Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-21709
PUMATECH, INC.
Incorporated Pursuant to the Laws of the State of Delaware
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IRS Employer Identification Number 77-0349154
2550 North First Street, San Jose, California 95131
(408) 321-7650
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 10, 2002: 45,325,662
PUMATECH, INC.
10-Q REPORT
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION 1
Item 1. Unaudited Condensed Consolidated Financial Statements 1
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
PART II - OTHER INFORMATION 40
Item 1. Legal Proceedings 40
Item 2. Changes in Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 40
SIGNATURE 41
EXHIBIT 10.1 - SUBLEASE AGREEMENT 42
PUMATECH, INC.
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
April 30, July 31,
2002 2001
---------- ---------
Assets
------
Current assets:
Cash and cash equivalents ................................................ $ 10,585 $ 18,837
Short-term investments ................................................... 26,754 30,071
Accounts receivable, net of allowance for doubtful
accounts of $1,261 and $1,286 ......................................... 3,877 4,120
Inventories, net ......................................................... 85 233
Other current assets ..................................................... 1,767 1,970
---------- ---------
Total current assets .................................................. 43,068 55,231
Property and equipment, net ................................................. 4,565 6,974
Intangible assets, net ...................................................... 8,739 12,818
Restricted cash ............................................................. 407 686
Other assets ................................................................ 2,891 3,225
---------- ---------
Total assets ...................................................... $ 59,670 $ 78,934
========== =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable ......................................................... $ 1,546 $ 2,541
Accrued liabilities ...................................................... 5,744 4,639
Notes payable ............................................................ 2,000 302
Deferred revenue ......................................................... 3,258 3,260
---------- ---------
Total current liabilities ............................................. 12,548 10,742
---------- ---------
Commitments (Note 8)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000 shares authorized; none issued
and outstanding at April 30, 2002 and July 31, 2001 ................... -- --
Common stock, $0.001 par value; 80,000 shares authorized;
45,306 and 44,555 shares issued and outstanding at April 30,
2002 and July 31, 2001, respectively .................................. 45 45
Additional paid-in capital ............................................... 149,221 148,479
Receivable from stockholders ............................................. (330) (330)
Deferred stock compensation .............................................. (328) (706)
Accumulated deficit ...................................................... (101,558) (79,407)
Other comprehensive income ............................................... 72 111
---------- ---------
Total stockholders' equity ............................................ 47,122 68,192
---------- ---------
Total liabilities and stockholders' equity ........................ $ 59,670 $ 78,934
========== =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
1
PUMATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ---------- ----------
Revenue
License ...................................................... $ 4,862 $ 8,077 $ 15,431 $ 25,906
Services ..................................................... 860 2,136 3,105 5,326
---------- ----------- ---------- ----------
Total revenue ............................................. 5,722 10,213 18,536 31,232
---------- ----------- ---------- ----------
Cost and operating expenses:
Cost of revenue (includes non-cash stock compensation
of $(26), $0, $5 and $0) .................................. 1,423 2,873 5,685 7,332
Research and development (includes non-cash stock compensation
of $(95), $61, $76 and $134) .............................. 4,217 6,090 11,905 18,675
Sales and marketing (includes non-cash stock compensation of
$(46), $185, $27 and $405) ................................ 3,630 5,570 12,608 16,071
General and administrative (includes non-cash stock
compensation of $22, $46, $187 and $194) .................. 952 1,720 3,324 4,685
Amortization of intangibles .................................. 1,251 2,157 4,077 5,853
Severance and facilities costs ............................... 3,568 583 3,568 583
---------- ----------- ---------- ----------
Total cost and operating expenses ......................... 15,041 18,993 41,167 53,199
---------- ----------- ---------- ----------
Operating loss .................................................. (9,319) (8,780) (22,631) (21,967)
Other income and expense, net ................................... 258 766 956 2,617
Other-than-temporary impairment of investments .................. (195) (1,180) (195) (1,180)
---------- ----------- ---------- ----------
Loss before income taxes ........................................ (9,256) (9,194) (21,870) (20,530)
Provision for income taxes ...................................... (74) (80) (281) (298)
---------- ----------- ---------- ----------
Net loss ........................................................ $ (9,330) $ (9,274) $ (22,151) $ (20,828)
========== =========== ========== ==========
Basic and diluted net loss per share ............................ $ (0.21) $ (0.21) $ (0.49) $ (0.48)
========== =========== ========== ==========
Shares used in computing basic and diluted net loss per share ... 44,831 44,220 44,764 43,510
========== =========== ========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
PUMATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
April 30,
----------------------------------
2002 2001
-------------- ---------------
Cash flows from operating activities:
Net loss ................................................................ $ (22,151) $ (20,828)
Adjustments to reconcile net loss to net cash used in operating
activities:
Severance and facilities costs ....................................... 2,304 402
Other-than-temporary impairment of investments ....................... 195 1,180
Allowance for doubtful accounts ...................................... 54 1,015
Provision for obsolete inventory ..................................... 11 (40)
Depreciation and amortization ........................................ 6,576 7,765
Non-cash stock compensation .......................................... 295 733
Realized gain on sale of investments ................................. -- 284
Changes in operating assets and liabilities:
Accounts receivable .................................................. 189 (1,123)
Inventories .......................................................... 137 47
Other current assets ................................................. 238 (375)
Other assets ......................................................... (22) (636)
Accounts payable ..................................................... (861) (719)
Accrued liabilities .................................................. (725) (725)
Deferred revenue ..................................................... (2) (2,522)
-------------- ---------------
Net cash used in operating activities ...................................... (13,762) (15,542)
-------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment ...................................... (530) (4,324)
Maturities/sales of short-term investments, net ......................... 3,294 6,000
Decrease in restricted cash ............................................. 223 --
Purchase of non-marketable securities ................................... -- (1,000)
Acquisitions ............................................................ -- (12,570)
-------------- ---------------
Net cash provided by (used in) investing activities ........................ 2,987 (11,894)
-------------- ---------------
Cash flows from financing activities:
Principal payments on notes payable ..................................... (302) (202)
Loan to related party ................................................... -- (235)
Proceeds from line of credit ............................................ 2,000 --
Proceeds from exercise of warrants ...................................... -- 2
Proceeds upon exercise of stock options ................................. 126 946
Proceeds from ESPP shares issued ........................................ 699 821
-------------- ---------------
Net cash provided by financing activities .................................. 2,523 1,332
-------------- ---------------
Net decrease in cash and cash equivalents .................................. (8,252) (26,104)
Cash and cash equivalents at beginning of period ........................... 18,837 54,492
-------------- ---------------
Cash and cash equivalents at end of period ................................. $ 10,585 $ 28,388
============== ===============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
PUMATECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The accompanying condensed consolidated financial statements of Pumatech,
Inc. (Pumatech or the "Company") for the three and nine months ended April 30,
2002 and 2001 are unaudited and reflect all normal recurring adjustments which
are, in the opinion of management, necessary for their fair presentation. These
condensed consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
2001. The condensed consolidated balance sheet as of July 31, 2001 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Certain prior period amounts have
been reclassified to conform to the current period's presentation. The results
of operations for the interim period ended April 30, 2002 are not necessarily
indicative of results to be expected for the full year.
Note 2 Recently Issued Accounting Pronouncements
Accounting for Business Combinations, Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 no longer be
amortized and be tested for impairment at least annually and written down only
when impaired. The Company will continue to amortize its goodwill, which it
anticipates will be approximately $2,700,000 for fiscal 2002, until its expected
adoption of the goodwill non-amortization provisions, among others, of this
statement at the beginning of fiscal 2003. The Company currently estimates that
the non-amortization of goodwill will result in a decrease in its amortization
expense of approximately $2,700,000 million for fiscal year 2003 based on
acquisitions completed as of April 30, 2002.
Further, SFAS No. 142 requires the Company to perform a transitional
assessment of whether there is an indication that its goodwill is impaired as of
the date of adoption. The Company will then have a transition period of six
months from the date of adoption to determine if the goodwill has been impaired.
The Company expects to complete the impairment test during the first quarter of
fiscal 2003. Any goodwill impairment loss (measured as of the beginning of the
fiscal year of adoption) will be recognized as the cumulative effect of a change
in accounting principle no later than the end of the initial fiscal year of
adoption. The Company will also be required to review its other intangible
assets for impairment and to reassess the useful lives of such assets and make
any necessary adjustments. The Company has not yet determined what further
effect these impairment tests will have on the Company's earnings and financial
position.
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 Accounting Principles
4
Board (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 Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Statement is
effective for the Company's financial statements issued for fiscal quarters
beginning on August 1, 2002. The Company is currently assessing the impact of
adopting SFAS No. 144 but does not expect the adoption to have a material impact
on its financial position and results of operations.
Accounting for Consideration Given to a Customer or a Reseller of the Vendor's
Products
In November 2001, the Emerging Issues Task Force (EITF) of the FASB issued
Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products." EITF No. 01-09 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. The Company adopted EITF No. 01-09
effective February 1, 2002, with comparative financial statements for prior
periods reclassified to conform to this presentation. Amounts previously
classified as sales and marketing expenses of approximately $91,000 and $315,000
for the three and nine months ended April 30, 2002, respectively, and $132,000
and $347,000 for the corresponding periods in fiscal 2001 were reclassified as a
reduction of revenue in the accompanying condensed consolidated statements of
operations. The Company's adoption of EITF No. 01-09 does not have a material
impact on its revenue and gross margins or any effect on its operating margins,
net loss and net loss per share.
Income Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred
In November 2001, the EITF ruled that all out-of-pocket expenses billed to
a customer be classified as revenue and subsequently issued EITF No. 01-14,
"Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred" in January 2002. The Company adopted EITF No.
01-14 effective February 1, 2002. The Company previously treated reimbursement
for "out-of-pocket" expenses as a reduction to cost of revenue. However, no
reclassifications were made as the amounts of such reimbursements for prior
periods were not significant. The Company's adoption of EITF No. 01-14 does not
have a material impact on its revenue or cost of revenue or any effect on its
gross margins, operating margins, net loss and net loss per share.
