cost of
license revenues to continue to decrease as a percent of related revenue over
the next year.
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 training and support services
to wireless device manufacturers and communication service providers. Cost of
maintenance and support services increased from $5.8 million for the fiscal
year ended June 30, 1999 to $14.9 million for the fiscal year ended June 30,
2000 to $28.9 million for the fiscal year ended June 30, 2001. As a percentage
of maintenance and support services revenues, cost of maintenance and support
services revenues in the fiscal years ended June 30, 2001, 2000 and 1999
represented 48%, 58% and 43%, respectively. The $9.1 million and $14.0 million
increase in cost of maintenance and support services for fiscal year 1999
compared to fiscal year 2000 and fiscal year 2000 compared to fiscal year 2001,
respectively, was attributed to an increase in personnel dedicated to support
the increase in wireless device manufacturers and communication service
providers. We anticipate that the cost of maintenance and support services will
remain constant as a percentage of related revenues in future operating
periods.
Cost of Professional Services Revenues
Cost of professional services revenues consists of compensation and independent
consultant costs for personnel engaged in our professional services operations
and related overhead. Cost of professional services revenues increased from
$8.7 million in the fiscal year ended June 30, 1999 to $17.0 million in the
fiscal year ended June 30, 2000 and $37.0 million for the fiscal year ended
June 30, 2001. As a percentage of professional service revenues, cost of
professional services revenues in the fiscal years ended June 30, 2001, 2000
and 1999 represented 62%, 62% and 59%, respectively. The $8.3 million and $20.0
million increase in cost of professional services for fiscal year 1999 compared
to fiscal year 2000 and fiscal year 2000 compared to fiscal year 2001,
respectively, was attributed to increases in personnel and outside consultants
to satisfy the increased demand for professional services to our customers. We
anticipate that the gross profit margin on professional services will decrease
slightly in future operating periods.
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 from $28.9 million in the fiscal year ended June 30, 1999 to $59.9
million in the fiscal year ended June 30, 2000 and $135.8 million in the fiscal
year ended June 30, 2001. As a percentage of revenues, research and development
expenses decreased from 48% for the fiscal year ended June 30, 1999 to 41% for
the fiscal year ended June 30, 2000 and 29% for the fiscal year ended June 30,
2001. We anticipate that the cost of research and development expenses will
continue to decrease as a percentage of total revenues in future operating
periods.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, sales commissions, marketing programs,
travel expenses, public relations, promotional materials and trade show
14
exhibit expenses. Sales and marketing expenses increased from $33.6 million in
the fiscal year ended June 30, 1999 to $68.4 million in the fiscal year ended
June 30, 2000 and $148.8 million in the fiscal year ended June 30, 2001. As a
percentage of revenues, sales and marketing expenses decreased from 56% for the
fiscal year ended June 30, 1999 to 47% for the fiscal year ended June 30, 2000
and 32% for the fiscal year ended June 30, 2001. We expect to continue to
increase our sales and marketing costs in absolute dollars in accordance with
our planned growth. However, sales and marketing expenses are expected to
continue to decrease as a percentage of total revenues.
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 from $12.1 million in the fiscal year ended June 30 1999 to $24.1
million in the fiscal year ended June 30, 2000 and $59.3 million in the fiscal
year ended June 30, 2001. As a percentage of revenues, general and
administrative expenses decreased from 20% for year ended June 30, 1999 to 16%
for the year ended June 30, 2000 and 13% for the year ended June 30, 2001. The
increase in dollars were due primarily to the addition of personnel, additional
expenses in connection with our operation as a public company, additional
provisions for unexpected uncollectible accounts and, to a lesser extent, legal
expenses associated with increased product licensing and patent activity.
General and administrative expenses are expected to continue to increase in
absolute dollars, but will continue to decrease as an overall percentage of
total revenues.
Stock-Based Compensation
Stock-based compensation expense totaled $10.2 million, $10.2 million and $2.2
million for the years ended June 30, 2001, 2000 and 1999, respectively. All
stock-based compensation is being amortized in a manner consistent with
Financial Accounting Board Interpretation No. 28. The increase of $8.0 million
of stock-based compensation expense during the fiscal year ended June 30, 2000
as compared to the fiscal year ended June 30, 1999, resulted primarily from the
amortization of deferred stock-based compensation related to acquisitions
during the year ended June 30, 2000. Stock-based compensation remained
relatively flat during the fiscal year ended June 30, 2001 as compared to the
fiscal year ended June 30, 2000, and consisted of continued amortization of the
deferred stock-based compensation related to acquisitions, as well as
compensation expense recognized on warrants, stock issued to executives, and
stock options granted to employees at exercise prices below the current fair
market value. We expect stock-based compensation to increase during the year
ended June 30, 2002 as compared to June 30, 2001 as a result of continued
acquisitions including Avogadro, which was completed in July 2001, and
restricted stock and stock options granted to employees and executives at
exercise prices below the current fair market value.
Amortization of Goodwill and Intangible Assets
Amortization of goodwill and intangible assets totaled $636.3 million, $216.6
million, and $329,000 for the years ended June 30, 2001, 2000 and 1999,
respectively, and primarily resulted from our acquisitions of Telarc, APiON and
Angelica in October 1999 and the acquisitions of AtMotion in February 2000,
Paragon in March 2000, Onebox in April 2000 and bCandid and MyAble in June
2000. Amortization of goodwill and other intangible assets is computed using
the straight-line basis over a three to five-year period. We expect
amortization of goodwill and other intangible assets will be approximately
$630.0 million for the fiscal year ending June 30, 2002.
