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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 000-23597
EXTENDED SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 82-0399670
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5777 NORTH MEEKER AVENUE, BOISE, ID 83713
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (208) 322-7575
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 $0.001 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of such stock on December 31, 2003 as
reported on the Nasdaq National Market, was approximately $52 million. Shares of
common stock held by each officer and director and by each person who own 5% or
more of the outstanding shares of common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of September 24, 2004, there were 15,101,701 shares outstanding of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders, to be filed subsequently, are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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EXTENDED SYSTEMS INCORPORATED
FISCAL YEAR 2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I.
Item 1. BUSINESS 4
Item 2. PROPERTIES 16
Item 3. LEGAL PROCEEDINGS 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 17
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 19
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 46
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 46
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 47
Item 9A. CONTROLS AND PROCEDURES 47
Item 9B. OTHER INFORMATION 47
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 47
Item 11. EXECUTIVE COMPENSATION 48
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 48
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 49
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 50
SIGNATURES 76
3
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS. IN THIS FORM 10-K, THE WORDS "MAY", "SHOULD", "EXPECTS,"
"ANTICIPATES," "BELIEVES," "INTENDS," "WILL", "SHOULD", "ESTIMATES", "PREDICTS",
"POTENTIAL", "CONTINUE", "STRATEGY", "PLANS", "OUTLOOK", "COULD", "PROJECT",
"FORECAST" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH
ARE BASED UPON INFORMATION CURRENTLY AVAILABLE TO US, SPEAK ONLY AS OF THE DATE
HEREOF AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. WE ASSUME NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE
RESULTS AND MARKET PRICE OF STOCK." YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED IN OTHER DOCUMENTS THAT WE FILE FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION, INCLUDING OUR QUARTERLY REPORTS ON FORM 10-Q TO BE
FILED IN FISCAL 2005. ALL PERIOD REFERENCES ARE TO OUR FISCAL YEARS ENDED JUNE
30, 2005, 2004, 2003 AND 2002, UNLESS OTHERWISE INDICATED.
PART I
ITEM 1. BUSINESS
OVERVIEW
We provide the expertise and solutions to help companies streamline their
business processes and accelerate product development through our adaptive
mobility software. Our software allows corporate enterprises, application
developers and device manufacturers to share, exchange, collaborate, manage and
deploy data effectively and easily across a wide range of mobile devices. This
creates a mobile ecosystem that accelerates companies into the mobile world.
Examples of our successes include:
o Deployment of our mobile applications in approximately 2,500
enterprise companies such as ThyssenKrupp, Airbus, BASF, and
DaimlerChrysler.
o Our software is being used in application development by approximately
1,500 independent software developers working for application software
vendors such as HDC Healthcare, QAD, Unique Solutions, m.able, and The
Messaging Architects.
o Integration of our technology into mobile devices or shipped together
with mobile phones by device manufacturers such as Siemens, Motorola,
SonyEricsson, palmOne, Panasonic, LG Electronics, Toshiba and Hewlett
Packard.
Founded in 1984, we are incorporated under the laws of the state of Delaware
with our headquarters located in Boise, Idaho. Our Internet address is
HTTP://WWW.EXTENDEDSYSTEMS.COM. On the "Investor Relations" section of our web
site, we post links to the following filings as soon as reasonably practicable
after they are electronically filed with or furnished to the United States
Securities and Exchange Commission (SEC): our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended. All such filings are available free
of charge. Information on our web site does not constitute a part of this Annual
Report on Form 10-K.
Our strategy is to:
o Build and maintain a full range of mobile products, technologies and
services that address the mobile application, mobile data management
and wireless connectivity needs of our customers.
o Deploy a worldwide sales, marketing, support and consulting
organization to serve our global 5000 customer base. Our organization
allows us to build customer intimacy with these enterprise customers
and facilitate their deployment of our software across multiple
geographies and industries.
o Provide leadership in the mobile connectivity market by continuing to
leverage alliances with wireless operators, mobile device
manufacturers and application developers within a variety of
industries. We also plan to maintain and expand our alliances with top
device manufacturers, semiconductor companies and application
developers that have a deep knowledge of their respective customer
base and industry. These
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alliances enhance our ability to develop innovative technology
products and influence the development of new platforms and protocols.
o Build a portfolio of mobile applications that are based on our
OneBridge Mobile Platform to market and sell to our customers through
both our direct to enterprise sales force and through our existing
global network of resellers, distributors and other channel partners.
These mobile applications will be developed internally by our
engineers and will be licensed from independent software development
companies.
o Acquire complementary businesses and technologies and integrate them
into our mobile strategy. In order to broaden our product offering and
extend our distribution channels, we have in the past and intend in
the future to pursue acquisitions of, and investments in, companies
with complementary products, technologies or distribution networks.
o Maintain and grow our existing base of network application developers
that use our enterprise database solutions as part of the applications
they offer to their customers. Additionally, we plan to expand our
application developer partnership network by marketing and
communicating the advantages of our recent product expansion and
enhancements.
INDUSTRY BACKGROUND
The use of mobile devices has increased tremendously as notebook computers,
personal digital assistants (PDAs) and mobile phones have achieved acceptance
and have become more advanced and increasingly capable of running complex
applications. Improvements in mobile technology and wireless infrastructure are
facilitating the ability to exchange both personal and corporate information,
thereby enabling mobile devices to be used for both data and voice applications.
IDC, a leading provider of technology and market data, predicts that 38.8
million converged mobile devices (devices that support both voice and data
capabilities) will ship in 2005 and 99.4 million will ship in 2008. IDC also
predicts that the United States population of mobile workers will reach 104.6
million by 2006. InStat/MDR, an analyst firm that follows the Bluetooth market,
forecasts Bluetooth chipset unit shipments will increase from 69 million in 2003
to 720 million in 2008; a compound annual growth rate of 60 percent. Revenue
from Bluetooth chips alone will reach $1.7 billion in 2008.
Mobile device manufacturers, corporate enterprises and application developers
face pressure to provide increased mobile functionality and proven value
propositions for their devices and applications. Many of these manufacturers,
enterprises and developers seek to incorporate mobile data communication
capabilities to enhance existing services or expand into new markets. Providing
flexible information access has historically been cumbersome and expensive
because it required combining products from multiple companies to arrive at a
mobile solution. The mobile ecosystem alone, while providing much of the
enabling technology, isn't sufficient to meet the needs of enterprises seeking a
solution that requires security and flexible support for applications across a
broad range of networks and devices.
There is a growing awareness of how mobile solutions can positively impact
company profitability, competitiveness, workforce productivity, time-to-market
and market leadership. Interest in the enabling devices and software has
resulted in the creation of a new market category. As companies have become
confident in the positive returns on investment from mobility projects, they
have been increasingly funding mobility projects to streamline their business
processes. Additionally mobile device manufacturers have increased their
reliance on short-range wireless connectivity software vendors to accelerate
their product development cycles.
With the growing adoption of ever-more powerful mobile devices based on multiple
operating systems, the availability of wireless networks using a myriad of
different technologies, and the requirement of mobile devices to support a wide
range of applications, a mobile middleware solution is required for enterprises
to deploy these technologies given the complexity inherent in a highly
heterogeneous ecosystem. These requirements include:
CORPORATE ENTERPRISES
Enterprises seek to advance their business by investing in mobility solutions
that use existing infrastructures, streamline business processes, increase
employee productivity, maintain corporate data security and deliver a clear
return on investment. As a result, enterprises require a solution that provides:
o MIDDLEWARE PLATFORM. Enterprises need a solution that enables
corporate information and data to be accessed, viewed and updated by
workers that are disconnected from the traditional wired corporate
infrastructure. The solutions must support a constantly evolving and
wide-range of mobile devices and
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operating systems. Additionally, the solution needs to support the
ability to access data from the multiple and often disparate
information systems that comprise the enterprise's IT environment. The
solution needs to support both the applications enterprises have
deployed today plus the applications they plan for the future.
o MOBILE MANAGEMENT AND SECURITY. Enterprises require data security. In
addition, enterprises increasingly require the ability to manage and
deploy mobile devices and applications with a similar infrastructure
so that enterprises can leverage their existing security protocols and
preferences.
o GROUPWARE APPLICATION. Enterprises have become dependent on the
exchange of e-mail, contact and calendar information. It is important
for them to be able to deploy this type of data on mobile devices
efficiently, cost effectively and easily.
o MOBILE WORKFORCE APPLICATIONS. Enterprise workforces have become
increasingly mobile to improve productivity and enhance customer
interaction. Enterprises require proven applications that can be
deployed on mobile devices for tasks such as sales force automation,
field service management, real-time collaboration and data access.
MOBILE APPLICATION DEVELOPERS
Application developers seek to expand their business by developing and selling
applications that will meet the demands of their customers. Increasingly their
customers are requesting applications for the mobile workforce that improve
workforce productivity and maintain data security. As a result, application
developers require a solution that provides:
o MIDDLEWARE PLATFORM. Application development organizations need a
solution that enables them to broaden their product offering by
mobilizing existing applications or developing new mobile applications
that they market and sell to enterprises. The solutions need to
support the current wide-range of mobile devices and operating systems
available in the marketplace plus evolve as new devices and operating
system updates come to market. The solutions must also provide
connectivity and the ability to extract information and data from the
wide-range enterprise application systems available in the
marketplace.
o MOBILE MANAGEMENT AND SECURITY. Applications development organizations
require a solution that assures their products can exchange data
securely and that their products are able to manage and deploy mobile
devices and applications.
o DATABASE SYSTEM. Application development organizations often choose a
database that is designed for lowest total cost of ownership and is
easy to manage across servers and mobile devices. Other important
aspects include the speed and reliability of the database as well as
the product's ability to scale and easily increase the number of
client users.
MOBILE DEVICE MANUFACTURERS
Mobile device manufacturers include companies who develop and market equipment
such as cellular phones, PDAs, converged devices, notebooks and even
automobiles. Device manufacturers seek to accelerate their time-to-market and
revenues with new mobile devices and applications that incorporate the latest
technologies and standards. As a result, manufacturers require a solution that
provides:
o MOBILE STANDARDS. With short development cycles and a requirement to
support a wide-range of mobile standards, manufacturers look for
solutions that support standards such as Bluetooth, IrDA and SyncML to
reduce the complexity of their product release.
o MOBILE PROFILES. The value of mobile devices is through the exchange
of information. Manufacturers want a solution that will communicate
with other devices but also has the framework to exchange data with a
wide range of applications.
o GROUPWARE APPLICATION. One of the first types of applications deployed
with mobile devices is exchange of contact, calendar and e-mail data
from the phone, PDA or converged device to a computer. Device
manufacturers often choose to bundle software that allows the mobile
devices to exchange this data with desktop and laptop PCs, enterprise
servers or the head unit of an automobile.
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OUR SOLUTION
We design, develop, sell and support adaptive mobile software that accelerates
development and deployment of solutions for corporate enterprises, applications
developers and device manufacturers. We have designed our products to:
o ENABLE MOBILE DATA MANAGEMENT. Our products enable enterprises,
developers and device manufacturers to access, synchronize and manage
information between mobile devices and computers, either directly to
the desktop or through enterprise networks. Using our products,
enterprises can connect their users wirelessly to a wide range of
devices; manage information between their mobile devices application
servers such as enterprise messaging including, Microsoft Exchange and
IBM Notes; enterprise applications, such as customer resource
management (CRM) and enterprise resource management (ERP) including
Siebel and SAP; or enterprise databases via JDBC, XML data sources,
and ODBC database connectors.
o INCREASE PRODUCTIVITY AND USABILITY OF MOBILE DEVICES. Our adaptive
mobility products and services improve the management of information
and applications and provide convenient, wireless connectivity. These
products enable users to share data between their mobile devices on
demand accessing information over the wireless internet to enterprise
applications and database servers. We believe our products help mobile
users, developers and enterprises increase their productivity by using
mobile devices for a variety of new tasks.
o INCREASE VALUE AND USAGE OF MOBILE DEVICES AND COMMUNICATIONS
SERVICES. Our products provide the tools to enable device
manufacturers and application developers to design and enhance
products to meet the needs of both enterprises and users. Because our
technology enables cost-effective communication and the ability to
easily manage many disparate devices, we believe device manufacturers
and application developers are able to increase the value of the
products they sell, thereby encouraging increased adoption of those
products. In addition, we believe the increased adoption of mobile
devices will, in turn, drive increased usage of and loyalty to
providers of mobile communications services, thereby increasing
service providers' revenue opportunities and minimizing their costs.
o ENABLE WIRELESS CONNECTIVITY. Our products facilitate enterprise
automation and effective mobile workforce management by providing
wireless connectivity between disparate mobile devices and between
mobile devices and personal computers or enterprise networks. Our
products enable mobile workers to access networks or peripherals
within enterprise facilities and enable enterprises to extend
applications to users beyond the network environment and over the
Internet, without physical connections.
Our solutions for enterprise, developer and device manufacturers include:
ENTERPRISE MOBILITY SOLUTIONS
Our OneBridge family of products includes our OneBridge mobile middleware
platform, which provides the foundation upon which enterprise applications can
be extended to mobile workers. Increasing the productivity of mobile workers
through mobile applications requires a dependable, fault tolerant architecture
that ensures high availability of the application and data even when the
wireless networks are not available. The OneBridge platform delivers high
availability mobile business solution based on an open architecture model, which
allows enterprises to optimize their solutions over the current heterogeneous
environment of devices and networks. The product is offered in two
components--mobile platform and enterprise applications. The platform provides
the foundation for support for a wide range of mobile devices, communication for
both wired and wireless environments, authentication of users, enhanced device
security features, encryption of data, software deployment, reporting tools and
device management. Our enterprise applications provide a comprehensive suite of
pre-built applications that extends existing enterprise systems to mobile
devices such as groupware applications, sales force automation (SFA), customer
relationship management (CRM) and enterprise resource planning (ERP)
applications.
ONEBRIDGE MOBILE PLATFORM
o ONEBRIDGE MOBILE DATA SUITE gives enterprises the power to extend
enterprise applications to mobile workers. Our platform supports
mobile operating systems such as Microsoft Pocket PC, Microsoft Smart
Phone, Microsoft Windows, Palm OS, Symbian and browser-enabled mobile
phones. It provides a comprehensive set
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of mobility engines for pushing data, synchronizing data, accessing
data in real-time and creating transaction extensions to enterprise
applications. It also addresses issues such as encryption,
authenticated access, configuration and deployment of mobile devices.
Built on industry standard technologies like WAP, XML, LDAP, Web
Services and SyncML, it provides the capability to connect enterprise
applications to mobile applications. OneBridge Mobile Data Suite also
offers advanced adapters into various enterprise servers such as
Microsoft Exchange, IBM Notes, Siebel Sales, SAP, TIBCO, Microsoft SQL
Server, Oracle Database Server and others allowing existing systems to
be extended to a mobile world.
o ONEBRIDGE MOBILE SECURE enables enterprises to extend the
organization's security, data management, and access management
standards and policies to mobile devices. It allows administrators to
manage mobile users, mobile devices and mobile data whether the device
is connected, periodically connected or unconnected to the enterprise.
ONEBRIDGE MOBILE APPLICATIONS
o ONEBRIDGE MOBILE GROUPWARE delivers e-mail and PIM (calendar, contacts
and tasks) data to mobile workers when and where they need it
regardless of the device used, the connection method or the groupware
application. OneBridge Mobile Groupware provides users the option to
proactively "push" data to their device, access information online in
real-time, or synchronize data for use offline. OneBridge Mobile
Groupware supports both Lotus Domino and Microsoft Exchange servers
and Novell GroupWise through a third party partner, The Messaging
Architects.
o ONEBRIDGE MOBILE SALES allows an enterprise sales team using
smartphones or handheld devices to manage contacts, opportunities,
sales orders, and to update forecasting information while leveraging
existing SFA, ERP, and other enterprise solutions in the field.
o ONEBRIDGE MOBILE PHARMA is designed specifically for sales associates
within the pharmaceutical and related industries, that allows sales
associates to review and edit practitioner and institution
information, plan and report on their visits with target physicians,
share clinical studies, track samples, and even submit expense reports
and timesheets during downtime between appointments.
o ONEBRIDGE MOBILE FIELD SERVICE is a series of templates customers can
leverage to build a proprietary mobile solution that integrates with
their existing field service processes. It gives field technicians the
ability manage work orders, schedule appointments, prepare for service
calls en route, retrieve and update spare parts inventories, and
gather customer information and electronic signatures.
o XTNDCONNECT PC is a flexible desktop-based solution that enables
enterprise mobile users to synchronize and manage contacts, calendars,
tasks, e-mail, and notes between their mobile device and popular
personal computer applications such as Microsoft Outlook, Microsoft
Outlook Express and IBM Lotus Notes.
ENTERPRISE DATABASE SOLUTIONS
We provide enterprise developers, application software developers and value
added resellers with an enterprise database solution. We offer a complete, high
performance client/server data management system for stand-alone, networked,
Internet, and mobile database applications. Our product offering allows
developers the flexibility to combine powerful SQL statements and relational
data access methods with the performance and control of navigational commands.
It provides native development interfaces designed to leverage existing
knowledge of popular development environments. Using optimized data access it
provides security, stability, and data integrity with zero administration. Our
enterprise database solutions offer application developers a product that can
meet their demands for proven reliability, performance, and functionality as
well as a cost-effective solution for virtually any application development
environment.
o ADVANTAGE DATABASE SERVER is a scalable, client/server relational
database management system for networked, stand-alone, mobile and
Internet database applications. It allows developers to combine
powerful SQL statements and relational data access methods with the
performance and control of navigational commands and is designed to
deliver a low total cost of ownership with zero administration, making
it ideally suited for business environments without database
administrators.
o ADVANTAGE LOCAL SERVER allows Advantage Windows and Linux applications
access to data files located locally, in shared environments, and in
peer-to-peer environments. The Advantage Local Server is a
non-
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client/server solution and can be used to access data on computers
that are not running the Advantage Database Server. The Advantage
Local Server is a DLL for Windows and a shared object for Linux.
Advantage Local Server resides on the client machine and is called
directly, instead of sending requests to a remote Advantage Database
Server.
o ADVANTAGE REPLICATION allows Advantage Database Server customers to
maintain identical database information at distributed locations.
Advantage Replication is available via Extended Systems OneBridge
Mobile Data Suite. Replication allows for the synchronization of data
and/or subsets of data in a database across one or more systems. Using
replication, a consistent view of a database can be maintained.
OneBridge allows for scheduled replication of an Advantage database
from a corporate server to branch servers, as well as replication from
an Advantage server to a desktop, laptop, or mobile device.
o ADVANTAGE CLIENT SOLUTIONS AND DEVELOPMENT TOOLS are native and
seamless in their integration into existing applications allowing
replacement of existing database drivers with fully compatible
Advantage drivers. Advantage clients allow for development of new
applications in a wide variety of environments.
MOBILE DEVICE SOLUTIONS
Our mobile embedded products help manufacturers to streamline the development
process and rapidly integrate short-range wireless connectivity and
synchronization into converged mobile devices, mobile phones, PDAs, Microsoft
PC's and other mobile devices. Our products permit device manufacturers to
wirelessly connect and exchange data using either Bluetooth short-range radio
frequency or IrDA (Infrared Data Association) infrared technology, thereby
creating easy-to-use wireless connections. We have developed a complete suite of
embedded software development kits (SDKs) for use by device manufacturers
including handset and PDA manufacturers, original equipment manufacturers (OEM),
original design manufacturers (ODM) and contract electronics manufacturers
(CEM).
o XTNDACCESS BLUE SDK provides an efficient way to add reliable
Bluetooth radio communications and mobile profiles to embedded
devices. This software development kit is on the Bluetooth Special
Interest Group (SIG) Qualified Product List and includes certified
mobile profiles for Generic Access Service Discovery, Serial Port, FAX
and Dial-up Networking. Additional profile support is also available.
o XNTDACCESS IRDA SDK is a complete infrared software development kit
that provides an efficient way to add reliable IrDA-compliant
communications to embedded devices. The XTNDAccess IrFM SDK is an
add-on to the XTNDAccess IrDA SDK and provides the source code, tools
and documentation required to implement IrFM (infrared for financial
messaging) on a Personal Trusted Device (PTD) or a Point of Sales
(POS) terminal. It allows applications to perform a full array of
financial messaging transactions utilizing the IrFM Point and Pay
Profile.
o XTNDAccess IrDA Test Suite is a complete financial messaging and
object exchange (OBEX) application test tool and provides a set of
customizable tests that enable developers to quickly and easily test
their IrFM, POS, and PTD devices as well as OBEX-based mobile
communications applications. The test suite reduces the cost and time
needed to develop, test and debug IrFM and OBEX-based products.
o XTNDACCESS DATA SYNC CLIENT SDK is a client toolkit that enables
developers to implement the Data Sync synchronization protocol for a
wide range of embedded devices. Designed for client devices such as
cell phones, smart phones and personal digital assistant, the kit
provides a complete set of tools including portable source code,
easy-to-use API's and comprehensive documentation.
o XTNDCONNECT PC provides device manufacturers with a synchronization
solution that manages contacts, calendars, tasks, e-mail, and notes
between their mobile device and popular personal computer applications
such as Microsoft Outlook, Microsoft Outlook Express and Lotus Notes.
It is bundled with devices and supports 26 languages.
COMPETITION
The markets for our products are rapidly evolving and intensely competitive.
Further, the markets for our mobile product solutions are relatively new and
characterized by frequent product introductions, changing protocols and rapidly
developing technology. As mobile devices continue to grow in power and usage and
become a major component of enterprise information management, we expect new
competitors to enter these markets and existing
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competitors to expend increasing resources to develop enterprise mobility
database and mobile device solutions. As a result, we expect competition in
these markets to intensify.
