10-K 1 d50108_10-k.txt ANNUAL REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number 000-31561 AvantGo, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 94-3275789 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 25881 Industrial Blvd. Hayward, California 94545 (Address of Principal Executive Offices, including Zip Code) (510) 259-4000 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 20, 2002, there were 35,501,609 shares of the registrant's Common Stock, $0.0001 par value, outstanding. The aggregate market value of the registrant's voting stock held by nonaffiliates as of March 20, 2002 was approximately $29.7 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 13, 2002 are incorporated by reference in Part III of this Form 10-K to the extent stated herein. ================================================================================ AVANTGO, INC. FORM 10-K CONTENTS ITEM 1. BUSINESS.......................................................... 1 ITEM 2. PROPERTIES........................................................ 9 ITEM 3. LEGAL PROCEEDINGS................................................. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS............. 9 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................... 9 ITEM 6. SELECTED FINANCIAL DATA........................................... 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 30 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 30 ITEM 11. EXECUTIVE COMPENSATION............................................ 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 31 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 31 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................................... 31 This Form 10-K contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve risks and uncertainties, including, but not limited to, those identified in the section of this Form 10-K entitled "Risk Factors," which may cause actual results to differ materially from those discussed in such forward-looking statements. When used in this document, the words "believes," "expects," "anticipates," "intends," "plans," "future," "may," "will," "should," "estimates," "potential," or "continue" and similar expressions, are intended to identify certain of these forward-looking statements. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Factors that could cause or contribute to such differences include those discussed below. We undertake no obligation to release publicly the results of any revision to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-K with the SEC. Readers are urged to review and consider carefully the various disclosures made by us in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risk factors that may affect our business. For a detailed discussion of these risks and uncertainties, see the "Risk Factors" section of this Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K. AvantGo, AvantGo Enterprise, AvantGo Mobile Engine, AvantGo Mobile Sales, AvantGo Mobile Delivery, Dynamic Mobility Model and the AvantGo logo are either registered trademarks or trademarks of AvantGo in the United States and/or other countries. As used in this report on Form 10-K, unless the context otherwise requires, the terms "we," "us," "our" or "the Company" and "AvantGo" refer to AvantGo, Inc., a Delaware corporation, and, unless the context otherwise requires, its wholly-owned subsidiaries. PART I ITEM 1. BUSINESS Overview We were incorporated in June 1997 as a Delaware corporation under the name Bombardier Software, Inc. and changed our name to AvantGo, Inc. in January 1998. In September 1998, we launched our AvantGo Enterprise products today called AvantGo M-Business Server products. In May 1999, we introduced our AvantGo Mobile Internet service. In May 2000, we purchased Globalware Computing and began integrating its software products and consulting services into our mobile offerings. In October 2000, we completed our initial public offering. In July 2001, September 2001 and March 2002, respectively, we launched AvantGo Mobile Sales, AvantGo Mobile Delivery and AvantGo Mobile Pharma - which interoperate with our AvantGo M-Business Server products. We provide mobile enterprise software and services that enable and enhance the use of Internet-based content and corporate applications on handheld devices and Internet-enabled phones. Our AvantGo M-Business Server products and mobile business applications are designed to automate business processes and improve the exchange of information between companies and their employees and customers, resulting in improved business efficiencies and more effective customer interactions. We license our AvantGo M-Business Server products and mobile business applications to help companies provide their employees, customers, suppliers and business affiliates with easy access to business information. We host our AvantGo Mobile Internet service to enable our Media and M-Business customers to deliver their content and applications to our over 5 million registered AvantGo Mobile Internet service users. Our AvantGo Mobile Internet service also allows consumers to access and interact with over 2000 sources of Internet-based content and corporate applications optimized for delivery to handheld devices and Internet-enabled phones. 1 Our AvantGo M-Business Server products, our mobile business applications and our AvantGo Mobile Internet service provide several key benefits to enterprises and content providers, or e-businesses, including the ability to: o Deliver sophisticated applications. Our software incorporates advanced configuration, processing, storage and transmission technology designed to overcome mobile device limitations including limited memory and slow processor performance, as well as external limitations, including limited network communications availability. Using our software, mobile devices can store and display complex, table-formatted content and graphics, collect data using innovative methods such as bar-code scanners built directly into mobile devices and capture hand-written information, including customer signatures, using touch-sensitive displays. o Improve access to information. We designed our patented software to keep information up-to-date and readily accessible, even when a network or wireless connection is unavailable. Our software allows users to easily update, add and remove applications and services. Additionally, systems administrators can use our software to allow for the remote delivery of business information to individuals within an enterprise or to the public. o Develop and deploy mobile applications using existing technology standards. We designed our software to enable mobile devices to support applications that rely on existing Internet technology standards, such as hypertext mark-up language, or HTML, extensible mark-up language, or XML, secure sockets layer, or SSL, and JavaScript. As a result, software developers can build and deploy applications on mobile devices using the same development tools and publishing systems that they use for ordinary Web browsers and personal computers. Our software and services also deliver benefits that enable businesses to build and deepen relationships with their workforces, customers, partners and business affiliates. Benefits to enterprises: o Increased productivity. We designed our AvantGo M-Business Server products to automate business processes and improve the exchange of information between companies and their employees and customers, resulting in improved business efficiencies and more effective customer interactions. Our software streamlines business processes such as billing, procurement, inventory control and customer relationship management by replacing traditional paper-based processes with those using mobile devices. For example, by providing delivery personnel with handheld devices running our AvantGo M-Business Server software, enterprises can keep tighter control over the invoicing process by enabling drivers to electronically input delivery information such as customer signatures. In addition, managers of manufacturing companies can make faster and more informed decisions when provided with up-to-date operations data accessible at any time using personal digital assistants or Internet-enabled phones. Our software allows access to information on a mobile device in situations where network connections or wireless signals are slow or unavailable. o Open platform. Our software runs on operating systems and hardware platforms that are compatible with HTML, XML, SSL and JavaScript. Our software integrates efficiently with existing systems, which enables our customers to quickly deploy a mobile infrastructure using applications and other technology they already own. o Centralized administration. Our enterprise software enables businesses to centrally manage their mobile workforces using a Web browser. For example, our software enables businesses to update applications and distribute them from a single location to dispersed mobile devices. Our software also simplifies information management and maintenance by allowing organizations to create user accounts, define user groups and control access. Benefits to media companies and other businesses: o Potential for cost savings and faster time to market. Instead of devoting significant resources to build a mobile network that may not operate over a variety of connectivity combinations, Internet content providers and other businesses can use our software and services to quickly deploy a 2 mobile infrastructure. By using our products and services, we believe that our content and other business customers, which we refer to as Media and M-Business customers, can quickly meet the mobile computing needs of their customers while remaining focused on their core businesses. o Acquire new customers. We have built a network of over 2000 sources of content and applications, and we currently have over 5 million registered AvantGo Mobile Internet service users. Our Media and M-Business customers can leverage our large mobile Internet registered user base to quickly and efficiently grow their own mobile user base. In turn, a wider selection of our Media and M-Business customers attract more users to our service. As a result, existing Media and M-Business customers have the opportunity to quickly extend their brand and service offerings to a wide consumer audience. o Create new customer touch points. Using our services, our Media and M-Business customers have the opportunity to develop personalized customer interactions through mobile advertising, direct marketing and customer relationship management opportunities. Products and Services Our mobile enterprise software and services, which are based on common platform technology, provide the foundation for our AvantGo M-Business Server products and AvantGo Mobile Internet service. We also offer professional services to help customers deploy and maintain our software and services. Revenues from our AvantGo M-Business Server products, our professional services and our AvantGo Mobile Internet service accounted for approximately 50%, 40% and 10% of our total revenues for the year ended December 31, 1999, approximately 56%, 20% and 24% for the year ended December 31, 2000, and approximately 56%, 20% and 24% for the year ended December 31, 2001. McKesson Corporation accounted for approximately 25% of our total revenues during the year ended December 31, 1999, approximately 26% for the year ended December 31, 2000, and approximately 20% for the year ended December 31, 2001. For information concerning international sales, see Note 12 to our consolidated financial statements. AvantGo M-Business Server Products Our AvantGo M-Business Server software, which our customers install directly within their corporate networks, enable organizations to extend interactive enterprise applications and data to mobile workers, through either a wireless connection or through desktop synchronization. AvantGo M-Business Server software allows enterprise customers to facilitate two-way communication on mobile devices, including sales force automation, document publishing, expense management applications, field service maintenance, inventory management, and logistics. Our AvantGo Mobile Internet service, a hosted solution, allows organizations to run the same types of applications as our AvantGo M-Business Server software without operating our software on their network. This service is well suited to enterprise customers that for timing, technical or cost-driven reasons do not want to install, operate and maintain our AvantGo M-Business Server software on their network. Our AvantGo M-Business Server solution, which we license to our enterprise customers, accounts for the majority of our enterprise revenues. We also make our AvantGo M-Business Server solution available to enterprises on a subscription basis. Mobile Business Applications Our AvantGo Mobile Sales application is designed to enable enterprises to view and update critical sales information from leading customer relationship management applications, such as Onyx, Oracle and Siebel Systems with their handheld devices and Internet-enabled phones. Our AvantGo Mobile Sales application provides wireless and off-line access to critical sales information from sales force automation systems and other corporate applications, including opportunities, contacts, service requests and inventory. Our AvantGo Mobile Delivery application is designed to enable delivery fleet operators to reduce delivery errors, cut costs and provide real-time package tracking information to customers. Our AvantGo Mobile Delivery application accomplishes this by replacing error-prone, paper-based processes with an automated delivery system featuring route management, manifest reconciliation and electronic signature capture on the mobile device. 3 We designed our AvantGo Mobile Pharma application to enable pharmaceutical companies to gain market share by improving the quality of physician interactions and increasing the productivity of their sales representatives. Our AvantGo Mobile Pharma application provides sales representatives with rapid access to the information most relevant to them, including existing sales force automation systems, product and clinical data, prescription distribution data, corporate intranet and the Internet on mobile devices. Our AvantGo Pylon Personal Information Management (PIM) Server for Microsoft Exchange and our AvantGo Pylon Personal Information Management (PIM) Server for Lotus Notes products enable much of the functionality of Microsoft Exchange and Lotus Notes to be used on mobile devices. Our Pylon PIM Server for Microsoft Exchange and Pylon PIM Server for Lotus Notes products enable users of handheld devices to synchronize data between a personal computer and a centrally configured server. In September 2001, we entered into a license agreement with Synchrologic, Inc. that enables us to provide users of mobile devices with the ability to synchronize their mobile devices with Microsoft Exchange. Our AvantGo Pylon Application Server for Lotus Notes product enables much of the functionality of Lotus Notes to be used on mobile devices. It enables users of handheld devices to synchronize data between a personal computer and a centrally configured server to deliver custom Lotus Notes databases, as well as personal information management information to the device. AvantGo Mobile Internet Service Our AvantGo Mobile Internet service allows Internet users with a handheld device or Internet-enabled phone to access Web-based services and content in real-time, using a device with a wireless connection or through synchronization with a desktop computer. Our AvantGo Mobile Internet service allows Internet users to interact with Web-based applications and services and enter information into mobile devices for posting onto the Web. Through our AvantGo Mobile Internet service, we generate placement, subscription, advertising, service access fee and professional services revenue, and have revenue-sharing arrangements that provide the opportunity for us to earn commissions on advertising, subscriptions and transactions. Companies delivering content and applications through our AvantGo Mobile Internet service pay an initial service fee and have the opportunity to increase their visibility and distribution by purchasing AvantGo Mobile Internet advertising distribution products on our Web site and on our on-device service. Additionally, we receive a share of revenue generated by providers of content and services on our AvantGo Mobile Internet service. These agreements, which typically are non-exclusive and have one-year renewable terms, stipulate that the content provider may offer unlimited content on our AvantGo Mobile Internet service. Currently over 2000 sources of content and applications are optimized for mobile devices and are available through our AvantGo Mobile Internet service. Our AvantGo Mobile Internet service currently has over 5 million registered users. AvantGo Professional Services We employ a professional services team that helps our customers to integrate our software into their computer networks and provides consulting services for our enterprise and AvantGo Mobile Internet service customers on a fee-for-service basis. AvantGo Professional Services offerings include implementation, consulting, training and technical support, and within each offering, our customers have the opportunity to choose the level of service that best meets their needs. Our service and support professionals may assist customers in every phase and stage of mobile solution development and delivery, including design, implementation and deployment of mobile architectures and applications. Sales and Marketing Our marketing organization works with our hardware, software and service providers to develop and participate in marketing activities, including seminars, advertising, public relations and trade show events. Our marketing activities are strategically focused on generating campaigns that target customers in both vertical markets, including pharmaceuticals, healthcare and government, as well as horizontal markets, such as sales, logistics and marketing. 4 Enterprise We sell software products, mobile business applications, hosted services and professional services to enterprise customers through our direct sales force in North America and third-party resellers. Our North American direct sales organization consists of field sales representatives, technical sales consultants/engineers and transactional sales representatives. Our European sales and marketing personnel are located in the United Kingdom and Germany. AvantGo Europe, Ltd., our U.K. subsidiary, focuses on marketing our products throughout Europe. We do not plan to significantly expand our international operations beyond continuing to increase our enterprise sales efforts. We augment our sales efforts with customer service and ongoing technical support. We also have a business development function that pursues and establishes distribution and marketing relationships with enterprise software vendors. In order to increase indirect distribution channels for our enterprise software, we are also expanding our relationships with companies that sell or bundle our products for enterprise use and that offer additional consulting services to these enterprises. AvantGo Mobile Internet We have a team of professionals that sells our mobile marketing solutions and AvantGo Mobile Internet service products on an ongoing basis to branded content and other business customers. We sell mobile advertising, Media and M-Business products and professional services to customers through our direct sales force in North America and in Europe. We have focused our recent marketing efforts on targeting businesses that want to create direct customer relationships using mobile devices, including pharmaceutical companies, retail outlets and automotive manufacturers. Strategic Relationships We have entered into agreements with major hardware and software producers to bundle or integrate our software with their mobile devices and software products. We have also entered into joint software development projects to integrate our software and AvantGo Mobile Internet content and services with the products of software and device vendors. We believe that these relationships are integral to our success because they expose our service offerings to a wide array of users and tie our products into integral elements of the mobile device architecture. Microsoft Corporation. Our software is integrated into Microsoft's Pocket Internet Explorer browser that ships on Windows Powered Pocket PC devices from leading manufacturers, including Hewlett-Packard Company, Compaq Computer Corporation, Casio, Inc. and Symbol Technologies, Inc. Our software is also available on other hardware platforms running the Microsoft Windows CE operating system, including Handheld PCs, the Handheld PC Pro and the Palm-sized PC. We continue to explore co-marketing opportunities with Microsoft designed to more broadly distribute our software to original equipment manufacturers that pre-install Microsoft's products, as well as to increase internal deployment of our software within Microsoft's product lines. Our agreement with Microsoft, which has a two-year renewable term, provides Microsoft with a license to incorporate our software with its Windows CE operating system on a non-exclusive basis. Palm, Inc. Palm, Inc. is a provider of handheld computers. Our software is compatible with every handheld device that runs on the Palm operating system or Palm OS, and is bundled with most of the Palm, Inc. devices. Under our agreement with Palm, Inc., Palm, Inc. bundles our software with its Palm(TM)devices on a non-exclusive basis. Technology Our technology builds upon open standards to deliver Internet-based content and applications to handheld devices and Internet-enabled phones. The software and services built using our technology take into account the specific limitations and capabilities of mobile devices, wireless data networks and Internet-based applications. Our software products allow mobile devices with limited memory, low processing 5 power and unreliable or limited network access to effectively interact with systems and applications designed to serve personal computers with high-speed, reliable Internet access. Components of AvantGo Server We designed our AvantGo Server to allow our customers to use AvantGo software in their own computing environment. We designed our AvantGo Server technology to enable customers to add more systems and support as they add users without increasing the risk of system failure. Our architecture allows our AvantGo Server to be deployed in configurations ranging from simple single-server configurations to large-scale configurations involving multiple servers aligned in clusters. Our AvantGo Server runs on Microsoft's Windows NT and Windows 2000, Sun Microsystems' Solaris operating system, Linux and FreeBSD and is designed to meet the reliability and performance requirements of large enterprises, as well as our AvantGo Mobile Internet service. Server Core. Our AvantGo Server core provides an expandable framework that performs many functions on behalf of mobile devices. Because wireless networks have limited capacity, processing power and memory, our technology shifts the processing load from mobile devices to the server. We designed our architecture to make the most efficient use of slow, expensive wireless networks by relying on servers to compress data before transmitting it to the mobile device. Our AvantGo Server provides reliable and secure communications so that software that resides on the mobile device is not encumbered with the many device-specific communications issues. Our AvantGo Server can integrate with existing directory services, such as Lightweight Directory Access Protocol and Windows NT Domain Services for identifying and administering information to users and groups of users. Server-side Web Module. Our AvantGo server-side Web module extends our server core to provide real-time wireless access to the Internet, and allows mobile devices without wireless capabilities to synchronize with Internet based applications and services. By shifting the processing of information and secure sockets layer from the mobile device to a server, our server-side Web module allows mobile devices to access all existing Internet-based applications, content and services. Depending upon the capabilities of the mobile device and on user preferences, our server-side Internet module can simultaneously send large quantities of information and data, search the Internet in real-time and compress data and files. Server-side Administration Module. Administrators can use the server-side administration module to assign and deliver applications, content or services to particular users or groups of users, as well as control user preferences and settings. Our server-side administration module enables installation and upgrading of software on mobile devices in addition to reporting on user activity. At the discretion of the server administrator, our end users can also self-administer their settings and preferences with the server-side administration module. Both server administrators and end users can access our server-side administration module with any Web browser. Components of AvantGo Client Client Core. Our AvantGo Client software allows the user to interact with various applications, content and services on the mobile device. Our AvantGo Client core software is not required to interact with our AvantGo Server. Devices such as Internet-enabled phones can access some portions of our AvantGo Server even though they lack our AvantGo Client software. As part of providing a framework for client-side modules, our AvantGo Client core transforms directives from our AvantGo Server into the appropriate commands recognizable by the specific device. Client-side Web Module. We provide a client-side Web module to display and navigate Web content including text, graphics and hypertext links. Our client-side Web module also supports the execution of standard JavaScript along with code that is specific to the particular operating system or hardware device to provide our users with an interactive experience even if a device lacks real-time capabilities. Additionally, HTML forms can be automatically organized by our client-side Web module for later transmission from mobile devices. 6 Intellectual Property Rights We regard our intellectual property protection for our proprietary technology, products and services as critical to our success. To protect our proprietary technology, products and services, we rely on a combination of patent, trademark, copyright and trade secret protection and confidentiality and license agreements with our employees, customers, business affiliates and others. On January 22, 2002, the U.S. Patent & Trademark Office granted us Patent number 6,341,316, which covers the system, method and computer program product for synchronizing content between a server and a client. The technology is core to AvantGo technology's unique ability to support both the wireless and off-line synchronization of content and applications to mobile devices. This patent expires September 10, 2019. We have also filed a number of non-provisional patent applications and provisional patent applications in the United States, and one Patent Cooperative Treaty (International) application, directed to aspects of our core technologies. We have received registered trademarks in the United States and applied for trademarks internationally for several of our trademarks and service marks, including the AvantGo circle logo and the name "AvantGo." We have applied for and obtained copyright registration in the United States for our software products. We also license some of our intellectual property to others, including our AvantGo Client technology and various trademarks and copyrighted material. While we attempt to ensure that the quality of our brand is maintained, others might take actions that materially harm the value of either these proprietary rights or our reputation. We license technology from others, including some portions of our compression-decompression technology, security and encryption technology and personal information management technology. If these technologies become unavailable to us, we would need to license other technology and redesign or redevelop portions of our system. We attempt to avoid infringing the proprietary rights of others, although we have not done an exhaustive patent search. Our competitors may claim that we are infringing their intellectual property and, if they are successful, we may be unable to obtain a license or similar agreement to use the technology we need to conduct our business. Employees As of December 31, 2001, we had 208 full-time employees. None of our employees are subject to a collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good. The executive officers of the Company as of March 20, 2002 are as follows:
Name Age Position ---- --- ------ Richard Owen................ 36 Chief Executive Officer and Chairman of the Board of Directors Felix Lin................... 38 Co-Founder and Vice Chairman of the Board of Directors David B. Cooper, Jr......... 46 Chief Financial Officer Michael Aufricht............ 41 Chief Marketing Officer Paul Kanneman............... 44 Vice President Client Services David Moore................. 36 Chief Technology Officer
Richard Owen has served as our chief executive officer and as one of our directors since February 2000 and has been employed by us since January 2000. He has been our Chairman of the Board since January 2001. From September 1998 to December 1999, Mr. Owen served as vice president of Dell Online Worldwide for Dell Computer Corporation. From July 1992 to September 1998, Mr. Owen served in a variety of roles, including international business development, director of supply chain integration and general manager of Japan Home and Small Office Sales at Dell Computer Corporation. From 1987 to 1990, Mr. Owen was an information technology consultant with KPMG Management Consultants in 7 London, England. Mr. Owen is also a director of FTD.com, Inc. Mr. Owen holds a Bachelors Degree in Mathematics and Economics from Nottingham University in England and a Master of Science in Management from the Massachusetts Institute of Technology Sloan School of Management. Felix Lin. Mr. Lin is one of our co-founders and is a director. Mr. Lin has been our vice chairman of the board since February 2001. Mr. Lin served as our chairman of the board from January 2000 to February 2001. From July 1997 to February 2000, Mr. Lin was our chief executive officer. Mr. Lin has also served as chairman of the board, president and chief executive officer, and as the sole director of our Globalware subsidiary since May 26, 2000. Prior to founding AvantGo, from October 1994 to June 1997, Mr. Lin was the director of Internet strategy for Versant Object Technology, a management systems company. Mr. Lin served as database product marketing manager at NeXT Computer, Inc. from February 1992 until October 1994. From October 1990 to January 1992, Mr. Lin was product manager at Cadre Technology (now Sterling Software). From June 1988 to June 1990, Mr. Lin was a principal consultant and consulting manager for Oracle Consulting Group at Oracle Corporation. Mr. Lin holds a B.S. degree in Electrical Engineering and a Master of Science in Computer Science from the Massachusetts Institute of Technology, and a Master of Science in Management from the Massachusetts Institute of Technology Sloan School of Management. David B. Cooper, Jr. has served as our chief financial officer since August 2000. From August 1998 to May 2000, Mr. Cooper served as vice president and chief financial officer of Powerbar Inc. From October 1994 to January 1998, Mr. Cooper served as executive vice president and chief financial officer of Edison Brothers Stores, Inc., an apparel and footwear retail company where he also served on the board of directors. From November 1993 to April 1994, Mr. Cooper served as executive vice president and chief financial officer of Del Monte Fresh Produce Company. From April 1986 to October 1993, Mr. Cooper served as the treasurer and as vice president at Dole Food Company. Mr. Cooper also served as senior vice president of Castle & Cook Holmes, an affiliate of Dole Food Company from January 1993 to October 1993, and as director of finance and as treasurer of Flexi-Van, Inc., an affiliate of Dole Food Company from October 1984 through October 1993. From February 1982 to September 1984, Mr. Cooper was an assistant manager at Chemical Bank. From 1978 to 1981, Mr. Cooper was a financial analyst at Continental Grain Company, a diversified agribusiness and commodities firm. Mr. Cooper holds a B.A. degree in Economics from Yale University and an M.B.A. degree from New York University. Michael Aufricht has served as chief marketing officer since 2001. Before that, he was general manager of AvantGo Mobile Internet since March 2000 and held the position of vice president of AvantGo.com for our company from December 1999 to March 2000. From April 1992 to November 1999, Mr. Aufricht held a variety of senior management positions at The Walt Disney Company's Buena Vista Home Entertainment, including senior vice president, Retail Services from October 1997 through November 1999, vice president of retail marketing from September 1994 through September 1997, director of brand marketing from November 1993 through August 1994 and director of Canadian marketing from April 1992 through October 1993. From September 1988 to March 1992, Mr. Aufricht was a manager at The Alliance Consulting Group. From July 1984 to July 1986, Mr. Aufricht was an associate brand manager at the Pepsi-Cola Company. Mr. Aufricht holds a B.S. from the University of California, Berkeley and an M.B.A. from the Harvard Graduate School of Business Administration Paul Kanneman has served as our vice president of worldwide client services since August 2001. From December 1999 to July 2001, Mr. Kanneman was Managing Director, Delivery for Lante Corporation. From April 1998 to December 1999, he served as President, Micah Technology Services, an I/T strategy consulting and systems integration services company he founded. From November 1994 to March 1998, Mr. Kanneman served as senior vice president and chief information officer for the Zales Corporation, a fine jewelry company. From July 1993 to November 1994 he was with Andersen Consulting as an Associate Partner in their Information and Technology Strategy practice. From August 1985 until July 1993, Mr. Kanneman worked at the management consulting firm of Booz, Allen and Hamilton. Prior to that, he served from June 1978 to June 1985 in the U.S.Army as an Intelligence Officer. Mr. Kanneman holds a B.A. degree in Political Science from The University of Toledo. 8 David Moore has served as our chief technology officer since October 2001, and as vice president of product development since September 1997. From May 1996 to August 1997, Mr. Moore was an engineering manager at Netscape Communications. From January 1990 to January 1995, Mr. Moore was a software engineer at NeXT Software, Inc. From June 1986 to December 1989 Mr. Moore was a software engineer at IBM Corporation. Mr. Moore holds a B.S. in Computer Science from Syracuse University. ITEM 2. PROPERTIES Our principal headquarters are in Hayward, California, where we lease approximately 88,000 square feet. In addition to this facility, we lease facilities in Chicago, Illinois and London, United Kingdom. In connection with the restructuring program adopted and implemented in 2001, under which restructuring charges were taken related to excess space, we have initiated the process of sub-leasing the Chicago facility and 37,000 square feet of the Hayward facility, both of which are unoccupied at this time. We have not yet secured subtenants for these facilities. We believe that existing facilities are adequate for our needs through 2002. ITEM 3. LEGAL PROCEEDINGS In October 2001, a purported shareholder class action lawsuit was filed in the United States District Court for the Southern District of New York against us, certain of our officers and directors, and the underwriters of our initial public offering. The suit is a class action filed on behalf of purchasers of our common stock during the period from September 27, 2000 to December 6, 2000. The complaint alleges that the underwriter defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for our initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The complaint seeks unspecified damages on behalf of the purported class. Over 300companies involved in an initial public offering have been named as defendants in nearly identical lawsuits filed by some of the same plaintiffs' law firms. We believe we have meritorious defenses, and we intend to defend the action vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock has been traded on the Nasdaq National Market under the symbol "AVGO" since our initial public offering on September 27, 2000. The following table sets forth the high and low closing sales prices as reported on the Nasdaq National Market for each quarter during which our common stock has been traded on the Nasdaq National Market. 2000 High Low Third Quarter (commencing September 27, 2000) $22.73 $20.00 Fourth Quarter 19.75 4.75 2001 High Low First Quarter $10.00 $ 1.75 Second Quarter 3.60 1.10 Third Quarter 3.48 1.00 Fourth Quarter 1.95 0.90 As of March 20, 2002 we had approximately 405 stockholders of record. We have never paid dividends on our capital stock. We currently intend to retain any future earnings for use in our business, and therefore do not anticipate paying any cash dividends in the foreseeable future. 9 5(b) USE OF PROCEEDS FROM SALE OF REGISTERED SECURITIES On October 2, 2000, we sold 6,325,000 shares of our common stock in an initial public offering at a price of $12.00 per share pursuant to a Registration Statement on Form S-1 (Registration No. 333-38888) that was declared effective by the SEC on September 26, 2000. Credit Suisse First Boston, Merrill, Lynch & Co. and CIBC World Markets were the managing underwriters of the offering. The aggregate proceeds to us from the offering were approximately $70,587,000 after deducting an aggregate of $5,313,000 in underwriting discounts and commissions to the underwriters. None of the proceeds of the offering was paid by us, directly or indirectly, to any director, officer or general partners of us or any of their associates, or to any persons owning ten percent or more of our outstanding stock. In addition to underwriting discounts and commissions, the expenses incurred in connection with the offering were approximately $2.2 million, including $0.9 million of legal costs, $0.6 million of accounting costs, $0.4 million, including of printing costs and other costs approximately $0.3 million. During the period from the offering to December 31, 2000, we invested all of the proceeds in commercial paper, government securities and corporate debt securities. During 2001, we converted all of our investments to cash and cash equivalents. These funds have been the principal source of liquidity for us during 2001 and were used to fund operating losses and capital expenditures as described in the financial statements included with this report. ITEM 6. SELECTED FINANCIAL DATA The consolidated statement of operations data for the years ended December 31, 2001, 2000, 1999 and 1998 and the period from June 30, 1997 (inception) through December 31, 1997, and the related balance sheet data as of December 31, 1997, 1998 and 1999 are derived from our consolidated financial statements, which have been audited by Ernst & Young LLP, independent auditors, and are contained in Item 8 of Part II of this Form 10-K. The selected statement of operations data for the period from June 30, 1997 (inception) through December 31, 1997 and for the year ended December 31, 1998 and the balance sheet data as of December 31, 1997, 1998 and 1999 are derived from audited financial statements not included in Item 8 of Part II of this Form 10-K. We have prepared this selected information on the same basis as the audited financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for such presentation of the financial condition and operating results for such date and periods. When you read this selected financial data, it is important that you read the AvantGo historical financial statements and related notes included in Item 8 of Part II of this Form 10-K. Historical results are not necessarily indicative of future results. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes to those statements included in Items 7 and 8 of Part II of this Form 10-K. 10 SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
Period from June 30, 1997 (inception) to Year Ended December 31, December 31, --------------------------------------------- -------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Consolidated Statement of Operations Data: Revenues: License fees ................................. $ 13,548 $ 9,087 $ 1,443 $ 189 $ -- Services ..................................... 10,456 7,231 1,446 198 -- -------- --------- -------- ------- ------- Total revenues ............................ 24,004 16,318 2,889 387 -- Costs and expenses: Cost of license fees ......................... 594 161 60 10 -- Cost of services (1) ......................... 5,137 4,103 1,466 239 -- Product development (2) ...................... 13,250 10,842 3,108 1,259 161 Sales and marketing (3) ...................... 29,362 30,682 4,630 1,292 61 General and administrative (4) ............... 8,085 5,768 548 167 68 Amortization of goodwill, other intangible assets and deferred stock compensation ....... 9,201 16,582 2,605 71 -- Purchased in-process research and development ............................... -- 600 -- -- -- Write-off of core technology ................. 1,981 -- -- -- -- Restructuring and other impairment charges ... 15,065 -- -- -- -- -------- --------- -------- ------- ------- Total costs and expenses ............... 82,675 68,738 12,417 3,038 290 -------- --------- -------- ------- ------- Loss from operations ............................ (58,671) (52,420) (9,528) (2,651) (290) Interest income (expense), net .................. 2,496 2,582 313 48 (1) -------- --------- -------- ------- ------- Net loss ........................................ $(56,175) $ (49,838) $ (9,215) $(2,603) $ (291) ======== ========= ======== ======= ======= Basic and diluted net loss per share ............ $ (1.71) $ (4.13) $ (2.11) $ (0.95) $ (0.20) ======== ========= ======== ======= ======= Common shares used to calculate basic and diluted net loss per common share ............... 32,892 12,077 4,377 2,735 1,464 ======== ========= ======== ======= ======= December 31, -------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $ 43,091 $ 73,466 $ 9,810 $ 2,124 $ 1,024 Working capital ................................. 38,203 69,902 9,809 1,951 960 Total assets .................................... 57,479 104,308 12,499 2,434 1,136 Long-term obligations, net of current portion ... -- -- 41 116 -- Total stockholders' equity ...................... 46,748 94,751 10,724 2,068 1,069
---------- (1) Excluding $208, $383, $181, and $9 in amortization of deferred stock compensation for the years ended December 31, 2001, 2000, 1999 and 1998. (2) Excluding $1,103, $1,809, $750 and $38 in amortization of deferred stock compensation for the years ended December 31, 2001, 2000, 1999 and 1998. (3) Excluding $1,725, $3,290, $1,211 and $15 in amortization of deferred stock compensation for the years ended December 31, 2001, 2000, 1999 and 1998. 11 (4) Excluding $3,525, $7,861, $463 and $9 in amortization of deferred stock compensation for the years ended December 31, 2001, 2000, 1999 and 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the financial statements and related notes contained elsewhere in this Form 10-K. The discussion contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "intend," or "continue," or the negative of such terms and other comparable terminology. These statements are only predictions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in the Form 10-K. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure or contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to uncollectable accounts, intangible assets, and restructuring. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about amounts and timing of revenue costs and expenses, the carrying values of assets and the recorded amount of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition We generally license our enterprise software under non-cancelable license agreements and provide services including training, consulting and maintenance, consisting of product support services and unspecified product updates. We sell placement service contracts which provide customers with priority visibility on our website, and also sell advertising on the device delivered through the AvantGo Mobile Internet service, a service that is free to consumers. We recognize license revenues when a non-cancelable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable, collectibility is probable, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement using the residual method. In instances where no vendor-specific objective evidence exists and the only undelivered element is maintenance, we recognize revenues ratably over the term of the agreement. Our agreements with our customers and resellers generally do not contain product return rights. We recognize revenues from maintenance, which consist of fees for ongoing support and product updates, ratably over the term of the contract, which is typically one year. For sales made through distributors, resellers and original equipment manufacturers, we recognize revenue at the time these partners report to us that they have sold the software to the end user and all revenue recognition criteria have been met. Consulting revenues are primarily related to implementation services performed on a time-and-materials basis under separate service arrangements. Training revenues are generated from classes offered both on-site and at customer locations. We recognize revenues from time-and-materials consulting engagements and training services as we perform the services. Occasionally we enter into short-term fixed price consulting contracts. Under these arrangements, we recognize revenues as work progresses using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. We follow this method since reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made. Recognized revenues are subject to revisions as the contract progresses to completion. We make revisions in recognized revenues in the period in which the facts that give rise to the revision become known. 12 We recognize revenues from placement agreements ratably over the service period, which in most instances is between three months and one year. We recognize advertising revenues based upon the lesser of the ratio of impressions delivered over the total guaranteed impressions or the straight-line basis over the term of the advertising contract. We also earn revenues from advertising barter transactions. We recognize revenues and costs from advertising barter transactions during the period in which the placement or advertising is delivered. We record barter transactions at the fair value of the goods or services provided or received, whichever is more readily determinable in the circumstances. In determining the value of the services provided, we use historical pricing of comparable cash transactions. Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Goodwill and Other Intangible Assets Goodwill and other intangible assets resulted from the Globalware Computing acquisition completed in May 2000. In assessing the recoverability of our goodwill and other intangible assets we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the assets. During September 2001, we identified indicators of possible impairment of goodwill and other intangible assets. Such indicators included, but were not limited to, an overall decline in information technology spending, and anticipated increased pressure from competitors. Consequently, we have estimated the value of goodwill and other intangible assets to zero and have written off the balance in these accounts. Restructuring We have recorded restructuring charges, some of which are based on estimates regarding the sublease of excess space at several of our facilities. If actual market conditions are less favorable than those projected by management, and we are unable to sublease the excess space as soon as estimated, or for the estimated rate, then additional restructuring charges may be required in the future. OVERVIEW We generate our primary sources of revenues through our license agreements and our services agreements. We recognize license revenues for our AvantGo M-Business Server products, which are typically based on fixed-fee agreements, when we have executed an agreement with a customer, delivery and acceptance have occurred, the fee is fixed or determinable, and we deem the collection of the related receivable to be probable. Historically, our services revenues have consisted primarily of consulting revenues, and technical support fees. We recognize revenues from consulting services on a monthly basis as the services are performed. We recognize technical support fees ratably on a monthly basis over the course of the support period, typically twelve months. Our services revenues also include amounts derived from the operation of our AvantGo Mobile Internet service, which include placement, subscription, and advertising revenues and revenue sharing arrangements. We recognize placement and advertising revenues ratably over the period of time in which placement or advertising is provided. The cost of license fees consists primarily of royalties paid to other software vendors whose products are included in our enterprise software products, as well as costs incurred to manufacture, package and distribute our enterprise software products and related documentation. Cost of services includes cost of professional services, customer service and support and costs related to running our AvantGo Mobile Internet service. Cost of professional services and technical support consists primarily of the cost of personnel. Costs related to our AvantGo Mobile Internet service consist of the cost of personnel, co-location facilities and bandwidth. Because the cost of services is greater than cost of license fees, cost of revenues as a percentage of total revenues may fluctuate based on the mix of products and services sold. 13 We classify our costs and expenses into three general operational categories: product development, sales and marketing, and general and administrative. In addition, our operating expenses include amortization of goodwill, intangible assets, deferred stock-based compensation and other acquisition-related costs, as well as a charge for in-process research and development which is related to our acquisition of Globalware in May 2000. Operating expenses also include charges related to the write-off of core technology related to our Globalware acquisition and restructuring and other impairment charges. We classify all charges to the product development, sales and marketing, and general and administrative categories based on the nature of the expenses. Each of these three categories includes commonly recurring expenses such as salaries, employee benefits, travel and entertainment costs, and allocated communication, rent and depreciation costs. We allocate these expenses to each of the functional areas that derive a benefit from such expenses based upon their respective headcount. The sales and marketing category of costs and expenses also includes sales commissions and expenses related to public relations and advertising, trade shows and marketing collateral materials. The general and administrative category of operating expenses also includes administrative and professional services fees. In connection with the granting of stock options to, and restricted stock purchases by, our employees, we recorded deferred stock compensation totaling approximately $23.4 million as of December 31, 2001. This amount represents the difference between the exercise and the deemed fair value of our common stock for financial accounting purposes on the date these stock options were granted. This amount is included as a component of stockholders' equity and is being amortized by charges to operations over the vesting period of the options using a declining balance method. The amortization of the remaining deferred stock compensation will result in additional charges to operations through 2005. We have incurred significant losses and negative cash flows from operations since our inception. As of December 31, 2001, we had an accumulated deficit of $118.1 million. We had 208 full-time employees as of December 31, 2001. RESULTS OF OPERATIONS The following table sets forth certain financial data, derived from our audited statements of operations, as a percentage of total revenues for the periods indicated.