In-Process Research and Development
For each of our prior acquisitions, we allocated the purchase price to
developed technology and in-process research and development (IPR&D). This
allocation was based on whether or not technological feasibility had been
achieved
15
and whether there was an alternative future use for the technology. Statement
of Financial Accounting Standards (SFAS) No. 86 sets guidelines for
establishing technological feasibility. Technological feasibility is determined
when a product reaches the "working model" stage, which is generally when a
product is classified as a beta version release. For the previous acquisitions
of Telarc and APiON in October 1999, Paragon in March 2000, Onebox in April
2000, and bCandid in June 2000, we concluded that the purchased IPR&D of $3.2
million, $110,000, $18.1 million, $4.3 million and $2.0 million, respectively,
had not yet reached technological feasibility and had no alternative use.
Therefore, we expensed these costs at the time of the purchase, according to
the provisions of FASB interpretation No. 4, Applicability of SFAS No. 2 to
Business Combinations Accounted for by the Purchase Method. The IPR&D purchased
from Onebox was used in our unified messaging product and reached technological
feasibility in the fiscal year ended June 30, 2001. With the exception of the
Onebox IPR&D, as of June 30, 2001, we were still in the development stage of
all previously written off IPR&D.
Merger and Integration costs
As a result of the merger with Software.com, we recorded merger and integration
costs of approximately $88.9 million during the year ended June 30, 2001.
Merger costs, which totaled approximately $79.8 million, were comprised of
banker's fees of $73.4 million, regulatory fees of $2.2 million, and
professional services of $4.2 million. Integration costs of approximately $9.1
million related to the merger with Software.com included costs associated with
the Company's name change and other consulting fees.
Interest and Other Income, Net
Interest and other income, net increased from $2.8 million in the fiscal year
ended June 30, 1999 to $23.2 million for the fiscal year ended June 30, 1999
and $24.8 million for the fiscal year ended June 30, 2001. The increase
resulted primarily from earnings on increased cash, cash equivalents and
investment balances as a result of our public equity offerings during late
fiscal year 1999 and early fiscal year 2001.
Income Taxes
Income tax expense totaled $2.3 million, $2.0 million and $13.0 million for the
fiscal years ended June 30, 1999, 2000 and 2001, respectively. Income taxes in
all periods presented consisted primarily of foreign withholding and foreign
income taxes.
In light of the Company's recent history of operating losses, the Company has
recorded a valuation allowance for all of its deferred tax assets, except to
the extent of deferred tax liabilities, as it is presently unable to conclude
that it is more likely than not that deferred tax assets in excess of deferred
tax liabilities will be realized.
As of June 30, 2001, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $744.0 million and
$323.0 million, respectively.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, which contributed $66.0 million in
aggregate net proceeds through March 31, 1999; through our initial public
offerings in June 1999, which generated net proceeds of $134.6 million; and
through our secondary public offering in November 1999, which generated net
proceeds of approximately $390.3 million. As of June 30, 2001, we had $348.5
million of cash, cash equivalents and short-term investments.
16
Net cash used for operating activities was $77.3 million, $8.3 million, and
$13.9 million for the years ended June 30, 2001, 2000 and 1999, respectively.
The net cash used during the year ended June 30, 2001 was primarily
attributable to $88.9 million paid in merger and integration costs related to
Software.com, an increase in accounts receivable of approximately $84.6
million, and a decrease in deferred revenue of $10.8 million, offset by an
increase in accrued liabilities of $24.4 million and after consideration of
non-cash depreciation and amortization expenses of $657.2 million.
Net cash provided by (used for) investing activities was $76.2 million,
($448.7) million, and ($45.4) million for the years ended June 30, 2001, 2000
and 1999, respectively. The net cash provided by investing activities during
the year ended June 30, 2001 primarily reflected net maturities from short-term
and long-term investments of $195.2 million, payments related to prior business
combinations of $25.2 million, and purchases of property and equipment of $87.5
million.
Net cash provided by financing activities was $42.7 million, $427.7 million,
and $167.3 million for the years ended June 30, 2001, 2000 and 1999,
respectively. The net cash provided by investing activities during the year
ended June 30, 2001 primarily reflected stock options exercised during the
year. The net cash provided by investing activities during the years ended 2000
and 1999 were primarily the effect of the Company's Initial Public Offering.
As of June 30, 2001, our principal commitments consisted of obligations
outstanding under operating leases and our equipment loans and capitalized
lease obligations. On March 30, 2000, we entered into a lease for approximately
280,000 square feet of office space in Redwood City, California. The lease
commenced upon completion of construction in the fourth quarter of fiscal year
ended June 30, 2001. Lease terms require a base rent of $3.25 per square foot
per month as provided by the lease agreement and will increase by 3.5%
annually. The lease term is for a period of 12 years from the commencement date
of the lease. The agreement required that we provide a letter of credit in the
amount of $16.5 million. As of June 30, 2000, we guaranteed the letter of
credit and pledged approximately $20.7 million, or 125% of the letter of
credit. The restricted cash and investments held in trust under this agreement
are earning approximately 4.7% interest, and the resulting income earned is not
subject to any restrictions. The lease further required that we pay leasehold
improvements which totaled $29.3 million at June 30, 2001. Although we have no
other 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 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 12 months. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or debt securities or to obtain a credit facility. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and terms of any debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and additional financing may
not be available in amounts or on terms acceptable to us. If additional
financing is necessary and we are unable to obtain the additional financing, we
may be required to reduce the scope of our planned product development and
marketing efforts, which could harm our business, financial condition and
operating results.
Recent Accounting Pronouncements
We adopted Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), as amended by SAB 101A and 101B on June 30, 2001,
retroactive to July 1, 2000. SAB 101 provides guidance on the recognition,
17
presentation, and disclosure of revenue in financial statements filed with the
Securities and Exchange Commission (SEC). Our adoption of SAB 101 has not had a
material impact on our consolidated financial position or results of
operations.