ENTERPRISE MOBILITY SOLUTIONS
MOBILE APPLICATION SOLUTIONS
Our mobile groupware solutions and other mobile applications compete primarily
with products offered by iAnywhere, IBM, Infowave, Intellisync, Microsoft, JP
Mobile and RIM. We also compete with numerous smaller companies with customized
product offerings that focus on a particular vertical mobile application. We
believe that the primary competitive factors for these products are:
o ability to support a broad range of mobile device platforms and
multiple modes of synchronization such as push and browse;
o ability to combine groupware, device management, security and mobile
applications in a single platform;
o ability to support Microsoft Exchange, IBM Notes and Novell GroupWise
environments;
o speed and security of synchronization;
o ability to quickly and easily extend enterprise platforms, such as
SAP, Siebel, Oracle and DB2data, and applications to mobile devices;
and
o the solution providers' experience in the vertical market segment.
MOBILE PLATFORMS SOLUTIONS
Our mobile solutions platforms and tools compete primarily with products offered
by Dexterra, Everypath, iAnywhere (a division of Sybase), IBM, SAP, Intellisync
and Microsoft. We believe that the primary competitive factors for these
products are:
o ability to support a broad range of mobile device platforms and
multiple modes of synchronization such as push and browse;
o ability to combine groupware, device management, security and mobile
applications in a single platform;
o ability to quickly and easily extend enterprise platforms, such as
SAP, Siebel, Oracle and DB2data, and applications to mobile devices;
and
o the solution providers' experience in the vertical market segment.
ENTERPRISE DATABASE SOLUTIONS
Our client/server database products compete primarily with products offered by
Microsoft, through its SQL Server product, Interbase, Pervasive Software and
Oracle, through its Oracle Lite server product. We believe that the primary
competitive factors for these products are:
o ease of integration into developers' applications;
o the total cost of ownership;
o ease of use without a database administrator; and
o speed and reliability.
MOBILE DEVICE SOLUTIONS
Our short-range wireless connectivity product solutions and embedded desktop
synchronizations products compete primarily with in-house development and
products offered by IVT Corporation, Link Evolution, Open Interface, Agilent,
Intellisync, Embednet, CSR, Broadcom, Stonestreet One, and Telica. We believe
that the primary competitive factors for these products are:
o ability to support a broad range of user profiles and mobile device
platforms;
o interoperability between mobile devices;
o easy porting to any device platform; and
o on-going support for the latest industry specifications.
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We believe our solutions are differentiated from our competitors. Some of our
competitors, particularly platform providers, generate a substantial amount of
their sales from non-mobile solutions. Due to their less dedicated focus on the
mobility market, their solution offerings meets a narrower range of customer
mobility needs. For example, they tend to focus on a more limited set of mobile
devices or enterprise application solutions. We believe that our combined focus
on 1) delivering mobile application solutions that address specific business
requirements for our customers, 2) continuing our commitment to deliver an open
architected platform, and 3) securing the support of a growing number of
application vendors will continue to allow us to be successful. We have also
established a large customer base that relies on our solutions to streamline
their business processes and accelerate product development through our mobility
solutions. In addition, the mobility market is relatively new and is
characterized by frequent product introductions and new technology standards
that require a research and development and marketing organization that can
adapt and deliver solutions that meet customer needs. We believe our focus on
mobile solutions, our existing customer base and our flexibility to adapt to the
evolving market gives us an important differentiator in the marketplace.
PRODUCT DEVELOPMENT/RESEARCH AND DEVELOPMENT
OUR PRODUCT DEVELOPMENT OBJECTIVES ARE TO:
o develop the infrastructure and applications to provide solutions for
mobilizing and provisioning back-end enterprise systems;
o provide customers solutions of high quality, robust functionality, and
low overall total cost of ownership; and
o use industry and technology standards, where appropriate, across the
broadest array of enterprise devices.
Our product development staff is organized into teams consisting of software
engineers, software quality assurance engineers, technical writers, project
leads, and product managers. Working closely with our customers, analysts, and
sales & marketing consultants, we determine product functionality based upon
market requirements. We also factor in user feedback, which we obtain from our
sales force, technical support and professional services groups. In addition, we
strive to incorporate standard technologies where possible to minimize research
and development costs and ensure interoperability with other business solutions
employed by our customers.
In August 2003, we released a major upgrade to the OneBridge Mobile Groupware
platform, version 4.0. The platform helps enterprises to manage and extend the
Groupware solution to a variety of mobile devices through wired and wireless
connectivity. It provides users with the ability to browse, sync and push their
e-mail and contacts, calendar and task (PIM) information from both thin-client
and rich-client devices so they are up-to-date wherever they are. In addition,
it provides IT organizations with the ability to manage and secure a host of
different devices using a central server-based management system through the
authentication of users using established corporate authentication systems,
end-to-end encryption using FIPS 140-2 compliant encryption algorithms, and
software & hardware inventory tracking and management. Because OneBridge Mobile
Groupware is part of the OneBridge Mobile Solutions Platform, enterprises can
add support for other enterprise systems like CRM, ERP and custom applications
to this platform and implement an integrated mobile platform solution.
In September 2003, we announced that the company is strengthening its database
management offering with the release of Advantage Database Server 7.0.
Significant new functionality incorporated into the company's Advantage Database
Server includes triggers, communications compression, full text search, and a
type-4 JDBC driver. With these product enhancements, Extended Systems continues
to provide commercial application developers with a client/server database
management solution that can be deployed on a variety of platforms.
In November 2003, we announced that the Advantage .NET Data Provider now
includes a seamless interface to any .NET development language. Advantage .NET
Data Provider creates a native interface for developers using Advantage Database
Server and any .NET development language, including Visual Studio .NET and
Borland C#Builder. With the addition of native access to .NET, Advantage
Database Server now provides a RDBMS solution for virtually any application
development environment on the market.
In December 2003, we released the XTNDAccess Car SDK, a software development kit
that enables the telematics industry to integrate user-friendly Bluetooth
wireless technology into the head unit of an automobile. XTNDAccess Car SDK will
help the telematics industry reduce development costs and shorten time-to-market
while ensuring strict compliance with the Bluetooth Special Interest Group's
(SIG) interoperability standards.
In January 2004, we released our OneBridge Mobile Groupware 4.1 product that
enabled mobile device users to have live, instant access to business
intelligence residing on corporate databases. Extended Systems is using its
IP-based
11
push technology, which currently enables users to have immediate access to
e-mail and to push other essential data into the field. Mobile employees -- such
as field service workers or sales representatives -- are now able to receive and
deliver information from and to corporate databases wirelessly, without user
initiation. Instant data delivery and real-time access to information in the
field can enable companies to boost productivity, improve accuracy, speed
response times and ultimately increase bottom-line profits.
In February 2004, we introduced the ExtendConnect Mobile Suite. There are three
major components to ExtendConnect Mobile Suite. The package includes a client
embedded SyncML SDK, a Windows communication suite, and our XTNDConnect PC
desktop synchronization software, which is bundled with mobile phones for use by
individuals. XTNDConnect PC supports Microsoft Outlook, IBM Notes, and other
groupware applications. Because a single experienced mobile solutions provider
provides all elements, cell phone manufacturers are assured that integration of
end-to-end data synchronization will be easy.
We maintain global development operations and have development centers in Boise,
Idaho; Toronto, Canada and Bristol, UK. We also have smaller development teams
in Corvallis, Oregon and Alpine, Utah. During the second half of fiscal 2004, we
began an initiative to add offshore development resources through an outsourcing
arrangement with a third party company in India. Operations in India are the
beginning of an outsourcing effort to expand our development capability and
capacity while maintaining our quality standards. We expect this operation to
continue to grow through the next fiscal year.
MARKETING, SALES AND DISTRIBUTION
We market and sell our adaptive mobility products and professional services
directly to enterprise customers and original equipment manufacturers ("OEMs").
We also market and sell our products through indirect sales channels, including
value-added resellers ("VARs"), distributors and systems integrators ("SIs").
Our enterprise customers include global 2000 companies as well as small to
medium-sized businesses, primarily in Europe and the Americas. We plan to grow
our market presence in Asia and the Pacific Rim by expanding the number of
VAR's, partners and other distributors with customers and relationships in this
geography. Additionally we sell to several of the world's largest mobile phone
and wireless semiconductor companies who embed our technology into their
products.
We market and license our device manufacturer products to our OEM or original
design manufacturer (ODM) customers through our global network of VAR's and
distributors. We support these resellers and also sell some products directly,
with our team of sales and technical professionals located in North America. We
have entered into strategic relationships with many of the world's largest
telematics suppliers, mobile phone manufacturers and component suppliers for
sales of our mobile device manufacturer products. Our OEM/ODM customers
integrate our software into their products, bundle our products with their
products, and some endorse our products in the marketplace. Mobile device
manufacturers incorporating our products include Siemens, Sony-Ericsson,
Motorola, LG Electronics, PalmOne, Hewlett-Packard and Visteon. We work directly
with OEM/ODM's to identify the requirements of new products in the design phase
for later market launch. We develop a proposal to address the customers'
technical and business requirements and typically confirm our products will meet
the technical specifications before the sales transaction is completed. The
sales cycle to achieve a customer design win for these products ranges from one
to nine months based on the customer's time to market requirements. Once a
design win has been achieved, the products containing our software products can
take from one to twelve months to reach the intended customer market.
We market our enterprise mobility and enterprise database products through both
our direct sales representatives and through a sales channel comprised of VAR's,
distributors, systems integrators and other resellers. In North America we
market and license our enterprise mobility solutions primarily through our
direct sales organization although we are building our indirect sales channels
to reach additional customers in North America. Our North American sales
representatives and technical pre-sales staff are located in sales territories
throughout the United States and Canada. In our EMEA region (Europe, Middle East
and Africa), we market and license our products through both our direct sales
force and through other channel partners. We also have sales representatives
based at our corporate headquarters that support our resellers and work to
expand the number of resellers in the Pacific Rim, Asia and Latin America.
A component of our plan is to grow our market presence through expanding our
value added indirect channels including:
12
APPLICATION DEVELOPERS
We market our enterprise mobility products and enterprise database solutions to
application developers. Our growth plans include broadening the portfolio of
available applications that include our mobile platform and database software.
This entails developing new relationships with many of the leading application
developers across a range of vertical markets for both large and mid-tier
enterprises, including healthcare, manufacturing, financial services, and the
public sector. These well established application partners bring both domain
expertise and large installed customer bases providing a ready market in which
to adopt mobile solutions. These leading application vendors have back-end
applications that comprise a part of the existing legacy application
infrastructure for enterprises in their target markets, and are in the best
position to extend these applications into the mobile environment. Embedding our
mobile platform into their applications, these partners generate the sales and
distribute our products as an integral part of their mobile solution.
SYSTEM INTEGRATORS AND MANAGED SERVICES PROVIDERS
Another channel to market for our mobile software products is through systems
integrators (SI's) whose professional services capabilities and in-depth
knowledge of customer's legacy environments enable them to build custom
applications according to specific customer requirements. We have worked
together with some of the world's largest systems integrators who have used our
products to build mobile applications for their customers. Some of our systems
integrator relationships include T-Systems, Software AG, Hewlett Packard,
Electronic Data Systems (EDS), and Computer Sciences Corporation (CSC) and we
are working to increase these and other SI's use of our products. Most systems
integration partners are authorized resellers of our products and some like EDS
and CSC use our products to deliver managed services.
To assist our direct sales teams and support our resellers and other channel
partners, we engage in a variety of marketing activities. Our marketing
personnel assist in generating new sales opportunities by creating various
marketing programs, updating our Web site, targeting additional strategic
relationships, advertising in industry and other publications, and conducting
public relations campaigns. We also participate in a number of trade shows and
industry events. We communicate with our installed customer base via newsletters
and by hosting web-based seminars. Our public relations strategy is designed to
convey our messages to appropriate audiences, and we reinforce this through our
ongoing communications with a number of key industry analysts and members of the
press. As of June 30, 2004 we are committed to have our sales and technical
support personnel located close to our customer locations. We maintained sales
and technical support offices primarily in Boise, Idaho; Bristol, UK and
Herrenberg, Germany. We also maintain smaller regional sales and support offices
in Paris, France, San Diego California; Corvallis, Oregon and Hertogenbosch,
Netherlands.
SERVICE AND SUPPORT
PROFESSIONAL SERVICES
Our professional services organization is staffed by qualified employees with
experience in the mobile application field. We provide our clients, as well as
our implementation partners, with consulting and deployment services, mobile
application design and development, work flow process for mobile workers and
comprehensive training and support to help achieve business goals with a quicker
return on investment. The professional services team consists of project
managers, business analysts and technologists. Our professional services
include:
o Project Advisory Services. Our consultants assess current or planned
mobile application needs, develop and document the project plan, and
deliver the design specification. We provide a configuration and
implementation roadmap to help meet business goals, including an
analysis of return on investment and business change management.
o Project Implementations. Our professional services consultants
individually, or as members of our project teams, implement and assist
in the configuration of our solutions to accelerate the project
deployment schedule and ensure a successful implementation process.
Such activities include the design, configuration and testing of our
deliverables as well as training and supporting the customer
organization during the rollout and when the applications go live. The
implementation activities also include the development and
configuration of interfaces to other enterprise solutions - either
commercial or in-house legacy systems, as needed based on the project.
13
o Business Analysis. We offer consulting services targeted at ensuring
the ability of our customers and implementation partners to deliver a
working solution. This includes consulting to determine strategies to
mobilize applications and develop estimates for the return on
investment for these mobile deployments.
o Custom Mobile Application Development. We have developed and
implemented successful mobile applications at enterprises in the
financial services, telecommunications, pharmaceuticals, retail
services, transportation and logistics, field service and utilities,
public sector and education, manufacturing, life sciences and
healthcare and other industries. We use a simple and standardized
methodology when developing and implementing customized mobile
solutions, based on the following five-step process:
o discover the need for a mobile solution which incorporates
business analysis and strategy consulting
o define the customer's business objectives and the benefits of
mobile technology to the customer's organization including the
project scope definition and ROI justifications and business case
formulation
o design the best mobile solution for the customer's users and
their needs
o develop a mobile solution using our mobile development tools, and
o deploy the solution to the customer's mobile users
TECHNICAL SUPPORT
Commitment to customer service and technical support is an essential component
of our ability to provide high levels of customer satisfaction and ensure the
success of our business. Our technical support teams interact regularly with
customers' network administrators and application developers and respond to
their needs. In the process of supporting our existing customers, our team is
also able to identify requirements for future products or product enhancements.
We offer a wide range of customer support services including multiple support
programs tailored to meet the needs of our customers. We also provide access to
the Extend Source web site that allows our customers to access information and a
wide range of support tools such as our on-line knowledge base, FAQs and
technical notes. These support services include a technical support hotline to
provide telephone support to our customers through a toll-free number. In
addition to our internal support, our independent distributors and resellers
provide service and support to certain customers.
OUR CUSTOMERS
To date we have licensed our software products to over 2500 enterprise customers
and 1500 independent software developers. We sell our products to enterprises
both directly and through a variety of channel partners including value added
resellers, distributors and other channel partners. We also sell to application
developers and device manufacturers. Extended Systems has a worldwide customers
base and key relationships with Computer Science Corporation, EDS, Hewlett
Packard, Janssen-Cilag, Microsoft, Motorola, palmOne, PalmSource, Siemens,
Software AG, SonyEricsson, Symbian and Toshiba. By giving mobile workers
real-time access to business critical information, Extended Systems has helped
companies like FedEx, 20th Century Fox and Otis Elevator improve operating
efficiencies and increase customer satisfaction.
INTELLECTUAL PROPERTY
Our success is significantly dependent on our proprietary technology and other
intellectual property. To protect our proprietary rights, we rely generally on
patent, copyright, trademark and trade secret laws. Additionally, we maintain
confidentiality agreements with many of our employees, consultants and
customers. Despite these protections, third parties might obtain and use our
technologies without authorization or develop similar technologies
independently. The steps we have taken may not prevent misappropriation of our
intellectual property, particularly in countries other than the United States
where laws or law enforcement practices may not protect our proprietary rights
as fully as in the United States.
We have entered into source code and design document escrow agreements with a
limited number of our customers requiring release of design details in some
circumstances. These agreements generally provide that these parties will have a
limited, non-exclusive right to use the code in the event that there is a
bankruptcy proceeding by or against us, if we cease to do business or if we fail
to meet our support obligations. We also provide our source code to foreign
language translation service providers and consultants to use in limited
circumstances.
14
We own 26 registered trademarks. We cannot assure you that any of our current or
future trademark applications will be approved. Even if these applications are
approved, any trademarks may be successfully challenged by others or
invalidated. There may be third parties using names similar to ours of which we
are unaware. If our trademark applications are not approved or if our trademarks
are invalidated because of prior third-party registrations, our use of these
marks could be restricted unless we enter into arrangements with these third
parties, which might not be available on commercially reasonable terms, if at
all.
We have been issued 14 patents; of which one expires in 2007 and 13 expire in
2010 and beyond. We also have 16 patents pending. We cannot assure you that any
of our current or future patent applications will be granted. Any of our patents
may be challenged, invalidated or circumvented and the rights granted under any
of our patents may not provide competitive advantages to us. If a blocking
patent is issued in the future to a third party, and we are not able to
distinguish our technologies, processes or methods from those covered under the
patent, we may need to either obtain a license or develop noninfringing
technologies, processes or methods with respect to that patent. We may not be
able to obtain a license on commercially reasonable terms, if at all, or design
around the patent, which could impair our ability to sell our products. Any
proprietary rights with respect to our technologies may not be viable or of
value in the future since the validity, enforceability and scope of protection
of proprietary rights in Internet-related industries are uncertain and still
evolving.
Other persons may claim that our technologies, processes or methods infringe
their patents. These claims may cause us to incur significant expenses and, if
successfully asserted against us, may cause us to pay substantial damages and
prevent us from selling some of our products, which would substantially harm our
business.
EMPLOYEES
As of June 30, 2004 we had 191 employees worldwide. None of our employees is
represented by a labor union or is subject to a collective bargaining agreement
with respect to his or her employment with us. We believe that our relations
with our employees are good.
EXECUTIVE OFFICERS
Our executive officers as of September 15, 2004 are as follows:
NAME AGE POSITION
- ---------------------- --- ------------------------------------------
Charles W. Jepson 58 Chief Executive Officer and President
Valerie A. Heusinkveld 45 Vice President of Finance, Chief Financial
Officer and Corporate Secretary
Nigel S. Doust 47 Vice President of Europe, Middle East and
Africa (EMEA)
Gregory T. Pappas 42 Vice President of Human Resources
Kerrin Pease 53 Vice President of Research and Development
Jeffrey M. Siegel 47 Vice President of Worldwide Marketing and
Chief Marketing Officer
Mark A. Willnerd 39 Vice.President of Business Development
CHARLES W. JEPSON was named Chief Executive Officer and President in August
2003. From February 2003 to August 2003, Mr. Jepson served as Vice President of
Sales and Marketing. He served as a member of our board of directors from
September 2001 to July 2003. Prior to joining us, Mr. Jepson was the Chairman,
President and CEO of Diligent Software Systems, a provider of e-procurement
software from July 2001 to October 2002. From June 2000 to July 2001, he was the
Senior Vice President of North American Field Operations at eGain
Communications, a provider of customer service software. From March 1998 to June
2000, Mr. Jepson was the President and Chief Executive Officer of Inference
Corporation, which was acquired by eGain in June 2000. From June 1997 to March
1998, Mr. Jepson was an independent consultant to small technology companies.
From March 1992 to May 1997, he was the President and Chief Executive Officer of
Interlink Computer Sciences.
VALERIE A. HEUSINKVELD was appointed Chief Financial Officer, Vice President of
Finance and Corporate Secretary in November 2003. Prior to joining the company,
Ms. Heusinkveld was an independent consultant to early stage companies in need
of hands-on management and seed capital. Before its sale to Cyprus
Semiconductor, she served as Chief Financial Officer at In-System Design, Inc.,
a fabless semiconductor company, from October 2000 until January 2002. From 1989
to 2000, Ms. Heusinkveld held senior management positions at TJ International,
Inc., where she was the Chief Financial Officer from December 1992 until the
sale of the company to Weyerhaeuser Company in 2000.
15
NIGEL S. DOUST has served as Vice President of EMEA since April 2003. Prior to
joining the company, Mr. Doust served as Vice President, International for
Diligent Software Systems, a provider of e-procurement software from September
2001 to February 2003. Prior to his tenure with Diligent, he was the Vice
President EMEA from 1999 to 2001 and Customer Service Director from 1998 to 1999
at eGain Communications. Previously he served as Divisional Manager, Business
Group Manager, and Technical Manager at Tangent International, a system
integrator.
GREGORY T. PAPPAS was appointed Vice President of Human Resources in July 2004.
Prior to joining the company, Mr. Pappas served as Vice President of Human
Resources and Administration for GlobalEnglish Corporation from 2000 to 2004.
From 1998 to 2000, he was Vice President of Human Resources and Administration
for Inference Corporation. From 1996 to 1998 Mr. Pappas was the Sr. Director of
Human Resources for Chordiant Software, Inc. and from 1993 to 1996, he held the
position of Human Resources Manager for Apple Computer, Inc. Prior to Apple
Computer, Mr. Pappas worked for the Northern Corporation in various operations
and human resources positions.
KERRIN PEASE has served as Vice President of Worldwide Research and Development
since November 2001. From 1999 to 2001, Mr. Pease served as Vice President,
Consulting and Development Americas, for GEAC Computer Corporation Limited, a
global provider of enterprise requirements planning (ERP) software and services.
From 1997 to 1999, Mr. Pease was Vice President, Consulting for Johnson Brown
Associates (JBA) International, a global provider of ERP software services. He
held various other positions with JBA from 1987 to 1997, including Product
Development Director, Operations Director UK/Europe and Regional Business
Manager. From 1980 to 1987, Mr. Pease served as Operations Manager for
Information Processing Services, a company that developed ERP products.