Note 3 Balance Sheet Components
Inventories, net, consist of the following:
April 30, July 31,
2002 2001
--------- --------
(In thousands)
Raw materials ................................ $ 23 $ 74
Finished goods and work-in-process ........... 99 185
--------- --------
122 259
Less: Inventory reserves ..................... (37) (26)
--------- --------
Inventories, net .......................... $ 85 $ 233
========= ========
5
Property and equipment, net, consist of the following:
April 30, July 31,
2002 2001
--------- --------
(In thousands)
Computer equipment and software ............. $ 8,781 $ 8,495
Furniture and office equipment .............. 1,822 2,376
Leasehold improvements ...................... 1,070 1,332
--------- --------
11,673 12,203
Less: Accumulated depreciation and
amortization ............................. (7,108) (5,229)
--------- --------
Property and equipment, net .............. $ 4,565 $ 6,974
========= ========
Intangible assets, net, consist of the following:
April 30, July 31,
2002 2001
--------- --------
(In thousands)
Intangible assets:
Goodwill ................................. $ 15,820 $ 15,820
Developed technology ..................... 6,175 6,175
Acquired workforce-in-place .............. 2,212 2,212
Existing contracts ....................... 200 200
--------- --------
24,407 24,407
Less: Accumulated amortization ........... (15,668) (11,589)
--------- --------
Intangible assets, net ............... $ 8,739 $ 12,818
========= ========
Note 4 Windward Acquisition and Escrow Shares
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 were to 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 would increase upon release of these
shares. The shares were to be released in equal installments to Vanteon based on
the achievement of quarterly performance milestones through the first quarter of
fiscal 2002. The performance milestones set for the second quarter of fiscal
year 2001 were met and therefore 42,757 shares, valued at approximately
$204,000, were released for the quarter ended January 31, 2001. As of the date
of this Report on Form 10-Q, no additional shares were released for the quarters
ended April 30, 2001, July 31, 2001 and October 31, 2001 as the Company has
determined that the performance milestones set for such quarters had not been
met.
Note 5 Long-Term Investments
The Company is a limited partner in a venture capital fund through which it
invests for business and strategic purposes in equity instruments of
privately-held companies. The Company's investment in this venture capital fund
is included in other assets and is accounted for under the cost method as its
ownership is less than 3% and it does not have the ability to exercise
significant influence over operations.
6
The Company's long-term investments consist of the following:
April 30, July 31,
2002 2001
--------- --------
(In thousands)
Azure Venture Partners, LLP ................ $ 2,305 $ 2,500
Others ..................................... 2 2
--------- --------
Long-term investments ............... $ 2,307 $ 2,502
========= ========
The Company regularly reviews the operating performance of the fund in
assessing its carrying value. The Company identifies and records impairment
losses when events and circumstances indicate that such asset might be impaired.
During the third quarter of fiscal 2002, the Company recorded a charge for
an other-than-temporary impairment of investments of approximately $195,000
related to the Company's pro-rata share of net loss realized by Azure Venture
Partners on sale or liquidation of certain investments.
Note 6 Restructuring and Cost-Reduction Plans
During fiscal 1999, 2001 and 2002, the Company implemented restructuring
and cost-reduction plans aimed at reducing costs that were not integral to the
Company's overall strategy and to better align its expense levels with current
revenue levels and ensure conservative spending during periods of economic
uncertainty. Included in the cost-reduction initiatives were reductions in
workforce and facilities consolidations.
Fiscal 1999
Of the resulting restructuring charge of $768,000 in fiscal 1999,
approximately $17,000 in cash was used during the nine months ended April 30,
2002, for net lease payments on an excess office space. The unused balance as of
April 30, 2002 of $156,000, which relates to the remaining net lease payments,
will be paid over the respective lease term through June 2006 using cash from
operations.
Fiscal 2001
Of the resulting restructuring charge of $1,417,000 in fiscal 2001,
$196,000 remained unused as of April 30, 2002. This amount 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. A
summary of the severance and facilities costs and assets held for disposal
relating to the cost-reduction plans implemented in fiscal 2001 is outlined as
follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- ---------
Total charge ........................... $ 581 $ 836 $ 1,417
Non-cash charges ....................... -- (165) (165)
Cash payments .......................... (561) (103) (664)
--------- ------------- ---------
Balance at July 31, 2001 ........... $ 20 $ 568 $ 588
Non-cash charges ....................... -- (52) (52)
Cash payments .......................... (20) (320) (340)
--------- ------------- ---------
Balance at April 30, 2002 .......... $ -- $ 196 $ 196
========= ============= =========
7
Fiscal 2002
During the third quarter of fiscal 2002, the Company announced and
implemented a further cost-reduction initiative in its continued effort to
streamline its operations to reduce its ongoing operating expenses and preserve
its cash reserves. As part of this program, the Company implemented a reduction
in its engineering workforce of approximately 60 employees while it increased
its offshore engineering capacity by utilizing a European software development
partner to perform certain product engineering-related projects and meet other
engineering requirements that may arise. This reduction in the Company's
engineering workforce, as well as the additional 23 positions eliminated in
other business functions, brought the number of the Company's worldwide
full-time equivalent employees, excluding significant contracted offshore
development resources, down to approximately 134. The program was completed by
the end of April 2002, and the associated severance costs incurred were
approximately $1,029,000, of which none remained unused as of April 30, 2002.
The Company also further consolidated its business facilities located in
Los Gatos, California and Nashua, New Hampshire with existing facilities located
in San Jose and Santa Cruz, California. The costs of consolidating facilities
includes $2,161,000 for excess facility lease and vacancy costs and $378,000 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 April 30, 2002 was $1,925,000.
A summary of the severance and facilities costs relating to the
cost-reduction plan implemented in the third quarter of fiscal 2002 is outlined
as follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- ---------
Total charge ........................... $ 1,029 $ 2,539 $ 3,568
Non-cash charges ....................... -- (378) (378)
Cash payments .......................... (1,029) (236) (1,265)
--------- ------------- ---------
Balance at April 30, 2002 .......... $ -- $ 1,925 $ 1,925
========= ============= =========
Amounts related to the net lease expense due to the consolidation of excess
facilities will be paid over the respective lease terms through May 2006 using
cash from operations. The remaining lease payments on these excess facilities as
of April 30, 2002, was approximately $4,100,000, net of proceeds from
outstanding sublease agreements. The Company has further reduced the total costs
of excess facilities by its estimated proceeds from assumed future subleases. If
the actual results differ from the Company's estimates and assumptions, the
Company may be required to adjust its facilities costs accrual related to
expected losses on subleases, including recording additional losses.
Note 7 Notes Payable
The Company's notes payable includes the following:
April 30, July 31,
2002 2001
--------- --------
(In thousands)
Revolving credit line, 5.1% rate, payable in June 2002 ........ $ 2,000 $ --
Equipment line, 9.3% average rate, paid in September 2001 ..... -- 302
--------- --------
Notes payable $ 2,000 $ 302
========= ========
8
In September 2001, the Company borrowed $2,000,000 under its loan and
security agreement entered into on March 29, 2001, which amount remained
outstanding at April 30, 2002. As of April 30, 2002, the Company was not in
compliance with a certain financial covenant under the agreement. Although the
loan balance is due in June 2002, the Company expects to receive a waiver of
covenant non-compliance and has initiated negotiations to renew the related
$10,000,000 revolving credit line. The Company also intends to amend its
financial covenants on a going forward basis to amounts that the Company
believes will allow for compliance.
The outstanding balance at July 31, 2001 on a $750,000 equipment line of
credit was paid off in September 2001 with a portion of the new borrowings
described above. The $750,000 equipment line and a $1,000,000 revolving line of
credit from the same bank were not renewed.
Note 8 Commitments
The Company is committed to invest an additional $2,250,000 in Azure
Venture Partners. The total of future actual investments may be less than this
amount, depending on future performance of the investee companies. These funds
are expected to be paid contractually as requested by the general partners over
a period not to exceed the contract term of eight years. The Company will invest
an additional $300,000 by the end of fiscal 2002 and believes that the remainder
of the funds will be paid over the next three fiscal years.
Note 9 Stock Option Cancellation/Regrant and Stock Compensation
On September 6, 2001, the Company's Board of Directors 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 more than six months after 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 had sufficient value to motivate and retain the option holders. 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.
On September 24, 2001, the Company filed a tender offer document with the
Securities and Exchange Commission that provides detailed information concerning
the stock option exchange and supplemental option grant program.
Holders of options exercisable for approximately 845,000 shares, net of the
effect of recent terminations completed as of April 24, 2002, elected to
participate in the program and received the new options on April 24, 2002, six
months and two days following the close of the tender offer. The new options
were granted at $1.11, the closing market price on the grant date, and with the
same terms, vesting start date and vesting schedule as those cancelled.
As a result of the above offer to cancel options in exchange for new
options and in accordance with FASB Interpretation (FIN) No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25, options to purchase 81,500 shares that were granted between July
and October 2001 became subject to variable plan accounting. FIN No. 44 holds
that if a lower-priced option is granted within a six-month period before or
after a higher priced option held by the same person is cancelled, the combined
transactions are considered a repricing and result in variable plan accounting.
The variable accounting cost is based on any excess of the common stock closing
price at the end of the reporting period or date of exercise, forfeiture or
cancellation without replacement, if earlier, over the exercise price (i.e.
intrinsic value). This cost is amortized on an accelerated basis over the
remaining vesting period consistent with the method described in FIN No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans."
As a result of a lower closing price of the Company's common stock at April
30, 2002, compared to that at July 31, 2001, a net recovery of deferred stock
compensation costs of approximately $136,000 was recorded for the
9
nine months ended April 30, 2002 for all options accounted for using variable
plan accounting, including those as described above. A net recovery of expense,
as a result of a lower closing price of the Company's common stock, of
approximately $214,000 and $14,000 relating to such options were recorded for
the three and nine months ended April 30, 2002, respectively.
Additional deferred stock compensation costs of approximately $53,000 were
recorded for the nine months ended April 30, 2002 for certain variable stock
options granted to employees of NetMind Technologies, Inc. (NetMind) prior to
the Company's acquisition of NetMind. Stock compensation expense of
approximately $69,000 and $309,000 was recorded for the three and nine months
ended April 30, 2002, respectively, related to such and other options granted to
employees of NetMind.
The total net change in deferred stock compensation costs, including the
effect of stock compensation costs described above, was $378,000 during the nine
months ended April 30, 2002. The net amount of stock compensation expense
recovered was approximately $145,000 for the three months ended April 30, 2002,
and the net stock compensation expense was $295,000 for the nine months then
ended, compared to $292,000 and $733,000, respectively, of total stock
compensation expense, all of which was related to options granted by NetMind, in
the corresponding periods in fiscal 2001.
Note 10 Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of dilutive potential
common shares that were outstanding during the period. Diluted weighted average
shares reflect the dilutive effect, if any, of potential common shares based on
the treasury stock method.
Basic and diluted net loss per share were calculated as follows during the
three and nine months ended April 30, 2002 and 2001, respectively:
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------ ------------- ------------
(In thousands, except per share amounts)
Numerator:
Net loss .................................................... $ (9,330) $ (9,274) $ (22,151) $ (20,828)
============== ============ ============= ============
Denominator:
Weighted average shares outstanding used to compute basic and
diluted net loss per common share ....................... 44,831 44,220 44,764 43,510
============== ============ ============= ============
Basic and diluted net loss per share ........................ $ (0.21) $ (0.21) $ (0.49) $ (0.48)
============== ============ ============= ============
All common shares that were held in escrow, totaling approximately 128,000
and 140,000 as of April 30, 2002 and 2001, respectively, were excluded from
basic and diluted net loss per share calculations.