Year Ended December 31, --------------------------------- 2001 2000 1999 ---- ---- ---- Revenues: License fees ......................................... 56% 56% 50% Services ............................................. 44 44 50 ---- ---- ---- Total revenues .................................. 100 100 100 Costs and expenses: Cost of license fees ................................. 3 1 2 Cost of services ..................................... 21 25 51 Product development .................................. 55 66 108 Sales and marketing .................................. 122 188 160 General and administrative ........................... 34 35 19 Amortization of goodwill, other intangible assets, and deferred stock compensation ................ 38 102 90 Purchased in-process research and development ........ -- 4 -- Write-off of core technology ......................... 8 -- -- Restructuring and other impairment charges ........... 63 -- -- ---- ---- ---- Total costs and expenses ................................. 344 421 430 ---- ---- ---- Loss from operations ..................................... (244) (321) (330) Interest and other income, net ........................... 10 16 11 ---- ---- ---- Net loss ................................................. (234)% (305)% (319)% ==== ==== ====
14 Comparisons of the Year Ended December 31, 2001 and 2000 Revenues License Fees. License fee revenues increased approximately 49% from approximately $9.1 million for the year ended December 31, 2000 to approximately $13.5 million for the year ended December 31, 2001. This increase was primarily attributable to sales force and product line expansion. The growth in revenues reflected an increased volume of licenses and services sold, rather than a substantive increase in price. If current economic conditions do not improve, revenues may not grow in 2002. Services. Services revenues increased approximately 45% from approximately $7.2 million for the year ended December 31, 2000 to approximately $10.5 million for the year ended December 31, 2001. This increase was primarily attributable to increased consulting services performed in connection with increased license fees, as well as increased advertising revenues from the continued expansion of our AvantGo Mobile Internet service organization. Deferred revenues reflected on our balance sheet were $1.8 million at December 31, 2001 as compared to $2.5 million at December 31, 2000 and will be recognized as revenue as services are performed. Costs and Expenses Cost of License Fees. Our cost of license fees increased approximately 269% from approximately $161,000 for the year ended December 31, 2000 to approximately $594,000 for the year ended December 31, 2001. These increases were primarily attributable to royalty expenses incurred as a result of reselling other software developers' products in conjunction with ours. We expect the cost of license fees to increase as we enter into agreements with other software developers and incorporate their products into ours. Cost of Services. Our cost of services increased approximately 25% from approximately $4.1 million for the year ended December 31, 2000 to approximately $5.1 million for the year ended December 31, 2001. This increase was primarily due to increased expenditures resulting from the expansion of our AvantGo Mobile Internet service and our consulting services organization. We expect these costs to increase as we continue to build these service organizations. Product Development. Product development expenses increased approximately 22% from approximately $10.8 million for the year ended December 31, 2000 to approximately $13.3 million for the year ended December 31, 2001. This increase was primarily a result of increased hiring of engineers and product development personnel throughout 2000 and during the first quarter of 2001. We expect product development expenses to decline in the near term due to lower current staffing levels, though they may increase in future periods. Sales and Marketing. Our sales and marketing expenses include those related to compensation, public relations and advertising, trade shows and marketing materials. Sales and marketing expenses decreased approximately 4% from approximately $30.7 million for the year ended December 31, 2000 to approximately $29.4 million for the year ended December 31, 2001. This decrease was primarily a result of decreased advertising expenses in line with our efforts to reduce costs and our restructuring programs. We expect sales and marketing expenses to decrease in 2002 from 2001 due to lower current staffing levels and decreased marketing spending. General and Administrative. Our general and administrative expenses consist primarily of salaries, recruiting and related costs for general corporate functions including executive, accounting and administrative personnel, lease expenses, facilities costs and other miscellaneous general corporate expenses. Our general and administrative expenses increased approximately 40% from approximately $5.8 million for the year ended December 31, 2000 to approximately $8.1 million for the year ended December 31, 2001. This increase was due primarily to increased personnel-related expenses. We expect general and administrative costs to decrease in 2002 from 2001 due to lower personnel costs. 15 Purchased in-process research and development. In connection with our May 26, 2000 acquisition of Globalware we have incurred an expense of $600,000 for purchased in-process research and development consisting of technology developed by Globalware. This is a non-recurring charge. Amortization of goodwill, other intangible assets, and deferred stock compensation. We have been amortizing the amount of goodwill, core technology and acquired workforce that we purchased in connection with our acquisition of Globalware. These intangible assets totaled approximately $15.9 million on the acquisition date. Amortization expense from the goodwill and other intangible assets was $3.1 million for the year ended December 31, 2000 and approximately $2.6 million during the year ended December 31, 2001. During 2001, we determined that the goodwill and intangible assets were impaired. Goodwill and other intangible assets have been written off and there will be no further amortization See Note 10 of notes to the Consolidated Financial Statements, "Restructuring and Other Impairment Charges," for further information regarding these activities. We are also amortizing the amount that equals the difference between the exercise price of stock options granted to our employees and consultants and what were considered to be the deemed fair values of our common stock, in the case of option grants to employees, and on values based on the Black-Scholes formula for valuing options, in the case of grants to non-employees, in each case on the date of the grants over vesting periods using a graded vesting method. We recognized approximately $13.3 million of related compensation expense during the year ended December 31, 2000 and approximately $6.6 million during the year ended December 31, 2001. Write-off of core technology. During 2001, due to an overall decline in information technology spending, and anticipated increased pressure from competitors, we concluded that the remaining carrying value of our Globalware core technology would not be recoverable. An impairment assessment, test and measurement resulted in the recording of a write-off of core technology of $2.0 million. See Note 10 of notes to the Consolidated Financial Statements, "Restructuring and Other Impairment Charges," for further information regarding this activity. Restructuring and other impairment charges. In response to new challenges in the business environment, in April 2001, management approved and we formally adopted and began to implement a restructuring program in an effort to reduce operating expenses. The restructuring charges were $2.8 million, which included $2.4 million related to excess leased space at one of our Hayward facilities, the impairment of assets of $22,000, and $415,000 related to employee termination costs associated with the elimination of 56 positions, most of which occurred in the United States and affected employees at all levels. As of April 30, 2001, all of the affected employees had been notified and the majority of these terminations were completed. In July 2001, management approved and we adopted and began to implement an additional restructuring program in an effort to reduce operating expenses that resulted in aggregate charges of $9.8 million. These charges included $687,000 related to excess leased space at our Chicago facility, which was closed in July, and the impairment of assets of $108,000. We also revised our estimate of the restructuring charge of one of our Hayward facilities resulting in an additional restructuring charge of $406,000. Restructuring charges also included $530,000 related to employee termination costs associated with the elimination of 28 positions, most of which occurred in the United States and affected employees at all levels. As of July 31, 2001, all of the affected employees had been notified and the majority of these terminations were completed. The revised estimate of excess payments on the remaining Hayward facility lease of $2.4 million extends through September 2007. The estimate of payments on the remaining Chicago facility costs of $508,000 extends through August 2005. Restructuring and other impairment charges also included a write-off of goodwill of $7.5 million and the write-off of acquired workforce of $339,000, discussed further below. In November 2001, management approved and we adopted and began to implement a further restructuring program in an effort to reduce operating expenses that resulted in aggregate charges of $2.5 million. These charges included $557,000 related to excess leased space at our San Mateo facility, which was closed in December 2001. We also revised our estimates of the restructuring charges of our Chicago facility and one of our Hayward facilities resulting in additional charges of $147,000 and $1,098,000. Restructuring charges also included $808,000 related to employee termination costs and accelerated vesting on stock options associated with the 16 elimination of 58 positions, most of which occurred in the United States and affected employees at all levels. As of December 31, 2001, all of the affected employees had been notified and the majority of the terminations were completed. The outstanding liability associated with the employee terminations was $325,000 as of December 31, 2001. The revised estimate of excess payments on the remaining Hayward facility lease of $3.3 million extends through September 2007. The revised estimate of payments on the remaining Chicago facility lease of $574,000 extends through August 2005. The remaining payments on the San Mateo facility lease of $243,000 extend through May 2002. In September 2001, we identified indicators of possible impairment of our long-lived assets, consisting of goodwill, acquired workforce and core technology associated with the acquisition of Globalware in May 2000. Such indicators included, but were not limited to, an overall decline in information technology spending, and anticipated increased pressure from competitors. During July 2001, we closed our Chicago office, which was where our Globalware employees resided, and terminated the employees at that location. Consequently, the value of the acquired workforce of $339,000 was written off and included in impairment charges. We performed asset impairment tests for the other identified asset categories, goodwill and core technology. The test for goodwill was performed by comparing the expected undiscounted cash flows for a five-year period, plus a terminal value for future cash flows to the total carrying amount of goodwill. Based on the result of this test, we determined that the carrying amount of the goodwill was impaired. We determined the fair value of the goodwill to be zero. Fair value was determined using the discounted cash flow method, using a discount rate of 20% and an estimated residual value. The discount rate was based upon our weighted average cost of capital and comparable to other companies. The assumptions supporting the discounted cash flow model reflect management's best estimates. A write-down of goodwill totaling $7.5 million was recorded, reflecting the write off of the entire balance of goodwill, and is included in the line item, "Restructuring and Other Impairment Charges". While we believe that our business realignment will assist us in streamlining operations and reducing expenses, we cannot assure you that we will achieve these anticipated results. We may in the future be required to take additional actions, including further changes to the business organization and restructurings, in order to realign the business with anticipated requirements. If we are not successful in realigning our business to increase revenues and decrease costs, we may never achieve profitability. Interest Income (Expense), Net. Net interest income decreased approximately 3% from approximately $2.6 million for the year ended December 31, 2000 to approximately $2.5 million for the year ended December 31, 2001. This decrease was primarily due to a decrease in our cash balances as a result of cash used to fund our continuing operations. Comparisons of the Year Ended December 31, 2000 and 1999 Revenues License Fees. License fee revenues increased approximately 530% from approximately $1.4 million for the year ended December 31, 1999 to approximately $9.1 million for the year ended December 31, 2000. This increase was primarily due to continued expansion of our enterprise sales team. Services. Services revenue increased approximately 400% from approximately $1.4 million for the year ended December 31, 1999 to approximately $7.2 million for the year ended December 31, 2000. This increase was primarily attributable to increased consulting services performed in connection with increased license fees, as well as the continued expansion of our AvantGo Mobile Internet service organization. Deferred revenues reflected on our balance sheet were $2.5 million at December 31, 2000 as compared to $247,000 at December 31, 1999 and will be recognized as revenue as services are performed. 17 Costs and Expenses Cost of License Fees. Our cost of license fees increased approximately 168% from approximately $60,000 for the year ended December 31, 1999 to approximately $161,000 for the year ended December 31, 2000. This increase was primarily attributable to an increase in license fee revenue during the period. Cost of Services. Our cost of services increased approximately 180% from approximately $1.5 million for the year ended December 31, 1999 to approximately $4.1 million for the year ended December 31, 2000. This increase was primarily due to increased expenditures resulting from the expansion of our AvantGo Mobile Internet service consulting services organization. Product Development. Product development expenses increased approximately 249% from approximately $3.1 million for the year ended December 31, 1999 to approximately $10.8 million for the year ended December 31, 2000. This increase was primarily a result of increased hiring of engineers and product development personnel. Sales and Marketing. Our sales and marketing expenses include those related to compensation, public relations and advertising, trade shows and marketing materials. Sales and marketing expenses increased approximately 563% from approximately $4.6 million for the year ended December 31, 1999 to approximately $30.7 million for the year ended December 31, 2000. This increase was primarily a result of increased personnel-related expenses. General and Administrative. Our general and administrative expenses consist primarily of salaries, recruiting and related costs for general corporate functions including executive, accounting and administrative personnel, lease expenses, facilities costs and other miscellaneous general corporate expenses. Our general and administrative expenses increased approximately 953% from approximately $548,000 for the year ended December 31, 1999 to approximately $5.8 million for the year ended December 31, 2000. This increase was due primarily to increased personnel-related expenses. Purchased in-process research and development. In connection with our May 26, 2000 acquisition of Globalware we have incurred an expense of $600,000 for purchased in-process research and development consisting of technology developed by Globalware. This is a non-recurring charge. Amortization of goodwill, other intangible assets, and deferred stock compensation. Amortization expense from the goodwill and other intangible assets was $3.1 million for the year ended December 31, 2000. No amortization was recorded for goodwill and other intangible assets in 1999. We are also amortizing the amount that equals the difference between the fair value of stock options granted to our employees and consultants and what were considered to be the deemed fair values of our common stock, in the case of option grants to employees, and on values based on the Black-Scholes formula for valuing options, in the case of grants to non-employees, in each case on the date of the grants over vesting periods using a declining balance method. We recognized approximately $2.6 million of related compensation expense during the year ended December 31, 1999 and approximately $13.3 million during the year ended December 31, 2000. Interest Income (Expense), Net. Net interest income increased approximately 725% from approximately $313,000 for the year ended December 31, 1999 to approximately $2.6 million for the year ended December 31, 2000. This increase was primarily due to increased cash balances as a result of our private placement financing completed in March and April 2000 and initial public offering in September 2000. 18 Liquidity and Capital Resources The following table compares restricted and unrestricted cash, cash equivalents and marketable securities, and current ratio as well as sources and uses of cash as of and for the years ended, December 31, 2001 and 2000 (in thousands):
2001 2000 Unrestricted cash, cash equivalents and marketable securities $ 43,091 $ 73,466 Restricted cash, cash equivalents and marketable securities $ 3,438 $ 3,438 Total cash, cash equivalents, marketable securities and restricted investments $ 46,529 $ 76,904 Percentage of total assets 81% 74% Current ratio* 11.29 6.89 Cash used in operating activities $(28,766) $ (27,534) Cash provided by (used in) investing activities $ 14,386 $ (23,999) Cash provided by financing activities $ 340 $ 102,716
* Calculated excluding deferred revenue Our restricted investments are classified as available-for-sale but are pledged as collateral against a letter of credit (see Note 10 of notes to the Consolidated Financial Statements). Restricted investments are held in our name by major financial institutions. On October 2, 2000, we closed our initial public offering of 6,325,000 shares of common stock, which included 825,000 shares in connection with the exercise of the underwriters' over-allotment option, at $12 per share. We received net proceeds of approximately $68.3 million in cash, after deducting underwriter discounts, commissions and other offering expenses. Prior to our initial public offering, we financed our operations from the sale of our preferred and common stock. As of December 31, 2001, we had unrestricted cash and cash equivalents of approximately $43.1 million, a decrease from approximately $73.5 million of unrestricted cash and cash equivalents and short-term investments held as of December 31, 2000. Net cash used in operating activities in 2001 of $28.8 million resulted primarily from net losses of $56.2 million adjusted for non-cash items, changes in working capital and other items. Significant non-cash items in 2001 operating activities included restructuring charges of $13.2 million and depreciation and amortization and other impairment charges of $12.1 million. Net cash used in operating activities in 2000 of $27.5 million resulted primarily from losses of $49.8 million adjusted for non-cash items, changes in working capital and other items. Significant non-cash items included in 2000 operating activities included depreciation and amortization and other acquisition costs of $16.6 million. Net cash provided by financing activities totaled $340,000 during 2001 and primarily consisted of the proceeds of issuances of common stock in connection with stock options and the employee stock purchase plan and the repayment of a note receivable from a stockholder. Net cash provided by financing activities in 2000 of $102.8 million consisted primarily of the proceeds of issuances of common stock issued in our initial public offering and issuances of preferred stock. Since our inception, our investing activities have consisted primarily of purchases of fixed assets, principally computer hardware and software and leasehold improvements. Capital expenditures totaled $2.4 million in 2001, as compared with $8.1 million in 2000. Cash was also used in fiscal year 2000 to establish a security deposit supporting a $3.4 million letter of credit related to the lease of our offices in Hayward, California and Chicago, Illinois. The following summarizes our contractual obligations at December 31, 2001, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands): Less Than Total 1 Year 1-3 Years 4-5 Years ----- ------ --------- --------- Non-cancellable operating leases $14,365 $3,022 $7,284 $4,059 Included in the table above is the restructuring liability of $4.1 million associated with charges related to excess office space. We currently anticipate that our current cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Our anticipated cash needs must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development. These and other factors could cause actual cash needs for working capital and capital expenditures to differ materially from those referred to above. 