JEFFREY M. SIEGEL was appointed Vice President of Worldwide Marketing and Chief
Marketing Officer in May 2004. Prior to joining us, Mr. Siegel was the Vice
President, Enterprise for Symbian from 2002 to 2003 and Director of Market
Development at Microsoft from 2001 to 2002. Prior to Microsoft, he was Director
of Market Development for 3Com/Palm from 1997 to 2001 and held various positions
in enterprise sales and marketing for the computer systems group at HP from 1982
to 1997.
MARK A. WILLNERD was appointed Vice President of Business Development in
September 2002. Mr. Willnerd joined the Company in July 1989 and has held
numerous positions with increasing accountability throughout his tenure. Prior
to his appointment, he held the positions of Business Development Director and
Alliance and Product Manager for our products.
ITEM 2. PROPERTIES
Our corporate headquarters facility is located in Boise, Idaho where we conduct
research and development, marketing and sales, customer support, professional
services and administration activities. We currently lease our headquarters
facility pursuant to a sale-and-leaseback agreement that we entered into in
September 2003. Of the approximately 100,000 square foot facility that we lease,
approximately 52,000 square feet is unused space that we sublease to third
parties or have available for lease. We also lease sales, support, professional
services and development offices throughout the United States, Canada and
Europe. These leases expire at varying dates through 2013 and some include
renewals at our option. We believe that our existing facilities are adequate to
meet our current requirements and that suitable additional or substitute space
will be available as needed to accommodate expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
On June 29, 2004 AppForge, Inc. ("AppForge") filed a complaint against the
Company in the United States District Court for the District of Delaware. An
amended complaint was filed on August 12, 2004 joining Extended Systems of
Idaho, Inc. ("ESI-Idaho") and four European subsidiaries of the Company.
ESI-Idaho and AppForge are parties to a distribution and license agreement
related to certain AppForge software. AppForge alleges that the defendant ESI
companies have used AppForge's technology and trademarks in a manner not
authorized by the parties' agreement. The Company believes that its use and
distribution of AppForge's software has been within the scope of the parties'
agreement.
Since the parties' license agreement provides for arbitration of disputes,
ESI-Idaho filed a demand for arbitration with the American Arbitration
Association on August 3, 2004 seeking a declaration of the parties' respective
rights and obligations. At the same time, in the Delaware action, the ESI
defendants have moved the Court for dismissal or a stay of the case because the
parties' license agreement provides that arbitration is the sole forum for
resolution of disputes arising out of or related to the license and distribution
agreement.
16
We believe that we have meritorious defenses against this action and we will
continue to vigorously defend it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq National Market under the symbol
"XTND". The following table sets forth the high and low sales prices of our
common stock, based on the last daily sale, in each of our last eight fiscal
quarters:
HIGH LOW
----------------
FISCAL YEAR 2004
Fourth Quarter, ended June 30, 2004............ $ 7.15 $ 4.81
Third Quarter, ended March 31, 2004............ 6.58 4.35
Second Quarter, ended December 31, 2003........ 4.88 3.70
First Quarter, ended September 30, 2003........ 5.50 3.50
FISCAL YEAR 2003
Fourth Quarter, ended June 30, 2003............ $ 4.85 $ 1.61
Third Quarter, ended March 31, 2003............ 2.00 1.30
Second Quarter, ended December 31, 2002........ 2.48 1.40
First Quarter, ended September 30, 2002........ 3.30 1.40
On September 24, 2004, the last reported per share sale price of our common
stock on the Nasdaq National Market was $2.60 per share. The market for our
common stock is highly volatile. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results and Market Price of Stock."
According to our transfer agent's records, we had 317 stockholders of record as
of September 24, 2004. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these stockholders of
record.
We have not declared or paid any dividends on our common stock since September
1994. We currently anticipate that we will retain all future earnings for use in
the operation and expansion of our business and do not anticipate paying any
dividends in the foreseeable future.
The information required by this item regarding equity compensation plans is
incorporated by reference to the information set forth in Item 12 of this annual
report on Form 10-K.
We made no repurchase of our equity securities during our quarter ended June 30,
2004
17
ITEM 6. SELECTED FINANCIAL DATA
You should read the following consolidated selected financial data in
conjunction with our Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. Amounts are
in thousands, except per share amounts. As a result of discontinuing our
infrared hardware business in the first quarter of fiscal 2003, selling our
Singapore subsidiary in fiscal 2002 and selling certain assets and liabilities
of our printing solutions segment in fiscal 2001, we accounted for the results
of these operations as discontinued operations in accordance with Accounting
Principles Bulletin No. 30 and Statement of Financial Accounting Standards No.
144. Amounts for all periods in this Annual Report on Form 10-K, including the
financial statements and related notes, have been reclassified to reflect the
discontinued operations.
FOR THE YEARS ENDED JUNE 30, 2004 2003 2002 2001 2000
-----------------------------------------------------
Net revenue............................................................... $32,186 $27,534 $22,275 $ 26,910 $ 21,551
Gross margin.............................................................. 27,727 23,203 19,722 19,634 14,398
Restructuring charges..................................................... 1,446 597 213 1,066 -
Patent litigation fees, license and settlement............................ 3,425 1,240 - - -
Loss from operations...................................................... (3,798) (4,368) (9,316) (19,514)C (10,827)
Other income (expense), net............................................... 1,007 A 257 (4) 457 (89)
Interest expense.......................................................... (453) (307) (70) 1 (259)
Income tax provision (benefit)............................................ 94 (200) (2,257)B 7,228 D (3,436)
Loss from continuing operations........................................... (3,338) (4,218) (7,133) (26,284) (7,739)
Income (loss) from discontinued operations and gain (loss) from sale of
discontinued operations, (net)....................................... 88 458 (57) 2,810 2,754
Net loss.................................................................. (3,250) (3,760) (7,190) (23,474) (4,985)
Loss per share from continuing operations:
Basic and diluted................................................ (0.23) (0.31) (0.64) (2.48) (0.81)
Earnings (loss) per share from discontinued
operations:
Basic and diluted................................................ 0.00 0.03 (0.01) 0.26 0.29
Loss per share:
Basic and diluted................................................ (0.23) (0.28) (0.65) (2.22) (0.52)
Shares used in computing basic and diluted income (loss) per share........ 14,370 13,376 11,048 10,587 9,552
AS OF JUNE 30, 2004 2003 2002 2001 2000
-----------------------------------------------------
Cash and cash equivalents................................................. $ 7,225 $ 3,502 $ 5,439 $ 6,585 $ 6,191
Total assets.............................................................. 33,356 29,091 20,371 28,143 44,221
Long-term debt and other long-term liabilities............................ 4,970 494 - - -
Total stockholders' equity................................................ 19,156 19,256 13,088 18,938 37,715
(A) Other income (expense) includes $1.1 million of gain on the sale of excess
land at our Boise, Idaho headquarters facility.
(B) Our income tax benefit from continuing operations of $2.3 million was
partially offset by an income tax expense of $301 thousand from
discontinued operations. This net benefit of $1.8 million was primarily the
result of a $1.6 million tax refund we received due to a net operating loss
carryback resulting from a temporary increase in the carryback period as
part of the Job Creation and Worker Assistance Act of 2002. The balance of
the benefit relates primarily to a reserve that was reversed when we sold
our Singapore subsidiary.
(C) Our loss from operations includes $1.4 million in charges associated with
the terminated merger with Palm, Inc. included in general and
administrative expenses.
(D) Our income tax provision includes a $14.0 million valuation allowance
recorded against our deferred tax assets.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
INTRODUCTION
We begin Management's Discussion and Analysis of Results of Operations and
Financial Condition (MD&A) with and overview to give the reader management's
perspective on our results for fiscal 2004 and our general outlook for the
current fiscal year. This is followed by a discussion of the critical accounting
polices that we believe are important to understanding the assumptions and
judgments incorporated in our reported financial results. In the next section,
we discuss our Results of Operations for fiscal 2004 compared to fiscal 2003 and
for fiscal 2003 compared to fiscal 2002. We then provide an analysis of our
liquidity and capital resources.
This discussion and other parts of this Annual Report on Form 10-K contain
forward-looking statements (within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended). Such statements are based upon current
expectations that involve risks, uncertainties and assumptions, and we undertake
no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this report.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. These forward-looking statements
include words such as "may," "will," "should," "estimates," "predicts,"
"potential," "continue," "strategy," "believes," "anticipates," "plans,"
"expects," "intends," "outlook," "could," "estimate," "project," "forecast," or
similar expressions that are intended to identify forward-looking statements.
Our actual results may differ materially from the results discussed in such
forward-looking statements. Factors that may cause a difference include, but are
not limited to, those discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Factors That May Affect Future
Results and Market Price of Stock". The following discussion should be read in
conjunction with the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K. All yearly references
are to our fiscal years ended June 30, 2004, 2003 and 2002, unless otherwise
indicated. All tabular amounts are in thousands, except percentages.
OVERVIEW
We are a leading provider of software and services that deliver solutions to
help companies streamline their business processes and improve workforce
productivity through mobilizing corporate applications and data. We also provide
software and expertise that enables our mobile device manufacturer customers to
accelerate their product development cycles and enhance the functionality of new
products they bring to market. The users of our products are enterprise
employees that complete their jobs or portions of their jobs outside of the
company-owned facilities where they have traditionally accessed, viewed and
updated information through wired networks. Also advancing the adoption of
enterprise mobility solutions is the increased availability and capability of
powerful mobile devices such as PDA's, mobile phones and converged devices.
Enterprises are increasingly realizing they can improve their competitiveness by
mobilizing corporate information.
We believe a full understanding of our operating results for the year ended June
30, 2004, requires an understanding of how the mobility solutions markets are
evolving and influenced the elements that drove our company performance.
Although the mobility solutions market is still in the early phases of
development, organizations are increasingly developing a mobile computing
strategy as part of their plans to increase productivity, improve
competitiveness and enhance customer relationships. However, the slow growth
recovery occurring in most global economies continues to restrain information
technology spending and has caused enterprises to focus spending on mobile
technology investments that can achieve a 12 to 18 month payback. Many companies
launch their mobile strategy with a mobile contacts, calendar, task and e-mail
application. Our mobile solution that meets this need, OneBridge Mobile
Groupware comprises the majority of our enterprise mobility software revenues
and revenue from this product was a significant element of our growth in fiscal
2004.
Device manufacturers are also evolving their products to address this growing
enterprise mobility market. Notebooks, mobile phones and standard PDAs have been
the dominant mobile infrastructure devices. However, as mobile device designers
and marketers have launched campaigns to communicate the added value of smart
phones and converge devices, adoption rates for these devices have increased.
To address the growth in this market, the rapid products development cycles, and
the demand for a robust feature set, device manufacturers have increasingly
turned to third parties to provide the technology for short-range wireless
connectivity products. Our device manufacturer solutions revenue grew in fiscal
2004 as additional handset manufacturers selected our technologies and the
handset models that included our technology were introduced successfully into
the marketplace.
19
We believe Europe has been the global leader in the deployment of wireless
infrastructure. The coverage and data capacity of wireless networks developed
more rapidly in Europe than in other global markets and the market for mobility
solutions has grown in Europe. We have a long operating history in Europe with
offices in four countries and have gained both market awareness and developed
long-standing customer relationships. A significant portion of our revenue and
revenue growth was derived from both European customers purchasing our
enterprise mobility solutions and European device manufacturers introducing
successful converged devices that contained our device manufacturer products.
In 1993, we introduced our first enterprise database products. We continue to
market and sell these products to application developers and enterprises to
support the data requirements of both mobile and traditional enterprise
applications. These products grew in fiscal 2004 as the applications utilizing
our database were marketed successfully to companies in Europe and North
America. Application developers that purchase our enterprise database products
have required a solution that is stable and mature. We also have developed an
extensive network of resellers that market these products globally. As these
products do not require heavy research and development investment or significant
sales and marketing support, they have been an important source of positive cash
flow to our company.
In fiscal 2005 we will continue to focus on revenue growth by generating more
sales of our solutions to enterprise customers and mobile device manufacturers.
We believe enterprise customers will move toward purchasing mobile applications
that can have an immediate financial impact such as field service, supply chain
and logistics, healthcare, field sales and government and education. Enterprises
will choose vendors with knowledge of workflows and business process and those
that can provide a business case for investment. We expect to compete directly
with both larger companies that have significant resources and experience and
smaller companies that focus on a particular mobile vertical. We also expect to
experience longer sales cycles, which is typical for sales of larger, mission
critical business applications.
Our operating expenses increased in fiscal 2004 as compared to fiscal 2003 by
$4.1 million. However $3.0 million of the higher spending was the result of
higher restructuring charges and higher costs associated with defending
ourselves in a patent infringement case. Without these expenditures, our
operating expenses increased $1.1 million, while revenues increased $4.7 million
in fiscal 2004 as compared to fiscal 2003 as a result of the factors we outlined
above. Despite the revenue growth and control of expense increases, we continued
to experience losses from operations and net losses per share.
In response to these conditions, we realigned our management and sales
organization to support the strategic direction of the company. We restructured
many of our operations and sales territories in an effort to improve
organizational efficiencies, controlled our expense structure, and took
initiatives to increase sales productivity and drive a more profitable long-term
financial model. We expect to continue many of these activities over the next
several quarters, and doing so may put pressure on our financial results and
operations as we continue to position the company to participate in the growth
of the mobile solutions market.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements in conformity with accounting
principles generally accepted in the United States, we make estimates,
assumptions and judgments that can have a material impact on our net revenue,
operating income and net income (loss), as well as on the value of certain
assets on our consolidated balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on our consolidated financial statements, so
we consider these to be our critical accounting policies. The policies described
below are not intended to be a comprehensive list of all our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles, with no need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. Our audited consolidated financial statements and
notes thereto contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies
that we consider critical to an understanding of the consolidated financial
statements are highlighted below.
REVENUE RECOGNITION
Revenue recognition rules for software companies are very complex. We follow
specific and detailed guidelines in determining the proper amount of revenue to
be recorded; however, certain judgments must be made by management in
interpreting the rules and in applying our revenue recognition policy. Revenue
results are difficult to
20
predict, and any shortfall in revenue or delay in recognizing revenue could
cause our operating results to vary significantly.
To recognize software revenue we apply the provisions of Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2), as amended by SOP 98-9, and
recognize revenue when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is
fixed or determinable and (4) collection of the resulting receivable is
reasonably assured.
At the time of a transaction, we assess whether the fee associated with our
revenue transactions is fixed or determinable, based on the payment terms
associated with the transaction. If payment terms are extended for a significant
portion of the fee or there is a risk that the customer will expect a
concession, we account for the fee as not being fixed or determinable. In these
cases, we recognize revenue as the fees become due and payable. If we had
assessed the fixed or determinable criterion differently, the timing and amount
of our revenue recognition may have differed materially from that reported.
At the time of the transaction we also assess whether or not collection is
reasonably assured based on a number of factors, including past transaction
history with the customer and credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not reasonably assured, we defer recognition of the fee as revenue, and
recognize revenue at the time collection becomes reasonably assured, which is
generally upon receipt of cash. If we assessed collectability differently, the
timing and amount of our revenue recognition may have differed materially from
that reported.
For arrangements with multiple obligations (for instance, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method. This means that we defer revenue
from the total fees associated with the arrangement equivalent to the
vendor-specific objective evidence of fair value of the elements of the
arrangement that have not yet been delivered. The vendor-specific objective
evidence of fair value of an undelivered element is generally established by
using historical evidence specific to Extended Systems. For example, the
vendor-specific objective evidence of fair value for maintenance and support is
based upon separate sales of renewals to other customers or upon the renewal
rates quoted in the contracts, and the fair value of services, such as training
or consulting, is based upon separate sales by us of these services to other
customers. If we allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support, patches, bug fixes and other
modifications to ensure that the products comply with their warranty provisions.
Accordingly, we allow for warranty costs at the time the product revenue is
recognized.
When we license our software to original equipment manufacturers or to companies
that include our software in their software offering, royalty revenue is
recognized when customers report to us the sale of software to their end user
customer. In cases where the arrangement with our customer provides for a
prepaid nonrefundable royalty, we recognize revenue when persuasive evidence of
an arrangement exits, delivery has occurred, the fee is fixed or determinable
and collection of the resulting receivable is reasonably assured.
We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we generally recognize revenue
from training services as these services are performed. For professional
services that involve significant implementation, customization, or modification
of our software that is essential to the functionality of the software, we
generally recognize both the service and related software license revenue over
the period of the engagement, using the percentage-of-completion method. In
cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, where significant
uncertainty about the project completion exists, or where an arrangement
provides for customer acceptance, we defer the contract revenue under the
completed contract method of accounting until the uncertainty is sufficiently
resolved or the contract is complete. If we were to make different judgments or
utilize different estimates of the total amount of work we expect to be required
to complete an engagement, the timing of our revenue recognition from period to
period, as well as the related margins, might differ materially from that
previously reported.
BUSINESS COMBINATIONS AND ACQUIRED INTANGIBLE ASSETS
We account for our purchases of acquired companies in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
account for the related acquired intangible assets in accordance with SFAS No.
142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 141, we
allocate the cost of the acquired companies to the identifiable tangible and
intangible assets acquired and liabilities
21
assumed, with the remaining amount being classified as goodwill. Certain
intangible assets, such as "developed technologies," are amortized to expense
over time, while in-process research and development costs ("IPR&D"), if any,
are immediately expensed in the period the acquisition is completed.
Identifiable intangible assets are currently amortized over a weighted-average
of one to three years using the straight-line method.
The majority of entities we acquire do not have significant tangible assets and,
as a result, a significant portion of the purchase price is typically allocated
to intangible assets and goodwill. Our future operating performance will be
impacted by the future amortization of intangible assets, potential charges
related to IPR&D for future acquisitions, and potential impairment charges
related to goodwill. Accordingly, the allocation of the purchase price to
intangible assets and goodwill has a significant impact on our future operating
results. The allocation of the purchase price of the acquired companies to
intangible assets and goodwill requires us to make significant estimates and
assumptions, including estimates of future cash flows expected to be generated
by the acquired assets and the appropriate discount rate for these cash flows.
Should different conditions prevail, material write-downs of intangible assets
and/or goodwill could occur.
Under SFAS No. 142, goodwill is no longer subject to amortization. Rather, we
evaluate goodwill for impairment at least annually, during the fourth quarter of
each fiscal year, or more frequently if events and changes in circumstances
suggest that the carrying amount may not be recoverable. Impairment of goodwill
is tested at the reporting unit level by comparing the reporting unit's carrying
value, including goodwill, to the fair value of the reporting unit. The fair
values of the reporting units are estimated using a combination of the income,
or discounted cash flows, approach and the market approach, which utilizes
comparable companies' data. If the carrying amount of the reporting unit exceeds
its fair value, goodwill is considered impaired and we then compare the "implied
fair value" of the goodwill to its carrying amount to determine the impairment
loss, if any.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
We assess the impairment of identifiable intangibles, fixed assets and goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Goodwill is reviewed for impairment annually in accordance
with SFAS No. 142. Factors we consider important that could trigger an
impairment review include, but are not limited to: (1) significant under
performance relative to historical or projected future operating results, (2)
significant changes in the manner of our use of the acquired assets or the
strategy for our overall business, (3) significant negative industry or economic
trends, (4) a significant decline in our stock price for a sustained period, and
(5) our market capitalization relative to net book value. When we determine that
the carrying value of long-lived assets may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a market capitalization approach when the information is
readily available. When the information is not readily available, we use a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in our current business model to measure any impairment. If we
made different judgments or utilized different estimates our measurement of any
impairment may have differed materially from that reported.
INCOME TAXES
On a quarterly basis we evaluate our deferred tax asset balance for
realizability. To the extent we believe it is more likely than not that some or
all of our deferred tax assets will not be realized, we establish a valuation
allowance against the deferred tax assets. As of June 30, 2004 we had recorded a
valuation allowance against 100 percent of our net deferred tax assets due to
uncertainties related to our ability to utilize our deferred tax assets,
primarily consisting of certain net operating losses carried forward and foreign
tax credits, before they expire. This valuation allowance was recorded based on
our estimates of future U.S. and foreign jurisdiction taxable income and our
judgments regarding the periods over which our deferred tax assets will be
recoverable. If we made different judgments or utilized different estimates, the
amount or timing of the valuation allowance recorded may have differed
materially from that reported. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to
reduce the valuation allowance, potentially resulting in an income tax benefit
in the period of reduction, which could materially impact our financial position
and results of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
We maintain an allowance for doubtful accounts based on a continuous review of
customer accounts, payment patterns and specific collection issues. Where
specific collection issues are identified, we record a specific allowance based
on the amount that we believe will not be collected. For accounts where specific
collection issues are not identified, we record a reserve based on the age of
the receivable and historical collection patterns. If we made
22
different judgments or utilized different estimates, the timing and amount of
our reserve may have differed materially from that reported.
RESTRUCTURING
We report costs associated with employee terminations and other exit activity in
accordance with SFAS No. 112, "Employers' Accounting for Postemployment Benefits
- - an amendment of FASB Statements No. 5 and 43," and SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". We record employee
termination benefits as an operating expense when the benefit arrangement is
communicated to the employee and no significant future services are required. We
recognize facility lease termination obligations, net of estimated sublease
income, and other exit costs when we have future payment with no future economic
benefit or a commitment to pay the termination costs of a prior commitment.
These termination and other exit costs are reported at fair value.
DETERMINING FUNCTIONAL CURRENCIES FOR THE PURPOSE OF CONSOLIDATION
In preparing our consolidated financial statements, we are required to translate
the financial statements of the foreign subsidiaries from their functional
currencies, generally the local currency, into United States dollars. This
process results in exchange gains and losses, or cumulative translation
adjustments, which are included as a separate part of our net equity under the
caption "Accumulated other comprehensive loss."