In late July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 Business Combinations (SFAS No. 141) and Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS 141 requires that all business combinations be
accounted for using the purchase method of accounting; therefore, the pooling-
of-interests method of accounting is prohibited. SFAS No. 141 also requires
that an intangible asset acquired in a business combination be recognized apart
from goodwill if: (i) the intangible asset arises from contractual or other
legal rights or (ii) the acquired intangible asset is capable of being
separated from the acquired enterprise, as defined in SFAS No. 141. SFAS No.
141 is effective for all business combinations completed by us after June 30,
2001.
For business combinations completed prior to July 1, 2001 and accounted for by
the purchase method, SFAS No. 141 provides that intangible assets that do not
meet the separate identifiable intangible asset criteria prescribed by this
pronouncement (e.g., assembled workforce, among others) be reclassified to
goodwill as of the date of adoption. Conversely, if a portion of the purchase
price had been assigned to an intangible asset that meets the criteria for
recognition apart from goodwill and that intangible asset is classified as part
of goodwill for financial reporting purposes, the carrying amount of that
intangible asset must be reclassified and reported separately from goodwill as
of the date of adoption (July 1, 2002).
SFAS No. 142 requires that goodwill should not be amortized but should be
tested for impairment at the "reporting unit level" (Reporting Unit) at least
annually and more frequently upon the occurrence of certain events, as defined
by SFAS No. 142. A Reporting Unit is the same level as or one level below an
"operating segment," as defined by SFAS No. 131 Disclosures About Segments of
an Enterprise and Related Information. Our identifiable intangible assets are
required to be amortized over their useful life and reviewed for impairment in
accordance with SFAS No. 121 Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of (SFAS No. 121). Goodwill is not
tested for impairment under SFAS No. 121, but instead is tested for impairment
as prescribed in SFAS No. 142.
SFAS No. 142 requires that goodwill be tested for impairment in a two-step
process. First, a company must compare the "estimated fair value" of a
Reporting Unit to its carrying amount, including goodwill, to determine if the
fair value of the Reporting Unit is less than the carrying amount, which would
indicate that goodwill is impaired. If we determine that goodwill is impaired,
we must compare the "implied fair value" of the goodwill to its carrying amount
to determine if there is an impairment loss. The "implied fair value" is
calculated by allocating the fair value of the Reporting Unit to all assets and
liabilities as if the Reporting Unit had been acquired in a business
combination and accounted for under SFAS No. 141.
For goodwill and intangible assets acquired in business combinations completed
prior to July 1, 2001, SFAS No. 142 is effective for us beginning on July 1,
2002. Goodwill and intangible assets acquired in a business combination
completed after June 30, 2001 are required to be accounted for in accordance
with the provisions of SFAS No. 142.
As of June 30, 2001, we currently have recorded net goodwill of $1.1 billion.
Under the current accounting, we expect to have amortization expense of
approximately $630.0 million for the fiscal year ending June 30, 2002.
We are currently evaluating the impact the adoption of these pronouncements may
have on our financial position and results of operations; however, due to these
pronouncements being issued in late July 2001 and due to our
18
expectations that the FASB will issue further guidance with respect to
adoption of both SFAS Nos. 141 and 142, we are currently unable to determine
the impact the adoption of these pronouncements may have on our financial
position or results of operations.
Factors That May Affect Future Results
In addition to the other information in this report, the following factors
should be considered carefully in evaluating our business and prospects.
Because we have a limited operating history, it is difficult to evaluate our
business.
Because we commenced operation in 1994 and commercially released our first
products in 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 reach profitability.
We face a number of risks encountered by early stage companies in the wireless
telecommunications and Internet software industries, including:
. our need for communication service providers to launch and maintain
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 communication service providers and wireless device
manufacturers;
. our dependence on a limited number of customers;
. 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 dependence upon key personnel;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
. the announcement or introduction of new or enhanced products or services
by our competitors;
. adverse customer reaction to technical difficulties or "bugs" in our
software;
. the growth rate and performance of wireless networks in general and of
wireless communications in particular;
. the volume of sales by our distribution partners and resellers;
. our pricing policies and those of our competitors; and
. our customers' willingness to incur the costs necessary to buy third-
party hardware and software required to use our software products and
any related price concessions on our product that our customers demand
as a result.
Our business strategy may not be successful, and we may not successfully
address these risks.
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
19
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.
Our operating results are subject to significant fluctuations, and our stock
price may decline if we do not meet expectations of investors and analysts.
Our revenues and operating results are difficult to predict and may fluctuate
significantly from period to period due to a number of factors, some of which
are outside of our control. These factors include, but are not limited to:
. delays in market acceptance or implementation by our customers of our
products and services;
. changes in demand by our customers for additional products and services;
. our lengthy sales and implementation cycles;
. our concentrated target market and the potentially substantial effect on
total revenues that may result from the gain or loss of business from
each incremental customer;
. introduction of new products or services by us or our competitors;
. delays in developing and introducing new products and services;
. changes in our pricing policies or those of our competitors or
customers;
. changes in our mix of domestic and international sales;
. risks inherent in international operations;
. changes in our mix of license, professional services and maintenance and
support services revenues;
. changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation;
. general political and economic factors, including an economic slowdown
or recession; and
. general industry factors, including a slowdown in the telecom industry,
either temporary or otherwise.
Most of our expenses, such as compensation for current employees and lease
payments for facilities and equipment, are relatively fixed. In addition, our
expense levels are based, in part, on our expectations regarding future
revenues. As a result, any shortfall in revenues relative to our expectations
could cause significant changes in our operating results from period to period.
