Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 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
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Commission File Number 0-21709
PUMATECH, INC.
Incorporated Pursuant to the Laws of the State of Delaware
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IRS Employer Identification Number 77-0349154
2550 North First Street, San Jose, California 95131
(408) 321-7650
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 31, 2001:
44,499,523
PUMATECH, INC.
10-Q REPORT
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION 2
Item 1. Unaudited Condensed Consolidated Financial Statements 2
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
PART II - OTHER INFORMATION 43
Item 1. Legal Proceedings 44
Item 2. Changes in Securities and Use of Proceeds 44
Item 3. Defaults Upon Senior Securities 44
Item 4. Submission of Matters to a Vote of Security Holders 44
Item 5. Other Information 44
Item 6. Exhibits and Reports on Form 8-K 44
SIGNATURE 45
EXHIBIT 10.1 - LOAN AND SECURITY AGREEMENT 46
1
PUMATECH, INC.
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
April 30, July 31,
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents............................................ $ 28,388 $ 54,492
Short-term investments............................................... 24,590 30,768
Accounts receivable, net of allowance for doubtful accounts of $1,015
at April 30, 2001 and $1,210 at July 31, 2000.................... 6,358 6,350
Inventories, net..................................................... 228 235
Other current assets................................................. 2,208 1,732
--------- ---------
Total current assets.............................................. 61,764 93,585
Property and equipment, net............................................ 7,665 4,828
Intangible assets, net.................................................. 24,894 17,109
Other assets............................................................ 4,156 3,133
--------- ----------
Total assets.................................................. $ 98,479 $ 118,655
========= ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable..................................................... $ 1,882 $ 2,601
Accrued liabilities.................................................. 3,525 4,036
Current portion of long-term notes payable........................... 259 259
Deferred revenue..................................................... 3,850 6,372
--------- ---------
Total current liabilities......................................... 9,516 13,268
Long-term notes payable................................................. 108 310
--------- ---------
Total liabilities................................................. 9,624 13,578
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000 shares authorized and no
shares issued and outstanding at April 30, 2001 and July 31, 2000. - -
Common stock, $0.001 par value; 80,000 shares authorized and 44,477 shares
issued and outstanding at April 30, 2001; 60,000 shares authorized and
42,307 shares issued and outstanding at July 31, 2000............. 44 42
Additional paid-in capital........................................... 148,426 146,051
Receivable from stockholders......................................... (330) (330)
Deferred stock compensation.......................................... (1,029) (3,114)
Accumulated deficit.................................................. (58,417) (37,589)
Other comprehensive income........................................... 161 17
--------- ---------
Total stockholders' equity........................................ 88,855 105,077
--------- ---------
Total liabilities and stockholders' equity.................... $ 98,479 $ 118,655
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
2
PUMATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- ---------- ---------
Revenue
License ...................................................... $ 8,209 $ 7,065 $ 26,253 $ 19,612
Services ..................................................... 2,136 949 5,326 2,175
-------- -------- -------- --------
Total revenue ........................................... 10,345 8,014 31,579 21,787
-------- -------- -------- --------
Cost and operating expenses:
Cost of revenue .............................................. 2,873 882 7,332 2,524
Research and development (includes non-cash stock compensation
of $61, $105, $134 and $308) ............................... 6,090 4,897 18,675 11,693
Sales and marketing (includes non-cash stock compensation of
$185, $147, $405 and $510) ................................. 5,702 4,794 16,418 11,617
General and administrative (includes non-cash stock
compensation of $46, $213, $194 and $508) .................. 1,720 1,458 4,685 3,765
In-process research and development .......................... -- -- -- 4,218
Amortization of intangibles .................................. 2,157 824 5,853 1,733
Merger costs ................................................. -- 6,322 -- 6,322
Severance and facilities costs ............................... 583 -- 583 --
-------- -------- -------- --------
Total cost and operating expenses ........................ 19,125 19,177 53,546 41,872
-------- -------- -------- --------
Operating loss .................................................. (8,780) (11,163) (21,967) (20,085)
Other income, net ............................................... 766 1,309 2,617 3,549
Other-than-temporary impairment of direct investments ........... (1,180) -- (1,180) --
-------- -------- -------- --------
Loss before income taxes ........................................ (9,194) (9,854) (20,530) (16,536)
Provision for income taxes ...................................... (80) (159) (298) (517)
-------- -------- -------- --------
Net loss ........................................................ (9,274) (10,013) (20,828) (17,053)
Accretion of mandatorily redeemable convertible preferred stock
to redemption value .......................................... -- (577) -- (3,877)
-------- -------- -------- --------
Net loss attributable to common stockholders .................... $ (9,274) $(10,590) $(20,828) $(20,930)
======== ======== ======== ========
Basic and diluted net loss per share ............................ $ (0.21) $ (0.26) $ (0.48) $ (0.62)
======== ======== ======== ========
Shares used in computing basic and diluted net loss per share ... 44,220 39,995 43,510 33,678
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
3
PUMATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
April 30,
--------------------------------
2001 2000
---------------- ---------------
Cash flows from operating activities:
Net loss........................................................... $ (20,828) $ (17,053)
Adjustments to reconcile net loss to net cash used in operating
activities:
Purchased in-process research and development................... - 4,218
Costs of consolidating facilities............................... 402 -
Other-than-temporary impairment of direct investments........... 1,180 -
Allowance for doubtful accounts and sales returns............... 890 1,009
Depreciation and amortization................................... 7,765 2,777
Non-cash stock compensation..................................... 733 1,326
Realized loss on sale of short-term investments................. 284 (2,182)
Changes in operating assets and liabilities:
Accounts receivable............................................. (998) (4,881)
Inventories..................................................... 7 (11)
Other current assets............................................ (375) (1,334)
Accounts payable................................................ (719) 558
Accrued liabilities............................................. (725) 1,521
Deferred revenue................................................ (2,522) 1,395
Other assets.................................................... (636) (1,263)
---------------- ---------------
Net cash used in operating activities................................. (15,542) (13,920)
---------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment................................. (4,324) (2,167)
Maturities/sales short-term investments, net....................... 6,054 3,404
Purchase of investments............................................. (1,054) -
Acquisitions of businesses.......................................... (12,570) -
---------------- ---------------
Net cash provided by (used in) investing activities................... (11,894) 1,237
---------------- ---------------
Cash flows from financing activities:
Principal payments on notes payable................................ (202) -
Loan to related party.............................................. (235) -
Notes advances to stockholders, net................................ - (1)
Proceeds from line of credit, net.................................. - 313
Proceeds from exercise of warrants................................. 2 -
Proceeds upon exercise of stock options, net....................... 946 957
Proceeds from newly issued common stock, net....................... 821 77,280
Payments to settle acquired liabilities............................ - (764)
---------------- ---------------
Net cash provided by financing activities............................. 1,332 77,785
---------------- ---------------
Net increase (decrease) in cash and cash equivalents.................. (26,104) 65,102
Cash and cash equivalents at beginning of period...................... 54,492 16,639
---------------- ---------------
Cash and cash equivalents at end of period............................ $ 28,388 $ 81,741
================ ===============
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ 45 $ 40
================ ===============
Income taxes paid.................................................. $ 345 $ 486
================ ===============
Common stock issued in connection with business acquisition........ $ 1,572 $ 14,787
================ ===============
Non-cash stock compensation (recovery) charge, net................. $ (1,352) $ 968
================ ===============
Accretion of redeemable convertible preferred stock................ $ - $ 3,877
================ ===============
See accompanying notes to unaudited condensed consolidated financial statements.
4
PUMATECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The accompanying condensed consolidated financial statements of Pumatech, Inc.
(Pumatech or the Company) for the three and nine months ended April 30, 2001 and
2000 are unaudited and reflect all normal recurring adjustments which are, in
the opinion of management, necessary for their fair presentation. These
condensed consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
2000. The condensed consolidated balance sheet as of July 31, 2000 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Certain prior period amounts have
been reclassified to conform to the current period's presentation. The results
of operations for the interim period ended April 30, 2001 are not necessarily
indicative of results to be expected for the full year.
Note 2 Recently Issued Accounting Pronouncement
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 was
amended by SFAS 138 in June 2000. SFAS 133 and 138 require that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. The Company adopted these
statements on August 1, 2000. Since the Company does not engage in hedging
activities and does not buy or sell derivative instruments, the adoption of SFAS
133 and 138 had no impact on the consolidated financial statements.
Revenue Recognition and Financial Statements
In December 1999, the Securities and Exchange Commission (SEC) issued SEC Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarized certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 must be implemented by the Company no later than its fourth quarter of
fiscal 2001. The Company is reviewing the requirements of SAB 101 and currently
believes that its revenue recognition policy is consistent with the guidance of
SAB 101.
5
Note 3 Balance Sheet Components
Inventories, net, consist of the following:
April 30, July 31,
2001 2000
-------------- ----------------
(In thousands)
Raw materials............................................................... $ 125 $ 173
Finished goods and work-in-process.......................................... 149 149
-------------- ----------------
274 322
Less: Inventory reserves................................................... (46) (87)
-------------- ----------------
Inventories, net........................................................ $ 228 $ 235
============== ================
Property and equipment, net, consist of the following:
April 30, July 31,
2001 2000
-------------- ---------------
(In thousands)
Computer equipment and software........................................... $ 10,436 $ 5,977
Furniture and office equipment............................................ 2,535 2,313
Leasehold improvements.................................................... 1,074 1,006
-------------- ---------------
14,045 9,296
Less: Accumulated depreciation and amortization........................... (6,380) (4,468)
-------------- ---------------
Property and equipment, net............................................. $ 7,665 $ 4,828
============== ===============
Intangible assets, net, consist of the following:
April 30, July 31,
2001 2000
-------------- ---------------
(In thousands)
Intangible assets:
Goodwill............................................................... $ 24,719 $ 14,130
Developed technology.................................................... 7,229 5,711
Acquired workforce-in-place............................................ 2,231 900
Existing contracts...................................................... 200 -
-------------- ---------------
34,379 20,741
Less: Accumulated amortization.......................................... (9,485) (3,632)
-------------- ---------------
Intangible assets, net.............................................. $ 24,894 $ 17,109
============== ===============
Additions to intangible assets arose from the asset acquisitions of The Windward
Group and SwiftTouch Corporation. See Note 10 for more information on the
acquisitions. Additions to goodwill also include an adjustment of $142,000 to
goodwill relating to the acquisition of Dry Creek Software in fiscal 2000.
Note 4 Related Party Transaction
In April 2001, the Company loaned its Chief Financial Officer $235,000 which is
repayable on or before April 16, 2002. The interest rate is 6% per annum. In the
event that the officer's employment with the Company is terminated, any unpaid
principal and interest shall be due on the 185th day from the termination, or on
the due date, whichever is sooner.
6
Note 5 Long-Term Investments
The Company is a limited partner in a venture capital fund and also invests
directly for business and strategic purposes in equity instruments of
privately-held companies, which include a number of its strategic partners who
are both customers and vendors. These investments are included in other
long-term assets and are accounted for under the cost method as none of the
investments represents over 5% ownership in the respective companies, and the
Company does not have the ability to exercise significant influence over
operations. These investments consist of the following (in thousands):
April 30, July 31,
2001 2000
----------- -----------
Azure Venture Partners, LLP.......................... $ 2,250 $ 1,250
YadaYada, Inc. (fka Free Communications, Inc.)....... - 750
If & Then, Inc....................................... - 330
PulseMD Corporation (fka 7th Street, Inc.)........... - 100
Others............................................... 56 2
----------- -----------
Long-term investments......................... $ 2,306 $ 2,432
=========== ===========
The Company regularly reviews the assumptions underlying the operating
performance and cash flow forecasts of its investees in assessing the carrying
values of the investments. The Company identifies and records impairment losses
when events and circumstances indicate that such assets might be impaired.
As of the end of the third quarter of fiscal 2001, the Company concluded that
the investments associated with YadaYada, If & Then, and PulseMD were impaired
as such investments were deemed not to be recoverable. These investments were
fully impaired due to changes in capital structure impacting the Company's
investment preferences, thin capitalization, dilution due to dramatic declines
in valuation and overall lack of persuasive evidence that would indicate a
future ability or intent of these entities that would support the historic
carrying value of the Company's investments. As a result, the Company recorded
other-than-temporary impairment charges aggregating $1,180,000 for the three and
nine months ended April 30, 2001.
Note 6 Cost Reduction Plan
During the three months ended April 30, 2001, the Company implemented a cost
reduction plan. The Company's primary cost reduction initiatives included a
reduction in workforce and facilities consolidation. The workforce reduction,
which was completed during April 2001, represented a reduction of
approximately 20% of the Company's then total workforce or approximately 57
full-time equivalent positions including 20 contractors and 37 permanent
employees, the majority holding positions in engineering and in support for
engineering related projects. The associated severance costs incurred were
approximately $181,000.