Under the relevant accounting guidance, the computation method and treatment of
these translation gains or losses is dependent upon management's determination
of the functional currency of each subsidiary. The functional currency is
determined based on management judgment and involves consideration of all
relevant economic facts and circumstances affecting the subsidiary. Generally,
the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures is considered the
functional currency, but any dependency upon the parent and the nature of the
subsidiary's operations is also considered.
Cumulative translation adjustments include any gain or loss associated with the
translation of that subsidiary's financial statements when the functional
currency of any subsidiary is the local currency. However, if the functional
currency were deemed to be the United States dollar then any gain or loss
associated with the remeasurement of these financial statements would be
included within our statement of operations. If we dispose of any of our
subsidiaries, any cumulative translation gains or losses would be realized and
recorded within our statement of operations in the period during which the
disposal occurs. If we determine that there has been a change in the functional
currency of a subsidiary to the United States dollar, any translation gains or
losses arising after the date of change would be included within our statement
of operations.
Based on our assessment of the factors discussed above, we consider the relevant
subsidiary's local currency to be the functional currency for each of our
international subsidiaries. Accordingly, during the years ended June 30, 2004,
2003 and 2002, translation adjustments of $144 thousand, $503 thousand and $65
thousand, respectively, were recorded as additions to our accumulated other
comprehensive loss. At June 30, 2004 and 2003, cumulative translation losses of
approximately $1.5 million and $1.4 million were included as part of accumulated
other comprehensive loss, within our balance sheet. These translation losses
have accumulated since we formed our first foreign subsidiary in 1991. Had we
determined that the functional currency of our subsidiaries was the United
States dollar, we would have computed a remeasurement gain or loss using a
different method and such gain or loss would have been included in our results
of operations for each of the years presented.
The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the United States dollar and the significance of the assets, liabilities,
revenues and expenses denominated in foreign currencies. These currencies
include the euro, the British Pound Sterling and Canadian dollar. Any future
translation gains or losses could be significantly higher than those noted in
each of these years. In addition, if we determine that a change in the
functional currency of one of our subsidiaries has occurred at any point in time
or we sell or liquidate one of our subsidiaries, we would be required to include
any translation gains or losses from the date of change in our statement of
operations.
LEGAL CONTINGENCIES
From time-to-time we may be involved in various legal proceedings and claims.
Periodically, but not less than quarterly, we review the status of each
significant matter and assess our potential financial exposure. If the potential
loss from any legal proceeding or claim is considered probable and the amount
can be reasonably estimated, we accrue a liability for the estimated loss.
Significant judgment is required in both the determination of probability and
23
the determination as to whether an exposure is reasonably estimable. Due to the
uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending litigation and claims
and may revise our estimates. Such revisions could have a material impact on our
results of operations and financial condition.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth the selected consolidated financial data for the
periods indicated, expressed as a percentage of total revenues.
FOR THE YEARS ENDED JUNE 30,
----------------------------
2004 2003 2002
------------------------
Revenue:
License fees and royalties................... 78% 79% 86%
Services and other........................... 22 21 14
------------------------
Total net revenue........................ 100 100 100
Costs and expenses:
Cost of license fees and royalties........... 1 2 3
Cost of services and other................... 11 12 5
Amortization of purchased technology......... 2 3 3
Research and development..................... 20 26 45
Acquired in-process research and development. -- 1 --
Marketing and sales.......................... 48 53 61
General and administrative................... 14 13 19
Restructuring charges........................ 4 2 1
Patent litigation fees, license and
settlement.................................. 11 4 1
Non-cash stock compensation ................. 1 -- --
Amortization of goodwill..................... -- -- 4
------------------------
Total costs and expenses................. 112 116 142
------------------------
Loss from operations..................... (12) (16) (42)
Other income (expense), net....................... -- 1 --
Gain on sale of land.............................. 3 -- --
Interest expense.................................. (1) (1) --
------------------------
Loss before income taxes................. (10) (16) (42)
Income tax (benefit) provision.................... -- (1) (10)
------------------------
Loss from continuing operations.......... (10) (15) (32)
Discontinued operations, net of tax:
Income (loss) from discontinued
operations.............................. -- 1 --
------------------------
Net loss................................. (10)% (14)% (32)%
========================
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Revenue
The following table presents our license, support and maintenance, and
professional services revenue for the years ended June 30, 2004, 2003 and 2002,
and the percentage changes from the prior year.
FISCAL YEAR ENDED JUNE 30,
2004 %CHANGE 2003 %CHANGE 2002
------------------------------------------------------
Revenue:
License fees and royalties........ $ 25,028 15% $ 21,733 13% $ 19,176
Support and maintenance .......... 4,398 43% 3,082 43% 2,155
Professional services and other... 2,760 2% 2,719 188% 944
--------- --------- ---------
Total net revenue............. $ 32,186 17% $ 27,534 24% $ 22,275
========= ========= =========
24
We sell our adaptive mobility products to enterprises, original equipment
manufacturers, application developers, distributors and valued-added resellers.
No customers accounted for greater than 10% of revenue from continuing
operations in fiscal 2004, 2003 or 2002.
LICENSE FEES AND ROYALTIES. The majority of our product license revenues consist
of fees related to products licensed to customers on a perpetual basis. Product
license fees can be associated with a customer's licensing of a given software
product for the first time or with a customer's purchase of the right to run a
previously licensed product on additional computing capacity or by additional
users. Our royalty revenue consists of fees related to our OEM customers
periodically increasing the number of units they are authorized to use of a
licensed software product and are normally paid on a quarterly basis.
We classify our product offerings into one operating segment, our adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. The products in our adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions.
The table below presents total net license fees and royalty revenue by product
line and its percentage of total revenue for the years ended June 30, 2004, 2003
and 2002.
FOR THE FISCAL YEAR ENDED JUNE 30,
2004 % OF TOTAL 2003 % OF TOTAL 2002 % OF TOTAL
-----------------------------------------------------------
License fees and royalties:
Enterprise Mobility Solutions $ 11,301 45% $ 9,848 45% $ 8,840 46%
% change from prior year 15% 11%
Mobile Device Solutions 5,942 24% 4,740 22% 3,822 20%
% change from prior year 25% 24%
Enterprise Database Solutions 7,785 31% 7,145 33% 6,514 34%
% change from prior year 9% 10%
-----------------------------------------------------------
Total net revenue $ 25,028 100% $ 21,733 100% $ 19,176 100%
===========================================================
License revenue from our enterprise mobility products increased $1.5 million in
fiscal 2004 as compared to fiscal 2003. We sell our enterprise mobility products
to corporate customers either directly through our field sales staff or through
distributors, valued-added resellers and other channel partners. The increase in
enterprise mobility product license revenue in fiscal 2004 compared to fiscal
2003 was due primarily to the successful introduction of our new IP-based push
enabled OneBridge products in early 2004. These new products enhanced
functionality that was of particular interest to our customers that purchase our
mobile PIM and email application, OneBridge Mobile Groupware. Sales growth
resulted from both sales of our OneBridge Mobile Groupware to new customers and
our existing customers deploying the products to more users during the year. We
believe these customers also purchased OneBridge Mobile Groupware because of its
competitive total cost of ownership combined with the OneBridge product
platform's design which enables customers to roll out future mobile applications
such as mobile field service and mobile sales force automation applications on
the same devices that receive email. License revenue from our enterprise
mobility products increased $1.0 million in fiscal 2003 as compared to fiscal
2002. Included in this increase was $700 thousand of additional revenue from
adding the OneBridge Presentation Server and Mobile Business solutions products
to our product mix as a result of the Viafone acquisiton during fiscal 2003.
License and royalty revenue from our mobile device products increased $1.2
million in fiscal 2004 as compared to fiscal 2003. We sell our mobile device
products either directly or through distributors primarily to original equipment
manufacturers that supply the mobile handset and the telematics industries. As
handset manufacturers have increased the capability of these devices to
communicate with other devices or synchronize data with personal computers, the
demand for our products that enable this functionality has grown. During fiscal
2004, we experienced both new design wins with OEM manufacturers that licensed
our products and saw existing customers increase shipments of handsets that
include our products. The increase in mobile device product license revenue of
$918 thousand in fiscal 2003 as compared to fiscal 2002 was due primarily to
design wins and the resulting royalties paid for our XTNDConnect PC products by
mobile handset manufacturers.
Royalty revenue generated from sales to original equipment manufacturers has
fluctuated from quarter to quarter in the past. We expect it will also fluctuate
in future quarters, because demand in these markets is difficult to predict, as
it is dependent upon the timing of customer projects and the effectiveness of
their marketing efforts. Additionally,
25
fluctuations can occur due to the nature of the arrangements with customers,
which can vary between quarterly royalty payments that become due as devices are
shipped by the manufacturer to initial one-time payments that allow the customer
either unlimited or a capped number of licenses.
License revenue from our enterprise database product lines increased $640
thousand in fiscal 2004 as compared to fiscal 2003 as the applications developed
and sold by the value-added resellers using our database technology gained wider
acceptance in the marketplace. We sell our database products to enterprise
customers and software developers who write applications utilizing our product's
data management capabilities. Additionally in the second half of fiscal 2004, we
offered significant incentives and discounts for quantity-based purchases to our
customers that resulted in higher license revenues. The increase of $631
thousand in enterprise database product license revenue in fiscal 2003 as
compared to fiscal 2002 was due primarily to the addition of value-added
resellers purchasing new licenses and the applications developed and marketed
using our database technology gaining wider acceptance.
We expect revenue from license fees and royalties to increase in fiscal 2005 as
we introduce new products and enhance the functionality of our existing
products. We also anticipate our installed customer base for our OneBridge
Mobile Groupware, particularly in Europe, to purchase additional licenses as
they roll products out to additional users. Also, during fiscal 2004 many of our
customers and potential customers investigated the cost and benefits of
implementing mobile applications beyond email, and we expect our revenues to
grow as these customers purchase new or additional licenses of our OneBridge
Mobile Platform middleware to enable these applications.
SUPPORT AND MAINTENANCE. Support and maintenance revenues are derived dominantly
from our enterprise mobility products and represent the ratable recognition of
fees to enroll products in our software maintenance and support programs.
Enrollment in these programs generally entitles customers to product
enhancements, technical support services and ongoing updates for compatibility
with new mobile devices and mobile device operating systems. These fees are
generally charged annually and for software products sold directly to
enterprises have been in the range of 15% to 20% of the discounted price of the
product. For software products sold through resellers that provide support
directly to their customers this range has been 11 to 14%. Software sold to OEM
customers generally does not include support or maintenance agreements, as all
technical issues are resolved before the sales transaction is completed.
Support and maintenance revenue increased 43% in fiscal 2004 as compared to
fiscal 2003. This increase was the result of customers who had previously
purchased our OneBridge products continuing support and maintenance combined
with the ratable recognition of revenue from new support and maintenance
contracts sold to customers purchasing our products for the first time in fiscal
2004. Additionally, several resellers who had not previously purchased support
and maintenance contracts elected to purchase these programs during fiscal 2004.
In fiscal 2003, revenue from support and maintenance increased 10% from fiscal
2002. The increased revenue resulted from both sales of support and maintenance
contracts to both new and existing customers.
Our support and maintenance revenue depends on both our software license revenue
and renewals of maintenance agreements by our existing customers. Our
maintenance revenue has increased on a year over year basis in each of fiscal
2004, 2003, and 2002, as a result of both new licenses and support and
maintenance renewals. We expect that our support and maintenance revenue will
increase or decrease as our license revenue increases or decreases.
PROFESSIONAL SERVICES. Professional services revenue is derived primarily from
our work related to enterprise mobility products and consists of fees for
consulting, product installations, training, and developing custom applications
that utilize our middleware products such as OneBridge Mobile Data Suite.
Professional services revenue in fiscal 2004 did not change significantly from
the revenue we reported in fiscal 2003. The primary driver for our professional
services revenue was our customers purchasing services to aid them in developing
software solutions for their mobile workforce. These services consisted
primarily of work to develop, test and deploy custom mobile applications for
field service, sales force automation and mobile consumer applications in both
Europe and North America.
The increase in service revenue for fiscal 2003 as compared to fiscal 2002 was a
result of adding a dedicated professional services group to our solutions
offerings in the first quarter of fiscal 2003 in connection with the ViaFone
acquisition. The majority of our professional services for fiscal 2002 related
to significant customization of our software products to operate in specific
customer environments or for inclusion in handset products by our OEM customers.
We expect service revenue to increase in fiscal 2005, as more customers will
purchase services to develop custom applications. Although we expect an overall
increase in the amount of billable hours of our professional services
26
group, service revenue may fluctuate from quarter to quarter based on the amount
of revenue we may be required to defer under our revenue recognition policy and
the timing of services engagements.
INTERNATIONAL REVENUE
We derive a significant amount of our revenue from sales to customers outside of
the United States, principally from our European based sales force and channel
partners, overseas original equipment manufacturers and from a number of
international distributors. Based on the region in which the customer resides,
the table below presents total net revenue by region and its percentage of total
net revenues for the years ended June 30, 2004, 2003 and 2002.
FOR THE FISCAL YEAR ENDED JUNE 30,
2004 % OF TOTAL 2003 % OF TOTAL 2002 % OF TOTAL
----------------------------------------------------------------
North America $ 12,624 39% $ 13,647 50% $ 11,227 50%
% change from prior year -7% 22%
Europe 16,586 52% 11,657 42% 8,387 38%
% change from prior year 42% 39%
Asia Pacific and Rest of World 2,976 9% 2,230 8% 2,661 12%
% change from prior year 33% -16%
----------------------------------------------------------------
Total net revenue $ 32,186 100% $ 27,534 100% $ 22,275 100%
================================================================
Sales to domestic customers declined in fiscal 2004 as compared to fiscal 2003
by $1.0 million and as a percentage of the total dollars. The decline was
primarily a result of more European based customers purchasing professional
services in fiscal 2004 as compared to fiscal 2003. In fiscal 2003 a dominant
portion of the professional services revenue was performed for North American
customers, however in fiscal 2004, 45% of the professional services revenue was
performed for customers in Europe. Sales in North America grew $2.4 million in
fiscal 2003 as compared to fiscal 2002. This growth was primarily a result of
both license revenue from the new OneBridge Presentation Server and Mobile
Business Solutions products and the professional services revenue added as a
result of the ViaFone acquisition in the first quarter of fiscal 2003.
The amount and percentage of revenue from Europe increased in both fiscal 2004
and fiscal 2003 as compared to the prior year as a result of several factors. In
fiscal 2003, a major European handset manufacturer incorporated our desktop
synchronization technology into a very successful mobile handset series and we
received quarterly royalty payments from this customer in both fiscal 2003 and
2004. Over the past several years we have made significant investments in our
European based pre-sales, sales, and technical support teams, and these
investments have resulted in both obtaining new customers and increasing the
amount of sales to existing customers. We believe the adoption rate of mobile
devices and wireless infrastructure in Europe is more advanced than that in
North America and we are benefiting from our significant presence in this
market. We have also developed an extensive network of resellers in Europe that
market our products, particularly our OneBridge Mobile Groupware products, to a
wide range of companies. Additionally, we have entered into relationships with
several partners that have developed vertical applications utilizing our
OneBridge Mobile Platform that they resell to customers in Europe.
Additionally, the increase in revenue from our European customers was a result
of the decrease in the strength of the U.S. dollar as compared to the euro and
British pound sterling, which resulted in sales to our European customers
invoiced in local currencies being greater in U.S. dollars than they would have
been, had the exchange rate remained constant. Reported revenue from our
European customers invoiced in local currency grew 17.4% between fiscal 2004 and
fiscal 2003 and 23.6% between fiscal 2003 and fiscal 2002, but had the exchange
rate for the U.S. dollar remained constant between those years, revenue would
have grown only 12.3% and 16.6%, respectively. We expect that international
sales will continue to represent a substantial portion of our net revenue in the
foreseeable future.
Our revenue from Asia Pacific and the rest of the world is primarily from our
sales to OEM customers of our mobile device manufacturer products. We also sell
our enterprise mobility products in this geography through distributors and
value-added resellers. We sell our products in these regions in US dollars and
do not have significant revenues derived from sales in foreign currencies from
this region. In fiscal 2004 revenue from the region increased $746 thousand.
This increase reflects additional shipments to OEM customers from Asia Pacific
of our products for inclusion in handsets manufactured in the region.
27
COST OF REVENUE
The following table sets forth our costs of license fees and other royalties,
technical support and professional services for the years ended June 30, 2004,
2003 and 2002, and dollar and percentage changes from the prior year:
Change Change
------ ------------- ------ ------------- ------
2004 $ % 2003 $ % 2002
------ ------ ----- ------ ------ ----- ------
Cost of licenses fees and royalties $ 382 $ (38) (9)% $ 420 $ (299) (42)% $ 719
as a % of license fees and royalty revenue 2% 2% 4%
Cost of technical support services 1,367 (4) 0% 1,371 194 16% 1,177
as a % of support and maintenance revenue 31% 45% 55%
Cost of professional services and other 2,089 275 15% 1,814 1,784 NM* 30
as a % of professional services and other revenue 76% 67% 3%
Total cost of revenue $3,838 $233 6% $3,605 $1,679 (87)% $1,926
* percentage change not meaningful
COST OF LICENSE FEES AND ROYALTIES. The cost of license and royalty revenue
consists primarily of amortization of purchased technology and royalties for the
use of third-party software. Although license and royalty revenue increased 15%
in fiscal 2004 as compared to fiscal 2003 and 13% in fiscal 2003 as compared to
fiscal 2002, there was no significant change in the cost of license fees and
royalties due to the fixed cost nature of the amortization and licensing
agreements we have arranged with third parties.
COST OF TECHNICAL SUPPORT SERVICES. The cost of technical support services
consists primarily of compensation and benefits, third-party contractor costs
and related expenses incurred in providing customer support. The increase in
gross margin during fiscal 2004 and 2003 compared to prior years was due to an
increase in support revenues resulting from new support and maintenance
contracts and renewals of previous contracts. We expect increases in our cost of
technical support services as our service revenue grows to support the
deployment of enterprise software solutions.
COST OF PROFESSIONAL SERVICES. The cost of professional services consists
primarily of compensation and benefits incurred in providing services for
building custom applications, training, consulting, installations and assisting
with customer deployments. Professional services gross margins were 24%, 33% and
97% in the fiscal years ended June 30, 2004, 2003 and 2002 respectively. In
fiscal 2002, we did not have a dedicated professional services group. The
revenue in fiscal 2002 was the result of charges paid by our mobile device
solutions customers for inclusion of their customer-driven specifications into
the products. These specific requests were incorporated into the product and
completed as part of the normal product development process. The corresponding
costs to complete this work were not distinguishable from our ongoing research
and development costs and were included as research and development costs in our
fiscal 2002 results of operations.
We expect professional services revenue to grow in fiscal 2005 as more of our
customers begin work on mobile applications projects. However, given the high
level of fixed costs associated with the professional services group, an
inability to generate sufficient services revenue to absorb these fixed costs
could lead to lower or negative gross margins. We have also experienced
fluctuations in our professional services revenue on a quarterly basis due to
the timing of revenue recognition, which may be delayed due to specific contract
terms. We expect our professional services revenue will continue to experience
these fluctuations in the future.
AMORTIZATION OF PURCHASED TECHNOLOGY
The following table presents our amortization of purchased technology for the
years ended June 30, 2004, 2003 and 2002, and the percentage changes from the
prior year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
--------------------------------------
Amortization of purchased technology.... $ 621 (14)% $ 726 16% $ 627
as a % of net revenue................. 2% 3% 3%
28
Amortization decreased in fiscal 2004 as compared to fiscal 2003 as a result of
the intangibles related to our acquisition of Rand Software becoming fully
amortized in the second quarter of fiscal 2004. The net increase in fiscal 2003
compared to fiscal 2002 results from the addition of non-goodwill intangibles in
connection with our acquisition of ViaFone. This increase was partially offset
by a decrease in amortization resulting from our adoption of SFAS No. 142, which
resulted in $138 thousand of intangible assets, comprised of assembled workforce
intangibles, being reclassified as goodwill in the first quarter of fiscal 2003.
We expect a decrease in amortization of other intangibles in fiscal 2005 as a
result of a portion of our purchased technology becoming fully amortized in the
first quarter of fiscal 2005.
RESEARCH AND DEVELOPMENT EXPENSES
The following table presents our research and development expenses for the years
ended June 30, 2004, 2003 and 2002, and the percentage changes from the prior
year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
--------------------------------------------
Research and development..... $6,316 (12)% $7,173 (28)% $10,030
as a % of net revenue...... 20% 26% 45%
Research and development expenses consist of compensation and benefits for our
software developers and development support personnel, including software
programmers, testing and quality assurance personnel, product managers and
writers of technical documentation such as product manuals and installation
guides. These expenses also include consulting costs, facility and
communications costs, costs for software development tools and equipment and, in
the second half of fiscal 2004, the cost of training our outsourced quality
assurance service provider. During the fiscal years presented above, all
software development costs have been expensed.
Research and development expenses were $857 thousand less in fiscal 2004 as
compared to fiscal 2003 primarily as a result of reductions in personnel costs
of $513 thousand achieved through attrition and layoffs resulting from
restructurings undertaken primarily in fiscal 2003 and completed in early 2004.
The $2.9 million decrease in research and development expenses in fiscal 2003 as
compared to fiscal 2002 was also primarily the result of a reduction in
personnel and consulting costs subsequent to our restructurings. Research and
development personnel decreased by 10% from fiscal 2004 to fiscal 2003 and by
22% from fiscal 2003 to fiscal 2002. The restructurings had an objective of
reducing the overall research and development spending level while
simultaneously increasing productivity. The productivity improvements were based
on a combination of improved processes, elimination of unnecessary function, and
clear ownership and focus of product development initiatives between our
separate development groups. We were also able to reduce research and
development costs in fiscal 2003 as a result of completing the fundamental
development work for our OneBridge Mobile Groupware and Platform solution upon
which the data synchronization and management product offerings are built.