19 Recent Accounting Pronouncements In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. SFAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. SFAS 142 will have no affect on our financial statements in that all goodwill and intangible assets have been written off due to impairment during 2001. RISK FACTORS The slowdown in the adoption of the mobile device and mobile application marketplace could harm our revenues. The emergence of markets for our software is critically dependent upon the rapid expansion of the market for mobile devices including personal digital assistants, handheld computers, smart phones, pagers and other mobile devices. This market has suffered recent setbacks due to the decline in general economic conditions. Moreover, the economic slowdown has caused prospective customers to reduce their budgets for information technology projects, such as mobile application deployments. This economic slowdown has reduced the rate of growth in the adoption of mobile devices, and associated products and services. Sustained economic slowdown could reduce demand for our software and services. We may be unable to fund our future operating and capital requirements and, therefore, may be unable to execute on our business strategy. Since our inception, we have never been profitable. From inception through December 31, 2001, we had an accumulated deficit of $118.1 million. Because we are not currently generating sufficient cash to fund our operations, we may be forced to rely on external financing to meet future operating and capital requirements. Any projections of future cash needs and cash flows are subject to substantial uncertainty. Our operating and capital requirements depend upon several factors, including the rate of market acceptance of our products and services, our ability to expand our customer base and increase revenues, our level of expenditures for product development, marketing and sales, general administration and purchases of equipment, and other factors. If our operating and capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. We cannot assure that financing will be available in amounts or on terms acceptable to us, if at all. Further, if we issue equity securities, stockholders may experience additional dilution, or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. Debt financing, if available, may involve restrictive covenants which could restrict our operations or finances. If we cannot raise funds, if needed, on acceptable terms, we may not be able to continue our operations, grow market share, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. This in turn, could materially and adversely impact our business, operating results and financial condition. A significant portion of our enterprise revenues comes from a small number of customers, and any decrease in revenues from these customers could harm our operating results. We currently derive a significant portion of our enterprise software revenues from a small number of major customers. For example, McKesson Corporation, our largest customer, represented 20% of our total 20 revenues in 2001. We expect that McKesson Corporation will continue to represent a significant portion of our revenues through March of 2003. Any disruption or termination of our commercial relationships with McKesson Corporation would harm our revenues and results of operations. We were named in a securities class action lawsuit that could materially harm our business and financial condition and result in a decline in our stock price. AvantGo, certain of our officers and directors, and the underwriters of our initial public offering are parties to a class action lawsuit alleging a violation of securities laws. See "Item III. Legal Proceedings." This pending litigation, and any subsequent litigation against us or our affiliates or employees, regardless of the outcome, may result in substantial costs and expenses and significant diversion of management, which could materially adversely affect our business. Due to inherent uncertainties in litigation, we cannot predict accurately the ultimate outcome of the litigation. An adverse judgment in a large monetary amount could have a material adverse impact on our financial position, and consequently our business and results of operations. Such an event is likely to cause our stock price to decline substantially. We depend on our M-Business software products as a primary source of our revenues, and we do not know if businesses will adopt our enterprise products and related services or continue to make investments in technology products such as ours. Our enterprise software, which consists of our AvantGo M-Business Server, AvantGo Mobile Sales, AvantGo Mobile Delivery and AvantGo Pylon products, has accounted for 56% of our revenues in 2001, 56% of our revenues in 2000 and 50% of our revenues in 1999. We expect that a significant portion of our revenues will depend upon the continued and growing market acceptance of our enterprise software products. The lifecycle of our products is particularly difficult to estimate because of growing competition and the changing marketplace. Our enterprise software may not achieve acceptance among businesses and other organizations. A decline in the demand for our enterprise software or our failure to successfully develop, introduce or market new or enhanced products in a timely manner would have a negative impact on sales of our enterprise products, jeopardizing our most important source of revenues. The sales cycle for our products is lengthy. Due to the recent economic downturn, our current and prospective customers may elect to delay or postpone investments in technology such as ours, which would harm our enterprise sales efforts and cause our business to suffer. Increasing competition could harm our ability to maintain or increase sales of our products or reduce the prices we can charge for our products. We face growing competition, and we expect this competition to intensify in the future. Our competitors include both start-up companies designing software and services similar to ours and established companies seeking to capitalize on the mobile market. Competition in our industry is primarily on the basis of product functionality, compatibility with other hardware and software, and price. Our enterprise software and services compete primarily with offerings from the following types of companies: o server synchronization software providers, including Palm, Inc., PUMATECH, Inc., Extended Systems and Oracle Corporation; o handheld application development environment providers, including PUMATECH, Inc., IBM Corporation and Microsoft Corporation; o application service providers, including Aether Systems, Inc.; o mobile personal information management application providers, including Synchrologic and Extended Systems; o mobile sales force automation application providers, including Siebel Systems; o mobile pharmaceutical application providers, including Dendrite; and 21 o mobile delivery application providers, including Aether Systems, Inc. Our AvantGo Mobile Internet service competes with the service offerings from the following types of companies: o value-added wireless service providers, such as Palm, Inc.'s Palm.Net and GoAmerica, Inc.; and o wireless Internet portals, such as InfoSpace, Inc. and Oracle Corporation's Portal to Go. As the mobile device and wireless markets mature, we expect competition to intensify. This competition presents us with several risks. Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do. Several of these competitors have greater name recognition and more established relationships with our target customers. Our competitors may be able to use these advantages to adopt more aggressive pricing policies and products that compete with our enterprise software and offer more attractive terms to customers. As a result, we may lose customers or may be required to limit the amount we can charge customers for our products. In addition, current and potential competitors may establish cooperative relationships among themselves or with third parties to compete more effectively with us. Further, existing and potential competitors may develop enhancements to or future generations of competitive products that will have better performance features than our products. Any of these factors, if they occur, would likely cause our sales and revenues to fall. Finally, competition in the mobile Internet sector could harm our ability to generate revenues from our AvantGo Mobile Internet service, undermining our potential for future growth. We do not maintain redundant facilities for our servers, and system failures resulting from earthquakes, power outages or other causes, or accidental or intentional security breaches could disrupt our operations, cause us to incur significant expenses, expose us to liability and harm our reputation. Our operations depend upon our ability to maintain and protect our computer systems, which are located at our offices in Hayward, California and at facilities owned by Level 3 Communications in Sunnyvale, California, and operated by Yipes Communications, Inc. We currently do not have redundant facilities for our servers. Our systems therefore are vulnerable to damage from vendor shutdowns, break-ins, unauthorized access, vandalism, fire, floods, earthquakes, power loss, telecommunications failures, terrorist acts such as that occurring on September 11, 2001 in New York and similar events. On March 22, 2002, Yipes Communications filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court. Yipes Communications has indicated that it will continue its business operations uninterrupted during the reorganization. Yipes Communications has stated that it has made arrangements for debtor-in-possession financing and that this additional financing will allow it to continue offering its existing customers 24x7 service and support and otherwise conduct business as normal. AvantGo is in the process of contracting with multiple bandwidth providers to eliminate any risk associated with financial difficulties that Yipes Communications has encountered. In the mean time, if these financial difficulties result in the interruption or discontinuation of bandwidth services, this whould disrupt operation of AvantGo Mobile Internet service and the operations of certain customers. Many other bandwidth providers are in financial difficulty and we may not be able to find a reliable, stable bandwidth service provider, and the next provider may encounter similar financial problems. The potential impact on us and our general infrastructure of being located near major earthquake faults is unknown, but operating results could be materially adversely affected in the event of a major earthquake. In addition, California recently experienced power shortages, which resulted in brief power outages, or "blackouts", in parts of the state. Any such blackouts in the future could cause disruptions to our operations, especially our AvantGo Mobile Internet service, which is housed at Level 3 Communications and during a blackout could become inaccessible to our users. Additionally, these blackouts could disrupt the operations of our distributors, resellers, and customers. Although we maintain insurance against break-in, unauthorized access, vandalism, fires, floods, earthquakes and general business interruptions, the amount of coverage may not be adequate in any particular case, and will not likely compensate us for all the damages caused by these or similar events. We may be unable to prevent computer programmers or hackers from penetrating our network security from time to time. A breach of our security could seriously damage our reputation, which would harm our business. In addition, because a hacker who penetrates our network security could misappropriate proprietary information or cause interruptions in our services, we might be required to expend significant resources to protect against, or to alleviate, problems caused by hackers. We might also face liability to persons harmed by misappropriation of secure information if it is determined that we did not exercise sufficient care to protect our systems. Our future success will depend on our ability to anticipate and keep pace with technological change, and if we experience delays in developing and introducing software compatible with new products and technologies, our business will suffer. The market for mobile Internet software is becoming highly competitive and is characterized by evolving industry standards, rapid technological change and frequent product introductions. To remain competitive, we must continuously develop new products and services and adapt our software to function on new devices and operating systems designed and marketed by other companies. The development of software and services like ours can be difficult, time-consuming and costly, and we could lose market share if we encounter delays in the development and introduction of our future software products. Additionally, our business could be seriously harmed if: o competitors develop new technologies and products which provide comparable functionality at reduced prices to our customers and potential customers; o we fail to anticipate technological trends or evolving industry standards or to adapt our software and services to these new trends and standards; o other companies develop products that render our software obsolete or less desirable to consumers; or o technical, legal, financial or other obstacles prevent us from improving our software and services to adapt to changing market conditions. If we fail to meet the continued listing requirements of the Nasdaq Stock Market, our stock could be delisted. Our stock is currently listed on the Nasdaq National Market. The Nasdaq Stock Market's Marketplace Rules impose certain minimum financial requirements on us for the continued listing of our stock. One such requirement is a minimum bid price on our stock of $1.00 per share. Our stock price has, from time to time, fallen below the minimums set forth by those rules. If we remain below minimum levels for an extended period, the Nasdaq National Market may delist our stock. If we are delisted and cannot obtain listing on another major market or exchange, our stock's liquidity would suffer, and we would likely experience reduced analyst coverage and investor interest. Such factors may result in a decrease in our stock's trading price. Delisting also may restrict us from issuing additional securities or securing additional financing. 22 Because our quarterly operating results are volatile and difficult to predict, period-to-period comparisons of our operating results are not necessarily meaningful, and you should not rely on them as indications of future performance. Because our licensing, professional services and AvantGo Mobile Internet service revenues can vary substantially from month to month and are difficult to predict, and we expect to continue to rely on these revenues, our future quarterly revenues and operating results may fluctuate substantially. As a result of these factors, we believe that quarter-to-quarter or other periodic comparisons of our revenue and operating results are not necessarily meaningful, and that these comparisons may not be accurate indicators of future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in new and rapidly evolving markets, such as Internet software. Examples of the factors that could cause our quarterly results to vary include: o failure to close key enterprise agreements as contemplated; o termination of important contracts, including those with McKesson Corporation; and o long sales cycles for our products. Because our staffing and operating expenses are based on anticipated revenue levels and because a high percentage of our costs are fixed, small variations in the timing of the recognition of specific revenue could cause significant variations in operating results from quarter to quarter. If we are unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, any significant revenue shortfall would likely have an immediate negative effect on our business. It is likely that in some future quarter or quarters our operating results will be below public expectations. If this occurs, we would expect to experience an immediate and significant decline in the market price of our common stock. The emergence of a dominant platform for mobile devices could reduce our customer base and revenues. The marketplace for mobile devices is currently characterized by a number of competing operating systems and standards for handheld devices and cellular telephones. Currently, our customers and potential customers often use a variety of mobile devices with multiple connectivity options. One of the primary benefits of our products is their ability to operate across a wide variety of platforms. If a dominant platform for mobile devices emerges, the demand for interoperable software may decline and the need for our software may diminish. We depend on our ability to market successfully the functionality of our software. Even if the market for mobile devices continues to expand, our success will depend, among other things, on whether businesses and consumers adopt our products and services for obtaining Web-based information and applications on the Internet and intranets. We have expended considerable resources on sales and marketing of our products and services. During 2001, our sales and marketing expenses were approximately $29.4 million. As revenues increase, we expect that these expenses will continue to increase. If our sales and marketing efforts are inadequate and we are unable to build our visibility and brand name, our enterprise revenues will fall and consumer use of our AvantGo Mobile Internet service will fail to develop, jeopardizing our ability to generate revenue from the sale of advertising and distribution products. If we adopt additional economic incentives to retain our current employees or attract new employees, stockholder equity could be diluted. The purchase price of many outstanding stock options held by our employees is above the current fair market value of our common stock. To adequately motivate and retain our employees, and to attract new employees, we may need to provide additional economic incentives. For example, our board of directors may seek to increase the stock pool in our existing 2000 Stock Incentive Plan or adopt a new equity incentive plan, such as the new 2001 Stock Incentive Plan, to reincentivize current employees and attract new employees. If we issue additional stock options or additional stock grants to current or new employees, our existing stockholders will suffer dilution. 23 If we fail to either maintain our existing relationships or enter into new key relationships with leading hardware and software manufacturers, our brand awareness and the use of our products and services will suffer. The success of our product and service offerings depends, in large part, on our ability to develop and maintain relationships with leading hardware and software manufacturers, such as Palm, Inc., Microsoft Corporation, and Research in Motion Ltd., that bundle or offer our software with their product offerings. We depend on these relationships to: o distribute our products to purchasers of mobile devices; o increase usage of our AvantGo Mobile Internet service; o build brand awareness through product marketing; and o cooperatively market our products and services. All of our agreements with these companies are non-exclusive and have broad rights of termination. In addition, these agreements do not require these companies to bundle our software with all of their product offerings. Some of these manufacturers have services that compete with our AvantGo Mobile Internet service. Any of these manufacturers may choose either to promote its competing service or promote the services of one or more of our other competitors, which could limit the growth of our AvantGo Mobile Internet service. If we fail to maintain these relationships or fail to enter into relationships with other leading hardware or software manufacturers, the distribution of our software to consumers and our AvantGo Mobile Internet service will suffer. Our success depends on strong performance by equipment manufacturers and software companies with whom we have key relationships. Because we depend on equipment manufacturers like Palm, Inc. and Research in Motion Ltd., and software companies like Microsoft Corporation to help distribute our software and promote our AvantGo Mobile Internet service, the sales growth of our products and services is dependent in part upon their success. If the products that these companies sell, or the operating systems upon which these products are based, were to lose popularity, or if any of these equipment manufacturers or software companies cease to distribute our software in significant volumes, or if they change operating systems to which we cannot adapt, our business would suffer. Acquisitions we consummate in the future may disrupt our business and cause our existing stockholders to suffer dilution. As part of our business strategy, we may acquire or make additional investments in businesses, products and technologies that complement ours. We may experience difficulties integrating the operations of companies we might acquire, into ours. As a result, we may divert management attention to the integration that would otherwise be available for the ongoing development of our core business. Acquisitions have inherent risks, including: o risks related to the strategic utility of technology acquired; o difficulties assimilating acquired operations, technologies or products; o unanticipated costs; and o adverse effects on relationships with customers, suppliers and employees. If we fail to successfully integrate any businesses, products, technologies or personnel that we acquire, that would harm our business. We cannot guarantee that we will not need to write off any of our investments or that our investments will yield a significant return, if any. We may issue equity securities to finance acquisitions, which would dilute our current stockholders' investment, or we may incur significant indebtedness, which could harm our business. 24 If we fail to manage future expansion effectively, we may be unable to meet our customers' needs or to attract new customers. We expect to continue to expand certain areas of our operations for the foreseeable future. For example, we expect to hire additional new employees to support our sales organization. Because of the technical nature of our products, we anticipate that it will take several months to train new personnel. Failure to accomplish this objective would impede our ability to deliver products in a timely fashion, fulfill existing customer commitments and attract and retain new customers, which would harm our business. The use of our AvantGo Mobile Internet service may be reduced if we are unable to maintain and expand our agreements with content providers and e-businesses. Existing users of our content providers and e-businesses that deliver content to our website account for a significant portion of the traffic to our AvantGo Mobile Internet service. To expand our AvantGo Mobile Internet service, we must maintain quality relationships with these content providers and e-businesses. If we fail to continue to provide valuable content and services, Internet users may be less likely to actively use our service and to engage in commercial transactions using our service, which, in turn, would harm our business. All of our agreements with content providers and e-businesses survive for a short period of time and are non-exclusive. These companies may choose not to renew their agreements with us or may terminate their agreements at any time. If any of these agreements terminate, we will experience a decline in the number of websites that are optimized for use with mobile devices, and our competitive position could suffer. Further, while we intend to pursue additional relationships with content providers and e-businesses, we may not experience sustained increases in user traffic from these affiliations. Our future results could be harmed by risks associated with our expansion into Europe and other international markets. We sell our products in the United States and abroad. We manage our European sales and marketing operations through our U.K. subsidiary, AvantGo Europe, Ltd. Revenues from international sales represented 16% of our revenues in 2001, and we anticipate that revenue from international operations will represent an increasing portion of our total revenues. Our business will therefore be increasingly subject to the risks associated with doing business internationally. We expect that the costs of developing overseas revenues will exceed those revenues. Accordingly, our future results could be harmed by a variety of factors, including: o changes in foreign currency exchange rates; o inflation; o the adoption of incompatible platforms or standards; o trade protection measures and import or export licensing requirements; o potentially negative consequences from changes in tax laws; and o weak economic conditions in foreign markets. Our success depends on retaining key personnel. Our future success depends to a significant extent on the continued services of our senior management and other key personnel. The loss of the services of our management team or other key employees may harm our business. We have no employment agreements that prevent any of our key personnel from terminating their employment at any time. We do not maintain key person life insurance on any of our officers. 