Potential common shares attributable to stock options, warrants and shares
held in escrow of 6,018,565 and 4,925,370 were outstanding at April 30, 2002 and
2001, respectively. However, as a result of a net loss incurred by the Company
in the three and nine months ended April 30, 2002 and 2001, the shares were
excluded from the weighted average outstanding shares (using the treasury stock
method) used to calculate net loss per share because the effect would have been
antidilutive.
10
Note 11 Comprehensive Income/(Loss)
Accumulated other comprehensive income/(loss) on the condensed consolidated
balance sheets consists of net unrealized gains on available for sale
investments and foreign currency translation adjustments. Total comprehensive
loss for the three and nine months ended April 30, 2002 and 2001, respectively,
is presented in the following table:
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------ ------------- ------------
(In thousands)
Net loss .................................................... $ (9,330) $ (9,274) $ (22,151) $ (20,828)
Other comprehensive income/(loss):
Change in net unrealized gain/(loss) on investments ..... (38) 39 (23) 160
Change in currency translation adjustments .............. (3) 8 (16) (16)
-------------- ------------ ------------- ------------
Total other comprehensive income/(loss) ............. (41) 47 (39) 144
-------------- ------------ ------------- ------------
Total comprehensive loss ........................ $ (9,371) $ (9,227) $ (22,190) $ (20,684)
============== ============ ============= ============
The net balance of unrealized gain/(loss) on investments at April 30, 2002
and 2001 was generated from our holdings of Amazon.com common stock and
government bonds.
Note 12 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 original equipment manufacturers (OEMs)
in the personal computer (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):
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------ ------------- ------------
(In thousands)
North America ............................................... $ 4,401 $ 8,171 $ 13,769 $ 24,006
Japan ....................................................... 585 1,042 2,552 4,212
Other International ......................................... 736 1,000 2,215 3,014
-------------- ------------ ------------- ------------
Total revenue ............................................ $ 5,722 $ 10,213 $ 18,536 $ 31,232
============== ============ ============= ============
Substantially all of the Company's long-lived assets are in the United
States.
11
Revenue information by product group is as follows:
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------ ------------- ------------
(In thousands)
Enterprise products ......................................... $ 3,360 $ 4,559 $ 9,884 $ 14,787
Technology licensing components ............................. 2,362 5,654 8,652 16,445
-------------- ------------ ------------- ------------
Total revenue ............................................ $ 5,722 $ 10,213 $ 18,536 $ 31,232
============== ============ ============= ============
The Company's Enterprise products include Intellisync(R), Enterprise
Intellisync(TM), Intellisync Anywhere(R) and Satellite Forms(R) software, as
well as related support and maintenance. Technology licensing components include
various licensed technology platforms, such as Sync-it, Mind-it(TM),
Browse-it(TM) and Intellisync Software Development Kit (Intellisync SDK),
Intellisync for Notebooks, professional services, non-recurring engineering
services, hosting services and related maintenance contract programs.
Note 13 Legal Proceedings
On April 19, 2002, the Company filed a patent infringement suit against
Extended Systems, Inc. in the United States District Court for the Northern
District of California. The Company alleged that Extended Systems' server and
desktop products infringe on seven of its synchronization-related patents. The
Company is seeking in the suit an injunction against future sales of Extended
Systems' infringing server and desktop products, as well as damages for past
sales of the infringing products. The Company further alleged that Extended
Systems' infringement of the seven synchronization patents was willful and
deliberate, entitling the Company to an award of treble damages, costs and
reasonable attorneys' fees. On May 28, 2002, The Company filed an amended
complaint in the lawsuit, adding claims of trademark infringement, unfair
competition and interference with contract, all in connection with Extended
Systems' use of the Company's Satellite Forms trademark. Extended Systems has
not yet filed a formal response in the lawsuit.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the condensed
consolidated financial statements and the notes thereto contained elsewhere in
this Form 10-Q and in conjunction with the consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations in our Form 10-K. This quarterly report on Form 10-Q, and in
particular management's discussion and analysis of financial condition and
results of operations, contains forward-looking statements regarding future
events or our future performance that involve certain risks and uncertainties
including those discussed in "Factors That May Affect Future Operating Results"
below. In this Form 10-Q, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify forward-looking statements.
All statements that address operating performance, events or developments that
we expect or anticipate will occur in the future, including statements relating
to planned product releases and composition of revenue, both in terms of segment
and geographical source, are forward-looking statements. Such forward-looking
statements are based on management's current views and assumptions regarding
future events and operating performance, and speak only as of the date hereof.
We undertake no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
Actual events or our actual future results may differ materially from any
forward-looking statements due to the risks and uncertainties outlined below.
Management's discussion and analysis includes:
o A discussion of estimates and assumptions affecting the application of
our critical accounting policies.
o Business overview.
o A comparison of our results of operations in the three and nine months
ended April 30, 2002 with the results in the corresponding periods in
fiscal 2001.
o Recently issued accounting pronouncements.
o A discussion of our operating liquidity and capital resources.
o A discussion of factors that may affect our future operating results.
Estimates, Assumptions and Critical Accounting Policies
The following discussion and analysis of financial condition and results of
operations are based on our condensed consolidated financial statements and
notes thereto set forth in Item 1 above, as well as our consolidated financial
statements and management's discussion and analysis of financial condition and
results of operations in our Form 10-K. These consolidated financial statements
have been prepared to include estimates and assumptions affecting certain assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and revenues and expenses during the
reporting period, in conformity with generally accepted accounting principles.
We believe that future conditions and events and their effects cannot be
predicted with certainty; therefore, estimates and assumptions we make require a
prudent application of critical accounting policies and exercise of judgment.
These accounting policies are considered critical as they are both important to
the representation of our financial condition and results of operations, and
they require our management to make the most complex and subjective judgments,
often as a result of the need to make estimates or assumptions about the effect
of certain events or circumstances that are inherently uncertain. Exercising
judgment depends on various factors that would provide us with a reasonable
basis for making the estimates and assumptions. These factors may include, but
are
13
not limited to, history and prior experience, experience of other enterprises in
the same industry, new related events, current economic conditions and
independent review. Actual results may differ from these estimates under
different assumptions or conditions. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary.
We use estimates in accounting for, among other things, allowances for
uncollectible receivables, returns, inventory obsolescence, fixed asset
obsolescence, recoverability of long-lived assets and investments, depreciation
and amortization, taxes, post-contract support, sales incentives, contingencies
and various revenue contracts. The following describes the more significant
assumptions and estimates affecting the application of critical accounting
policies that our management uses in the preparation of our consolidated
financial statements:
o Allowance for doubtful accounts. Accounts receivable are valued and
reported at net realizable value, the net amount expected to be
received, which is not necessarily the amount legally receivable.
Determining net realizable value requires an estimation of
uncollectible receivables resulting from the inability of our
customers to make required payments. If any of our customers were to
experience financial difficulty, additional allowance for doubtful
accounts may be required. Other factors that may affect our estimates
of allowance for doubtful accounts include prior and current
experience of other software companies in the mobile computing
industry, financial forecasts of our customers and appraisal of
current economic conditions.
o Channel inventory/returns reserve. We maintain a sales returns
reserve for 100% of product inventories held at our distribution
partners. However, if any retail or other customers of our
distributors were to experience slow sales, additional returns reserve
may be required. Other factors that may affect our estimates of
returns include the timing of the release of our new products or new
versions to consumers or retail channels and change in our sales and
marketing policies, as well as those of our distributors and
resellers.
o Valuation of intangibles, investments and other long-lived assets. We
evaluate the carrying value of certain identifiable intangibles,
investments and long-lived assets for impairment, when events and
circumstances indicate that the carrying amount of the underlying
asset may not be recoverable. Changes in the manner of use of the
acquired assets, changes in overall business strategy, negative
industry or economic trends, and decline in stock price and market
capitalization may trigger an impairment review for certain
intangibles. Poor operating results of underlying investments or
adverse changes in market conditions may result in losses or an
inability to recover the carrying value of investments. Changes in
market value of the assets, physical changes and continuing operating
or cash-flow losses associated with assets used to generate revenue
may suggest problems of recoverability for certain long-lived assets.
Whenever the evaluation demonstrates that the carrying amount of an
intangible, investment or any other long-lived asset is not
recoverable, an impairment charge may be required.
o Restructuring accruals. During fiscal 1999, 2000 and, most recently,
the third quarter of fiscal 2002, we implemented cost-reduction plans
as part of our continued effort to streamline our operations to reduce
ongoing operating expenses. These plans resulted in the consolidation
of excess facilities and a reduction in our workforce. Calculation of
the restructuring accrual relating to expected losses on the existing
lease requires us to make estimates, such as the expected length of
time to sublease the excess facility, the expected rental rates on
sublease, and estimated broker's fees associated with executing the
sublease. We look at current economic conditions and use the
assistance of independent real estate brokers in making such
estimates. If actual results differ from our original estimates,
adjustment to our restructuring accrual, as well as recording
additional losses, may be required.
o License and service revenue. Revenue from license fees is recognized
when persuasive evidence of an agreement exists, delivery of the
product has occurred, no significant company obligations with
14
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. If we
were to assess the collectibility of fees differently, the timing and
amount of our revenue recognition might differ substantially from
previously estimated or reported.
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. If we were to allocate more or less value to the unspecified
upgrades and ongoing support, the timing of our revenue recognition
might differ substantially from that previously reported.
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 the American Institute of
Certified Public Accountants in Statement of Position (SOP) No. 98-9,
"Modification of SOP No. 97-2 with Respect to Certain Transactions."
We have accumulated relevant information from contracts to use in
determining the availability of vendor-specific objective evidence and
believe that such information complies with the criteria established
in SOP 97-2, "Software Revenue Recognition" which provides guidance on
generally accepted accounting principles for recognizing revenue on
software transactions. If we were to allocate the respective fair
values of the aforementioned elements differently, the timing of our
revenue recognition might differ substantially from that previously
estimated or reported.
License and service revenue associated with contracts that involve
significant implementation of customization of 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 are generally used as the measure of
progress towards completion. Revenue for these arrangements is
classified as license revenue and service revenue based upon estimates
of fair value of each element, and the revenue is recognized based on
the percentage-of-completion ratio for the arrangement. Recognized
revenue is subject to revisions as the engagement progresses to
completion. Revisions in estimates or estimated losses on engagements
are charged to income in the period in which the loss becomes probable
and can be reasonably estimated. Considerable judgement, such as the
scope of work and reliance on the customer or other vendors to fulfill
some tasks, may be required in determining estimates to complete an
engagement. If we were to make different judgements or utilize
different estimates of the total amount of work required to complete
the engagement, the timing of our revenue recognition from period to
period, as well as the related margins, might differ substantially
from that previously estimated or reported.
Refer to Note 1 of the Notes to Consolidated Financial Statements, "The
Company and a Summary of Its Significant Accounting Policies," set forth in Part
IV, Item 14 of our Annual Report on Form 10-K for the year ended July 31, 2001,
for more information on our critical accounting policies.