The Company also incurred additional restructuring charges aggregating $402,000
for consolidating facilities with space located in Santa Cruz, California and
Nashua, New Hampshire. The costs of consolidating facilities include $174,000 of
future lease payments and $228,000 for accelerated depreciation of property and
equipment, which consisted primarily of leasehold improvements, office equipment
and furniture and fixtures, to be disposed or removed from operations.
7
A summary of the severance and facilities costs is outlined as follows (in
thousands):
Total Noncash Accrued Liabilities
Charges Charges Cash Payments at April 30, 2001
---------- ---------- ------------- --------------------
Workforce reduction..................... $ 181 $ - $ 181 $ -
Consolidation of excess facilities...... 402 402 - 402
---------- ---------- ------------- --------------------
Total.............................. $ 583 $ 402 $ 181 $ 402
========== ========== ============= ====================
Amounts related to the net lease expense due to the consolidation of facilities
will be paid over the respective lease terms through November 2001.
Note 7 Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of dilutive potential
common shares that were outstanding during the period. Diluted weighted average
shares reflect the dilutive effect, if any, of potential common shares based on
the treasury stock method.
Basic and diluted net loss per share were calculated as follows during the three
and nine months ended April 30, 2001 and 2000, respectively:
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------------- ---------------------------
(In thousands, except per share amounts) 2001 2000 2001 2000
------------- ------------- ------------- -------------
Numerator:
Net loss attributable to common stockholders................ $ (9,274) $ (10,590) $ (20,828) $ (20,930)
============= ============ ============= =============
Denominator:
Weighted average shares outstanding used to compute basic
and diluted net loss per common share................... 44,220 39,995 43,510 33,678
============= ============ ============= =============
Basic and diluted net loss per share........................ $ (0.21) $ (0.26) $ (0.48) $ (0.62)
============= ============ ============= =============
All common shares that were held in escrow, totaling approximately 140,000 as of
April 30, 2001, were excluded from basic and diluted net loss per share
calculations. See Note 10 for more information on common shares held in escrow.
Potential common shares attributable to mandatorily redeemable preferred stock,
stock options, and warrants of 4,925,370 and 8,484,236 were outstanding at April
30, 2001 and 2000, respectively. However, as a result of a net loss incurred by
the Company in the three and nine months ended April 30, 2001 and 2000, the
corresponding weighted average outstanding shares (using the treasury stock
method) were antidilutive and were excluded from net loss per share
calculations.
8
Note 8 Comprehensive Income / (Loss)
Accumulated other comprehensive income (loss) on the condensed consolidated
balance sheets consists of unrealized gains (losses) on available for sale
investments and foreign currency translation adjustments. Total comprehensive
loss for the three and nine months ended April 30, 2001 and 2000, respectively,
is presented in the following table:
Three Months Ended Nine Months Ended
(In thousands) April 30, April 30,
--------------------- ---------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net loss .......................................... $ (9,274) $(10,013) $(20,828) $(17,053)
Other comprehensive income/(loss):
Change in unrealized gain/(loss) on investments 39 (506) 160 (910)
Change in currency translation adjustments .... 8 60 (16) 24
---------- ---------- ---------- ----------
Total other comprehensive income/(loss) ... 47 (446) 144 (886)
---------- ---------- ---------- ----------
Total comprehensive loss .......................... $ (9,227) $(10,459) $(20,684) $(17,939)
========== ========= ========== ==========
The balance of unrealized gain on investments at April 30, 2001 consisted of net
unrealized gain for our holdings of Amazon.com common stock and government
bonds. The balance of unrealized loss on investments at April 30, 2000 consisted
entirely of unrealized loss from our holdings of Amazon.com common stock.
Note 9 Purchased In-Process Research and Development
The Company expensed purchased in-process research and development costs of
$4,218,000 as a result of the ProxiNet, Inc. (ProxiNet) acquisition in the first
quarter of fiscal 2000.
The ProxiNet acquisition has been accounted for as a purchase. The total
purchase price of approximately $17,384,000 was assigned to the fair value of
the assets acquired, including the following (in thousands):
Tangible assets, net, acquired................ $ 676
In-process research and development........... 4,218
Developed technology.......................... 3,092
Acquired workforce-in-place................... 286
Goodwill...................................... 9,112
---------
$17,384
=========
As of the acquisition date, technological feasibility of the in-process research
and development had not been established and the technology had no alternative
future use. Therefore, the Company expensed the in-process research and
development in the first quarter of fiscal year 2000. The remaining intangible
assets are being amortized using the straight-line method over the estimated
useful life of the assets ranging from 18 months to 5 years.
The value assigned to this acquired in-process research and development was
determined by identifying research projects in areas for which technological
feasibility had not been established as of the acquisition date. These include
projects for ProxiWare(TM) and ProxiWeb(TM) technology. The value was determined
by estimating the revenue contribution and the percentage of completion of each
of these
9
projects. The projects were deemed to be 55% complete on the date of
acquisition. The net cash flows were then discounted utilizing a weighted
average cost of capital of 27.5%, which, among other related assumptions, we
believe to be fairly accurate. This discount rate takes into consideration the
inherent uncertainties surrounding the successful development of the in-process
research and development, the expected profitability levels of such technology,
and the uncertainty of technological advances that could potentially impact the
estimates described above. Revenues were projected to be generated in fiscal
2000 for the products in development at the acquisition date.
To date, actual results have been consistent, in all material respects, with our
assumptions at the time of the acquisition. The assumptions primarily consist of
an expected completion date for the in-process projects, estimated costs to
complete the projects, and revenue and expense projections once the products
have entered the market. The projects for ProxiWare and ProxiWeb technology that
is currently branded as the Browse-it(TM) product were completed, as expected,
in the fourth quarter of fiscal 2000 and are now generating revenue. Failure to
achieve the expected levels of revenue and net income from this product during
its entire life cycle will negatively impact the return on investment expected
at the time that the acquisition was completed and potentially result in
impairment of any other assets related to the development activities.
Note 10 Acquisitions
The Windward Group
In October 2000, the Company signed and closed an asset purchase agreement with
Vanteon Corporation (Vanteon), of Rochester, New York to acquire certain assets
and assume certain liabilities of The Windward Group (Windward), a wholly owned
subsidiary of Vanteon headquartered in Los Gatos, California. Windward is a
professional services company specializing in creating consumer and enterprise
solutions that combine mobile, wireless, desktop, Internet and database
technology. Under the terms of the asset purchase agreement, we paid $12,250,000
in cash and placed 171,026 shares of Pumatech common stock in escrow. These
shares will be valued upon release from escrow based on the fair value of the
common stock on the release date and as a result, the amount of goodwill arising
from the transaction may increase upon release of these shares. The shares will
be released in equal installments to Vanteon based on the achievement of
quarterly performance milestones through the first quarter of fiscal 2002. The
performance milestones set for the second quarter of fiscal year 2001 were met
and therefore 42,757 shares, valued at approximately $204,000, were released for
the quarter ended January 31, 2001. As of the date of this Report on Form 10-Q,
no additional shares were released for the quarter ended April 30, 2001 as the
Company had not yet assessed whether the performance milestones set for the
third quarter had been met. The agreement also provided for a rent reimbursement
from Vanteon for the Los Gatos facility over the remaining term of the related
lease which has been assumed by the Company. Approximately $611,000,
representing the present value of the rent reimbursement, was treated as a
reduction of the purchase price.
10
The Windward acquisition has been accounted for as a purchase business
combination. The condensed consolidated financial statements include the results
of operations of Windward since the date of acquisition. The total
purchase price of approximately $12,234,000 (including liabilities of $191,000,
acquisition costs of $200,000, and released shares from escrow of $204,000)
was assigned to the fair value of net assets acquired, including the following
(in thousands):
Tangible assets acquired, net.............. $ 406
Existing contracts......................... 200
Acquired workforce-in-place................ 1,281
Goodwill................................... 10,347
----------
$ 12,234
==========
The intangible assets acquired are being amortized using the straight-line
method over the estimated useful life of the assets. The estimated useful life
of the existing contracts is the remaining term of the respective contracts
ranging from one to four months. The useful life of the acquired
workforce-in-place and goodwill is estimated to be 18 months and 5 years,
respectively.
The following unaudited pro-forma consolidated financial information reflects
the results of operations for the three and nine months ended April 30, 2001 and
2000, as if the acquisition of Windward had occurred on August 1, 1999 and after
giving effect to purchase accounting adjustments. These pro- forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the acquisition actually taken
place on August 1, 1999. In addition, these results are not intended to be a
projection of future results and do not reflect any synergies that might be
achieved from the combined operations.
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ------------ ----------
(In thousands, except per share data)
Pro-forma revenue ............................ $ 10,345 $ 9,949 $ 33,192 $ 28,042
Pro-forma net loss ........................... $ (9,274) $(12,222) $(22,202) $(24,495)
Pro-forma basic and diluted net loss per share $ (0.21) $ (0.30) $ (0.51) $ (0.72)
SwiftTouch Corporation
In November 2000, the Company signed and closed an asset purchase agreement to
acquire certain intellectual property and other assets of SwiftTouch Corporation
(SwiftTouch) of Bedford, Massachusetts, a provider of Web-based Universal Access
Solutions. Under the terms of the asset purchase agreement, the Company paid
$320,000 in cash and issued 100,000 shares of the Company's common stock, 12,000
of which were held in escrow to be released in fiscal 2002. The shares were
valued at approximately $1,368,000, using the average price of the Company's
common stock, net of a 2.5% discount, for the period ended around the date of
acquisition.
11
The SwiftTouch acquisition has been accounted for as a purchase business
combination. The condensed consolidated financial statements include the results
of operations of SwiftTouch since the date of acquisition. The total purchase
price of approximately $1,688,000 was assigned to the fair value of the assets
acquired, including the following (in thousands):
Tangible assets acquired................... $ 20
Developed technology....................... 1,518
Acquired workforce-in-place................ 50
Goodwill................................... 100
---------
$ 1,688
=========
The intangible assets acquired are being amortized using the straight-line
method over the estimated useful life of the assets ranging from 18 months to 5
years.
Note 11 Business Segments
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available that is evaluated by the
chief operating decision maker or decision-making group to make decisions about
how to allocate resources and assess performance. The Company's chief operating
decision maker is the chief executive officer. To date the Company has reviewed
its operations principally in a single segment. The chief operating decision
maker assesses performance based on the gross profit generated by this segment.
The Company operates in a single industry segment encompassing the development,
marketing and support of mobile data exchange software. The Company markets its
products to customers primarily in North America, Asia and Europe. The Company's
customer base consists primarily of corporate organizations, business
development organizations, industry associations, resellers, international
system integrators, large OEMs in the PC market and selected distributors in
North America, Africa, Asia, Australia, Europe, New Zealand and South America
which primarily market to the retail channel.
Revenue information by geographic region is as follows:
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- ---------------- --------------- ----------------
(In thousands)
North America......................................... $ 8,303 $ 6,024 $ 24,353 $ 15,552
Japan.................................................. 1,042 1,695 4,212 5,198
Other International.................................... 1,000 295 3,014 1,037
--------- ---------- --------- ---------
Total revenue........................................ $ 10,345 $ 8,014 $ 31,579 $ 21,787
========= ========== ========= =========
Substantially all of the Company's long-lived assets are in the United States.
12
Revenue information by product family is as follows:
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------------ -------------------------------------
2001 2000 2001 2000
----------------- ----------------- ------------------ -----------------
(In thousands)
Notebook royalty revenues.............................. $ 388 $ 1,209 $ 1,748 $ 3,942
Enterprise............................................. 4,467 3,658 14,698 9,864
MAP.................................................... 3,354 2,198 9,807 5,806
Service................................................ 2,136 949 5,326 2,175
----------------- ----------------- -------------------------------------
Total revenue........................................ $ 10,345 $ 8,014 $ 31,579 $ 21,787
================= ================= =====================================
Note 12 Stock Option Cancellation/Regrant
In January 2001, the Company's compensation committee approved a proposal to
offer its employees, officers and directors the opportunity to cancel stock
options granted to them between December 1999 and October 2000 for an equal
number of new options to be granted in the future, on a date at least six months
after the date of cancellation of the original options. The company's
compensation committee determined that existing options eligible under the terms
of the proposal no longer have sufficient value to motivate and retain employees
in a tight labor market.
The exercise price of the new options will be 85% of the market price on July
30, 2001, the date of the new grant. The new grants will have the same terms,
vesting start date and vesting schedule as those cancelled. In order to receive
the new options, the employees must remain employed by the Company until the new
grant date.
Holders of options exercisable for approximately 3,358,000 shares with exercise
prices of $15 or greater were given the opportunity to cancel their options and
holders of options exercisable for approximately 2,694,000 million shares, net
of the effect of recent terminations, elected to cancel their options. The
cancelled options had exercise prices ranging from $18.31 to $83.50, with a
weighted average exercise price of $31.93. The cancelled options had been
granted under the Puma Technology, Inc. Amended and Restated 1993 Plan, NetMind
Technologies, Inc. 1997 Stock Plan and the Puma Technology, Inc. 2000
Supplemental Stock Option Plan.