Due to the foregoing factors, we believe period-to-period comparisons of our
revenue levels and operating results are of limited use. You should not rely on
our period revenues and operating results to predict our future performance.
We may be unable to successfully integrate acquired or merged companies into
our business or achieve the expected benefits of the business combinations.
To date, we have merged with or acquired 13 companies, including Avogadro,
Software.com, AtMobile, Mobility.net, bCandid, MyAble, Velos, Onebox, Paragon,
AtMotion, Angelica, APiON, and Telarc. We may not be able to successfully
assimilate the personnel, operations and customers of these companies, along
with those of their
20
acquired companies, into our business. Additionally, we may fail to achieve the
anticipated synergies from the combined businesses, including product
integration, marketing, product development, distribution and other operations
synergies.
The integration process may further strain our existing financial and
managerial controls and reporting systems and procedures. This may result in
the diversion of management and financial resources from our core business
objectives. In addition, we are relatively inexperienced in managing
significant facilities or operations in geographically distant areas. We may
also fail to retain these companies' key employees.
These companies have specific technology and other capabilities that we may not
be able to successfully integrate with our existing products and services. As a
result, we may incur unexpected integration and product development expenses
which could harm our results of operations. Due to rapidly changing market
conditions, we may find the value of our acquired technologies and related
intangible assets, such as goodwill as recorded in our financial statements, to
be impaired, resulting in charges to operations.
Any future merger or acquisition of companies or technologies may result in
disruptions to our business.
We may merge with or acquire technologies or companies in the future. Entering
into any business combination entails many risks, any of which could materially
harm our business, including:
. diversion of management's attention from other business concerns;
. failure to assimilate the combined companies with pre-existing
businesses;
. potential loss of key employees from either our pre-existing business or
the merged or acquired business;
. dilution of our existing stockholders as a result of issuing equity
securities; and
. assumption of liabilities of the merged or acquired company.
We may not be able to identify future suitable merger or acquisition
candidates, and even if we do identify suitable candidates, we may not be able
to make these transactions on commercially acceptable terms, or at all. If we
do merge with or acquire other companies, we may not be able to realize the
benefits we expected to achieve at the time of entering into the transaction.
In any future merger or acquisition, we will likely face the same risks as
discussed above. Further, we may have to utilize cash reserves, incur debt or
issue equity securities to pay for any future merger or acquisition, the
issuance of which could be dilutive to our existing stockholders.
We may not be successful in making strategic investments.
We have made, and in the future, we may continue to make strategic investments
in other companies. These investments have been made in, and future investments
will likely be made in, immature businesses with unproven track records and
technologies. Such investments have a high degree of risk, with the possibility
that we may lose the total amount of our investments. We may not be able to
identify suitable investment candidates, and, even if we do, we may not be able
to make those investments on acceptable terms, or at all. In addition, even if
we make investments, we may not gain strategic benefits from those investments.
Our sales cycle is long and our stock price could decline if sales are delayed
or cancelled.
Fluctuations in our operating performance are exacerbated by our sales cycle,
which is lengthy, typically between three and twelve months, and unpredictable.
Many factors outside our control add to the lengthy education and
21
customer approval process for our products. We spend a substantial amount of
time educating customers regarding the use and benefits or our products and
they in turn spend a substantial amount of time performing internal reviews and
obtaining capital expenditure approvals before purchasing our products.
Further, the emerging and evolving nature of the market for Internet-based
services via wireless devices may lead prospective customers to postpone their
purchasing decisions. Any delay in sales of our products could cause our
operating results to vary significantly from projected results, which could
cause our stock price to decline.
Our success depends on acceptance of our products and services by communication
service providers and their subscribers.
Our future success depends on our ability to increase revenues from sales of
our infrastructure software, applications and other services to communication
service providers. This dependence is exacerbated by the relatively small
number of communication service providers worldwide whose willingness to
purchase our products is critical to our success. To date, only a limited
number of communication service providers have implemented and deployed
services based on our products. We cannot assure you that communication service
providers will widely deploy or successfully market services based on our
products, or that large numbers of subscribers will use these services.
The market for the delivery of Internet-based services is rapidly evolving, and
we may not be able to adequately address this market.
The market for the delivery of Internet-based services is rapidly evolving and
characterized by an increasing number of market entrants who have introduced or
developed, or are in the process of introducing or developing, products that
facilitate the delivery of Internet-based services through wireless devices. As
a result, the life cycle of our products is difficult to estimate. We may not
be able to develop and introduce new products, services and enhancements that
respond to technological changes or evolving industry standards on a timely
basis, in which case our business would suffer. In addition, we cannot predict
the rate of adoption by wireless subscribers of these services or the price
they will be willing to pay for these services. As a result, it is extremely
difficult to predict the pricing of these services and the future size and
growth rate of this market.
Our communication service provider customers face implementation and support
challenges in introducing Internet-based services via wireless devices, which
may slow their rate of adoption or implementation of the services our products
enable. Historically, communication service providers have been relatively slow
to implement new complex services such as Internet-based services. In addition,
communication service providers may encounter greater customer service demands
to support Internet-based services via wireless devices than they do for their
traditional voice services. We have limited or no control over the pace at
which communication service providers implement these new services. The failure
of communication service providers to introduce and support services utilizing
our products in a timely and effective manner could harm our business.
Until recently, we have relied on sales to a small number of customers, and the
failure to retain these customers or add new customers may harm our business.
To date, a significant portion of our revenues in any particular period has
been attributable to a limited number of customers, comprised primarily of
communication service providers. We believe that we will continue to depend
upon a limited number of customers for a significant portion of our revenues
from each period for the foreseeable future. Any failure by us to capture a
significant share of these customers could materially harm our business.