15
Business Overview
Pumatech, Inc. (Pumatech) develops, markets and supports synchronization,
change detection/notification, and Web rendering/browsing software that enables
consumers, mobile professionals and information technology (IT) officers to
harness the full capabilities of handheld organizers and computers, Web-enabled
cellular phones, pagers and other wireless or wireline personal communications
platforms. We provide a mobile solution that provides several alternative
implementations for synchronization, and 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) and
Satellite Forms(R) software, along with our technology licensing components -
Sync-it, Mind-it(TM), Browse-it(TM) and Intellisync Software Development Kit
(Intellisync SDK) software - are designed to connect mobile devices to essential
information anytime, anywhere.
We license our software products directly to 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.
Currently, as over the past several fiscal quarters, we continue to face
the impact of the recent unfavorable general economic conditions and slow
economic recovery, which has resulted in delayed or postponed corporate IT
spending. Consequently, we have experienced declines in revenue in the last five
fiscal quarters. However, despite adverse market conditions, we have continued
to secure new customers, develop and deliver products and services to our
customers' satisfaction and maintain our financial position, and we continue to
have no long-term debt. Our current cash and tangible worth per-share values and
strong current and quick ratios illustrate our financial strength. In response
to the economic slowdown, we implemented initiatives in the last fiscal year
and, most recently, this third quarter of fiscal 2002 to reduce costs and
control spending, and we remain committed to reestablishing our top-line
business growth and improving our financial results.
In February 2002, we announced and implemented a cost-reduction initiative
consisting of further workforce reductions and facilities consolidations. This
initiative was fully implemented by the end of the third quarter of fiscal 2002.
The workforce reduction represented a reduction of 60 employees in engineering
and 23 employees in other business functions, bringing the number of our
worldwide full-time equivalent workforce down to approximately 134. While we
reduced our engineering workforce in the United States, we increased our
offshore engineering capacity by utilizing a European software development
partner to perform certain product engineering-related projects and meet other
engineering requirements that may arise. Additionally, we further consolidated
our business facilities located in Los Gatos, California and Nashua, New
Hampshire with our existing facilities located in San Jose and Santa Cruz,
California. These actions resulted in restructuring charges of approximately
$3,568,000 related to severance and facility-closing costs in the third quarter
of fiscal 2002. We expect the financial benefits from the recent restructuring
to include increased gross margins, reduced operating expenses, and improved
cash burn rate over the next several quarters.
16
Results of Operations
The following table sets forth certain consolidated statement of operations
data as a percentage of revenue for the periods indicated. Certain prior period
amounts were reclassified to conform to the current period's presentation of
certain channel marketing expenses as a reduction of revenue as required by the
Emerging Issues Task Force (EITF) No. 01-09, "Accounting for Consideration Given
by a Vendor to a Customer or a Reseller of the Vendor's Products" issued by
Financial Accounting Standards Board (FASB). Refer to the caption "Recently
Issued Accounting Pronouncements" set forth below for more details.
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------ ------------- ------------
Revenue
License 85.0% 79.1% 83.2% 82.9%
Services 15.0 20.9 16.8 17.1
-------------- ------------ ------------- ------------
Total revenue 100.0 100.0 100.0 100.0
-------------- ------------ ------------- ------------
Cost and operating expenses:
Cost of revenue 24.9 28.1 30.7 23.5
Research and development 73.7 59.6 64.2 59.8
Sales and marketing 63.4 54.6 68.0 51.4
General and administrative 16.6 16.9 17.9 15.0
Amortization of intangibles 21.9 21.1 22.0 18.7
Severance and facilities costs 62.4 5.7 19.3 1.9
-------------- ------------ ------------- ------------
Total cost and operating expenses 262.9 186.0 222.1 170.3
-------------- ------------ ------------- ------------
Operating loss (162.9) (86.0) (122.1) (70.3)
Other income and expense, net 4.5 7.5 5.2 8.4
Other-than-temporary impairment of investments (3.4) (11.5) (1.1) (3.8)
-------------- ------------ ------------- ------------
Loss before income taxes (161.8) (90.0) (118.0) (65.7)
Provision for income taxes (1.3) (0.8) (1.5) (1.0)
-------------- ------------ ------------- ------------
Net loss (163.1)% (90.8)% (119.5)% (66.7)%
============== ============ ============= ============
Revenue. We derive revenue from two primary sources: software licenses and
fees for service. Revenue for the three and nine months ended April 30, 2002 was
$5,722,000 and $18,536,000, respectively, compared to $10,213,000 and
$31,232,000, respectively, for the corresponding periods in fiscal 2001. The 44%
and 41% decreases in revenue in the three and nine months ended April 30, 2002
resulted mainly from the general economic slowdown and its impact on our
customers, many of whom have reduced their IT spending or ceased their
investment in products, services and technologies such as those we provide. The
decline in our revenue also resulted from a general slowdown in sales of Palm
OS-based handhelds and other personal digital assistant (PDA) devices.
o 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 in the three and nine
months ended April 30, 2002 decreased 40% to $4,862,000 and
$15,431,000, respectively, compared to $8,077,000 and $25,906,000,
respectively, for the corresponding periods in fiscal 2001. The
decrease in license revenue reflected a decrease in revenue from our
Enterprise products (which include both personal and server-based
Intellisync and Satellite Forms products), from our technology
licensing components, and from our legacy personal computers (PC) or
notebooks business - Intellisync for Notebooks royalty revenue.
17
o Service Revenue. Service revenue is derived from fees for services,
including time and materials for professional services, non-recurring
engineering service projects for software development, amortization of
maintenance contract fees, hosting and advertising fees. Service
revenue in the three and nine months ended April 30, 2002 decreased
60% to $860,000 and 42% to $3,105,000, respectively, compared to
$2,136,000 and $5,326,000, respectively, for the corresponding periods
in fiscal 2001. The decrease in service revenue was primarily due to a
decrease in professional service revenue associated with our
technology licensing partners, many of whom have reduced their IT
spending as a result of general economic slowdown.
Revenue from original equipment manufacturers (OEMs) continues to represent
a significant portion of our revenue. OEM revenue in the three and nine months
ended April 30, 2002, was $1,964,000, or 34% of revenue, and $6,948,000, or 37%
of revenue, respectively, compared to $2,251,000, or 22% of revenue, and
$7,750,000, or 25% of revenue, respectively, in the corresponding periods in
fiscal 2001. OEM revenue decreased in absolute terms primarily due to a decline
in revenue from Intellisync for Notebooks royalties and platform licensing of
the Intellisync SDK. This decrease was slightly offset by an increase in revenue
from our server-based products. The increase in OEM revenue as a percentage of
total revenue was primarily due to a greater decline in revenue from personal
Enterprise products, professional services and other technology licensing
components. We believe that the percentage of revenue derived from OEMs may
fluctuate in future periods since the use of domestic and international
distribution channels for our existing and future products is subject to change,
causing our revenue to be difficult to forecast. Further, we expect the
notebook-related OEM portion of this revenue to continue to decrease in absolute
terms and as a percentage of our overall revenue throughout fiscal 2002.
International revenue also continues to represent a significant portion of
our revenue. International revenue in the three and nine months ended April 30,
2002, was $1,585,000, or 28% of revenue, and $5,745,000, or 31% of revenue,
respectively, compared to $2,310,000, or 23% of revenue, and $8,067,000, or 26%
of revenue, respectively, in the corresponding periods in fiscal 2001. The
revenue gains in Europe and certain parts of Asia, which resulted directly from
our international direct sales force expansion in fiscal 2001, were more than
offset by a decrease in revenue in Japan resulting from a general economic
slowdown and an overall reduction in technology spending in that country. The
increase as a percentage of total revenue was due to a decline in our overall
revenue. International revenue may be subject to certain risks not normally
encountered in domestic operations, including exposure to tariffs, various trade
regulations, fluctuations in currency exchange rates, as well as international
software piracy. Also, refer to other relevant risks and uncertainties
associated with international revenue and software piracy set forth below under
the caption "Factors That May Affect Future Operating Results."
No customer accounted for more than 10% of total revenue in either the
three-month or nine-month period ended April 30, 2002 and 2001.
Deferred revenue remained relatively flat at $3,258,000 as of April 30,
2002, compared to $3,260,000 at July 31, 2001.
Cost of Revenue. Cost of revenue consists of license costs and service
costs. License costs comprise product-packaging expenses such as product media
and duplication, manuals, packing supplies, shipping and post-sales customer
support costs. Fluctuations in license costs are generally the result of varying
changes in product mix and the timing of large license sales. Service costs
comprise personnel-related expenses such as salaries and other related costs
(including non-cash stock compensation) associated with work performed under
professional service contracts, non-recurring engineering agreements and hosting
costs for online services associated with technology licensing 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. Service
costs can be expected to vary significantly from period to period depending on
the mix of services we provide.
18
In general, license costs represent 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, whereas 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 groups, our inability to generate revenue sufficient to absorb these
fixed costs could lead to negative service gross margins.
Cost of revenue in the three and nine months ended April 30, 2002, was
$1,423,000, or 25% of revenue, and $5,685,000, or 31% of revenue, respectively,
compared to $2,873,000, or 28% of revenue, and $7,332,000, or 23% of revenue,
respectively, in the corresponding periods in fiscal 2001. The decrease in cost
of revenue in absolute dollars was primarily due to a decrease in professional
services costs as a result of workforce reductions we implemented in the third
and fourth quarters of fiscal 2001, as well as overall reduction in our service
revenues. The decrease also resulted, to a lesser extent, from reduced variable
packaged product costs associated with reduced license volumes. The increase in
cost of revenue as a percentage of revenue for the nine months ended April 30,
2002 was primarily due to a decline in our overall revenue.
Research and Development. Research and development expenses consist
primarily of salaries and other related costs (including non-cash stock
compensation) for research and development personnel, quality assurance
personnel, product localization, fees to outside contractors and the cost of
facilities and depreciation of capital equipment. We invest in research and
development both for new products and to provide continuing enhancements to
existing products. Research and development expenses in the three and nine
months ended April 30, 2002, were $4,217,000, or 74% of revenue, and
$11,905,000, or 64% of revenue, respectively, compared to $6,090,000, or 60% of
revenue, and $18,675,000, or 60% of revenue, respectively, in the corresponding
periods in fiscal 2001. The decrease in absolute research and development
spending was primarily due to the elimination of the Intellisync.comSM online
service and re-emphasis on core product development, as part of the cost control
initiatives we implemented in the third and fourth quarters of fiscal 2001,
which in turn resulted in a decrease in personnel- and contractor-related costs.
This decrease was slightly offset by completion bonuses paid to certain
employees affected by restructuring in the third quarter of fiscal 2002, as well
as contract costs associated with ramping up our offshore development resources.