25 Competition for personnel could harm our ability to develop or market new products or provide professional services necessary to sustain our growth. During 2001, we implemented a restructuring plan and reduced our workforce. Despite this reduction in workforce, we will continue to recruit key personnel. We may be unable to retain our key employees or to attract, assimilate or retain other highly qualified employees in the future. The mobile computer industry is a complex industry that requires a unique knowledge base, and the loss of technical knowledge and industry expertise among our key personnel, or our failure to obtain necessary additional expertise, could result in delays in software development, loss of sales and a diversion of management resources which could harm our business. Our software may contain defects or errors which would delay shipments of our products, harm our reputation and increase our costs. Our software is complex as it must operate across a broad variety of operating systems, devices and connectivity options and meet the stringent requirements of our customers. We must develop our products and services quickly to keep pace with the rapidly changing software and telecommunications markets. Despite testing by our customers and us, software as complex as ours is likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Our software may not be free from errors or defects after delivery to customers has begun, which could result in the rejection of our software or services, damage to our reputation, lost revenues, diverted development resources and increased service and support costs, any of which could harm our business. Computer viruses have been reported to impact handheld device operating systems. Viruses and publicity about them may adversely impact our product sales and usage of our AvantGo Mobile Internet service. In particular, the unavailability of anti-virus protection that our users deem to be adequate to combat these viruses could have a material adverse effect on both our enterprise license business as well as our AvantGo Mobile Internet service. 26 We incorporate software licensed from third parties into our products, and our loss of these licenses could disrupt our sales. We currently license software from a variety of third parties. If we were found to be in breach of any of our license agreements, or, in any event, upon termination of such agreements, we would have to discontinue the use of the licensed software, cease the use and sale of products containing this software, and incur expenses to develop or obtain licenses to other technology. We may be unable to develop alternative technologies or to obtain a license to use the software formerly licensed to us on commercially reasonable terms. Although we are generally indemnified against claims that technology licensed to us infringes the intellectual property rights of others, such indemnification is not always available for all types of intellectual property, and in some cases the scope of such indemnification is limited. Even if we receive broad indemnification, third party indemnitors may not have the financial resources to fully indemnify us in the event of infringement, resulting in substantial exposure to us. We cannot be assured that infringement claims arising from the incorporation of this technology will not be asserted or prosecuted against us. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources in addition to potential redevelopment costs and delays, all of which could materially adversely affect our business, operating results and financial condition. Increasing government regulation could cause demand for our products and services to grow more slowly or to decline. We are subject not only to government regulations applicable to businesses generally, but also to laws and regulations directly applicable to the Internet. Demand for our software in certain countries, and our ability to meet this demand, is subject to export controls on hardware and on the encryption software incorporated into our products. In addition, state, federal and foreign governments may adopt laws and regulations governing any of the following issues: o user privacy; o taxation of electronic commerce; o the online distribution of specific material or content; and o the characteristics and quality of online products and services. One or more states or the federal government could enact regulations aimed at companies like us, which provide software that facilitates e-commerce and the distribution of content over the Internet. The likelihood of the enactment of regulations in these areas will increase as the Internet becomes more pervasive and extends to more people's daily lives. Any legislation, regulation or taxation of, or concerning, electronic commerce could dampen the growth of the Internet and decrease its acceptance as a communications and commercial medium. If a reduction in growth occurs as a result of these events, demand for our client software and AvantGo Mobile Internet service could decline significantly. We may be subject to liability for transmitting information, and our insurance coverage may be inadequate to fully cover us against this liability. We could be exposed to liability with respect to third-party information that our users access with our software. Even if these claims do not result in liability to us, they would likely divert management's attention and resources and we could incur significant costs in investigating and defending against these claims. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may be inadequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. We rely on intellectual property rights, and we may not be able to obtain patent or other protection for our technology, products or services. We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary technology, products and services. We 27 also believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and name recognition are essential to establishing and maintaining a technology leadership position. We seek to protect our proprietary software and written materials under trade secret, patent and copyright laws, which afford only limited protection. We do not know if these or other applications will ever be issued or, if issued, whether they will contain claims with the scope that we seek, or whether they will survive legal challenges that may be brought. Any such legal challenges, whether or not successful, may be expensive to defend. Furthermore, others may develop technologies that are similar or superior to our technology or design around any patents which may issue. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not ensure that our means of protecting our proprietary rights in the United States or abroad will be adequate. We have entered into source code escrow agreements with a limited number of our customers and business affiliates requiring release of our source code in certain limited circumstances. These agreements generally provide that each party to the agreement will have a limited, non-exclusive right to use our code should one of these circumstances occur, such as if we cease to do business or if we fail to meet our contractual obligations. This may increase the likelihood of misappropriation by third parties. If we are unable to adequately protect our intellectual property, it could materially affect our financial performance. In addition, potential competitors may be able to develop non-infringing technologies or services similar to ours. We may be sued by third parties for infringement of their proprietary rights, and litigation or threatened litigation could require us to incur significant litigation or licensing expenses, prevent us from selling our software or require us to make expensive modifications to our software to avoid infringement. The wireless communications, handheld computers and software industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement or other violations of intellectual property rights. As the number of participants in our market increases, the likelihood of an intellectual property claim against us could increase. We expect that we may increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any claim made against us, regardless of merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources or cause product release delays. In addition, this kind of claim, if successful, could require us to discontinue the use of infringing software code or processes, to cease the use and sale of infringing products, to incur significant litigation costs and expenses and to develop non-infringing technology or to obtain licenses to the alleged infringing technology under which we might be required to pay expensive royalties. We may be unable to develop alternative technologies or to obtain a license to use software formerly used by us or, if a license were obtainable, the terms might not be commercially acceptable to us. In the event of a successful claim of product infringement against us and our failure or inability to obtain a license or develop or acquire non-infringing technology, our business would suffer. Our stock price may continue to be volatile and an active trading market for our common stock may never develop or be sustained. The stock markets, particularly the Nasdaq National Market on which our common stock is listed, have experienced significant price and volume fluctuations, and the market prices of companies focused on the Internet and wireless communications have been highly volatile. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to factors including: o actual or anticipated variations in our quarterly operating results; o announcements of new product or service offerings by us or our competitors; o changes in the handheld and wireless device industries; 28 o technological innovations; o competitive developments; o departure of key personnel; o securities class action litigation, or other civil litigation, brought against us by third parties, regardless of outcome; o changes in financial estimates by securities analysts; and o changes in interest rates and other general economic conditions. Future sales of our common stock may cause our stock price to decline. Sales of significant amounts of our common stock in the public market or the perception that sales of significant amounts of common stock will occur could adversely affect the market price of our common stock or our future ability to raise capital through an offering of our equity securities. As of December 31, 2001 we had approximately 35.2 million shares of common stock outstanding, of which 34.7 million were freely tradable, except for any shares purchased by our "affiliates" as defined in Rule 144 of the Securities Act of 1933. Sales of a large number of restricted shares, or sales of shares held by affiliates, could have an adverse effect on the market price for our common stock. Provisions in our charter documents and Delaware law could prevent or delay a change in control, which could reduce the market price of our common stock. Provisions of our certificate of incorporation and bylaws, and of Delaware law, could limit the price that investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change of control or changes in our management. These provisions: o allow the board of directors to issue preferred stock without any vote or further action by the stockholders; o eliminate the right of stockholders to act by written consent without a meeting; o eliminate cumulative voting in the election of directors; and o divide our board of directors into three classes, with each class serving a staggered three-year term. Provisions of Delaware law may discourage, delay or prevent someone from acquiring or merging with us. These provisions prevent us from engaging, under limited circumstances, in a merger or sale of more than 10% of our assets, with a stockholder who owns 15% or more of our outstanding voting stock, as well as affiliates and associates of the stockholder, for three years following the date that the stockholder became an owner of 15% or more of our outstanding voting stock unless: o the transaction is approved by the board of directors before the date the interested stockholder attained that status; o upon the closing of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or o on or after such date, the business combination is approved by the board and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. You should not unduly rely on forward-looking statements because they are inherently uncertain. You should not rely on forward-looking statements in this document. This document contains forward-looking statements that involve risks and uncertainties. We use words such as "believes," "expects," "anticipates," "intends," "plans," "future," "may," "will," "should," "estimates," "potential," or "continue" and similar expressions to identify forward-looking statements. You should not place undue reliance on 29 these forward-looking statements, which apply only as of the date of this document. The forward-looking statements contained in this document are subject to the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described above and elsewhere in this document. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to the impact of interest rate changes and change in the market values of our investments. Interest Rate Risk. We are exposed to the impact of short-term changes in interest rates. Our exposure primarily relates to our investment portfolio. We invest our excess cash in high quality corporate and municipal debt instruments. Investments in both fixed rate and floating rate interest earning instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted by a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. As a result, changes in interest rates may cause us to suffer losses in principal if forced to sell securities that have declined in market value or may cause our future investment income to fall short of expectations. Our investment portfolio is designated as available-for-sale, and accordingly is presented at fair value in the consolidated balance sheet. We protect and preserve our invested funds with investment policies and procedures that limit default, market and reinvestment risk. We have not utilized derivative financial instruments in our investment portfolio. As of December 31, 2001, we had unrestricted cash and cash equivalents of $43.1 million. Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of three months or less at the date of purchase. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our cash and cash equivalents, we have concluded that there is no material market risk exposure. At December 31, 2001, our cash and cash equivalents consisted primarily of demand deposits, money market funds, U.S. government obligations, and corporate debt securities held by three major financial institutions in the United States. We had no short-term investments at December 31, 2001. Foreign Currency Exchange Risk. We develop products in the United States for sale in North America and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars and translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets. We have one foreign subsidiary whose expenses are incurred in its local currency. As exchange rates vary, its expenses, when translated, may vary from expectations and adversely impact overall expected profitability. Our operating results were not significantly affected by exchange rate fluctuations in 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements included in this report beginning at page F-1 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 of Form 10-K with respect to identification of directors is incorporated by reference from the information contained in the section captioned "Election of Directors" in AvantGo's definitive proxy statement for the Annual Meeting of Stockholders to be held May 13, 2002, a 30 copy of which will be filed with the SEC before the date 120 days after the end of 2001. For information with respect to the executive officers of AvantGo, see "Employees" at the end of Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned "Executive Compensation" in the proxy statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the proxy statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the section captioned "Certain Relationships and Related Transactions" in the proxy statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements (1) Report of Ernst & Young LLP, Independent Auditors, dated January 16, 2002 (See page F-2 hereof). (2) Consolidated Balance Sheets as of December 31, 2001 and 2000. (See page F-3 hereof). (3) Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 (See page F-4 hereof). (4) Consolidated Statements of Stockholder's Equity for the years ended December 31, 2001, 2000 and 1999 (See pages F-5 and F-6 hereof). (5) Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 (See page F-7 hereof). (6) Notes to Consolidated Financial Statements. (See pages F-8 through F-23 hereof). (a)(2) Financial Statement Schedules Schedule No. Description ---------- ---------- Schedule II Valuation and Qualifying Accounts Other schedules are not provided because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. (a)(3) Exhibits. The following is a complete list of Exhibits filed as part of this Form 10-K. Exhibit No Description ---------- ---------- 2.1* Agreement and Plan of Merger by and among AvantGo, Inc., GC Acquisition, Inc., Globalware Computing, Inc. and the stockholders of Globalware Computing, Inc. dated as of May 26, 2000. Reference is made to Exhibit 2.1 of the registrant's Registration Statement on Form S-1 (No. 333-38888) filed with the Commission on June 8, 2000, as amended (the "Form S-1"). 2.2* Escrow and Indemnity Agreement by and among AvantGo, Inc., Chase Manhattan Bank and Trust Company, N.A., as escrow agent and the stockholders of Globalware Computing, Inc. (See Exhibit 2.2 to Form S-1) 3.1* Seventh Amended and Restated Certificate of Incorporation. (See Exhibit 3.2 to Form S-1) 3.2* Amended and Restated Bylaws. (See Exhibit 3.4 to Form S-1). 31 Exhibit No Description ---------- ---------- 4.1* Form of common stock certificate. (See Exhibit 4.1 to Form S-1) 4.2* Fourth Amended and Restated Investors' Rights Agreement dated May 19, 2000. (See Exhibit 4.2 to Form S-1) 10.1* Form of Indemnification Agreement (See Exhibit 10.1 to Form S-1). 10.2* 1998 Globalware Computing, Inc. stock option plan. (See Exhibit 10.56 to Form S-1). 10.3* 1997 Stock Option Plan, as amended. (See Exhibit 10.3 to Form S-1) 10.4* Form of Notice of Option Grant and Stock Option Agreement. (See Exhibit 10.4 to Form S-1) 10.5* Form of 2000 Employee Stock Purchase Plan. (See Exhibit 10.5 to Form S-1) 10.6* Form of 2000 Stock Incentive Plan. (See Exhibit 10.6 to Form S-1) 10.7* Stock Option Grant Program for Non-employee Directors. (See Exhibit 10.7 to Form S-1) 10.8* 401(k) Standardized Profit Sharing Plan Adoption Agreement by and between AvantGo, Inc. and Paychex Retirement Services, dated January 1, 1998. (See Exhibit 10.8 to Form S-1) 10.9* Founders Stock Purchase Agreement by and between AvantGo, Inc. and Felix Lin, dated August 11, 1997. (See Exhibit 10.16 to Form S-1). 10.10* Founders Stock Purchase Agreement by and between AvantGo, Inc. and Linus Upson, dated August 11, 1997. (See Exhibit 10.17 to Form S-1). 10.11* Employment Offer Letter between AvantGo, Inc. and Richard Owen, dated December 4, 1999. (See Exhibit 10.34 to Form S-1). 10.12* Pledge Agreement between AvantGo, Inc. and David B. Cooper, Jr., dated August 30, 2000. (See Exhibit 10.58 to Form S-1). 10.13* Full Recourse Promissory Note executed by David B. Cooper, Jr. in favor of AvantGo, Inc. dated August 30, 2000. (See Exhibit 10.59 to Form S-1). 10.14* Change of Control Agreement by and between David B. Cooper, Jr. and AvantGo, Inc. dated August 30, 2000. (See Exhibit 10.60 to Form S-1). 10.15* Amended and Restated Change of Control Agreement by and between AvantGo, Inc. and Felix Lin, dated October 13, 1997. (See Exhibit 10.22 to Form S-1). 10.16* Change of Control Agreement by and between AvantGo, Inc. and Richard Owen, dated January 24, 2000. (See Exhibit 10.23 to Form S-1). 10.17* Amended and Restated Change of Control Agreement by and between AvantGo, Inc. and Linus Upson, dated October 13, 1997. (See Exhibit 10.24 to Form S-1). 10.18*+ Master Agreement by and between AvantGo, Inc. and American Express Travel-Related Services Company, Inc., dated February 16, 2000. (See Exhibit 10.30 to Form S-1). 10.19* Warrant to purchase Series D preferred stock issued to Imagine Health, Inc., dated March 8, 2000. (See Exhibit 10.33 to Form S-1). 10.20* Consulting Agreement between AvantGo, Inc. and R.B. Webber and Company, dated April 16, 1998. (See Exhibit 10.35 to Form S-1). 10.21* Consulting Agreement between AvantGo, Inc. and RB Webber, dated December 11, 1998. (See Exhibit 10.36 to Form S-1). 10.22* QuickStart Loan and Security Agreement with Silicon Valley Bank in the amount of $300,000, dated January 28, 1998. (See Exhibit 10.37 to Form S-1). 10.23* Irrevocable Standby Letter of Credit No. SVB001S with Silicon Valley Bank in the amount of $3,250,000, dated June 2, 2000. (See Exhibit 10.38 to Form S-1). 10.24*+ License Agreement by and between AvantGo, Inc. and McKesson Corporation, dated October 1, 1998, as amended August 31, 1999 and March 7, 2000. (See Exhibits 10.39, 10.40 and 10.41 to Form S-1). 32 Exhibit No Description ---------- ----------- 10.25*+ Agreement for Implementation of Licensor Software Materials by and between AvantGo, Inc. and Palm Computing Inc., dated June 1, 1999. (See Exhibit 10.43 to Form S-1). 10.26*+ Marketing and Distribution Agreement by and between AvantGo, Inc. and Microsoft Corporation, dated June 2, 1999, as amended January 25, 2000. (See Exhibits 10.44 and 10.45 to Form S-1). 10.27*+ Enterprise License Agreement by and between AvantGo, Inc. and Ford Motor Company, dated December 9, 1999, as amended January 31, 2000 and March 7, 2000. (See Exhibits 10.46, 10.47 and 10.48 to Form S-1). 10.28* Bayshore Corporate Center Office Lease by and between AvantGo, Inc. and Cornerstone Properties I, LLC, dated June 23, 1997, as amended January, 30, 1998; April 27, 1998; November 16, 1998, and April 2, 1999. (See Exhibits 10.49, 10.50, 10.51, 10.52 and 10.53 to Form S-1). 10.29* Bayshore Corporate Center Office Lease by and between AvantGo, Inc. and Cornerstone Properties I, LLC, dated August 5, 1999. (See Exhibit 10.54 to Form S-1). 10.30* Net Lease by and between AvantGo, Inc. and The Multi-Employer Property Trust, dated March 31, 2000. (See Exhibit 10.55 to Form S-1). 10.31** Promissory Note executed by Mike Aufricht and AvantGo, Inc. dated April 20, 2000. 10.32**+ Amendments to License Agreement by and between AvantGo, Inc. and McKesson Corporation dated October 1, 1998 (as amended through March 7, 2000) December 30, 2000 and undated amendments to Exhibit B to License Agreement. 10.33 Form of 2001 Stock Incentive Plan 10.34 Form of 2001 Stock Option Agreement 10.35 Amended and Restated Change of Control Agreement by and between AvantGo, Inc. and David Moore, dated October 13, 1997. 10.36 Amended and Restated Change of Control Agreement by and between AvantGo, Inc. and Michael Aufricht, dated December 6, 1999. 10.37 Change of Control Agreement by and between AvantGo, Inc. and Paul Kanneman, dated July 12, 2001. 10.38 Offer Letter and Change of Control Agreement Supplement, by and between AvantGo, Inc. and Paul Kanneman, dated August 1, 2001. 10.39++ Amendment to License Agreement by and between AvantGo, Inc. and McKesson Corporation dated August 17, 2001. 10.40++ Amendment Number 2 to Marketing and Distribution Agreement by and between AvantGo, Inc. and Microsoft Corporation, dated August 31, 2001. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney (see signature page). ---------- (*) Incorporated by reference to the registrant's Registration Statement on Form S-1 (No. 333-38888) filed with the Commission on June 8, 2000, as amended. (**) Incorporated by reference to the registrant's Annual Report on Form 10-K (No. 000-31561) filed with the Commission on April 2, 2001, as amended. + Confidential treatment granted on portions of this exhibit. ++ Confidential treatment requested on portions of this exhibit. (6) Reports on Form 8-K None. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of March, 2002. AVANTGO, INC. -------------------------- (REGISTRANT) By: /s/ Richard Owen -------------------------- Richard Owen Chief Executive Officer and Chairman of the Board of Directors POWER OF ATTORNEY Know all persons by these presents, that each person whose signature appears below constitutes and appoints Richard Owen as his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- Principal Executive Officers: /s/ Richard Owen ------------------------- Richard Owen Chief Executive Officer and Chairman of the Board of Directors March 29, 2002 /s/ Felix Lin Vice Chairman of the Board of Directors March 29, 2002 ------------------------- Felix Lin Principal Financial and Principal Accounting Officer: /s/ David B. Cooper, Jr. Chief Financial Officer March 29, 2002 ------------------------- David B. Cooper, Jr. Additional Directors: /s/ Christopher B. Hollenbeck Director March 29, 2002 ------------------------- Christopher B. Hollenbeck 34 /s/ Robert J. Lesko Director March 29, 2002 ------------------------- Robert J. Lesko /s/ William J. Miller Director March 29, 2002 ------------------------- William J. Miller /s/ James Richardson Director March 29, 2002 ------------------------- James Richardson /s/ Linus Upson Director March 29, 2002 ------------------------- Linus Upson /s/ Jeffrey T. Webber Director March 29, 2002 ------------------------- Jeffrey T. Webber /s/ Peter H. Ziebelman Director March 29, 2002 ------------------------- Peter H. Ziebelman