22
We are exposed to the credit risk of some of our customers and to credit
exposures in weakened markets.
A portion of our sales are derived through customers who tend to have access to
more limited financial resources than others and, therefore, represent
potential sources of increased credit risk. Furthermore, with the consolidation
of the Internet specifically in the area of Internet service providers (ISPs),
future growth in sales attributed to a market of many ISPs may decline.
Although we have programs in place to monitor and mitigate the associated risk,
there can be no assurance that such programs will be effective in reducing our
credit risk. We also continue to monitor increased credit exposures from
weakened financial conditions in certain geographic regions, and the impact
that such conditions may have on the worldwide economy. We have recently
experienced losses due to customers failing to meet their obligations,
primarily as a result of the weakened financial state of the wireless and
telecom industry. Although these losses have not been significant, future
losses, if incurred, could harm our business and have a material adverse effect
on our operating results and financial condition.
If wireless devices are not widely adopted for mobile delivery of Internet-
based services, our business could suffer.
We have focused a significant amount of our efforts on mass-market wireless
devices as the principal means of delivery of Internet-based services using our
products. If wireless devices are not widely adopted for mobile delivery of
Internet-based services, our business would suffer materially. Mobile
individuals currently use many competing products, such as portable computers,
to remotely access the Internet and e-mail. These products generally are
designed for the visual presentation of data, while wireless devices
historically have been limited in this regard. In addition, the development and
proliferation of many types of competing products capable of the mobile
delivery of Internet-based service in a rapidly evolving industry represents a
significant risk to a dominant product emerging. If mobile individuals do not
adopt wireless devices as a means of accessing Internet-based services, our
business would suffer.
If widespread integration of browser technology does not occur in wireless
devices, our business could suffer.
Because our current software offers enhanced features and functionality that
are not currently covered by the specifications promulgated by the WAP Forum,
subscribers currently must use wireless devices enabled with our browser in
order to fully utilize these features and functionality. Additionally, we
expect that future versions of our software and related server-based software
will offer features and functionality that are compatible with the
specifications promulgated by the WAP Forum. Our business could suffer
materially if widespread integration of our browser or WAP-compliant third-
party browser software in wireless devices does not occur. All of our
agreements with wireless device manufacturers are nonexclusive, so they may
choose to embed a browser other than ours in their wireless devices. We may not
succeed in maintaining and developing relationships with wireless device
manufacturers, and any arrangements may be terminated early or not renewed at
expiration. In addition, wireless device manufacturers may not produce products
using our browser in a timely manner and in sufficient quantities, if at all.
The market for our products and services is highly competitive.
The market for our products and services is becoming increasingly competitive.
The widespread adoption of open industry standards such as the WAP
specifications may make it easier for new market entrants and existing
competitors to introduce products that compete with our software products. In
addition, a number of our
23
competitors, including Nokia, have announced or are expected to announce
enhanced features and functionality as proprietary extensions to the WAP
standard. Furthermore, some of our competitors, such as NTT DoCoMo, have
introduced or may introduce services based on proprietary wireless protocols
that are not compliant with the WAP specifications.
We expect that we will compete primarily on the basis of price, time to
market, functionality, quality and breadth of product and service offerings.
Our current and potential competitors include the following:
. wireless equipment manufacturers, such as Ericsson and Nokia;
. Microsoft;
. Wireless Knowledge, a joint venture of Microsoft and Qualcomm, as well
as a similar European joint venture of Microsoft and Ericsson;
. messaging software providers, such as Comverse.
. systems integrators, such as CMG plc, and software companies, such as
Oracle Corporation and iPlanet, a Sun/Netscape alliance, and Critical
Path;
. service providers, such as iPlanet, E-Commerce Solutions and Infospace;
. communication service providers, such as NTT DoCoMo; and
. providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions.
Microsoft Corporation has announced its intention to introduce products and
services that may compete directly with many of our products. In addition,
Microsoft has announced that it intends to enable its Windows CE operating
system to run on wireless handheld devices, including wireless telephones.
Microsoft has announced its own browser, called Mobile Explorer, for these
devices.
Nokia is marketing a WAP server to corporate customers and content providers.
This WAP server is designed to enable wireless device subscribers to directly
access applications and services provided by these customers, rather than
through gateways provided by communication service providers' WAP servers. If
Nokia's WAP server is widely adopted by corporate customers and content
providers, it could undermine the need for communication service providers to
purchase WAP servers. Many of our existing competitors, as well as potential
competitors, have substantially greater financial, technical, marketing and
distribution resources than we do.
As we enter new markets and introduce new services, we will face additional
competitors.
As we enter the unified messaging market, we will face competition from
established voice mail providers such as Comverse, and Internet-based unified
messaging providers such as Critical Path. In the portal framework market, a
number of companies have introduced products and services relating to mobile
portals that compete with our products and services. These existing and
potential competitors may include telecommunications companies such as Lucent
Technologies, traditional Internet portals such as AOL, InfoSpace, Microsoft
MSN and Yahoo!, Internet infrastructure software companies and several private
mobile Internet portal companies.
In addition to the existing competitors listed above, voice mail solutions
providers are expected to be competitors in the unified messaging market
because of their existing relationships with service providers and ownership
of technologies for the conversion of voice to data. If we are unable to
compete effectively against existing or emerging competitors our business,
financial condition and operating results will suffer.
24
Our software products may contain defects or errors, and shipments of our
software may be delayed.
