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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21709
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PUMATECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0349154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 North First Street, Suite 500 95131
San Jose, California (ZIP Code)
(Address of principal executive offices)
(408) 321-7650
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 16, 2001, was approximately $79,016,391.
The number of the registrant's $0.001 par value Common Stock outstanding as
of October 16, 2001, was 42,882,251 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III
Certain sections of the Proxy Statement for registrant's 2001 Annual Meeting
of Stockholders to be held on December 6, 2001 to be filed with the Commission
pursuant to Registration 14A no later than 120 days after the end of the fiscal
year covered by this Form.
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TABLE OF CONTENTS
Page
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PART I.............................................................................................. 1
ITEM 1. Business................................................................................. 1
Overview................................................................................. 1
Industry Background...................................................................... 1
Our Technology Solutions................................................................. 2
Products................................................................................. 4
Technology............................................................................... 7
Professional Services Organization....................................................... 9
Sales and Marketing...................................................................... 10
Competition.............................................................................. 10
Customer Support......................................................................... 12
Research and Development................................................................. 12
Proprietary Rights....................................................................... 12
Employees................................................................................ 13
Business Risks........................................................................... 14
Executive Officers and Directors of the Registrant....................................... 29
ITEM 2. Properties............................................................................... 31
ITEM 3. Legal Proceedings........................................................................ 32
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 32
PART II............................................................................................. 33
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 33
ITEM 6. Selected Financial Data.................................................................. 34
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 36
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 50
ITEM 8. Financial Statements and Supplementary Data.............................................. 51
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure..... 51
PART III............................................................................................ 52
ITEM 10. Directors and Executive Officers of the Registrant....................................... 52
ITEM 11. Executive Compensation................................................................... 52
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................... 52
ITEM 13. Certain Relationships and Related Transactions........................................... 52
PART IV............................................................................................. 53
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 53
SIGNATURES.......................................................................................... 56
POWER OF ATTORNEY................................................................................... 56
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES..................................... F-1
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT......................................................... E-1
EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS..................................................... E-2
PART I
ITEM 1. BUSINESS
This annual report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. Words such as "anticipates," "believes,"
"excepts," "future," "plan," "intends" "should," and similar expressions are
used to identify forward-looking statement. These statements are only
predictions. The actual results that we achieve may differ materially from
those indicated in any forward looking statements due to the risks and
uncertainties set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business Risks" and elsewhere
in this Form 10-K. We undertake no obligation to revise any forward looking
statements in order to reflect events or circumstances that may arise after the
date of this report. Readers are urged to carefully review and consider the
various disclosures made by us in this report and our reports filed with the
Securities and Exchange Commission that attempt to advise interested parties on
the risks and factors that may affect our business.
Overview
Pumatech, Inc. (Pumatech or the "Company") was incorporated in California in
August 1993 and reincorporated in Delaware in November 1996, both under the
name Puma Technology, Inc. The Company changed its corporate name to Pumatech,
Inc. in December 2000. 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 provides several alternative implementations
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),
Enterprise Intellisync(TM), 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.
Industry Background
In recent years, significant advancements in miniaturization, visual
displays, long-life batteries and portable communications have led to the
introduction of many innovative, new mobile computing devices. These highly
portable devices allow users to work and communicate while they are away from
the office and have fueled the significant growth of mobile computing. The
growth of the mobile computing industry began with the widespread adoption of
notebook computers, which provided mobility and an extension of corporate
enterprise data, followed by the emergence of handheld devices to which
personal information was delivered locally from a desktop personal computer.
Today in this period of "anytime, anywhere" access, the mobile computing
industry is capitalizing on both wired and wireless access to information that
can reside on a personal computer (PC), an intranet/corporate server or even on
the Internet. This information or content is often highly customized, based on
distinct user preferences.
The mobile computing market is projected to grow in all handheld device
categories. Smart electronic consumer devices, such as personal electronic
organizers, smart phones and pagers have been proliferating rapidly, providing
data storage and information management capabilities to the mobile business
professional. Palm OS(R) devices such as the Palm V and Palm III, along with
Pocket PC, Windows CE, Handspring, Research in Motion (RIM) and Sony wireless
handhelds, are examples of popular handheld mobile devices. Industry analysts,
such as International Data Corporation (IDC), project that purchases of smart
handheld devices, notably of personal digital assistant (PDA) devices and 2-way
pagers, will grow substantially over the next three years,
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with a projected market of $26 million by 2004. The IDC forecast claims that
global shipments of smart handheld devices will increase from 12.9 million
units in 2000 to over 63.4 million by 2004. Aberdeen Group, on the other hand,
states in its recent industry report that the PDA market will reach $6.6
billion by 2005 with approximately 39 million units shipped. By 2002, Forrester
Research predicts that 45% of online users will connect to the Internet, their
home PCs or company servers via more than one device and consumers will spend
22% of online time on mobile devices. Forrester also reports that the number of
regular mobile online users will grow from 2 million in 2001 to 23 million in
2003 and that 26% of the mobile computing users in 2003 will have three or more
devices. Additionally, in its recent industry report, Gartner Dataquest
predicts that mobility-focused applications and consumer data services and
devices will increase the number of mobile computing users in North America
alone from 7.3 million in 2000 to 137.5 million in 2005. This growth will
result from the rollout of packet data networks, increased overall usage of
wireless devices to receive messages and e-mail, inexpensive wireless data
devices, and company-specific applications.
As more types of new mobile computing devices become available to business
professionals at an accelerating rate, users are faced with the difficulty of
exchanging information among these various devices. This problem of
interoperability is caused by the need to exchange information among different
hardware devices, operating systems and applications. Hardware platforms range
from high-speed Pentium PCs with hundreds of megabytes of memory and gigabytes
of storage, to "shirt pocket" organizers, with specialized processors and
limited memory and storage. In addition, these devices use numerous operating
systems, such asWindows 98, Windows 2000, Windows NT, Windows CE, DOS, Palm OS
and others, and utilize an even greater range of information management
applications, databases and data formats. Enabling these devices to
communicate, exchange and synchronize information is a complex and challenging
task. Accomplishing this requires data-level, or content-aware, synchronization
technology to maintain complete, up-to-date and accurate information. For
example, content-aware data synchronization technology allows users to exchange
addresses from the Address Book software application on a Palm OS handheld with
Microsoft Outlook on a desktop PC or Lotus Notes on corporate server, updating
only the fields that have been most recently modified, rather than copying one
file over another, thereby synchronizing both databases with the latest
information.
With the increasing mobility of work-forces, as well as additional
competitive pressures, business professionals are continuously seeking ways to
improve productivity and, as a result, are increasingly using the growing
number of new, innovative mobile computing devices. In order to manage
information effectively, these users need convenient connectivity and
synchronization solutions for the specific combination of devices and
applications that they use. These software solutions must allow users to
synchronize information maintained separately on multiple devices, for example,
contact databases maintained by a mobile professional using a handheld computer
in the field and by a support colleague using a desktop PC in the office. A
software solution that links such different devices must address multiple
hardware architectures, operating systems, communications architectures and
application-specific data formats and structures.
Our Technology Solutions
Our software solutions, anchored by the award-winning Intellisync family and
Satellite Forms software, along with our technology licensing
components--Browse-it, Mind-it, Sync-it and the Intellisync Software
Development Kit (Intellisync SDK)--are designed to increase productivity for
business professionals by allowing users to easily access, exchange and
synchronize information stored on a variety of different computing devices. Our
technologies, products and services allow the mobile professional to access
information with easy-to-use applications, saving time and money.
We also work closely with companies to embed our technologies into new and
existing applications by combining off-the-shelf products and custom-built
applications. By operating on multiple platforms and streamlining delivery of
information from common repositories such as the intranet, World Wide Web,
corporate PIM (Personal Information Management) applications and databases, we
extend information to the companies' points of business.
2
The Intellisync product family allows users to synchronize data on handheld
mobile computing devices with data on PCs and groupware servers by virtue of
our patented Data Synchronization Extensions Technology (DSX Technology(R)
engine). Intellisync Anywhere software automatically monitors in advance all
changes in the groupware application through the use of our Notification
Transport Processing Technology (NXP Technology(TM) engine), optimizing
workgroup server performance and minimizing synchronization time over
potentially expensive wireless connections. Intellisync for Notebooks, the
next-generation successor to our TranXit(R) product line, is designed to
utilize infrared connectivity (IR) technology for reliable, cost-effective file
exchange, synchronization and printing.
Satellite Forms software is the premier visual rapid application development
(RAD) tool for devices based on the Palm OS platform. Satellite Forms enables
software developers to extend custom enterprise applications to handheld
computers, and to seamlessly integrate these handheld solutions with enterprise
data from Oracle, DB2, Microsoft Access, and many other databases. Through this
integration, Satellite Forms acts as a catalyst for the proliferation of new
and diverse custom software applications.
Our technology licensing components include a variety of data access engines
geared to the mobile market, including a synchronization engine, a
change-detection and notification engine, and a Web-content rendering/browsing
engine.
Our technology solution includes the following characteristics:
. Intelligent, Content-Aware Data Synchronization. Our patented DSX
Technology engine provides content-aware data synchronization among a
growing number of handheld devices and industry-leading PIM software,
contact management and scheduling applications such as Microsoft Outlook,
Schedule+ and Exchange, Lotus Notes and Organizer, Symantec ACT!, Novell
GroupWise, and others. This technology seamlessly and transparently
translates the information from one data format to another as the
information is synchronized. Built on a powerful synchronization engine,
it can expand via device- and application-specific translators to
accommodate new devices and applications. With the Intellisync SDK, we
have enabled independent software vendors (ISVs), device original
equipment manufacturers (OEMs) and Internet-based services to build
synchronization solutions for their products on the Intellisync platform,
further entrenching our standard, and have lowered our own development
costs.
. Anytime, Anywhere Handheld Access to Corporate Application Standards. With
the Intellisync Anywhere product line, we are providing desktop, remote
and local area network-based (LAN-based) synchronization between and among
Palm OS and Pocket PC devices and the Microsoft Exchange and Lotus Domino
corporate groupware messaging server applications. Using wired or wireless
connections, users can synchronize e-mail, calendar, contact and task
information from virtually any location.
. Widespread Solutions for Interoperability. Our products provide
connectivity and content-aware data synchronization among industry-leading
PCs and mobile computing devices, operating systems and applications. Our
products operate with major PC operating systems for Windows 98, Windows
2000, Windows 2002 and Windows NT, as well as several proprietary
operating systems. We also provide interoperability across a wide range of
industry-standard and vendor-specific applications by supporting multiple
data formats. Our IR communications architecture enables robust operation
across IR-enabled platforms. Intellisync for Notebooks is backwards
compatible with previous versions of TranXit, allowing users to connect
and exchange information with all previous versions across different
operating systems.
. IR Connectivity Software. Both Intellisync for Notebooks and the TranXit
product family are specifically designed for file exchange and
synchronization over convenient wireless IR connections. They fully
support the Infrared Data Association (IrDA) standards, with TranXit being
the first file exchange software to incorporate the new Fast IR standard
(IrDA-2) for 4.0 megabits per second (Mbps) connectivity. They provide a
rich set of wireless file transfer, synchronization and wireless printing
features that are both easy to use and cost-effective. We have also
bundled either TranXit or Intellisync for Notebooks with the vast majority
of IR-enabled notebooks shipped worldwide.
3
connectivity. They provide a rich set of wireless file transfer,
synchronization and wireless printing features that are both easy to use
and cost-effective. We have also bundled either TranXit or Intellisync for
Notebooks with the vast majority of IR-enabled notebooks shipped
worldwide.
. Other Mobile Solutions Available for Licensing. Our technology licensing
components comprise a range of pre-built services, including Browse-it,
Mind-it, and Sync-it technologies, as well as the Intellisync SDK. These
pre-built services implement frequently-used functionality in a
language-independent, reusable fashion, so that users do not have to
invest their own effort in re-implementing these services for their
applications. Browse-it, the key Web rendering/browsing engine, is a
super-thin client that renders Web content that has been transformed by
Browse-it servers. Browse-it employs the look and feel of a desktop
browser, transforming handheld devices into information appliances, giving
mobile users full and immediate access to information and applications on
the Web, with the ability to conduct secure, encrypted transactions.
Mind-it allows users of Wireless Application Protocol (WAP) phones, cell
phones, handhelds, pagers, and PCs to track specific business and personal
information on the Internet and be notified promptly when that information
changes. Based on our synchronization software, Sync-it provides a single
destination for users to synchronize e-mail, calendars, and other
essential information among multiple devices and applications
simultaneously.
Products
We offer a wide range of software technologies, products and services to the
OEM, enterprise, retail and online markets. These technologies, products and
services allow users to synchronize the critical connections between both wired
and wireless handheld devices and the vast stores of information found in
corporate databases, the Internet and individuals' PC applications. By
combining our advanced data synchronization and IR connectivity technologies,
we are able to develop a number of products designed for a specific
application, operating system or hardware platform. We provide the tools needed
to create custom handheld applications. Our software enables users to view Web
pages online or offline via their Palm OS handheld devices. We also provide
change-detection/notification software, enabling users to track specific Web
information and be notified when that information changes.
Product Name Description Introduction Date
------------ ----------- -----------------
Synchronization Products
Intellisync Enables direct synchronization of calendars, e-mail, contacts, August 1996
and tasks between Palm OS, Windows CE/Pocket PC or
Symbian Release 5.0-compatible handhelds and the leading
PC-based PIM, contact management and groupware messaging
applications. With its patented DSX Technology engine,
Intellisync lets users simultaneously synchronize handheld
organizer data with multiple PC applications such as Microsoft
Outlook, Schedule + and Exchange, Lotus Notes and Organizer,
Novell GroupWise, ACT! and others.
Intellisync for Notebooks Sold through the OEM channel, Intellisync for Notebooks September 1997
provides PC-to-PC file transfer and synchronization, including
PIM-to-PIM synchronization over wireless IR, wired
connections and network connections. Intellisync for
Notebooks is the successor of our TranXit product line.
Intellisync Gold Designed for the corporate market, Intellisync Gold is an all-in- October 1997
one site licensing solution for synchronization between PCs and
Palm OS, Pocket PC, Windows CE and or Symbian Release
5.0-compatible handhelds.
4
Product Name Description Introduction Date
------------ ----------- -----------------
Intellisync Anywhere Provides remote and LAN-based synchronization between March 1999
handhelds and mission-critical enterprise groupware applications.
The three offerings in this product line--Intellisync Anywhere for
Microsoft Exchange, Intellisync Anywhere for Lotus Domino and
Intellisync Anywhere for Lotus Domino R5--let users stay up-to-
the-minute regardless of location. With Intellisync Anywhere and
a modem-enabled handheld device, users can securely connect
from the road by dial-up (via a RAS or PPP-compatible server) to
the Intellisync Anywhere Server. Or, users can connect down the
hall or even in another office just by placing their device into a
mobile device cradle connected to any PC on the LAN. Intellisync
Anywhere also allows for mobile notifications (or alerts) to SMS
(Systems Management Server)-capable cell phones and pagers
whenever a user receives a new e-mail from pre-specified
individuals or has new calendar items added.
Sync-it An ASP (Active Server Pages) solution that allows true, multi- February 2001
point, Web-based synchronization of contacts, calendar, tasks, and
e-mail between a handheld device and a home PC, work PC, or
Internet PIM, using a network, dial-up, or wireless connection to
the Internet.
Enterprise Intellisync Permits IT managers to efficiently deploy and manage desktop June 2001
implementations of Intellisync from one central location. It
includes Intellisync PC-to-handheld synchronization software,
plus an administrator console for tasks like deployment, license
management and troubleshooting. In one easy step, Intellisync
automatically synchronizes calendar, e-mail, contacts and tasks
with personal information management, contact management and
groupware applications, including Microsoft Outlook, Microsoft
Exchange, Lotus Notes and Novell GroupWise. Enterprise
Intellisync can be used in conjunction with Microsoft SMS or
other systems management software to distribute configured and
licensed copies of Intellisync.
IntelliZone(TM) Enables Palm OS handheld users to change time zones on their June 2001
device, automatically adjust e-mail and appointment times, update
the current time for daylight savings, and use a world map to
easily choose the correct region for a new time zone.
Change Detection/Notification Products
Mind-it A service for users who want to track business and personal February 2000
information on the Internet, intranets and extranets, and be (acquired)
notified in real-time via e-mail, the Web, or mobile devices,
including WAP and iMode phones, when that information
changes. Mind-it works with the browser and e-mail users already
have installed on their machines. It puts users in control by letting
them decide which portion of a page to track, how often to receive
updates, and where to be notified about the change.
Mind-it for Webmasters A program for Webmasters who want to integrate Mind-it buttons February 2000
into their sites, allowing people to easily track changes to any (acquired)
page or search and bring visitors back to the site.
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Product Name Description Introduction Date
------------ ----------- -----------------
Mind-it Server A secure, scalable server application that builds change- June 2000
detection/notification solutions, allowing users to monitor the
intranet, extranet, and/or the Internet, and to be notified when
specific information changes. Mind-it Server eliminates the
problem of searching for the same information when bookmarks
are not accessible. Mind-it HTML (hypertext markup language)-
to-WML (wireless markup language) transformation capabilities
ensure optimal viewing of highly relevant Web content on
WAP phones.
Application Development Tools
Intellisync Software Enables customers to develop translator software for both February 1998
Development Kit applications and devices, which can be incorporated into
(Intellisync SDK) Intellisync product offerings. It provides a 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.
Satellite Forms A rapid application development (RAD) tool, Satellite Forms July 1998
lets developers quickly create and deploy custom handheld (acquired)
applications for Palm OS devices, which can be tightly
integrated with desktop or network databases, including Oracle,
DB2, and Microsoft Access. Through this integration, Satellite
Forms acts as a catalyst for the proliferation of new and diverse
custom software applications.
Satellite Forms Enterprise Provides a flexible and extensible RAD platform for connecting August 2000
Edition 4.0 Palm OS handhelds to mission-critical enterprise data. Users can
create custom Palm OS applications that connect to enterprise
data via a PC or that utilize Satellite Forms Server.
Satellite Forms Server Provides secure, concurrent, server-based synchronization with August 2000
enterprise data, while also delivering convenient Web-based
management of users, groups, devices and applications.
Integration of the Satellite Forms Server with the Satellite
Forms Enterprise Edition RAD tool allows developers to
quickly build robust applications that utilize the server's
database connectivity capabilities. The server provides
additional functionality that extends the reach of mobile users.
In addition, device and application administration can be
performed anywhere with the Satellite Forms Web-based
management console.
Intellisync for Web A ready-to-use desktop software solution that enables users of July 2000
Internet PIM software to synchronize their contacts, calendar, (acquired)
tasks and e-mail to leading PIMs and devices including
Microsoft Outlook and Palm OS devices. Intellisync for Web
incorporates the Intellisync synchronization engine, and
provides full two-way synchronization including conflict
resolution, field mapping and data filtering.
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Product Name Description Introduction Date
------------ ----------- -----------------
Intellisync for A ready-to-use desktop software solution that enables users of PIM July 2000
Desktop PIMs software to synchronize their contacts, calendar, tasks and e-mail to (acquired)
leading PIMs and devices including Microsoft Outlook and Palm OS
devices. Intellisync for Desktop incorporates the Intellisync
synchronization engine, and provides full two-way synchronization
including conflict resolution, field mapping and data filtering.
Web Rendering/Browsing Product
Browse-it A server-based transformation engine that turns HTML pages into live, June 2000
interactive content uniquely reformatted for Palm OS handheld devices.
Browse-it enables users to view Web content, including color graphics,
online on Palm OS handhelds via a wireless or wireline modem with no
re-authoring required, as well as to take "Snapshots" for offline viewing
when online access is not available.
Technology
Our software products allow the exchange and synchronization of data across
diverse platforms, operating systems and applications. We have developed three
complementary proprietary technologies--the DSX Technology engine for
content-aware data synchronization, NXP Technology engine for optimizing
performance of wireless connections and IR connectivity. In addition, our
technology licensing components, including Browse-it, Mind-it, Sync-it and
Intellisync SDK technologies, implement functionality commonly used by many
applications. These complementary technologies, utilized individually and
together, enable us to provide comprehensive solutions that meet the market's
growing needs for convenient, accurate, easy-to-use data exchange,
synchronization and connectivity.
Content-Aware DSX Technology. Our content-aware Data Synchronization
Extensions Technology (DSX Technology engine) operates at both the file and
record level to synchronize data among different software applications and
hardware platforms during data transfer. With the DSX Technology engine, our
products allow users to synchronize not only files, but also the data within
those files, and synchronize databases by field or record, not just copy one
database file from one file to another. This advanced data synchronization
technology is composed of three main components that collectively work to
enable the effective transfer of data across supported applications and
platforms:
Synchronization Engine. Our proprietary synchronization engine is the
central component responsible for controlling the flow of data throughout
the entire synchronization process. It directs translator modules to
retrieve, add, delete, change and distribute data records or fields on
demand.
Intermediate Data Representation. Our synchronization technology makes
extensive use of modularity to maximize reusability for the translator
modules. The synchronization engine communicates with all translator modules
using a common "dialect," referred to as intermediate data representation.
Intermediate data representation stipulates rules for exchanging common
types of data imposing restrictions on data content (i.e., the number and
type of fields in each application). The existence of the intermediate data
representation makes it possible for a new translator to immediately
synchronize with any supported application or mobile computing device.
Translators. Each translator module is responsible for interfacing with
one application or mobile computing device. When operating under Windows, a
translator is packaged as a separate Dynamic Link Library (DLL) for maximum
reusability. The development of new translators (as well as the maintenance
of existing modules) is simplified by the existence of the translator
framework, a collection of powerful C++ classes that supply software
engineers with the necessary abstractions to quickly and easily develop
translator modules to meet expanding market needs.
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NXP Technology. A core technology underpinning the Intellisync Anywhere
product family of remote synchronization server solutions is Notification
Transport Processing Technology (NXP Technology). NXP Technology optimizes
performance for the increasingly common wireless connections by automatically
checking and preparing for synchronization of all new information for each
user, such as email and appointments, stored on corporate servers. This process
minimizes end user remote synchronization time and reduces the overhead on the
corporate messaging server itself.
IR Connectivity. Our infrared connectivity (IR) software enables the
wireless transfer of data between and among notebook and desktop PCs, printers
and mobile computing devices. Intellisync for Notebooks and the TranXit family
are designed to support IrDA standards, with TranXit being the first file
exchange and synchronization software to incorporate the new Fast IR standard
(IrDA-2) for 4.0 Mbps connectivity.
Communications Architecture. Our software is based upon an extensive,
proprietary, network- and device-independent communications architecture,
enabling access to a variety of mobile computing devices through a flexible
and simple application program interface (API) that speeds the development
of new features. A layered, modular design allows the architecture to
leverage existing published data transfer protocols (IrDA, Windows Sockets),
when available, and to create proprietary data transfer protocols to provide
connectivity to a broad range of devices without extensive modification of
the software.
Our IR communications architecture isolates hardware implementation
details from the rest of the protocol stack, enabling quick support of new
IR hardware implementations and fast adoption of new IR standards and
extensions. The architecture supports multiple vendors' implementation of
IrDA protocol stacks for migration to new operating systems and platforms.
Our communication protocols are designed to operate across a variety of
network and operating system environments, enabling mobile data exchange
among them. Our software currently supports data transfer among Windows for
Workgroups, Windows 3.1, Windows 95, Windows 98 and Windows 2000. We have
also worked with Microsoft Corporation to ensure that the Microsoft IR
driver supports Mobile Data Exchange among operating systems and IR devices.
Technology Licensing Components. As the mobile solutions of today are highly
fragmented, many companies and other users are forced to license point
solutions from multiple vendors to address their complete needs. To address
this problem, we developed and made available various technologies that support
a broad range of mobile devices and services, which include a variety of data
access engines geared to the mobile market: a Web content rendering/ browsing
engine (Browse-it), a change-detection/notification engine (Mind-it), and a
synchronization engine (Sync-it) in addition to the Intellisync SDK that uses
the DSX technology engine described above.
. Browse-it.