We expect research and development costs to increase in fiscal 2005 as we add
additional resources to complete our planned new products and enhanced
functionality of our existing products. We expect to incur these expenses
through the recruiting and hiring of additional employees in our engineering
departments in addition to retaining offshore resources, primarily in India, to
assist with the technical support, quality assurance and development activities.
MARKETING AND SALES EXPENSES
The following table presents our marketing and sales expenses for the years
ended June 30, 2004, 2003 and 2002, and the percentage changes from the prior
year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
-----------------------------------------------
Marketing and sales.......... $15,362 6% $14,482 7% $13,489
as a % of net revenue...... 48% 53% 61%
Marketing and sales expenses consist primarily of salaries for our sales, inside
sales, marketing and technical sales staff, sales related commissions and
bonuses paid to our direct sales force, commissions to third party distributors
29
and other marketing related expenses including trade shows, promotional
materials, public relations and advertising. The increased spending in fiscal
2004 is primarily the result of $270 thousand in increased sales salaries and a
$900 thousand increase in sales commissions. These higher costs were the result
of retaining more experienced sales leadership and increasing the experience
level of the people who are accountable for the sales of our enterprise mobility
solutions. Additionally, we incurred $253 thousand of increased travel and
entertainment costs for our sales and marketing organization. Commissions to
third parties increased by $214 thousand during fiscal 2004 as compared to
fiscal 2003 as these distributors increased the amount of mobile device
solutions they sold to our OEM/ODM customers. The increases discussed above were
partially offset by a $744 thousand decrease in our marketing expenses achieved
both through a reduction in personnel and by reducing our participation in trade
show and other marketing programs.
The increase in marketing and sales expenses in fiscal 2003 compared to fiscal
2002 was primarily due to an increase in personnel costs of approximately $1.2
million, offset in part by a decrease in promotional expenses of approximately
$600 thousand.
We expect marketing and sales expenses to increase in fiscal 2005 as a result of
an expected increase in revenue, although we expect these expenses to decrease
as a percentage of net revenue. We expect that the increase in marketing and
sales expenses in fiscal 2005 will be primarily attributable to increased sales
compensation.
GENERAL AND ADMINISTRATIVE EXPENSES
The following table presents our general and administrative expenses for the
years ended June 30, 2004, 2003 and 2002, and the percentage changes from the
prior year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
----------------------------------------------
General and administrative..... $4,486 23% $3,649 (17)% $4,381
as a % of net revenue........ 14% 13% 19%
General and administrative expenses primarily consist of salaries and other
personnel costs for our executive management, finance and accounting, management
information systems, human resources and other administrative groups. Other
expenses included in general and administrative expenses are fees paid for
outside legal and accounting services, directors' and officers' insurance costs
and SEC and listing fees.
General and administrative expenses increased $837 thousand in fiscal 2004 as
compared to fiscal 2003. The increased expenses related to higher professional
services costs of $505 thousand related to increased external audit fees and
costs for outside legal counsel. We also incurred increased personnel costs in
our accounting and finance group primarily related to additional personnel
engaged in readiness activities for compliance with Sarbanes-Oxley and an
ongoing infrastructure software implementation. Fiscal 2004 amounts also include
an expense recorded in the first fiscal quarter of $575 thousand of legal and
other professional services costs related to failed acquisition activities and
the reversal in the first quarter of $513 thousand of accrued professional
services costs related to the failed merger with Palm, Inc. in 2001.
The decrease in general and administrative expenses in fiscal 2003 compared to
fiscal 2002 was primarily attributable to a decrease of approximately $400
thousand in personnel costs resulting from our restructurings and a decrease in
bad debt expense of approximately $300 thousand.
RESTRUCTURING CHARGES
The following table presents our restructuring charges for the years ended June
30, 2004, 2003 and 2002, and the percentage changes from the prior year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
----------------------------------------------
Restructuring charges ...... $1,446 142% $ 597 180% $ 213
as a % of net revenue..... 4% 2% 1%
We recorded $1.4 million in workforce reduction costs during fiscal 2004. The
restructuring charges consist of $791 thousand of severance, benefits, and other
costs related to the resignation of Steven Simpson, our former President and
Chief Executive Officer, and $162 thousand of severance, benefits and other
costs related to the resignation of Karla Rosa, our former Chief Financial
Officer. Additionally, we recorded $498 thousand of expenses for the
30
termination of eighteen employees from our marketing and sales, research and
development, human resources, administration and operations groups. Of the
terminated employees, fourteen were located in the United States and four were
in Europe. The restructuring charge includes $554 thousand of non-cash
compensation resulting from the accelerated vesting of employee stock options
that is not included in the table below. As of June 30, 2004 we had paid $781
thousand of the amounts owed in cash. The remaining balance of $116 thousand
will be paid in the first two quarters of fiscal 2005.
We recorded $597 thousand in workforce reduction costs during fiscal 2003,
consisting primarily of severance, benefits, and other costs related to the
termination of 31 employees in research and development, marketing and sales,
manufacturing, and administration, of which 24 were located in the United
States, 3 in Canada and 4 in Europe. As of June 30, 2003 we had paid $409
thousand of these charges. The remaining balance of $188 thousand was paid in
the first two quarters of fiscal 2004.
During the first quarter of fiscal 2003 we also assumed a restructuring
liability in connection with our acquisition of ViaFone. Prior to our
acquisition of the company, ViaFone had implemented a restructuring program that
resulted in charges for workforce reduction costs, costs related to closing its
office in France and excess facilities costs related to lease commitments for
space no longer used in Brisbane, California. At the time we completed the
ViaFone acquisition, there were $993 thousand of future lease commitments that
had been accrued but not yet paid, $266 thousand of workforce reduction
liabilities and $30 thousand of liabilities relating to the closure of ViaFone's
French office. As of June 30, 2003 the workforce reduction liabilities and
liabilities related to closing ViaFone's French office had been paid in full,
and the $534 thousand balance of future lease commitments assumed was paid or
reversed in fiscal 2004.
During fiscal 2002, we recorded approximately $213 thousand in workforce
reduction costs, consisting primarily of severance, benefits and other costs
related to the termination of approximately 25 employees in research and
development, marketing and sales, and administration. Of those terminated, 21
were located in the United States and 4 were in Europe. All amounts due were
paid in the fourth quarter of fiscal 2002.
A summary of the restructuring costs payable is outlined as follows:
Workforce Facilities
Reduction and Other
Costs Costs Total
---------- ---------- ----------
Balance at June 30, 2001...................................... 1,096 -- 1,096
Restructuring charges incurred in fiscal 2002................. 213 -- 213
Cash payments................................................. (1,309) -- (1,309)
---------- ---------- ----------
Balance at June 30, 2002...................................... $ -- $ -- $ --
Restructuring charges incurred in fiscal 2003................. 597 -- 597
Restructuring accrual assumed with ViaFone acquisition........ 266 1,023 1,289
Adjustment to the accrual assumed with ViaFone acquisition.... (14) -- (14)
Cash payments................................................. (661) (489) (1,150)
---------- ---------- ----------
Balance at June 30, 2003...................................... $ 188 $534 $ 722
Restructuring charges incurred in fiscal 2004................. 897 -- 897
Other adjustments............................................. (13)A (340)B (353)
Cash payments................................................. (956) (194) (1,150)
---------- ---------- ----------
Balance at June 30, 2004...................................... $ 116 $ -- $ 116
========== ========== ==========
(A) An adjustment was made to the accrual for workforce reduction costs to
account for amounts paid to certain former employees who were paid amounts
less than originally provided.
(B) As a result of the Brisbane lease termination during the second quarter of
fiscal 2004, the balance of restructuring charges related to this lease as
of October 31, 2003 was reversed.
PATENT LITIGATION FEES, LICENSE AND SETTLEMENT
The following table presents our patent litigation, license and settlement
expense for the years ended June 30, 2004, 2003 and 2002, and the percentage
changes from the prior year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
-----------------------------------------------
Patent Litigation Fees,
License & Settlement..... $ 3,425 176% $ 1,240 661% $ 163
as a % of net revenue..... 11% 5% 1%
31
In April 2002, Intellisync Corporation filed a patent infringement action
against the company in the U.S. District Court in Northern California. The
action alleged that our XTNDConnect server and desktop synchronization products
infringed on seven of Intellisync's synchronization-related patents. We incurred
legal fees and other related costs in connection with defending this action. On
March 4, 2004 we mutually agreed with Intellisync Corporation ("Intellisync"),
formerly known as Pumatech, Inc., to settle the patent infringement lawsuit.
Both companies agreed to settle all claims and to immediately terminate
litigation proceedings. In connection with the settlement, we made a one-time
payment to Intellisync of $2.0 million and received a license to certain
Intellisync patents. This payment covers estimated past and future royalties on
revenue related to our products shipped and covered under Intellisync's licensed
patents. Both companies have agreed there will be no further patent litigation
actions for a period of five years and that Intellisync will release all of our
customers from any claims of infringement relating to their purchase and future
use of our products. Included in the expense above is $1.6 million of the
one-time payment based on revenues related to our products covered by the
license. The remaining one-time payment balance of $430 thousand was capitalized
and will be amortized over future years, based on sales of the related products.
NON-CASH STOCK COMPENSATION
The following table presents our non-cash stock compensation expense for the
years ended June 30, 2004, 2003 and 2002, and the percentage changes from the
prior year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
-----------------------------------------------
Non-cash stock compensation... $ 490 NM*% $ -- NM*% $ --
as a % of net revenue....... 2% 0% 0%
* percentage change not meaningful
During fiscal 2004, we changed the compensation for the members of our Board of
Directors to include annual grants of restricted stock. Additionally, we made
restricted stock grants to certain of our employees in October 2003. These
expenses reflect the charges related to the amortization of the related
compensation expense over the period the stock vests.
In fiscal 2005, we expect these charges to decrease as the grants to employees
fully vest in the second quarter of fiscal 2005. However, the decrease will be
offset somewhat by future amortization expense related to additional annual
grants of restricted stock to be made to the members of our Board of Directors.
OTHER INCOME (EXPENSE)
The following table presents our other income and expense for the years ended
June 30, 2004, 2003 and 2002, and the percentage changes from the prior year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
---------------------------------------------
Foreign currency exchange
gain (loss).................. $ (206) (179)% $ 261 302% $ (129)
Interest income................ 58 49 39 (66) 115
Net rental income.............. 224 NM* (30) NM* --
Other net income (expense)..... (127) NM* (13) (130) 10
------- ------- -------
$ (51) (120)% $ 257 NM*% $ (4)
======= ======= =======
* percentage change not meaningful
Other income and expense consists primarily of foreign currency exchange gains
or losses related to the mark-to-market of intercompany amounts owed to us by
our international subsidiaries, rental income generated from subleasing the
excess space at our headquarters facility and interest income earned on cash,
cash equivalents and short-term investment balances.
The change in foreign currency gain or loss from fiscal 2003 to 2004 and from
fiscal 2002 to 2003 is primarily due to the gain we recognized in fiscal 2003 as
a result of the decrease in the strength of the U.S. dollar in the fourth
quarter of fiscal 2003 at a time when we were not entering into foreign currency
forward contracts. We recognized foreign
32
currency exchange losses in fiscal 2002 and 2004 primarily due to our
intercompany balance forecasts differing from projections in periods of currency
volatility. For additional information on our foreign currency exposure see Item
7A of this Form 10-K.
Interest income increased in fiscal 2004 compared to fiscal 2003 due to an
increase of invested cash in fiscal 2004 generated by the sale-and-leaseback of
our headquarters building and the sale of excess land. Interest income decreased
in fiscal 2003 compared to fiscal 2002 primarily due to a decline of cash
invested and a drop in short-term interest rates.
In the fourth quarter of fiscal 2003, we began subleasing a portion of the
unused space at our headquarters facility in Boise, Idaho. The increase in net
rental income from fiscal 2003 to fiscal 2004 is due primarily to our subleasing
space for all of fiscal 2004. In addition, the rent we received in fiscal 2003
was offset by the leasing commission we expensed when earned.
The amount of any foreign currency exchange gain or loss for fiscal 2005 will
depend upon currency volatility, the amount of our intercompany balances and our
ability to accurately predict such balances, and whether we decide to enter into
foreign currency forward contracts in fiscal 2005. We expect interest income and
net rental income to remain relatively constant.
GAIN ON SALE OF LAND
In the second quarter of fiscal 2004 we sold approximately 16 acres of vacant
land adjacent to our headquarters building in Boise, Idaho. We received net cash
proceeds of $1.5 million after deducting fees related to the transaction.
INTEREST EXPENSE
The following table presents our interest expense for the years ended June 30,
2004, 2003 and 2002, and the percentage changes from the prior year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
-----------------------------------------------
Interest expense............ $ 453 48% $ 307 339% $ 70
as a % of net revenue..... 1% 1% 0%
Interest expense consists primarily of interest associated with the
sale-and-leaseback of our headquarters land and building, which is accounted for
as a financing transaction, interest paid on the term debt that we assumed in
connection with our acquisition of ViaFone in August 2002 and warrant expense
amortization related to entering into our line of credit agreement with Silicon
Valley Bank in January 2002. Interest expense increased by approximately $349
thousand in fiscal 2004 compared to fiscal 2003 as a result of entering into the
sale-and-leaseback agreement. This increase was partially offset by a $157
thousand decrease in interest expense in fiscal 2004 related to the cessation of
the warrant expense amortization in fiscal 2003. Interest expense increased to
$307 thousand in fiscal 2003 from $70 thousand in fiscal 2002 primarily as a
result of interest expense related to our assumption of $1.1 million of term
debt in connection with the ViaFone acquisition and as a result of fiscal 2003
including a full year of warrant amortization.
INCOME TAX PROVISION (BENEFIT)
The following table presents our income tax provision or benefit for the years
ended June 30, 2004, 2003 and 2002, and the percentage changes from the prior
year.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
-----------------------------------------------
Income tax provision (benefit). $ 94 (53)% $ (200) 91% $(2,257)
as a % of income (loss) before
taxes........................ 3% (5)% (24)%
We recorded an income tax provision in fiscal 2004 consisting primarily of
foreign withholding taxes for which no credit is currently available against
U.S. taxes due to our net loss position. The change in the income tax provision
(benefit) from fiscal 2003 to fiscal 2004 was primarily due to the tax benefit
we recorded for continuing operations in fiscal 2003 that offset the foreign
withholding taxes.
33
The income tax benefit decreased in fiscal 2003 compared to fiscal 2002
primarily as a result of recording an income tax benefit of approximately $1.6
million in the third quarter of fiscal 2002 for the refund we received as a
result of the temporary increase in the net operating loss carryback period
created by the Job Creation and Worker Assistance Act of 2002.
We expect to record an income tax provision of approximately $125 thousand in
fiscal 2005 related primarily to payments of foreign withholding taxes.
BUSINESS COMBINATIONS
In August 2002, we completed our acquisition of ViaFone. For information on this
acquisition see "Note 7. Business Combinations" in the Notes to Consolidated
Financial Statements of this report.
RESULTS OF DISCONTINUED OPERATIONS
In fiscal years ended 2003 and 2002 we exited a historical business that no
longer fits into the company's strategy for becoming the global leader in
providing mobile solutions for the enterprise.
In the first quarter of fiscal 2003, we adopted a formal plan to exit our
infrared hardware business as a result of an expected decline in sales of these
products and our desire to increase our focus on our core software businesses.
Throughout fiscal 2003 and the first half of fiscal 2004, we continued to see
revenue from this business as customers placed final orders. All final orders
were shipped before December 31, 2003.
On June 12, 2002, we completed the sale of Extended Systems Singapore Pte Ltd,
our wholly owned Singapore subsidiary, to Brookhaven Asia Ltd., a holding
company co-owned by the existing management team of Extended Systems Singapore
Pte Ltd. The purchase price for all the outstanding shares of the company was
$987,000. We originally acquired Extended Systems Singapore Ltd., formerly
Parallax Research Ltd., in November 1998. The Singapore operation was
instrumental in driving our infrared hardware business, and in managing our
relationships with third party contract manufacturers in Asia. As we have
continued to focus our efforts on our mobile and wireless enterprise software
solutions, revenue from our hardware products has been a declining percentage of
our net revenue. As a result, the Singapore entity was no longer strategic to
our business.
Results for our infrared hardware business and Singapore subsidiary operations
have been reclassified as discontinued operations for all periods and are
reported, net of tax, under "Income from discontinued operations" on our
Statements of Operations.
FISCAL YEAR ENDED JUNE 30,
2004 % CHANGE 2003 % CHANGE 2002
------------------------------------------
Net revenue......................... $ 169 (89)% $1,488 (45)% $2,687
Income from discontinued
operations, net of tax............ 88 (81) 458 65 278
Gain (loss) on sale of discontinued
operations, net of tax............ -- NM* -- NM* (335)
* percentage change not meaningful
Revenue from discontinued operations for fiscal 2004 and 2003 consisted
primarily of revenue from our discontinued infrared hardware business. Both net
revenue and income from discontinued operations declined in fiscal 2004 as
compared to fiscal 2003 because final orders were shipped in the first half of
fiscal 2004.
Net revenue from discontinued operations decreased in fiscal 2003 compared to
fiscal 2002 primarily as a result of there being no revenue from our former
Singapore subsidiary and no material revenue from our discontinued printing
solutions segment in fiscal 2003. Income from discontinued operations increased
in fiscal 2003 compared to fiscal 2002 due to an increase in net income from our
infrared hardware operations in fiscal 2003, which was a result of minimizing
expenses related to these operations. Additionally, in fiscal 2002 the Singapore
business generated a net loss.
34
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
NET CASH USED BY OPERATING ACTIVITIES
FISCAL YEAR ENDED JUNE 30,
2004 2003 2002
---------------------------------
Net cash used by operating activities....... $ (3,591) $ (3,163) $ (2,472)
Net cash used by operating activities in fiscal 2004 was primarily the result of
our net loss, which was significantly impacted by the non-recurring cash costs
of approximately $4.0 million related to the litigation and settlement of the
alleged patent infringement lawsuit by Intellisync Corporation. Included in the
net loss were non-cash charges for depreciation of $1.5 million, which declined
from the prior year as assets became fully depreciated and were not replaced
with new purchases. Non-cash charges for stock compensation of $1.0 million were
also included and increased from the prior year primarily due to the
amortization of the restricted stock grants made during the year plus the
charges related to the termination of employees including the former CEO and
CFO. Also included in our operating results was a non-cash gain of $1.1 million
related to the sale of excess land adjacent to the corporate headquarters during
the second quarter of fiscal 2004. Accounts payable and accrued expenses
decreased by $1.3 million during fiscal 2004 primarily due to the reduction in
accrued restructuring costs and the reversal in the first quarter of $513
thousand of accrued professional services costs related to the failed merger
with Palm, Inc. in 2001.
Net cash used by operating activities in fiscal 2003 was primarily the result of
our net loss and the result of a decrease in accounts payable and accrued
expenses of $2.0 million, adjusted for such non-cash items as depreciation and
amortization of $1.9 million. These cash uses were partially offset by acquired
in-process research and development of $430 thousand. Net cash used by operating
activities in fiscal 2002 was primarily the result of our net loss and the
result of a decrease in accounts payable and accrued expenses of $2.4 million,
adjusted for such non-cash items as depreciation and amortization of $2.9
million. These cash uses were partially offset by a decrease in receivables and
inventories of $3.5 million, and an increase in deferred revenue of $827
thousand.
Accounts receivable, net of allowance, increased from $5.6 million at June 30,
2003 to $6.9 million at June 30, 2004. This increase in accounts receivable is
due to an increase in total net revenue and an increase in DSOs (days sales
outstanding). Our DSO for the quarter ended June 30, 2004 was 80 days as
compared to 70 days for the quarter ended June 30, 2003. The increase in DSO is
a result of more of our revenues originating from customers in Europe and Asia
that have historically had longer payment terms than our North American
customers. We expect that our accounts receivable will increase in fiscal 2005
as a result of an expected increase in net revenues. Accounts receivable may
also increase in the future if net revenue from international customers becomes
a higher percentage of our net revenue.
NET CASH PROVIDED BY INVESTING ACTIVITIES
FISCAL YEAR ENDED JUNE 30,
2004 2003 2002
--------------------------------
Net cash provided by investing activities.... $ 724 $ 1,248 $ 462
Net cash provided by investing activities in fiscal 2004 was generated primarily
from the sale of our excess land. In the second quarter of fiscal 2004 we sold
approximately 16 acres of vacant land adjacent to our headquarters building in
Boise, Idaho. We received approximately $1.5 million in net cash proceeds after
deducting fees related to the transaction. This cash inflow was offset by
spending on property and equipment, which included spending of $204 thousand for
tenant improvements we were required to make to the subleased portion of the
unused space at our headquarters building pursuant to the sublease agreements
and $384 thousand for software and other expenses related to a project to
upgrade our accounting and transactional infrastructure.
Net cash provided by investing activities in fiscal 2003 was primarily the
result of completing the acquisition of ViaFone. As part of our continued effort
to control cash and expenses, we did not make a significant investment in
property and equipment in fiscal 2003. Net cash provided by investing activities
in fiscal 2002 was primarily the result of proceeds from the sale of our
Singapore subsidiary net of cash sold with the entity. These proceeds were
partially offset by purchases of property and equipment of $148 thousand. As
part of our effort to control cash and expenses, we also did not make a
significant investment in property and equipment in fiscal 2002.
We plan to incur aggregate capital expenditures of approximately $500 thousand
during fiscal 2005, primarily for updating hardware and software infrastructure
and real property repairs.
35
NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES
FISCAL YEAR ENDED JUNE 30,
2004 2003 2002
-----------------------------
Net cash provided by (used by)
financing activities........................ $ 6,573 $ (123) $ 871
Net cash provided from financing activities in fiscal 2004 resulted most
significantly from the cash received in the sale-and-leaseback of our
headquarters facility. On September 26, 2003, we closed the sale-and-leaseback
transaction and received proceeds of $4.8 million, netting $4.6 million after
deducting transaction costs. As part of the agreement, we entered into a 10-year
master lease for the building with annual payments equal to approximately $442
thousand. We also received cash from transactions related to our stock during
fiscal 2004. We received $1.4 million in net cash proceeds from the exercise of
stock options granted to employees and $872 thousand from the purchase of stock
by our employees through our employee stock purchase plan.