In connection with the regrant, the Company expects to incur a stock
compensation charge upon the reissuance of the options in the amount equal to
the 15% difference between the exercise price of the new options and the market
value of the underlying shares at July 30, 2001. The portion of the charge
relating to options that are deemed vested as of July 31, 2001 will be expensed
in the fourth quarter of fiscal 2001. The rest of the charge will be amortized
over the remaining vesting period. In addition, stock compensation charges for
4,000 of the new options are expected to be subject to variable plan accounting
until their expiration or exercise.
Note 13 Commitment
On March 29, 2001, the Company entered into another loan and security agreement
with a commercial bank under which it can borrow up to $10 million. The loan and
security agreement matures in March 2002. Borrowings under the agreement bear
interest at a rate equal to the prime rate or LIBOR as selected by the Company
and are secured by cash deposits, receivables, inventories, equipment, and
intangibles. The loan and security agreement contains covenants requiring the
Company to maintain a minimum level of tangible net worth and meet a certain
quick ratio. The agreement also contains certain restrictive covenants
13
including but not limited to limitations on indebtedness, limitations on
didvidends and other restrictions on payments (including repurchases of our
common stock), limitations on transactions with affiliates, limitations on
liens, limitations on disposition of proceeds of asset sales, and limitations on
investments and mergers, among others. At April 30, 2001, there were no
outstanding borrowings under the agreement.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the condensed
consolidated financial statements and the notes thereto contained elsewhere in
this Form 10-Q and in conjunction with the consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations in our Form 10-K. This quarterly report on Form 10-Q, and in
particular management's discussion and analysis of financial condition and
results of operations, contains forward-looking statements regarding future
events or our future performance that involve certain risks and uncertainties
including those discussed in "Factors That May Affect Future Operating Results"
below. In this Form 10-Q, the words "anticipates", "believes", "expects",
"intends", "future" and similar expressions identify forward-looking statements.
All statements that address operating performance, events or developments that
we expect or anticipate will occur in the future, including statements relating
to planned product releases and composition of revenue, both in terms of segment
and geographical source, are forward-looking statements. Such forward-looking
statements are based on management's current views and assumptions regarding
future events and operating performance, and speak only as of the date hereof.
We undertake no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
Actual events or our actual future results may differ materially from any
forward looking statements due to the risks and uncertainties outlined below.
Management's discussion and analysis includes:
o Business overview.
o A comparison of our results of operations in the three and nine months
ended April 30, 2001 with the results in the corresponding period in
fiscal 2000.
o A discussion of our operating liquidity and capital resources.
o A discussion of factors that may affect our future operating results.
Business Overview
Pumatech, Inc. (Pumatech or the Company) was incorporated in California in
August 1993 and reincorporated in Delaware in November 1996 under the name Puma
Technology, Inc. We develop, market and support synchronization, change
detection/notification, and Web rendering/browsing software that enables
consumers, mobile professionals and information technology officers to harness
the full capabilities of handheld organizers/computers, Web-enabled-cellular
phones, pagers and other wireless/wireline personal communications platforms. We
provide a mobile solution that addresses several scenarios for synchronization,
complete customization of device-based applications, centralized backup,
security, information flow control, notification, e-commerce and browsing of
intranet and Internet-based information. Our software is designed to improve the
productivity of business professionals and corporations who are increasingly
relying on mobile computing devices to address their growing needs for
accessible, up-to-date information, whether in or out of the office. Our product
families, which include Intellisync(R), Intellisync Anywhere(R), Satellite
Forms(R), Browse-it(TM), Mind-it(TM) and Sync-it(TM) software, are designed to
connect mobile devices to essential information anytime, anywhere. The
Intellisync platform lets users synchronize the critical connection between both
wired and wireless handheld devices and the vast stores of information found in
corporate databases, the Internet and individuals' PC applications. Intellisync
Anywhere keeps users current with remote and
15
LAN-based data synchronization between groupware servers and handheld devices.
Satellite Forms provides the tools needed to create custom applications for Palm
OS(R) handheld devices and the ability to integrate those applications with
desktop or network databases. Browse-it enables users to view Web pages online
or offline on their Palm OS handhelds in a secure, conventional and quick
manner. Mind-it technology provides user-driven personalization, enabling users
to track specific Web information and be notified when that information changes.
Based on our Intellisync synchronization software, Sync-it solution allows users
to perform true, multi-point, Web-based synchronization of calendar, e-mail,
contacts, and tasks between their Palm OS handheld and their home PC, work PC,
and Internet PIM (Personal Information Management), using a network, dial-up, or
wireless connection to the Internet.
Browse-it, Mind-it and Sync-it form the essential components of our Mobile
Application Platform (MAP) offering. MAP is the common server platform on which
we are building our new mobile and wireless solutions. Designed for maximum
scalability and performance, MAP empowers both Internet access and wireless
access to mobile devices. This differs markedly from the PC-centric connectivity
solutions that enable Internet access only while tethered to a PC. MAP will
provide ubiquitous access to mobile devices over both wired and wireless media,
and will not require the PC to act as a gateway to the network. MAP is deployed
inside the firewalls of major corporations. In addition, MAP is hosted in the
public Internet space through our Intellisync.comSM Web service.
We license our software products directly to enterprise corporations, original
equipment manufacturers (OEMs) and business development organizations worldwide.
In addition, we sell our retail products through several distribution channels
both domestically and internationally, including major distributors, resellers,
computer dealers, retailers and mail-order companies. Internationally, we are
represented by over 20 distributors and resellers in Africa, Asia, Australia,
Canada, Europe, New Zealand, and South America.
Many of our customers have been successful in implementing our various
technology initiatives without further technical service provision. However, we
believe that building up a strong relationship with our customers, as well as
future growth in our product sales, depends on our ability to provide them with
adequate support, training and consulting when necessary. We therefore remain
committed to continuously improving the various services we offer to our
customers, which include providing contract support services upon the purchase
or use of our products and performing non-recurring engineering service projects
for software development. To implement this commitment, we have established an
in-house professional services organization. Created in July 2000 with the
acquisition of Dry Creek Software (Dry Creek), our professional services
organization provides business application experience, technical expertise and
product knowledge to complement our MAP infrastructure and to provide solutions
to customers' business requirements. The major types of services provided
include software consulting, integration and hosting services which allow more
rapid and customer-unique end-to-end deployments. Our acquisition in October
2000 of certain assets and liabilities of The Windward Group (Windward)
including our hiring of approximately 40 employees from Windward, represented a
threefold expansion of our professional services organization, which now focuses
on delivering customized solutions based on our MAP infrastructure to target
customers such as wireless carriers, ISPs, Web portals and corporate
enterprises.
In October 2000, we signed and closed an asset purchase agreement with Vanteon
Corporation (Vanteon), of Rochester, New York to acquire selective assets and
assume cetain liabilities of Windward, a wholly owned subsidiary of Vanteon
headquartered in Los Gatos, California. Windward is a professional services
company specializing in creating consumer and enterprise solutions that combine
mobile, wireless, desktop, Internet and database technology. Also on November 7,
2000, we signed and closed a definitive agreement to acquire certain
intellectual property and other assets of SwiftTouch Corporation (SwiftTouch) of
Bedford, Massachusetts, a provider of Web-based Universal Access Solutions. Both
transactions were accounted for
16
as a purchase. See Note 10 of the notes to the unaudited condensed consolidated
financial statements for more information on the acquisitions.
During the three months ended April 30, 2001, the Company implemented a cost
reduction plan. The Company's primary cost reduction initiatives included a
reduction in workforce and facilities consolidation as described under
"Severance and Facilities" within the "Results of Operations" section below:
Results of Operations
The following table sets forth certain consolidated statement of operations data
as a percentage of revenue for the periods indicated:
Three Months Ended Nine Months Ended
April 30, April 30,
------------------ -----------------
2001 2000 2001 2000
-------- --------- -------- --------
Revenue
License .............................................. 79.4% 88.2% 83.1% 90.0%
Services ............................................. 20.6 11.8 16.9 10.0
-------- --------- -------- --------
Total revenue ................................... 100.0 100.0 100.0 100.0
-------- --------- -------- --------
Cost and operating expenses:
Cost of revenue ...................................... 27.8 11.0 23.2 11.6
Research and development ............................. 58.9 61.1 59.2 53.7
Sales and marketing .................................. 55.1 59.8 52.0 53.3
General and administrative ........................... 16.6 18.2 14.8 17.3
In-process research and development .................. -- -- -- 19.4
Amortization of intangibles .......................... 20.9 10.3 18.5 7.9
Merger costs ......................................... -- 78.9 -- 29.0
Severance and facilities costs ....................... 5.6 -- 1.9 --
-------- --------- -------- --------
Total cost and operating expenses ................ 184.9 239.3 169.6 192.2
-------- --------- -------- --------
Operating loss .......................................... (84.9) (139.3) (69.6) (92.2)
Other income, net ....................................... 7.4 16.3 8.3 16.3
Other-than-temporary impairment of direct investments ... (11.4) -- (3.7) --
-------- --------- -------- --------
Loss before income taxes ................................ (88.9) (123.0) (65.0) (75.9)
Provision for income taxes .............................. (0.8) (2.0) (0.9) (2.4)
-------- --------- -------- --------
Net loss ................................................ (89.7) (125.0) (65.9) (78.3)
Accretion of mandatorily redeemable convertible preferred
stock to redemption value ............................ -- (7.2) -- (17.8)
-------- --------- -------- --------
Net loss attributable to common stockholders ............ (89.7)% (132.2)% (65.9)% (96.1)%
======== ========= ======== ========
Revenue. We derive revenue from two primary sources: software licenses and fees
for service. Revenue in the three and nine months ended April 30, 2001 was
$10,345,000 and $31,579,000, respectively, compared to $8,014,000 and
$21,787,000, respectively, for the corresponding periods in fiscal 2000. The 29%
and 45% revenue growth in the three and nine months ended April 30, 2001,
respectively, resulted from higher revenues from our MAP licensing, Enterprise
products, and services. This increase in revenue more than offset the decline in
our legacy notebook business--Intellisync for Notebook and TranXit(R) product
royalty revenue. Revenue in the three and nine months ended April 30, 2001 from
our core business, excluding all revenue from our legacy notebook business,
increased 46% to $9,957,000 and 67% to $29,831,000, respectively, compared to
$6,805,000 and $17,845,000, respectively, for the corresponding periods in
fiscal 2000.
17
OEM revenue continues to represent a significant portion of our revenue. OEM
revenue in the three and nine months ended April 30, 2001, was $2,251,000, or
22% of revenue, and $7,750,000, or 25% of revenue, respectively, compared to
$3,288,000, or 41% of revenue, and $9,320,000, or 43% of revenue, respectively,
in the corresponding periods in fiscal 2000. The decrease in OEM revenue was
primarily due to the decline in Intellisync for Notebook and TranXit product
royalty revenue, partially offset by an increase in platform licensing of
Software Development Kits (SDK). No customer accounted for more than 10% of
total revenue in the three and nine months ended April 30, 2001 and 2000.
Although several OEMs agreements contain contractual minimum purchase
obligations, there can be no assurance that any particular OEM will satisfy such
obligation. In addition, we believe that the percentage of revenue derived from
OEMs may fluctuate in future periods since the revenue associated with the
distribution channels we use both domestically and internationally for our
existing and future products are subject to change. Further, we expect the
notebook and PC OEM portion of this revenue to continue to decrease as a
percentage of our overall revenue throughout fiscal 2001.
International revenue continues to represent a significant portion of our
revenue. International revenue in the three and nine months ended April 30,
2001, was $2,310,000, or 22% of revenue, and $8,067,000, or 26% of revenue,
respectively, compared to $2,040,000, or 25% of revenue, and $6,494,000, or 30%
of revenue, respectively, in the corresponding periods in fiscal 2000. Our
international revenue in absolute terms increased for the three and nine months
ended April 30, 2001 due to our continued efforts to expand our international
presence and sales efforts. This increase was partially offset by lower
international notebook and PC OEM royalties. International revenue decreased as
a percentage of total revenue due to the substantial increase in our U.S.
revenue. We expect, however, our international revenue to continue to increase
in absolute dollars in future periods as we continue to expand our operations
worldwide, particularly in Europe. We believe that continued growth would
require further expansion in international markets. We have utilized and will
continue to utilize substantial resources to expand existing and establish
additional international operations. International revenue may be subject to
certain risks not normally encountered in domestic operations, including
exposure to tariffs, various trade regulations and fluctuations in currency
exchange rates. See "Factors That May Affect Future Operating Results."
o License Revenue. License revenue is earned from the sale and use of
software products and royalty agreements with OEMs. License revenue in
the three and nine months ended April 30, 2001 increased 16% to
$8,209,000 and 34% to $26,253,000, respectively, compared to $7,065,000
and $19,612,000, respectively, for the corresponding periods in fiscal
2000. The increase in license revenues reflected an increase in
revenues of MAP products and Enterprise products, primarily
Intellisync, Satellite Forms and Intellisync Anywhere. This increase
was offset by declining revenue received for our legacy notebook
business--the Intellisync for Notebook and TranXit products. Revenue
from our Enterprise products increased due to the market's continued
widespread adoption of our Enterprise product offerings. MAP revenue
increased due to an increase in the number of licensing arrangements
entered into by the Company during the first three quarters of fiscal
2001. Notebook revenue decreased as its revenue stream has matured and
as we continue to deemphasize the resources and effort associated with
this revenue segment. Accordingly, we expect that our legacy notebook
business revenue in subsequent quarters will be flat or moderately
lower.