The software we develop is complex and must meet the stringent technical
requirements of our customers. We must develop our products quickly to keep
pace with the rapidly changing Internet software and telecommunications
markets. Software products and services as complex as ours are likely to
contain undetected errors or defects, especially when first introduced or when
new versions are released. We have in the past experienced delays in releasing
some versions of our products until software problems were corrected. Our
products may not be free from errors or defects after commercial shipments
have begun, which could result in the rejection of our products and damage to
our reputation, as well as lost revenues, diverted development resources and
increased service and warranty costs, any of which could harm our business.
We depend on recruiting and retaining key management and technical personnel
with telecommunications and Internet software experience.
Because of the technical nature of our products and the dynamic market in
which we compete, our performance depends on attracting and retaining key
employees. In particular, our future success depends in part on the continued
services of each of our current executive officers. Competition for qualified
personnel in the telecommunications, Internet software and Internet messaging
industries is significant. We believe that there are only a limited number of
persons with the requisite skills to serve in many key positions, and it is
difficult to hire and retain these persons. Competitors and others have in the
past, and may in the future, attempt to recruit our employees.
We may fail to support our anticipated growth in operations.
To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy and further develop products and expand service
capabilities, while managing anticipated growth by implementing effective
planning and operating processes. If we fail to manage our growth effectively,
our business could suffer materially. To manage anticipated growth, we must:
. continue to implement and improve our operational, financial and
management information systems;
. hire, train and retain additional qualified personnel;
. continue to expand and upgrade core technologies;
. effectively manage multiple relationships with various communication
service providers, wireless device manufacturers, content providers,
applications developers and other third parties; and
. successfully integrate the businesses of our acquired companies.
Our systems, procedures and controls may not be adequate to support our
operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our products and services.
Our success, particularly in international markets, depends in part on our
ability to maintain and expand our distribution channels.
Our success depends in part on our ability to increase sales of our products
and services through value-added resellers and systems integrators and to
expand our indirect distribution channels. If we are unable to maintain the
relationships that we have with our existing distribution partners, increase
revenues derived from sales through our indirect distribution channels, or
increase the number of distribution partners with whom we have relationships,
then we may not be able to increase our revenues or achieve profitability.
25
We expect that many communication service providers in international markets
will require that our products and support services be supplied through value-
added resellers and systems integrators. Thus, we expect that a significant
portion of international sales will be made through value-added resellers and
systems integrators, and the success of our international operations will
depend on our ability to maintain productive relationships with value-added
resellers and systems integrators.
In addition, our agreements with our distribution partners generally do not
restrict the sale by them of products and services that are competitive with
our products and services, and each of our partners generally can cease
marketing our products and services at their option and, in some circumstances,
with little notice and with little or no penalty.
Our business depends on continued growth in use and improvement of the Internet
and customers ability to operate their systems effectively.
The infrastructure, products and services necessary to maintain and expand the
Internet may not be developed, and the Internet may not continue to be a viable
medium for secure and reliable personal and business communication, in which
case our business, financial condition and operating results would be harmed.
Because we are in the business of providing Internet infrastructure software,
our future success depends on the continued expansion of, and reliance of
consumers and businesses on, the Internet for communications and other
services. The Internet may not be able to support an increased number of users
or an increase in the volume of data transmitted over it. As a result, the
performance or reliability of the Internet in response to increased demands
will require timely improvement of the high speed modems and other
communications equipment that form the Internet's infrastructure. The Internet
has already experienced temporary outages and delays as a result of damage to
portions of its infrastructure. The effectiveness of the Internet may also
decline due to delays in the development or adoption of new technical standards
and protocols designed to support increased levels of activity and due to the
transmission of computer viruses.
In addition to problems that may affect the Internet as a whole, our customers
have in the past experienced some interruptions in providing their Internet-
related services, including services related to our software products. We
believe that these interruptions will continue to occur from time to time. Our
revenues depend substantially upon the number of end users who use the services
provided by our customers. Our business may suffer if our customers experience
frequent or long system interruptions that result in the unavailability or
reduced performance of their systems or networks or reduce their ability to
provide services to their end users.
We depend on others to provide content and develop applications for wireless
devices.
In order to increase the value to customers of our product platform and
encourage subscriber demand for Internet-based services via wireless devices,
we must successfully promote the development of Internet-based applications and
content for this market. If content providers and application developers fail
to create sufficient applications and content for Internet-based services via
wireless devices, our business could suffer materially. Our success in
motivating content providers and application developers to create and support
content and applications that subscribers find useful and compelling will
depend, in part, on our ability to develop a customer base of communication
service providers and wireless device manufacturers large enough to justify
significant and continued investments in these endeavors.
26
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving, and we may not be
able to adequately address this market.
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving and is characterized
by an increasing number of market entrants that have introduced or developed,
or are in the process of introducing or developing, products that facilitate
wireless communication and the delivery of Internet-based services through
wireless devices. We intend to devote significant efforts and resources on
developing and marketing infrastructure applications for wireless
communications and the wireless delivery of Internet-based content and
services. In addition, the emerging nature of the market for wireless
communications and Internet-based services via wireless devices may lead
prospective customers to postpone adopting wireless devices or using wireless
technology. As a result, the life cycle of our wireless products is difficult
to estimate. We may not be able to develop and introduce new products, services
and enhancements that respond to technological changes or evolving industry
standards on a timely basis, in which case our business would suffer. In
addition, we cannot predict the rate of adoption by wireless subscribers of
these services or the price they will be willing to pay for these services. As
a result, it is extremely difficult to predict the pricing of these services
and the future size and growth rate of the wireless market.
Our customer service providers face implementation and support challenges in
expanding wireless communications and introducing Internet-based services via
wireless devices, which may slow their rate of adoption or implementation of
the services our wireless messaging products enable. Historically, customer
service providers have been relatively slow to implement new complex services
such as wireless messaging services and wireless delivery of Internet content.