Browse-it facilitates both on-line (real-time) and offline access to
dynamic Web content via Palm OS handhelds. Browse-it can deliver Web
content in a variety of markup languages including Compact HTML (used for
i-mode in Japan) and standard Internet formats such as HTML and Extensible
Markup Language (XML). Browse-it uses a client-server architecture to
offload the work of content transformation to a powerful server, reducing
the load on the client and increasing performance. A thin Browse-it client
is available for devices lacking a standard browsing client. For example,
a small Browse-it client is currently available for Palm OS handheld
devices, supporting both efficient online and offline viewing of Web
pages. The Browse-it server includes multiple components that make the
viewing of Web-based data a robust user experience on a handheld device: a
Web switch and front-end (FE) that communicates with mobile devices using
well-known encryption technology (DESX); Distillers that are responsible
for filtering and transforming the Web page elements for rendering on the
given mobile device; a cache that is used to improve overall service
performance and reduce access frequency to the network; and advanced
128-bit encryption technology (SSL) to access Web content from secure
sites.
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. Mind-it.
Mind-it is a change detection and notification service based on
patented technology developed by NetMind, one of the companies we acquired
in fiscal 2000. In its current form, the Web contains a huge volume of
publisher-centric and unqualified information that must be viewed from a
large display. Given the inherent size and capacity limitations of mobile
devices such as phones and pagers, it is simply impractical to rely on the
general Web browsing model for these classes of devices and still achieve
a reasonable degree of usability. Mobile devices are designed for
selective access to Web content, and this is precisely the goal of the
Mind-it. The user explicitly chooses items of interest and receives only
changes matching his or her personal criteria. No senseless browsing over
slow wireless networks, and no spamming of irrelevant information. Mind-it
puts the user in the driver's seat and lets him or her control precisely
the changes and information that are received. Mind-it was designed with a
highly scalable, enterprise level architecture, and as such incorporates
separate, independent software modules. Responder is used to interact with
the end-user at the Web-interface layer, permitting user account settings
and the creation of change detection and alert requests. Detector
constantly monitors those pages on the Internet that have been specified
as containing relevant data by the user (via the Responder interface) and
uses intelligent algorithms to detect changes at a specific and granular
level. Notifier takes care of personalizing and sending (to different form
factors and networks) alerts to mobile devices over standard means such as
Simple Mail Transfer Protocol (SMTP), WAP and Short Message Service (SMS).
And finally, Storer is responsible for managing the persistent database of
relevant information on behalf of each subscriber.
. Sync-it.
Based on Pumatech's synchronization software, our Sync-it technology
enables multipoint, two-way synchronization via the Internet. Using a hub
and spoke model, Sync-it is designed from the ground up to support
synchronization of contacts, calendars, tasks, and e-mail between the most
popular devices, operating systems and applications--seamlessly and
accurately. In the Sync-it model, the Sync-it server becomes the central
data repository, deployed within a corporate firewall or in an ASP
configuration. Each device and/or application represents a sync point
or--to use the hub and spoke analogy--"a spoke on the wheel."
Professional Services Organization
Our Professional Services Organization, created in July 2000 with the
acquisition of Dry Creek Software (Dry Creek) and renamed The Windward Group
(Windward) following the October 2000 acquisition of the company by the same
name, provides business application experience, technical expertise and product
knowledge to complement our various mobile technologies and to provide
solutions to customers' business requirements. The Windward Group specializes
in creating consumer and enterprise solutions that combine handheld, mobile,
wireless, desktop, Internet, synchronization, back-office applications and
database technologies. We work across multiple phases of development projects:
business analysis and strategic technology consulting, project management,
design, engineering, quality assurance, software testing, localization and
technical writing.
The Windward Group Platforms. Our initial area of expertise was UNIX
client/server applications and IBM mainframe and midrange systems and
databases. With the rise in popularity and capability of personal computers and
handheld devices, we branched out into new platforms, particularly Palm OS, and
expanded our expertise with Web-based technologies such as Java, JavaScript,
Dynamic HTML, XML, sActiveX controls and Web server extensions. With the
increasing size of the mobile market, we increased our focus on delivering
customized solutions based on existing technologies, integrating Intellisync,
Browse-it, Mind-it, and Sync-it applications. In the area of communications,
our projects have ranged from driver-level security protocol implementations to
intermediate-level raw and stream socket work, to high-level API interfaces for
HTTP employed in synchronizing desktop and Web data.
9
Sales and Marketing
We strive to be both a marketing and a technology partner with our OEM
customers and our strategic partners. Our sales and marketing organization
sells our products directly to our OEM partners, and then works with them on
joint marketing and channel programs. We work closely with OEM partners on
their new hardware products by providing them with technical input, thereby
helping to ensure that our software products will work successfully with the
OEM's hardware products. We also train and educate the OEM's sales and
marketing organizations on our products, allowing them to act as our "virtual"
sales force to their channels and direct customers. In addition, we work
closely with our hardware and software strategic partners to develop effective
marketing programs designed to increase sales.
We distribute our retail products through several distribution channels both
domestically and internationally. In the United States, our sales organization
works directly with major distributors, resellers, computer dealers, retailers
and mail-order companies to distribute our retail packaged products.
Increasingly, we are also distributing our software products directly to
corporate customers through the Intellisync Gold, Enterprise Intellisync and
Intellisync Anywhere enterprise site license programs. In order to further
develop our brand name recognition, we plan to continue to expand our joint
marketing programs, marketing channel promotions and bundling arrangements with
our strategic partners.
Revenue from OEMs was approximately 27%, 62% and 54% of revenue in fiscal
2001, fiscal 2000, and fiscal 1999, respectively. Although several OEMs are
subject to certain contractual minimum purchase obligations, there can be no
assurance that any particular OEM will satisfy the minimum obligations.
Weakening demand from any key OEM and the inability to replace revenue provided
by such an OEM could have a material adverse effect on our business, operating
results and financial condition. We maintain individually significant
receivable balances from major OEMs. If these OEMs fail to meet their payment
obligations, our operating results could be materially and adversely affected.
We market and sell through selected distributors and republishers that focus
on specific geographic and market segment areas. These international partners
operate as an extension of our marketing and sales organizations, developing
the appropriate sales channels in their regions. They also work with local
resellers as well as local offices of our OEM customers to develop specific
marketing and channel promotions for their regions. As of July 31, 2001, we
were represented by over 30 distributors and resellers in Africa, Asia,
Australia, Canada, Europe, New Zealand and South America and are continuing to
expand our international reach as appropriate distributors or republishers are
found. Our international revenue was 26%, 27% and 40% of total revenue in
fiscal 2001, 2000 and 1999, respectively. Also, refer to section "We are
dependent on our international operations for a significant portion of our
revenues" below under the caption "Business Risks."
Our current customer base includes major OEMs in the PC market. No customers
accounted for more than 10% of total revenue in fiscal 2001 and 2000. In fiscal
1999, Toshiba Corporation accounted for approximately 14% and no other customer
accounted for more than 10% of our revenue.
Competition
We expect the market for our software, including data synchronization and
technology licensing components to the extent they develop, to become intensely
competitive. To maintain or increase our competitive advantage, we will
continually need to enhance our current product, service and technology
offerings, introduce new product features and enhancements, and expand our
professional service capabilities. We currently face direct competition with
respect to our Intellisync, Intellisync Anywhere, Enterprise Intellisync,
Satellite Forms, Sync-it, Browse-it and Mind-it products. Intellisync retail
and Enterprise products face competition from AvantGo Inc.'s Pylon Conduit,
Chapura, Inc.'s Pocket Mirror, Duke Communications' (Group Computing) EasySync
Pro, Extended Systems, Inc., IBM Corporation's Lotus Software, Laplink, Inc.'s
PDASync, and Palm Desktop from Palm, Inc. Satellite Forms faces competition
from Aether Systems' ScoutBuilder, AppForge, Inc., iConverse, Inc., Metrowerks
Code Warrior, mPortal, Inc., Pencel Corporation, Pendragon Software
Corporation,
10
and Salsa Software. Our server-based software and Sync-it product's
synchronization features face competition from Aether, AvantGo, Chapura,
Extended Systems, 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,
AU-Systems, AvantGo, Everypath, Inc., 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., MicroStrategy, Inc., and
724 Solutions Inc.
In addition to direct competition noted above, we face indirect competition
from existing and potential customers that may provide internally developed
solutions for each of our technology licensing components. As a result, we must
educate prospective customers as to the advantage of our products versus
internally developed solutions. We currently face limited direct competition
from major applications and operating systems software vendors who may in the
future choose to incorporate data synchronization functionality into their
operating systems software, thereby potentially reducing the need for OEMs to
include our products in their notebook and desktop PCs. For example,
Microsoft's inclusion of certain features permitting data synchronization
between computers utilizing the Windows 98 or Windows 2000 operating system may
have the effect of reducing revenue from our software if users of Windows 98 or
Windows 2000 perceive that their data synchronization needs are adequately met
by Microsoft. Other competing companies providing increased "real-time" time
access to corporate data via wireless connectivity from mobile devices, such as
Palm OS, Windows CE, RIM wireless handhelds and WAP phones, may have given
users the perception that "off-line" synchronization would not be valuable or
may not be needed at all. We, therefore, may need to educate our prospective
customers on the advantages of "off-line" synchronization and other features of
our products vs. competitive products or services that have provided
"real-time" access to users who may find inconsistent service and 24/7
ubiquitous access between network carriers frustrating and unsatisfactory.
Certain companies, with whom we compete or may compete in the future,
including internal software development groups of our current and potential
customers, have substantially greater financial, marketing, sales and support
resources and may have more "brand-name" recognition than we do. There can be
no assurance that we will be able to either develop software comparable or
superior to software offered by our current or future competitors or to adapt
to new technologies, evolving industry standards and changes in customer
requirements. In addition, the PC and mobile computing device markets
experience intense price competition, and we expect in order to remain
competitive we may have to decrease our unit royalties on certain products.
The principal competitive factors affecting the market for our software are
compatibility, functionality, reliability, OEM relationships and price. We
believe we compete favorably overall with respect to these factors.
We believe that users will want to be able to license point solutions from a
single vendor to address their complete needs, and that our technology
licensing components will support a broad range of mobile devices and services
to allow us to compete favorably with other companies with no similar platform
or whose mobile solutions are highly fragmented.
We believe that users will want to be able to utilize data synchronization
functionality with a wide variety of mobile computing devices and software
applications, and that our standards-based approach will continue to allow us
to compete favorably with larger companies whose products may not be able to
support such a degree of interoperability. Our strategic relationships with
hardware and software vendors enable us to provide interoperability among a
broader range of applications than many of our current and potential
competitors.
Also, refer to section "There are many companies providing competing
products and services" below under the caption "Business Risks."
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Customer Support
Our service and support organization provides secondary technical support to
OEMs, primary technical support to retailers and end users, and education and
training services to OEMs and retailers. We also utilize an outsourced vendor
to provide technical support related to the majority of our retail products.
Our current OEMs typically have software maintenance agreements with us. These
agreements provide for technical support and include maintenance of our
products in accordance with specifications contained in our guidelines for such
products, as well as access to technical support personnel by telephone, fax
and e-mail. Customers under license agreements are typically entitled to
certain minor product updates and modifications, primarily bug fixes. Our OEMs
and some of our retail channel partners provide telephone and initial support
to end-users.
Research and Development
We seek to capitalize on our expertise in data synchronization technology by
developing products for new applications and increasing the functionality of
existing products. We believe our core DSX Technology and NXP Technology
engines are widely applicable, and we plan to continue to develop new products
and expand our technology licensing components with additional mobile solutions
based on our core technologies.
As of July 31, 2001, our engineering group consisted of 107 full-time
employees and full-time equivalent consultants, which reflects the effect of
recent termination as a result of cost reduction plans we implemented in the
third and fourth quarters of fiscal 2001. Employees in our engineering group
are engaged in product development and localization efforts for existing
products. Product maintenance and customer support responsibilities are shared
by engineering group employees on an as-needed basis. In fiscal 2001, fiscal
2000 and fiscal 1999, research and development expenses were $23.7 million,
$17.9 million and $12.5 million, respectively.
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. We first introduced our TranXit products in
October 1994. Our future success will depend to a substantial degree upon our
ability to enhance our existing products and to develop and introduce, on a
timely and cost-effective basis, new products and features that meet changing
customer requirements and emerging and evolving industry standards. We plan our
budget for research and development based on planned product introductions and
enhancements; however, actual expenditures may significantly differ from
budgeted expenditures. Inherent in the product development process are a number
of risks. The development of new, technologically advanced software products is
a complex and uncertain process requiring high levels of innovation, as well as
accurate anticipation of technological and market trends. The introduction of
new or enhanced products also requires us to manage the transition from older
products in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demand. There can be no
assurance that we will successfully develop, introduce or manage the transition
to new products. We have in the past, and may in the future, experience delays
in the introduction of our products, due to factors internal and external. Any
future delays in the introduction or shipment of new or enhanced products, the
inability of such products to gain market acceptance or problems associated
with new product transitions could adversely affect our operating results,
particularly on a quarterly basis. Also, refer to section "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" below under the caption "Business Risks."
Proprietary Rights
We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. We also believe that factors such as technological and
creative skills of our personnel, new product developments, frequent product
enhancements and name recognition are essential to establishing and maintaining
a technology leadership position. We seek to protect our software,
documentation and other written materials under trade secret and copyright
laws, which afford only
12
limited protection. We currently have 16 issued United States patents that
expire in 2012 through 2018 and have 18 patent applications pending. There can
be no assurance that our patents will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to us or that any of our pending or future patent applications,
whether or not being currently challenged by applicable governmental patent
examiners, will be issued with the scope of the claims sought by us, if at all.
Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to our technology or design around
the patents owned by us. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
the our products is difficult, and while we are unable to determine the extent
to which piracy of our software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not ensure that our means of protecting our proprietary rights in
the United States or abroad will be adequate or that competition will not
independently develop similar technology. We have entered into source code
escrow agreements with a limited number of our customers and resellers
requiring release of source code in certain circumstances. Such agreements
generally provide that such parties will have a limited, non-exclusive right to
use such code in the event that there is a bankruptcy proceeding by or against
us, if we cease to do business or if we fail to meet our support obligations.
We also provide our source code to foreign language translation service
providers and to consultants in a limited circumstance. The provision of source
code may increase the likelihood of misappropriation by third parties.
We are not aware of any infringement of proprietary rights of any third
party. There can be no assurance, however, that third parties will not claim
infringement by us of their intellectual property rights. We expect that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps and as patent
protection for software becomes increasingly popular. Any such claims, with or
without merit, could be time consuming to defend, resulting in costly
litigation, divert our attention and resources or cause product shipment
delays. In addition, such claims could require us to discontinue the use of
certain software codes or processes, to cease the manufacture, use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that we would be able to
develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially acceptable to us. In the
event of a successful claim of product infringement against us and failure or
inability to license the infringed or similar technology, our business,
operating results and financial condition would be materially adversely
affected. Also, refer to section "Our failure to adequately protect our
propriety rights may harm our competitive position" below under the caption
"Business Risks."
Employees
As of July 31, 2001, we had 223 employees and full-time equivalent
consultants, including 68 in sales and marketing, 107 in engineering, 25 in
professional services and 23 in operations, finance and administration. These
numbers reflect an approximately 35% reduction in our workforce as a result of
our cost reduction programs implemented during April and July of 2001. Refer to
Note 11 of Notes to Consolidated Financials Statements set forth in Part IV of
this report on Form 10-K for information on the cost reduction plans.
All of our employees are located in the United States with the exception of
22, who are located in our foreign offices in Australia, Canada, Germany,
Japan, Sweden and United Kingdom. None is represented by a labor union. We have
experienced no work stoppages and believe our relationship with our employees
is good.
Competition for qualified personnel in our industry is intense. We believe
that our future success will depend in part on our continued ability to hire,
train and retain qualified personnel. Also, refer to section "We must retain
and attract key employees or else we may not grow or be successful" below under
the caption "Business Risks."
13
Business Risks
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.
Recent terrorist activities and resulting military and other actions could
adversely affect our business.
The recent terrorist attacks in the United States, which have brought
devastation to many people and shaken consumer confidence, have disrupted
commerce throughout the world. The continued threat of terrorism within the
United States and other countries and heightened security measures, as well as
the current military action, in response to such threat may cause significant
disruption to the global economy, including widespread recession. To the extent
that such disruptions result in a general decrease in consumer spending and
demand for our products and services, our inability to effectively market our
products, or financial or operational difficulties for various vendors on which
we rely for certain integral services used to support our operations, our
business and results of operations could be materially and adversely affected.
We are unable to predict whether the threat of terrorism or the responses
thereto will result in any long-term commercial disruptions or if such
activities or responses will have any long-term material adverse effect on our
business, results of operations or financial condition.
We are exposed to recent unfavorable economic conditions that have resulted
in lower revenue, suspension of our online service offering and actions to
reduce operating expenses, and continued or worsened conditions may result in
additional actions to reduce operating expenses.
We believe largely as a result of recent unfavorable economic conditions
which have delayed or postponed corporate IT spending, our revenue has declined
sequentially in both the third and fourth quarters of fiscal 2001 compared to
the previous two quarters. In addition, due to slow adoption of Web-based
service offerings as well as the delay of wireless handheld device deployment
in United States corporations, we suspended indefinitely the release to the
general public of our Intellisync.com/SM/ online service offering. We also
incurred adjustments and other charges associated with actions we recently
implemented aimed at reducing operating expenses. While we expect the current
economic conditions to continue well into fiscal 2002, there can be no
certainty as to the severity or duration of the economic slowdown. We also
cannot predict the extent and timing, if any, of the impact of economic
slowdown 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 also 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.
Historically, we have derived 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 the failure 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.
14
The recent unfavorable economic conditions may severely affect a number of
our customers as well as vendors, which may subsequently harm our business
and results of operations.
Economic slowdowns could cause many of our 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 economic uncertainties.
Economic slowdowns may also affect the various vendors on whom 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.
Our investment in goodwill and intangibles resulting from our acquisitions
could become impaired.
As of July 31, 2001, our goodwill and other intangibles, which are currently
being amortized over a period of 18 months to five years, amounted to $12.8
million, net of accumulated amortization. We will continue to amortize our
goodwill, $2.7 million for fiscal 2002, until our adoption in fiscal 2003 of
Statement of Financial Accounting Standards (SFAS) No. 142, which requires the
discontinuance of goodwill amortization. We will amortize approximately $2.4
million and $800,000 for other intangibles in fiscal 2002 and 2003,
respectively. However, to the extent we do not generate sufficient cash flows
to recover the net amount of any investment in goodwill and intangibles
recorded, the investment could be considered impaired and could be subject to
earlier write-off. In such events, our results of operations in any given
period could be negatively impacted. Refer to Note 12 of Notes to Consolidated
Financial Statements set forth in Part IV of this report on Form 10-K for
information on impairment charges we recorded on certain goodwill and
intangibles in fiscal 2001.
We may incur significant stock-based compensation charges related to our
stock option cancellation/regrant programs in future periods.
Under the guidance in Financial Accounting Standards Board (FASB)
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of Accounting Principles Board (APB) Opinion
No. 25, we have incurred and will continue to incur variable accounting charges
related to certain stock options under our cancellation/regrant programs. These
charges have been and will be based on the amount by which the common stock
closing price at the end of the reporting period or date of exercise,
forfeiture, cancellation without replacements, if earlier, exceeds the exercise
price. The charge is amortized on an accelerated basis over the remaining
vesting period of four years consistent with the method described by FASB
Interpretation (FIN) No. 28. Depending upon movements in the market value of
our common stock, the variable accounting treatment of certain stock options we
granted may result in significant additional non-cash compensation charges in
future periods. Refer to the caption "Non-Cash Stock Compensation" set forth
under Results of Operations in Part II, Item 7 of this report on Form 10-K and
Notes 10 and 18 of the Notes to Consolidated Financial Statements for more
information on our recent cancellations/regrant programs.
Our business and prospects depend on demand for and market acceptance of the
wireless devices and mobile computing devices.
The use of wireless devices and mobile computing devices for retrieving,
sharing and transferring information among businesses, consumers, suppliers and
partners has begun to develop only in recent years. Our success will depend in
large part on continued growth in the use of wireless devices and mobile
computing devices including personal digital assistants, handheld computers,
smart phones, pagers and other mobile devices. Critical issues concerning the
commercial use of wireless devices and mobile computing devices, 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
15
our services. The adoption of 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 wireless devices and mobile
computing devices are subject to a high level of uncertainty and are dependent
on a number of factors, including:
. the growth in access to, and market acceptance of, new interactive
technologies;
. emergence of a viable and sustainable market for wireless and mobile
computing services;
. the development of technologies that facilitate interactive communication
between organizations; and
. increases in bandwidth for data transmission.
If the market for 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 the wireless and mobile computing 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 other
current and planned services, our revenue will not grow significantly and our
business, results of operations and financial condition will be seriously
harmed.
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, a new and 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:
. the effectiveness of our marketing strategy and efforts;
. our product and service differentiation and quality;
. our ability to provide timely, effective customer support;
. our distribution and pricing strategies as compared to our competitors;
. growth in the sales of handheld devices supported by our software and
growth in wireless network capabilities to match end user demand and
requirements;
. our industry reputation; and
. general economic conditions such as slowdowns in the computer or software
markets or the economy in general.
16
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:
. our technology or systems may become obsolete upon the introduction of
alternative technologies;
. 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
. 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.
We have experienced losses and may not achieved sustained profitability in
the future.
An investor in our common stock should consider the risks, expenses and
difficulties that young companies frequently encounter in the new and rapidly
evolving market for wireless and mobile computing products and services. These
risks to us include:
. our evolving, new business model;
. our need and ability to manage growth; and
. rapid evolution of technology.
To address these risks and uncertainties, we must take several steps,
including:
. creating and maintaining strategic relationships;
. expanding sales and marketing activities;
. integrating existing and acquired technologies;
. expanding our customer base and retaining key clients;
. introducing and expanding new services, including our professional
services organization;
. managing rapidly growing operations, including new facilities and
information technology infrastructure;
. competing in a highly competitive market; and
. attracting, retaining and motivating key employees.
We may not be successful in implementing any of our strategies or in
addressing these risks and uncertainties. Despite cost reduction measures we
implemented in the third and fourth quarters of fiscal 2001, we expect that we
will continue to incur reasonable costs, primarily as a result of our
investment in various initiatives to enhance our existing products, develop and
introduce, on a timely and cost-effective basis, new products and technologies
that meet changing customer requirements, and develop our professional services
17
organization. Moreover, even if we accomplish our objectives, we still may not
achieve sustainable profitability in the future.
There can be no assurance that we will generate sufficient revenues to meet
expenses or to operate profitably in the future. These losses present a
significant risk to our stockholders. If we cannot achieve profitability or
positive cash flows from operating activities, we may be unable to meet our
working capital and other payment obligations, which would have a material
adverse effect on our business, financial condition and results of operation
and the price of our common stock.
Operating results may fluctuate significantly and may be difficult to
predict.
Our operating results have fluctuated in the past, and with the integration
of the ProxiNet, Inc. (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:
. the demand for our products and services;
. our success in developing new products and integrating acquired
technologies;
. the timing of new product introductions by us and our competitors;
. market acceptance of our new and enhanced products and services;
. market acceptance of handheld devices generally, and those supported by
our products and services;
. the emergence of new industry standards;
. the timing of customer orders;
. the mix of products and services sold;
. product life cycles;
. competition;
. the mix of distribution channels employed;
. seasonal trends;
. the timing and magnitude of our capital expenditures, including costs
relating to the expansion of operations;
. the evolving and unpredictable nature of the markets for our products and
mobile computing devices generally;
. the rate of growth of the market for personal computer, wireless devices
and mobile computing devices in general; and
. 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, 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.