As a percentage of total revenue, research and development expenses increased
due to overall revenue decline in the first three quarters of fiscal 2002.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, promotional expenses and other related costs (including
non-cash stock compensation) relating to sales and marketing employees, as well
as to technical support personnel associated with pre-sales activities such as
building brand awareness, performing product and technical presentations and
answering customers' product and service inquiries. Sales and marketing expenses
in the three and nine months ended April 30, 2002, were $3,630,000, or 63% of
revenue, and $12,608,000, or 68% of revenue, respectively, compared to
$5,570,000, or 55% of revenue, and $16,071,000, or 51% of revenue, respectively,
in the corresponding periods in fiscal 2001. Sales and marketing expenses
decreased in absolute terms primarily due to reduced salaries and other
personnel-related costs as a result of headcount reductions, reduced bonus and
commissions as a result of lower revenue, and reduced corporate marketing
resources and corporate branding initiatives as a result of lower planned
spending. Sales and marketing expenses, however, increased as a percentage of
total revenue due to overall revenue decline in the first three quarters of
fiscal 2002.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs (including non-cash stock
compensation) relating to administrative, executive and financial personnel and
outside professional fees. General and administrative expenses in the three and
nine months ended April 30, 2002, were $952,000, or 17% of revenue, and
$3,324,000, or 18% of revenue, respectively, compared to $1,720,000, or 17% of
revenue, and $4,685,000, or 15% of revenue, respectively, in the corresponding
periods in fiscal 2001. The decrease in absolute general and administrative
spending was primarily due to a reduced provision for bad debts allowance, as
well as to reduced personnel-related costs as a
19
result of our recent restructurings. General and administrative expenses,
however, increased as a percentage of total revenue for the nine months ended
April 30, 2002 due to overall decline in revenue.
Amortization of Intangibles. Amortization of acquired intangibles in the
three and nine months ended April 30, 2002, was $1,251,000, or 22% of revenue,
and $4,077,000, or 22% of revenue, respectively, compared to $2,157,000, or 21%
of revenue, and $5,853,000, or 19% of revenue, respectively, in the
corresponding periods in fiscal 2001. The decrease in amortization of
intangibles reflects the effect of the impairment charge recorded in the fourth
quarter of fiscal 2001, which significantly reduced the carrying value of our
existing goodwill and other intangibles. We will continue to amortize our
goodwill, which we anticipate will be approximately $2,700,000 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. In
addition, we will amortize approximately $2,400,000 and $800,000 for other
intangibles in fiscal 2002 and 2003, respectively, based on acquisitions
completed as of April 30, 2002. Refer to the caption "Recently Issued Accounting
Pronouncements" set forth below 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 condensed consolidated statements
of operations, relates to stock options that were deemed to have been granted at
a price below market value, as well as to certain options that are subject to
variable plan accounting. These charges are amortized over the vesting period of
the options. The aggregate non-cash stock compensation expense (recovery), net
of the effect of terminations, was $(145,000) and $295,000 in the three and nine
months ended April 30, 2002, respectively, compared to $292,000 and $733,000,
respectively, in the corresponding periods in fiscal 2001. The non-cash
compensation expense (recovery) in the three and nine months ended April 30,
2002 relates to options granted between July and October 2001, as described
below, that are subject to variable plan accounting, and options granted by
NetMind Technologies, Inc. (NetMind) prior to our acquisition of NetMind. The
non-cash compensation expense in the three and nine months ended April 30, 2001
relates to options granted by NetMind prior to our acquisition of NetMind.
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 and a day after the date of cancellation of the
original options. Holders of approximately 2,676,000 shares received the new
options. The new grants for executive officers and directors were priced at the
closing market price on the date of the new grant, or $2.10. The new executive
grants are accounted for as fixed awards, for which no stock compensation cost
was recorded, with the exception of certain options belonging to an employee who
later elected to cancel other higher-priced options in October 2001 (see below
for more details). The new grants for other 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 FASB 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 cost is based on any excess of the common
stock closing price at the end of the reporting period or date of exercise,
forfeiture or cancellation without replacements, if earlier, over the exercise
price (i.e. intrinsic value). This cost is amortized on an accelerated basis
over the remaining vesting period consistent with the method described in FIN
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans." We remeasure and record the intrinsic value of the
repriced employee options every quarter until they are exercised, forfeited,
cancelled, or expire.
In addition, in the first quarter of fiscal 2002, our Board of Directors
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. The new options were
granted on April 24, 2002, six months and two days following the close of the
tender offer on October 22, 2001, and priced at $1.11, the closing market price
on the grant date. Holders of options exercisable for approximately 845,000
shares, net of the effect of recent terminations completed as of April 24, 2002,
elected to participate in the program and received the new options.
20
As a result of the October 2001 offer to cancel options in exchange for new
options and in accordance with FIN No. 44, options to purchase 81,500 shares
that were granted between July and October 2001 became subject to variable plan
accounting. FIN No. 44 holds that if a lower-priced option is granted within a
six-month period before or after a higher priced option held by the same person
is cancelled, the combined transactions are considered a repricing and result in
variable plan accounting.
As a result of a lower closing price of our common stock at April 30, 2002,
compared to that at July 31, 2001, a net recovery of deferred stock compensation
costs of approximately $136,000 was recorded for the nine months ended April 30,
2002 for all options accounted for using variable plan accounting, including
those as described above. A net recovery of expense, as a result of a lower
closing price of our common stock, of approximately $214,000 and $14,000
relating to such options were recorded for the three and nine months ended April
30, 2002, respectively.
Additional deferred stock compensation costs of approximately $53,000 were
recorded for the nine months ended April 30, 2002 for certain variable stock
options granted to employees of NetMind prior to our acquisition of NetMind.
Stock compensation expense of approximately $69,000 and $309,000 was recorded
for the three and nine months ended April 30, 2002, respectively, related to
such and other options granted to employees of NetMind.
Other Income and Expense, Net. Other income and expense, net, represents
interest earned on cash and short-term investments and realized gains on
miscellaneous investments, offset by interest expense on notes payable and
miscellaneous bank fees and charges. Other income and expense, net, in the three
and nine months ended April 30, 2002 was $258,000 and $956,000, respectively,
compared to $766,000 and $2,617,000, respectively, in the corresponding periods
in fiscal 2001. The decrease in other income and expense, net, was primarily due
to a decrease in yields on reduced balances of cash and investments as a result
of a decline in short-term interest rates. We expect this trend to continue in
the next few quarters as higher-yielding investments mature and proceeds are
reinvested in lower-yielding securities.
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 income taxes for our foreign
subsidiaries. Provision for income taxes in the three and nine months ended
April 30, 2002 was $74,000 and $281,000, respectively, compared to $80,000 and
$298,000, respectively, in the corresponding periods of fiscal 2001.
Non-Recurring Charges
Severance and Facilities Costs. During the third quarter of fiscal 2002, we
announced and implemented a cost-reduction initiative in our continued effort to
streamline our operations to reduce ongoing operating expenses and preserve our
cash reserves. As part of this program, we implemented a reduction in our
engineering workforce of approximately 60 employees while simultaneously
increasing our offshore engineering capacity by utilizing a European software
development partner. This reduction in our engineering workforce, as well as the
additional 23 positions eliminated in other business functions, brought the
number of our worldwide full-time equivalent employees, excluding significant
contracted offshore development resources, down to approximately 134. The
program was completed by the end of April 2002, and the associated severance
costs incurred were approximately $1,029,000, of which none remained unused as
of April 30, 2002.
We also further consolidated our business facilities located in Los Gatos,
California and Nashua, New Hampshire with existing facilities located in San
Jose and Santa Cruz, California. The costs of consolidating facilities includes
$2,161,000 for excess facility lease and vacancy costs and $378,000 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 April 30, 2002 was $1,925,000.
21
A summary of the severance and facilities costs relating to the
cost-reduction plan implemented in the third quarter of fiscal 2002 is outlined
as follows (in thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- ---------
Total charge ........................... $ 1,029 $ 2,539 $ 3,568
Non-cash charges ....................... -- (378) (378)
Cash payments .......................... (1,029) (236) (1,265)
--------- ------------- ---------
Balance at April 30, 2002 .......... $ -- $ 1,925 $ 1,925
========= ============= =========
Amounts related to the net lease expense due to the consolidation of excess
facilities will be paid over the respective lease terms through May 2006 using
cash from operations. The remaining lease payments on these excess facilities as
of April 30, 2002, was approximately $4,100,000, net of proceeds from
outstanding sublease agreements. We have further reduced the total costs of
excess facilities by the estimated proceeds from assumed future subleases. If
the actual results differ from our estimates and assumptions, we may be required
to adjust our facilities costs accrual related to expected losses on subleases,
including recording additional losses.
During the third quarter of fiscal 2001, we implemented our first
cost-reduction plan for the fiscal year, which resulted in a total charge of
approximately $583,000. This amount, together with the $834,000 charge relating
to the cost-reduction plan we implemented during the fourth quarter of fiscal
2001, was incurred for the purpose of reducing our workforce and consolidating
our excess facilities. Of the total charge of $1,417,000, $196,000 remained
unused as of April 30, 2002. This amount 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.
A summary of the severance and facilities costs relating to the
cost-reduction plans implemented in fiscal 2001 is outlined as follows (in
thousands):
Consolidation
Workforce of Excess
Reduction Facilities Total
--------- ------------- ---------
Total charge ........................... $ 581 $ 836 $ 1,417
Non-cash charges ....................... -- (165) (165)
Cash payments .......................... (561) (103) (664)
--------- ------------- ---------
Balance at July 31, 2001 ........... $ 20 $ 568 $ 588
Non-cash charges ....................... -- (52) (52)
Cash payments .......................... (20) (320) (340)
--------- ------------- ---------
Balance at April 30, 2002 .......... $ -- $ 196 $ 196
========= ============= =========
Other-Than-Temporary Impairment of Investments. During the third quarter of
fiscal 2002, we recorded a charge for an other-than-temporary impairment of
investments of approximately $195,000 representing our pro-rata share of net
loss realized by our venture capital fund on sale or liquidation of certain
investments.
During the third quarter of fiscal 2001, we concluded that our direct
investments in YadaYada, Inc., If & Then, Inc., and PulseMD Corporation were
impaired as such investments were deemed not to be recoverable. These
investments were fully impaired due to changes in 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.
22
Recently Issued Accounting Pronouncements
Accounting for Business Combinations, Goodwill and Other Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards
(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 no longer be amortized and be tested for impairment at least
annually and written down only when impaired. We will continue to amortize our
goodwill, which we anticipate will be approximately $2,700,000 for fiscal 2002,
until our expected adoption of the goodwill non-amortization provisions, among
others, of this statement at the beginning of fiscal 2003. We currently estimate
that the non-amortization of goodwill to result in a decrease in its
amortization expense of approximately $2,700,000 million for fiscal year 2003
based on acquisitions completed as of April 30, 2002.
Further, SFAS No. 142 requires that we perform a transitional assessment of
whether there is an indication that our goodwill is impaired as of the date of
adoption. We will then have a transition period of six months from the date of
adoption to determine if the goodwill has been impaired. We expect to complete
the impairment test during the first quarter of fiscal 2003. Any goodwill
impairment loss (measured as of the beginning of the fiscal year of adoption)
will be recognized as the cumulative effect of a change in accounting principle
no later than the end of the initial fiscal year of adoption. We will also be
required to review our other intangible assets for impairment and to reassess
the useful lives of such assets and make any necessary adjustments. We have not
yet determined what further effect these impairment tests will have on our
earnings and financial position.