In addition, customer service providers may encounter greater customer service
demands to support Internet-based services via wireless devices than they do
for their traditional Internet services. We have limited or no control over the
pace at which customer service providers implement these new services. The
failure of customer service providers to introduce and support services
utilizing our products in a timely and effective manner could harm our
business.
If we are unable to integrate our products with third-party technology, such as
communication service providers' systems, our business may suffer.
Our products are integrated with communication service providers' systems and
wireless devices. If we are unable to integrate our platform products with
these third-party technologies, our business could suffer materially. For
example, if, as a result of technology enhancements or upgrades of these
systems or devices, we are unable to integrate our products with these systems
or devices, we could be required to redesign our software products. Moreover,
many communication service providers use legacy, or custom-made, systems for
their general network management software. Legacy systems and certain custom-
made systems are typically very difficult to integrate with new server
software. We may not be able to redesign our products or develop redesigned
products that achieve market acceptance.
An interruption in the supply of software that we license from third parties
could cause a decline in product sales.
We license technology that is incorporated into our products from third
parties, such as RSA Data Security, Inc. and other companies. Any significant
interruption in the supply of any licensed software could cause a decline in
product sales, unless and until we are able to replace the functionality
provided by this licensed software. We also depend on
27
these third parties to deliver and support reliable products, enhance their
current products, develop new products on a timely and cost-effective basis,
and respond to emerging industry standards and other technological changes. The
failure of these third parties to meet these criteria could materially harm our
business.
Our intellectual property or proprietary rights could be misappropriated, which
could force us to become involved in expensive and time-consuming litigation.
Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology. We rely on a
combination of patent, copyright, trade secret and trademark law to protect our
technology, although we believe that other factors such as the technological
and creative skills of our personnel, new product developments, frequent
product and feature enhancements and reliable product support and maintenance
are more essential to maintaining a technology leadership position.
We generally enter into confidentiality and nondisclosure agreements with our
employees, consultants, prospective customers, licensees and corporate
partners. In addition, we control access to and distribution of our software,
documentation and other proprietary information. Except for certain limited
escrow arrangements, we do not provide customers with access to the source code
for our products. Despite our efforts to protect our intellectual property and
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Effectively policing the
unauthorized use of our products is time-consuming and costly, and there can be
no assurance that the steps taken by us will prevent misappropriation of our
technology, particularly in foreign countries where in many instances the local
laws or legal systems do not offer the same level of protection as in the
United States.
If others claim that our products infringe their intellectual property rights,
we may be forced to seek expensive licenses, reengineer our products, engage in
expensive and time-consuming litigation or stop marketing our products.
We attempt to avoid infringing known proprietary rights of third parties in our
product development efforts. However, we do not regularly conduct comprehensive
patent searches to determine whether the technology used in our products
infringes patents held by third parties. There are many issued patents as well
as patent applications in the electronic messaging field. Because patent
applications in the United States are not publicly disclosed until the patent
is issued, applications may have been filed which relate to our software
products. In addition, our competitors and other companies as well as research
and academic institutions have conducted research for many years in the
electronic messaging field, and this research could lead to the filing of
further patent applications. If we were to discover that our products violated
or potentially violated third-party proprietary rights, we might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can we be
certain that any licenses would be available on commercially reasonable terms.
Substantial litigation regarding intellectual property rights exists in the
software industry, and we expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segments grows and the functionality of software products in different
industry segments overlaps. Any third-party infringement claims could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product and service delays or require us to enter into
royalty or licensing agreements. Any royalty or licensing arrangements, if
required, may not be available on terms acceptable to us, if at all. A
successful claim of infringement against us and our failure or inability to
license the infringed or similar technology could have a material adverse
effect on our business, financial condition and results of operations.
28
On February 2, 2001, a complaint, Leon Stambler v. RSA Security Inc., Verisign
Inc., First Data Corporation, Openwave Systems Inc. and Omnisky Corporation,
Civil Action No. 01-00065, was filed in the U.S. District Court for the
district of Delaware against us and certain other companies. The complaint
alleges that the defendants have infringed claims of one or more patents that
Mr. Stambler asserts have been granted to him. On March 26, 2001, we responded
to the complaint. We denied the allegations that we have infringed any claim
in either of the patents asserted against us. In addition, we asserted
counterclaims against Mr. Stambler seeking a declaratory judgment that the
asserted patents are not infringed by us and that the patents are also invalid
and unenforceable. Although the parties have exchanged some written discovery,
discovery is still in its initial stages and no trial date has been set. Based
on the facts known to date, we believe that we have meritorious defenses and
claims. We are unable to estimate the range of potential loss, if any.
On April 30, 2001, a complaint, Opuswave Networks, Inc. v. Openwave Systems
Inc. and Alain Rossmann, Civil Action No. 01-1681, was filed in the U.S.
District Court for the Northern District of California against us and a former
affiliate. The complaint alleges that the defendents have infringed claims of
a common law trademark that plaintiff asserts it has acquired. On June 5,
2001, we responded to the complaint. We denied allegations that we have
infringed any trademark rights asserted against us. In addition, we asserted
counterclaims against the plaintiff seeking a declaratory judgment that the
asserted trademark rights are not infringed by us. On June 13, 2001, Opuswave
Networks responded to the counterclaims its allegations. Discovery has not
commenced and no trial date has been set. Based on the facts known to date, we
believe that we have meritorious defenses and intend to defend this suit. We
are unable to estimate the range of potential loss, if any.
International sales of products is an important part of our strategy, and this
expansion carries specific risks.