18
Due to our ongoing efforts to expand into retail and reseller channels, we
are focusing our efforts on licensing our server and personal applications, as
well as out technology licensing components--Browse-it, Mind-it, Sync-it and
the Intellisync SDK--to corporations, software developers and mobile computing
device manufacturers. As a result, we expect that our notebook and PC OEM
revenue will continue to decrease as a percentage of our overall revenue. This
new sales strategy has the following risks:
. sales into these channels are harder to predict and may have lower margins
than sales in other channels;
. we have a very limited history in penetration and support for these
channels;
. the average transaction size and sales cycle vary significantly, making
forecasting difficult;
. smaller transactions may have relatively higher administrative costs;
. any significant deferral of purchases of our products by customers could
jeopardize our operating results in any particular quarter;
. to the extent that significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected;
. products that are accepted in the OEM market may not be readily accepted
by corporations;
. we may incur increased costs related to new infrastructure requirements;
and
. 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 acquired Dry Creek in fiscal 2000 and, in
connection with the acquisition of assets of Windward in fiscal 2001, we hired
a number of employees of Windward to form the basis of our professional
services group. Consequently, professional service revenue increased relatively
in the first three quarters of fiscal 2001. Such 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 gross margins
as a percent of total revenue. On the other hand, any decrease in utilization
of employees in the professional services group brought about by a decrease in
demand for implementation services may also result in gross margin on service
revenue remaining low. Other factors that may affect gross margins include
price changes or increased spending in response to competition or to pursue new
market opportunities.
The operating results of many software companies reflect seasonal
fluctuations. 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.
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:
. distribute our products to purchasers of mobile devices;
. increase usage of our technology licensing components;
19
. build brand awareness through product marketing; and
. 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.
If we are unable to provide satisfactory and quality services through 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.
If we are unable to develop sufficient relationships with third-party systems
integrators and other customers, unable to complete product implementations in
a timely manner, and unable to provide customers with satisfactory and quality
support, consulting, maintenance and other services, we could face customer
dissatisfaction, damage to our reputation, decreased overall demand for our
products and loss of revenue.
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:
. quarterly variations in operating results;
. announcements of technological innovations;
. announcements of new software or services by us or our competitors;
. changes in financial estimates by securities analysts; or
. other events beyond our control, including general market conditions.
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. Furthermore,
our operating results and prospects from time to time may be below the
expectations of public market analysts and investors. Any negative change in
the public's perception of 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.
20
Nasdaq could delist Pumatech common stock if we do not maintain compliance
with Nasdaq's minimum bid price or continue to comply with financial,
corporate governance, and other standards for continued listing.
Our common stock is listed on the Nasdaq National Market. In order to
maintain our listing on the Nasdaq National Market we must meet minimum
financial and other requirements. If our stock price fails to close at $1.00 or
higher for 30 consecutive days, Nasdaq may determine that we are not in
compliance with its listing requirements and commence proceedings to have our
stock delisted from the National Market. Although Nasdaq has declared a
temporary moratorium on delisting for failure to meet the $1 minimum bid price
requirement, if the minimum bid price of our common stock is below $1 for 30
consecutive trading days after the moratorium is lifted, our common stock may
be delisted. In such case, while we intend to request an appeal of any
potential delisting notice and undertake measures intended to maintain our
listing, such as proposing reverse split, there can be no assurance that our
common stock will remain listed on the Nasdaq National Market. Additional
reasons for delisting include failure to maintain a minimum amount of
stockholders' equity, and failure to timely file various reports with the SEC,
as well as other requirements. There are also circumstances where Nasdaq may
exercise broad discretionary authority for continued inclusion. If our common
stock were delisted from Nasdaq for any reason, it could materially reduce the
value of our common stock and its liquidity.
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. Currently, we have a commitment with a venture capital firm that
invests in companies 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 slowdown, there is a greater risk that the investments might be
impaired. Refer to Note 4 of the Notes to Consolidated Financial Statements set
forth in part IV of this report on Form 10-K for impairment charge we recorded
on certain investments in fiscal 2001. Any impairment of such investments in
the future could have a material adverse effect on our results of operations
and financial condition.
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%, 27% and
40% of our revenue in fiscal 2001, 2000, and 1999, respectively. 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:
. unexpected changes in regulatory requirements and tariffs;
. export controls relating to encryption technology and other export
restrictions;
. political and economic instability;
. difficulties in staffing and managing foreign operations;
. reduced protection for intellectual property rights in some countries;
. longer payment cycles;
. problems in collecting accounts receivable;
. potentially adverse tax consequences;
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world;
. fluctuations in currency exchange rates that may make our products more
expensive to international customers;
21
. gains and losses on the conversion to United States dollars of accounts
receivable and accounts payable arising from international operations due
to foreign currency denominated sales;
. nonrefundable withholding taxes on royalty income from customers in
certain countries, such as Japan and Taiwan; and
. an adverse effect on our provision for income taxes based on the amount
and mix of income from foreign customers; and
. 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 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 theses factors could cause our business and prospects to suffer.
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 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 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 United
States dollars. For the fiscal years 2001, 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 ramp up
our offices in Europe and open offices in 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.
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:
. issue stock that would dilute the ownership of our then existing
stockholders;
. incur debt;
22
. assume liabilities;
. 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;
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
These acquisitions and investments also involve numerous risks, including:
. problems integrating the operations, technologies or products purchased
with those we already have;
. unanticipated costs and liabilities;
. diversion of management's attention from our core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited
prior experience; and
. potential loss of key employees, particularly those of the acquired
organizations.
For information on the impairment charges we recorded in fiscal 2001 on
certain goodwill and identifiable intangibles and other related assets held for
disposal, refer to Note 12 of Notes to Consolidated Financial Statements set
forth in Part IV of this report on Form 10-K.
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 Pumatech. 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.
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.
23
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, and technological and
competitive 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.
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.
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.
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 wireless and mobile
computing devices. 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:
. taxation of electronic commerce;
. the wireless distribution of specific material or content; and
. the characteristics and quality of mobile 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
wireless communications. The likelihood of the enactment of regulation in these
areas will increase as the wireless and mobile devices become more pervasive
and extend to
24
more people's daily lives. Any legislation, regulation or taxation of or
concerning electronic commerce could dampen the growth of wireless and mobile
computing devices 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 services, technologies and other products could decline
significantly.
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 our Intellisync,
Intellisync Anywhere and Enterprise Intellisync, Satellite Forms, Sync-it,
Browse-it and Mind-it products. Intellisync retail and Enterprise products face
competition from AvantGo Inc.'s Pylon Conduit, Chapura, Inc.'s Pocket Mirror,
Duke Communications' (Group Computing) EasySync Pro, Extended Systems, Inc.,
IBM Corporation's Lotus Software, Laplink, Inc.'s PDASync, and Palm Desktop
from Palm, Inc. Satellite Forms faces competition from Aether Systems'
ScoutBuilder, AppForge, Inc., iConverse, Inc., Metrowerks Code Warrior,
mPortal, Inc., Pencel Corporation, Pendragon Software Corporation, and Salsa
Software. Our server-based software and Sync-it product's synchronization
features face competition from Aether, AvantGo, Chapura, Extended Systems,
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, AU-Systems,
AvantGo, Everypath, Inc., 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., MicroStrategy, Inc., and 724
Solutions Inc. In addition to direct competition noted, we face indirect
competition from existing and potential customers that may provide internally
developed solutions to each of our technology licensing components.
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 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.
Increased competition could result in:
. price and revenue reductions and lower profit margins;
. loss of customers or failure to obtain additional customers; and
. 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
may interfere with our operations.
We may, in the 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 may result in some disruption to
25
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 16 issued United States patents and have an
additional 18 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 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.
26
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:
. 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.
. 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.
. 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
27
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 and core business applications, which are located at our offices, as
well as hosted by a third party vendor. 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. In addition, while we
put various security measures in place to detect any unauthorized access to our
computers and computer networks, we may be unable to prevent computer
programmers or hackers from penetrating our network security or creating
viruses to sabotage or otherwise attack our computer networks 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.
Rapid growth in our business could strain our resources and harm our business
and financial results.
Any plan to expand and develop our existing enterprise and professional
services 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. In addition, we recently opened additional offices
in Europe and other international locations and may require opening more
offices in United States and international locations in the future. In such
cases, 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.
28
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Bradley A. Rowe......... 41 President, Chief Executive Officer and Director
Stephen A. Nicol........ 41 Executive Vice President of Sales and
BusinessDevelopment, Secretary and Director
Kelly J. Hicks.......... 39 Vice President of Operations and Chief Financial
Officer
John W. Stossel......... 37 Vice President of Professional Services
Richard Walker.......... 44 Vice President of Marketing and Online Services
Michael M. Clair........ 53 Chairman of the Board
M. Bruce Nakao.......... 57 Director
Michael J. Praisner +... 55 Director
Kirsten Berg-Painter *.. 41 Director
--------
+ Mr. Praisner became a director of Pumatech in April 2001
* Ms. Berg-Painter became a director of Pumatech in August 2001
Mr. Rowe co-founded Pumatech in August 1993 and has served as president
since October 1993 and chief executive officer since March 1995. He has also
served as a director of Pumatech since August 1993. Prior to founding Pumatech,
from January 1991 to July 1993, he held various management positions at
SystemSoft Corporation, a PC system software supplier, including vice president
of worldwide sales and general manager of desktop computing. In June 1988, Mr.
Rowe co-founded Extar Technologies, a manufacturer's representative of PC
products, where he held a number of management positions, including vice
president of sales and president until December 1990. From November 1983 to
June 1988, Mr. Rowe served in various sales positions at Western Digital
Corporation, a storage management company, including director of western area
sales. Mr. Rowe currently serves as a director of several privately-held
companies. Mr. Rowe holds a BS degree in engineering and management science
from Princeton University.
Mr. Nicol co-founded Pumatech in August 1993. He served as senior vice
president of sales of Pumatech until November 1999, when he was appointed
senior vice president of sales and business development. He has also served as
a director of Pumatech since August 1993. Prior to founding Pumatech, he served
in several capacities at SystemSoft Corporation, including director of sales
for Japan and Asia Pacific from July 1992 to July 1993 and as sales manager for
the Eastern United States from November 1991 to July 1992. Mr. Nicol co-founded
Extar Technologies in June 1988 where he served until November 1991 as vice
president of sales. Previously, Mr. Nicol served as OEM manager for Western
Digital Corporation and computer sales representative for Hewlett-Packard
Company, a global provider of computing and imaging solutions and services. He
holds an AB degree in Political Science from Princeton University.
Mr. Hicks became the chief financial officer and vice president of
operations of Pumatech in May 1999. From November 1998 to May 1999, Mr. Hicks
served as vice president of finance and operations of Luminate Software, Inc.,
a provider of service level management software solutions. Mr. Hicks also
served as corporate controller of Pumatech from January 1997 to November 1998.
From 1991 to January 1997, Mr. Hicks served in various capacities with The
Santa Cruz Operation, Inc., a UNIX software development company, last serving
as corporate controller. Mr. Hicks holds a BS degree in business administration
with a concentration in Finance from California State University, Chico.
Mr. Stossel became the vice president of professional services of Pumatech
in July 2000. From February 1999 to July 2000, Mr. Stossel served as a member
of Dry Creek Software LLC, a mobile computing professional services firm he
founded in February 1999 and was acquired by Pumatech in July 2000. Prior to
founding Dry Creek, Mr. Stossel served as vice president of engineering of
Pumatech from July 1997 to
29
January 1999. Mr. Stossel was also founder and chief executive officer from
January 1994 to July 1997 of RealWorld Solutions which provided enterprise
class software enabling handheld devices to access data over the Internet and
wireless networks. RealWorld was acquired by Pumatech in July 1997. Previously,
Mr. Stossel held a variety of management and engineering positions at Apple
Computer, Inc., a personal computing company, and Charles Schwab & Co., Inc.,
an online brokerage firm. Mr. Stossel is a dual-degree graduate of the
University of Pennsylvania and holds a BS degree in Economics from Wharton
School along with a BAS concentrating in Electrical Engineering engineering
positions at Apple Computer, Inc., a personal computing company, and Charles
Schwab & Co., Inc., an online brokerage firm. Mr. Stossel is a dual-degree
graduate of the University of Pennsylvania and holds a BS degree in Economics
from Wharton School along with a BAS concentrating in Electrical Engineering.
Mr. Walker became the vice president of marketing and online services of
Pumatech in November 2000. Prior to joining Pumatech, Mr. Walker has served as
an independent information technology consultant. From October 1999 to
September 2000, Mr. Walker was founder, president and chief executive officer
of TapCast, a mobile portal combining the Internet with wireless technology for
the consumer youth market. From May 1998 to October 1999, Mr. Walker served as
vice president of marketing for Terastor Corporation, developer of
revolutionary optical recording system based on Near Field Recording
Technology. From April 1983 to May 1998, Mr. Walker served in various
capacities with Hewlett-Packard, working in North America, Europe and Asia. His
accomplishments at Hewlett-Packard included managing the company's commercial
PC business in Asia Pacific, driving the worldwide marketing of handheld
products, and serving as a founding member of the executive staff for the
company's entry into the consumer PC business. He holds a bachelor's of
business degree from Sheffield Polytechnic (now Sheffield University) in
Sheffield, England.
Mr. Clair became a director of Pumatech in December 1994 and has served as
chairman of the board of Pumatech since March 1995. Since June 1995, Mr. Clair
has served as an independent financial consultant. Mr. Clair was a founder of
SynOptics Communications (now Nortel Networks), a computer networking company,
and from January 1987 to November 1992, served as vice president of sales and
marketing and then as senior vice president of sales and customer service of
SynOptics. Mr. Clair has more than 25 years of experience in data processing,
data and voice communications and local area networking. He spent the early
part of his career with Tymshare, Inc., a computer time-sharing company, and
ROLM, a manufacturer of digital PBX equipment, in a variety of sales and
marketing positions. He holds a BS degree in business and an MBA degree from
the University of Buffalo. Mr. Clair is a director of several private
companies.
Mr. Nakao became a director of Pumatech in May 1999. Prior to joining
Pumatech's board of directors, from June 1996 to May 1999, Mr. Nakao was senior
vice president, finance and administration and the chief financial officer of
Pumatech. Prior to that, from May 1986 to June 1996, Mr. Nakao served in
several capacities at Adobe Systems Incorporated, a software company, most
recently as its senior vice president, finance and administration, chief
financial officer and treasurer. Prior to his retirement Mr. Nakao was with Ask
Jeeves, Inc., an Internet search company, where he served as its senior vice
president, finance and administration and chief financial officer from April
1999 until July 2000. He holds a BA degree in business and economics from the
University of Washington and a MBA degree from Stanford University.
Mr. Praisner became a director of Pumatech in April 2001. Prior to his
retirement, from April 1998 to October 1999, Mr. Praisner served as vice
president of finance and administration and chief financial officer of
Beyond.com Corporation, an online software resale company. From 1995 to 1997,
Mr. Praisner served as vice president, finance and administration, chief
financial officer, and secretary of Silicon Storage Technology, Inc., a
supplier of flash memory devices. From 1994 to 1995, Mr. Praisner served as
vice president, finance and chief financial officer of MicroModule Systems,
Inc., a manufacturer of multichip modules for computer and telecommunications
applications. From 1992 to 1993, Mr. Praisner served as vice president, finance
and chief financial officer of Electronics for Imaging, Inc., a manufacturer of
color desktop publishing computer systems. During part of 1991, Mr. Praisner
served as vice president, finance and chief financial officer of Digital Link
Corp., a computer communications equipment company. From 1989 to 1991, Mr.
Praisner served as corporate
30
controller of Applied Materials Inc., a manufacturer of semiconductor wafer
fabrication equipment. He holds a BA degree in liberal arts and MBA degree from
Southern Methodist University and is a Certified Public Accountant.
Ms. Berg-Painter became a director of Pumatech in August 2001. Since
November 2000, Ms. Berg-Painter has served as an independent marketing
consultant. From July 1998 to October 2000, Ms. Berg-Painter served as senior
vice president of worldwide marketing at Clarify, Inc. (now a division of
Nortel Networks), a software developer. From 1989 to 1998, Ms. Berg-Painter
served in various capacities with Aspect Communications Corporation, a provider
of customer relationship portals, last serving as general manager and vice
president of one of its product divisions. Previously, Ms. Berg-Painter served
as director of product marketing for AST Research, Inc., a personal computer
manufacturer; as director of marketing for Syntellect, Inc., a provider of
call-center technology and hosted service solutions; and in various marketing
positions at IBM, a provider of computer hardware and software, in Norway. Ms.
Berg-Painter currently serves as a member of the advisory board for On Your
Mind, Inc., an enterprise software company. She holds a BA degree in business
and economics from University of California, Los Angeles and attended business
school at Norges Handleshoyskolen in Bergen, Norway.
ITEM 2. PROPERTIES
At July 31, 2001, we leased the facilities described below:
Lease
Location Function Square Feet Expiration Date
-------- -------- ----------- ---------------
California
San Jose, CA Corporate headquarters; administrative offices,
sales and marketing 31,952/(1)/ June 2006
Los Gatos, CA Professional services 15,000 August 2005
Santa Cruz, CA Engineering 20,924/(2)/ April 2006
Campbell, CA 5,500/(3)/ August 2002
Emeryville, CA 6,753/(4)/ August 2003
New Hampshire
Nashua, NH Engineering, product marketing, and technical
support for Intellisync family of products 18,688 November 2003
9,006/(3)/ October 2003
International
Farnham, United Kingdom Sales and marketing 1,037 January 2005
Tokyo, Japan Sales and marketing and administrative offices 3,024 July 2002
--------
/(1)/30% of property is subleased until May 2003.
/(2)/28% of property is available for sublease.
/(3)/Subleased for the duration of the lease term.
/(4)/Available for sublease.
As part of the restructuring we implemented in fiscal 1999, we vacated a
portion of our San Jose and Nashua facilities. The total restructure charge
related to this facility was $558,000. The unused balance as of July 31, 2001
was $173,000. We have secured a tenant for the vacated portion of the San Jose
facility.
As part of the cost reduction plans implemented during the third and fourth
quarters of fiscal 2001, we consolidated facilities with space located in Santa
Cruz, California and Nashua, New Hampshire. Accordingly, we incurred a total
charge for anticipated lease payments and vacancy costs of approximately
$573,000, of which $568,000 remained unused at July 31, 2001. Those facilities
in Santa Cruz, Campbell, Emeryville and Nashua that we vacated as a result of
consolidating our offices are subleased or available for sublease.
31
We believe that our existing facilities are suitable for our present
purposes and that we can locate and acquire additional space when and as it is
needed although we cannot be certain that such space can be acquired on terms
acceptable to us.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any litigation that we believe will have a material
adverse effect on our consolidated financial condition, results of operations,
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of fiscal year 2001.
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pumatech's common stock began trading on the Nasdaq National Market on
December 5, 1996, under the symbol "PUMA." The following table sets forth the
high and low closing prices for our common stock as reported on the Nasdaq
National Market from August 1, 1999, through July 31, 2001. These prices are
adjusted for the two-for-one stock split in the form of a stock dividend paid
to our stockholders on March 22, 2000. These prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
High Low
-------- --------
Fiscal 2000
-----------
First fiscal quarter (August 1, 1999 to October 31,1999)........ $18.5000 $ 2.1875
Second fiscal quarter (November 1, 1999 to January 31, 2000).... 65.3125 17.5000
Third fiscal quarter (February 1, 2000 to April 30, 2000)....... 98.0000 22.8750
Fourth fiscal quarter (May 1, 2000 to July 31, 2000)............ 37.0000 19.7500
Fiscal 2001
-----------
First fiscal quarter (August 1, 2000 to October 31, 2000)....... 26.6250 12.2500
Second fiscal quarter (November 1, 2000 to January 31, 2001).... 16.7500 3.8125
Third fiscal quarter (February 1, 2001 to April 30, 2001)....... 9.2500 2.5400
Fourth fiscal quarter (May 1, 2001 to July 31, 2001)............ 4.8100 2.0300
As of October 16, 2001, there were approximately 395 stockholders of record
of our common stock and 44,882,251 shares of common stock outstanding.
Additionally, on such date the last reported closing sale price of our common
stock, as reported by the Nasdaq National Market, was $2.2401 per share.
We have never paid dividends on our capital stock. We currently intend to
retain any future earnings for use in our business and do not anticipate paying
any cash dividends in the foreseeable future.
33
ITEM 6. SELECTED FINANCIAL DATA
This summary of our consolidated financial information for fiscal years 1997
to 2001 should be read along with our audited consolidated financial statements
contained in this Annual Report on Form 10-K. The summarized financial
information, other than the statement of operations data for fiscal 1997 and
1998 and the balance sheet data at July 31, 1997, 1998 and 1999, was taken from
these financial statements.
This summary of consolidated financial statements include the accounts of
Pumatech and our wholly and majority owned subsidiaries, including the company
formerly known as NetMind Technologies, Inc. (NetMind) that merged with and
into a wholly-owned subsidiary of Pumatech on February 24, 2000 in a pooling of
interests transaction. All periods presented have been restated in order to
include the financial results of NetMind since inception.
A number of items affect the comparability of this information:
. The results of operations for fiscal year 2001 include the effect of a
$1,417,000 charge for severance costs, facilities consolidation and assets
held for disposal associated with the cost reduction programs implemented
in the third and fourth quarters of fiscal 2001. Additional charges were
incurred for write-downs of impaired intangibles and other assets of
$10,614,000 and direct investments of $1,180,000, and non-cash stock
compensation expense of $1,058,000 in connection with the options granted
by NetMind prior to the Company's acquisition of NetMind and the stock
option regrant program implemented in July 2001.
. The results of operations for fiscal years 2000 and 1999 include charges
of $2,002,000 and $410,000, respectively, for non-cash stock compensation
expense incurred in connection with the acquisition of NetMind and IPO of
Pumatech.
. The results of operations for fiscal year 2000 include a charge of
$4,218,000 for purchased in-process research and development in connection
with the acquisitions of ProxiNet, Inc. and a charge of $6,322,000 for
merger related expenses incurred in connection with the merger with
NetMind.
. The results of operations for fiscal years 2000 and 1999 include charges
of $3,877,000 and $4,238,000, respectively, for accretion of redeemable
convertible preferred stock in connection with the acquisition of NetMind.
. The results of operations for fiscal year 1999 include the effect of a
$768,000 charge associated with the restructuring program implemented for
the purpose of consolidating the majority of Pumatech's engineering and
development work at existing facilities in Nashua, New Hampshire.
. The results of operations for fiscal years 1998 and 1997 include charges
of $2,155,000 and $880,000, respectively, for purchased in-process
research and development in connection with the acquisitions of SoftMagic
Corporation, Real World Solutions and IntelliLink Corporation,
respectively.
34
Condensed Consolidated Statement of Operations Data
Year Ended July 31,
----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- -------
(In thousands, except per share data)
Revenue.................................................. $ 38,693 $ 30,813 $ 20,723 $22,341 $15,633
Cost of revenue and operating expenses................... 82,238 57,403 29,704 26,408 15,529
-------- -------- -------- ------- -------
Operating income (loss).................................. (43,545) (26,590) (8,981) (4,067) 104
Other income, net........................................ 3,344 5,023 3,868 1,077 820
Other-than-temporary impairment of direct investments.... (1,180) -- -- -- --
-------- -------- -------- ------- -------
Income (loss) before income taxes........................ (41,381) (21,567) (5,113) (2,990) 924
Provision for income taxes............................... (437) (632) (715) (1,164) (831)
-------- -------- -------- ------- -------
Net income (loss)........................................ (41,818) (22,199) (5,828) (4,154) 93
Accretion of mandatorily redeemable convertible preferred
stock to redemption value.............................. -- (3,877) (4,238) -- --
-------- -------- -------- ------- -------
Net income (loss) attributable to common stockholders.... $(41,818) $(26,076) $(10,066) $(4,154) $ 93
======== ======== ======== ======= =======
Basic and diluted net loss per share..................... $ (0.96) $ (0.74) $ (0.34) $ (0.15) $ --
Condensed Consolidated Balance Sheet Data
July 31,
----------------------------------------
2001 2000 1999 1998 1997
------- -------- ------- ------- -------
(In thousands)
Cash, cash equivalents and short-term investments.......... $48,908 $ 85,260 $28,516 $21,091 $21,180
Working capital............................................ 44,489 80,317 24,896 20,480 22,241
Total assets............................................... 78,934 118,655 37,122 30,745 29,530
Long-term obligations...................................... -- 310 -- 41 66
Total stockholders' equity................................. 68,192 105,077 18,201 25,824 26,242
Summary Condensed Quarterly Data
Three Months Ended
--------------------------------------------------------------------------
July 31, April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31,
2001 2001 2001 2000 2000 2000 2000 1999
-------- --------- -------- -------- -------- --------- -------- --------
(In thousands, except per share data)
Revenue....................... $ 7,114 $10,345 $11,311 $ 9,923 $ 9,026 $ 8,014 $ 7,361 $6,412
Cost of revenue and operating
expenses.................... 28,692 19,125 18,564 15,857 15,531 19,177 10,454 12,241
-------- ------- ------- ------- ------- -------- ------- --------
Operating loss................ (21,578) (8,780) (7,253) (5,934) (6,505) (11,163) (3,093) (5,829)
Net loss...................... (20,990) (9,274) (6,572) (4,982) (5,146) (10,013) (2,285) (4,755)
Accretion of mandatorily
redeemable convertible
preferred stock to
redemption value............ -- -- -- -- -- (577) (1,765) (1,535)
-------- ------- ------- ------- ------- -------- ------- --------
Net loss attributable to
common stockholders......... $(20,990) $(9,274) $(6,572) $(4,982) $(5,146) $(10,590) $(4,050) $(6,290)
======== ======= ======= ======= ======= ======== ======= ========
Basic and diluted net loss per
share....................... $ (0.47) $ (0.21) $ (0.15) $ (0.12) $ (0.12) $ (0.26) $ (0.11) $(0.20)
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and included elsewhere
in our annual report on Form 10-K for the fiscal year ended July 31, 2001. This
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. In this report, the
words "anticipate(s)," "believe(s)", "expect(s)", "intend(s)", "future" and
similar expressions identify forward-looking statements. Actual events or our
actual future results may differ materially from any forward-looking statements
due to such risks and uncertainties including those set forth in Part I, Item 1
under the caption "Business Risks" and elsewhere in this report on Form 10-K.
We assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking assumptions. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only
as of the date hereof. We undertake no obligation to publicly release the
results of any revision to these forward-looking statements, which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Management's discussion and analysis includes:
. Business overview.
. A comparison of our results of operations for fiscal 2001 with the results
for fiscal 2000, and the results for fiscal 2000 with those for fiscal
1999.
. A discussion of our operating liquidity and capital resources.
Business Overview
Pumatech, Inc. (Pumatech or the "Company") was incorporated in California in
August 1993 and reincorporated in Delaware in November 1996, both under the
name Puma Technology, Inc. We changed our corporate name to Pumatech, Inc. in
December 2000. 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 provides several alternative implementations
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),
Enterprise Intellisync(TM), 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.
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 30 distributors and resellers in
Africa, Asia, Australia, Canada, Europe, New Zealand, and South America.
Acquisitions
In October 1999, we acquired ProxiNet, Inc. (ProxiNet), a privately-held
company involved in the development of software enabling users of Palm OS(R)
handheld devices to browse Internet content. ProxiNet brought us a highly
scalable proxy-based transformation and delivery architecture. As a result, in
June 2000 we
36
introduced Browse-it software which allows portals, wireless internet service
providers (ISPs) and e-commerce companies to provide highly secure, real-time
Web access to users of Palm OS handheld devices, along with the ability to
download Web pages for offline viewing when wireless or wireline access is not
available.
In February 2000, we acquired NetMind Technologies, Inc. (NetMind), a
leading provider of scalable software solutions that integrate user-driven
personalization technologies into the Internet infrastructure, which brought us
a broad range of Web-based personalization, change-detection and notification
technologies. As a result, in June 2000 we introduced Mind-it software which
enables users to receive instant notification of changes to any content they
request on the Internet or corporate intranet.
In July 2000, we acquired Dry Creek Software (Dry Creek), a professional
services entity engaged in delivering software products and services that
enable rapid integration of new product features into e-business applications.
Together with The Windward Group (Windward), Dry Creek forms the core of
Pumatech's new Professional Services Organization.
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 certain 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.
In November 2000, we signed and closed an agreement to acquire certain
intellectual property and other assets of SwiftTouch Corporation (SwiftTouch)
of Bedford, Massachusetts, a provider of Web-based Universal Access Solutions.
The above acquisitions, except for NetMind, were accounted for as purchase
business combinations, and the results of operations of these acquired entities
are included in our historical consolidated financial statements prospectively
from their respective dates of acquisition. NetMind was accounted for as a
pooling of interests and, accordingly, all of our historical financial
information and analysis have been restated to combine the results of Pumatech
and NetMind. Refer to Note 3 of the Notes to Consolidated Financial Statements
set forth in Part IV of this report on Form 10-K for more information on the
acquisitions.
Non-Recurring Events
In the first quarter of fiscal 1999, we implemented a restructuring program
for the purpose of consolidating the majority of engineering and development
work at our existing facilities in Nashua, New Hampshire. As a result, we
recorded a total restructuring charge of $768,000 for fiscal 1999 for reduction
in workforce of approximately 40 positions and vacating a portion of our San
Jose, California and Nashua, New Hampshire facilities.
In the fourth quarter of fiscal 2001, we determined that certain intangibles
we acquired from Dry Creek, Windward and SwiftTouch, as well as certain assets
related to our Intellisync.com/SM/ online service offering, are impaired and,
accordingly, recorded a total impairment charge of $10,614,000 to write-down
the underlying goodwill and identifiable intangibles and write-off related
assets held for disposal. Refer to the caption "Loss on Impairment of Assets"
set forth in Results of Operations below and Note 12 of the Notes to
Consolidated Financial Statements for more information on the impairment
charges.
During the third quarter and fourth quarters of fiscal 2001, we announced
and implemented cost reduction actions aimed at reducing costs that are not
integral to the execution of our overall strategy and to better align our
expense levels with current revenue levels and ensure conservative spending
during the current period of economic uncertainty. Included in our cost
reduction initiatives was a reduction in workforce which was implemented during
April and July of 2001, representing a total reduction of approximately 35% of
our then total workforce. We also consolidated our business facilities located
in California and vacated excess facilities. As a result, we recorded a total
restructuring charge of $1,417,000 for fiscal 2001.
37
The restructuring charges above were recorded in accordance with the
Emerging Issues Task Force (EITF) No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." Refer to
the caption "Severance Costs and Facilities Costs and Assets Held for Disposal"
set forth in Results of Operations below and Note 11 of the Notes to
Consolidated Financial Statements set forth in Part IV of this report on Form
10-K for more information on the restructuring and cost reduction plans.
Results of Operations
The following table sets forth items included in the consolidated statement
of operations (Part IV of this report on Form 10-K) as percentages of total
revenue for the periods indicated:
Years Ended July 31,
----------------------
2001 2000 1999
------ ----- -----
Revenue:
License................................................................... 84.0% 89.8% 92.1%
Services.................................................................. 16.0 10.2 7.9
------ ----- -----
Total revenue......................................................... 100.0 100.0 100.0
------ ----- -----
Cost of revenue:
Cost of license revenue................................................... 3.8 5.9 6.1
Cost of service revenue................................................... 22.6 6.4 3.4
------ ----- -----
Total cost of revenue................................................. 26.4 12.3 9.5
------ ----- -----
Gross profit................................................................. 73.6 87.7 90.5
------ ----- -----
Operating expenses:
Research and development.................................................. 61.3 58.1 60.3
Sales and marketing....................................................... 57.3 55.3 48.1
General and administrative................................................ 15.8 17.9 19.5
In-process research and development....................................... -- 13.7 --
Amortization of intangibles............................................... 20.6 8.5 2.2
Merger costs.............................................................. -- 20.5 --
Severance costs........................................................... 1.5 -- 1.0
Facilities costs and assets held for disposal............................. 2.2 -- 2.7
Loss on impairment of assets.............................................. 27.4 -- --
------ ----- -----
Total operating expenses.............................................. 186.1 174.0 133.8
------ ----- -----
Operating loss............................................................... (112.5) (86.3) (43.3)
Other income (expense)
Interest income........................................................... 9.8 9.5 5.9
Interest expense.......................................................... (0.2) (0.2) (0.1)
Other, net................................................................ (1.0) 7.0 12.9
------ ----- -----
Total other income.................................................... 8.6 16.3 18.7
Other-than-temporary impairment of direct investments........................ (3.0) -- --
------ ----- -----
Loss before income taxes..................................................... (106.9) (70.0) (24.6)
Provision for income taxes................................................... (1.2) (2.0) (3.5)
------ ----- -----
Net loss..................................................................... (108.1) (72.0) (28.1)
------ ----- -----
Accretion of mandatorily redeemable convertible preferred stock to redemption
value...................................................................... -- (12.6) (20.5)
------ ----- -----
Net loss attributable to common stockholders................................. (108.1)% (84.6)% (48.6)%
====== ===== =====
38
Revenue. We derive revenue from two primary sources: software licenses and
fees for service. Revenue was $38,693,000 in fiscal 2001 as compared to
$30,813,000 in fiscal 2000 and $20,723,000 in fiscal 1999. Revenue increased
26% in fiscal 2001 as compared to fiscal 2000 and increased 49% in fiscal 2000
as compared to fiscal 1999. Our revenue growth in fiscal 2001 and 2000 resulted
from higher revenues from our technology licensing components, 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.
OEM revenue in fiscal 2001 was $10,593,000, or 27% of total revenue,
compared to $13,048,000 or 42% of total revenue in fiscal 2000 and $10,291,000
or 50% of total revenue in fiscal 1999. The decrease in OEM revenue in absolute
terms and as a percentage of total revenue in fiscal 2001 was primarily due to
the decline in Intellisync for Notebook and TranXit product royalty revenue,
partially offset by an increase in licensing of Intellisync Software
Development Kits (Intellisync SDKs). The increase of OEM revenue in absolute
dollars in fiscal 2000 was due to a significant increase in our revenue from
Intellisync SDK licensing, partially offset by a decrease in Intellisync for
Notebook and TranXit product royalty revenue. The decrease in OEM revenue as a
percentage of total revenue in fiscal 2000 was primarily due to an overall
increase in total revenue resulting from the additions of new products and
service offerings. Although several OEM 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 continue to 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 personal computer (PC) OEM portion of this
revenue to continue to decrease as a percentage of our overall revenue
throughout fiscal 2002.
International revenue continues to represent a significant portion of our
revenue. International revenue in fiscal 2001 was $9,987,000, or 26% of total
revenue, compared to $8,347,000 or 27% of total revenue in fiscal 2000 and
$8,357,000 or 40% of total revenue in fiscal 1999. Our international revenue in
absolute terms increased in fiscal 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 in fiscal 2001 and 2000 due
to the substantial increase in our United States revenue. We expect, however,
our international revenue in absolute dollars to increase relatively or remain
constant in the next few quarters compared to recent previous quarters. 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. Also, refer to other
relevant risks and uncertainties associated with International revenue set
forth in Part I, Item 1 under the caption "Business Risks" in this report on
Form 10-K.
No customers accounted for more than 10% of total revenue in fiscal 2001 and
2000. In fiscal 1999, Toshiba Corporation accounted for approximately 14% of
our revenue and no other customer accounted for more than 10% of our revenue.
. License Revenue. License revenue is earned from the sale and use of
software products, including our technology licensing components, and
royalty agreements with OEMs. License revenue was $32,518,000 in fiscal
2001 as compared to $27,685,000 in fiscal 2000 and $19,084,000 in fiscal
1999. The 17% and 45% increase in license revenues in fiscal 2001 and
2000, respectively, reflected an increase in revenues of technology
licensing components 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. Revenue from technology licensing
components increased due to an increase in the number of licensing
arrangements entered into by the Company particularly during the first
three quarters of fiscal 2001.
39
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.
. 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 was $6,175,000 in fiscal 2001 as compared to $3,128,000 in fiscal
2000 and $1,639,000 in fiscal 1999. The 97% increase in service revenue in
fiscal 2001 was brought about primarily by the creation of our
professional services organization with the acquisitions of Dry Creek and
Windward. The increase in fiscal 2001 was also due to an increase in
maintenance contract programs which was primarily the result of the
increase in licensing activity. This increase was partially offset by a
decrease in advertising fees and decrease in non-recurring engineering
service projects revenue. The 91% increase in service revenue in fiscal
2000 was primarily due to an increased number of non-recurring engineering
service projects, increased maintenance revenue and increased Web-based
advertising fees.
Deferred revenue was $3,260,000 and $6,372,000 at July 31, 2001 and 2000,
respectively. The 49% decrease in deferred revenue was primarily attributable
to the decline in number of technology licensing customers, many of whom were
forced to close their operations or unable to meet their contractual
obligations as a result of the economic downturn, and, to a lesser extent, due
to new licensing deals that were not structured with guaranteed commitments.
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, post-sales
customer support costs and in certain instances, royalties paid to third-party
vendors. Service costs include personnel related costs associated with work
performed under professional service contracts, non-recurring engineering
agreements and hosting costs for online services associated with the hosting of
our technology licensing components to both partners and end users. 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 level 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 gross service margins.
. Cost of License Revenue. Cost of license revenue was $1,476,000 or 5% of
license revenue, $1,827,000 or 7% of license revenue, and $1,270,000 or 7%
of license revenue in fiscal 2001, 2000 and 1999, respectively. The
decrease in cost of license revenue in absolute dollars and as a
percentage of license revenue in fiscal 2001 primarily reflects
efficiencies realized from higher license revenue volumes . The increase
in cost of license revenue in absolute dollars in fiscal 2000 reflects
product shipments and costs associated with increased license revenue. In
general, fluctuations in cost of license revenue are primarily the result
of varying levels of royalties paid, changes in product mix and the timing
of large license sales.
. Cost of Service Revenue. Cost of service revenue was $8,760,000 or 142% of
service revenue, $1,953,000 or 62% of service revenue, and $709,000 or 43%
of service revenue in fiscal 2001, 2000 and 1999, respectively. The
increase in cost of service revenue in absolute dollars and as a
percentage of service revenue in fiscal 2001 and 2000 reflects an increase
in service revenue, increased headcount in our online services and
professional services organization and hosting costs associated with our
online
40
service offerings. The gross margin loss in fiscal 2001 was largely due to
a high amount of fixed costs, primarily personnel-related expenses,
associated with our professional services organization that had
experienced higher but insufficient revenue to absorb their total fully
burdened costs.
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 increased by 32% to
$23,723,000 in fiscal 2001 from $17,909,000 in fiscal 2000. In fiscal 2000,
research and development expenses increased by 43% to $17,909,000 from
$12,489,000 in fiscal 1999. Research and development represented 61%, 58% and
60% of total revenue in fiscal 2001, 2000 and 1999, respectively. The increase
in absolute research and development spending in fiscal 2001 and 2000 was
primarily due to increased personnel that we acquired in connection with our
acquisitions, planned higher spending for the development and maintenance of
our technology licensing components, and increased costs associated with
preparing for the production launch of Intellisync.com.
All of our research and development costs have been expensed as incurred.
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" 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 and, during fiscal 2001, 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 and marketing employees, as
well as technical support personnel associated in pre-sales activities such as
building brand awareness, performing product and technical presentations and
answering customers' product and service inquiries. Sales and marketing
expenses increased by 30% to $22,171,000 in fiscal 2001 from $17,024,000 in
fiscal 2000. In fiscal 2000, sales and marketing expenses increased 71% to
$17,024,000 from $9,975,000 in fiscal 1999. Sales and marketing expenses
represented 57%, 55% and 48% of total revenues in fiscal 2001, 2000, and 1999,
respectively. Sales and marketing expenses increased in absolute terms and as a
percentage of total revenue in fiscal 2001 and 2000 primarily due to an
increase in sales personnel to expand our United States and international sales
and business development organizations, and an increase in corporate marketing
resources, corporate branding and marketing headcount for our online services
group. In addition, increase in sales and marketing expenses in fiscal 2000
reflected, to a lesser extent, an increase in costs associated with corporate
branding, which included renaming our corporate name to Pumatech, Inc.,
redesigning our Website, and various product branding initiatives.
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 increased by 11%
to $6,120,000 in fiscal 2001 from $5,520,000 in fiscal 2000. In fiscal 2000,
general and administrative expenses increased 37% to $5,520,000 from $4,034,000
in fiscal 1999. General and administrative expenses represented approximately
16%, 18% and 19% of total revenues in fiscal 2001, 2000 and 1999, respectively.
The increase in absolute
41
general and administrative spending in fiscal 2001 and 2000 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 during fiscal 2000 and the first part of fiscal 2001, and
the consolidation and assimilation of the ProxiNet, NetMind and Dry Creek
businesses and the Windward and SwiftTouch assets. The decrease in general and
administrative spending as a percentage of total revenue in fiscal 2001and 2000
reflects an increase in revenue.
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. At the acquisition date, revenues were projected to be generated in
fiscal 2000 for the products in development.
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 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.
Amortization of Intangibles. Regular amortization of acquired intangibles
increased 202% to $7,957,000 in fiscal 2001 from $2,630,000 in fiscal 2000. In
fiscal 2000, amortization of intangibles increased 473% to $2,630,000 from
$459,000 in fiscal 1999. The increase in amortization of intangibles in fiscal
2001 and 2000 resulted from our acquisitions of SwiftTouch and Windward in
fiscal 2001 and Dry Creek and ProxiNet in fiscal 2000. In addition, we recorded
a write-down of certain impaired intangibles as discussed under "Loss on
Impairment of Assets" set forth below. We will continue to amortize our
goodwill, $2.7 million for fiscal 2002, until our adoption in fiscal 2003 of
Statement of Financial Accounting Standards (SFAS) No. 142 which requires the
discontinuance of goodwill amortization and will amortize approximately $2.4
million and $800,000 for other intangibles in fiscal 2002 and 2003,
respectively, based on acquisitions completed as of July 31, 2001. Refer to
Note 17 of the Notes to Consolidated Financial Statements set forth in Part IV
of this report on Form 10-K for more information on the new accounting for
goodwill.
Non-Cash Stock Compensation. Non-cash stock compensation, included in each
appropriate operating expense category of our consolidated statements of
operations, relates to stock options that were deemed to have been granted at a
price below market value. These charges are amortized over the vesting period
of the options. The non-cash stock compensation charge, net of the effect of
terminations, aggregated $1,058,000, $2,002,000 and $410,000 in fiscal 2001,
2000 and 1999, respectively. The majority of the non-cash compensation expense
relates to options that were granted by NetMind prior to our acquisition of
NetMind.
42
In January 2001, we offered our employees, officers and directors the
opportunity to cancel stock options granted to them between December 1999 and
October 2000 in exchange for an equal number of new options to be granted on
July 30, 2001, six months after the date of cancellation of the original
options. Holders of approximately 2,676,000 shares received the new options.
The re-grants for executive officers and directors were priced at the closing
market price on the date of the new grant or $2.10. The executive re-grants are
accounted for as fixed awards, and, accordingly, no stock compensation charge
was recorded. The re-grants for employees were priced at 85% of the underlying
market price or $1.78. As they were priced below the then current market price,
the new options granted to our employees are accounted for using variable
accounting under the guidance in Financial Accounting Standards Board
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of Accounting Principles Board (APB)
Opinion No. 25. According to FIN No. 44, the variable accounting charge is
based on any excess of the common stock closing price at the end of the
reporting period or date of exercise, forfeiture, cancellation without
replacements, if earlier, over the exercise price (i.e. intrinsic value). This
charge is amortized on an accelerated basis over the remaining vesting period
of four years consistent with the method described in FIN No. 28. We will
remeasure and record the intrinsic value of the repriced employee options every
quarter until they are exercised, forfeited, cancelled, or expire. In the
fourth quarter of fiscal 2001, we recorded a charge of approximately $185,000
to deferred stock compensation of which approximately $61,000 was recorded to
expense, included in the aforementioned total stock compensation charge for
fiscal 2001.
Our Board of Directors recently approved a new proposal to offer our
employees, officers and directors the opportunity to cancel stock options
granted to them between September 1999 and June 2001 in exchange for an equal
number of new options to be granted six months and two days following the close
of the related tender offer and priced at the closing market price on that
date. The number of options eligible to be cancelled is approximately 1.3
million shares, net of the effect of recent terminations. In accordance with
FIN No. 44, this option cancellation and regrant program will cause certain
options granted in the six month period prior to the cancellation to be subject
to variable accounting. FIN No. 44 holds that if a lower-priced option is
granted within six months before or after a higher priced option is cancelled,
the combined transactions are considered a repricing and result in
variable-plan accounting. As we have recently granted some lower-priced
options, we expect to incur variable accounting charges relating to these
options in future periods.
Other Income (Expense). Other income (expense), 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. Total other income, net, was
$3,344,000, $5,023,000 and $3,868,000 in fiscal 2001, 2000 and 1999,
respectively. The decrease in total other income, net, in fiscal 2001 reflects
a decrease in rate of interest on reduced balances of cash and investments, as
well as a loss of $300,000 realized from the sale of PG&E commercial paper. The
increase in total other income, net, in fiscal 2000 was primarily due to an
increased gain recognized from the sales of equity investments, higher yields
on our investments and increased interest earned on our higher cash balance
resulting from the private placement completed in March 2000.
Provision for Income Taxes. The provision for income taxes primarily
represents foreign withholding taxes on royalties earned from certain foreign
customers and, to a lesser extent, estimated taxes for foreign subsidiaries.
Provision for income taxes was $437,000, $632,000 and $715,000 in fiscal 2001,
2000 and 1999, respectively.
Accretion of Mandatorily Redeemable Convertible Preferred Stock to
Redemption Value. During fiscal 1999, NetMind issued approximately 4.0 million
shares of Series B Preferred Stock which converted into approximately 3.4
million shares of the Company's 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 $3,877,000 and
$4,238,000 in fiscal 2000 and 1999, respectively.
43
Non-Recurring Charges
Merger Costs. During the third quarter of fiscal 2000, we incurred one-time
costs totaling $6,322,000 associated with the acquisition of NetMind. These
costs included direct transaction costs primarily for financial advisory
service and professional service costs associated with the merger.
Severance Cost and Facilities Costs and Assets Held for Disposal. In fiscal
2001, we incurred total severance and facilities charges of $1,417,000
associated with two separate cost reduction plans we implemented during the
third and fourth quarters of fiscal 2001 aimed at reducing costs that are not
integral to the execution of our overall strategy and to better align our
expense levels with current revenue levels and ensure conservative spending
during the current period of economic uncertainty.
. In the third quarter of fiscal 2001, we announced and implemented our
first cost reduction plan for the fiscal year. Our 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 our 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. As of
July 31, 2001, there was no unused balance. This implementation of the
plan was completed at the end of April 2001.
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 includes
$174,000 for excess facility lease and vacancy costs and $228,000 for
write-off of property and equipment, which consisted primarily of
leasehold improvements, office equipment and furniture and fixtures, to be
taken out of service. The unused balance as of July 31, 2001 was $169,000.
A summary of the severance and facilities costs and assets held for
disposal relating to the cost reduction plan implemented in the third
quarter of fiscal 2001 is outlined as follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- -----
Total charge................................ $ 181 $ 402 $ 583
Non-cash charges............................ -- (130) (130)
Cash payments............................... (181) (103) (284)
----- ----- -----
Balance at July 31, 2001................. $ -- $ 169 $ 169
===== ===== =====
Amounts related to the net lease expense due to the consolidation of
excess facilities will be paid over the respective lease terms through
April 2006 using cash from operations. We have reduced the total costs of
leased facilities by subleasing the excess office space. All remaining
assets held for disposal are expected to be disposed of by the end of
first quarter of fiscal 2002.
. In the fourth quarter of fiscal 2001, we announced and implemented our
second cost reduction plan for the fiscal year. Our primary cost reduction
initiatives included a reduction in workforce and facilities
consolidation. The workforce reduction represented a further reduction of
approximately 20% of our then total workforce, or approximately 50
full-time equivalent positions. This reduction, affecting mostly those
holding positions in engineering and professional services, brought the
number of our worldwide workforce down to approximately 215 full-time
employees. The associated severance costs incurred were approximately
$400,000, of which $20,000 remained unused as of July 31, 2001. This
implementation of the plan was completed at the end of August 2001.
We also incurred additional restructuring charges aggregating $434,000 for
consolidating more facilities with space located in Santa Cruz,
California. The costs of consolidating facilities includes $399,000 for
44
excess facility lease and vacancy costs and $35,000 for write-off of
property and equipment, which consisted primarily of leasehold
improvements, computer and engineering equipment, office equipment and
furniture and fixtures, to be taken out of service. The unused balance as
of July 31, 2001 was $399,000.