Net cash used by financing in fiscal 2003 was primarily the result of $499
thousand of payments made on term debt assumed as part of our acquisition of
ViaFone, partially offset by $376 thousand of proceeds from the issuance of
common stock under our stock plans. In fiscal 2002 net cash provided by
financing activities was the result of $871 thousand in proceeds received from
the issuance of common stock under our stock plans.
On January 15, 2002, we entered into a loan and security agreement with Silicon
Valley Bank and renewed and restructured this agreement effective as of August
31, 2004. Under this agreement we can access up to $2.5 million of financing in
the form of a demand line of credit. Our borrowing capacity is limited to 80% of
eligible accounts receivable balances and is collateralized by certain of our
assets. Interest on any borrowings will be paid at prime. The line of credit
agreement requires us to maintain certain financial ratios and expires in August
2006. We are in compliance with all covenants. There are no outstanding draws on
this facility.
Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank. We have restructured that
debt into a term loan due in 30 equal monthly installments bearing interest at
8%. The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005.
We believe that our existing working capital, our borrowing capacity and the
funds we expect to generate from our operations will be sufficient to fund our
anticipated working capital and capital expenditure requirements for the next
twelve months. We cannot be certain, however, that our underlying assumed levels
of revenues and expenses will be accurate. If our operating results were to fail
to meet our expectations or if accounts receivable, or other assets were to
require a greater use of cash than is currently anticipated, we could be
required to seek additional sources of liquidity. However if we were required to
obtain additional financing to fund future operations, sources of capital may
not be available on terms favorable to us, if at all.
We intend to continue to pursue strategic acquisitions of, or strategic
investments in, companies with complementary products, technologies or
distribution networks in order to broaden our adaptive mobility product
offerings. We currently have no commitments or agreements regarding any material
transaction of this kind. At some point in the future we may require additional
funds for either operating or strategic purposes and may seek to raise
additional funds. These sources of liquidity could include raising funds through
public or private debt financing, borrowing against our line of credit or
offering additional equity securities. If additional funds are raised through
the issuance of equity securities, substantial dilution to our stockholders
could result. In the event additional funds are required, adequate funds may not
be available when needed or may not be available on favorable terms, which could
have a negative effect on our business and results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
As part of our on-going business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnership
such as entities often referred to as structured finance or special purpose
entities, or SPE's, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited proposes. As of June 30, 2004, we are not involved in any unconsolidated
SPE transactions.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
We currently lease office space at our locations in Boise, Idaho; Herrenberg,
Germany; Toronto, Canada; Corvallis, Oregon; Paris, France; Bristol, England;
San Diego, California; American Fork, Utah; and
36
`s-Hertogenbosch, the Netherlands. We also lease certain equipment under
non-cancelable operating and capital leases. Lease expense under operating lease
agreements was $578 thousand, $894 thousand and $391 thousand for the fiscal
years ended June 30, 2004, 2003 and 2002, respectively.
On September 26, 2003, we closed a transaction with Hopkins Financial Services
for the sale-and-leaseback of our headquarters building and land in Boise,
Idaho. Because we have a 10-year option to repurchase the building and land at a
price of $5.1 million and we sublet more than a small portion of the building
space, the sale-and-leaseback was recorded as a financing transaction and is
shown as $4.8 million of long-term debt on our balance sheet at June 30, 2004.
As part of the agreement, we entered into a 10-year master lease for the
building with annual lease payments equal to 9.2% of the sale price, or
approximately $442 thousand. We are also obligated to pay all expenses
associated with the building during our lease, including the costs of property
taxes, insurance, operating expenses and repairs.
Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank ("SVB"). We restructured that
debt into a term loan due in 30 equal monthly installments bearing interest at
8%. The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005. At June 30, 2004, the loan balance was $325 thousand.
Our minimum future contractual commitments associated with our operational
indebtedness and lease obligations as of June 30, 2004 are as follows (in
thousands):
YEAR ENDING JUNE 30,
--------------------------------------
2005 2006 2007 2008 2009 THEREAFTER TOTAL
----------------------------------------------------------
SVB debt principal (1)........ $ 325 $ -- $ -- $ -- $ -- $ -- $ 325
SVB debt interest............. 11 -- -- -- -- -- 11
Payment pursuant to building
sale-and-leaseback.......... 442 442 442 442 442 1,875 4,085
Capital leases (1)............ 28 12 7 -- -- -- 47
Operating leases ............. 522 351 284 253 251 63 1,724
Post-retirement benefits...... 17 17 17 17 17 67 152
----------------------------------------------------------
Total commitments..... $1,345 $ 822 $ 750 $ 712 $ 710 $ 2,005 $6,344
==========================================================
(1) This amount is reported on the balance sheet as a liability.
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES
We derive a substantial portion of our net revenue from international sales,
principally through our international subsidiaries and through a limited number
of independent distributors and overseas original equipment manufacturers. Sales
made by our international subsidiaries are generally denominated in each
country's respective currency. Fluctuations in exchange rates could cause our
results to fluctuate when we translate revenue and expenses denominated in other
currencies into U.S. dollars. Fluctuations in exchange rates also may make our
products more expensive to original equipment manufacturers and independent
distributors who purchase our products in U.S. dollars.
We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and British pound sterling, to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. While these instruments are subject to fluctuations
in value, these fluctuations are generally offset by fluctuations in the value
of the underlying asset or liability being managed, resulting in minimal net
exposure for us. These forward contracts do not qualify for hedge accounting
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and, as such, the contracts are recorded in the consolidated balance
sheet at fair value. We report a net currency gain or loss based on changes in
the fair value of forward contracts combined with changes in fair value of the
underlying asset or liability being managed. The success of these currency
activities depends upon estimation of intercompany balances denominated in
various foreign currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, we could experience
unanticipated currency gains or losses. When determining whether to enter into
foreign currency forward contracts, we also consider the impact that the
settlement of such forward contracts may have on our cash position. To eliminate
a potential cash settlement of a forward position we may, from time to time,
decide not to use foreign currency forward contracts to manage fluctuations in
the value of foreign currencies on transactions with our international
subsidiaries. In a period where we
37
do not enter into foreign currency forward contracts, we could experience
significant non-cash currency gains or losses if the value of the U.S. dollar
strengthens or weakens significantly in relation to the value of the foreign
currencies. As of June 30, 2004, we had forward contracts with a nominal value
of $10.8 million in place against the Canadian dollar, euro and British pound
sterling, which matured within 30 days. We had no forward contracts in place as
of June 30, 2003. We recognized a net currency exchange loss of approximately
$206 thousand for the fiscal year ended June 30, 2004, a net currency exchange
gain of approximately $261 thousand for the fiscal year ended June 30, 2003 and
a net currency exchange loss of approximately $129 thousand for the fiscal year
ended June 30, 2002.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
WE HAVE A RECENT HISTORY OF LOSSES AND MAY CONTINUE TO GENERATE LOSSES IN FISCAL
2005.
Since the third quarter of our fiscal 1999, we have devoted significant
financial resources to the research and development of, and marketing and sales
for, our mobile information management software products and, as a result, we
have generated operating losses. We intend to continue to devote significant
financial resources to product development and to marketing and sales
activities. Our ability to reach break-even from operations and our ability to
reach profitability and positive cash flow from operations in subsequent
periods, will depend on a number of factors, including:
o our ability to generate sufficient revenue and control expenses;
o buying patterns of our enterprise, application developer and original
equipment manufacturer customers;
o changes in customer demand for our products;
o the timing of customer orders, which can be influenced by fiscal year-end
buying patterns, seasonal trends or general economic conditions;
o announcements or introductions of new products or services by our
competitors;
o delays in our development and introduction of new products and services;
o changes in our pricing policies as a result of increased competition;
o the mix of distribution channels through which we sell our products;
o the market acceptance of our new and enhanced products and the products of
our customers that are application developers and original equipment
manufacturers;
o the emergence of new technologies or industry standards;
o normal seasonality that we typically experience in the first quarter of our
fiscal year; and
o a shift in the mix of professional services and licensing revenue, which
may result in fluctuations in our gross margin.
WE ARE ADVANCING OUR ENTERPRISE MOBILITY SOLUTIONS PRODUCT LINE, WHICH CURRENTLY
DERIVES ITS REVENUES PRIMARILY FROM PERSONAL INFORMATION MANAGEMENT AND EMAIL
APPLICATIONS, BY INCREASING THE EMPHASIS ON MOBILE APPLICATIONS, INCLUDING LINE
OF BUSINESS APPLICATIONS FOR FIELD SERVICE, SALES FORCE AUTOMATION AND OTHER
CUSTOM APPLICATIONS. IF WE ARE UNABLE TO COMPLETE THIS PROGRESSION, OUR
OPERATING RESULTS COULD BE HARMED.
o Changes in our partnering and go-to market strategy. To effectively
compete in mobile line of business applications we need to partner
with independent software vendors and system implementers that have
knowledge of the specific industries and workflows for the targeted
vertical applications. One of our core capabilities is our knowledge
of how mobile access to corporate information can impact and improve
the productivity of mobile workers. To achieve a successful partnering
arrangement we must attract the business interests of these
prospective partners and coordinate the efforts of our marketing,
sales and professional services organizations. These tasks are
complicated and involve many people and processes. If we fail to
attract these partners or effectively co-ordinate these efforts we
will not be able to broaden the acceptance of our mobile middleware
platform into other applications and would remain dependent on revenue
from PIM and email applications which we believe could be subject to
price erosion in the marketplace.
o Changes in the make-up of our executive team. We believe we have taken
steps to strengthen our management team and have added people with the
skills and experience to lead the company through the progression
described above. Several members of our executive team, including our
Chief Executive Officer, our Chief Financial Officer, our Chief
Marketing Officer, Vice President of Human Resources and Vice
President of EMEA have joined the company within the last three to
eighteen months. As a result, the executive team has a relatively
short history of working together, and we cannot be certain whether
they will
38
be able to manage the transition of the company. If they are unable to
work together effectively or do not execute the business plan
efficiently, our business will suffer.
o Changes in the sales organization. We have many new sales
representatives in our enterprise mobility products sales force that
may take time to reach productivity. Late in fiscal 2003 and into
fiscal 2004 we began to reorganize our sales force and replace the
previous sales team with people that have more tenure and experience
selling to large enterprises. We also established a new focus on large
strategic accounts, re-allocated territories and terminated a number
of representatives. As a result of these changes many of our account
representatives operated under new leadership, began working with new
customers or were relatively new to our company. We have a significant
number of sales representatives that are working toward achieving
acceptable productivity. If the new members of our sales team are
unable to become fully productive in a reasonable time frame or we are
unable to retain these new sales representatives, we may lose sales
opportunities and market share, take longer to close anticipated sales
and experience a shortfall in revenues.
MARKETS FOR OUR PRODUCTS ARE BECOMING INCREASINGLY COMPETITIVE, WHICH COULD
RESULT IN LOWER PRICES FOR OUR PRODUCTS OR A LOSS OF MARKET SHARE.
We may not compete successfully against current or future competitors, some of
whom have longer operating histories, greater name recognition, more employees
and significantly greater financial, technical, marketing, public relations and
distribution resources. We expect increasing price pressure for several of our
products including our mobile PIM and email applications, IrDA and Bluetooth
products as these technologies become more commodity oriented and less
differentiated in the marketplace. Increased competition may result in price
reductions, reduced margins, loss of market share and a change in our business
and marketing strategies, any of which could harm our business. The competitive
environment may require us to make changes in our products, pricing, licensing,
services or marketing to maintain and extend the market acceptance of our
products. Price concessions or the emergence of other pricing or distribution
strategies by our competitors or us may diminish our revenue.
DEFECTS IN OUR SOFTWARE PRODUCTS, INCLUDING OUR NEWLY RELEASED ONEBRIDGE
PRODUCTS, COULD RESULT IN A LOSS OF REVENUES, DECREASED MARKET ACCEPTANCE,
INJURY TO OUR REPUTATION AND PRODUCT LIABILITY CLAIMS.
The software products we offer, particularly our enterprise mobility software,
are inherently complex. Significant technical challenges arise with our products
because our customers purchase and deploy our products across a wide variety of
mobile device hardware types and operating systems, operate over various carrier
networks and interface into a wide variety of enterprise scale applications and
data configurations. This risk increases when we release new products or make
significant enhancements to our existing products or where we have limited
experience with new or complex customer environments. We have not experienced
substantial, unresolved problems to date; however, customers have in the past
and may in the future experience delays and difficulties when deploying our
products into large, complex and variable environments. Product deployment
issues can arise from a customer's configuration of their load balancing,
clustering, authentication profiles or the data structures of their IBM Notes or
Microsoft Exchange systems and may require professional services to resolve
these issues. Despite quality control processes and testing by our current and
potential customers, and us we cannot be sure that errors will not be found in
current versions, new products or enhancements of our products after
commencement of commercial shipments.
We recently began shipping and customers have recently begun installing
OneBridge 4.2. In the course of the customer implementation activities that we
have been involved with to date, we have encountered what we believe to be
ordinary errors of the type generally associated with a release of major
software programs. However, there can be no assurance that significant defects
will not be detected as customers deploy the product in larger volumes into even
more complex environments. Software errors, if significant, or market perception
that our software is not fully ready for production use - whether accurate or
not - could result in:
o failure to achieve market acceptance;
o loss of customers;
o loss or delay in revenues;
o loss of market share;
o diversion of development resources;
o damage to our reputation;
o increased service and warranty costs; and
o claims or litigation for breach of contract or warranty.
39
OUR INCREASING FOCUS ON ENTERPRISE CUSTOMERS MAY LENGTHEN OUR SALES CYCLES AND
INCREASE FLUCTUATIONS IN OUR FINANCIAL RESULTS.
As we seek to license our software to large enterprises and increase the average
value of each sales transaction through our varied channel approach, we have
experienced sales cycles that can be substantially more lengthy and uncertain
than sales to smaller organizations of less complex product offerings. As we
focus on large mobile application solutions that involve mission critical
business applications, our enterprise customers generally require us to expend
substantial time, effort and money in establishing the relationship and
educating them about our solutions and how our solutions can provide benefits to
their business. Also, sales to enterprise customers generally require an
extensive sales effort throughout the customer's organization and often require
final approval by the customer's chief information officer or other senior
executive employee. These factors substantially extend the sales cycle and
increase the uncertainty of whether a sale will be made in any particular
quarter, or at all. We have experienced and expect to continue to experience
delays and uncertainty in our sales cycle as well as increased up-front expenses
in connection with our enterprise sales efforts. The timing of the execution of
the enterprise volume licenses or the length of the contract negotiation process
could cause our revenues and results of operations to vary significantly from
quarter to quarter.
WE MAY INCUR SUBSTANTIAL COSTS TO COMPLY WITH THE REQUIREMENTS OF THE
SARBANES-OXLEY ACT OF 2002.
The Sarbanes-Oxley Act of 2002 introduced new requirements applicable to us
regarding corporate governance and financial reporting. Among many other
requirements is the requirement under Section 404 of the Act for management to
report on our internal controls over financial reporting and for our registered
public accountant to attest to this report. We expect to dedicate significant
time and resources during fiscal 2005 to ensure compliance. There can be no
assurance that we will be successful in our efforts to comply with Section 404.
Failure to do so could result in penalties and additional expenditures to meet
the requirements, which could affect the ability of our auditors to issue an
unqualified report.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO PREDICT. THE
TIMING OF LARGE ORDERS IS MORE UNPREDICTABLE. OUR EXPENSES ARE RELATIVELY FIXED
IN THE SHORT TERM AND UNPREDICTABLE REVENUE SHORTFALLS COULD DISPROPORTIONATELY
AND ADVERSELY AFFECT OPERATING RESULTS.
Our quarterly operating results have fluctuated in the past and may continue to
do so in the future. As we increase our focus on sales to large enterprise and
increase our sales through independent software vendors the lack of
predictability of our sales cycle will increase. The timing to close orders
remains difficult to accurately predict as a result of the overall economic
conditions, cautious capital spending by business and the complexities of
selling to large enterprises. In contrast, our expense levels are relatively
fixed in the near term and based in part on our revenue expectations. If revenue
is below expectations in any given quarter, the adverse impact of the shortfall
on our operating results may be magnified by our inability to adjust personnel
and other expenditures to compensate for the shortfall on a rapid basis.
OUR STOCK PRICE IS VOLATILE. OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY
FLUCTUATE SIGNIFICANTLY AND FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS
OR INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our stock price has been and is highly volatile. Our stock price is highly
influenced by current expectations of our future revenues, earnings and cash
flows from operations. If our operating results fall below the expectations of
securities analysts, prospective investors or current shareholders, the price of
our stock may fall. In addition, quarter-to-quarter variations in our revenue
and operating results could create uncertainty about the direction or progress
of our business or create a negative change in our perceived long-term growth
prospects, which could result in a decline in the price of our stock.
Other factors that may have a significant impact on the market price of our
common stock include:
o announcements of acquisitions by us or our competitors;
o changes in our management team;
o our ability to obtain financing when needed;
o sales of significant numbers of shares within a short period of time;
o announcements of technological innovations or new products by us or our
competitors;
40
o general conditions in the computer and mobile device industry;
o general economic conditions and their impact on corporate information
technology spending;
o price and trading volume volatility in the public stock markets in general;
o announcements and updates of our business outlook; and
o changes in security analysts' earnings estimates or recommendations
regarding our competitors or our customers.
CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO COMPETE EFFECTIVELY.
Consolidation continues to occur among companies that compete in our markets as
firms seek to offer more extensive suites of mobility software products and to
take advantage of efficiencies and economies of scale. In fiscal 2004 our
competitors completed acquisitions including but not limited to the following
examples; Intellisync Corporation acquired Synchrologic, iAnywhere, a division
of Sybase, Inc. acquired Xcellenet, Inc., Broadcom acquired Widcomm, Inc. and
Infowave Incorporated acquired Telispark. Changes resulting from these and other
consolidations may harm our competitive position. In addition as the trend
toward consolidation continues, we may encounter increased competition for
attractive acquisition targets and my have to pay higher prices for those
businesses or technologies we seek to acquire.
THE LOSS OF KEY PERSONNEL, OR OUR INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, MAY HARM OUR BUSINESS.
Our future success will depend on our ability to attract and retain experienced,
qualified employees, particularly highly skilled software engineers, effective
enterprise sales representatives and management personnel. Our plans include
adding a number of new employees most significantly in our research and
development group. Competition for qualified personnel in the computer software
industry is growing as the software industry rebounds from the technology
downturn experienced in the past several years. We are not certain that our
efforts to retain our key employees will succeed or that we will be successful
in recruiting new qualified employees.
If we lose the services of one or more key employees, or if one or more of them
decide to join a competitor or otherwise compete directly or indirectly with us,
our business could be harmed. Searching for replacements for our key employees
could divert management's time and result in increased operating expenses that
may not be offset by either improved productivity or higher prices. New
employees generally require substantial training, which may require significant
resources and management attention.
OUR BUSINESS RELIES ON ENTERPRISES IMPLEMENTING MOBILE APPLICATIONS AND DEVICES.
THE MARKET FOR THESE PRODUCTS IS DEVELOPING AND MAY BE HARMED IF CUSTOMERS ARE
SLOW, OR DO NOT ADOPT OUR PRODUCTS OR BY DECLINES IN OVERALL INFORMATION
TECHNOLOGY SPENDING.
The enterprise mobile application market is still developing and enterprises are
exploring the benefits of mobilizing corporate information including their
mission critical applications. Mobile contacts, calendar and email are becoming
more generally accepted mobile applications, however, our customers and
potential customers have not traditionally mobilized their other enterprise
applications. As this is a relatively new market, we cannot be certain that this
market will develop and grow. We expect that we will continue to need to pursue
intensive marketing and selling efforts to educate prospective customers about
the benefits to their operations through use of our products. This could cause
our sales and marketing expenses to increase without a corresponding increase in
revenues.
The market for our products also depends on the broader economic climate and
spending on information technology, including mobile applications and devices.
The global economic downturn and the slower growth in the geographies
experiencing economic recovery may cause enterprises to delay implementation of
mobile device and application rollouts, reduce their overall information
technology budgets or reduce or cancel orders for our products. Our original
equipment manufacturer customers may also limit development of new products that
incorporate our products or reduce their level of purchases of our products in
the face of slower information technology spending by their customers. A general
weakening of the global economy and weakening of business conditions,
particularly in the information technology, telecommunications, financial
services and manufacturing industry sectors, could result in potential customers
experiencing declines in their revenue and operations. In this environment,
customers may experience financial difficulty or cease operations.
While we believe we have adequately factored these conditions into our current
revenue forecasts, if these conditions worsen or continue longer than expected,
demand for our products may be reduced as a result of enterprises reducing
information technology spending on our products and original equipment
manufacturers reducing their use of our products in their own products. As a
result, our revenue may fail to grow or could decline, which would harm our
41
operating results. If the current economic slowdown persists or worsens, we also
may be forced to reduce our operating expenses, which could result in additional
charges incurred in connection with restructuring or other cost-cutting measures
we may implement. For example, in both fiscal 2003 and fiscal 2004, we announced
restructuring plans to replace or reduce personnel, reduce costs, and improve
operating efficiencies and, as a result, incurred restructuring costs, primarily
for severance payments to terminated employees.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE AGAINST CURRENT AND POTENTIAL
COMPETITORS.