18
o Service Revenue. Service revenue is derived from fees for services,
including time and materials for professional services, non-recurring
engineering service projects for software development, amortization of
maintenance contract programs, hosting and advertising fees. Service
revenue in the three and nine months ended April 30, 2001 increased
125% to $2,136,000 and 145% to $5,326,000, respectively, compared to
$949,000 and $2,175,000, respectively, for the corresponding periods in
fiscal 2000. The increase in service revenue was brought about
primarily by increased personnel in our professional services
organization primarily as a result of our acquisitions of Dry Creek and
Windward. The increase was also due to an increase in maintenance
contract programs. This increase was partially offset by a decrease in
advertising fees and in revenue resulting from fewer non-recurring
engineering service projects.
Deferred revenue was $3,850,000 and $6,372,000 at April 30, 2001 and July 31,
2000, respectively. The 40% decrease in deferred revenue was primarily
attributable to the recognition of revenue on certain license contracts related
to our MAP components, Intellisync Gold and Intellisync Anywhere products.
The United States economy has experienced a rapid and increasingly severe
downturn during the first three quarters of fiscal 2001 which has had an adverse
effect on demand for our products. While we expect this economic downturn to
continue well into the fourth quarter of fiscal 2001, there can be no certainty
as to the severity or duration of this downturn. We also cannot predict the
extent and timing, if any, of the impact of the economic downturn in the United
States on economies in other countries and geographic regions in which we
conduct business. If the economic conditions in the United States continue or
worsen or if wider or global economic slowdowns occur, the demand for our
products and services may be reduced. Not only may these economic slowdowns
reduce our customers' and prospects' budgets for our products and services, but
also they may adversely affect our customers' ability to pay for our products
and services. Accordingly, these economic slowdowns may have a material adverse
impact on our business, operating results and financial condition.
Cost of Revenue. Cost of revenue consists of license costs and service costs.
License costs include product packaging costs including product media and
duplication, manuals, packing supplies, shipping expenses and in certain
instances, royalties paid to third-party vendors. Service costs include
personnel related costs associated with work performed under professional
services contracts, non-recurring engineering agreements and hosting costs for
online services associated with the hosting of MAP to both partners and end
users via Intellisync.com. Hosting costs include expenses related to bandwidth
for hosting, tape backup, security and storage, third-party fees and internal
personnel costs associated with logistics and operational support of the hosting
services and depreciation of computer equipment associated with the hosting
service.
In general, license costs are a far smaller percentage of license revenue than
service costs, which have a much higher cost structure as a percentage of
service revenue. Additionally, license costs tend to be variable based on
license revenue volumes where service costs tend to be fixed within certain
service revenue volume ranges. We would expect that an increase in service
revenue as a percentage of our total revenue would generate lower overall gross
margins as a percentage of total revenue. Also, given the high amount of fixed
costs associated with the professional services and online services, inability
to generate revenue sufficient to absorb these fixed costs could lead to
negative service margins.
Cost of revenue in the three and nine months ended April 30, 2001, was
$2,873,000, or 28% of revenue, and $7,332,000, or 23% of revenue, respectively,
compared to $882,000, or 11% of revenue, and $2,524,000, or 12% of revenue,
respectively, in the corresponding periods in fiscal 2000. The increase in cost
of revenue in absolute dollars and as a percentage of revenue was primarily due
to an increase in service costs due to increased headcount in our online
services and professional services organization and increased hosting costs
associated with our online service offerings.
19
Research and Development. Research and development expenses consist primarily of
salaries and other related expenses, including non-cash stock compensation, for
research and development personnel, quality assurance personnel, product
localization, fees to outside contractors and the cost of facilities and
depreciation of capital equipment. We invest in research and development both
for new products and to provide continuing enhancements to existing products.
Research and development expenses in the three and nine months ended April 30,
2001, were $6,090,000, or 59% of revenue, and $18,675,000, or 59% of revenue,
respectively, compared to $4,897,000, or 61% of revenue, and $11,693,000, or 54%
of revenue, respectively, in the corresponding periods in fiscal 2000. The
increase in absolute research and development spending was primarily due to
increased personnel that we acquired in connection with our recent acquisitions,
planned higher spending for the integration of various MAP technologies on a
common, modular platform, and increased costs associated with the production
launch of Intellisync.com.
We believe that the cost reduction plan we implemented in the third quarter of
fiscal 2001, which included resizing of our engineering organization and
reducing discretionary expenses, will have a fairly significant impact on our
operating expense structure, primarily in research and development, moving
forward. We expect absolute spending in research and development to decrease in
the fourth quarter of fiscal 2001 from the $6,090,000 reported in the third
quarter of fiscal 2001 as a result of the reduction in workforce.
All of our research and development costs have been expensed as incurred.
Statement of Financial Accounting Standards (SFAS) No. 86 requires
capitalization of certain software development costs once technological
feasibility is established. We define establishment of technological feasibility
at the point that product reaches beta. Software development costs incurred
subsequent to the establishment of technological feasibility through the period
of general market availability of the product are capitalized, if material. To
date, all of these software development costs have been insignificant and
expensed as incurred.
In March 2000, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 00-2, "Accounting for the Costs of Developing a Web Site." In general,
EITF 00-2 states that the costs of developing a Web site should be accounted for
under the provisions of Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." It requires
that costs incurred during the Web application and infrastructure and graphics
development stages of development should be capitalized. We adopted EITF 00-2.
The application of EITF 00-2 did not have a material impact on our financial
position or results of operations.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions, promotional expenses and other related expenses, including non-cash
stock compensation, of sales, marketing and technical support personnel. Sales
and marketing expenses in the three and nine months ended April 30, 2001, were
$5,702,000, or 55% of revenue, and $16,418,000, or 52% of revenue, respectively,
compared to $4,794,000, or 60% of revenue, and $11,617,000, or 53% of revenue,
respectively, in the corresponding periods in fiscal 2000. Sales and marketing
expenses increased in absolute terms primarily due to an increase in sales
personnel to expand our US and international sales and business development
organizations, and an increase in corporate marketing resources, corporate
branding and marketing headcount for our online services group. Sales and
marketing expenses decreased, however, as a percentage of total revenue due to
overall revenue growth. We expect that sales and marketing expenses will
continue to increase in absolute dollars throughout the remainder of fiscal 2001
as we continue to expand our direct sales force, particularly in Europe, and as
we selectively invest in demand generation programs for existing products and
formally launch Intellisync.com.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related expenses, including non-cash stock
compensation, of administrative, executive and financial personnel and other
outside professional fees. General and administrative expenses in the three and
nine months ended April 30, 2001, were $1,720,000, or 17% of revenue, and
$4,685,000, or 15% of revenue,
20
respectively, compared to $1,458,000, or 18% of revenue, and $3,765,000, or 17%
of revenue, respectively, in the corresponding periods in fiscal 2000. The
increase in absolute general and administrative spending was primarily due to an
increased provision for bad debts allowance and, to a much lesser extent, the
addition of personnel and increased fees for professional services, such as
legal, accounting, and other consulting services, to support the expansion of
our infrastructure, and the consolidation and assimilation of the ProxiNet, Inc.
(ProxiNet), NetMind Technologies (NetMind), Dry Creek, Windward and SwiftTouch
businesses.
Non-Cash Stock Compensation. Non-cash stock compensation, included in each
appropriate operating expense category, relates to stock options that were
deemed to have been granted at a price below market value. These charges are
amortized on a straight-line basis over the vesting period of the options. The
aggregate non-cash stock compensation charge, net of the effect of terminations,
in the three and nine months ended April 30, 2001 was $292,000 and $733,000,
respectively, compared to $465,000 and $1,326,000, respectively, in the
corresponding periods in fiscal 2000. The non-cash compensation expense in the
three and nine months ended April 30, 2001 and 2000 relates to options that were
granted by NetMind prior to our acquisition of NetMind. The aggregate
amortization expense is expected to be approximately $1,837,000, $839,000 and
$765,000 in fiscal 2001, 2002 and 2003, respectively, which includes estimated
charges of approximately $832,000, $430,000, and $430,000, respectively,
associated with the stock option regrant program taking place at July 2001 as
discussed below. Future amortization expense would be reduced if any employee
terminates employment prior to the expiration of the option vesting period.
In connection with the stock option regrant program, we expect to incur a stock
compensation charge upon the reissuance of the options in the amount equal to
the 15% difference between the exercise price of the new options and the market
value of the underlying shares at July 30, 2001. The portion of the charge
relating to options that are deemed vested as of July 31, 2001 will be expensed
in the fourth quarter of fiscal 2001. The rest of the charge will be amortized
over the remaining vesting period. In addition, stock compensation charges for
4,000 of the new options are expected to be subject to variable plan accounting
until their expiration or exercise. See Note 12 of the notes to the unaudited
condensed consolidated financial statements for more information on the regrant
program.
Purchased In-Process Research and Development. We expensed purchased in-process
research and development costs of $4,218,000 as a result of the ProxiNet
acquisition in the first quarter of fiscal 2000.
The ProxiNet acquisition has been accounted for as a purchase. The total
purchase price of approximately $17,384,000 (including liabilities of
$2,070,000), was assigned to the fair value of the assets acquired, including
$676,000 to tangible assets acquired, $3,378,000 to identified intangible
assets, $4,218,000 to in-process research and development, and $9,112,000 to
goodwill. The in-process research and development was expensed at the
acquisition date. The value assigned to this acquired in-process research and
development was determined by identifying research projects in areas for which
technological feasibility had not been established as of the acquisition date.
These include projects for ProxiWare(TM) and ProxiWeb(TM) technology. The value
was determined by estimating the revenue contribution and the percentage of
completion of each of these projects. The projects were deemed to be 55%
complete on the date of acquisition. The net cash flows were then discounted
utilizing a weighted average cost of capital of 27.5%, which, among other
related assumptions (discussed below), we believe to be fairly accurate. This
discount rate takes into consideration the inherent uncertainties surrounding
the successful development of the in-process research and development, the
expected profitability levels of such technology, and the uncertainty of
technological advances that could potentially impact the estimates described
above. Revenues were projected to be generated in fiscal 2000 for the products
in development at the acquisition date.
To date, actual results have been consistent, in all material respects, with our
assumptions at the time of the acquisition. The assumptions primarily consist of
an expected completion date for the in-process
21
projects, estimated costs to complete the projects, and revenue and expense
projections once the products have entered the market. The projects for
ProxiWare and ProxiWeb technology that is currently branded as the Browse-it
product was completed, as expected, in the fourth quarter of fiscal 2000 and are
now generating revenue. Failure to achieve the expected levels of revenue and
net income from this product during its entire life cycle will negatively impact
the return on investment expected at the time that the acquisition was completed
and potentially result in impairment of any other assets related to the
development activities.
Amortization of Intangibles. Amortization of acquired intangibles in the three
and nine months ended April 30, 2001, was $2,157,000, or 21% of revenue, and
$5,853,000, or 19% of revenue, respectively, compared to $824,000, or 10% of
revenue, and $1,733,000, or 8% of revenue, respectively, in the corresponding
periods in fiscal 2000. The increase in amortization of intangibles resulted
from our acquisitions of SwiftTouch and Windward in fiscal 2001 and Dry Creek
and ProxiNet in fiscal 2000.
Merger Costs. During the quarter ended April 30, 2000, we incurred $6,322,000 in
acquisition costs for the transaction with NetMind. These costs included direct
transaction costs primarily for financial advisory services and professional
services costs associated with the merger.
Severance and Facilities Costs. We incurred total charges of $583,000
associated with the cost reduction plan implemented during the quarter ended
April 30, 2001. Our cost reduction initiatives included a reduction in
workforce, representing a reduction of approximately 20% of our then total
workforce. The associated severance costs incurred were approximately $181,000.
We also incurred additional restructuring charges aggregating $402,000 for
consolidating facilities with space located in Santa Cruz, California and
Nashua, New Hampshire. The costs of consolidating facilities include $174,000 of
future lease payments and $228,000 for accelerated depreciation of property and
equipment, which consisted primarily of leasehold improvements, office equipment
and furniture and fixtures, to be disposed or removed from operations.