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
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Statement is effective for our
financial statements issued for fiscal quarters beginning on August 1, 2002. We
are currently assessing the impact of adopting SFAS No. 144 but do not expect
the adoption to have a material impact on our financial position and results of
operations.
23
Accounting for Consideration Given to a Customer or a Reseller of the Vendor's
Products
In November 2001, the EITF of the FASB issued Issue No. 01-09, "Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products." EITF No. 01-09 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. We adopted EITF No. 01-09 effective February 1, 2002, with
comparative financial statements for prior periods reclassified to conform to
this presentation. Amounts previously classified as sales and marketing expenses
of approximately $91,000 and $315,000 for the three and nine months ended April
30, 2002, respectively, and $132,000 and $347,000 for the corresponding periods
in fiscal 2001 were reclassified as a reduction of revenue in the accompanying
condensed consolidated statements of operations. Adoption of EITF No. 01-09 does
not have a material impact on our revenue and gross margins or any effect on our
operating margins, net loss and net loss per share.
Income Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred
In November 2001, the EITF ruled that all out-of-pocket expenses billed to
a customer be classified as revenue and subsequently issued EITF No. 01-14,
"Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred" in January 2002. We adopted EITF No. 01-14
effective February 1, 2002. We previously treated reimbursement for
"out-of-pocket" expenses as a reduction to cost of revenue. However, no
reclassifications were made as the amounts of such reimbursements for prior
periods were not significant. Adoption of EITF No. 01-14 does not have a
material impact on our revenue or cost of revenue or any effect on our gross
margins, operating margins, net loss and net loss per share.
Liquidity and Capital Resources
We ended the third quarter of fiscal 2002 with $37,339,000 in cash, cash
equivalents and short-term investments. Cash and cash equivalents decreased by
$8,252,000 during the first three quarters of fiscal 2002 to $10,585,000 at
April 30, 2002. Short-term investments decreased by $3,317,000 to $26,754,000
during the same period.
Net cash used in operations was $13,762,000 during the nine months ended
April 30, 2002, compared with $15,542,000 during the same period in fiscal 2001.
Operating cash flow in the first three quarters of fiscal 2002 comprised
$12,716,000 of net loss, as adjusted for non-cash items and $1,046,000 of net
change in working capital items, compared with $9,489,000 of net loss, as
adjusted for non-cash items and $6,053,000 of net change in working capital
items during the nine months ended April 30, 2002. Our negative operating cash
flows primarily reflect our net losses resulting generally from the same factors
affecting our revenues and expenses as described above. We made significant
changes to our operating structure, including the consolidation of facilities
and the reduction of workforce, over the last two quarters of fiscal 2001 and,
more recently, during the third quarter of fiscal 2002. We believe that these
efforts have and will continue to reduce costs, control spending and decrease
our operating expenses and align us with our commitment to improve our operating
cash flows and overall financial results.
Net cash provided by investing activities of $2,987,000 during the nine
months ended April 30, 2002, resulted from $3,294,000 of net sales of short-term
investments and a decrease of $223,000 in restricted cash, partially offset by
capital expenditures of $530,000. Net cash used in investing activities of
$11,894,000 during the nine months ended April 30, 2001 primarily resulted from
$12,570,000 of cash paid for the asset purchase of The Windward Group (Windward)
and SwiftTouch Corporation (SwiftTouch), $4,324,000 for capital expenditures and
$1,000,000 for an other long-term investment, partially offset by $6,000,000 in
net sales of short term investments.
Net cash provided by financing activities of $2,523,000 during the nine
months ended April 30, 2002, resulted primarily from $2,000,000 drawn from a
line of credit and $825,000 of proceeds from issuance of common stock,
24
partially offset by $302,000 of principal repayments on notes payable. Net cash
provided by financing activities of $1,332,000 during the nine months ended
April 30, 2001, resulted primarily from $1,769,000 of proceeds from issuance of
common stock, partially offset by a loan of $235,000 to a related party and
$202,000 of principal repayments 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. At April 30,
2002, the restricted cash amounted to $463,000, of which $56,000 is included in
"Other Current Assets."
We are committed to invest an additional $2,250,000 in Azure Venture
Partners. The total of future actual investments may be less than this amount,
depending on future performance of the investee companies. These funds are
expected to be paid contractually as requested by the general partners over a
period not to exceed the contract term of eight years. We will invest an
additional $300,000 by the end of fiscal 2002 and believe that the remainder of
the funds will be paid over the next three fiscal years.
In September 2001, we borrowed $2,000,000 under our loan and security
agreement entered into on March 29, 2001, which remained outstanding at April
30, 2002. As of April 30, 2002, we were not in compliance with a certain
financial covenant under the agreement. Although the loan balance is due in June
2002, we expect to receive a waiver of covenant non-compliance and have
initiated negotiations to renew the related $10,000,000 revolving credit line.
We also intend to amend our financial covenants on a going forward basis to
amounts that we believe will allow for compliance.
The outstanding balance at July 31, 2001 on a $750,000 equipment line of
credit was paid off in September 2001 with a portion of the new borrowings
described above. The $750,000 equipment line and a $1,000,000 revolving line of
credit from the same bank were not renewed.
The table below summarizes our future payments due under debt and lease
obligations as of April 30, 2002:
Less Than
(In thousands) 1 year 1-3 years 4-5 years Total
-------------- --------------- --------------- --------------
Line of credit .............................. $ 2,000 $ -- $ -- $ 2,000
Operating leases, net of minimum proceeds
from sublease ............................ 2,043 4,527 2,105 8,675
-------------- --------------- --------------- --------------
Total $ 4,043 $ 4,527 $ 2,105 $ 10,675
============== =============== =============== ==============
We believe that our current cash, cash equivalents and short-term
investment balances, including 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 will be
available to us at all or on terms favorable to us.
25
Factors That May Affect Future Operating Results
There are many factors that affect our business and the results of our
operations, some of which are beyond our control. The following is a description
of some of the important factors that may cause the actual results of our
operations in future periods to differ materially from those currently expected
or desired.
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.
On June 11, 2002, we received a letter from The Nasdaq Stock Market, Inc.
(Nasdaq) stating that our common stock had failed to maintain a minimum bid
price of $1.00 over the prior 30 consecutive trading days as required for
continued listing on the Nasdaq National Market under Marketplace Rule
4450(a)(5). (Refer to other information set forth in Part II, Item 5 below.) We
have 90 days or until September 9, 2002, to regain compliance with this rule. If
at any time before September 9, 2002, the closing bid price of our common stock
is at least $1.00 for a minimum of ten consecutive trading days, staff at Nasdaq
will notify us of our compliance with the rule. However, if we are unable to
demonstrate compliance by September 9, 2002, the staff at Nasdaq will provide us
with written notification that our securities will be delisted. At that time, we
can appeal to the Nasdaq Listing Qualifications Panel and undertake measures
intended to maintain our listing. There can be no assurances that this appeal
would be resolved favorably. In the event that any such appeal is denied, our
common stock would thereafter be quoted on the Over-the-Counter Bulletin Board
unless re-listed on the Nasdaq National Market or another exchange or quotation
system.
Additional reasons for delisting include failure to maintain a minimum
amount of stockholders' equity, and failure to file various reports with the
Securities and Exchange Commission (SEC) in a timely fashion, 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 the Nasdaq National Market for any reason, it could materially
reduce the value of our common stock and its liquidity.
We are exposed to recent unfavorable economic conditions that have resulted in
lower revenue and caused us to take various actions to reduce operating
expenses. Continued or worsened conditions may result in additional actions to
reduce operating expenses.
Our revenue has declined sequentially in the last five quarters largely as
a result of recent unfavorable economic conditions that have caused our
customers to delay or postpone corporate IT spending. We also made adjustments
and incurred charges associated with actions we recently implemented aimed at
reducing operating expenses. While we expect the current economic conditions to
continue well into the remainder of fiscal 2002, there can be no certainty as to
the severity or duration of the economic slowdown. To date, various segments of
the software industry have experienced significant economic downturns
characterized by decreased product demand, price erosion, work slowdowns, and
layoffs. Also recently, concerns have increased throughout the technology
industry regarding negative growth forecasts for calendar year 2002. Moreover,
there is increasing uncertainty in the enterprise software market attributable
to many factors, including global economic conditions and strong competitive
forces. Our future revenue and results of operations may continue to experience
substantial fluctuations from quarter to quarter as a consequence of these
factors, and such conditions and other factors affecting capital spending may
continue to affect the timing of purchase or service orders from our current and
potential customers. As a result, continued economic slowdowns in general may
require us to take additional cost-reduction measures that could have a material
adverse effect on our business, operating results or financial condition.
26
Our restructurings could result in customer uncertainty and management
distractions.
We have undergone a number of restructurings in fiscal 2001 and, most
recently, in the third quarter of fiscal 2002 involving, among other things, a
substantial reduction in our worldwide workforce. These reductions could result
in customers or prospective customers deciding to delay or not purchase our
products and services due to perceived uncertainty caused by the restructurings.
There can be no assurance that we will not reduce or otherwise adjust our
workforce again in the future or that the related transition issues associated
with such reductions will not adversely affect our operations in the future.
This uncertainty could result in a lack of focus and reduced productivity by our
remaining employees, including those directly responsible for revenue
generation, which in turn may affect our revenue in the future. In addition,
employees directly affected by the reductions may seek future employment with
our business partners, customers, or even our competitors. Although certain
employees are required to sign a confidentiality agreement with us at the time
of hire, there can be no assurances that the confidential nature of our
proprietary information will be maintained in the course of such future
employment.
We have experienced losses and may not achieve sustained profitability in the
future. And as we implement our plan to reduce operating expenses, we may fail
to support our operations, which could reduce demand for our products and
services and materially adversely affect our results of operations.
We have experienced losses of $9.3 million and $22.2 million for the three
and nine months ended April 30, 2002, respectively, and $9.3 million and $20.8
million, respectively, in the corresponding periods in fiscal 2001. We may not
be able to attain or sustain consistent future revenue growth on a quarterly or
annual basis, or achieve and maintain consistent profitability on a quarterly or
annual basis. An investor in our common stock should accordingly consider the
risks, expenses and difficulties that companies frequently encounter in the new
and rapidly evolving market for wireless and mobile computing products and
services. These risks to us include:
o our evolving business model;
o our need and ability to manage growth; and
o rapid evolution of technology.
To address these risks and uncertainties, we must take several steps,
including:
o creating and maintaining strategic relationships;
o expanding sales and marketing activities;
o integrating existing and acquired technologies;
o expanding our customer base and retaining key clients;
o introducing and expanding new services, including our professional
services organization;
o managing rapidly growing operations, including new facilities and IT
infrastructure;
o competing in a highly competitive market; and
o attracting, retaining and motivating key employees.