Our markets are increasingly competitive and our competitors are some of the
largest software providers in the world. As the markets for adaptive mobility
products grow, we expect competition from both existing and new competitors to
intensify. We compete with:
o mobile data management companies, including, IBM, iAnywhere (a division of
Sybase), Infowave; JP Mobile, Microsoft, Intellisync and RIM
o application mobilization companies, including Everypath, iAnywhere,
Microsoft, and Oracle;
o mobile enterprise solutions companies, including Aether Systems, Dexterra,
and Infowave;
o client/server database providers, including Interbase, Microsoft, Oracle
and Pervasive Software;
o mobile connectivity companies, including IVT Corporation, Agilent,
Embednet, CSR, Broadcom, Telica, Stonestreet One, Link Evolution and Open
Interface; and
o internal research and development departments of original equipment
manufacturers, many of whom are our current customers.
To date, our solutions have been differentiated from our competitors based on
total cost of ownership, interoperability, performance and reliability. We may
not be able to maintain our competitive position against current and potential
competition, particularly competitors that have longer operating histories and
significantly greater financial, technical, marketing, sales and other resources
than we do and therefore may be able to respond more quickly than us to the new
or changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged to gain market share to our
detriment. These competitors may be able to undertake more extensive promotions
activities, adopt more aggressive pricing policies, and offer more attractive
terms to purchasers than we can. Current and potential competitors have
established or may establish cooperative relationship among themselves or with
third parties to enhance their products. Additionally, if existing or new
competitors were to merge or form strategic alliances, our market share may be
reduced or pressure may be put on us to reduce prices resulting in reduced
revenue and margins. These and other competitive factors could result in price
reductions, reduced revenues and gross margins and lost market share and an
inability to expand into new markets and industries, any one of which could
materially affect our results of operations.
THE SUCCESS OF OUR BUSINESS MAY DEPEND ON US IDENTIFYING AND SECURING ADDITIONAL
SOURCES OF FINANCING, WHICH SOURCES MAY NOT BE AVAILABLE WHEN NEEDED OR MAY NOT
BE AVAILABLE ON FAVORABLE TERMS.
We believe that our existing working capital, the expected funds from the sale
of our excess land, our borrowing capacity and the funds we expect to generate
from our operations will be sufficient to fund our anticipated working capital
and capital expenditure requirements for the next twelve months. We cannot be
certain, however, that our underlying assumed levels of revenues and expenses
will be accurate. If our operating results were to fail to meet our expectations
or if accounts receivable, or other assets were to require a greater use of cash
than is currently anticipated, we could be required to seek additional sources
of liquidity. These sources of liquidity could include raising funds through
public or private debt financing, borrowing against our line of credit or
offering additional equity securities. If additional funds are raised through
the issuance of equity securities, substantial dilution to our stockholders
could result. In the event additional funds are required, adequate funds may not
be available when needed or may not be available on favorable terms, which could
have a negative effect on our business and results of operations.
WE DEPEND ON A NUMBER OF KEY BUSINESS RELATIONSHIPS AND IF WE FAIL TO MAINTAIN
THESE RELATIONSHIPS, OR ARE UNABLE TO DEVELOP NEW RELATIONSHIPS, OUR BUSINESS
WOULD SUFFER.
An important element of our strategy is the development of key business
relationships with other companies that are involved in product development,
joint marketing and the development of mobile communication protocols. If we
fail to maintain our current relationships or are unable to develop new
relationships, our business would suffer. Some of these relationships impose
substantial product support obligations on us, which may not be offset by
significant revenue. The benefits to us may not outweigh or justify our
obligations in these relationships. Also, in order to meet our current or future
obligations to original equipment manufacturers, we may be required to allocate
additional
42
internal resources to original equipment manufacturers' product development
projects, which may delay the completion dates of our other current product
development projects.
Our existing key business relationships do not, and any future key business
relationships may not, provide us any exclusive rights. Many of the companies
with which we have established and intend to establish key business
relationships have multiple strategic relationships, and these companies may not
regard their relationships with us as significant. In most of these
relationships, either party may terminate the relationship with little notice.
In addition, these companies may attempt to develop or acquire products that
compete with our products. They may do so on their own or in collaboration with
others, including our competitors. Further, our existing business relationships
may interfere with our ability to enter into other business relationships.
OUR INVESTMENT IN GOODWILL AND INTANGIBLES RESULTING FROM OUR ACQUISITIONS COULD
BECOME IMPAIRED.
As of June 30, 2004, the amount of goodwill and other identifiable intangibles
recorded on our books, net of accumulated amortization, was $12.5 million. We
ceased amortizing goodwill upon our adoption of SFAS No. 142 as of the beginning
of fiscal 2003, and we expect to amortize $576 thousand of net identifiable
intangibles in fiscal years 2005 through 2009. However, to the extent that our
goodwill or other identifiable intangibles are considered to be impaired because
circumstances indicate their carrying value may not be recoverable, all or a
portion of these assets may be subject to write-off in the quarter of
impairment. Such impairment and any resulting write-off could have a negative
impact on our results of operations in the period goodwill or other identifiable
intangibles are written off.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP OR INTRODUCE NEW PRODUCTS.
The markets for our products are characterized by:
o rapidly changing technologies;
o evolving industry standards;
o frequent new product introductions; and
o short product life cycles.
Any delays in the introduction or shipment of new or enhanced products, the
inability of our products to achieve market acceptance or problems associated
with new product transitions could harm our business. The product development
process involves a number of risks. Development of new, technologically advanced
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. The
introduction of new or enhanced products also requires us to manage the
transition from older products to minimize disruption in customer ordering
patterns.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENT, TRADEMARK, COPYRIGHT OR
OTHER INTELLECTUAL PROPERTY RIGHTS FROM COMPETITORS, AND WE MAY BE REQUIRED TO
USE A SIGNIFICANT AMOUNT OF OUR RESOURCES TO DEFEND OURSELVES FROM INFRINGEMENT
CLAIMS MADE BY OTHERS.
Our patents, trademarks or copyrights may be invalidated, circumvented or
challenged, and the rights granted under these patents, trademarks and
copyrights might not provide us with any competitive advantage, which could harm
our business. Any of our pending or future patent applications may not be issued
with the scope of the claims we are seeking, if at all. In addition, others may
develop technologies that are similar or superior to our technology, duplicate
our technology or design around our patents. Further, effective intellectual
property protection may be unavailable or limited in some countries outside of
the United States.
Companies in the software industry resort to litigation over intellectual
property rights and there has been a substantial amount of litigation in the
software industry regarding intellectual property rights. During 2004 we settled
an intellectual property dispute that required a significant amount of company
resources. It is possible in the future that third parties may claim that our
current or potential future products infringe their intellectual property. If a
court finds that we infringe on the intellectual property rights of any third
party, we could be subject to liabilities, which could harm our business. As a
result, we might be required to seek licenses from other companies or to refrain
from using, manufacturing or selling specific products or using specific
processes. Holders of patents and other intellectual property rights may not
offer licenses to use their patents or other intellectual property rights on
acceptable terms, or at all. Failure to obtain these licenses on commercially
reasonable terms or at all could harm our business.
In order to protect our proprietary rights, we may decide to sue third parties.
Any litigation, whether brought by or against us, could cause us to incur
significant expenses and could divert a large amount of management time and
effort. A claim by us against a third party could, in turn, cause a counterclaim
by the third party against us, which could impair our intellectual property
rights and harm our business.
43
OUR BUSINESS MAY BE HARMED DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS, WHICH REPRESENT A SUBSTANTIAL PORTION OF OUR REVENUE.
In fiscal
2004, based on the region where the customer resides, over 50% of our revenue
was generated from international sales. We expect that international sales will
continue to represent a substantial portion of our revenue for the foreseeable
future. International sales are subject to a number of risks, including:
o changes in regulatory requirements and resulting costs ;
o export license requirements;
o export restrictions, tariffs, taxes and other trade barriers;
o potentially reduced or less certain protection for intellectual property
rights than is available under the laws of the United States;
o longer collection and payment cycles than those in the United States;
o difficulty in staffing and managing international operations; and
o political and economic instability, including the threat or occurrence of
military and terrorist actions and enhanced national security measures.
One or more of these risks could harm our future research operations and
international sales and support. If we are unable to manage these risks of doing
business internationally, our results could suffer.
OUR BUSINESS MAY BE HARMED IF OUR PROFESSIONAL SERVICES ORGANIZATION DOES NOT
GENERATE AN ACCEPTABLE PROFIT LEVEL, INCURS COSTS IN EXCESS OF AMOUNTS BILLABLE
TO CUSTOMERS OR IF OUR PROFESSIONAL SERVICE REVENUE INCREASES AS A PERCENTAGE OF
TOTAL REVENUES.
Our professional services business is subject to a variety of risks including:
o we may be unable to accurately predict staffing requirements and therefore
the expense of fulfilling our service contracts may be greater than we
anticipate; and
o we may have an inappropriate level of resources dedicated to the
professional services business in relation to the number of projects we are
able to sell, resulting in a low utilization rate of resources.
o we may enter into professional services engagements that are complex and
which are is difficult to estimate resource requirements and costs due
to the nature and scope of the engagement and the need to integrate our
work product with the products of other contractors retained by our
customers; and
o we have and may in the future enter into contractual arrangements with our
professional services customers that subject us to damages and other
liabilities if our work product does not conform to the agreed
specification.
If we are unable to operate the professional services organization effectively,
the profitability of this business could decline, or even result in a loss,
which could harm our business. In addition, we may enter into professional
services projects that charge customers a fixed fee for a defined deliverable.
We have at times in the past underestimated and may in the future underestimate
the amount of time or resources required to complete this work and receive
customer acceptance. If we do not correctly estimate the amount of time or
resources required for a large project or a significant number of projects, our
gross margins could decline, adversely impacting our operating results.
We realize lower margins on our professional service revenue than on license
revenues. As a result, if professional service revenue increases as a percentage
of total revenue our gross margins may decline and our operating results may be
adversely affected.
CURRENCY EXCHANGE RATE FLUCTUATIONS COULD CAUSE OUR OPERATING RESULTS TO
FLUCTUATE.
The transactions made through our subsidiaries in Canada, France, Germany,
Italy, the Netherlands and the United Kingdom are primarily denominated in local
currencies. Accordingly, these international operations expose us to currency
exchange rate fluctuations, which in turn could cause our operating results to
fluctuate when we translate revenue and expenses denominated in other currencies
into U.S. dollars.
From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro, and British pound sterling, to manage
currency fluctuations on payments and receipts of foreign currencies on
transactions with our international subsidiaries. The success of these currency
activities depends upon estimation of intercompany balances denominated in
various foreign currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, we could experience
unanticipated currency gains or losses. When determining whether to enter into
foreign currency forward contracts, we also consider the impact that the
44
settlement of such forward contracts may have on our cash position. To eliminate
a potential cash settlement of a forward position we may, from time to time,
decide not to use foreign currency forward contracts to manage fluctuations in
the value of foreign currencies on transactions with our international
subsidiaries. In a period where we do not enter into foreign currency forward
contracts, we could experience significant non-cash currency gains or losses if
the value of the U.S. dollar strengthens or weakens significantly in relation to
the value of the foreign currencies.
IF WE ACCOUNT FOR EMPLOYEE STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS USING
THE FAIR VALUE METHOD, IT COULD SIGNIFICANTLY REDUCE OUR NET INCOME AND EARNINGS
PER SHARE.
There has been ongoing public debate whether employee stock option and employee
stock purchase plans shares should be treated as a compensation expense and, if
so, how to properly value such charges. If we elected or were required to record
an expense for our stock-based compensation plans using the fair value method,
we could have significant accounting charges. For example, in fiscal year 2004,
had we accounted for stock-based compensation plans using the fair-value method
prescribed in FASB Statement No. 123 as amended by Statement 148, our net loss
would have been increased by approximately $4.6 million. Although we are not
currently required to record any compensation expense using the fair value
method in connection with option grants that have an exercise price at or above
fair market value at the grant date and for shares issued under our employee
stock purchase plan, it is possible that future laws or regulations will require
us to treat all stock-based compensation as an expense using the fair value
method. See Note 3 of Notes to Consolidated Financial Statements for a more
detailed presentation of accounting for stock-based compensation plans. If we
are required to treat all stock-based compensation as an expense, we may change
both our cash and stock-based compensation practices.
WE DEPEND ON NON-EXCLUSIVE LICENSES FOR SOME OF THE TECHNOLOGY WE USE WITH OUR
PRODUCTS.
We license technology on a non-exclusive basis from several companies for use
with our products and anticipate that we will continue to do so in the future.
For example, we license encryption technology that we include in our OneBridge
Mobile Groupware products. Our inability to continue to license this technology,
or to license other technology necessary for use with our products, could result
in the loss of, or delays in the inclusion of, important features of our
products or result in substantial increases in royalty payments that we would
have to pay pursuant to alternative third-party licenses, any of which could
harm our business. In addition, the effective implementation of our products
depends upon the successful operation of licensed software in conjunction with
our products. Any undetected errors in products resulting from this licensed
software may prevent the implementation or impair the functionality of our
products, delay new product introductions and injure our reputation.
SOME ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND STOCKHOLDER RIGHTS PLAN, AS WELL AS PROVISIONS OF DELAWARE LAW, COULD
IMPAIR A TAKEOVER ATTEMPT.
We have provisions in our certificate of incorporation and bylaws, each of which
could have the effect of rendering more difficult or discouraging an acquisition
deemed undesirable by our Board of Directors. These include provisions:
o dividing our board of directors into three classes, each serving a
staggered three-year term;
o authorizing blank check preferred stock, which could be issued with voting,
liquidation, dividend and other rights superior to its common stock;
o dividend and other rights superior to its common stock;
o limiting the liability of, and providing indemnification to, directors and
officers;
o requiring advance notice of stockholder proposals for business to be
conducted at meetings of stockholders and for nominations of candidates for
election to our Board of Directors;
o specifying that stockholders may take action only at a duly called annual
or special meeting of shareowners.
These provisions, alone or together, could deter or delay hostile takeovers,
proxy contests and changes in control or management of Extended Systems. As a
Delaware corporation, we also are subject to provisions of Delaware law,
including Section 203 of the Delaware General Corporation Law, which prevents
some stockholders from engaging in certain business combinations without
approval of the holders of substantially all of our outstanding common stock.
In June 2003, pursuant to a Preferred Stock Rights Agreement between Extended
Systems and EquiServe Trust Company, N.A., our Board of Directors issued certain
Preferred Share Purchase Rights. The Rights were not intended to prevent a
takeover of Extended Systems. However, the Rights may have the effect of
rendering more difficult or discouraging an acquisition of Extended Systems
deemed undesirable by our Board of Directors. The Rights would cause substantial
dilution to a person or group that attempted to acquire Extended Systems on
terms or
45
in a manner not approved by our Board of Directors, except pursuant to an offer
conditioned upon redemption of the Rights.
Any provision of our certificate of incorporation or bylaws or Delaware law that
has the effect of delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their shares of common
stock and also could affect the price that some investors are willing to pay for
our common stock.
WE INTEND TO PURSUE ADDITIONAL ACQUISITIONS, AND ANY ACQUISITIONS COULD PROVE
DIFFICULT TO INTEGRATE WITH OUR BUSINESS, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR ADVERSELY AFFECT OUR OPERATING RESULTS.
As part of our strategy, we intend to continue to pursue the acquisition of
companies that either complement or expand our existing business. If we fail to
properly evaluate and execute acquisitions, our business would be harmed. We may
not be able to properly evaluate the technology and accurately forecast the
financial impact of the transaction, including accounting charges and
transaction expenses. Acquisitions involve a number of risks and difficulties,
including:
o the integration of acquired technologies with our existing products and
technologies;
o diversion of management's attention and other resources to the assimilation
of the operations and employees of the acquired companies;
o availability of equity or debt financing on terms favorable to us and our
stockholders;
o integration of management information systems, employees, research and
development, and marketing, sales and support operations;
o expansion into new markets and business areas;
o potential adverse short-term effects on our operating results; and
o retention of customers and employees post-acquisition. In addition, if we
conduct acquisitions using debt or equity securities, our existing
stockholders' investments may be diluted, which could affect the market
price of our stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our liquid investments are at fixed interest rates and,
therefore, the fair value of these instruments is affected by changes in market
interest rates. All of our liquid investments mature within 90 days or less of
June 30, 2004, therefore, we believe that the market risk arising from our
holdings of liquid investments is minimal.
Sales made by our international subsidiaries are generally denominated in the
foreign country's currency. Fluctuations in exchange rates between the United
States dollar and other currencies could materially harm our business. From time
to time, we enter into foreign currency forward contracts, typically against the
Canadian dollar, euro, and British pound sterling, to manage fluctuations in the
value of foreign currencies on transactions with our international subsidiaries,
thereby limiting our risk that would otherwise result from changes in exchange
rates. We report a net currency gain or loss based on changes in the fair value
of forward contracts combined with changes in fair value of the underlying asset
or liability being managed. The success of these currency activities depends
upon estimation of intercompany balances denominated in various foreign
currencies. To the extent that these forecasts are overstated or understated
during periods of currency volatility, we could experience unanticipated
currency gains or losses. When determining whether to enter into foreign
currency forward contracts, we also consider the impact that the settlement of
such forward contracts may have on our cash position. To eliminate a potential
cash settlement of a forward position we may, from time to time, decide not to
use foreign currency forward contracts to manage fluctuations in the value of
foreign currencies on transactions with our international subsidiaries. In a
period where we do not enter into foreign currency forward contracts, we could
experience significant non-cash currency gains or losses if the value of the
U.S. dollar strengthens or weakens significantly in relation to the value of the
foreign currencies. As of June 30, 2004, we had forward contracts with a nominal
value of approximately $10.8 million that matured within 30 days in place
against the Canadian dollar, euro and British pound sterling. We had no forward
contracts in place as of June 30, 2003. We recognized a net currency exchange
loss of approximately $206 thousand for the fiscal year ended June 30, 2004, a
net currency exchange gain of approximately $261 thousand for the fiscal year
ended June 30, 2003 and a net currency exchange loss of approximately $129
thousand for the fiscal year ended June 30, 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in Item 16 of this Annual Report on Form
10-K.
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the month of June 2004, our audit committee requested proposals for
external audit services for the fiscal year beginning July 1, 2004 and ending
June 30, 2005 ("FY 2005") from three firms, including PricewaterhouseCoopers LLP
("PwC"), the incumbent independent registered public accounting firm. During
July 2004, the audit committee received proposals from the two national
independent registered accounting firms with offices in Boise, Idaho. On July
26, 2004, PwC notified the audit committee that PwC would not be submitting a
proposal to provide audit services for the Company's FY 2005 and that PwC
declined to stand for re-election as the Company's independent registered
accounting firm. The audit committee of the Board is continuing the accounting
firm selection process and expects to complete the process and appoint a new
independent registered public accounting firm for FY 2005 in the near term.
PwC's reports on the Company's financial statements as of June 30, 2003 and 2002
and for the two fiscal years then ended did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principle.
During the Company's fiscal years ended June 30, 2003 and 2002 and through July
26, 2004, there were no disagreements with PwC on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which disagreements, if not resolved to PwC's satisfaction, would have
caused PwC to make reference to the subject matter of such disagreements in
connection with its report of the financial statements for such years; and there
were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company requested that PwC furnish it with a letter addressed to the SEC
stating whether or not it agrees with the above statements. A copy of such
letter, dated July 30, 2004, is filed as Exhibit 16.1 to this Form 10-K.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures" within the meaning of Rule
13a-14(c) of the Exchange Act ("Disclosure Controls and Procedures"). Our
Disclosure Controls and Procedures are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Our Disclosure Controls and Procedures are also designed to ensure that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. It should be noted, however,
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Based on an evaluation of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934 (the "Exchange Act")) performed by our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, as of the end of the
period covered by this Annual Report on Form 10-K, such officers have concluded
that the Disclosure Controls and Procedures are effective.
There has been no change in our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The information required by this Item with respect to executive officers is
included in Part I of this Form 10-K under the heading "Employees." The
information required by this Item with respect to our directors is incorporated
by reference from the information contained in the section entitled "Proposal
One--Election of Class II Director" and "Proposal Two--Election of Class III
Directors" in the definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders ("the Proxy Statement"), a copy of which will be filed with the
Securities and Exchange Commission before the meeting date. The information
required by this Item with respect to compliance with Section 16(a) of the
47
Securities Exchange Act of 1934 is incorporated by reference from the
information contained in the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
The information required by this Item with respect to our code of ethics policy
required to be disclosed under Section 406 of Regulation S-K is incorporated by
reference to the information contained in the section entitled "Code of Ethics
Policy" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information contained in the sections entitled "Executive Compensation and Other
Matters, " and "Performance Graph" in the definitive Proxy Statement for our
2004 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
- ------------------------------------------------------------------
The following table sets forth information regarding our equity compensation
plans as of June 30, 2004:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- ------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by 3,213,889 $ 8.11 980,980
shareholders(1).....................
Equity compensation plans not approved
by shareholders(2).................. 35,000 $ 7.35 -
Total.................................. 3,303,769 $ 8.10 980,980
- --------------
(1) INCENTIVE STOCK OPTION PLANS
The aggregate number of shares of common stock for which options may be
granted under the 2001 Approved Share Option Scheme is 150,000. The term of
these non-transferable stock options may not exceed ten years. The exercise
price is generally the fair market value on the date of grant or at a price
determined by our directors. During the years ended June 30, 2004 and 2003,
the Company granted options to purchase 50,550 and 58,466 shares,
respectively. At June 30, 2004, 123,342 options were outstanding under the
2001 Approved Share Option Scheme, of which 45,979 options were exercisable.
The aggregate number of shares of common stock for which options may be
granted under the 1998 Stock Plan is 4,050,000. The term of these
non-transferable stock options may not exceed ten years. The exercise price
is generally the fair market value on the date of grant or at a price
determined by our directors. During the years ended June 30, 2004 and 2003,
the Company granted options to purchase 1,629,445 and 1,195,309 shares,
respectively. At June 30, 2004, 2,766,409 options were outstanding under the
1998 Stock Plan, of which 1,329,181 options were exercisable.
The aggregate number of shares of common stock for which options have been
granted under the 1994 Stock Plan is 2,666,667. The term of these
non-transferable stock options may not exceed ten years. The exercise price
is generally the fair market value on the date of grant or at a price
determined by our directors. During the years ended June 30, 2004 and 2003,
there were no options granted under the 1994 Stock Plan. At June 30, 2004,
134,971 options were outstanding and exercisable under the 1994 Stock Plan.