35 AVANTGO, INC. INDEX TO FINANCIAL STATEMENTS Page ---- Report of Ernst & Young LLP, Independent Auditors..................... F-2 Consolidated Balance Sheets........................................... F-3 Consolidated Statements of Operations................................. F-4 Consolidated Statements of Stockholders' Equity....................... F-5 Consolidated Statements of Cash Flows................................. F-7 Notes to Consolidated Financial Statements............................ F-8 F-1 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders AvantGo, Inc. We have audited the accompanying consolidated balance sheets of AvantGo, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in Item 14(a) of this Annual Report on Form 10-K. These financial statements and schedule are the responsibility of the management of AvantGo, Inc. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AvantGo, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Walnut Creek, California January 16, 2002 F-2 AVANTGO, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, ------------------------ 2001 2000 --------- --------- ASSETS Current Assets: Cash and cash equivalents .......................................... $ 43,091 $ 57,034 Short-term investments ............................................. -- 16,432 Accounts receivable, net of allowance for doubtful accounts of $965 in 2001 and $240 in 2000, respectively .................... 3,236 4,724 Prepaid expenses and other current assets .......................... 480 1,186 --------- --------- Total current assets ........................................... 46,807 79,376 Restricted investments ....................................................... 3,438 3,438 Property and equipment, net .................................................. 6,890 7,998 Goodwill and other intangibles ............................................... -- 12,803 Other assets ................................................................. 344 693 --------- --------- Total assets ................................................... $ 57,479 $ 104,308 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ................................................... $ 1,243 $ 3,227 Accrued liabilities ................................................ 3,855 1,527 Accrued compensation and related benefits .......................... 1,693 2,238 Current portion of borrowings under bank line of credit agreement .. -- 40 Deferred revenue ................................................... 1,813 2,442 --------- --------- Total current liabilities ...................................... 8,604 9,474 Deferred revenue, net of current portion ..................................... -- 83 Accrued restructuring charges, net of current portion ........................ 2,127 -- Commitments Stockholders' Equity: Convertible preferred stock, $0.0001 par value, issuable in Series: 10,000,000 shares authorized at December 31, 2001; none and none issued and outstanding at December 31, 2001, and 2000, respectively ................................................... -- -- Common stock, $0.0001 par value; 150,000,000 shares authorized; 35,166,133 and 34,473,663 shares issued and outstanding at December 31, 2001 and 2000, respectively .................... 168,603 170,841 Notes receivable from stockholders ................................. (502) (706) Deferred stock compensation ........................................ (2,752) (12,350) Revenue offset relating to warrant agreements ...................... (592) (1,099) Accumulated deficit ................................................ (118,122) (61,947) Accumulated other comprehensive income ............................. 113 12 --------- --------- Total stockholders' equity ..................................... 46,748 94,751 --------- --------- Total liabilities and stockholders' equity ..................... $ 57,479 $ 104,308 ========= =========
See accompanying notes. F-3 AVANTGO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Year Ended December 31, ------------------------------------ 2001 2000 1999 -------- -------- -------- Revenues: License fees .................................... $ 13,548 $ 9,087 $ 1,443 Services ........................................ 10,456 7,231 1,446 -------- -------- -------- Total revenues ........................ 24,004 16,318 2,889 Costs and expenses: Cost of license fees ............................ 594 161 60 Cost of services (1) ............................ 5,137 4,103 1,466 Product development (2) ......................... 13,250 10,842 3,108 Sales and marketing (3) ......................... 29,362 30,682 4,630 General and administrative (4) .................. 8,085 5,768 548 Amortization of goodwill, other intangible assets, and deferred stock compensation ....... 9,201 16,582 2,605 Purchased in-process research and development ... -- 600 -- Write-off of core technology .................... 1,981 -- -- Restructuring and other impairment charges ...... 15,065 -- -- -------- -------- -------- Total costs and expenses .............. 82,675 68,738 12,417 -------- -------- -------- Loss from operations ...................................... (58,671) (52,420) (9,528) Other income (expense): Interest income (expense), net .................. 2,496 2,582 313 -------- -------- -------- Net loss .............................. $(56,175) $(49,838) $ (9,215) ======== ======== ======== Basic and diluted net loss per share ............ $ (1.71) $ (4.13) $ (2.11) ======== ======== ======== Common shares used to calculate basic and diluted net loss per common share ................... 32,892 12,077 4,377 ======== ======== ========
---------- (1) Excluding $208, $383, $181 and $9 in amortization of deferred stock compensation for the year ended December 31, 2001, 2000, 1999 and 1998, respectively. (2) Excluding $1,103, $1,809, $750 and $38 in amortization of deferred stock compensation for the year ended December 31, 2001, 2000, 1999 and 1998, respectively. (3) Excluding $1,725, $3,290, $1,211 and $15 in amortization of deferred stock compensation for the year ended December 31, 2001, 2000, 1999 and 1998, respectively. (4) Excluding $3,525, $7,861, $463 and $9 in amortization of deferred stock compensation for the year ended December 31, 2001, 2000, 1999 and 1998, respectively. See accompanying notes. F-4 AVANTGO, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data)
Convertible Notes Preferred Stock Common Stock Receivable Comprehensive --------------------- ----------------------- from Income (Loss) Shares Amount Shares Amount Stockholders -------------- ---------- ------- ---------- ------- ------------ BALANCES AT DECEMBER 31, 1998 ......... 7,736,042 4,807 7,864,120 540 -- Issuance of Series C preferred stock, net of issuance costs ...... 3,659,898 14,373 -- -- -- Issuance of Series C preferred stock in exchange for cancellation of notes payable ..... 76,142 300 -- -- -- Exercise of stock options ........... -- -- 1,805,942 694 (100) Repurchase of common stock .......... -- -- (40,000) (1) -- Deferred stock compensation ......... -- -- -- 9,695 -- Amortization of deferred stock compensation ...................... -- -- -- -- -- Net loss and comprehensive loss ..... (9,215) -- -- -- -- -- ======= ---------- ------ ---------- ------- ---- BALANCES AT DECEMBER 31, 1999 ......... 11,472,082 19,480 9,630,062 10,928 (100) Issuance of common stock in exchange for services ............. -- -- 12,500 187 -- Issuance of Series D preferred stock in connection with license .. 4,785 40 -- -- -- Issuance of Series D preferred stock, net of issuance costs ...... 3,726,094 31,042 -- -- -- Exercise of stock options ........... -- -- 1,794,445 4,157 (606) Repurchase of common stock .......... -- -- (496,167) (141) -- Deferred stock compensation ......... -- -- -- 18,218 -- Amortization of deferred stock compensation ...................... -- -- -- -- -- Issuances of Series D warrant ....... 71,562 159 -- -- -- Issuance of Series E preferred stock in connection with acquisition ....................... 1,933,300 15,466 -- -- -- Issuance of common stock options in connection with acquisition .... -- -- -- 1,444 -- Issuance of common stock in connection with initial public offering, net of issuance costs of $7,560 ...................... 6,325,000 68,340 Deferred revenue relating to warrants -- 1,521 -- -- -- Deferred Revenue Accumulated Stock Offset Other Total Compen- Relating to Accumulated Comprehensive Stockholders' sation Warrants Deficit Income (Loss) Equity -------- ----------- ----------- ------------- ------------- BALANCES AT DECEMBER 31, 1998 ......... (385) -- (2,894) -- 2,068 Issuance of Series C preferred stock, net of issuance costs ...... -- -- -- -- 14,373 Issuance of Series C preferred stock in exchange for cancellation of notes payable ..... -- -- -- -- 300 Exercise of stock options ........... -- -- -- -- 594 Repurchase of common stock .......... -- -- -- -- (1) Deferred stock compensation ......... (9,695) -- -- -- -- Amortization of deferred stock compensation ...................... 2,605 -- -- -- 2,605 Net loss and comprehensive loss ..... -- -- (9,215) -- (9,215) ------- ------ ------- ------ ------- BALANCES AT DECEMBER 31, 1999 ......... (7,475) 0 (12,109) -- 10,724 Issuance of common stock in exchange for services ............. -- -- -- -- 187 Issuance of Series D preferred stock in connection with license .. -- -- -- -- 40 Issuance of Series D preferred stock, net of issuance costs ...... -- -- -- -- 31,042 Exercise of stock options ........... -- -- -- -- 3,551 Repurchase of common stock .......... -- -- -- -- (141) Deferred stock compensation ......... (18,218) -- -- -- -- Amortization of deferred stock compensation ...................... 13,343 -- -- -- 13,343 Issuances of Series D warrant ....... -- -- -- -- 159 Issuance of Series E preferred stock in connection with acquisition ....................... -- -- -- -- 15,466 Issuance of common stock options in connection with acquisition .... -- -- -- -- 1,444 Issuance of common stock in connection with initial public offering, net of issuance costs of $7,560 ...................... 68,340 Deferred revenue relating to warrants -- (1,521) -- -- --
See accompanying notes. F-5 AVANTGO, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued) (In thousands, except share data)
Convertible Notes Preferred Stock Common Stock Receivable Comprehensive ------------------------ ------------------------- from Income (Loss) Shares Amount Shares Amount Stockholders ------------- ----------- -------- ----------- --------- ------------ Amortization of warrant ............ -- -- -- -- -- Conversion of preferred stock into common stock upon initial public offering ........................ (17,207,823) (67,708) 17,207,823 67,708 Net loss ........................... (49,838) -- -- -- -- -- Foreign currency translation adjustment ...................... 16 -- -- -- -- -- Unrealized loss on investment, net . (4) -- -- -- -- -- Comprehensive loss ................. (49,826) -- -- -- -- -- ======== ----------- -------- ----------- --------- ----- BALANCES AT December 31, 2000 ........ 0 0 34,473,663 170,841 (706) Exercise of stock options .......... -- -- 387,826 301 -- Issuance of common stock under the Employee Stock Purchase Plan ................................ -- -- 331,995 310 -- Repurchase of common stock ......... -- -- (87,351) (155) -- Reversal of stock based compensation upon termination of employees .... -- -- -- (2,587) -- Accelerated vesting of options for terminated employees ............. -- -- -- 280 -- Issuance of restricted stock ......... -- -- 60,000 63 -- Revaluation of common stock options issued to consultants ............ -- -- -- (450) -- Amortization of deferred stock compensation ..................... -- -- -- -- -- Repayment of note receivable by stockholder ...................... -- -- -- -- 204 Amortization of warrant ............ -- -- -- -- -- Net loss ........................... (56,175) -- -- -- -- -- Foreign currency translation adjustment ....................... 97 -- -- -- -- -- Unrealized gain on investment, net . 4 -- -- -- -- -- -------- Comprehensive loss ................. $(56,074) -- -- -------- ----------- -------- ----------- --------- ----- BALANCES AT December 31, 2001 ........ 0 $ 0 35,166,133 $ 168,603 $(502) =========== ======== =========== ========= ===== Deferred Reevenue Accumulated Stock Offset Other Total Compen- Relating to Accumulated Comprehensive Stockholders' sation Warrants Deficit Income (Loss) Equity -------- ----------- ----------- ------------- ------------- Amortization of warrant ............ -- 422 -- -- 422 Conversion of preferred stock into common stock upon initial public offering ........................ Net loss ........................... -- -- (49,838) -- (49,838) Foreign currency translation adjustment ...................... -- -- -- 16 16 Unrealized loss on investment, net . -- -- -- (4) (4) Comprehensive loss ................. -- -- -- -- -- -------- ------- --------- ----- -------- BALANCES AT December 31, 2000 ........ (12,350) (1,099) (61,947) 12 94,751 Exercise of stock options .......... -- -- -- -- 301 Issuance of common stock under the Employee Stock Purchase Plan ................................ -- -- -- -- 310 Repurchase of common stock ......... -- -- -- -- (155) Reversal of stock based compensation upon termination of employees .... 2,587 -- -- -- -- Accelerated vesting of options for terminated employees ............. -- -- -- -- 280 Issuance of restricted stock ......... -- -- -- -- 63 Revaluation of common stock options issued to consultants ............ 450 -- -- -- -- Amortization of deferred stock compensation ..................... 6,561 -- -- -- 6,561 Repayment of note receivable by stockholder ...................... -- -- -- -- 204 Amortization of warrant ............ -- 507 -- -- 507 Net loss ........................... -- -- (56,175) -- (56,175) Foreign currency translation adjustment ....................... -- -- -- 97 97 Unrealized gain on investment, net . -- -- -- 4 4 Comprehensive loss ................. -- -- -- -- -- -------- ------- --------- ----- -------- BALANCES AT December 31, 2001 ........ $ (2,752) $ (592) $(118,122) $ 113 $ 46,748 ======== ======= ========= ===== ========
See accompanying notes. F-6 AVANTGO, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Year Ended December 31, ----------------------------------- 2001 2000 1999 -------- --------- -------- OPERATING ACTIVITIES: Net loss ........................................................ $(56,175) $ (49,838) $ (9,215) Adjustments to reconcile net loss to net cash used in operating activities: Purchased in-process research and development ............... -- 600 -- Write-off of core technology ................................ 1,981 -- -- Restructuring and other impairment charges .................. 13,156 -- -- Amortization of goodwill, other intangible assets, and deferred stock compensation ............................. 9,201 16,582 2,605 Depreciation and amortization ............................... 2,892 1,013 163 Amortization of revenue offset relating to warrant agreements .............................................. 507 422 -- Issuance of common stock in exchange for services ........... 63 187 -- Changes in operating assets and liabilities, net of business acquisition: Accounts receivable ..................................... 1,606 (3,174) (1,426) Prepaid expenses and other current assets ............... 706 (929) (230) Accounts payable ........................................ (1,984) 2,326 764 Accrued liabilities ..................................... 144 1,000 295 Accrued compensation and related benefits ............... (264) 1,999 200 Deferred revenue ........................................ (599) 2,278 231 -------- --------- -------- Net cash used in operating activities ............... (28,766) (27,534) (6,613) INVESTING ACTIVITIES: Purchase of property and equipment .............................. (2,385) (8,051) (871) Business acquisition, net of cash acquired ...................... -- 456 -- Restricted investments .......................................... -- (3,438) -- Other assets .................................................... 335 (613) (15) Cash paid for investments ....................................... -- (20,781) (10,000) Proceeds from investments ....................................... 16,436 8,428 6,025 -------- --------- -------- Net cash provided by (used in) investing activities . 14,386 (23,999) (4,861) FINANCING ACTIVITIES: Repayment of obligations under bank line of credit agreement .... (40) (72) (71) Principal payments on capital lease obligations ................. -- (4) (10) Proceeds from issuance of convertible preferred stock, net ...... -- 31,042 14,373 Proceeds from note repayment by shareholder ..................... 204 -- -- Proceeds from issuance of convertible notes payable ............. -- -- 300 Proceeds from issuance of common stock, net ..................... 176 71,750 593 -------- --------- -------- Net cash provided by financing activities ........... 340 102,716 15,185 -------- --------- -------- Effect of foreign exchange rate changes on cash and cash equivalents 97 16 -- -------- --------- -------- Increase in cash and cash equivalents ............................... (13,943) 51,199 3,711 Cash and cash equivalents at beginning of period .................... 57,034 5,835 2,124 -------- --------- -------- Cash and cash equivalents at end of period .......................... $ 43,091 $ 57,034 $ 5,835 ======== ========= ======== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of preferred stock in exchange for convertible notes payable ....................................................... $ -- $ -- $ 300 ======== ========= ======== Issuance of preferred stock in exchange for license ............. $ -- $ 40 $ -- ======== ========= ======== Issuance of preferred stock in connection with acquisition ...... $ -- $ 15,466 $ -- ======== ========= ======== Issuance of common stock for notes receivable from stockholder .. $ -- $ 606 $ 100 ======== ========= ======== Warrant issued in connection with a content service agreement ... $ -- $ 159 $ -- ======== ========= ======== SUPPLEMENTAL DISCLOSURES: Cash paid during the period for interest ........................ $ 5 $ 9 $ 18 ======== ========= ========