A summary of the severance and facilities costs and assets held for
disposal relating to the cost reduction plan implemented in the fourth
quarter of fiscal 2001 is outlined as follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- -----
Total charge........................... $ 400 $434 $ 834
Non-cash charges....................... -- (35) (35)
Cash payments.......................... (380) -- (380)
----- ---- -----
Balance at July 31, 2001............ $ 20 $399 $ 419
===== ==== =====
Amounts related to the net lease expense due to the consolidation of
excess facilities will be paid over the respective lease terms through
April 2006 using cash from operations. We have reduced the total costs of
leased facilities by subleasing the excess office space. All remaining
assets held for disposal are expected to be disposed of by the end of
first quarter of fiscal 2002.
In fiscal 1999, we recorded total charges of $768,000 associated with a
restructuring program we implemented for the purpose of consolidating the
majority of our engineering and development work at existing facilities in
Nashua, New Hampshire. As part of this program, we implemented a reduction in
force of approximately 40 positions that primarily affected the engineering
group located at the San Jose, California facility. As a result, we incurred a
severance charge of $210,000. This plan was completed at the end of February
1999. Also as part of this restructuring, we vacated a portion of our San Jose
facility which resulted in a facilities charge of $558,000.
A summary of the severance and facilities costs relating to the
restructuring program in fiscal 1999 is outlined as follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- -----
Total charge........................... $ 210 $ 558 $ 768
Cash payments.......................... (210) (227) (437)
----- ----- -----
Balance at July 31, 1999............ $ -- $ 331 $ 331
Cash payments.......................... -- (110) (110)
----- ----- -----
Balance at July 31, 2000............ $ -- $ 221 $ 221
Cash payments.......................... -- (48) (48)
----- ----- -----
Balance at July 31, 2001............ $---- $ 173 $ 173
===== ===== =====
Amounts related to the net lease expense due to the consolidation of excess
facilities will be paid over the respective lease terms through June 2006 using
cash from operations. We reduced the total costs of leased facilities by
subleasing the excess office space.
Loss on Impairment of Assets. In the fourth quarter of fiscal 2001, we
determined that certain intangible assets we acquired and certain assets used
exclusively for Intellisync.com were impaired. Therefore, we recorded
impairment charges of $8,745,000 to write down goodwill in connection with the
Dry Creek and Windward acquisitions, and $1,869,000 to write off goodwill and
identifiable intangibles purchased from SwiftTouch and other related assets
held for disposal.
45
. Dry Creek and Windward
We purchased Dry Creek and Windward in the fourth quarter of fiscal 2000
and first quarter of fiscal 2001, respectively, in anticipation of several
benefits from the acquisitions, including:
. Dry Creek would serve as the core of our professional services
organization;
. Windward would expand the professional services organization and
become a turnkey vendor providing top tier customers with customized
solutions based on our technology licensing components;
. the opportunities to accelerate deployment of our technology licensing
components with existing and targeted customers;
. the acquisition of a pool of talented and highly skilled employees;
approximately 70 employees were hired from both acquisitions;
. Dry Creek's developed and core technology.
At the time the acquisitions were completed, we had experienced sequential
growth in quarterly revenue from our technology licensing components. From
$1,555,000 for the first quarter of fiscal 2000, our technology license
revenue increased for the same period in fiscal 2001 by 113% to
$3,313,000. From the first quarter of fiscal 2000 to the first quarter of
fiscal 2001, cost of revenue was in the range of 9.4% to 15.7% of total
revenue. At the time the acquisitions were consummated, we anticipated
continued growth and increased gross margin contribution due to increased
capacity acquired from our increased professional services workforce.
The recent economic slowdown, however, has caused a number of our existing
and potential customers to reduce their IT spending or cease their
investment in products, services and technologies such as those we
provide. Additionally, many of our technology licensing customers have
closed their operations or have been unable to meet their contractual
obligations thus leaving us with a smaller install base of customers by
which to utilize our professional service team. Because of these and other
factors, our technology licensing revenue decreased during the second
quarter of fiscal 2001 to $3,140,000, remained relatively flat in the
third quarter at $3,354,000, and decreased during the fourth quarter to
$2,661,000 compared to technology licensing revenue in the first quarter.
Revenue from our professional services organization for the same periods
was $1,451,000, $1,577,000 and $228,000, respectively, which was
significantly lower than our expectations. In addition, cost of revenue
for those periods of 25.6%, 27.8% and 40.8%, respectively, of total
revenue were significantly higher than those in recent previous quarters
given the high amount of related fixed costs, in particular
personnel-related costs, and revenues insufficient to absorb these costs.
To better align our expense levels with current revenue levels and ensure
conservative spending, we implemented cost reduction plans in the third
and fourth quarter of fiscal 2001. The first plan, as well as employees'
transfers and resignations, had decreased the number of employees in the
professional services organization to 45 by the end of the third quarter
of fiscal 2001. The second plan resulted in a further reduction in our
workforce bringing down the number of employees in the professional
services organization to 25 by July 31, 2001.
Those factors and events as described above had led us to believe that the
goodwill and intangibles acquired from Dry Creek and Windward were
impaired. Accordingly, we engaged a third party appraiser to assess the
recoverability of the related long-lived assets and, as a result, recorded
an impairment write-down of goodwill of $8,745,000. The impairment was
measured as the amount by which the carrying amount of goodwill and
purchased intangibles exceeded the present value of the estimated future
cash flows from the professional services group. The assumptions
supporting the future cash flows, including the discount rate of 20%, were
determined using our best estimates. The discount rate was determined
46
based upon the weighted average cost of capital of comparable companies.
The new carrying amount of $5,438,000 is being amortized over the
remaining life of the respective intangibles through July 2003, except for
goodwill which is amortized until we adopt the non-amortization provisions
of a new accounting standard.
In the next several quarters, we plan to continue monitoring the
operations of our professional services organization, its trend of revenue
growth or decline, all associated costs, and its overall contribution to
our profitability, as well as any events or indicators that the carrying
amount of the remaining goodwill and intangibles might not be recoverable.
Refer to the caption "Severance Costs and Facilities Costs and Assets Held
for Disposal" set forth above for more information on the cost reduction
plans and Note 17 of the Notes to Consolidated Financial Statements set
forth in Part IV of this report on Form 10-K for more information on the
new accounting for goodwill.
. SwiftTouch
We purchased certain technology assets from SwiftTouch in the second
quarter of fiscal 2001 in anticipation of increasing our revenue and
accelerating our return to profitability through the use of SwiftTouch
developed technology for our Intellisync.com online service offering. We
believed this technology would extend the capabilities of our
Intellisync.com service bureau by providing potential subscribers with
access to various information via WAP (Wireless Application
Protocol)-enabled phones or by voice. It would deliver powerful
collaborative features that automatically update calendar and contact
information among groups of users, while also giving us a viral marketing
tool for minimizing user-acquisition costs as we build Intellisync.com
subscriber base.
At the time the SwiftTouch acquisition was consummated, we had planned to
host our technology licensing components for the public through our
Intellisync.com Web service within the first half of calendar year 2001.
In March 2001, we introduced Intellisync.com to the public and offered its
available service options free of charge during the initial introductory
period. We had anticipated that several thousands users would adopt
Intellisync.com and that we would derive a significant portion of our
future revenue from offering fee-based services beginning in the Spring of
2001.
By the end of the first half of calendar year 2001, we had realized that
successful customer adoption of and monetization from several fee-based
online service offerings such as our Intellisync.com offerings had been
slow and limited. Additionally, deployment and usage of mobile wireless
devises had fallen short of our expectations. These factors, as well as
changes in general economic and market conditions, led us to believe that
if Intellisync.com were to continue, the costs associated with its
operation would have a further negative impact on our results of
operations in the near future.
By the end of fiscal 2001, as a result of the events described above, we
had decided that Intellisync.com should be suspended indefinitely and
determined that technology acquired from SwiftTouch used exclusively for
Intellisync.com was impaired. Accordingly, an impairment write-down of
$1,156,000 related to the net book value of goodwill and identifiable
intangibles from the SwiftTouch acquisition was recorded.
. Other Assets Related to Intellisync.com
With respect to the indefinite suspension of Intellisync.com described
above, we identified certain assets related to Intellisync.com which we
would no longer use. We, therefore, classified these assets as
"held-for-disposal" and revised their carrying value from book value to
recovery value less disposal costs resulting in a $713,000 impairment
charge.
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 in YadaYada, Inc., If & Then,
47
Inc., and PulseMD Corporation were impaired as such investments were deemed not
to be recoverable. These investments were fully impaired due to changes in
these entities' 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 fiscal 2001.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows Highlights and Short-Term Investments
(in thousands)
2001 2000 1999
------ ------ -----
Operating activities............................. $(18.8) $(15.7) $(3.3)
Investing activities............................. (18.1) (25.2) 4.4
Financing activities............................. 1.3 78.7 8.1
------ ------ -----
Net cash flows provided (used)................... $(35.6) $ 37.8 $ 9.2
====== ====== =====
Cash and cash equivalents at end of period....... $ 18.8 $ 54.5 $16.6
Short-term investments........................... $ 30.1 $ 30.8 $11.9
We ended fiscal 2001 with $48.9 million in cash, cash equivalents and
short-term investments. Cash, cash equivalents and short-term investments
decreased by $36.4 million or 43% during fiscal 2001 from $85.3 million at July
31, 2000. Cash, cash equivalents and short-term investments increased by $56.7
million or 199% during fiscal 2000 from $28.5 million at July 31, 1999.
Net cash used in operations was $18.8 million during fiscal 2001, compared
with $15.7 million and $3.3 million in fiscal 2000 and 1999, respectively.
Operating cash flow in fiscal 2001 was comprised of $16.2 million of net loss
as adjusted for non-cash items and $2.6 million of net change in working
capital items, compared with $13.5 million of net loss adjusted for non-cash
items and $2.2 million of net change in working capital items in fiscal 2000,
and $5.5 million of net loss adjusted for non-cash items and $2.2 million of
net change in working capital items in fiscal 1999. The variation in net loss
adjusted for non-cash items is reflective of the variation in net earnings and
non-recurring charges. The change in working capital items in fiscal 2001
reflected a decrease in deferred revenue related to the recognition of revenue
on certain license contracts. In fiscal 2000, the change in working capital
items reflected an increase in accounts receivable, other current assets,
accounts payable and deferred revenue related to increased business volumes and
contracts signed during the year. In fiscal 1999, the change in working capital
items reflected an increase in deferred revenue related to increased contracts
signed during the year.
Net cash used in investing activities of $18.1 million during fiscal 2001,
resulted from $12.6 million of cash paid for the asset purchases of Windward
and SwiftTouch, $4.9 million for capital expenditures and $1.2 million for
other long-term investments, partially offset by net sales of short term
investments of $0.5 million. Net cash used in investing activities of $25.2
million during fiscal 2000 was primarily for net purchases of short-term
investments of $17.5 million, capital expenditures of $3.1 million, acquisition
of ProxiNet and Dry Creek of $2.4 million and purchase of other long-term
investments of $2.2 million. Net cash provided by investing activities of $4.4
million during fiscal 1999 resulted from net sales of short-term investments of
$5.3 million, partially offset by capital expenditures of $0.9 million.
Net cash provided by financing activities of $1.3 million during fiscal 2001
resulted primarily from $1.8 million of proceeds from issuance of common stock,
partially offset by $0.3 million of principal repayments on notes payable and a
$0.2 million loan to a related party. Net cash provided by financing activities
of $78.7 million during fiscal 2000 resulted from $78.4 million of proceeds
primarily from a private placement in March 2000 and $0.3 million of proceeds
from a line of credit. Net cash provided by financing activities of $8.1
million during fiscal 1999 resulted primarily from $8.6 million of proceeds
from issuance of common and
48
preferred stock, partially offset by $0.3 million of advances to stockholders
and $0.2 million of payments on notes payable.
We have restricted cash held by a financial institution as collateral on a
letter of credit in connection with our lease of office space. The restricted
cash amounted to $686,000 at July 31, 2001.
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
expires 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. As of
July 31, 2001, we were in compliance with the loan covenants. Principal is due
at expiration, and interest payments are generally due monthly. At July 31,
2001, there were no outstanding borrowings under the agreement.
We 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 restrictions on 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.
Principal and interest payments are due monthly. At July 31, 2001, $302,000 was
outstanding on the equipment line and will be paid in full in the first quarter
of fiscal 2002, and we had no outstanding balance drawn on the revolving credit
line.
In connection with our acquisitions, we used $320,000 of cash and issued
100,000 shares of our common stock in November 2000 for certain assets of
SwiftTouch. We used $12,250,000 of cash and issued 171,026 shares of our common
stock to Vanteon in October 2000 for Windward. We used $1,987,500 of cash and
issued 153,000 shares of our common stock in July 2000 for Dry Creek. We issued
8,808,000 shares of our common stock in February 2000 for NetMind. We issued
5,200,000 shares of our common stock and options in October 1999 for ProxiNet.
For additional information regarding these acquisitions, refer to Note 3 of the
Notes to Consolidated Financial Statements set forth in Part IV of this report
on Form 10-K.
In connection with our restructuring and cost reduction plans, we used
$712,000, $110,000, and $437,000 of cash for severance costs associated with
the reduction in our workforce and other costs associated with the
consolidation of our excess facilities in fiscal 2001, 2000 and 1999,
respectively. For additional information regarding the restructuring and cost
reduction plans, refer to the caption "Severance Costs and Facilities Costs and
Assets Held for Disposal" set forth in Results of Operations above and to Note
11 of the Notes to Consolidated Financial Statements set forth in Part IV of
this report on Form 10-K.
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.
49
ITEM 7A. 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 July 31, 2001, we had an investment portfolio of fixed income securities
excluding those classified as cash and cash equivalents and securities
available for sale of $29,995,000. (Refer to Note 2 of the Notes to
Consolidated Financial Statements set forth in Part IV of this report on Form
10-K for more details.) These securities, like all fixed income instruments,
are subject to interest rate risk and will fall in value if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by 10% from levels as of July 31, 2001, the decline of the fair value
of the portfolio would be immaterial. The majority of our fixed income
investments have maturities of less than one year. While we intend 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 included the PG&E commercial paper. Accordingly, we
recorded a realized loss of approximately $300,000 to the value of our PG&E
commercial paper for the impairment of this security in fiscal 2001. This
charge is reflected in "Other, net" in consolidated statements of operations
for the year ended July 31, 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
United States 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 United States 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 United States dollars, an
increase in the value of the United States 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 July 31, 2001, the fair value of these investments is
approximately $27,000. 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 3% and we
do not have the ability to exercise significant influence over operations. At
July 31, 2001, these investments amounted to $2,502,000. (Refer to Note 4 of
the Notes to Consolidated Financial Statements set forth in Part IV of this
report on Form 10-K for more details.) For these investments, we regularly
review the assumptions underlying the operating 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.
50
As of the end of the third quarter of fiscal 2001, we 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 these entities' 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 fiscal 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 unfavorable economic conditions and the effect of
economic slowdown on the capital markets, we cannot be assured that any other
investments we have can be fully recouped if at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated September 4, 2001, except as to Note 18, which
is as of September 24, 2001, are hereby incorporated by reference to Part IV of
this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the Company
is set forth in Part I, Item 1 of this report under the caption "Executive
Officers and Directors of the Registrant." Information relating to compliance
with Section 16(a) of the Exchange Act is incorporated by reference to the
definitive proxy statement for the Company's 2001 annual meeting of
stockholders to be filed with the Commission pursuant to Regulation 14A no
later than 120 days after the end of the fiscal year covered by this form (the
"Proxy Statement") under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Proxy Statement under the caption "Executive Compensation and Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners
and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Proxy Statement under the caption "Certain Transactions."
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the Company are
filed as part of this Annual Report on Form 10-K:
. Consolidated Balance Sheets at July 31, 2001 and 2000 (F-2)
. Consolidated Statements of Operations for the three fiscal years
ended July 31, 2001 (F-3)
. Consolidated Statements of Stockholders' Equity for the three
fiscal years ended July 31, 2001 (F-4)
. Consolidated Statements of Cash Flows for the three fiscal years
ended July 31, 2001 (F-5)
. Notes to Consolidated Financial Statements (F-6)
. Report of Independent Accountants (F-35)
2. Supplemental Schedules
The following financial statement schedule of the Company is filed as
part of this Annual Report on Form 10-K and should be read in
conjunction with the Company's Consolidated Financial Statements.
. Schedule II--Valuation and Qualifying Accounts (S-1)
Financial Statement Schedules, other than the schedule listed above,
have been omitted because the required information is contained in the
Consolidated Financial Statements and the Notes thereto, or because such
schedules are not required or applicable.
3. Exhibits
The exhibits listed on the accompanying index to exhibits immediately
preceding the financial statement schedules are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of
the fiscal year covered by this report.
53
(c) Exhibits
Exhibit
Number Exhibit Title
---------- -------------
2.1 1 Agreement and Plan Merger and Reorganization by and among Puma Technology, Inc., CAT
Acquisition Corporation and ProxiNet, Inc., dated August 22, 1999.
2.2 2 Agreement and Plan of Merger and Reorganization by and among Puma Technology, Inc. and Rocket
Kitty Acquisition Corp. and NetMind Technologies, Inc. dated December 8,1999.
2.3 3 Interest Purchase Agreement among Puma Technology, Inc., Dry Creek Software, LLC. and the The
Dry Creek Members dated July 7, 2000.
2.4 3 Asset Purchase Agreement by and among Puma Technology, Inc., dba Pumatech, Inc., Vanteon
Corporation and The Windward Group dated October 18, 2000.
2.5 3 Product Acquisition Agreement between Puma Technology, Inc., dba Pumatech, Inc. and SwiftTouch
Corporation dated November 7, 2000.
3.1 4 Certificate of Incorporation of Puma Technology, Inc., a Delaware corporation.
3.2 4 Bylaws of Puma Technology, Inc., a Delaware corporation.
3.3 5 Certificate of Amendment of Restated Certificate of Incorporation dated December 19, 2000.
10.1* 6 Amended and Restated 1993 Stock Option Plan and forms of stock option agreements used thereunder.
10.2* 6 Puma Technology, Inc. 1998 Employee Stock Purchase Plan and form of notice of exercised used
thereunder.
10.3 4 Lease Agreement dated October 18, 1995, between the Company and Photonics Corporation.
10.4+ 4 Software License Agreement dated as of May 30, 1995, between the Company and Toshiba Corporation.
10.5+ 4 Software License Agreement dated as of September 14, 1995, between the Company and NEC
Technologies, Inc. and Amendment No. 1 thereto dated October 25, 1995 and Amendment No. 2
thereto dated January 10, 1996.
10.6+ 4 Software License Agreement dated as of May 23, 1995, between the Company and NEC Corporation
and Amendment No. 1 thereto dated February 19, 1996.
10.7+ 4 Software License Agreement dated as of May 20, 1996 between the Company and NEC Corporation.
10.8* 4 Form of Indemnity Agreement for directors and officers.
10.9* 7 ProxiNet 1997 Stock Plan.
10.10* 8 NetMind Technologies, Inc. 1997 Stock Plan.
10.11* 9 Form of Stock Purchase Agreement by and between Puma Technology, Inc. and each of the selling
stockholders.
10.12* 10 Puma Technology, Inc. 2000 Supplemental Stock Option Plan and related form of stock option
agreement.
10.13* 11 Puma Technology, Inc. 2000 Supplemental Stock Option Plan and Related Form of Non-statutory
Stock Option Agreement initially established as of March 29, 2000 and as amended through
August 22, 2000.
10.14* 12 Pumatech, Inc. Amended and Restated 1993 Stock Option Plan dated December 6, 2000.
10.15 13 Loan and Security Agreement dated March 29, 2001, by and between Imperial Bank and Pumatech, Inc.
21.1 14 Subsidiaries of the Registrant.
23.1 14 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 14 Power of Attorney (reference page 56 of this Form 10-K).
54
--------
+ Confidential treatment has been granted for portions of this exhibit.
* Management contract or compensatory plan or arrangement.
1 Incorporated by reference to the Company's Report on Form 8-K filed on
October 29,1999.
2 Incorporated by reference to the Company's Report on Form 8-K filed on
December 10,1999.
3 Incorporated by reference to the Company's Report on Form S-3 filed on
December 4, 2000.
4 Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-011445).
5 Incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended January 31, 2001 filed on March 19, 2001.
6 Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal year ended July 31, 1999 filed on October 29, 1999.
7 Incorporated by reference to the Company's Report on Form S-8 filed on
November 1, 1999.
8 Incorporated by reference to the Company's Report on Form S-8 filed on
February 24, 2000.
9 Incorporated by reference to the Company's Report on Form S-3 filed on April
21, 2000.
10 Incorporated by reference to the Company's Report on Form S-8 filed on May
5, 2000.
11 Incorporated by reference to the Company's Report on Form S-8 filed on
October 27, 2000.
12 Incorporated by reference to the Company's Report on Form S-8 filed on
February 6, 2001.
13 Incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended April 30, 2001 filed on June 16, 2001.
14 Filed herewith.
(d) Financial Statement Schedules.
Refer to Item 14 (a) above.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be
signed on its behalf by the undersigned thereunto duly authorized, on this
29/th/ day of October, 2001.
PUMATECH, INC.
Date: October 29, 2001 By: /S/ KELLY J. HICKS
------------------------------------
Kelly J. Hicks
Vice President of Operations and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Bradley A. Rowe and Kelly J. Hicks, and
each of them acting individually, as his attorney-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ BRADLEY A.ROWE President, Chief Executive Officer October 29, 2001
------------------------ and Director (Principal Executive
Bradley A. Rowe Officer)
/S/ STEPHEN A. NICOL Executive Vice President, Sales and October 29, 2001
------------------------ Business Development, Secretary
Stephen A. Nicol and Director
/S/ KELLY J. HICKS Vice President of Operations and October 29, 2001
------------------------ Chief Financial Officer (Principal
Kelly J. Hicks Financial and Accounting
Officer)
/S/ MICHAEL M. CLAIR Chairman of the Board October 29, 2001
------------------------
Michael M. Clair
/S/ M. BRUCE NAKAO Director October 29, 2001
------------------------
M. Bruce Nakao
/S/ MICHAEL PRAISNER Director October 29, 2001
------------------------
Michael Praisner
/S/ KIRSTEN BERG-PAINTER Director October 29, 2001
------------------------
Kirsten Berg-Painter
56
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
----
Consolidated Balance Sheets............................................... F-2
Consolidated Statements of Operations..................................... F-3
Consolidated Statements of Stockholders' Equity and Comprehensive Loss.... F-4
Consolidated Statements of Cash Flows..................................... F-5
Notes to Consolidated Financial Statements................................ F-6
Report of Independent Accountants......................................... F-35
Schedule II............................................................... S-1
F-1
PUMATECH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
July 31,
------------------
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 18,837 $ 54,492
Short-term investments.............................................................. 30,071 30,768
Accounts receivable, net of allowance for doubtful accounts of $1,286 and $1,210.... 4,120 6,358
Inventories, net.................................................................... 233 235
Other current assets................................................................ 1,970 1,732
-------- --------
Total current asset............................................................. 55,231 93,585
Property and equipment, net............................................................ 6,974 4,828
Intangible assets, net................................................................. 12,818 17,109
Restricted cash........................................................................ 686 600
Other assets........................................................................... 3,225 2,533
-------- --------
Total assets.................................................................... $ 78,934 $118,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 2,541 $ 2,601
Accrued liabilities................................................................. 4,639 4,036
Current portion of long term notes payable.......................................... 302 259
Deferred revenue.................................................................... 3,260 6,372
-------- --------
Total current liabilities....................................................... 10,742 13,268
Long term notes payable................................................................ -- 310
-------- --------
Total liabilities............................................................... 10,742 13,578
-------- --------
Commitments and contingencies (Note 8).................................................