A summary of the severance and facilities costs is outlined as follows (in
thousands):
Total Noncash Cash Accrued Liabilities
Charges Charges Payments at April 30, 2001
--------- ----------- ------------ -------------------
Workforce reduction..................... $ 181 $ - $ 181 $ -
Consolidation of excess facilities...... 402 402 - 402
--------- ----------- ------------ -------------------
Total................................... $ 583 $ 402 $ 181 $ 402
========= =========== ============ ===================
Amounts related to the net lease expense due to the consolidation of facilities
will be paid over the respective lease terms through November 2001.
Other Income, Net. Other income, net, represents interest earned on cash and
short-term investments and realized gains on miscellaneous investments, offset
by interest expense on long-term debt and capitalized leases and miscellaneous
bank fees and charges. Other income, net, in the three and nine months ended
April 30, 2001 of $766,000 and $2,617,000, respectively, consisted primarily of
interest earned on cash and short term investments, offset by realized losses of
$103,000 and $300,000, respectively, from the sale of PG&E commercial paper.
Other income, net, in the three and nine months ended April 30, 2000 of
$1,309,000 and $3,549,000, respectively, consisted primarily of interest earned
on cash and short term investments and realized gains of $634,000 and
$2,221,000, respectively, from the sales of Amazon.com securities.
22
Other-Than-Temporary Impairment of Direct Investments. As of the end of the
third quarter of fiscal 2001, we concluded that the investments associated with
our direct investments -- YadaYada, Inc., If & Then, Inc., and PulseMD
Corporation were impaired as such investments were deemed not to be recoverable.
These investments were fully impaired due to changes in capital structure
impacting our investment preferences, thin capitalization, dilution due to
dramatic declines in valuations and overall lack of persuasive evidence that
would indicate a future ability or intent of these entities that would support
the carrying value of our investments. As a result, we recorded impairment
charges aggregating $1,180,000 for the three and nine months ended April 30,
2001.
Provision for Income Taxes. The provision for income taxes primarily represents
foreign withholding taxes on royalties earned from certain foreign customers.
Provision for income taxes in the three and nine months ended April 30, 2001 was
$80,000 and $298,000, respectively, compared to $159,000 and $517,000,
respectively, in the corresponding periods of fiscal 2000.
Accretion of Mandatorily Redeemable Convertible Preferred Stock to Redemption
Value. During fiscal 1999, NetMind issued approximately 4 million shares of
Series B Preferred Stock which converted into approximately 3.4 million shares
of Pumatech common stock upon completion of the NetMind merger in February 2000.
Under the terms of the original issuance, the Series B shares were redeemable in
September 2003 and 2004, at the higher of their original issue price or the fair
value of the stock at the dates of redemption. The difference between the
issuance price and the fair value of the Series B stock was accreted by NetMind.
Such accretion aggregated to $577,000 and $3,877,000 in the three and nine
months ended April 30, 2000.
Liquidity and Capital Resources
We ended the third quarter of fiscal 2001 with $53.0 million in cash, cash
equivalents and short-term investments. Cash and cash equivalents decreased by
$26.1 million during the first three quarters of fiscal 2001 to $28.4 million at
April 30, 2001. Short-term investments decreased by $6.2 million to $24.6
million during the same period.
Net cash used in operations of $15.5 million during the nine months ended April
30, 2001, was comprised of the net loss adjusted for non-cash items of $9.6
million and net change in operating assets and liabilities of $5.9 million. Net
cash used in operations of $13.9 million during the nine months ended April 30,
2000, was comprised of the net loss adjusted for non-cash items of $9.9 million
and net change in operating assets and liabilities of $4.0 million.
Net cash used in investing activities of $11.9 million during the nine months
ended April 30, 2001, resulted from $12.6 million of cash paid for the asset
purchases of Windward and SwiftTouch, $4.3 million for capital expenditures and
$1.1 million for other long-term investments, partially offset by net sales of
short term investments of $6.1 million. Net cash provided by investing
activities of $1.2 million during the nine months ended April 30, 2000 was
primarily for net sales of short-term investments of $3.4 million, partially
offset by capital expenditures of $2.2 million.
Net cash provided by financing activities of $1.3 million during the nine months
ended April 30, 2001 resulted primarily from $1.7 million of proceeds from
issuance of common stock, partially offset by $0.2 million of principal
repayments on notes payable and $0.2 million of loan to a related party. Net
cash provided by financing activities of $77.8 million during the nine months
ended April 30, 2000, resulted from $78.3 million of proceeds primarily from a
private placement in March 2000 and $0.3 million of proceeds from line of
credit, partially offset by $0.8 million of payments made to settle acquired
liabilities.
23
On March 29, 2001, we entered into a loan and security agreement with a bank
under which we can borrow up to $10 million. The loan and security agreement
matures in March 2002. Borrowings under the agreement bear interest at a rate
equal to the prime rate or LIBOR as selected by the Company and are secured by
cash deposits, receivables, inventories, equipment, and intangibles. The loan
and security agreement contains covenants requiring that we maintain a minimum
level of tangible net worth and meet a certain quick ratio. The agreement also
contains certain restrictive covenants including but not limited to limitations
on indebtedness, limitations on dividends and other restrictions on payments
(including repurchases of our common stock), limitations on transactions with
affiliates, limitations on liens, limitations on disposition of proceeds of
asset sales, and limitations on investments and mergers, among others. At April
30, 2001, there were no outstanding borrowings under the agreement.
We also maintain another loan and security agreement that provides a $1,000,000
revolving credit line and a $750,000 equipment line. Borrowings under the
revolving credit line bear interest at a per annum rate equal to the prime rate
plus one half of one percent. Borrowings under the equipment line bear interest
at a per annum rate equal to the prime rate plus one percent. Equipment acquired
is pledged as collateral. The loan and security agreement contains covenants
requiring that we maintain a minimum level of equity and meet certain quick and
liquidity ratios. The agreement also contains certain restrictive covenants
including but not limited to limitations on indebtedness, limitations on
dividends and other restricted payments (including repurchases of our common
stock), limitations on transactions with affiliates, limitations on liens and
limitations on disposition of proceeds of asset sales, among others. We are
currently in compliance with all of the aforementioned covenant obligations. At
April 30, 2001, $367,000 was outstanding on the equipment line and we had no
outstanding balance drawn on the revolving credit line.
In October 2000, in connection with our acquisition of Windward, we used
$12,250,000 of cash and issued 171,026 shares of Pumatech common stock to
Vanteon Corporation. For additional information regarding the acquisition, refer
to Note 10 of the notes to unaudited condensed consolidated financial
statements.
In November 2000, in connection with our acquisition of certain assets of
SwiftTouch, we used $320,000 of cash and issued 100,000 shares of Pumatech
common stock. For additional information regarding the acquisition, refer to
Note 10 of the notes to unaudited condensed consolidated financial statements.
In April 2001, in connection with the implementation of our cost reduction plan,
we used $181,000 of cash for severance costs associated with the reduction in
our workforce. For additional information regarding the cost reduction plan,
refer to Note 6 of the notes to unaudited condensed consolidated financial
statements.
We believe that our current cash, cash equivalents and short-term investment
balances, including the credit lines and cash generated from operations, if any,
will be sufficient to meet our working capital and other cash requirements for
at least the next 12 months.
In the future, we may seek to raise cash through the issuance of debt or equity
securities. There can be no assurance that such financing would be available to
us at all or on terms favorable to us.
24
Factors That May Affect Future Operating Results
There are many factors that affect our business and the results of our
operations, some of which are beyond our control. The following is a description
of some of the important factors that may cause the actual results of our
operations in future periods to differ materially from those currently expected
or desired.
We are exposed to recent unfavorable economic conditions.
The United States has seen a rapid and increasingly severe downturn during the
first three quarters of fiscal 2001. While we expect this economic downturn to
continue well into the fourth quarter of fiscal 2001, there can be no certainty
as to the severity or duration of this downturn. We also cannot predict the
extent and timing, if any, of the impact of economic downturn in the United
States on economies in other countries and geographic regions in which we
conduct business. If the economic conditions in the United States continue or
worsen or if wider or global economic slowdowns occur, the demand for our
products and services may be reduced. Not only may these economic slowdowns
reduce our customers' and prospects' budgets for our products and services, but
also they may adversely affect our customers' ability to pay for our products
and services. Accordingly, these economic slowdowns may have a material adverse
impact on our business, operating results and financial conditions.
We derive a portion of our revenue from a number of thinly capitalized and
early-stage customers such as dot-com companies.
We have derived, and believe that we will continue to derive, a portion of our
revenues from small and early-stage companies including dot-coms. Recently, many
of these dot-com and other small companies have been closing down their
operations. As a result of such failures, many similarly situated customers and
potential customers may be experiencing difficulty in their capital raising
activities and may not be able to continue operations. The composition of our
customer base exposes us to additional risks, including longer payment cycles
and collection problems. We have implemented policies and procedures to identify
and mitigate our exposure to such risks, but allure of these thinly capitalized
companies to be successful in their operations could have a material adverse
effect on our business, results of operations and financial condition.
The recent economic downturn may severely affect a number of our thinly
capitalized customers, as well as vendors, which may subsequently harm our
business and results of operations.
Economic downturns could cause our thinly capitalized customers to reduce their
IT spending or cease their investment in products, services and technologies
such as those we provide. Any decrease in the demand for our products and
services could adversely affect our operating results and financial condition.
Our operating results and financial condition may also be adversely affected by
difficulties we may encounter in collecting our accounts receivable and
maintaining our profit margins during an economic downturn.
Economic downturns may also affect our various vendors on which we rely for
certain integral services used to support our operations. Our operating results
and financial condition may be adversely affected in the event that a vendor
were to experience financial or operational difficulties that resulted in a
reduction or interruption in services it provides us.
The failure of the market for mobile devices to develop as expected would harm
our revenues.
The emergence of markets for our software is critically dependent upon the rapid
expansion of the market for mobile devices including personal digital
assistants, handheld computers, smart phones, pagers and other mobile devices.
This market has only recently emerged and is rapidly growing. This growth,
however, may
25
not continue. Any slowdown in the growth of adoption of mobile devices would
likely reduce the demand for our software and services, causing our enterprise
license and service revenues to fall.
Hosting our Mobile Application Platform on Intellisync.com may not be
successful; and, if successful, may divert our attention from our existing
product license business, which could result in lower revenue from such
business.
In January 2001, Intellisync.com became available as a public web site. By the
end of the third quarter of calendar year 2001, we intend to announce the fee
structure for the premium services that we plan to offer on Intellisync.com
service. An unsuccessful launch of Intellisync.com for the public may have a
negative effect on our revenue and results of operations. Our customers may not
choose to use MAP through Intellisync.com for their applications for a variety
of reasons, including the actual or perceived reduction in security protections
of mobile solutions hosted on the Internet; the possible reluctance to be
dependent on a third party to host important information and infrastructure and
to perform basic support and other functions; and the possible inability of MAP
to be able to support many users in an enterprise-wide environment. Although we
expect to derive a significant portion of our future revenue from our
Intellisync.com subscription offering, we just recently have commercially
introduced it and, therefore, do not have a proven expense and revenue model for
it. Intellisync.com may not be commercially viable if our expense and revenue
model is not acceptable to our customers. This would seriously harm our
business, particularly if the failure of Intellisync.com and MAP to achieve
market acceptance negatively affects sales of our other products and services.
In addition, if our customers adopt the MAP offering through Intellisync.com, we
may experience a decline in the growth of our existing product license business.
We may not achieve profitability if we are unable to maintain, improve and
develop Intellisync.com. Our services will have to achieve market acceptance,
maintain technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in synchronization of
corporate ad other data over various wired and wireless platforms, new services
and enhancements may require long development and testing periods. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new services or enhancements. Such new services and
enhancements may not achieve market acceptance and we may not be able to recover
the costs of development or attain profitability.
Because we have had limited Internet operating history, it is difficult to
evaluate our business and we may face various risks, expenses and difficulties
associated with early stage companies.
Historically, we have licensed our products and technology primarily to PC OEMs,
corporations and to end users through our channels of distribution. In the
second quarter of fiscal 2000, we announced our Internet initiative. This
initiative has required us to add additional resources and to develop and market
our Intellisync.com service destination site and the products and technologies
we obtained in the ProxiNet and NetMind acquisitions. We plan to market and
license our new Web-based products and solutions to wireless carriers, Web
portals and individual consumers. We also plan to offer these new products and
solutions to corporations. We expect to incur significant costs in implementing
our Internet initiative.
Our overall operating results have changed significantly as a result of
developing and bringing to market our new Internet products. It is important to
understand that our historical financial statements include operating results of
our recently launched Internet initiative only to the extent that NetMind's
historical operating results have been reflected under pooling-of-interests
accounting. As a result of our Internet initiative, we expect our combined
results to reflect an operating loss for at least the next several fiscal
quarters. There can be no assurance that we will be able to achieve or sustain
profitability.