See accompanying notes. F-7 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company AvantGo, Inc. (the "Company") was incorporated on June 30, 1997 in Delaware. The Company provides software and services that enable and enhance the use of Internet-based content and corporate intranets to mobile devices, including personal digital assistants and Internet-enabled phones. The Company licenses its AvantGo M-Business Server products and AvantGo mobile applications products to help its customers provide their employees, customers, suppliers and business affiliates with easy access to business information. The AvantGo Mobile Internet service allows individuals to access Internet-based content and applications and gives content providers and other businesses a new medium for reaching and interacting with new and existing customers, increasing customer acquisition and retention. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The functional currency of the Company's foreign subsidiary is the local currency. The Company translates all assets and liabilities to U.S. dollars at the current exchange rates as of the applicable balance sheet date. Revenue and expenses are translated at the average exchange rate prevailing during the period. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. Gains and losses resulting from the translation for the foreign subsidiary's financial statements have not been material to date. Net gains and losses resulting from foreign exchange transactions were not significant during any of the periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the date of purchase and are stated at cost, which approximate fair value. Cash equivalents consist principally of investments in short-term money market instruments. Restricted Investments At December 31, 2001, the Company's restricted investments are classified as available-for-sale but are pledged as collateral against a letter of credit (see Note 10). Restricted investments are held in the Company's name by major financial institutions. Short-Term Investments Short-term investments consist principally of commercial paper and corporate notes with original maturities greater than 90 days and are stated at amounts that approximate fair market value. The Company accounts for its short-term investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company classifies its short-term investments as available-for-sale. F-8 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 Available-for-sale investments are recorded at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss). Fair values of investments are based on quoted market prices, where available. Other income and expense includes realized gains and losses and declines in the value of short-term investments determined to be other than temporary, which have been immaterial to date. These valuation adjustments are derived using the specific identification method for determining the cost of investments sold. Dividend and interest income is recognized when earned. Fair Value of Financial Instruments The carrying value of the Company's financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable, current liabilities, and notes receivable from stockholders, approximate their fair value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of three years. Equipment under capital leases is amortized over the shorter of the estimated useful life or the life of the lease. Leasehold improvements are amortized over the lease life of seven years. Useful lives are evaluated regularly by management in order to determine recoverability in light of current technological conditions. Goodwill and Other Intangible Assets Goodwill and other intangible assets resulted from the Globalware Computing acquisition accounted for under the purchase method (see Note 2). Amortization of goodwill and other intangible assets has been provided for on the straight-line basis over the respective estimated useful lives of the assets. During September 2001, management identified indicators of possible impairment of goodwill and other intangible assets. Such indicators included, but were not limited to, an overall decline in information technology spending, and anticipated increased pressure from competitors. See Note 9 for a discussion of the write-down of goodwill and other intangible assets during the year ended December 31, 2001. Software Development Costs The Company accounts for software development costs in accordance with Financial Accounting Standards Board ("FASB") Statement No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("FASB 86"), under which certain software development costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model. Through December 31, 2001, costs incurred subsequent to the establishment of technological feasibility have not been significant and all software development costs have been charged to product development expense in the accompanying consolidated statements of operations. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents and short-term investments are deposited with four high-credit quality financial institutions. Accounts receivable consists of balances due from a limited number of customers. The Company markets, sells and grants credit to its customers without requiring collateral or third-party guarantees. The Company monitors its exposure for credit losses and maintains appropriate allowances. To date, the Company has not experienced any material losses with respect to its accounts receivable. For the year ended December 31, 1999 two customers accounted for 25% and 15%, respectively, of total revenues. For the year ended December 31, 2000 one of these customers accounted for 26% of total revenues. For the year ended December 31, 2001 the same customer accounted for 20% of total revenues F-9 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 Revenue Recognition The Company licenses software under non-cancelable license agreements and provides services including training, consulting and maintenance, consisting of product support services and unspecified product updates. The Company sells placement service contracts which provide customers with priority visibility on the Company's web-site, and also sells advertising on the device delivered through AvantGo Mobile Internet, a service that is free to consumers. License revenues are recognized when a non-cancelable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable, collectibility is probable, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement using the residual method. In instances where no vendor-specific objective evidence exists and the only undelivered element is maintenance, revenue is recognized ratably over the term of the agreement. The Company's agreements with its customers and resellers generally do not contain product return rights. Revenues from maintenance, which consist of fees for ongoing support and product updates, are recognized ratably over the term of the contract, typically one year. Consulting revenues are primarily related to implementation services performed on a time-and-materials basis under separate service arrangements. Occasionally the Company enters into short-term fixed price consulting contracts. Under these arrangements, the Company recognizes revenue as work progresses using the percentage-of-completion method. Training revenues are generated from classes offered both on-site and at customer locations. Revenues from consulting and training services are recognized as the services are performed. For sales made through distributors, resellers and original equipment manufacturers, the Company recognizes revenue at the time these partners report that they have sold the software to the end user and all revenue recognition criteria have been met. Revenues from placement agreements are recognized ratably over the service period, which in most instances is between three months and one year. Advertising revenues are recognized based upon the lesser of the ratio of impressions delivered over the total guaranteed impressions or the straight line basis over the term of the advertising contract. The Company also earns revenues from advertising barter transactions. Revenues and costs from advertising barter transactions are recognized during the period in which the placement or advertising is delivered. Barter transactions are recorded at the fair value of the goods or services provided or received, whichever is more readily determinable in the circumstances. In determining the value of the services provided, the Company uses historical pricing of comparable cash transactions. Revenues earned from barter transactions were $258,000, $407,000 and $92,000 for the years ended December 31, 2001, 2000 and 1999. Stock-Based Compensation The Company accounts for employee stock options using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and has adopted the disclosure-only alternative of FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FASB 123"). All stock option awards to non-employees are accounted for at their fair value, as calculated using the Black-Scholes model, in accordance with FASB 123 and Emerging Issues Task Force Consensus No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"). The option arrangements are subject to periodic re-valuation over their vesting terms. Advertising Expense The cost of advertising is expensed as incurred. Advertising costs, which are included in sales and marketing expense, were approximately $1,101,000, $8,772,000, and $91,000, for the years ended December 31, 2001, 2000, and 1999, respectively, including $250,000, $407,000 and $83,000 resulting from barter transactions for the years ended December 31, 2001, 2000 and 1999, respectively. Net Loss Per Share Basic net loss per share information for all periods is presented under the requirement of FASB Statement No. 128, "Earnings per Share" ("FASB 128"). Basic net loss per share has F-10 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 been computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options, warrants, and convertible securities. Shares subject to repurchase will be included in the computation of net loss per share when the Company's commitment to repurchase these shares lapses. Diluted net loss per share has been computed as described above and also gives effect, under Securities and Exchange Commission guidance, to the conversion of preferred shares not included above that automatically converted to common shares immediately prior to the completion of the Company's initial public offering, using the if-converted method from the original date of issuance. Diluted net loss per share reflects the potential dilution of securities by adding other common stock equivalents, including stock options, shares subject to repurchase, warrants and convertible preferred stock, to the weighted average number of common shares outstanding for a period, if dilutive. All potentially dilutive securities have been excluded from the computation, as their effect is anti-dilutive. The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share amounts):
Year Ended December 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ----------- Net loss ............................................... $ (56,175) $ (49,838) $ (9,215) ============ ============ =========== Weighted average shares of common stock outstanding .... 34,778,212 16,366,727 8,924,914 Less weighted average shares that may be repurchased ... (1,886,049) (4,289,389) (4,548,317) ------------ ------------ ----------- Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share .... 32,892,163 12,077,338 4,376,597 ============ ============ =========== Basic and diluted net loss per share ................... $ (1.71) $ (4.13) $ (2.11) ============ ============ ===========
If the Company had reported net income, the calculation of diluted loss per share would have included approximately an additional 1,215,271, 9,866,258 and 5,226,544 common equivalent shares related to the outstanding stock options, shares subject to repurchase and warrants not included above (determined using the treasury stock method) for the years ended December 31, 2001, 2000, and 1999, respectively. Income Taxes The Company accounts for income taxes in accordance with FASB Statement No. 109, "Accounting for Income Taxes" ("FASB 109"), which requires the use of the liability method in accounting for income taxes. Under FASB 109, deferred tax assets and liabilities are measured based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Recent Accounting Pronouncements In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. SFAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under F-11 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. SFAS 142 will have no affect on the Company's financial statements in that all goodwill and intangible assets have been written off due to impairment during 2001. 2. BUSINESS ACQUISITION Effective May 26, 2000, the Company acquired Globalware Computing, Inc. ("Globalware"), a company which develops and sells software designed to increase connectivity between business and personal databases using handheld devices, in a transaction accounted for as a purchase. The operations of Globalware are included in the consolidated statement of operations from the date of acquisition. The purchase consideration was approximately $17.1 million consisting of 1,933,300 shares of preferred stock with a fair value of $15,500,000, stock options to acquire 180,438 shares of common stock with a fair value of $1,400,000, and approximately $200,000 of acquisition costs. The fair values of equity securities issued by the Company in the acquisition were determined as follows: common stock--$8.00 per share based on a discount from recent per share prices of preferred stock sales to reflect the superior rights of the preferred stock; and common stock options--$8.00 per share based on a fair value computation as of the acquisition date using the Black-Scholes valuation mode. The purchase consideration was allocated to the acquired assets and assumed liabilities based on deemed fair values as follows (in thousands): Net tangible assets.............................................. $ 666 Intangible assets: Purchased technology........................................ 3,100 Assembled workforce......................................... 530 Goodwill.................................................... 12,214 ------- Total intangible assets................................ 15,844 Purchased in-process research and development charged to operations for the year ended December 31, 2000............. 600 ------- Total purchase consideration........................... $17,110 ======= Goodwill, purchased technology and assembled workforce arising from the acquisition were being amortized on a straight-line basis over three years prior to the identification of impairment. See Note 9 for a further discussion of the impairment of goodwill and other intangible assets. Purchased in-process research and development consists of a single project to develop connectivity software that enables end users to conduct wireless and modem synchronization from Palm devices to the Lotus Notes server. This tool has been added to the Company's suite of products. The Company's management is primarily responsible for estimating the fair value of the purchased in-process research and development. The Company estimated the revenues, costs and resulting net cash flows from the project, and discounted the net cash flows back to their net present value. These estimates were based on several assumptions, including those summarized below. The resultant value was then adjusted to reflect only the value creation effort of Globalware prior to the acquisition and further reduction by the estimated value of core technology, which was included in capitalized purchased technology. F-12 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 Revenues and operating profit attributable to the in-process research and development were estimated over a three-year projection period. The resulting projected net cash flows were discounted to their present value using a discount rate of 23%, which was calculated based on the weighted-average cost of capital, adjusted for the technology risk associated with the purchased in-process research and development. The technology risk was considered to be significant due to the rapid pace of technological change in the software industry. The following unaudited pro forma adjusted summary represents the consolidated results of operations for the year ended December 31, 2000 and 1999 as if the acquisition of Globalware had been consummated on January 1, 1999 and is not intended to be indicative of future results (in thousands, except per share amounts) (unaudited). Year ended December 31, --------------------- 2000 1999 -------- -------- Pro forma adjusted total revenues ...................... $ 17,281 $ 4,324 Pro forma adjusted net loss ............................ (51,359) (14,190) Pro forma adjusted net loss per share--basic and diluted $ (3.80) $ (2.25) The pro forma results of operations include historical operations of the Company and Globalware adjusted to reflect certain pro forma adjustments, including amortization of goodwill and other intangible assets arising from the acquisition and do not include the charge for purchased in-process research and development of $600,000 since it is a nonrecurring charge. These results do not purport to be indicative of what would have occurred had the acquisition been made as of those dates or the results of operations which may occur in future periods. 3. SHORT-TERM INVESTMENTS The following is a summary of fair value of available for sale securities at December 31, 2001 (in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Money market mutual funds............... $ 41,152 $ -- $ -- $ 41,152 --------- --------- ---------- -------- $ 41,152 $__-- $ (_--_) $ 41,152 ========= ========= ========== ========
The following is a summary of fair value of available for sale securities at December 31, 2000 (in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ---------- ---------- -------- Money market mutual funds............... $ 23,051 $ -- $ -- $ 23,051 Auction rate preferred stock............ 9,785 -- -- 9,785 Corporate bonds and commercial paper.... 38,540 6 (10) 38,536 -------- ------- --------- -------- $ 71,376 $ ____6 $ (__10) $ 71,372 ========= ========= ========= ========
F-13 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 December 31, ----------------------- 2001 2000 ------- ------- Included in cash and cash equivalents $41,152 $54,940 Included in short-term investments -- 16,432 ------- ------- $41,152 $71,372 ======= ======= 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): December 31, ------------------- 2001 2000 ------- ------- Computers and equipment........................... $ 6,120 $ 5,275 Furniture, fixtures and improvements.............. 4,468 3,954 ------- ------- 10,588 9,229 Less accumulated depreciation and amortization.... (3,698) (1,231) ------- ------- $ 6,890 $ 7,998 ======= ======= 5. GOODWILL AND OTHER INTANGIBLE ASSETS All goodwill and other intangible assets were written off in 2001. See Note 9 for a discussion of the impairment and write-down of these assets. Goodwill and other intangible assets consisted of the following at December 31, 2000 (in thousands): Life (years) ------------ Purchased technology......................... $ 3,100 3 Assembled workforce.......................... 530 3 Prepaid technology royalties................. 40 3 Goodwill..................................... 12,214 3 -------- Goodwill and other intangible assets......... 15,884 Accumulation amortization.................... (3,081) -------- Goodwill and other intangible assets, net.... $ 12,803 ======== Amortization of goodwill and other intangible assets amounted to approximately $2,640,000 and $3,081,000 for the years ended December 31, 2001 and 2000, respectively. The Company did not have goodwill or other intangible assets at December 31, 1999. 6. INCOME TAXES There has been no provision for U.S. federal, state or foreign income taxes for any period as the Company has incurred operating losses in all periods and for all jurisdictions. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows (in thousands): December 31, -------------------- 2001 2000 ------- ------- Deferred tax assets: Net operating loss carryforwards............. $28,314 $13,985 Deferred revenue............................. 725 976 Capitalized research and development costs... 1,107 543 Research credit carryforwards................ 1,467 740 Other........................................ 2,446 944 ------- ------- Total deferred tax assets........................ 34,059 17,188 Valuation allowance.............................. (34,059) (17,188) ------- ------- Net deferred tax assets.......................... $ -- $ -- ======= ======= F-14 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $16,871,000, and $13,286,000 during the years ended December 31, 2001 and 2000, respectively. As of December 31, 2001, the Company had net operating loss carryforwards for federal income tax purposes of approximately $68 million, which expire in fiscal years 2012 through 2021 and federal research and development tax credits of approximately $900,000 which expire in the years 2012 through 2021. Utilization of the Company's net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. 7. BANK LINE OF CREDIT AGREEMENT In January 1998, the Company entered into a line of credit agreement with a bank which provided for borrowings of up to $300,000. Borrowings of $40,000 were outstanding under the line of credit at December 31, 2000. Borrowings under the line of credit bear interest at the bank's prime plus 0.5% (9.5% at December 31, 2000). The line of credit matured in July 2001, and borrowings were repaid in full. Outstanding borrowings under the agreement were collateralized by substantially all the Company's assets. 