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000 shares authorized and no shares issued and
outstanding at July 31, 2001 and 2000............................................. -- --
Common stock, $0.001 par value; 80,000 shares authorized, 44,555 shares issued
and outstanding at July 31, 2001 and 60,000 shares authorized, 42,307 shares
issued and outstanding at July 31, 2000........................................... 45 42
Additional paid-in capital.......................................................... 148,479 146,051
Receivable from stockholders........................................................ (330) (330)
Deferred stock compensation......................................................... (706) (3,114)
Accumulated deficit................................................................. (79,407) (37,589)
Accumulated other comprehensive income.............................................. 111 17
-------- --------
Total stockholders' equity...................................................... 68,192 105,077
-------- --------
Total liabilities and stockholders' equity...................................... $ 78,934 $118,655
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
PUMATECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended July 31,
----------------------------
2001 2000 1999
-------- -------- --------
Revenue:
License............................................................. $ 32,518 $ 27,685 $ 19,084
Services............................................................ 6,175 3,128 1,639
-------- -------- --------
Total revenue................................................... 38,693 30,813 20,723
-------- -------- --------
Cost of revenue:
Cost of license revenue............................................. 3,844 1,827 1,270
Cost of service revenue (includes non-cash stock compensation of
$8, $0 and $0).................................................... 6,392 1,953 709
-------- -------- --------
Total cost of revenue........................................... 10,236 3,780 1,979
-------- -------- --------
Gross profit........................................................... 28,457 27,033 18,744
-------- -------- --------
Operating expenses:
Research and development (includes non-cash stock compensation of
$220, $769 and $68)............................................... 23,723 17,909 12,489
Sales and marketing (includes non-cash stock compensation of
$596, $610 and $217).............................................. 22,171 17,024 9,975
General and administrative (includes non-cash stock compensation of
$234, $623 and $125).............................................. 6,120 5,520 4,034
In-process research and development................................. -- 4,218 --
Amortization of intangibles......................................... 7,957 2,630 459
Merger costs........................................................ -- 6,322 --
Severance costs..................................................... 581 -- 210
Facilities costs and assets held for disposal....................... 836 -- 558
Loss on impairment of assets........................................ 10,614 -- --
-------- -------- --------
Total operating expenses........................................ 72,002 53,623 27,725
-------- -------- --------
Operating loss......................................................... (43,545) (26,590) (8,981)
Other income (expense):
Interest income..................................................... 3,791 2,918 1,214
Interest expense.................................................... (65) (58) (17)
Other, net.......................................................... (382) 2,163 2,671
-------- -------- --------
Total other income.............................................. 3,344 5,023 3,868
Other-than-temporary impairment of direct investments.................. (1,180) -- --
-------- -------- --------
Loss before income taxes............................................... (41,381) (21,567) (5,113)
Provision for income taxes............................................. (437) (632) (715)
-------- -------- --------
Net loss............................................................... (41,818) (22,199) (5,828)
Accretion of mandatorily redeemable convertible preferred stock to
redemption value (Note 9)............................................ -- (3,877) (4,238)
-------- -------- --------
Net loss attributable to common stockholders........................... $(41,818) $(26,076) $(10,066)
======== ======== ========
Basic and diluted net loss per share................................... $ (0.96) $ (0.74) $ (0.34)
======== ======== ========
Shares used in computing basic and diluted net loss per common share... 43,729 35,319 29,970
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PUMATECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands)
Common Stock Additional Receivable Deferred
-------------- Paid-in From Stock
Shares Amount Capital Stockholders Compensation
------ ------ ---------- ------------ ------------
Balance at July 31, 1998............................................... 29,374 $29 $ 35,476 $ (66) $ (53)
Issuance of common stock upon exercise of options...................... 1,388 1 1,164 _ _
Issuance of common stock under Employee Stock Purchase Plan............ 348 _ 308 _ _
Repurchase of unvested common stock.................................... (12) _ (2) _ _
Exercise of warrants................................................... 14 _ _ _ _
Notes issued to stockholders........................................... _ _ _ (362) _
Unrealized gain on securities available for sale....................... _ _ _ _ _
Realized gain on securities available for sale......................... _ _ _ _ _
Currency translation adjustment........................................ _ _ _ _ _
Issuance of common stock............................................... 389 _ 47 _ _
Deferred compensation.................................................. _ _ 4,130 _ (4,130)
Amortization of deferred compensation.................................. _ _ _ _ 410
Redeemable stock accretion............................................. _ _ (4,238) _ _
Net loss............................................................... _ _ _ _ _
====== === ======== ===== =======
Balance at July 31, 1999............................................... 31,501
30 36,885 (428) (3,773)
Issuance of common stock upon exercise of options...................... 1,529 2 1,026 _ _
Issuance of common stock under Employee Stock Purchase Plan............ 141 _ 307 _ _
Exercise of warrants................................................... 426 _ 123 _ _
Conversion of preferred stock to common stock (see Note 9)............. 3,397 4 15,166 _ _
Unrealized gain on securities available for sale....................... _ _ _ _ _
Realized gain on securities available for sale......................... _ _ _ _ _
Currency translation adjustment........................................ _ _ _ _ _
Issuance of common stock in connection with acquisitions............... 3,955 4 18,530 _ _
Issuance of common stock............................................... 1,358 2 76,923 _ _
Deferred compensation.................................................. _ _ 968 _ (968)
Repayments by stockholders............................................. _ _ _ 98 _
Amortization of deferred compensation.................................. _ _ _ _ 1,627
Redeemable stock accretion............................................. _ _ (3,877) _ _
Net loss............................................................... _ _ _ _ _
====== === ======== ===== =======
Balance at July 31, 2000...............................................
42,307 42 146,051 (330) (3,114)
Issuance of common stock upon exercise of options, net of repurchases.. 1,052 2 995 _ _
Issuance of common stock under Employee Stock Purchase Plan............ 237 _ 821 _ _
Exercise of warrants................................................... 138 _ 2 _ _
Unrealized loss on securities available for sale....................... _ _ _ _ _
Realized loss on securities available for sale......................... _ _ _ _ _
Currency translation adjustment........................................ _ _ _ _ _
Issuance of common stock in connection with acquisitions............... 805 1 1,572 _ _
Stock-based compensation on issuance of common stock................... 16 _ 388 _ _
Reversal of stock-based compensation on termination of employees....... _ _ (1,650) _ 1,650
Deferred compensation.................................................. _ _ 300 _ (300)
Amortization of deferred compensation.................................. _ _ _ _ 1,058
Net loss............................................................... _ _ _ _ _
====== === ======== ===== =======
Balance at July 31, 2001............................................... 44,555 $45 $148,479 $(330) $ (706)
====== === ======== ===== =======
Accumulated
Other
Accumulated Comprehensive Stockholders' Comprehensive
Deficit Income Equity Loss
----------- ------------- ------------- -------------
Balance at July 31, 1998............................................... $ (9,562) $ _ $ 25,824
Issuance of common stock upon exercise of options...................... _ _ 1,165 $ _
Issuance of common stock under Employee Stock Purchase Plan............ _ _ 308 _
Repurchase of unvested common stock.................................... _ _ (2) _
Exercise of warrants................................................... _ _ _ _
Notes issued to stockholders........................................... _ _ (362) _
Unrealized gain on securities available for sale....................... _ 3,533 3,533 3,533
Realized gain on securities available for sale......................... _ (2,650) (2,650) (2,650)
Currency translation adjustment........................................ _ (6) (6) (6)
Issuance of common stock............................................... _ _ 47 _
Deferred compensation.................................................. _ _ _ _
Amortization of deferred compensation.................................. _ _ 410 _
Redeemable stock accretion............................................. _ _ (4,238) _
Net loss............................................................... (5,828) _ (5,828) (5,828)
======== ======= ======== ========
Balance at July 31, 1999............................................... $ (4,951)
(15,390) 877 18,201 ========
Issuance of common stock upon exercise of options...................... _ _ 1,028 $ _
Issuance of common stock under Employee Stock Purchase Plan............ _ _ 307 _
Exercise of warrants................................................... _ _ 123 _
Conversion of preferred stock to common stock (see Note 9)............. _ _ 15,170 _
Unrealized gain on securities available for sale....................... _ 1,345 1,345 1,345
Realized gain on securities available for sale......................... _ (2,221) (2,221) (2,221)
Currency translation adjustment........................................ _ 16 16 16
Issuance of common stock in connection with acquisitions............... _ _ 18,534 _
Issuance of common stock............................................... _ _ 76,925 _
Deferred compensation.................................................. _ _ _ _
Repayments by stockholders............................................. _ _ 98 _
Amortization of deferred compensation.................................. _ _ 1,627 _
Redeemable stock accretion............................................. _ _ (3,877) _
Net loss............................................................... (22,199) _ (22,199) (22,199)
======== ======= ======== ========
Balance at July 31, 2000............................................... $(23,059)
(37,589) 17 105,077 ========
Issuance of common stock upon exercise of options, net of repurchases.. _ _ 997 $ _
Issuance of common stock under Employee Stock Purchase Plan............ _ _ 821 _
Exercise of warrants................................................... _ _ 2 _
Unrealized loss on securities available for sale....................... _ (184) (184) (184)
Realized loss on securities available for sale......................... _ 340 340 340
Currency translation adjustment........................................ _ (62) (62) (62)
Issuance of common stock in connection with acquisitions............... _ _ 1,573 _
Stock-based compensation on issuance of common stock................... _ _ 388 _
Reversal of stock-based compensation on termination of employees....... _ _ _ _
Deferred compensation.................................................. _ _ _ _
Amortization of deferred compensation.................................. _ _ 1,058 _
Net loss............................................................... (41,818) _ (41,818) (41,818)
======== ======= ======== ========
Balance at July 31, 2001............................................... $(79,407) $ 111 $ 68,192 $(41,724)
======== ======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-4
PUMATECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended July 31,
----------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net loss...................................................................... $(41,818) $(22,199) $ (5,828)
Adjustments to reconcile net loss to net cash used in operating activities:
Purchased in-process research and development.............................. -- 4,218 --
Severance costs and facilities costs and assets held for disposal.......... 753 -- 331
Other-than-temporary impairment of direct investments...................... 1,180 -- --
Loss on impairment of assets............................................... 10,614 -- --
Allowance for doubtful accounts............................................ 1,235 456 492
Depreciation and amortization.............................................. 10,483 4,215 1,678
Non-cash stock compensation................................................ 1,058 2,002 410
Realized loss (gain) on sale of investment................................. 340 (2,221) (2,650)
Changes in assets and liabilities:............................................
Accounts receivable........................................................ 611 (3,514) (37)
Inventories................................................................ 2 23 (14)
Other current assets....................................................... 14 (1,092) (180)
Accounts payable........................................................... (60) 1,259 (354)
Accrued liabilities........................................................ 198 (465) 493
Deferred revenue........................................................... (2,836) 2,313 2,320
Other assets and liabilities............................................... (543) (692) (36)
-------- -------- --------
Net cash used in operating activities................................... (18,769) (15,697) (3,375)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment............................................ (4,856) (3,105) (877)
Purchase of short term investments............................................ (45,128) (41,813) (20,230)
Sale and maturities of short-term investments................................. 45,655 24,318 25,551
Investments in non-marketable securities...................................... (1,250) (2,132) --
Acquisitions, net of cash acquired............................................ (12,570) (2,450) --
-------- -------- --------
Net cash provided by (used in) investing activities..................... (18,149) (25,182) 4,444
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations............................ -- -- (69)
Principal payments on notes payable........................................... (267) -- (203)
Proceeds from line of credit, net............................................. -- 236 175
Loan to related party (Note 5)................................................ (235) -- --
Note repayments from (advances to) stockholders............................... -- 98 (362)
Proceeds from exercise of warrants............................................ 2 123 --
Proceeds from issuance of convertible preferred stock, net.................... -- -- 7,055
Proceeds upon exercise of stock options, net.................................. 997 1,028 1,165
Proceeds from issuance of common stock, net................................... 821 77,232 353
-------- -------- --------
Net cash provided by financing activities............................... 1,318 78,717 8,114
-------- -------- --------
Effect of exchange rate changes on cash........................................... (55) 15 30
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.............................. (35,655) 37,853 9,213
Cash and cash equivalents at beginning of period.................................. 54,492 16,639 7,426
-------- -------- --------
Cash and cash equivalents at end of period........................................ $ 18,837 $ 54,492 $ 16,639
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid................................................................. $ 50 $ 58 $ 17
======== ======== ========
Income taxes paid............................................................. $ 351 $ 631 $ --
======== ======== ========
Common stock issued in connection with business acquisitions.................. $ 1,573 $ 18,534 $ --
======== ======== ========
Conversion of preferred stock to common stock (Note 9)........................ $ -- $ 15,170 $ --
======== ======== ========
Non-cash stock compensation................................................... $ 300 $ 968 $ 4,130
======== ======== ========
Reversal of stock-based compensation on termination of employees.............. $ (1,650) $ -- $ --
======== ======== ========
Accretion of redeemable convertible preferred stock........................... $ -- $ 3,877 $ 4,238
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
PUMATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 The Company and a Summary of its Significant Accounting Policies
The Company
Pumatech, Inc. (Pumatech or the "Company") was incorporated in California on
August 27, 1993 and was subsequently reincorporated in Delaware on November 27,
1996, both under the name Puma Technology, Inc. In December 2000, the Company
changed its name to Pumatech, Inc. The Company develops, markets and supports
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.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, including the company formerly
known as NetMind Technologies, Inc. (NetMind) that merged with and into a
wholly-owned subsidiary of Pumatech on February 24, 2000 in a pooling of
interests transaction. (Refer to Note 3 for more information on the acquisition
of NetMind.) All periods presented have been restated in order to include the
financial results of NetMind since inception. All significant inter-company
accounts and transactions have been eliminated. Certain amounts in prior
periods have been reclassified to conform to the current presentation.
Prior to the acquisition, NetMind's fiscal year ended on December 31. The
consolidated financial statements for the years ended July 31, 2001, 2000, and
1999 reflect the results of operations of Pumatech combined with the results of
operations of NetMind for the corresponding periods.
Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition"
which superseded SOP 91-1 and provides guidance on generally accepted
accounting principles for recognizing revenue on software transactions. SOP
97-2 requires that revenue recognized from software arrangements be allocated
to each element of the arrangement based on the relative fair values of the
elements, such as software products, upgrades, enhancements, post contract
customer support, installations or training. Under SOP 97-2, the determination
of fair value is based on objective evidence, which is specific to the vendor.
If such evidence of fair value for each element of the arrangement does not
exist, all revenue from the arrangement is deferred until such time that
evidence of fair value does exist or until all elements of the arrangement are
delivered. SOP 97-2 was amended in February 1998 by SOP 98-4, "Deferral of the
effective date of Provision of SOP 97-2" and was amended again in December 1998
by SOP 98-9, "Modification of 97-2, Software Revenue recognition with Respect
to Certain Transactions." Those amendments deferred and then clarified,
respectively, the specification of what was considered vendor specific
objective evidence of fair value for the various elements in a multiple element
arrangement. The Company adopted the provisions of SOP 97-2 and SOP 98-4 as of
August 1, 1998.
F-6
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
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. The Company adopted SAB No. 101, as amended, in the fourth quarter
of fiscal 2001 as required. The adoption of SAB No. 101 did not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
Revenue is derived from software licenses and related services, which
include implementation and integration, technical support, training and
consulting. For contracts with multiple elements, and for which vendor-specific
objective evidence of fair value for the undelivered elements exists, revenue
is recognized for the delivered elements based upon the residual contract value
as prescribed by Statement of Position No. 98-9, "Modification of SOP No. 97-2
with Respect to Certain Transactions". The Company has accumulated relevant
information from contracts to use in determining the availability of
vendor-specific objective evidence and believes that such information complies
with the criteria established in Statement of Position 97-2 as follows:
. Customers are required to pay separately for annual maintenance. Future
renewal rates are included as a term of the contracts. The Company uses
the renewal rate as vendor-specific objective evidence of fair value for
maintenance.
. The Company charges standard hourly rates for consulting services based
upon the nature of the services and experience of the professionals
performing the services, and such services are separately priced in
contracts.
. For training, the Company charges standard course rates for each course
based upon the duration of the course, and such courses are separately
priced in contracts. The Company has a history of selling such courses
separately.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations with regard to implementation or integration exist, the fee is
fixed or determinable and collectibility is probable. Arrangements for which
the fees are not deemed probable for collection are recognized upon cash
collection. Arrangements for which the fees are not deemed fixed or
determinable are recognized in the period they become due. Payments from
customers received in advance of revenue recognition are recorded as deferred
revenue.
Services revenue primarily comprises revenue from consulting fees,
maintenance contracts and training. Services revenue from consulting and
training is recognized as the service is performed. Maintenance contracts
include the right to unspecified upgrades and ongoing support. Maintenance
revenue is deferred and recognized on a straight-line basis as services revenue
over the life of the related contract.
License and services revenue on contracts involving significant
implementation, customization or services, which are essential to the
functionality of the software is recognized over the period of each engagement,
primarily using the percentage-of-completion method. Labor hours incurred is
generally used as the measure of progress towards completion. Revenue for these
arrangements is classified as license revenue and services revenue based upon
our estimates of fair value for each element and recognizes the revenue based
on the percentage-of-completion ratio for the arrangement. A provision for
estimated losses on engagements is made in the period in which the loss becomes
probable and can be reasonably estimated.
The Company currently sells its products directly to corporations, to
original equipment manufacturers (OEMs) and to a lesser extent to distributors
and resellers in the United States, Africa, Asia, Australia, Canada, Europe,
New Zealand and South America. The Company grants distributors and resellers
certain rights of return
F-7
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
and price protection on unsold merchandise held by those distributors and
resellers. Accordingly, reserves for estimated future returns and credits for
price protection are provided for upon revenue recognition. Such reserves are
based on historical rates of returns and allowances, distributor inventory
levels and other factors.
Revenue from OEMs under minimum guaranteed royalty arrangements, which are
not subject to significant future obligations, is recognized when such
royalties are earned and become payable. Royalty revenue that is subject to
significant future obligations is recognized when such obligations are
fulfilled. Royalty revenue that exceeds minimum guarantees is recognized in the
period earned.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less at the date of purchase to be cash
equivalents.
Short Term Investments
The Company considers cash invested in highly liquid financial instruments
with original maturities greater than three months to be short-term
investments, which are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." SFAS 115 requires the Company to classify debt and
equity securities into one of three categories: held to maturity, trading or
available for sale. As of July 31, 2001 and 2000, the Company's short-term
investments include commercial paper, corporate notes, certificates of deposit,
and auction rate preferred stock, which are classified as held-to-maturity and
valued using the amortized cost method which approximates market value.
Short-term investments also include United States government backed securities
and equity securities, which are classified as available-for-sale and carried
at fair value, with the unrealized gains and losses reported as a separate
component of shareholders' equity. Short-term investments have maturities of
less than one year from the balance sheet date, except for certain investments
classified as available-for-sale which the Company intends to sell in the next
fiscal year. Realized gains and losses on sales of investment securities are
included in the consolidated statements of operations. The cost of securities
sold is based on the specific identification method. Refer to Note 2 for more
details on short-term investments.
Inventories
Inventories consist principally of software and related documentation, which
are stated at the lower of cost (first-in, first-out) or market.
Software Development Costs
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. The Company defines establishment of technological
feasibility at the point which 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 in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed," if material. To date, all software
development costs have been expensed as incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to five years, or in the case of leased assets,
F-8
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
the life of the lease, if shorter. Repair and maintenance costs are charged to
operations as incurred and major improvements are capitalized. The Company
reviews the carrying amount of fixed assets and evaluates the remaining life
and recoverability of such equipment in light of current market condition. Upon
disposal, the assets and related accumulated depreciation are removed from the
Company's accounts and resulting gains and losses are recorded in other income
or expense.
The Company follows the provisions of the AICPA's SOP 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use", in
determining the amount of software costs developed in-house to be capitalized.
The Company applies the provisions of Emerging Issues Task Force Issue (EITF)
No. 00-02 "Accounting for Website Development Costs" in determining the amount
of website development costs to be capitalized. These standards require
capitalization of certain direct development costs associated with internal use
software and website development costs. Costs to be capitalized include
internal and external direct project costs including, among others, payroll and
labor, material, and services. These costs are being amortized over the lesser
of the estimated useful life. Costs incurred on new projects, projects in a
preliminary phase and projects that contract negotiations have not begun, as
well as maintenance, and training costs are charged to expense as incurred.
Intangible Assets
Goodwill represents the unamortized portion of the excess of the purchase
price of acquired businesses over the fair value of the identifiable net assets
acquired and is amortized using the straight-line method over estimated useful
lives ranging from three to five years.
Identifiable intangible assets result from the application of the purchase
method of accounting for the Company's acquisitions and are composed of the
unamortized identifiable assets including acquired workforce in place, customer
contracts, developed technology and core technology. Acquired
workforce-in-place is amortized over the period of benefit, generally 18
months. Customer contracts are amortized over the period of benefit of the
respective contracts. Acquired developed and core technology is amortized over
the period of benefit, generally three years.
Long-Term Investments
Long-term investments that are not represented by marketable securities are
carried at cost less write-downs for declines in value that are judged to be
other-than-temporary. Dividends are recorded in other income when received.
Long Lived Assets
The Company periodically evaluates the carrying value of long-lived assets
and certain identifiable intangibles for impairment, when events and
circumstances indicate that the carrying amount of an asset may not be
recoverable. Factors considered important which could trigger an impairment
review include, but are not limited to significant changes in the manner of use
of the acquired assets or the strategy for the Company's overall business,
significant negative industry or economic trends, a significant decline in the
Company's stock price for a sustained period, and the Company's market
capitalization relative to net book value. When the Company determines that the
carrying value of long-lived assets may not be recoverable based on the
existence of one or more of the above indicators of impairment, the Company
measures any impairment based on a projected discounted cash flow method using
a discount rate commensurate with the risk inherent in the Company's current
business model. An impairment loss is recognized whenever the evaluation
demonstrates that
F-9
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
the carrying amount of a long-lived asset is not recoverable. Refer to Note 2
for balance sheet components, including long-lived assets, and Notes 4 and 12
for details on impairment of long-lived assets.
Restricted Cash
Restricted cash represents cash held by a financial institution as
collateral on a letter of credit in connection with the Company's lease of
office space. Restricted cash was $686,000 and $600,000 at July 31, 2001 and
2000, respectively.
Shipping and Handling
During fiscal 2001, the Company adopted EITF No. 00-10, "Accounting for
Shipping and Handling Fees and Costs." EITF No. 00-10 addresses the income
statement classification of amounts billed to a customer for shipping and
handling costs as well as the classification of amounts incurred for shipping
and handling costs. The EITF No. 00-10 requires that amounts billed to
customers in sales transactions related to shipping and handling should be
classified as revenue, and any costs incurred should be classified as cost of
goods sold. The adoption of EITF No. 00-10 by the Company did not have a
material impact on the Company's financial position or results of operations.
Sales Incentives
In May 2000, the EITF released issue No. 00-14 "Accounting for Certain Sales
Incentives", which provides guidance on the accounting for certain sales
incentives offered by companies to their customers such as discounts, coupons,
rebates and products or services. EITF 00-14 addresses the recognition,
measurement and income statement classification for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or
that are exercisable by a customer as a result of a single exchange
transaction. The provisions of EITF 00-14 requires the Company to classify free
product and service incentives delivered to customers at the time of sale as
cost of sales in its consolidated statement of operations. The Company adopted
this statement on August 1, 2000. The adoption did not have a material impact
on the Company's financial position or results of operations.
Advertising Expense
The Company accrues for co-operative advertising as the related revenue is
earned, and other advertising expense is recorded as incurred. Advertising
costs, which are included in sales and marketing expense, were approximately
$2,765,000, $1,081,000 and $873,000 for the fiscal years 2001, 2000 and 1999,
respectively.
Income Taxes
Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of the assets and liabilities and are measured using the currently
enacted tax rates and laws. The measurement of deferred tax assets is reduced,
if necessary by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as a change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and
F-10
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
distributions to owners. The primary difference between net loss and
comprehensive income (loss) for the Company arises from foreign currency
translation adjustments and unrealized gains/(losses) on available-for-sale
securities.
Foreign Currency and Derivative Instruments
Balance sheet accounts of non-United States subsidiaries are translated into
United States dollars at exchange rates prevailing at balance sheet dates.