We may not be successful in implementing any of our strategies or in
addressing these risks and uncertainties. Despite cost-reduction measures we
implemented in the third and fourth quarters of fiscal 2001, and most recently
in the third quarter of fiscal 2002, we expect that we will continue to incur
reasonable costs, primarily as a result of (1) our investment in various
initiatives to enhance our existing products, (2) development and introduction
of new products and technologies that meet changing customer requirements, and
(3) cultivation of relationships with our
27
software development partners. 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 revenue to meet
expenses or to operate profitably in the future. Our losses today and the risk
of future 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 operations and the price of our common stock.
We depend on strategic relationships and business alliances with our offshore
software development partners.
We recently established a global software development program to assist us
in the implementation of custom software and other technology applications. The
program calls for extending our engineering team to include a number of offshore
software development partners. The success of our future development efforts
will depend on our ability to maintain strategic relationships with these
offshore partners. Our business relationships often consist of cooperative
engineering programs, joint business seminars and cooperation in product
development. Many of these relationships may not be contractual and may depend
on the continued voluntary cooperation of each party with us. Divergence in
strategy or change in focus by any of our partners may interfere with our
ability to develop and support our products, which in turn could harm our
business. Further, if our partners enter into strategic alliances with other
companies, they could reduce their support of our products. Our existing
relationships may be jeopardized if we enter into alliances with competitors of
our strategic partners. One or more of our partners may use the information they
gain from their relationship with us to develop competing products. In addition,
our operations could be adversely affected if any of these offshore partners is
affected by volatile economic, political or military conditions in its country
or by various restrictions imposed by its country regarding the transfer of
technology, the mobile computing industry and business in general.
Our common stock will likely be subject to substantial price and volume
fluctuations due to a number of factors, some of which are beyond our control.
The trading price of our common stock has been, and is likely to continue
to be, highly volatile. Our stock price is subject to wide fluctuations in
response to a variety of factors including:
o quarterly variations in operating results;
o seasonal fluctuations on product sales;
o announcements of technological innovations;
o announcements of new software or services by us or our competitors;
o changes in financial estimates by securities analysts; or
o other events beyond our control, 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.
28
Recent terrorist activities and resulting military and other actions could
adversely affect our business.
The September 11 terrorist incident in the United States, which has brought
devastation to many people and shaken consumer confidence, has disrupted
commerce throughout the world. In response to such attacks, the United States is
actively using military force to pursue those behind these attacks and
initiating broader actions against global terrorism. The continued threat of
terrorism throughout the world, the escalation of military action, and
heightened security measures in response to such threats may cause significant
disruption to the global economy, including widespread recession. To the extent
that such disruptions result in a continued 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 whom 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.
Our failure to adequately protect our proprietary rights may harm our
competitive position.
We rely on a combination of patents, copyrights, trademarks, service mark
and trade secret laws and contractual restrictions to establish and protect
proprietary rights in our products and services. These measures afford only
limited protection. We currently have 17 issued United States patents and
additional 19 patent applications pending in the United States. Effective
intellectual property protection may not be available in every country in which
we offer our products and services. Our means of protecting our proprietary
rights in the United States or abroad may not be adequate, and competitors may
independently develop similar technologies. We have also provided our source
code under escrow agreements and to foreign translators, which may increase the
likelihood of misappropriation by third parties. Our future success will depend
in part on our ability to protect our proprietary rights. Despite our efforts to
protect our proprietary rights and technologies, unauthorized parties may
attempt to copy aspects of our products or to obtain and use trade secrets or
other information that we regard as proprietary. Policing unauthorized use of
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. Embedded software products, like those offered by us,
can be especially susceptible to software piracy. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the laws
of the United States. Legal proceedings to enforce our intellectual property
rights could be burdensome and expensive and could involve a high degree of
uncertainty. These legal proceedings may also divert management's attention from
growing our business. If we do not enforce and protect our intellectual
property, our business may suffer substantial harm. Refer to Part II, Item 1
below for more information on our recent legal proceeding against Extended
Systems, Inc. alleging infringement of seven of our patents.
We are dependent on non-exclusive licenses for certain technology included in
our products. We may be unable to license such technology or it may be subject
to infringement claims by third parties.
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 fails to support or maintain these
development tools, we will have to support the tools ourselves or transition to
another vendor. Such maintenance or 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 in 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 of
and demand for our products, business and prospects.
29
Our commercial success will also depend in part on not infringing upon 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 technologies or to alter our products or
processes, obtain licenses or cease activities that infringe on a 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.
Operating results may fluctuate significantly and may be difficult to predict.
Our operating results have fluctuated in the past and are likely to
continue to fluctuate significantly due to a number of factors, many of which
are outside of our control, including, but not limited to:
o the demand for our products and services;
o our success in developing new products and integrating acquired
technologies;
o the timing of new product introductions by us and our competitors;
o market acceptance of our new and enhanced products and services;
o market acceptance of handheld devices generally, and those supported
by our products and services;
o the emergence of new industry standards;
o the timing of customer orders;
o the mix of products and services sold;
o product life cycles;
o competition;
o the mix of distribution channels employed;
o seasonal trends;
o the timing and magnitude of our capital expenditures, including costs
relating to the expansion of operations;
o the evolving and unpredictable nature of the markets for our products
and mobile computing devices generally;
o the growth rate of the markets for personal computers, wireless
devices and mobile computing devices in general; and
o general economic conditions.
We derive a portion of our revenue from a number of thinly capitalized and
early-stage customers such as dot-com companies. The recent unfavorable economic
conditions may severely affect a number of such and other customers, as well as
vendors, which may subsequently harm our business and results of operations.
Historically, we have derived a portion of our revenues from small and
early-stage companies including dot-coms. Recently, due to general economic
slowdowns, many of these dot-com and other small companies have reduced their IT
spending or ceased their investment in products, services and technologies such
as those we provide. Many similarly situated customers and potential customers
continue to experience difficulty in their capital-raising activities and may
not be able to continue operations. As a result of such failures, any decrease
in the demand for our products and services could adversely affect our operating
results and financial condition. The composition of our customer base exposes us
to additional risks, including longer payment cycles and collection problems.
30
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 could be adversely affected if a vendor were to
experience financial or operational difficulties that resulted in a reduction or
interruption in services it provides us.
We have implemented policies and procedures to identify and mitigate our
exposure to the risks mentioned above, but the failure of these thinly
capitalized and other companies to be successful in their operations could have
a material adverse effect on our business, results of operations and financial
condition.
Our business and prospects depend on demand for, and market acceptance of, the
wireless and other mobile computing devices.
The use of wireless and other 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 and other mobile computing
devices including PDAs, handheld computers, smart phones, pagers and other
mobile devices. The recent economic slowdown may adversely affect the growth of
the market for wireless and other mobile computing devices. In addition,
critical issues concerning the commercial use of wireless and other 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 our services. The adoption of wireless and other
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 and other mobile computing devices are subject to a high
level of uncertainty and are dependent on a number of factors, including:
o the growth in access to, and market acceptance of, new interactive
technologies;
o emergence of a viable and sustainable market for wireless and mobile
computing services;
o the development of technologies that facilitate interactive
communication between organizations; and
o increases in bandwidth for data transmission.
If the market for wireless and other 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, the size of
which cannot be accurately estimated, and therefore we are unable to accurately
determine the potential demand for our products and services. If our customer
base does not expand or if there is not widespread acceptance of our products
and services, our business and prospects will be harmed. We believe that our
potential to grow and increase the market acceptance of our products depends
principally on the following factors, some of which are beyond our control:
o the effectiveness of our marketing strategy and efforts;
31
o our product and service differentiation and quality;
o our ability to provide timely, effective customer support;
o our distribution and pricing strategies as compared to those of our
competitors;
o growth in sales of handheld devices supported by our software and
growth in wireless network capabilities to match end-user demand and
requirements;
o our industry reputation; and
o general economic conditions such as slowdowns in the computer or
software markets or the economy in general.
Our market changes rapidly due to evolution in technology and industry
standards. If we do not adapt to meet the sophisticated needs of our customers,
our business and prospects will suffer.
The market for our services is characterized by rapidly changing
technology, evolving industry standards and frequent new service introductions.
Our future success will depend to a substantial degree on our ability to offer
services that incorporate leading technology, address the increasingly
sophisticated and varied needs of our current and prospective customers and
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis. You should be aware that:
o our technology or systems may become obsolete upon the introduction of
alternative technologies;
o we may not have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with
future technologies or service offerings; and
o the price of the services we provide is expected to decline as rapidly
as the cost of any competitive alternatives.
We may not be able to respond effectively 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.
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 other
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:
o taxation of electronic commerce;
o the wireless distribution of specific material or content; and
o the characteristics and quality of mobile products and services.
32
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 wireless and other mobile devices become more pervasive.
Any legislation, regulation or taxation of electronic commerce could dampen the
growth of wireless and other mobile computing devices. If a reduction in growth
occurs as a result of these events, demand for our services, technologies and
other products could decline significantly.
If we fail to maintain our existing relationships or enter into new
relationships with OEMs, business development organizations, and sales
distribution channels, our brand awareness, the sales of our products and use of
our services would suffer.
The success of our product and service offerings depends, in large part, on
our ability to develop and maintain relationships with OEMs and business
development organizations that help distribute our products and promote our
services. We depend on these relationships to:
o distribute our products to purchasers of mobile devices;
o increase usage of our technology licensing components;
o build brand awareness through product marketing; and
o cooperatively market our products and services.
If the products that these equipment manufacturers or business development
organizations sell, or the operating systems upon which these products are
based, were to lose popularity, or if any of these companies cease to utilize
our product and service offerings in significant volumes, our business would
suffer.
The relationships we have developed with sales distribution channels and
other resellers also allow us to offer our products and services to a much
larger customer base than we would otherwise be able to reach through our own
direct sales and marketing efforts. A significant number of our customers
purchase our products and services through our resellers, and we anticipate they
will continue to do so as we expand our product offerings. In addition, because
we sell indirectly through sales distribution channels and resellers, we cannot
control the relationships through which customers purchase our products. We do
not control the presentation of our products to these customers as well. Our
sales, therefore, could also be affected by disruptions in the relationships
between our resellers and customers. Resellers may also choose not to emphasize
our products to their customers. Any of these occurrences could diminish the
effectiveness of our distribution channel and lead to decreased sales.
If we are unable to provide satisfactory and quality services through our
professional services organization, customer satisfaction and demand for our
products will suffer.
Many of our customers have been successful in implementing our various
technology initiatives without further provision of technical service. However,
we believe that building strong relationships with our customers, as well as
future growth in our product sales, depends on our ability to provide our
customers with professional services, including customer support, training,
consulting and initial implementation and deployment of our products when
necessary. 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.