8. STOCKHOLDERS' EQUITY Common Stock In October 2000, the Company sold 6,325,000 shares of common stock in its initial public offering, including the underwriters over-allotment of 825,000 shares, with proceeds, net of commissions, to the Company of approximately $68.3 million. In conjunction with the initial public offering, all of the then outstanding shares of Series A, B, C, D and E of the Company's preferred stock converted into shares of common stock on a one-to-one basis. Preferred Stock Effective September 2000, the stockholders of the Company approved an amendment to the Company's certificate of incorporation authorizing 10,000,000 shares of preferred stock. The Board of Directors has the authority to issue the preferred stock in one or more series and to fix its rights, preferences, privileges, and restrictions, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, and the number of shares constituting any series or designation of the series. Warrants On February 1, 2000, the Company issued a warrant to purchase 117,558 shares of series D preferred stock at an exercise price of $8.36 per share. The warrant was issued in connection with a Content and Service agreement pursuant to which the Company and Yahoo! have agreed to co-brand their content and make it available to users of their services. The service component of the agreement provides that the Company agrees to make the AvantGo Mobile Internet service, including but not limited to Yahoo!'s content, available to Yahoo! users. A total of 58,779 shares vested at the closing of the Company's Series D Preferred Stock financing in March 2000. The remaining shares vested on the effective date of the F-15 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 Company's initial public offering. The warrant was exercised in October 2000 in a net issuance for a total of 71,562 shares of common stock. The fair value of $437,000 was estimated using the Black-Scholes valuation model with the following assumptions: risk-free interest rate of 6.50%, expected life of 3 years, expected dividend yield of 0%, and volatility of 70%. The fair value of this warrant is being charged to operations over the term of the business arrangement. The company issued a second warrant on February 1, 2000 to purchase 117,558 shares of common stock at the average fair value of the company's common stock over the most recent twenty business days before the vesting date. The warrant expired when the Company agreed to purchase $1,000,000 of advertising from Yahoo, in accordance with terms of the warrant. In March 2000, the company entered into a software license agreement and three year Channel Management Agreement (Agreements). In connection with these Agreements, the Company issued a warrant to purchase 358,851 shares of Series D preferred stock at an exercise price of $8.36 per share, which converted to a warrant for common stock upon the completion of the Company's initial public offering. The warrant is immediately exercisable and non-forfeitable and expires three years from the issue date. The fair value of the warrant of $1,521,000 was calculated using the Black-Scholes valuation model with the following assumptions: risk-free interest rate of 6.5%; expected life of 3 years; expected dividend yield of 0%; and volatility rate of 70%. The estimated fair value was originally recorded in equity and is being amortized as a reduction to revenue over the three-year term of the Agreements. Employee Stock Purchase Plan The Board of Directors adopted the 2000 Employee Stock Purchase Plan (the "ESPP") in May 2000 that was effective upon the completion of the Company's initial public offering of its common stock. At December 31, 2001, a total of 694,737 shares of common stock have been reserved for issuance under the ESPP, of which 362,742 are available for issuance as of December 31, 2001. The Plan provides for an automatic increase in the Plan pool each January 1. The Plan consists of four six-month purchase periods in each two-year offering period. Shares may be purchased under the Plan at 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period or the fair market value of the common stock on the last day of the applicable purchase period. As of December 31, 2001, a total of 331,995 shares have been issued under the ESPP. Stock Option Plans The Company reserved 13,213,600 shares of common stock under the 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan provides for incentive stock options, as defined by the Internal Revenue Code, to be granted to employees, at an exercise price not less than 100% of the fair value at the grant date as determined by the Board of Directors, unless the optionee is a 10% shareholder, in which case the option price will not be less than 110% of such fair market value. The 1997 Plan also provides for nonqualified stock options to be issued to employees and consultants at an exercise price of not less than 85% of the fair value at the grant date. Options granted generally have a maximum term of 10 years from grant date, are immediately exercisable and generally vest over a four-year period. The plan provides that shares issued under the plan prior to vesting are subject to repurchase by the Company upon termination of employment at the original price paid for the shares. The repurchase rights lapse at the rate of 25% after one year and ratably on a monthly basis for three years thereafter. As of December 31, 2001, 498,252 shares were subject to repurchase. A total of 1,143,448 shares were not issued under the 1997 Plan and were added to the options available for issuance under the 2000 Stock Incentive Plan (the "2000 Plan"). In May 2000, the Board of Directors adopted the 2000 Stock Incentive Plan. There are 4,367,131 shares of common stock authorized for issuance under the plan which includes 1,143,448 shares reserved but not granted under the 1997 Plan and returned to the 2000 Plan upon cancellation of the unexercised options. The terms of the 2000 Plan are substantially similar to the 1997 Plan, except that options cannot be exercised prior to vesting, and there are no repurchase rights. On May 26, 2000, the Company acquired Globalware Computing by merger and assumed all stock options outstanding under the Globalware Computing, Inc. Stock Option Plan (the "Globalware Plan"). F-16 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 There are 180,438 shares of common stock authorized for issuance under the plan. The assumed options are exercisable for shares of the Company's common stock. The terms of the Globalware Plan are substantially similar to the 2000 Plan. No additional options will be issued under the Globalware stock option plan. The Company has reserved 1,700,000 shares of common stock under the 2001 Stock Option Plan (the "2001 Plan"). The 2001 Plan provides for nonqualified stock options, as defined by the Internal Revenue Code, to be granted to employees and consultants, at an exercise price not less than 85% of the fair value at the grant date as determined by the Board of Directors. Options granted generally have a maximum term of 10 years from grant date, cannot be exercised prior to vesting, and generally vest over a four-year period. A summary of the Company's stock option activity under the Company's stock option plans follows: Weighted- Number of Average Shares Exercise Price ---------- -------------- Outstanding at December 31, 1998 ........ 541,200 0.12 Granted ............................ 3,891,000 1.09 Exercised .......................... (1,805,942) 0.38 Canceled ........................... (30,000) 0.13 ---------- Outstanding at December 31, 1999 ........ 2,596,258 1.40 Granted ............................ 6,552,520 5.83 Exercised .......................... (1,794,445) 2.37 Canceled ........................... (234,587) 4.45 ---------- Outstanding at December 31, 2000 ........ 7,119,746 5.12 Granted ............................ 4,530,050 2.64 Exercised .......................... (387,826) 0.61 Restricted stock grant ............. (60,000) 1.05 Canceled ........................... (3,291,997) 5.12 ---------- Outstanding at December 31, 2001 ........ 7,909,973 $ 3.95 ========== The following table summarizes information about stock options outstanding and exercisable at December 31, 2001:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Remaining Weighted- Weighted- Contractual Average Average Range of Number of Life Exercise Number of Exercise Exercise Prices Shares (in Years) Price Shares Price --------------- --------- ----------- --------- --------- --------- $0.03--0.90 131,646 7.44 $ 0.29 94,892 $ 0.11 1.07--1.98 2,051,670 9.10 1.24 350,720 1.50 2.00--2.90 2,051,641 8.28 2.31 1,736,641 2.31 3.03--3.75 1,518,061 9.17 3.49 136,019 3.39 4.50--5.78 150,650 8.75 5.13 78,848 5.03 6.00--7.50 165,275 8.91 6.62 53,525 6.02 8.00--9.94 1,677,030 8.64 8.81 1,634,811 8.78 10.00--12.00 155,000 8.75 11.93 150,875 11.98 16.13 9,000 8.80 16.13 2,625 16.13 --------- -------- Total 7,909,973 8.27 3.95 4,230,957 5.17
F-17 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 Shares Reserved for Future Issuance As of December 31, 2001, shares of common stock reserved for future issuance were as follows: Stock options available for grant 2,601,151 Stock options outstanding 7,909,973 Shares reserved under ESPP 362,742 Warrants outstanding 358,851 ---------- Total shares reserved for future issuance 11,232,717 ========== Pro Forma Disclosure of the Effect of Stock-Based Compensation Pro forma information regarding results of operations and net loss per share is required by FASB 123, which also requires that the information be determined as if the Company had accounted for its employee stock options under the fair value method of FASB 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: a risk-free interest rate of 6.0%, no dividend yield, a weighted average expected life of the option of 4.5 years and volatility factors of 0, 0.7 and 1.5 for the years ended December 31, 1999, 2000 and 2001 respectively. The option valuation models are developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the options. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation cost for the Company's stock-based compensation plans been determined using the fair value at the grant dates for awards under those plans calculated using the minimum value method of FASB 123, the Company's net loss and pro forma basic and diluted net loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share amounts):
Year Ended December 31, ----------------------------------- 2001 2000 1999 --------- --------- -------- Pro forma net loss $ (58,466) $ (51,096) $ (6,411) Pro forma basic and diluted net loss per share $ (1.78) $ (4.23) $ (1.46)
The weighted average fair value of options granted, which is the value assigned to the options under FASB 123, was $1.63, $4.35,and $3.18 for options granted during the years ended December 31, 2001, 2000, and 1999, respectively. The pro forma impact of options on the net loss for the years ended December 31, 2001, 2000 and 1999 is not representative of the effects on net income (loss) for future years, as future years will include the effects of additional years of stock option grants. Deferred Stock Compensation The Company recorded deferred stock compensation of $0, $17,636,000, and $8,186,000 during the years ended December 31, 2001, 2000, and 1999, respectively, representing the difference between the exercise price and the deemed fair value for financial accounting purposes of the Company's common stock on the date the stock options were granted. The Company recorded a reduction in deferred stock compensation of $2,888,000 in the year ended December 31, 2001 due to cancellations of stock options F-18 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 upon the termination of employees related to our restructurings (see Note 9). In the absence of a public market for the Company's common stock, the deemed fair value was based on the price per share of recent preferred stock financings. These amounts are being amortized by charges to operations over the vesting periods of the individual stock options using a graded vesting method. Such amortization amounted to approximately $6,504,000, $11,998,000, and $2,432,000 for the years ended December 31, 2001, 2000, and 1999, respectively. The expected annual amortization for stock options granted through December 31, 2001, (assuming no cancellations) for the next three years will be as follows: 2002........................... $2,075,000 2003........................... 649,000 2004........................... 28,000 The Company also recorded deferred stock compensation of approximately $0, $582,000 and $1,509,000 during the years ended December 31, 2001, 2000 and 1999, respectively, relating to the issuance of 0, 174,000 and 266,000 of consultant options for administrative and sales and marketing services. These amounts were computed using the Black-Scholes option valuation model. Unvested shares will be remeasured at each measurement date, as they are variable awards, and the related amortization will be charged to operations over the remaining term of the related consulting agreements. Such amortization amounted to approximately $57,000, $1,345,000 and $173,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The assumptions used to compute the value of the options at the grant date under Black-Scholes are as follows: expected volatility, 0.7; expected life, 5 years; expected dividend yield, 0%; and risk-free interest rate, 6.0%. Notes Receivable From Stockholders During 2001, 2000 and 1999, the Company issued $0, $948,000 and $100,000, respectively, of full recourse notes receivable from stockholders which bear interest at rates ranging from 6.5% to 8.5% per annum in consideration for the exercise of stock options and the purchase of Series D Preferred Stock. During 2000, a note receivable of $342,000 was repaid in full plus interest. During 2001, a note receivable of $204,000 was repaid in full plus interest. The notes are collateralized by assets and mature on various dates through fiscal 2005. 9. RESTRUCTURING AND OTHER IMPAIRMENT CHARGES Restructuring Charges In response to new challenges in the business environment, in April 2001, management approved and the Company formally adopted and began to implement a restructuring program in an effort to reduce operating expenses. The restructuring charges were $2.8 million, which included $2.4 million related to excess leased space at one of the Company's Hayward facilities, the impairment of assets of $22,000, and $415,000 related to employee termination costs associated with the elimination of 56 positions, most of which occurred in the United States, and affected employees at all levels of the Company. As of April 30, 2001, all of the affected employees had been notified and the majority of these terminations were completed. In July 2001, management approved and the Company adopted and began to implement an additional restructuring program in an effort to reduce operating expenses that resulted in aggregate charges of $9.8 million. These charges included $687,000 related to excess leased space at the Company's Chicago facility, which was closed in July, and the impairment of assets of $108,000. The Company also revised its estimate of the restructuring charge of one of its Hayward facilities resulting in an additional restructuring charge of $406,000. Restructuring charges also included $530,000 related to employee termination costs associated with the elimination of 28 positions, most of which occurred in the United States, and affected employees at all levels of the Company. As of July 31, 2001, all of the affected employees had been notified and the majority of these terminations were completed. The revised estimate of excess payments on the remaining Hayward facility lease costs of $2.4 million extends through September 2007. The estimate of payments on the remaining Chicago facility costs F-19 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 of $508,000 extends through August 2005. Restructuring and other impairment charges also included a write-off of goodwill of $7.5 million and the write-off of acquired workforce of $339,000, discussed further below. In November 2001, the Company adopted and began to implement a further restructuring program in an effort to reduce operating expenses that resulted in aggregate charges of $2.5 million. These charges included $557,000 related to excess space at the Company's San Mateo facility, which was closed in December 2001. The Company also revised its estimates of the restructuring charges of its Chicago facility and one of its Hayward facilities resulting in additional charges of $147,000 and $1,098,000, respectively. Restructuring charges also included $808,000 related to employee termination costs and accelerated vesting on stock options associated with the elimination of 58 positions, most of which occurred in the U.S. and affected employees at all levels of the Company. As of December 31, 2001, all of the affected employees had been notified and the majority of the terminations were completed. The outstanding liability associated with the employee terminations was $325,000 as of December 31, 2001. The revised estimate of excess lease payments on the remaining Hayward facility costs of $3.3 million extends through September 2007. The revised estimate of payments on the remaining Chicago facility lease costs of $574,000 extends through August 2005. The remaining payments on the San Mateo facility lease costs of $243,000 extend through May 2002. The following table sets forth the restructuring activity during the year ended December 31, 2001 (in thousands):
Total Restructuring Cash Non-cash Balance at Charges Expenditures Expenditures December 31, 2001 ------- ------- ------- ----------------- Facility lease costs .......... $ 5,299 $ (761) $ (405) $4,133 Employee termination costs .... 1,753 (1,148) (280) 325 Excess equipment .............. 130 -- (130) -- Goodwill ...................... 7,544 -- (7,544) -- Acquired workforce ............ 339 -- (339) -- ------- ------- ------- ------ Total ......................... $15,065 $(1,909) $(8,698) $4,458
At December 31, 2001, the current portion of the restructuring liability of $2,241,000 is included in accrued liabilities; the non-current portion of $2,217,000 is included in accrued restructuring charges. Impairment Write-down of Goodwill, Acquired Workforce, and Core Technology In September 2001, management identified indicators of possible impairment of its long-lived assets, consisting of goodwill, acquired workforce and core technology associated with the acquisition of Globalware Computing in May 2000. Such indicators included an overall decline in information technology spending, and anticipated increased pressure from competitors. During July 2001, the Company closed its Chicago office and terminated the employees at that location. Consequently, the value of the acquired workforce of $339,000 was written off and included in restructuring charges. The Company performed asset impairment tests for the other identified asset categories, goodwill and core technology. The test for goodwill was performed by comparing the expected undiscounted cash flows for a five-year period, plus a terminal value for future cash flows to the total carrying amount of goodwill. The assumptions supporting the estimated cash flows, and an estimated terminal value, reflect management's F-20 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 best estimates. Based on the result of this test, the Company determined that the carrying amount of the goodwill was impaired. The Company determined the fair value of the goodwill to be zero. Fair value was determined using the discounted cash flow method, using a discount rate of 20% and an estimated residual value. The discount rate was based upon the weighted average cost of capital for the Company and comparable companies. The assumptions supporting the discounted cash flow model reflect management's best estimates. A write-down of goodwill totaling $7.5 million was recorded, reflecting the write off of the entire balance of goodwill, and is included in the line item, "Restructuring and other impairment charges". The test for core technology was performed by comparing the estimated future gross revenues from the product reduced by the estimated future direct costs, including the costs of performing maintenance and customer support required to satisfy the Company's responsibility. The assumptions supporting the estimated future gross revenues and direct costs reflect management's best estimates. Based on the result of this test, the Company determined that the carrying amount of the core technology was impaired and should be written down to zero. 10. COMMITMENTS Leases The Company leases its facilities under various noncancelable operating leases that expire at various dates through 2007. Rent expense under operating lease arrangements amounted to $3,004,052, $1,537,000, and $374,000 for the years ended December 31, 2001, 2000, and 1999 respectively. The capital lease obligations are paid in full. Future minimum payments under operating leases (of which $4,123,180 has been accrued for in connection with our restructuring plans) are as follows (in thousands): Year ending December 31, 2002........................................ $ 3,022 2003........................................ 2,390 2004........................................ 2,484 2005........................................ 2,410 2006........................................ 2,290 Thereafter.................................. 1,769 ------- $14,365 ======= The Company maintains two letters of credit totaling $3,438,000 held as collateral for the operating leases for two of the Company's facilities. 11. LEGAL PROCEEDINGS In October 2001, a purported shareholder class action lawsuit was filed in the United States District Court for the Southern District of New York against the Company, certain of its officers and directors, and the underwriters of its initial public offering. The suit purports to be a class action filed on behalf of purchasers of the Company's common stock during the period from September 27, 2000 to December 6, 2000. The complaint alleges that the underwriter defendants agreed to allocate stock in the Company's initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for the Company's initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The complaint seeks unspecified damages on behalf of the purported class. Over 300 companies involved in an initial public offering have been named as defendants in nearly identical lawsuits filed by some of the same plaintiffs' law firms. We believe we have meritorious defenses, and we intend to defend the action F-21 AVANTGO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 vigorously; however, due to inherent uncertainties in litigation, we cannot predict accurately the ultimate outcome of the litigation. An adverse judgment in a large monetary amount could have a material adverse impact on our financial position, and consequently our business and results of operations. 12. BUSINESS SEGMENT INFORMATION The Company operates in a single operating segment, providing software and services that enable and enhance the use of Internet-based content and corporate applications to mobile devices, including personal digital assistants and Internet-enabled phones. Geographic Information The Company operates in North America and Europe. Approximately 16% of revenues were derived from outside North America during 2001. Less than 10% of revenues were derived from outside North America in 2000 and 1999. At December 31, 2001, 2000 and 1999, less than 10% of the Company's assets were located outside North America. 13. EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan that allows eligible employees to contribute up to 15% of their pretax salary, subject to annual limits. Contributions by the Company are at the discretion of the Board of Directors. No discretionary contributions have been made by the Company to date. 14. RELATED PARTY TRANSACTION The Company has entered into two consulting agreements with R.B. Webber & Company, Inc., which is related to one of the Company's directors. Pursuant to these consulting agreements, R.B. Webber & Company, Inc. has provided consulting services to the Company with respect to the development of the Company's business plan and the performance of a market study. The Company paid R.B. Webber & Company, Inc. $36,787, $392,000, and $115,000 for such services during the years ended December 31, 2001, 2000, and 1999 respectively. 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table contains, for the period presented, selected data from our consolidated Statements of Operations. The data has been derived from our unaudited consolidated financial statements, and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of the results of operations for these periods.
[In thousands, except per share data] Three Months Ended March 31 June 30 September 30 December 31 2001 Total revenues $ 7,307 $ 6,469 $ 4,897 $ 5,331 Total costs and expenses 20,889 21,218 26,754 13,814 Net loss (12,808) (13,928) (21,203) (8,236) Basic and diluted net loss per share (0.41) (0.43) (0.63) (0.24) 2000 Total revenues $ 1,661 $ 3,456 $ 4,636 $ 6,565 Total costs and expenses 9,309 14,952 21,324 23,153 Net loss (7,431) (11,001) (16,231) (15,175) Basic and diluted net loss per share (1.30) (1.69) (2.67) (0.50) 1999 Total revenues $ 228 $ 561 $ 1,052 $ 1,048 Total costs and expenses 1,343 2,132 3,591 5,351 Net loss (1,108) (1,565) (2,369) (4,173) Basic and diluted net loss per share (0.31) (0.38) (0.51) (0.82)
F-22 AVANTGO, INC. Schedule II: Valuation and Qualifying Accounts (in thousands)
Balance at Additions Balance at Beginning Charged End of of Period to Expense Period ---------- ---------- ---------- Year ended December 31, 2001: Allowance for doubtful accounts $240 $725 $965 ---------------------------------------- $240 $725 $965 ======================================== Year ended December 31, 2000: Allowance for doubtful accounts $ 50 $190 $240 ---------------------------------------- $ 50 $190 $240 ======================================== Year ended December 31, 1999: Allowance for doubtful accounts $ -- $ 50 $ 50 ---------------------------------------- $ -- $ 50 $ 50 ========================================
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