Revenues, costs and expenses are translated into United States dollars at
average rates for the period. Gains and losses resulting from translation are
accumulated as a component of stockholders' equity (deficit). Net gains and
losses resulting from foreign exchange transactions are included in the
consolidated statement of operations and were not significant during any of the
periods presented. To date, the Company has not engaged in hedging activities.
In June 1998, the Financial Accounting Standards Board (FASB) issued 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.
Concentration of Supply and Credit Risk
The Company depends on development tools provided by a limited number of
third party vendors. Together with application developers, the Company relies
primarily upon software development tools provided by companies in the personal
computer (PC) and mobile computing device industries. If any of these companies
fail to support or maintain these development tools, the Company will have to
support the tools itself or transition to another vendor. Any maintenance or
support of the tools by the Company 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 the Company's
products. Failure to procure the needed software development tools or any delay
in availability of third party applications could negatively impact the
Company's ability and the ability of third party application developers to
release and support the Company's products or they could negatively and
materially affect the acceptance and demand for the Company's products,
business and prospects.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and trade accounts receivable. The Company places its
cash, cash equivalents and short-term investments primarily in money market
accounts, commercial paper, corporate notes, certificates of deposit, and
government notes and bonds. At July 31, 2001, the Company held its depository
accounts with four financial institutions in the United States, three financial
institutions in Japan, and one financial institution in Ireland. Deposits with
these institutions may exceed the amount of insurance provided on such
deposits. The Company has not historically experienced any losses on deposits
held at these institutions. The Company, by policy, limits the amount of credit
exposure for cash equivalents and investments to any one issuer.
The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses. At July 31, 2001, one customer
accounted for 26% of accounts receivable. At July 31, 2000, one customer
accounted for 15% of accounts receivable. At July 31, 1999, two customers
accounted for 21% and 14% of accounts receivable, respectively. No customers
accounted for more than 10% of total revenue in fiscal 2001 and 2000. One
customer accounted for 14% of total revenue in fiscal 1999.
F-11
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
The Company's sales are generally denominated in United States dollars. The
Company does not undertake any foreign currency hedging activities.
Fair Value Of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and notes receivable from stockholders
approximate their respective fair values because of the short-term maturity of
these items. Based on the borrowing rates available for the Company's loans
with similar terms, the carrying values of the notes payable and capital lease
obligation approximate fair value.
Non-Cash Stock Compensation
The Company uses the intrinsic value method of Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," in accounting
for its employee stock options, and presents disclosure of proforma information
required under SFAS No. 123, "Accounting for Stock-Based Compensation." Stock
and other equity instruments issued to nonemployees is accounted for in
accordance with SFAS No. 123 and EITF No. 96-18, "Accounting for Equity
Instruments Issued to Other than Employees for Acquiring, or in Conjunction
with Selling Goods or Services" and valued using the Black Scholes model.
Expense associated with stock-based compensation is being amortized on an
accelerated basis over the vesting period of the individual award consistent
with the method described in FASB Interpretation (FIN) No. 28.
In March 2000, FASB issued FIN No. 44, "Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB Opinion No. 25." FIN No.
44 clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 became effective on July 1, 2000, but certain
conclusions in FIN No. 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The adoption of FIN No. 44 by the
Company did not have a material impact on the Company's financial position or
results of operations.
Net Income (Loss) Per Share
Net income (loss) per share is computed in accordance with SFAS No. 128.
Basic net income per share is computed using the weighted average common shares
outstanding during the period. Diluted net income per share is computed using
the weighted average common shares and dilutive common equivalent shares
outstanding during the period.
F-12
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Note 2 Balance Sheet Components
Cash equivalents and short-term investments include available-for-sale
securities as follows:
July 31, 2001
----------------------------------
Gross Gross Estimated
Amortized Unrealized Fair
Cost Gains/(Losses) Value
--------- -------------- ---------
(In thousands)
Cash equivalents
Commercial paper......................... $ 3,444 $ -- $ 3,444
Corporate notes.......................... 5,971 -- 5,971
Money market funds....................... 7,156 -- 7,156
------- ---- -------
$16,571 $ -- $16,571
======= ==== =======
Short term investments
Commercial paper......................... $ 2,182 $ -- $ 2,182
Corporate notes.......................... 6,907 -- 6,907
Certificate of deposit................... 2,000 -- 2,000
Government notes and bonds............... 16,030 176 16,206
Auction rate preferred stock............. 2,700 -- 2,700
Other.................................... 89 (13) 76
------- ---- -------
$29,908 $163 $30,071
======= ==== =======
July 31, 2000
------------------------------
Gross Gross Estimated
Amortized Unrealized Fair
Cost Gains Value
--------- ---------- ---------
(In thousands)
Cash equivalents
Commercial paper............................. $38,927 $-- $38,927
Corporate notes.............................. -- -- --
Money market funds........................... 13,610 -- 13,610
------- --- -------
$52,537 $-- $52,537
======= === =======
Short term investments
Commercial paper............................. $11,524 $-- $11,524
Corporate notes.............................. 1,515 -- 1,515
Certificate of deposit....................... 2,000 -- 2,000
Government notes and bonds................... 10,904 -- 10,904
Auction rate preferred stock................. 4,600 -- 4,600
Other........................................ 218 7 225
------- --- -------
$30,761 $ 7 $30,768
======= === =======
The realized loss on sales of securities was $340,000 for the year ended
July 31, 2001. The realized gain on sales of securities was $2,221,000 and
$2,650,000 for the years ended July 31, 2000 and July 31, 1999, respectively.
The short-term investments include securities with maturities of less than one
year from the balance sheet date and certain investments classified as
available-for-sale which the Company intends to sell in the next fiscal year.
F-13
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Inventories, net, consist of the following:
July 31,
-------------
2001 2000
---- ----
(In thousands
Raw materials.............................................. $ 74 $173
Finished goods and work-in-process......................... 185 149
---- ----
259 322
Less: Inventory reserves................................... (26) (87)
---- ----
Inventories, net........................................ $233 $235
==== ====
Property and equipment, net, consist of the following:
July 31,
----------------
2001 2000
------- -------
(In thousands)
Computer equipment and software............................ $ 8,495 $ 5,977
Furniture and office equipment............................. 2,376 2,313
Leasehold improvements..................................... 1,332 1,006
------- -------
12,203 9,296
Less: Accumulated depreciation and amortization............ (5,229) (4,468)
------- -------
Property and equipment, net............................. $ 6,974 $ 4,828
======= =======
At July 31, 2001, the Company had no equipment under capital lease. The
depreciation expense for fiscal years 2001, 2000 and 1999 was $2,685,000,
$1,428,000 and $1,678,000, respectively.
Intangible assets, net, consist of the following:
July 31,
-----------------
2001 2000
-------- -------
(In thousands)
Intangible assets:
Goodwill................................................ $ 14,746 $14,130
Developed technology.................................... 7,230 5,711
Acquired workforce-in-place............................. 2,231 900
Existing contracts...................................... 200 --
-------- -------
24,407 20,741
Less: Accumulated amortization............................. (11,589) (3,632)
-------- -------
Intangible assets, net.................................. $ 12,818 $17,109
======== =======
Additions to intangible assets arose from the asset acquisitions of The
Windward Group and SwiftTouch Corporation. The amount of goodwill at July 31,
2001 also reflects impairment write-down of $9,901 incurred in fiscal 2001.
The amortization expense for fiscal 2001 was $7,957,000, exclusive of
$9,901,000 impairment charge. The amortization expense for fiscal 2000 and 1999
was $2,630,000 and $459,000, respectively.
Refer to Note 3 and Note 12 for more information on the acquisitions and
impairment of certain intangibles, respectively.
F-14
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Other assets consist of the following:
July 31,
--------------
2001 2000
------ ------
(In thousands)
Long-term deposits......................................... $ 322 $ 28
Investments (Note 4)....................................... 2,502 2,432
Long-term receivable from Vanteon Corporation.............. 389 --
Other long-term assets..................................... 12 73
------ ------
Other assets............................................ $3,225 $2,533
====== ======
Other-than-temporary impairment of direct investments totaled $1,180,000 for
fiscal 2001. Refer to Note 4 for more information on the impairment.
Accrued liabilities consist of the following:
July 31,
--------------
2001 2000
------ ------
(In thousands)
Payroll related accruals................................... $2,705 $2,623
Other accrued liabilities.................................. 1,934 1,413
------ ------
Accrued liabilities..................................... $4,639 $4,036
====== ======
Note 3 Business Combinations and Impairment of Purchased Intangibles
Pooling of Interests Combination
NetMind Technologies, Inc.
On February 24, 2000, the Company completed its acquisition of NetMind, a
provider of scalable software solutions that integrate user-driven
personalization technologies into the Internet infrastructure. Pursuant to the
terms of the Agreement and Plan of Reorganization dated December 8, 1999, the
Company issued approximately 8,808,000 shares of Pumatech's common stock in the
acquisition and assumed options and warrants that can be exercised for
approximately 801,000 and 391,000 shares of Pumatech's common stock
respectively.
The acquisition has been accounted for as a pooling-of-interests. Prior to
the acquisition, NetMind's fiscal year ended on December 31. The consolidated
financial statements for the years ended July 31, 2001, 2000, and 1999 reflect
the results of operations of Pumatech for the years ended July 31, 2001, 2000,
and 1999 combined with the results of operations of NetMind for the
corresponding periods.
The Company incurred $6,322,000 in acquisition-related charges, principally
in the fiscal third quarter ended April 30, 2000. These charges include direct
transaction costs primarily for financial advisory services, legal and
consulting fees and costs associated with combining the operations of the two
companies.
Purchase Combinations
ProxiNet, Inc.
On October 28, 1999, Pumatech closed the acquisition of ProxiNet, Inc.
(ProxiNet), a software development company focusing on software that will
enable users with handheld devices and wireline or wireless modems to access
the Internet quickly, conveniently and securely. Under the terms of the
agreement, the Company issued 5,200,000 shares of Common Stock, including stock
options, in exchange for all outstanding shares of ProxiNet and options to
purchase shares of ProxiNet.
F-15
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
The ProxiNet acquisition has been accounted for as a purchase. The
consolidated financial statements include the results of operations of ProxiNet
since the date of acquisition. The total purchase price of approximately
$17,384,000 (including liabilities of $2,070,000), was assigned, based on an
independent appraisal, to the fair value of the assets acquired, including the
following (in thousands):
Tangible assets acquired................................... $ 676
In-process research and development........................ 4,218
Core technology............................................ 3,092
Acquired workforce......................................... 286
Goodwill................................................... 9,112
-------
$17,384
=======
As of the acquisition date, technological feasibility of the in-process
technology 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, 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 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), the Company believes 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
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.
Dry Creek Software, LLC
On July 14, 2000, Pumatech closed the acquisition of Dry Creek Software, LLC
(Dry Creek), a California Limited Liability Corporation and a professional
services entity engaged in delivering software products and services that
enable rapid integration of new product features into e-business applications.
Under the terms of the agreement, the Company paid $1,987,500 in cash and
issued approximately 153,000 shares of common stock in exchange for all
outstanding Dry Creek membership interests.
F-16
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
The Dry Creek acquisition has been accounted for as a purchase. The
consolidated financial statements include the results of operations of Dry
Creek since the date of acquisition. The total purchase price of approximately
$6,886,000 (including liabilities of $931,000 ), was assigned, based on
independent appraisal, to the fair value of the assets acquired, including the
following (in thousands):
Tangible assets acquired................................... $ 169
Developed technology....................................... 345
Core technology............................................ 1,414
Acquired workforce......................................... 404
Goodwill................................................... 4,554
------
$6,886
======
The above goodwill reflects a final net adjustment to the purchase price of
$70,000. The intangible assets acquired are being amortized using the
straight-line method over the estimated useful life of the assets, 18 months to
5 years. During the fourth quarter of fiscal 2001, the Company recorded an
impairment write-down of the above goodwill due to impairment. Refer to Note 12
for more details on the impairment charge.
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, the
Company 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-K, no additional shares were released
for the quarters ended April 30, 2001 and July 31, 2001 as the Company has
determined that the performance milestones set for the said quarters had not
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.
The Windward acquisition has been accounted for as a purchase business
combination. The 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
Customer contracts......................................... 200
Acquired workforce-in-place................................ 1,281
Goodwill................................................... 10,347
-------
$12,234
=======
F-17
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
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. During the fourth quarter of fiscal 2001, the Company recorded an
impairment write-down of the above goodwill due to impairment. Refer to Note 12
for more details on the impairment charge.
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
to secure the indemnification and other obligations of SwiftTouch. 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.
The SwiftTouch acquisition has been accounted for as a purchase business
combination. The 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 were originally amortized using the
straight-line method over the estimated useful life of the assets ranging from
18 months to 5 years. During the fourth quarter of fiscal 2001, the Company
recorded a write-down of the above goodwill and identifiable intangibles due to
impairment. Refer to Note 12 for more details on the impairment charges.
F-18
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Pro Forma Results (Unaudited)
The following unaudited pro-forma consolidated financial information
reflects the results of operations for the fiscal years ended July 31, 2001 and
2000, as if the acquisitions of ProxiNet, Dry Creek and Windward had occurred
on August 1, 1999 and after giving effect to purchase accounting adjustments
but excluding the impact of write-offs of acquired in-process technology. The
pro forma effect of the SwiftTouch acquisition as if it had occurred on August
1, 1999 is immaterial and, therefore, excluded from the following pro-forma
consolidated financial information. 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 acquisitions actually taken place on
August 1, 1999 and may not be indicative of future operating results.
Year Ended July 31,
------------------------
2001 2000
-------- --------
(In thousands, except pe
share data)
Pro-forma revenue................................ $ 40,306 $ 39,894
Pro-forma net loss............................... $(37,938) $(31,613)
Pro-forma basic and diluted loss per share....... $ (0.86) $ (0.89)
Note 4 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 3% 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):
July 31,
-------------
2001 2000
------ ------
Azure Venture Partners, LLP................................ $2,500 $1,250
YadaYada, Inc. (fka Free Communications, Inc.)............. -- 750
If & Then, Inc............................................. -- 330
PulseMD Corporation (fka 7th Street, Inc.)................. -- 100
Others..................................................... 2 2
------ ------
Long-term investments................................... $2,502 $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.
During the third quarter of fiscal 2001, the Company determined 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 these entities 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
fiscal 2001.
F-19
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Note 5 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 date, or on the due date, whichever is sooner. The underlying
amount is classified as "Other Current Assets" in the consolidated balance
sheet.
Note 6 Employee 401(k) Plan
The Company has adopted a plan to provide retirement and incidental benefits
for its employees. As allowed under Section 401(k) of the Internal Revenue
Code, the Plan provides tax-deferred salary deductions for eligible employees.
Employees may contribute from 1% to 20% of their annual compensation, limited
to a maximum annual amount as set periodically by the Internal Revenue Service.
As of fiscal 2001, the Company matches 50% of employee contributions up to a
maximum of $750 per year per person. Employee contributions vest immediately,
whereas Company matching contributions vest at a rate of 25 percent per year
after first year of employment. At the direction of each employee participant,
the trustee of the 401(k) plan invests the contributions to the 401(k) plan in
selected investment options. The Company's matching contributions to the 401(k)
plan were approximately $151,000, $74,000 and $0 in fiscal 2001, 2000 and 1999,
respectively.
Note 7 Notes Payable
The Company's long-term notes payable includes the following:
July 31,
--------------
2001 2000
---- ----
(In thousands)
Equipment line, 9.3% average rate,
payable through March 2003........... $302 $561
Other.................................. -- 8
---- ----
302 569
Less: Short-term portion of notes
payable.............................. 302 259
---- ----
Long-term notes payable............. $ -- $310
==== ====
The Company maintains a 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 the Company 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 restrictions on 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. Principal and interest payments are due monthly. At
July 31, 2001, $302,000 was outstanding on the equipment line and will be paid
in full in the first quarter of fiscal 2002. The Company had no outstanding
balance drawn on the revolving credit line.
On March 29, 2001, the Company entered into a loan and security agreement
with a bank under which it can borrow up to $10,000,000. The loan and security
agreement expires 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,
F-20
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
receivables, inventories, equipment, and intangibles. The loan and security
agreement contains covenants requiring that the Company 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. As of
July 31, 2001, the Company was in compliance with the loan covenants. Principal
is due at expiration, and interest payments are generally due monthly. At July
31, 2001, there were no outstanding borrowings under the agreement.
Note 8 Commitments and Contingencies
The Company leases its facilities under operating leases that expire at
various dates through April 2006. The leases provide for escalating lease
payments.
Future minimum lease payments, at July 31, 2001 were as follows:
Operating
Leases
--------------
(In thousands)
Fiscal year ending July 31,
2002................................ $ 2,490
2003................................ 2,718
2004................................ 2,456
2005................................ 2,372
2006................................ 1,662
-------
Total future minimum lease
payments...................... $11,698
=======
Total rent expense was approximately $2,212,000, $1,225,000 and $1,161,000
for the years ended July 31, 2001, 2000 and 1999, respectively.
The Company is also committed to invest an additional $2,500,000 ($1,500,000
in fiscal 2002) in Azure Venture Partners.
The Company is involved in litigation arising from the normal course of
business. In management's opinion, this litigation is not expected to
materially impact the Company's consolidated results of operations or financial
condition.
Note 9 Redeemable Convertible Preferred Stock
During fiscal 1999 NetMind issued approximately 4.1 million shares of Series
B Redeemable Preferred Stock which converted into approximately 3.4 million
shares of the Company's 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 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 until the date of conversion to common stock. Such
accretion aggregated $3,877,000 and $4,238,000 in years ended July 31, 2000 and
1999, respectively.
F-21
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
The following table summarizes activities related to the Redeemable
Convertible Preferred Stock:
Redeemable Convertible
Preferred Stock
---------------------
Shares Amount
------ --------
(In thousands)
NetMind's issuance of Series B Mandatorily Redeemable Convertible Preferred Stock at
$1.74 per share in October 1998, net of issuance costs................................. 4,072 $ 7,055
Accretion of Mandatorily Redeemable Convertible Preferred Stock to redemption value...... -- 4,238
------ --------
Balance at July 31, 1999................................................................. 4,072 11,293
Accretion of Mandatorily Redeemable Convertible Preferred Stock to redemption value...... -- 3,877
Conversion of Mandatorily Redeemable Convertible Preferred Stock into 3,397 shares of
Pumatech's common stock................................................................ (4,072) (15,170)
------ --------
Balance at July 31, 2000................................................................. -- $ --
====== ========
Note 10 Stockholders' Equity
Stock Option Plans. In October 1993, the Board of Directors and stockholders
adopted the 1993 Stock Option Plan (the "Plan") which provides for granting of
incentive stock options (ISOs) and nonqualified stock options (NSOs) to
purchase shares of common stock to employees, directors, consultants and
advisors of the Company. To date, the Company has not granted any significant
options to consultants or advisors. In accordance with the Plan, the stated
exercise price shall be not less than 100% and 85% of the estimated fair market
value of common stock on the date of grant for ISOs and NSOs, respectively, as
determined by the Board of Directors. The Plan provides that the options shall
be exercisable over a period not to exceed ten years. Options generally vest
25% one year after date of grant and 1/48th each month thereafter for the next
36 months. The Plan provides that the options may be exercised prior to the
options becoming vested but the shares are subject to repurchase. If the
optionee's employment is terminated for any reason, the Company has the right
to repurchase any unvested shares. Options available for grant as of July 31,
2001 were approximately 1,089,000 shares.
In October 1998, the Board of Directors approved the repricing of certain
outstanding stock options under the Plan. Each employee, officer and director
who elected to participate in the repricing program received a new option with
an exercise price of $1.0938 (the fair market value on October 29, 1998). Each
repriced option retained its original vesting schedule except that no portion
of the option could be exercised prior to January 29, 1999. Options to purchase
4,719,032 shares were repriced pursuant to the program.
The Company has assumed certain options granted to former employees of
acquired companies (the "Acquired Options"). All of the Acquired Options have
been adjusted to effectuate the conversion under the terms of the agreements
between the Company and the companies acquired. The Acquired Options generally
become exercisable over a four-year period and generally expire ten years from
the date of grant. No additional options will be granted under any of these
plans. Refer to Note 3 for more information on the acquired companies.
In March 2000, the Board of Directors adopted the 2000 Supplemental Stock
Option Plan (the "SSOP") which provides for granting of nonqualified stock
options to purchase shares of common stock to non-executive officers, employees
and consultants of the Company. In accordance with the SSOP, the stated
exercise price shall
F-22
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
not be less than 85% of the estimated fair market value of common stock on the
date of grant as determined by the Board of Directors. The SSOP provides that
the options shall be exercisable over a period not to exceed ten years. Options
generally vest 25% one year after date of grant and 1/48th each month
thereafter for the next 36 months. Options available for grant as of July 31,
2001 were approximately 1,196,000 shares.
In January 2001, the Company's Board of Directors approved a cancellation
and regrant program for outstanding options. Under the program, holders of
outstanding options granted after July 24, 1996, with exercise prices in excess
of $15.00 per share were given the choice of retaining these options or
obtaining in substitution repriced options for the same number of shares that
will be issued on a date which is at least six months plus one day from the
cancellation date. Holders of approximately 2,676,000 shares elected to
participate in the program and received the new options. The re-grants for
executive officers and directors were priced at $2.10 (the fair market value on
July 30, 2001, the date of the new grant). The re-grants for employees were
priced at $1.78 (85% of the underlying market price on July 30, 2001). The new
options vest according to their original grant schedules.
Stock option activity, both incentive and nonqualified, under all plans is
presented as follows:
Weighted Average
Option Shares Range of Price Exercise Price
(In thousands) Per Share per Share
-------------- -------------- ----------------
Outstanding at July 31, 1998...... 5,002 $0.10-$ 4.88 $ 2.68
Granted........................ 7,408 $0.13-$ 2.94 $ 1.30
Exercised...................... (1,388) $0.10-$ 1.25 $ 0.84
Canceled....................... (5,934) $0.10-$ 4.88 $ 2.69
-------------
Outstanding at July 31, 1999...... 5,088 $0.10-$ 2.94 $ 1.16
Granted........................ 5,924 $0.16-$83.50 $27.44
Exercised...................... (1,529) $0.10-$ 2.94 $ 0.67
Canceled....................... (1,530) $0.13-$83.50 $30.12
-------------
Outstanding at July 31, 2000...... 7,953 $0.10-$83.50 $14.70
Granted........................ 4,162 $1.78-$24.72 $ 5.29
Exercised...................... (1,056) $0.13-$ 7.50 $ 0.95
Canceled....................... (4,472) $0.13-$83.50 $25.72
-------------
Outstanding at July 31, 2001...... 6,587 $0.10-$27.06 $ 3.47
=============
Proceeds received by the Company from exercises are credited to common stock
and additional paid-in capital.
At July 31, 2001, there were no shares subject to repurchase, and options to
purchase approximately 2,285,000 shares were available for future grants.
Deferred Stock Compensation. Based on an independent appraiser's valuation
report, management believed that the exercise price for certain options granted
during fiscal 1996 were below the estimated fair value of the Company's stock
at the dates of grant. The Company is recognizing approximately $115,000 in
fiscal 1996 of compensation expense over the options' four-year vesting
periods.
In conjunction with certain options granted by NetMind, the Company is
recognizing over the options' four-year vesting periods a deferred compensation
expense of approximately $3,563,000, $115,000 of which the Company recorded in
fiscal 2001 in conjunction with remeasuring variable stock options. The total
number of options accounted for under variable accounting relating to NetMind
was approximately 24,000, of which all were vested and approximately 6,500
remained outstanding and exercisable at July 31, 2001.
F-23
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
In conjunction with the cancellation and regrant program implemented in
January 2001 as described above, the new options granted to executive officers
and directors were priced at the fair market value on the date of the new grant
and accounted for as fixed awards. Accordingly, no stock compensation charge is
recorded for these new options. The new options granted to employees were
priced at a discount and accounted for using variable accounting under the
guidance in FIN No. 44. According to FIN No. 44, the associated compensation
charge under variable accounting is based on any excess of the common stock
closing price at the end of the reporting period or date of exercise,
forfeiture, cancellation without replacements, if earlier, over the exercise
price (i.e. intrinsic value). Accordingly, the Company is recognizing
approximately $185,000 of the underlying deferred compensation charge for the
employees' options on an accelerated basis over the remaining vesting period of
four years consistent with the method described in FIN No. 28. The Company will
remeasure and record the intrinsic value of the repriced employee options every
quarter until they are exercised, forfeited, cancelled, or expire.