33
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, 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,
Extended Systems, Inc.'s XTNDConnectPC, IBM Corporation's Lotus Software
EasySync Pro, Laplink, Inc.'s PDASync, Microsoft, Inc's ActiveSync and Palm
Desktop from Palm, Inc. Satellite Forms faces competition from Adobe Systems,
Inc., Aligo, Inc., AppForge, Inc., Covigo, Inc., iConverse, Inc., Metrowerks
Code Warrior, mPortal, Inc., Pencel Corporation, Pendragon Software Corporation,
and Penright Corporation's MobileBuilder. Our server-based software and Sync-it
product's synchronization features face competition from Aether Systems,
AvantGo, Extended Systems, FusionOne, Inc., InfoSpace, Inc., Infowave Software,
JP Mobile, Inc., Microsoft, Motorola, Inc., Openwave, Inc., Sybase, Inc.,
Synchrologic, Inc., Wireless Knowledge, Inc., and XcelleNet, Inc. Browse-it's
transformation and mobile content distribution features face competition from
AU-Systems, AvantGo, Bitstream Inc.'s Thunderhawk, 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., 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:
o price and revenue reductions, and lower profit margins;
o loss of customers or failure to obtain additional customers; and
o loss of market share.
Any one of these could materially and adversely affect our business,
financial condition and results of operations.
We are dependent on our international operations for a significant portion of
our revenues.
International revenue, primarily from customers based in Japan, accounted
for 28% and 31% of our revenue in the three and nine months ended April 30,
2002, respectively, and 19% and 22% of our revenue, respectively, in the
corresponding periods in fiscal 2001. In the future, we may further expand our
international presence. As we continue to expand internationally, we are
increasingly subject to risks of doing business internationally, including:
o unexpected changes in regulatory requirements and tariffs;
o export controls relating to encryption technology and other export
restrictions;
34
o political and economic instability;
o difficulties in staffing and managing foreign operations;
o reduced protection for intellectual property rights in some countries;
o longer payment cycles;
o problems in collecting accounts receivable;
o potentially adverse tax consequences;
o seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world;
o fluctuations in currency exchange rates that may make our products
more expensive to international customers;
o gains and losses on the conversion to United States dollars of
accounts receivable and accounts payable arising from international
operations, due to foreign currency denominated sales;
o nonrefundable withholding taxes on royalty income from customers in
certain countries, such as Japan and Taiwan;
o an adverse effect on our provision for income taxes based on the
amount and mix of income from foreign customers; and
o exposure to risk of non-payment by customers in foreign countries with
highly inflationary economies.
Any of these risks could harm our international operations. For example,
some European countries already have laws and regulations related to content
distributed via Internet technologies that are stricter than those currently in
force in the United States. The European Parliament has adopted a directive
relating to the reform of copyright in the European Community that restricts
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, in the future, are
unable to expand international sales channel management and support, 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.
Our investment in goodwill and intangibles resulting from our acquisitions could
become impaired.
As of April 30, 2002, our goodwill and other intangibles, which are
currently being amortized over a period of 18 months to five years, amounted to
$8.7 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
SFAS No. 142, which requires the discontinuance of goodwill amortization. We
will amortize approximately $2.4 million and $0.8 million 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
subject to earlier write-off. In such events, our results of operations in any
given period could be negatively impacted.
35
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 that are at risk for financial failure especially during an economic
slowdown, there is a greater risk that the investments might be impaired. Any
impairment of such investments in the future could have a material adverse
effect on our results of operations and financial condition. Refer to the
caption "Other-than-Temporary Impairment of Investments" set forth under Results
of Operations and Note 5 of the Notes to Unaudited Condensed Consolidated
Financial Statements above for more information on our recent write-down of
investments.
We may incur significant stock-based compensation charges related to our stock
option cancellation/regrant programs in future periods.
Under the guidance in FIN No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB Opinion No. 25, we have
incurred and will continue to incur variable accounting costs related to certain
stock options under our cancellation/regrant programs. These costs 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 or cancellation
without replacements, if earlier, exceeds the exercise price. The costs are
amortized on an accelerated basis over the remaining vesting period consistent
with the method described by FIN No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans." 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 costs in future periods. Refer to the caption "Non-Cash Stock
Compensation" set forth under Results of Operations and Note 9 of the Notes to
Unaudited Condensed Consolidated Financial Statements above for more information
on our recent cancellations/regrant programs.
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 flow from
sales of products and services or to raise sufficient funds may require us to
delay or abandon some or all of our development and expansion plans or otherwise
forego market opportunities. Our inability to obtain additional capital on
satisfactory terms may delay or prevent the expansion of our business, which
could cause our business, operating results and financial condition to suffer.
Our working capital is primarily comprised of cash, short-term investments,
accounts receivable, inventory, other current assets, accounts payable, accrued
expenses, deferred revenue and current portion of notes payable. The timing and
amount of our future capital requirements may vary significantly depending on
numerous factors, including our financial performance, 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.
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 products and
services in United States dollars. For the first three quarters of fiscal 2002
and fiscal 2001, 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
36
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.
Our products may contain product errors that could subject us to product
liability claims.
Our products may contain undetected errors or failures when first
introduced or as new versions are released, which can result in loss of or delay
in market acceptance and could adversely impact future operating results. We do
not currently maintain product liability insurance. Although our license
agreements contain provisions limiting our liability in the case of damages
resulting from use of the software, in the event of such damages, we may be
found liable, and in such event, such damages could materially affect our
business, operating results and financial condition.
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 in the future
intend to acquire or make investments in, other complementary companies,
products and technologies. We have acquired certain assets of Windward and
SwiftTouch and acquired Dry Creek, NetMind, ProxiNet, SoftMagic Corporation,
RealWorld Solutions, Inc. and IntelliLink Corporation. In the event of any
future acquisitions or investments, we could:
o issue stock that would dilute the ownership of our then existing
stockholders;
o incur debt;
o assume liabilities;
o face the SEC challenges to the accounting treatment of these
acquisitions, which may result in changes to our financial statements
and cause us to incur charges to earnings over time that we did not
expect;
o incur amortization expenses related to intangible assets (other than
goodwill); or
o incur large and immediate write-offs.
These acquisitions and investments also involve numerous risks, including:
o problems integrating the operations, technologies or products
purchased with those we already have;
o unanticipated costs and liabilities;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers and
customers;
o risks associated with entering markets in which we have no or limited
prior experience; and
o potential loss of key employees, particularly those of the acquired
organizations.
37
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
are limited in their ability to make proposals at stockholder meetings.
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.
The loss of key personnel could harm our business.
We are highly dependent on key members of our management and engineering
staff, many of whom would be extremely difficult to replace. 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. In addition, competition for employees in our industry and
geographic location could be intense. We may not be able to continue to attract
and retain skilled and experienced personnel on acceptable terms.
38
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including changes in interest rates,
foreign currency fluctuations, and market values of our investments which could
impact our results of operations and financial condition. We currently do not
utilize derivative financial instruments to hedge such risks.
At April 30, 2002, we had an investment portfolio of fixed income
securities, excluding those classified as cash and cash equivalents and
securities available for sale, of $26,669,000. 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 April 30, 2002, the decline
of the fair value of the portfolio would be immaterial. Other than certain
government securities, our fixed income investments have maturities of less than
one year. While we intend to hold such 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.
To date, the majority of our recognized revenue has been denominated in
United States dollars, and our exposure to foreign currency exchange rates has
been immaterial. We expect, however, that more product and service revenue may
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 a limited partner in a venture capital fund, through which we invest
in equity instruments of privately-held companies for business and strategic
purposes. Our investment in this venture capital fund is included in other
assets and is accounted for under the cost method as our ownership is less than
3% and we do not have the ability to exercise significant influence over
operations. At April 30, 2002, this investment amounted to $2,305,000. (Refer to
Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements
for more details.) For such investment, we regularly review the operating
performance of the fund in assessing the carrying value. We identify and record
an impairment loss when events and circumstances indicate that such asset might
be impaired. During the third quarter of fiscal 2002, we recorded a charge for
an other-than-temporary impairment of investments of approximately $195,000
related to our pro-rata share of net loss realized by our venture capital fund
on sale or liquidation of certain investments.
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.
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PUMATECH, INC.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
On April 19, 2002, we filed a patent infringement suit against Extended
Systems, Inc. in the United States District Court for the Northern District of
California. We alleged that Extended Systems' server and desktop products
infringe on seven of our synchronization-related patents. We are seeking in the
suit an injunction against future sales of Extended Systems' infringing server
and desktop products, as well as damages for past sales of the infringing
products. We further alleged that Extended Systems' infringement of the seven
synchronization patents was willful and deliberate, entitling us to an award of
treble damages, costs and reasonable attorneys' fees. On May 28, 2002, we filed
an amended complaint in the lawsuit, adding claims of trademark infringement,
unfair competition and interference with contract, all in connection with
Extended Systems' use of our Satellite Forms trademark. Extended Systems has not
yet filed a formal response in the lawsuit.
We are also involved in various legal proceedings from time to time arising
in the ordinary course of business, none of which are expected to have a
material adverse effect on our results of operations or financial condition.
Refer to the caption "Our failure to adequately protect our proprietary
rights may harm our competitive position" set forth under Factors That May
Affect Future Operating Results in Part I, Item 2 above.
Item 2. Changes in securities and use of proceeds - Not Applicable
Item 3. Defaults upon senior securities - Not Applicable
Item 4. Submission of matters to a vote of security holders - Not Applicable
Item 5. Other information
On June 11, 2002, we received a letter from The Nasdaq Stock Market, Inc.
(Nasdaq) stating that our common stock had failed to maintain a minimum bid
price of $1.00 over the prior 30 consecutive trading days as required for
continued listing on the Nasdaq National Market under Marketplace Rule
4450(a)(5). We have 90 days or until September 9, 2002, to regain compliance
with this rule. If at any time before September 9, 2002, the closing bid price
of our common stock is at least $1.00 for a minimum of ten consecutive trading
days, staff at Nasdaq will notify us of our compliance with the rule. However,
if we are unable to demonstrate compliance by September 9, 2002, the staff at
Nasdaq will provide us with written notification that our securities will be
delisted. At that time, we can appeal to the Nasdaq Listing Qualifications Panel
and undertake measures intended to maintain our listing. There can be no
assurances that this appeal would be resolved favorably. In the event that any
such appeal is denied, our common stock would thereafter be quoted on the
Over-the-Counter Bulletin Board unless re-listed on the Nasdaq National Market
or another exchange or quotation system.
Refer to the caption "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" set forth under Factors That May Affect Future Operating Results in
Part I, Item 2 above.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
--------
10.1 Sublease Agreement, dated February 4, 2002 by and between
Pumatech, Inc. and AlphaSmart, Inc.
(b) Reports on Form 8-K - Not Applicable
-------------------
40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PUMATECH, INC.
(Registrant)
Date: June 13, 2002 By: /s/ KELLY J. HICKS
--------------------------------------------
Kelly J. Hicks
Vice President of Operations and
Chief Financial Officer
(Principal Financial and Accounting Officer)
41