International sales of products and services accounted for 66% of our total
revenues for the year ended June 30, 2001. We expect international sales to
continue to account for a significant portion of our revenues, although the
percentage of our total revenues derived from international sales may vary.
Risks inherent in conducting business internationally include:
. failure by us and/or third parties to develop localized content and
applications that are used with our products;
. fluctuations in currency exchange rates;
. problems caused by the ongoing conversion of various European currencies
into a single currency, the Euro;
. any imposition of currency exchange controls;
. unexpected changes in regulatory requirements applicable to the Internet
or our business;
. difficulties and costs of staffing and managing international
operations;
. differing technology standards;
. export restrictions on encryption and other technologies;
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonable variations in customer buying patterns or electronic
messaging usage;
. political instability, acts of terrorism or war;
. economic downturns;
. potentially adverse tax consequences;
29
. reduced protection for intellectual property rights in certain
countries;
. costs of localizing our products for foreign markets;
. contractual provisions governed by foreign laws; and
. the burden of complying with complex and changing regulatory
requirements.
Any of these factors could harm our international operations and, consequently,
our business, financial condition and operating results.
The security provided by our messaging products could be breached, in which
case our reputation, business, financial condition and operating results could
suffer.
The occurrence or perception of security breaches could harm our business,
financial condition and operating results. A fundamental requirement for online
communications is the secure transmission of confidential information over the
Internet. Third parties may attempt to breach the security provided by our
messaging products, or the security of our customers' internal systems. If they
are successful, they could obtain confidential information about our customers'
end users, including their passwords, financial account information, credit
card numbers or other personal information. Our customers or their end users
may file suits against us for any breach in security. Even if we are not held
liable, a security breach could harm our reputation, and even the perception of
security risks, whether or not valid, could inhibit market acceptance of our
products. Despite our implementation of security measures, our software is
vulnerable to computer viruses, electronic break-ins, intentional overloading
of servers and other sabotage, and similar disruptions, which could lead to
interruptions, delays, or loss of data. We may be required to expend
significant capital and other resources to license encryption or other
technologies to protect against security breaches or to alleviate problems
caused by these breaches. In addition, our customers might decide to stop using
our software if their end users experience security breaches.
Future governmental regulation of the Internet could limit our ability to
conduct our business.
Although there are currently few laws and regulations directly applicable to
the Internet and commercial messaging, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. Further, the growth and development of the market for
online messaging may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies, including us, that
conduct business online. The adoption of any additional laws or regulations may
impair the growth of the Internet or commercial online services, which would
decrease the demand for our services and could increase our cost of doing
business or otherwise harm our business, financial condition and operating
results. Moreover, the applicability of existing laws governing property
ownership, sales and other taxes, libel and personal privacy to the Internet is
uncertain and may take years to resolve.
Our stock price, like that of many companies in the Internet and
telecommunications software industries, may be volatile.
Our stock price has experienced significant volatility. We expect that the
market price of our common stock also will fluctuate in the future as a result
of variations in our operating results. These fluctuations may be exaggerated
if the trading volume of our common stock is low. In addition, due to the
technology-intensive and emerging nature of our business, the market price of
our common stock may rise and fall in response to:
. announcements or technological or competitive developments;
30
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order;
. changes in estimates or our financial performance or changes in
recommendations by securities analysts; or
. changes in financial performance of competitors and other companies in
our industry.
Our stock price may be volatile, exposing us to expensive and time-consuming
securities class action litigation.
The stock market in general, and the stock prices of Internet-related
companies in particular, have recently experienced extreme volatility, which
has often been unrelated to the operating performance of any particular
company or companies. If market or industry-based fluctuations continue, our
stock price could decline below current levels regardless of our actual
operating performance. Furthermore, the historical trading volume of our stock
is not indicative of any future trading volume because a substantial portion
of shares were not eligible for sale until recently. Therefore, if a larger
number of shares of our stock are sold in a short period of time, our stock
price will decline. In the past, securities class action litigation has often
been brought against companies following periods of volatility in their stock
prices. We may in the future be the targets of similar litigation. Securities
litigation could result in substantial costs and divert management's time and
resources, which could harm our business, financial condition and operating
results.
Item7A. Quantitative and Qualitative Disclosures About Market Risk
The tables below provide information about the Company's derivative financial
instruments and financial instruments that are subject to market risk. These
include a foreign currency forward contract used to hedge a foreign currency
deposit, which is subject to exchange rate risk, cash equivalents and
available-for-sale short-term investments, which are subject to interest rate
risk.
The Company manages its foreign currency exchange rate risk by entering into
contracts to sell or buy foreign currency at the time a foreign currency
receivable or payable is generated. When the foreign currency asset or
liability is extinguished, the contract is liquidated, and the resulting gain
or loss on the contract mitigates the exchange rate risk of the associated
asset or liability.
The following summarized the Company's foreign currency forward contract,
which matures in 2002, by currency, as of June 30, 2001. (in thousands):
Contract Fair
Amount Value at
(Local Contract June 30,
Currency) Amount 2001 (US$)
----------- -------- ----------
Japanese yen ("YEN") (contract to pay
Yen/receive US$)............................. (YEN)82,100 US$708 $27
Contract amounts are representative of the expected payments to be made under
these instruments through earnings. Derivatives or portions of derivatives
that are not designated as hedging instruments are adjusted to fair value
through earnings and are recognized in the period of change in their fair
value.
We operate internationally and thus are exposed to potentially adverse
movements in foreign currency rate changes. We have entered into foreign
exchange forward contracts to reduce our exposure to foreign currency rate
changes on receivables, payables and intercompany balances denominated in a
non-functional currency. The objective of these contracts is to neutralize