As a result of the employee and executive terminations during the year ended
July 31, 2001, the Company recorded a reduction of unearned stock-based
compensation of $1,650,000. For many of the terminated employees and
executives, the Company had incurred significant deferred stock-based charges
on the original option grants in previous years. The reversed amounts represent
the additional paid in capital and stock-based compensation amounts associated
with the unvested options and stock awards.
The Company booked $1,058,000, $1,627,000 and $410,000 of expense relating
to the above deferred compensation charges in fiscal 2001, 2000 and 1999,
respectively.
Other Stock Compensation. During fiscal 2001, the Company issued a total of
15,000 shares of its common stock pursuant to a certain employment and release
agreement by and among the Company and two former employees of Dry Creek, each
dated as of July 8, 2000 and executed in connection with the acquisition of Dry
Creek. In addition, The Company issued 1,000 shares of its common stock to a
consultant for services rendered during the fourth quarter of fiscal 2000. The
Company recognized a total expense of approximately $388,000, which had been
previously accrued in fiscal 2000, representing the fair value of the stock at
the date of issuance.
The following table summarizes information about stock options under all
plans outstanding at July 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Number Number
Outstanding Weighted-Average Exercisable
At 7/31/01 Remaining Weighted-Average At 7/31/01 Weighted-Average
Range of Exercise Prices (In thousands) Contractual Life Exercise Price (In thousands) Exercise Price
------------------------ -------------- ---------------- ---------------- -------------- ----------------
$0.10-$ 1.69 2,036 6.61 $1.04 1,860 $1.07
$1.70-$ 2.10 2,619 9.98 $2.01 1,924 $2.04
$2.11-$27.06 1,932 7.67 $8.02 1,116 $5.20
----- -----
6,587 8.26 $3.47 4,900 $2.39
===== =====
Employee Stock Purchase Plan. In December 1998, the Board of Directors
adopted the Employee Stock Purchase Plan (ESPP). The ESPP authorizes the
issuance of 1,000,000 shares of Common Stock. The purpose of the ESPP is to
provide eligible employees of the Company with a means of acquiring common
stock of the Company through payroll deductions. The plan consists of four
six-month purchase periods in each two-year offering period. Shares may be
purchased under the ESPP at 85% of the lesser of the fair market value of the
common stock on the grant or purchase date. During fiscal 2001, 2000 and 1999,
237,480, 141,352, and 348,228 shares were sold through the ESPP at a weighted
average price of $3.46, $2.17 and $0.88, respectively. Approximately 621,000
shares were available for purchase as of July 31, 2001.
F-24
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Pro Forma Information. The Company applies APB Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
the stock compensation plans (the "Plans") described above. If compensation
cost for the Plans had been determined consistent with SFAS No. 123 "Accounting
for Stock-Based Compensation," the Company's net loss and loss per share would
have been adjusted to the pro-forma amounts indicated below:
Year Ended July 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands, except per share data
Net loss attributable to common stockholders............... $(41,818) $(26,076) $(10,066)
======== ======== ========
Net loss attributable to stockholders--pro forma........... $(40,888) $(45,269) $(14,138)
======== ======== ========
Basic and diluted net loss per common share................ $ (0.96) $ (0.74) $ (0.34)
======== ======== ========
Basic and diluted net loss per common share--pro forma..... $ (0.94) $ (1.28) $ (0.47)
======== ======== ========
Because the method of accounting prescribed by SFAS 123 has not been applied
to options granted prior to August 1, 1995, pro forma net income for the year
ended July 31, 1999 does not reflect all applicable options granted prior to
such date. Because the Black-Scholes option valuation model was developed for
traded options and requires the input of subjective assumptions and the number
of future shares to be issued or cancelled is not known, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
Stock Option Plans Employee Stock Purchase Plan
------------------ ---------------------------
Year Ended July 31, Year Ended July 31,
------------------ ---------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Option life (in years)....... 2.3 5.1 4.0 1.0 1.0 2.0
Risk-free interest rate...... 4.37% 6.24% 6.04% 5.93% 6.50% 6.04%
Stock price volatility....... 118% 75% 75% 82% 75% 75%
Dividend yield............... -- -- -- -- -- --
The following is a summary of weighted-average grant date fair values:
Weighted-Average Grant
Date Fair Value
----------------------
Year Ended July 31,
----------------------
2001 2000 1999
----- ------ -----
Options granted under Stock Option Plans......... $3.63 $18.58 $1.81
Shares granted under the Stock Purchase Plan..... $1.34 $ 1.20 $1.20
Common Stock Warrants. In July 1996, the Company agreed to issue a warrant
to purchase 280,000 shares of its common stock at $2.75 per share to one of its
Series C stockholders in exchange for rights to certain technology. These
warrants were subsequently issued in August 1996. The aggregate value of the
warrant was estimated by the Company at $175,000 and is being accounted for as
purchased technology. The warrant is exercisable immediately and expires at the
earlier of August 2001 or the acquisition of the Company by another entity. The
purchased technology was amortized over its estimated life of three years.
F-25
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
In conjunction with the issuance of convertible promissory notes and notes
payable in fiscal 1997 and 1998, NetMind issued 91,650 shares of Series A
Convertible Preferred Stock at $1.00 per share which converted into
approximately 75,000 shares of the Company's common stock with an exercise
price of $1.26 per share upon completion of the NetMind merger in February
2000. Under terms of the original issuance, the warrants are exercisable
immediately and expire five years from the date of issue.
In conjunction with the issuance of Series A Convertible Preferred Stock in
fiscal 1998, NetMind issued warrants to purchase 816,250 shares of NetMind's
common stock at $0.01 per share and 73,411 shares of NetMind's common stock at
$1.00 per share which converted into approximately 651,000 shares exercisable
at $0.01 per share and 58,600 shares exercisable at $1.26 per share,
respectively, of the Company's common stock upon completion of the NetMind
merger in February 2000. Under terms of the original issuance, the warrants are
exercisable immediately and expire five years from the date of issue.
The following summarizes the warrants to purchase Pumatech common stock
which are outstanding at July 31, 2001:
Exercise Term
Number of Shares Price (Years) Expiration Date
---------------- -------- ------- ---------------
280,000..................... $2.75 5 August 2001
5,518....................... $1.26 5 January 2002-June 2002
40,901...................... $0.01 5 August 2002-December 2002
41,960...................... $1.26 5 May 2003-June 2003
-------
368,379
=======
Notes Receivable from Stockholders. In October 1996, an officer of the
Company purchased a total of 2,500 shares of the Company's common stock for
$15,000 in exchange for a full recourse promissory note. The note bears
interest at 6 percent per annum, with interest and principal due on demand. The
note is secured by the common shares purchased by the officer.
In July 1999, an officer of the Company purchased a total of 143,413 shares
of the Company's common stock for $315,000 in exchange for a full recourse
promissory note. The note bears interest at 5.32 percent per annum, with
interest and principal payable in July 2002. The note is secured by the common
shares purchased by the officer.
Note 11 Restructuring and Cost Reduction Plans
Fiscal 1999 Restructuring Program
In the first quarter of fiscal 1999, the Company announced and implemented a
restructuring program for the purpose of consolidating the majority of
engineering and development work at existing facilities in Nashua, New
Hampshire. As part of this program, the Company implemented a reduction in
force of approximately 40 positions that primarily affected the engineering
group located at the San Jose, California facility. This plan was completed at
the end of February 1999. The severance costs were $210,000. As of July 31,
2001, there was no unused balance.
Also as part of the restructuring, the Company vacated a portion of the San
Jose, California facility, as well as a facility in Nashua, New Hampshire. The
restructure charge was $558,000, of which $173,000 remained unused as of July
31, 2001.
F-26
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
A summary of the severance and facilities costs relating to the
restructuring program in fiscal 1999 is outlined as follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
- --------- ------------- -----
Total charge..................................... $ 210 $ 558 $ 768
Cash payments.................................... (210) (227) (437)
----- ----- -----
Balance at July 31, 1999...................... $ -- $ 331 $ 331
Cash payments.................................... -- (110) (110)
----- ----- -----
Balance at July 31, 2000...................... $ -- $ 221 $ 221
Cash payments.................................... -- (48) (48)
----- ----- -----
Balance at July 31, 2001...................... $ -- $ 173 $ 173
===== ===== =====
Amounts related to the net lease expense due to the consolidation of excess
facilities will be paid over the respective lease terms through June 2006 using
cash from operations. The Company has reduced the total costs of leased
facilities by subleasing the excess office space.
Third Quarter-Fiscal 2001 Cost Reduction Plan
In the third quarter of fiscal 2001, the Company announced and implemented
its first cost reduction plan for the fiscal year. 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. This implementation of
the plan was completed at the end of April 2001. As of July 31, 2001, there was
no unused balance.
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
includes $174,000 for excess facility lease and vacancy costs and $228,000 for
write-off of property and equipment, which consisted primarily of leasehold
improvements, office equipment and furniture and fixtures, to be taken out of
service. The unused balance as of July 31, 2001 was $169,000.
A summary of the severance and facilities costs and assets held for disposal
relating to the cost reduction plan implemented in the third quarter of fiscal
2001 is outlined as follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- -----
Total charge..................................... $ 181 $ 402 $ 583
Non-cash charges................................. -- (130) (130)
Cash payments.................................... (181) (103) (284)
----- ----- -----
Balance at July 31, 2001...................... $ -- $ 169 $ 169
===== ===== =====
Amounts related to the net lease expense due to the consolidation of excess
facilities will be paid over the respective lease terms through April 2006
using cash from operations. The Company has reduced the total costs of leased
facilities by subleasing the excess office space. All remaining assets held for
disposal are expected to be disposed of by the end of first quarter of fiscal
2002.
F-27
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Fourth Quarter-Fiscal 2001 Cost Reduction Plan
In the fourth quarter of fiscal 2001, the Company announced and implemented
its second cost reduction plan for the fiscal year. The Company's primary cost
reduction initiatives included a reduction in workforce and facilities
consolidation. The workforce reduction represented a further reduction of
approximately 20% of the Company's then total workforce, or approximately 50
full-time equivalent positions. This reduction, affecting mostly those holding
positions in engineering and professional services, brought the number of the
Company's worldwide workforce down to approximately 215 full-time employees.
The associated severance costs incurred were approximately $400,000, of which
$20,000 remained unused as of July 31, 2001. This implementation of the plan
was completed at the end of August 2001.
The Company also incurred additional restructuring charges aggregating
$434,000 for consolidating more facilities with space located in Santa Cruz,
California. The costs of consolidating facilities includes $399,000 for excess
facility lease and vacancy costs and $35,000 for write-off of property and
equipment, which consisted primarily of leasehold improvements, computer and
engineering equipment, office equipment and furniture and fixtures, to be taken
out of service. The unused balance as of July 31, 2001 was $399,000.
A summary of the severance and facilities costs and assets held for disposal
relating to the cost reduction plan implemented in the fourth quarter of fiscal
2001 is outlined as follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- -----
Total charge.................................... $ 400 $434 $ 834
Non-cash charges................................ -- (35) (35)
Cash payments................................... (380) -- (380)
----- ---- -----
Balance at July 31, 2001..................... $ 20 $399 $ 419
===== ==== =====
Amounts related to the net lease expense due to the consolidation of excess
facilities will be paid over the respective lease terms through April 2006
using cash from operations. The Company has reduced the total costs of leased
facilities by subleasing the excess office space. All remaining assets held for
disposal are expected to be disposed of by the end of first quarter of fiscal
2002.
The following table (unaudited) shows the amounts of severance costs and
facilities costs and assets held for disposal that would have been recorded
under the following income statement categories had these charges not been
separately stated in the consolidated statements of operations:
Year Ended July 31,
-------------------
2001 2000 1999
------ ---- -----
(In thousands)
Cost of service revenue.......................... $ 318 $ -- $ --
Research and development......................... 622 -- 763
Sales and marketing.............................. 366 -- 5
General and administrative....................... 111 -- --
------ ---- -----
Severance costs and facilities costs and
assets held for disposal.................... $1,417 $ -- $ 768
====== ==== =====
F-28
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Note 12 Impairment of Long-Lived Assets
Goodwill and Identifiable Intangibles
Dry Creek and Windward. During the fourth quarter of fiscal 2001, based on
the significant decline in revenue from our professional services organization
particularly for the last quarter of fiscal 2001, the Company, in accordance
with its accounting policy, determined that a recoverability assessment of the
carrying values of the intangibles associated with Dry Creek and Windward
acquisitions was needed. Accordingly, the Company engaged a third party
appraiser to perform the evaluation and, as a result, recorded an impairment
write-down of goodwill of $8,745,000.
The above impairment was measured as the amount by which the carrying amount
of goodwill and purchased intangibles exceeded the present value of the
estimated future cash flows for the professional services group and long-lived
assets. The assumptions supporting the future cash flows, including the
discount rate of 20%, were determined using the Company's best estimates. The
discount rate was determined based upon the weighted average cost of capital of
comparable companies. The new carrying amount of $5,438,000 is being amortized
over the remaining life of the respective intangibles through July 2003, except
for goodwill which, in accordance with the non-amortization provisions of SFAS
142 recently issued by FASB, will be amortized until the Company's adoption of
the new accounting standard (Refer to Note 17).
SwiftTouch. During the fourth quarter of fiscal 2001, the Company suspended
indefinitely its online service offering, Intellisync.com, due to slow adoption
by its customers and determined that the technology acquired with the
SwiftTouch acquisition used exclusively for Intelliysnc.com was impaired.
Accordingly, the Company recorded an impairment charge of $1,156,000 to
write-off the underlying goodwill and other related intangibles.
Intellisync.com-Related Assets
In relation to the indefinite suspension of Intellisync.com, the Company
classified certain related assets as "held-for-disposal" and recorded an
impairment charge of $713,000 to revise the carrying value of the assets to
recovery value less disposal costs.
The total amount of the above impairment charges of $10,614,000 is recorded
as "Loss on Impairment of Assets" in the consolidated statements of operations.
The following table (unaudited) shows the charges that would have been recorded
under the following income statement categories had they not been separately
stated in the consolidated statements of operations (in thousands):
Cost of service revenue.................................... $ 713
Research and development................................... 1,074
General and administrative................................. 8,827
-------
Loss on impairment of assets............................ $10,614
=======
Investments
Total impairment of investments of $1,180,000 in fiscal 2001 is recorded as
"Other-Than-Temporary Impairment of Direct Investments" in consolidated
statements of operations. Refer to Note 4 for more details.
F-29
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Note 13 Other Income (Expense)
Other, net, consists of the following:
Year Ended July 31,
---------------------
2001 2000 1999
----- ------ ------
(In thousands)
Other expenses, net................................ $ (42) $ (58) $ (55)
Realized gains (losses)............................ (340) 2,221 2,650
Miscellaneous income............................... -- -- 76
----- ------ ------
Other, net..................................... $(382) $2,163 $2,671
===== ====== ======
Note 14 Income Taxes
The income tax provision (benefit) for the years ended July 31, 2001, 2000
and 1999 is summarized as follows:
Year Ended July 31,
-------------------
2001 2000 1999
---- ---- ----
(In thousands)
Current
Federal............................................ $ (5) $ 20 $ --
State.............................................. 59 32 3
Foreign withholding tax............................ 383 580 712
---- ---- ----
$437 $632 $715
==== ==== ====
Deferred tax assets are summarized as follows:
July 31,
-----------------
2001 2000
-------- -------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards................... $ 20,528 $ 5,446
Alternative minimum tax credit carryforwards....... 107 78
Research and development credit carryforwards...... 9,602 1,226
Foreign tax credit carryforwards................... 1,343 1,923
Reserves and accruals.............................. 1,485 1,157
Depreciation and amortization...................... 6,257 --
Deferred revenue................................... 2,329 --
-------- -------
Total deferred tax assets...................... 41,651 9,830
Deferred tax asset valuation allowance............. (41,651) (9,830)
-------- -------
$ -- $ --
======== =======
F-30
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Except for fiscal 1997, the Company has incurred losses from inception
through fiscal 2001. Management believes that, based on the history of such
losses and other factors, the weight of available evidence indicates that it is
more likely than not that the Company will not be able to realize its deferred
tax assets and thus a full valuation reserve has been recorded at July 31, 2001
and 2000. The change in valuation allowance for deferred tax assets was an
increase of $31,821,000 and $4,503,000 during fiscal 2001 and 2000,
respectively.
Deferred tax assets of approximately $13,600,000 as of July 31, 2001 pertain
to certain net operating losses carryforwards and credit carryforwards
resulting from the exercise of employee stock options. When recognized, the tax
benefit of these loss and credit carryforwards are accounted for as a credit to
additional paid-in capital rather than a reduction of the income tax provision.
A reconciliation of the income tax provision to the amount computed by
applying the statutory federal income tax rate to income (loss) before income
tax provision is summarized as follows:
Year Ended July 31,
--------------------------
2001 2000 1999
-------- ------- -------
(In thousands)
Amounts computed at statutory federal rate............ $(14,070) $(7,548) $(1,739)
Foreign withholding taxes............................. 383 580 712
Non deductible amortization and in-process research
and development..................................... 1,978 3,097 --
Future benefits not currently recognized.............. 12,146 4,503 1,742
-------- ------- -------
$ 437 $ 632 $ 715
======== ======= =======
At July 31, 2001, the Company has federal and state net operating loss
carryforwards of $56,361,000 and $23,407,000, respectively, and federal and
state credit carryforwards of $5,091,000 and $2,715,000, respectively,
available to offset future taxable income. The Company's carryforwards expire
in 2009 through 2021.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. As a result of ownership changes which may have
occurred in past fiscal years, the Company's net operating losses and
carryforwards may be subject to these limitations.
Note 15 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.
F-31
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Basic and diluted net loss per share were calculated as follows during the
years ended July 31, 2001, 2000 and 1999, respectively:
Year Ended July 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In thousands, except
per share amounts)
Numerator:
Net loss attributable to common
stockholders......................... $(41,818) $(26,076) $(10,066)
======== ======== ========
Denominator:
Weighted average shares outstanding
used to compute basic and diluted net
loss per common share................ 43,729 35,319 29,970
======== ======== ========
Basic and diluted net loss per share... $ (0.96) $ (0.74) $ (0.34)
======== ======== ========
All common shares that were held in escrow, totaling approximately 140,000
as of July 31, 2001, were excluded from basic and diluted net loss per share
calculations. Refer to Note 3 for more information on common shares held in
escrow.
Potential common shares attributable to mandatorily redeemable preferred
stock, stock options, warrants and shares held in escrow of 7,095,868,
8,142,568 and 9,247,669 were outstanding at July 31, 2001, 2000 and 1999,
respectively. However, as a result of a net loss incurred by the Company in the
years ended July 31, 2001, 2000 and 1999, the corresponding weighted average
outstanding shares (using the treasury stock method) were antidilutive and were
excluded from net loss per share calculations.
Note 16 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 (revenue is
attributed to regions based on the location of customers):
Year Ended July 31,
-----------------------
2001 2000 1999
------- ------- -------
(In thousands)
North America.......................... $29,814 $22,786 $12,366
Japan.................................. 5,205 6,822 7,134
Other International.................... 3,674 1,205 1,223
------- ------- -------
Total revenue....................... $38,693 $30,813 $20,723
======= ======= =======
Substantially all of the Company's long-lived assets are in the United
States.
F-32
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Revenue information by product group is as follows:
Year Ended July 31,
-----------------------
2001 2000 1999
------- ------- -------
(In thousands)
Notebook royalty revenues........................ $ 2,212 $ 4,724 $ 6,130
Enterprise products.............................. 17,838 14,144 9,114
Technology licensing components.................. 12,468 8,817 3,840
Service.......................................... 6,175 3,128 1,639
------- ------- -------
Total revenue................................. $38,693 $30,813 $20,723
======= ======= =======
Note 17 Recent Accounting Pronouncements
Income Statement Characterization of Consideration Paid to a Reseller
In June 2001, the EITF of the FASB issued EITF Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 00-25 addresses whether consideration from a
vendor to a reseller of the vendor's products is an adjustment to the selling
prices of the vendor's products and, therefore, should be deducted from revenue
when recognized in the vendor's results of operations, or, a cost incurred by
the vendor for assets or services received from the reseller and, therefore,
should be included as a cost of expense when recognized in the vendor's results
of operations. EITF No. 00-25 is effective for the Company's fiscal quarters
beginning on February 1, 2002. Upon adoption of EITF No. 00-25, financial
statements for prior periods presented for comparative purposes should be
reclassified to comply with EITF No. 00-25. The Company is currently assessing
the impact of adopting EITF No. 00-25 on its financial position and results of
operations.
Accounting for Business Combinations, Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 provides new
guidance on the accounting for a business combination at the date a business
combination is completed. Specifically, it requires use of the purchase method
of accounting for all business combinations initiated after June 30, 2001,
thereby eliminating use of the pooling-of-interests method. SFAS No. 142
establishes new guidance on how to account for goodwill and intangible assets
after a business combination is completed. Among other things, it requires that
goodwill and certain other intangible assets will no longer be amortized and
will be tested for impairment at least annually and written down only when
impaired. The Company expects to adopt the goodwill non-amortization
provisions, among others, of this statement at the beginning of fiscal 2003.
The Company is currently assessing the impact of adopting SFAS No. 141 and SFAS
No. 142 on its financial position and results of operations.
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets to be held
and used, to be disposed of other than by sale and to be disposed of by sale.
Although the Statement retains certain of the requirements of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of", it supersedes SFAS No. 121 and APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions for the disposal of a segment of a business. SFAS No.
144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial
F-33
PUMATECH, INC.
NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued)
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption encouraged.
The Company is currently assessing the impact of adopting SFAS No. 144 on its
financial position and results of operations.
Note 18 Subsequent Event
On September 6, 2001, the Company announced that its Board of Directors had
approved a proposal to offer its employees, officers and directors the
opportunity to cancel stock options granted to them between September 1999 and
June 2001 in exchange for an equal number of new options to be granted in the
future, on a date more than six months after the date of cancellation of the
original options. The Company's Board of Directors determined that existing
options eligible under the terms of the proposal no longer have sufficient
value to motivate and retain the optionholders.
On September 24, 2001, the Company filed a tender offer document with the
SEC that provides detailed information concerning the stock option exchange and
supplemental option grant program.
The new options will be granted on or about April 24, 2002, six months and
two days following the close of the tender offer on October 22, 2001 and will
be priced at the closing market price on the grant date. Additionally, the
replacement 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 1,315,000 shares with exercise prices of
$3.01 or greater and a weighted average price of $10.01 were given the
opportunity to cancel their options.
In accordance with FIN No. 44, a certain number of options to be granted
under this new regrant program will be subject to variable plan accounting.
Accordingly, the Company expects to incur variable accounting charges relating
to these options in future periods. The intrinsic value of the regranted
options will be determined based on the difference between the exercise price
and the current fair value of the Company's common stock. The value of the
options will be recalculated on a quarterly basis and amortized on an
accelerated basis until the options are cancelled, exercised, forfeited or
expire.
F-34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pumatech, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 53 present fairly, in all material
respects, the financial position of Pumatech, Inc. and its subsidiaries at July
31, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 53 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
September 4, 2001,
except as to Note 18, which is as of September 24, 2001
F-35
SCHEDULE II
PUMATECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance Charged
at to costs Balance
beginning and at end of
Classification of period expenses Deductions period
-------------- --------- -------- ---------- ---------
Allowance for doubtful accounts for the year ended:
July 31, 1999................................................ $ 530 $ 492 $ 114 $ 908
July 31, 2000................................................ $ 908 $ 456 $ 154 $ 1,210
July 31, 2001................................................ $1,210 $ 1,235 $1,159 $ 1,286
Valuation allowance for deferred tax assets for the year ended:
July 31, 1999................................................ $3,769 $ 1,558 $ -- $ 5,327
July 31, 2000................................................ $5,327 $ 4,503 $ -- $ 9,830
July 31, 2001................................................ $9,830 $31,821 $ -- $41,651
S-1