26
Since we just launched our Internet initiative, there is little information on
which to evaluate our business and prospects as an Internet company. An investor
in our common stock should consider the risks, expenses and difficulties that
young companies frequently encounter in the new and rapidly evolving markets for
Internet products and services. These risks to us include:
o our evolving new business model;
o our need and ability to manage growth; and
o rapid evolution of technology.
To address these risks and uncertainties, we must take several steps, including:
o creating and maintaining strategic relationships;
o expanding sales and marketing activities;
o integrating existing and acquired technologies;
o expanding our customer base and retaining key clients;
o introducing and expanding new services, including our professional
services organization;
o managing rapidly growing operations, including new facilities and
information technology infrastructure;
o competing in a highly competitive market; and
o attracting, retaining and motivating key employees.
We may not be successful in implementing any of our strategies or in addressing
these risks and uncertainties. We expect that our operating expenses will
continue to increase, primarily as a result of our investment in our new
Internet product initiative. Moreover, even if we accomplish our objectives, we
still may not achieve sustainable profitability in the future.
We have invested substantial amounts in technology and infrastructure
development and development of our professional services organization. We expect
to continue to invest substantial financial and other resources to develop and
introduce new Internet and wireless products and services, and to expand our
sales and marketing organizations, our professional services organization,
strategic relationships and operating infrastructure. We expect that our cost of
revenue, sales and marketing expenses, operations and customer support expenses,
and depreciation and amortization expenses may continue to increase in absolute
dollars and may increase as a percent of revenue. If revenue does not
correspondingly increase, our operating results and financial condition could be
negatively affected.
Our business and prospects depend on demand for and market acceptance of the
Internet, wireless devices and mobile computing devices.
The increased use of the Internet, wireless devices and mobile computing devices
for retrieving, sharing and transferring information among businesses,
consumers, suppliers and partners, and for Internet personalization services has
only begun to develop in recent years. Our success will depend in large part on
continued growth in the use of the Internet, wireless devices and mobile
computing devices. Critical issues concerning the commercial use of the
Internet, wireless devices and mobile computing devices,
27
including security, reliability, cost, ease of access and use, quality of
service, regulatory initiatives and necessary increases in bandwidth
availability, remain unresolved and are likely to affect the development of the
market for our services. The adoption of the Internet, wireless devices and
mobile computing devices for information retrieval and exchange, commerce and
communications generally will require the acceptance of a new medium of
conducting business and exchanging information. Demand for and market acceptance
of the Internet, wireless devices and mobile computing devices are subject to a
high level of uncertainty and are dependent on a number of factors, including:
o the growth in access to and market acceptance of new interactive
technologies;
o emergence of a viable and sustainable market for Internet
personalization services;
o the development of technologies that facilitate interactive
communication between organizations; and
o increases in bandwidth for data transmission.
If the market for Internet personalization services or the Internet, wireless
devices and mobile computing devices as a commercial or business medium does not
develop, or develops more slowly than expected, our business, results of
operations and financial condition will be seriously harmed.
Specifically, even if an Internet personalization services market does develop,
services that we currently offer or may offer in the future may not achieve
widespread market acceptance. Failure of our current and planned services to
operate as expected could delay or prevent their adoption. If our target
customers do not adopt, purchase and successfully deploy our current and planned
services, our revenue will not grow significantly and our business, results of
operations and financial condition will be seriously harmed. We have not taken
any steps to mitigate the risks associated with reduced demand for our existing
Internet personalization services.
The emergence of a dominant platform for mobile devices could reduce our
customer base and revenues.
The marketplace for mobile devices is currently characterized by a number of
competing Internet systems and standards for mobile computing devices.
Currently, our customers and potential customers often use a variety of mobile
devices with multiple connectivity options. One of the primary benefits of our
products is their ability to operate across a wide variety of platforms. If a
dominant platform for mobile devices emerges, the demand for our platform and
products may diminish.
The size of the mobile computing market cannot be accurately predicted, and if
our market does not grow as we expect, our revenue will be below our
expectations and our business and financial results will suffer.
We are focusing on expanding into the mobile computing market, an unproven
market. Accordingly, the size of this market cannot be accurately estimated and
therefore we are unable to accurately determine the potential demand for our
products and services. If our customer base does not expand or if there is not
widespread acceptance of our products and services, our business and prospects
will be harmed. We believe that our potential to grow and increase the market
acceptance of our products depends principally on the following factors, some of
which are beyond our control:
o the effectiveness of our marketing strategy and efforts;
o our product and service differentiation and quality;
28
o our ability to provide timely, effective customer support;
o our distribution and pricing strategies as compared to our competitors;
o growth in the sales of handheld devices supported by our software and
growth in wireless network capabilities to match end user demand and
requirements;
o our industry reputation; and
o general economic conditions such as downturns in the computer or
software markets.
Our market changes rapidly due to changing technology and evolving industry
standards. If we do not adapt to meet the sophisticated needs of our customers,
our business and prospects will suffer.
The market for our services is characterized by rapidly changing technology,
evolving industry standards and frequent new service introductions. Our future
success will depend to a substantial degree on our ability to offer services
that incorporate leading technology, address the increasingly sophisticated and
varied needs of our current and prospective customers and respond to
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. You should be aware that:
o our technology or systems may become obsolete upon the introduction of
alternative technologies;
o we may not have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with
future technologies or service offerings; and
o the price of the services we provide is expected to decline as rapidly
as the cost of any competitive alternatives.
We may not be able to effectively respond to the technological requirements of
the changing market. To the extent we determine that new technologies and
equipment are required to remain competitive, the development, acquisition and
implementation of such technologies and equipment are likely to continue to
require significant capital investment by us. Sufficient capital may not be
available for this purpose in the future, and even if it is available,
investments in new technologies may not result in commercially viable
technological processes and there may not be commercial applications for such
technologies. If we do not develop and introduce new products and services and
achieve market acceptance in a timely manner, our business and prospects may
suffer.
There are risks associated with our long-term investments that may adversely
affect our results of operations.
Historically, we have made direct or indirect investments in privately held
companies. Additionally, we entered into a commitment with a venture capital
firm and invested in some of our strategic partners, both customers and vendors,
that we believe have the potential to grow, and we may continue to make
strategic investments in the future. There can be no assurance that these
investments will bring us a return on investment. In addition, because the
strategic investments tend to be in small, start-up technology companies, which
are at risk for financial failure especially during an economic downturn, there
is a greater risk that the investments might be impaired. For example, as of the
end of the third quarter of fiscal 2001, we concluded that the investments
associated with our direct investments -- YadaYada, If & Then, and PulseMD were
impaired as such investments were deemed not to be recoverable. These
investments were fully impaired due to poor historical financial performance,
changes in capital structure impacting our investment preferences, thin
capitalization,
29
dilution due to dramatic declines in valuations and overall lack of persuasive
evidence that would indicate a future ability or intent of these entities that
would support the carrying value of our investments. As a result, we recorded
impairment charges aggregating $1,180,000 for the three and nine months ended
April 30, 2001. See Note 5 of the notes to the unaudited condensed consolidated
financial statements for more details. Any impairment of such investments in the
future could have a material adverse effect on our results of operations and
financial condition.
Operating results may fluctuate significantly and may be difficult to predict.
Our operating results have fluctuated in the past, and with our Internet product
initiative, the ProxiNet, NetMind and Dry Creek acquisitions and the Windward
and SwiftTouch asset purchases, our operating results are likely to continue to
fluctuate significantly. A number of factors, many of which are outside of our
control, are likely to cause fluctuations in operating results, including, but
not limited to:
o the demand for our products and services;
o our success in developing new products and integrating acquired
technologies;
o the timing of new product introductions by us and our competitors;
o market acceptance of our new and enhanced products and services;
o market acceptance of handheld devices generally, and those supported by
our products and services;
o the emergence of new industry standards;
o the timing of customer orders;
o the mix of products and services sold;
o product life cycles;
o competition;
o the mix of distribution channels employed;
o seasonal trends;
o the timing and magnitude of our capital expenditures, including costs
relating to the expansion of operations;
o the evolving and unpredictable nature of the markets for our products
and mobile computing devices generally;
o the rate of growth of the Internet and the personal computer market in
general; and
o general economic conditions.
In addition, we typically operate with a relatively small order backlog. As a
result, quarterly sales and operating results depend in part on the volume and
timing of orders received and fulfilled within the quarter, which are difficult
to forecast. A significant portion of our expense levels are fixed in advance,
30
based in large part on our resource requirements to meet planned product and
customer requirements. If revenue is below expectations in any given quarter,
the adverse impact of the shortfall on operating results may be magnified by our
inability to adjust spending to compensate for the shortfall. Therefore, a
shortfall in actual revenue as compared to estimated revenue would have an
immediate adverse effect on our business, operating results and financial
condition that could be material.
Due to our ongoing efforts to expand into retail and reseller channels, we are
focusing our efforts on licensing our server and personal applications to
corporations and licensing our Software Development Kits (SDKs) to software
developers and mobile computing device manufacturers. SDKs provide the complete
solution for adding intelligent synchronization to enterprise applications,
mobile devices and Web-based services. With intelligent synchronization, users
can keep their critical information up-to-date and in sync across multiple
applications and mobile devices. As a result, we expect that our notebook and PC
OEM revenue will decrease as a percentage of our overall revenue. This new sales
strategy has the following risks:
o sales into these channels are harder to predict and may have lower
margins than sales in other channels;
o we have a very limited history in penetration and support for these
channels;
o the average transaction size and sales cycle vary significantly, making
forecasting difficult;
o smaller transactions may have relatively higher administrative costs;
o any significant deferral of purchases of our products by customers
could jeopardize our operating results in any particular quarter;
o to the extent that significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected;
o products that are accepted in the OEM market may not be readily
accepted by corporations;
o we may incur increased costs related to new infrastructure
requirements; and
o planned marketing strategy may require significant expenditures but may
not have immediate or future beneficial effect on sales.
Our gross margin on service revenue, particularly non-recurring engineering
service and professional service revenue, is substantially lower than gross
margin on license revenue. We have recently acquired Dry Creek and, in
connection with the acquisition of assets from Windward, we hired a number of
employees of Windward, which forms the basis of our professional service group,
and, consequently, professional service revenue increased significantly in the
last two quarters and we expect that it will continue to increase in future
quarters. Until we are able to fully utilize all employees in the professional
service group, our gross margin will continue to be low. Any increase in
non-recurring engineering service and professional service revenue would have a
corresponding increase in cost of revenue and would have an adverse effect on
our gross margins as a percent of total revenue. We may also change prices or
increase spending in response to competition or to pursue new market
opportunities.
The operating results of many software companies reflect seasonal fluctuation.
For example, sales in Europe and certain other countries typically are adversely
affected in the summer months when business activity is reduced. Our revenue and
operating results may be adversely affected by diminished demand for products on
a seasonal basis.
31
Period-to-period comparisons of operating results are not a good indication of
future performance. It is likely that operating results in some quarters will be
below market expectations. In this event, the price of our common stock is
likely to decline.
If we fail to maintain our existing relationships or enter into new key
relationships with original equipment manufacturers and business development
organizations, our brand awareness and the use of our products and services
would suffer.
The success of our product and service offerings depends, in large part, on our
ability to develop and maintain relationships with original equipment
manufacturers and business development organizations that help distribute our
products and promote our services. We depend on these relationships to:
o distribute our products to purchasers of mobile devices;
o increase usage of our MAP components;
o build brand awareness through product marketing; and
o cooperatively market our products and services.
Also, because we depend on equipment manufacturers and business development
organizations to help distribute our products and promote our services, the
growth of our operations is dependent in part upon their success. If the
products that these companies sell, or the operating systems upon which these
products are based, were to lose popularity, or if any of these equipment
manufacturers or business development organizations cease to utilize our product
and service offerings in significant volumes, our business would suffer.
Rapid growth in our business could strain our resources and harm our business
and financial results.
The planned expansion of our Internet initiative as well as growth in our
existing enterprise business will place a significant strain on our management,
financial controls, operations systems, personnel and other resources. If we are
successful in implementing our marketing strategy, we also expect the demands on
our technical support resources to grow rapidly, and we may experience
difficulties responding to customer demand for our services and providing
technical support in accordance with our customers' expectations. We expect that
these demands will require not only the addition of new management personnel,
but also the development of additional expertise by existing management
personnel and the establishment of long-term relationships with third-party
service vendors. Additionally, we have recently opened an additional office in
the United Kingdom and intend to open new offices elsewhere in Europe and other
international locations. We may encounter difficulties in integrating
information and communications systems in multiple locations. We may not be able
to keep pace with growth, successfully implement and maintain our operational
and financial systems or successfully obtain, integrate and utilize the
employees, facilities, third-party vendors and equipment, or management,
operational and financial resources necessary to manage a developing and
expanding business in our evolving and increasingly competitive industry. If we
are unable to manage growth effectively, we may lose customers or fail to
attract new customers and our business and financial results will suffer.
32
Because tracking Internet-based information across the entire worldwide Web is a
highly complex process, our products and services may have errors or defects
that could seriously harm our business.
The tracking of Internet-based information across the entire worldwide Web is a
highly complex process. We and our customers have, from time to time, discovered
errors and defects in our software. In the future, there may be additional
errors and defects in our software that may adversely affect our products and
services. If we are unable to efficiently fix errors or other problems that may
be identified, we could experience:
o loss of or delay in revenue and loss of market share;
o loss of customers;
o failure to attract new customers or achieve market acceptance;
o diversion of development resources;
o loss of reputation and credibility;
o increased service costs; and
o legal actions by our customers.
If we are unable to successfully expand our professional services organization,
customer satisfaction and demand for our products will suffer.
We believe that successful implementation of our technology by our customers and
future growth in our product sales depend on our ability to provide our
customers with professional services, including customer support, training,
consulting and initial implementation and deployment of our products. We have
developed an in-house professional services organization with employees who can
perform these tasks and who also educate third-party systems integrators in the
use of our products so that they can
provide these services to our customers. Competition for qualified professional
services personnel is intense due to the limited number of people who have the
requisite knowledge and skills. As a result, we may not be able to attract or
retain a sufficient number of qualified professional services personnel. If we
are unable to develop sufficient relationships with third-party systems
integrators and our professional services organization is under-staffed, we
could be unable to complete implementations in a timely manner, which would
cause delays in revenue recognition. In addition, if we do not provide adequate
customer support, consulting and training for our customers, we could face
customer dissatisfaction, damage to our reputation and decreased overall demand
for our products.
Acquisitions we have made and may make in the future could disrupt our business
or not be successful and harm our financial condition.
We have in the past acquired or made investments in, and intend in the future to
acquire or make investments in other complementary companies, products and
technologies. We have acquired certain assets of Windward and SwiftTouch and
acquired Dry Creek, NetMind, ProxiNet, SoftMagic Corporation, RealWorld
Solutions, Inc. and IntelliLink Corporation. In the event of any future
acquisitions or investments, we could:
o issue stock that would dilute the ownership of our then existing
stockholders;
33
o incur debt;
o assume liabilities;
o face the Securities and Exchange Commission (SEC) challenges to the
accounting treatment of these acquisitions which may result in changes
to our financial statements and cause us to incur charges to earnings
over time that we did not expect;
o incur amortization expenses related to goodwill and other intangible
assets; or
o incur large and immediate write-offs.
These acquisitions and investments also involve numerous risks, including:
o problems integrating the operations, technologies or products purchased
with those we already have;
o unanticipated costs and liabilities;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers and
customers;
o risks associated with entering markets in which we have no or limited
prior experience; and
o potential loss of key employees, particularly those of the acquired
organizations.
We have anti-takeover defenses that could delay or prevent a takeover that
stockholders may consider favorable.
Certain provisions of our certificate of incorporation and bylaws and provisions
of Delaware law could have the effect of delaying, deferring or preventing an
acquisition of us. These provisions include a
classified board of directors and limitations on actions by our stockholders by
written consent. In addition, our board of directors has the right to issue up
to 2,000,000 shares of "blank check" preferred stock without stockholder
approval, which could be used to dilute the stock ownership of a potential
hostile acquirer. The preferred stock we issue could have mandatory redemption
features, liquidation preference and other rights that are senior to the rights
of common stockholders. Delaware law also imposes some restrictions on mergers
and other business combinations between us and any holder of 15% or more of our
outstanding common stock. Although we believe these provisions provide for an
opportunity to receive a higher bid by requiring potential acquirers to
negotiate with our board of directors, these provisions apply even if the offer
may be considered beneficial by some stockholders.
In addition, our stockholders may not take actions by written consent and our
stockholders are limited in their ability to make proposals at stockholder
meetings.
Our common stock will likely be subject to substantial price and volume
fluctuations due to a number of factors, some of which are beyond our control.
The trading price of our common stock has been and is likely to continue to be
highly volatile. Our stock price is subject to wide fluctuations in response to
a variety of factors including:
o quarterly variations in operating results;
34
o announcements of technological innovations;
o announcements of new software or services by us or our competitors;
o changes in financial estimates by securities analysts; or
o other events beyond our control.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the trading prices of equity
securities of many high technology companies. These fluctuations have often been
unrelated or disproportionate to the operating performance of these companies.
Any negative change in the public's perception of Internet or Internet software
companies or companies in the wireless communications market could depress our
stock price regardless of our operating results.
Recently, when the market price of a stock has been volatile, holders of that
stock have often instituted securities class action litigation against the
company that issued the stock when such stock declines. If any of our
stockholders brought such a lawsuit against us, we could incur substantial costs
defending the lawsuit. The lawsuit could also divert the time and attention of
our management.
We expect that our future operating results could fluctuate significantly as a
result of numerous factors including, but not limited to, the demand for our
products, our success in developing new products, the timing of new product
introductions by us and our competitors, the timing of releases of new handheld
devices by our customers, market acceptance of our new and enhanced products,
the emergence of new industry standards, the timing of customer orders, the mix
of products sold, competition, the mix of distribution channels employed, the
evolving and unpredictable nature of the markets for our products and mobile
computing devices generally, the rate of growth of the personal computer market
in general and general economic conditions.
We may require additional capital, which we may not be able to obtain.
The expansion and development of our business may require additional capital in
the future to fund our operating losses, working capital needs and capital
expenditures. Historically we have relied on the capital markets, including a
private placement in March 2000 to raise money for our working capital and
capital expenditure needs. The capital markets are very volatile and we may not
be able to obtain future equity or debt financing in the future on satisfactory
terms or at all. Our failure to generate sufficient cash flows from sales of
products and services or to raise sufficient funds may require us to delay or
abandon some or all of our development and expansion plans or otherwise forego
market opportunities. Our inability to obtain additional capital on satisfactory
terms may delay or prevent the expansion of our business, which could cause our
business, operating results and financial condition to suffer.
Our working capital is primarily comprised of cash, short-term investments,
accounts receivable, inventory, other current assets, accounts payable, accrued
expenses, deferred revenue and current portion of notes payable. The timing and
amount of our future capital requirements may vary significantly depending on
numerous factors, including our financial performance, technological,
competitive and other developments in our industry. These factors may cause our
actual revenue and costs to vary from expected amounts, possibly to a material
degree, and such variations are likely to affect our future capital
requirements.
35
We are dependent on our international operations for a significant portion of
our revenues.
Our international activities expose us to additional risks. International
revenue, primarily from customers based in Japan, accounted for 26% of our
revenue in the nine months ended April 30, 2001, 27% of revenue in fiscal 2000,
and 40% of revenue in fiscal 1999. A key component of our strategy is to further
expand our international activities. As we continue to expand internationally,
we are increasingly subject to risks of doing business internationally,
including:
o unexpected changes in regulatory requirements and tariffs;
o export controls relating to encryption technology and other export
restrictions;
o political and economic instability;
o difficulties in staffing and managing foreign operations;
o reduced protection for intellectual property rights in some countries;
o longer payment cycles;
o problems in collecting accounts receivable;
o potentially adverse tax consequences;
o seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world;
o fluctuations in currency exchange rates that may make our products more
expensive to international customers;
o gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations
due to foreign currency denominated sales;
o nonrefundable withholding taxes on royalty income from customers in
certain countries, such as Japan and Taiwan; and
o an adverse effect on our provision for income taxes based on the amount
and mix of income from foreign customers; and
o exposure to risk of non-payment by customers in foreign countries with
highly inflationary economies.
Any of these risks could harm our international operations. For example, some
European countries already have laws and regulations related to content
distributed on the Internet and technologies used on the Internet that are more
strict than those currently in force in the United States. The European
Parliament has recently adopted a directive relating to the reform of copyright
in the European Community that will, if made into law, restrict caching and
mirroring. Any or all of these factors could cause our business and prospects to
suffer.
Our international sales growth will be limited if we are unable to establish
additional foreign operations, expand international sales channel management and
support, hire additional personnel, customize products for local markets and
develop relationships with international service providers, distributors and
36
device manufacturers. Even if we are able to successfully expand international
operations, we cannot be certain that we will succeed in maintaining or
expanding international market demand for our products.
Foreign exchange fluctuations could decrease our revenues or cause us to lose
money, especially since we do not hedge against currency fluctuations.
To date, the majority of our customers have paid for our services in U.S.
dollars. Through the first three quarters fiscal 2001 and for the fiscal years
2000 and 1999, costs denominated in foreign currencies were nominal and we had
minimal foreign currency losses during those periods. However, we believe that
in the future an increasing portion of our costs will be denominated in foreign
currencies as we begin opening offices in Europe and other countries.
Fluctuations in the value of the Yen, Euro or other foreign currencies may cause
our business and prospects to suffer. We will also be exposed to increased risk
of non-payment by our customers in foreign countries, especially those with
highly inflationary economies. We currently do not engage in foreign exchange
hedging activities and, although we have not yet experienced any material losses
due to foreign currency fluctuation, our international revenues are currently
subject to the risks of foreign currency fluctuations and such risks will
increase as our international revenues increase.
Regulations or consumer concerns regarding privacy on the Internet could limit
market acceptance of our products and services.
Our products and services will allow our customers to develop and maintain Web
user profiles to tailor content to specific users. Profile development involves
both data supplied by the user and data derived from the user's Web site
behavior. Privacy concerns may cause users to resist providing personal data or
to avoid Web sites that track user behavior. In addition, legislative or
regulatory requirements may heighten consumer concerns if businesses must notify
Web site users that user profile data may be used to direct product promotion
and advertising to users. Other countries and political entities, such as the
European Economic Community, have adopted such legislation or regulatory
requirements. The United States may do so in the future. If privacy legislation
is enacted or consumer privacy concerns limit the market acceptance of
personalization software, our business, financial condition and operating
results could be harmed.
We use cookies to provide users convenient access to the Web sites they are
minding and to track demographic information and user preferences. A cookie is
information keyed to a specific user that is stored on a computer's hard drive,
typically without the user's knowledge. Cookies are generally removable by the
user, although removal could affect the content available on a particular site.
A number of governmental bodies and commentators in the United States and abroad
have urged passage of laws limiting or abolishing the use of cookies. If such
laws are passed or if users begin to delete or refuse cookies as a common
practice, market demand for our products and services could be reduced.
Increasing government regulation could cause demand for our products and
services to grow more slowly or to decline.
We are subject not only to regulations applicable to businesses generally, but
also to laws and regulations directly applicable to the Internet. Demand for our
products in certain countries, and our ability to meet this demand, is subject
to export controls on hardware and on the encryption software incorporated into
our products. In addition, state, federal and foreign governments may adopt laws
and regulations governing any of the following issues:
o user privacy;
o taxation of electronic commerce;
37
o the online distribution of specific material or content; and
o the characteristics and quality of online products and services.
One or more states or the federal government could enact regulations aimed at
companies like us, which provide software that facilitates e-commerce and the
distribution of content over the Internet. The likelihood of the enactment of
regulation in these areas will increase as the Internet becomes more pervasive
and extends to more people's daily lives. Any legislation, regulation or
taxation of or concerning electronic commerce could dampen the growth of the
Internet and decrease its acceptance as a communications and commercial medium.
If a reduction in growth occurs as a result of these events, demand for our
Internet service and other products could decline significantly.
Actions by major Web site providers to block our software from minding their
sites could limit market acceptance of our products.
One of the primary benefits of our products and services is that they bring
users back to a Web site through click-throughs on links within our change
notifications. This is generally very beneficial to Web site providers. These
providers do, however, have the ability to detect our monitoring of their sites
and could block our access to their site. Widespread blocking by major Web sites
could seriously limit market acceptance of our products.
There are many companies providing competing products and services.
There are few substantial barriers to entry and we expect that we will face
additional competition from existing competitors and new market entrants in the
future.
We currently face direct competition with respect to Satellite Forms, MAP and
its individual elements--Sync-it, Browse-it and Mind-it, and Intellisync.com.
Satellite Forms faces competition from Aether
Systems' ScoutBuilder, AppForge, Inc., iConverse, Inc., Metrowerks Code Warrior,
mPortal, Inc., and Pendragon Software Corporation. MAP infrastructure faces
competition from Aether, Hewlett Packard's Bluestone Software, Inc., IBM
Corporation, iConverse, Microsoft Corporation, mPortal, Openwave Systems, Inc.
and Sun Microsystems, Inc. Sync-it's synchronization features face competition
from Aether, AvantGo, Inc., Chapura, Inc., Extended Systems, Inc., FusionOne,
Inc., Infowave Software, Motorola, Inc., Synchrologic, Inc. and Wireless
Knowledge, Inc. Browse-it's transformation and mobile content distribution
features face competition from AlterEgo Networks, AvantGo, 4thpass LLC,
Handspring's Bluelark Systems, Neomar, Inc., Qualcomm, Inc., ThinkersGroup, Inc.
and Wireless Knowledge. In the area of alerts, change detection and analytics,
Mind-it faces competition from Adeptra, Inc., Alerts.com, Inc., BroadVision,
Inc., Categoric Software Corporation, Connotate Technologies, Inc. and
MicroStrategy, Inc. Intellisync.com faces competition from FusionOne, InfoSpace,
Inc., Palm Inc.'s my.palm.com, Synchrologic's ReadySyncGo, and Visto
Corporation. In addition to direct competition noted above, we face indirect
competition from existing and potential customers that may provide internally
developed solutions to each of the elements of MAP.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
Our larger competitors may be able to provide customers with additional benefits
in connection with their Internet systems and network solutions, including
reduced communications costs. As a result, these companies may be able to price
their products and services more competitively than we can and respond more
quickly than us to new or emerging technologies and changes in customer
requirements. If we are unable to compete successfully against our current or
future competitors, we may lose market share, and our business and prospects
would suffer.
38
Increased competition could result in:
o price and revenue reductions and lower profit margins;
o loss of customers or failure to obtain additional customers; and
o loss of market share.
Any one of these could materially and adversely affect our business, financial
condition and results of operations.
The integration of key new employees and officers into our management team has
interfered, and will continue to interfere, with our operations.
We may, in the near future, hire a number of key employees to our professional
services organization, research and development, administrative and sales and
marketing groups. To integrate into our company, new employees must spend a
significant amount of time learning our business model and management system, in
addition to performing their regular duties. Accordingly, the integration of new
personnel has resulted and will continue to result in some disruption to our
ongoing operations. If we fail to complete this integration in an efficient
manner, our business and financial results will suffer.
We must retain and attract key employees or else we may not grow or be
successful.
We are highly dependent on key members of our management and engineering staff.
The loss of one or more of these officers or key employees might impede the
achievement of our business objectives. Furthermore, recruiting and retaining
qualified technical personnel to perform research, development and technical
support is critical to our success. If our business grows, we will also need to
recruit a significant number of management, technical and other personnel for
our business. Competition for employees in our industry and geographic location
is intense. We may not be able to continue to attract and retain skilled and
experienced personnel on acceptable terms.
Our failure to adequately protect our proprietary rights may harm our
competitive position.
We rely on a combination of patents, copyrights, trademark, service mark and
trade secret laws and contractual restrictions to establish and protect
proprietary rights in our products and services. However, we will not be able to
protect our intellectual property if we are unable to enforce our rights or we
do not detect unauthorized use of our intellectual property.
Although we currently have 14 issued United States patents and have an
additional 12 patent applications pending, we cannot be certain that such
patents and patent applications will provide an adequate level of intellectual
property protection. In addition, we have corresponding international patent
applications pending under the Patent Cooperation Treaty in countries to be
designated at a later date. We cannot be certain that any pending or future
patent applications will be granted, that any pending or future patents will not
be challenged, invalidated or circumvented, or that rights granted under any
patent that may be issued will provide competitive advantages to us.
We have also provided our source code under escrow agreements and to foreign
translators which may increase the likelihood of misappropriation by third
parties.
We have applied for trademarks and service marks on certain terms and symbols
that we believe are important for our business. However, the steps we have taken
to protect our technology or intellectual
39
property may be inadequate. Our competitors may independently develop
technologies that are substantially equivalent or superior to ours. Moreover, in
other regions where we do business, such as in Africa, Asia-Pacific and Europe,
there may not be effective legal protection of patents and other proprietary
rights that we believe are important to our business.
As a matter of company policy, we enter into confidentiality and assignment
agreements with our employees, consultants and vendors. We also control access
to and distribution of our software, documents and other proprietary
information. Notwithstanding these precautions, it may be possible for an
unauthorized third party to copy or otherwise obtain and use our software or
other proprietary information or to develop similar software independently.
Policing unauthorized use of our products is difficult, particularly because the
global nature of the Internet makes it difficult to control the ultimate
destination or security of software and other transmitted data. The laws of
other countries may afford us little or no effective protection of our
intellectual property. The steps we have taken to prevent misappropriation of
our technology, including entering into agreements for that purpose may be
insufficient. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of our management
resources, either of which could harm our business.
We may be unable to license necessary technology and it may be subject to
infringement claims by third parties.
Our commercial success will also depend in part on not infringing the
proprietary rights of others and not breaching technology licenses that cover
technology used in our products. It is uncertain whether any third party patents
will require us to develop alternative technology or to alter our products or
processes, obtain licenses or cease activities that infringe on third party's
intellectual property rights. If any such licenses are required, we may not be
able to obtain such licenses on commercially favorable terms, if at all. Our
failure to obtain a license to any technology that we may require to
commercialize our products and services could cause our business and prospects
to suffer. Litigation may also be necessary to enforce any patents issued or
licensed to us or to determine the scope and validity of third party proprietary
rights.
We are dependent on non-exclusive licenses for certain technology included in
our products.
We depend on development tools provided by a limited number of third party
vendors. Together with application developers, we rely primarily upon software
development tools provided by companies in the PC and mobile computing device
industries. If any of these companies fail to support or maintain these
development tools, we will have to support the tools ourselves or transition to
another vendor. Any maintenance or our support of the tools or transition could
be time consuming, could delay product release and upgrade schedule and could
delay the development and availability of third party applications used on our
products. Failure to procure the needed software development tools or any delay
in availability of third party applications could negatively impact our ability
and the ability of third party application developers to release and support our
products or they could negatively and materially affect the acceptance and
demand for our products, business and prospects.
The risks associated with such non-exclusive third party licenses:
o If we are unable to continue to license the technology or to license
other necessary technologies for use with our products or if there are
substantial increases in royalty payments under third-party licenses,
it could jeopardize our operating results.
40
o The effective implementation of our products depends upon the
successful operation of these licenses in conjunction with our
products, and therefore any undetected errors in products resulting
from such licenses may prevent the implementation or impair the
functionality of our products, delay new product introductions and
injure our reputation. Such problems could have a material adverse
effect on our business, operating results and financial condition.
o Although we are generally indemnified against claims that the third
party technology we license infringes the proprietary rights of others,
this indemnification is not always available for all types of
intellectual property rights (for example, patents may be excluded)
and, in some cases, the scope of such indemnification is limited. Even
if we receive broad indemnification, third party indemnitors are not
always well-capitalized and may not be able to indemnify us in the
event of infringement, resulting in substantial exposure to us. There
can be no assurance that infringement or invalidity claims arising from
the incorporation of third party technology in our products, and claims
for indemnification from our customers resulting from these claims,
will not be asserted or prosecuted against us. These claims, even if
not meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential product
redevelopment costs and delays, all of which could materially adversely
affect our business, operating results and financial condition.
Our products may contain product errors that could subject us to product
liability claims.
Our products may contain undetected errors or failures when first introduced or
as new versions are released, which can result in loss of or delay in market
acceptance and could adversely impact future operating results. We do not
currently maintain product liability insurance. Although our license agreements
contain provisions limiting our liability in the case of damages resulting from
use of the software, in the event of such damages, we may be found liable, and
in such event such damages could materially affect our business, operating
results and financial condition.
System failures or accidental or intentional security breaches could disrupt our
operations, cause us to incur significant expenses, expose us to liability and
harm our reputation.
Our operations depend upon our ability to maintain and protect our computer
systems, which are located at our offices in California and New Hampshire. Our
systems are vulnerable to damage from break-ins, unauthorized access, vandalism,
fire, floods, earthquakes, power loss, telecommunications failures and similar
events. Although we maintain insurance against break-in, unauthorized access,
vandalism, fires, floods, earthquakes and general business interruptions, the
amount of coverage may not be adequate in any particular case, and will not
likely compensate us for all the damages caused by these or similar events. We
may be unable to prevent computer programmers or hackers from penetrating our
network security from time to time. A breach of our security could seriously
damage our reputation, which would harm our business. In addition, because a
hacker who penetrates our network security could misappropriate proprietary
information or cause interruptions in our services, we might be required to
expend significant resources to protect against, or to alleviate, problems
caused by hackers. We might also face liability to persons harmed by
misappropriation of secure information if it is determined that we did not
exercise sufficient care to protect our systems.
41
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including changes in interest rates,
foreign currency fluctuations, marketable equity security prices and market
values of our investments which could impact our results of operations and
financial condition. We currently do not utilize derivative financial
instruments to hedge such risks.
At April 30, 2001, we had an investment portfolio of fixed income securities
excluding those classified as cash and cash equivalents and securities available
for sale of $24,575,000. These securities, like all fixed income instruments,
are subject to interest rate risk and will fall in values if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by 10% from levels as of April 30, 2001, the decline of the fair value
of the portfolio would be immaterial. Our fixed income investments have
maturities of less than one year. While we have the intent to hold our fixed
income investments until maturity to avoid recognizing an adverse impact in
income or cash flows in the event of an increase in market interest rates, there
can be no assurance that we will be able to do so.
Due to the recent energy crisis in California that has caused a dramatic change
in the financial position of PG&E Corporation, PG&E has defaulted on the
interest and principal payments of its commercial paper obligations. Our
investment portfolio includes the PG&E commercial paper. Accordingly, we
recorded an adjustment of approximately $103,000 and $300,000 to the value of
our PG&E commercial paper for the impairment of this security in the three and
nine months ended April 30, 2001, respectively. This adjustment is reflected in
"Other income, net" in Condensed Consolidated Statements of Operations for the
three and nine months ended April 30, 2001. In April 2001, we sold our PG&E
commercial paper for the remaining book value of $700,000.
To date, substantially all of our recognized revenue has been denominated in
U.S. dollars and generated primarily from customers in the United States, and
our exposure to foreign currency exchange rates has been immaterial. We expect,
however, that more product and service revenue may also be derived from
international markets and may be denominated in the currency of the applicable
market in the future. As a result, our operating results may become subject to
significant fluctuations based upon changes in exchange rates of certain
currencies in relation to the U.S. dollar. We will also be exposed to increased
risk of non-payment by our customers in foreign countries, especially those of
highly inflationary economies. Furthermore, to the extent that we engage in
international sales denominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products and services
less competitive in international markets. Although we will continue to monitor
our exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot be assured that exchange rate fluctuations will not adversely affect
our financial results in the future.
We are subject to equity price risks on the marketable portion of investments in
publicly traded equity securities. These investments are generally in companies
having operations or technology in areas within our strategic focus. We do not
attempt to reduce or eliminate our market exposure on these securities. At April
30, 2001, the fair value of these investments is approximately $16,000. We
believe that a decline in the investments' fair values would not adversely
impact our results of operations.
We are a limited partner in a venture capital fund and invest directly in equity
instruments of privately-held companies, which include a number of our strategic
partners who are both customers and vendors, for business and strategic
purposes. These investments are included in other long-term assets and are
accounted for under the cost method as ownership is less than 5% and we do not
have the ability to exercise significant influence over operations. At April 30,
2001, these investments amounted to $2,306,000. (See Note 5 of the notes to the
unaudited condensed consolidated financial statements for more details.) For
these investments, we regularly review the assumptions underlying the operating
42
performance and cash flow forecasts in assessing the carrying values. We
identify and record impairment losses when events and circumstances indicate
that such assets might be impaired.
As of the end of the third quarter of fiscal 2001, we concluded that the
investments associated with YadaYada, Inc., If & Then, Inc., and PulseMD
Corporation were impaired as such investments were deemed not to be recoverable.
These investments were fully impaired due to changes in capital structure
impacting our investment preferences, thin capitalization, dilution due to
dramatic declines in valuations and overall lack of persuasive evidence that
would indicate a future ability or intent of these entities that would support
the carrying value of our investments. As a result, we recorded impairment
charges aggregating $1,180,000 for the three and nine months ended April 30,
2001.
Although we will continue to assess the carrying values of our investments, we
cannot be assured that a decline in value of our current and future investments
will not adversely affect our financial results in the future. Furthermore,
given the recent economic downturn and its effect on the capital markets, we
cannot be assured that any other investments we have can be fully recouped if at
all.
43
PUMATECH, INC.
PART II - OTHER INFORMATION
Item 1. Legal proceedings - Not Applicable
Item 2. Changes in securities and use of proceeds - Not Applicable
Item 3. Defaults upon senior securities - Not Applicable
Item 4. Submission of matters to a vote of security holders - Not Applicable
Item 5. Other information - Not Applicable
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.1 Loan and Security Agreement, dated March 29,
2001, by and between Imperial Bank and Pumatech,
Inc.
(b) Reports on Form 8-K - Not Applicable
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PUMATECH, INC.
(Registrant)
Date: June 13, 2001 By: /s/ KELLY J. HICKS
--------------------------------
Kelly J. Hicks
Vice President of Operations and
Chief Financial Officer (Principal
Financial and Accounting Officer)
45