NON-QUALIFIED STOCK PLANS
The aggregate number of shares of common stock for which options have been
granted under the 1987 Restricted Stock Option Plan is 1,668,334. The term
of these non-transferable stock options may not exceed ten years. The terms,
such as exercise price of the options, were determined at the date of grant.
The plan terminated in September 1997. At June 30, 2004, 6,667 options were
outstanding and exercisable under the 1987 Restricted Stock Option Plan.
48
The aggregate number of shares of common stock for which options may be
granted under the 1998 Director Stock Plan is 375,000. The term of these
non-transferable stock options may not exceed ten years. The exercise price
is generally the fair market value on the date of grant. During the years
ended June 30, 2004 and 2003, the Company granted options to purchase
140,000 and 45,000 shares, respectively. At June 30, 2004, 182,500 options
were outstanding under the 1998 Director Stock Plan, of which 52,500 options
were exercisable.
EMPLOYEE STOCK PURCHASE PLAN
The aggregate number of shares of common stock that are available for
issuance under this plan as of June 30, 2004 is 421,810 shares and is
included in column (c). As of June 30, 2004, there have been 1,593,811
shares issued since the plan's inception. The plan provides for annual
increases in the number of shares available for issuance on each anniversary
date of the plan's adoption equal to the lesser of (i) the number of shares
needed to restore the maximum aggregate number of shares available to
700,000, or (ii) an amount determined by the Board of Directors.
(2) WARRANTS
On January 15, 2002, in connection with obtaining our line of credit with
Silicon Valley Bank, the Company issued stock warrants to purchase 35,000
shares of the Company's Common Stock at an exercise price of $7.35 per
share. The warrants vested immediately upon issuance and expire seven years
from the date of the grant.
OTHER INFORMATION REQUIRED BY THIS ITEM
- ---------------------------------------
Certain other information required by this Item is incorporated by reference to
the information contained in the section entitled "Share Ownership of Beneficial
Owners" in the definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
information contained in the section entitled "Certain Transactions" in the
definitive Proxy Statement for our 2004 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference to the
information contained in the definitive Proxy Statement for our 2004 Annual
Meeting of Stockholders.
49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report:
Consolidated financial statements as of June 30, 2004 and 2003 and for
each of the three years in the period ended June 30, 2004:
Report of Independent Registered Public Accounting Firm ........... 53
Consolidated Balance Sheets........................................ 54
Consolidated Statements of Operations.............................. 55
Consolidated Statements of Comprehensive Loss...................... 55
Consolidated Statements of Stockholders' Equity.................... 56
Consolidated Statements of Cash Flows.............................. 58
Notes to Consolidated Financial Statements......................... 59
2. FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts......................... 75
All other schedules are omitted because they are not applicable or the
required information is shown in our consolidated financial statements
or the notes to our consolidated financial statements.
3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.4 Agreement and Plan of Merger and Reorganization by and among
Extended Systems Incorporated, Venus Acquisition Corporation,
ViaFone, Inc., U.S. Bank N.A. as the Escrow Agent and Josh
Stein as the Company Representative dated May 28, 2002. (5)
3.1 Restated Certificate of Incorporation. (1)
3.2 Restated Bylaws. (2)
4.1 Preferred Stock Rights Agreement, dated June 5, 2003, between
the Registrant and Equiserve Trust Company, N.A., including
the Certificate of Designation, the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A, B,
and C, respectively. (7)
10.1 Form of Indemnification Agreement for directors and officers.
(9)
10.2.1 1998 Stock Plan and form of agreement thereunder. (1)
10.2.2 Amendment 1 to the 1998 Stock Plan. (4)
10.3.1 1998 Employee Stock Purchase Plan and forms of participation
agreements thereunder. (1)
10.3.2 Amendment 1 to the Employee Stock Purchase Plan. (4)
10.4 1998 Directors Stock Option Plan (Restated 10/21/03) (10)
10.5 1994 Incentive Stock Option Plan. (1)
10.6 1987 Restricted Stock Option Plan, as amended. (1)
10.7 1984 Incentive Stock Option Plan, as amended. (1)
10.8 Extended Systems Incorporated 2001 Approved Share Option
Scheme. (4)
10.9 Extended Systems Incorporated 401(k) Plan. (1)
10.10.1 Commercial/Investment Real Estate Purchase and Sale Agreement
dated September 3, 2003 between Extended Systems of Idaho,
Incorporated and C Hopkins Real Estate Investment #I, LLC. (8)
10.10.2 Commercial Lease Agreement dated September 26, 3003 between
Extended Systems of Idaho, Incorporated and Hopkins Real
Estate Investments, LLC. C (8)
10.10.3 Option Agreement dated September 26, 2003 between Extended
Systems of Idaho, Incorporated and Hopkins Real Estate
Investments, LLC. (8)
10.11 Real Estate Purchase Agreement dated September 2, 2003 between
Extended Systems of Idaho, Incorporated and Brighton
Investments, LLC. (9)
10.20 Form of Change in Control Agreement for U.S. officers
including Charles Jepson, Valerie Heusinkveld, Gregory Pappas,
Kerrin Pease, Jeffrey F Siegel, David Willis and Mark
Willnerd. *
10.21 Employment Agreement between the Company and Steven D.
Simpson. (1)
10.22 Employment Agreement between the Company and Raymond A.
Smelek. (8)
10.26 Employment Agreement between the Company and Bradley J.
Surkamer. (3)
10.27.1 Employment Agreement between the Company and Karla K. Rosa.
(3)
50
10.27.2 Amendment to Employment Agreement between the Company and
Karla K. Rosa. (8)
10.28 Employment Agreement between the Company and Raphael Auphan.
(6)
10.29 Employment Agreement between the Company and Fernando Ruarte.
(6)
10.30.1 Employment Agreement between the Company and Kerrin Pease. (8)
10.30.2 Amendment to Employment Agreement between the Company and
Kerrin Pease. (8)
10.31.1 Employment Agreement between the Company and Mark A. Willnerd.
(8)
10.31.2 Amendment to Employment Agreement between the Company and Mark
A. Willnerd. (8)
10.32.1 Employment Agreement between the Company and Nigel Doust. (8)
10.32.2 Amendment to Employment Agreement between the Company and
Nigel Doust. (8)
10.33 Employment Agreement between the Company and Charles W.
Jepson. (8)
10.34 Employment Agreement between the Company and David L. Willis
(10)
10.35 Employment Agreement between the Company and Valerie A.
Heusinkveld (10)
10.36 Employment Agreement between the Company and Jeffrey M.
Siegel*
10.50 Separation Agreement between the Company and Donald J.
Baumgartner. (8)
10.51 Separation Agreement between the Company and Bradley J.
Surkamer. (8)
10.52 Separation Agreement between the Company and Fernando Ruarte.
(8)
10.53 Separation Agreement between the Company and Raphael Auphan.
(8)
10.54 Separation Agreement between the Company and Steven D.
Simpson. (8)
10.55 Separation Agreement between the Company and Karla K. Rosa(10)
10.7 Settlement and License Agreement dated March 4, 2004 by and
between the Company and Intellisync Corporation (11)
16.1 Letter from PricewaterhouseCoopers LLP to the Securities &
Exchange Commission dated July 30, 2004 (12)
21.1 List of Subsidiaries. *
31 Certification of Executive Officers pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
32 Certification of Executive Officers pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
- ----------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (File No. 333-42709) filed with the Securities and Exchange
Commission on March 4, 1998.
(2) Incorporated by reference from our Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on May 14, 1998.
(3) Incorporated by reference from our Annual Report on Form 10-K filed with
the Securities and Exchange Commission on September 28, 1999.
(4) Incorporated by reference from our Annual Report on Form 10-K filed with
the Securities and Exchange Commission on September 17, 2001.
(5) Incorporated by reference from Registrant's Registration Statement on Form
S-4, as amended (File No. 333-91202), filed initially with the Securities
and Exchange Commission on July 19, 2002.
(6) Incorporated by reference from our Annual Report on Form 10-K filed with
the Securities and Exchange Commission on September 20, 2002.
(7) Incorporated by reference from our Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 9, 2003.
(8) Incorporated by reference from our Annual Report on 10-K filed with the
Securities and Exchange Commission on September 29, 2003.
(9) Incorporated by reference from our Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on November 14, 2003.
(10) Incorporated by reference from our Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on February 17, 2004.
51
(11) Incorporated by reference from our Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on May 17, 2004.
(12) Incorporated by reference from our Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 30, 2004.
* Filed herewith.
(b) REPORTS ON FORM 8-K
On April 8, 2004, we filed a current report on Form 8-K in connection with
the issuance of a press release dated April 5, 2004 announcing the
appointment of a new independent member to our Board of Directors,
Klaus-Dieter Laidig.
On April 27, 2004, we filed a current report on Form 8-K in connection
with the issuance of a press release dated April 27, 2004 announcing our
financial results for the third fiscal quarter ended March 31, 2004.
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Extended Systems Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in owner's net
investment/stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Extended Systems Incorporated and its
subsidiaries at June 30, 2004 and June 30, 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2004 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 16(a)(2) on page 75 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
- -----------------------------------
San Jose, California
September 29, 2004
53
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
JUNE 30, JUNE 30,
2004 2003
-------- --------
ASSETS
Current:
Cash and cash equivalents ..................................................... $ 7,225 $ 3,502
Receivables, net of allowances of $446 and $831 ............................... 6,903 5,644
Prepaid and other ............................................................. 1,318 966
-------- --------
Total current assets ...................................................... 15,446 10,112
Property and equipment, net ........................................................ 4,331 5,293
Construction in Progress ........................................................... 384 --
Goodwill ........................................................................... 12,489 12,489
Intangibles, net ................................................................... 576 1,197
Other long-term assets ............................................................. 130 --
-------- --------
Total assets .............................................................. $ 33,356 $ 29,091
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable .............................................................. $ 1,931 $ 2,314
Accrued expenses .............................................................. 3,264 2,888
Deferred revenue .............................................................. 3,569 2,961
Accrued restructuring ......................................................... 116 722
Current portion of long-term debt ............................................. 325 434
Current portion of capital leases ............................................. 25 22
-------- --------
Total current liabilities ................................................. 9,230 9,341
Non-current:
Long-term debt ................................................................ 4,800 325
Capital leases ................................................................ 17 42
Other long-term liabilities ................................................... 153 127
-------- --------
Total non-current liabilities ............................................. 4,970 494
-------- --------
Total liabilities ......................................................... 14,200 9,835
Commitments and contingencies--Note 12
Stockholders' equity:
Preferred stock; $0.001 par value per share, 5,000 shares authorized; no shares
issued or outstanding ..................................................... -- --
Common stock; $0.001 par value per share, 75,000 shares authorized; 15,078 and
13,977 shares issued and outstanding ...................................... 15 14
Additional paid-in capital .................................................... 48,005 44,481
Treasury stock; $0.001 par value per share, 0 and 261 common shares ........... -- --
Accumulated deficit ........................................................... (27,134) (23,884)
Unamortized stock-based compensation .......................................... (231) --
Accumulated other comprehensive loss .......................................... (1,499) (1,355)
-------- --------
Total stockholders' equity ................................................ 19,156 19,256
-------- --------
Total liabilities and stockholders' equity ................................ $ 33,356 $ 29,091
======== ========
The accompanying notes are an integral part of the consolidated financial statements
54
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED JUNE 30,
------------------------------------------
2004 2003 2002
------------------------------------------
Revenue:
License fees and royalties ....................... $ 25,028 $ 21,733 $ 19,176
Services and other ............................... 7,158 5,801 3,099
------------------------------------------
Total net revenue ............................ 32,186 27,534 22,275
Costs and expenses:
Cost of license fees and royalties ............... 382 420 719
Cost of services and other ....................... 3,456 3,185 1,207
Amortization of purchased technology ............. 621 726 627
Research and development ......................... 6,316 7,173 10,030
Acquired in-process research and development ..... -- 430 --
Marketing and sales .............................. 15,362 14,482 13,489
General and administrative ....................... 4,486 3,649 4,218
Restructuring charges ............................ 1,446 597 213
Patent litigation fees, license and settlement ... 3,425 1,240 163
Non-cash stock compensation ...................... 490 -- --
Amortization of goodwill ......................... -- -- 925
------------------------------------------
Total costs and expenses ..................... 35,984 31,902 31,591
------------------------------------------
Loss from operations ......................... (3,798) (4,368) (9,316)
Other income (expense), net ........................... (51) 257 (4)
Gain on sale of land .................................. 1,058 -- --
Interest expense ...................................... (453) (307) (70)
------------------------------------------
Loss before income taxes ..................... (3,244) (4,418) (9,390)
Income tax (benefit) provision ........................ 94 (200) (2,257)
------------------------------------------
Loss from continuing operations .............. (3,338) (4,218) (7,133)
Discontinued operations, net of tax:
Income (loss) from discontinued operations ... 88 458 (57)
------------------------------------------
Net loss ..................................... $ (3,250) $ (3,760) $ (7,190)
==========================================
Basic and diluted income (loss) per share:
Loss from continuing operations .................. $ (0.23) $ (0.31) $ (0.64)
Income (loss) from discontinued operations ....... 0.00 0.03 (0.01)
------------------------------------------
Basic and diluted loss per share ...................... $ (0.23) $ (0.28) $ (0.65)
==========================================
Number of shares used in per share calculations:
Basic and diluted ................................ 14,370 13,376 11,048
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
FOR THE YEARS ENDED JUNE 30,
------------------------------------------
2004 2003 2002
------------------------------------------
Net loss .............................................. $ (3,250) $ (3,760) $ (7,190)
Change in currency translation ........................ (144) (503) (65)
------------------------------------------
Comprehensive loss ........................... $ (3,394) $ (4,263) $ (7,255)
==========================================
The accompanying notes are an integral part of the consolidated financial statements
55
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
RETAINED OTHER TOTAL
COMMON STOCK ADDITIONAL EARNINGS DEFERRED COMPRE- STOCK-
---------------- PAID-IN (ACCUMULATED COMPEN- HENSIVE HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) SATION LOSS EQUITY
------ ------ ------- -------- ------ ---- ------
BALANCE AT JUNE 30, 2001 ......................... 10,971 $ 11 $ 32,725 $(12,934) $ (77) $ (787) $ 18,938
Net loss ................................... -- -- -- (7,190) -- -- (7,190)
Translation adjustment ..................... -- -- -- -- -- (65) (65)
Notes issued/ payments received ............ -- -- 85 -- -- -- 85
Stock issued in business combinations ...... 34 -- 204 -- -- -- 204
Stock warrants ............................. -- -- 209 -- -- -- 209
Stock issued from stock option exercises
and ESPP purchases ........................ 203 -- 871 -- -- -- 871
Compensatory options ....................... -- -- (41) -- 77 -- 36
-----------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 ......................... 11,208 $ 11 $ 34,053 $(20,124) $ -- $ (852) $ 13,088
=============================================================================
Net loss ................................... -- -- -- (3,760) -- -- (3,760)
Translation adjustment ..................... -- -- -- -- -- (503) (503)
Notes issued / payments received ........... -- -- 158 -- -- -- 158
Stock issued in business combinations ...... 2,550 3 9,894 -- -- -- 9,897
Stock issued from stock options
exercises and ESPP purchases .............. 219 -- 376 -- -- -- 376
-----------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 ......................... 13,977 $ 14 $ 44,481 $(23,884) $ -- $ (1,355) $ 19,256
=============================================================================
Net loss ................................... -- -- -- (3,250) -- -- (3,250)
Translation adjustment ..................... -- -- -- -- -- (144) (144)
Notes issued/ payments received ............ -- -- 19 -- -- -- 19
Stock issued from stock option exercises
and ESPP purchases ........................ 928 1 2,228 -- -- -- 2,229
56
Compensatory options ....................... -- -- 598 -- -- -- 598
Restricted stock grants .................... 173 -- 777 -- (764) -- 13
Restricted stock amortization .............. -- -- -- -- 460 -- 460
Restricted stock repurchase ................ -- -- (98) -- 73 -- (25)
-----------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004 ......................... 15,078 $ 15 $ 48,005 $(27,134) $ (231) $ (1,499) $ 19,156
=============================================================================
The accompanying notes are an integral part of the consolidated financial statements
57
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED JUNE 30,
---------------------------------------
2004 2003 2002
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................ $(3,250) $(3,760) $(7,190)
Adjustments to reconcile net loss to net cash used by operating
activities:
Provision for bad debts ............................................. 166 85 383
Provision for product returns ....................................... -- -- 1
Provision for (benefit from) obsolete inventory ..................... (80) 86 24
Depreciation and amortization ....................................... 1,516 1,905 2,917
Stock compensation .................................................. 1,046 250 36
Acquired in-process research and development ........................ -- 430 --
Other ............................................................... -- -- (56)
Gain on sale of property and equipment .............................. (1,001) -- --
Changes in assets and liabilities, net of effect of acquisitions:
Receivables ..................................................... (841) 33 3,226
Inventories ..................................................... 39 (1) 306
Prepaid and other assets ........................................ (483) (385) (517)
Deferred revenue ................................................ 572 226 827
Accounts payable and accrued expenses ........................... (1,275) (2,032) (2,429)
---------------------------------------
Net cash used by operating activities ....................... (3,591) (3,163) (2,472)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................................... (859) (46) (148)
Proceeds from sale of property and equipment ............................ 1,564 15 16
Proceeds from sale of discontinued operations, net of
cash expenses ........................................................ -- -- 512
Acquisitions:
ViaFone, net of cash acquired ....................................... -- 1,119 --
AppReach, Inc., net of cash acquired ................................ -- -- (15)
Other investing activities .............................................. 19 160 97
---------------------------------------
Net cash provided by investing activities ................... 724 1,248 462
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale-and-leaseback of building ............................ 4,800 -- --
Proceeds from the issuance of common stock .............................. 2,229 376 871
Payments on long-term debt .............................................. (456) (499) --
---------------------------------------
Net cash provided by (used by) financing
activities ............................................... 6,573 (123) 871
Effect of exchange rate changes on cash ................................. 17 101 (7)
---------------------------------------
Net increase (decrease) in cash and cash equivalents .................... 3,723 (1,937) (1,146)
CASH AND CASH EQUIVALENTS:
Beginning of year ....................................................... 3,502 5,439 6,585
---------------------------------------
End of year ............................................................. $ 7,225 $ 3,502 $ 5,439
=======================================
The accompanying notes are an integral part of the consolidated financial statements
58
EXTENDED SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 1. BASIS OF PRESENTATION
Our consolidated financial statements include Extended Systems Incorporated, a
Delaware corporation, and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated on consolidation. Tabular amounts
are in thousands, except years, percentages and per share amounts.
The preparation of financial statements in conformity with generally accepted
accounting principles requires that we make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of our financial statements. It
also requires that we make estimates and assumptions that affect the reported
amounts of our revenue and expenses during the reporting periods. Our actual
results could differ from those estimates.
As a result of discontinuing our infrared hardware business in the first quarter
of fiscal 2003 and disposing of our Singapore subsidiary in the fourth quarter
of fiscal 2002, we have reclassified our consolidated statement of operations
and other related disclosures for all periods presented to present the results
of these businesses as discontinued operations. We have made other
reclassifications to the consolidated financial statements to conform the
presentations. These reclassifications had no impact on the net loss for the
years presented.
We have a history of incurring losses from operations and have an accumulated
deficit of approximately $27.1 million as of June 30, 2004. For the year ended
June 30, 2004, we incurred a loss from operations of approximately $3.8 million,
and negative cash flows from operations of approximately $3.6 million. At June
30, 2004, we had cash and cash equivalents of $7.2 million. Management believes
that our existing working capital and borrowing capacity and the funds we expect
to generate from our operations will be sufficient to fund our anticipated
working capital and capital expenditure requirements through at least June 30,
2005.
Management cannot be certain, however, that the underlying assumed levels of
revenues and expenses will be accurate. If operating results were to fail to
meet management's expectations, we could be required to seek additional sources
of liquidity. These sources of liquidity could include raising funds through
public or private debt financing, borrowing against our line of credit or
offering additional equity securities. If additional funds are raised through
the issuance of equity securities, substantial dilution to our stockholders
could result. In the event additional funds are required, adequate funds may not
be available when needed or may not be available on favorable terms, which could
have a negative effect on our business and results of operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING CHANGES. In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period ending after December 15, 2003. We believe we have no
investment in or contractual relationship or other business relationship with a
variable interest entity, and therefore, the adoption of this interpretation did
not have any impact on our financial position or results of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is
generally effective for derivative instruments, including derivative instruments
embedded in certain contracts, entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. The adoption of this
statement did not have a material impact on our financial position or results of
operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 requires that
certain financial instruments, which under previous guidance were accounted for
as equity, must now be accounted for as
59
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS No. 150 was effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise was effective beginning July 1, 2003. In November 2003, the FASB
issued FASB Staff Position No. 150-3, "Effective Date, Disclosures, and
Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests under SFAS
No. 150," which defers the effective date for various provisions of SFAS No.
150. As of June 30, 2004, we had no financial instruments within the scope of
this pronouncement and, as a result, the adoption of this statement did not have
any impact on our financial position or results of operations.
CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency. We translate assets and liabilities of international
subsidiaries into U.S. dollars using exchange rates in effect at the balance
sheet date, and we report gains and losses from this translation process as a
component of comprehensive income or loss. We translate revenue and expenses
into U.S. dollars using the average exchange rate for the period.
From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and the British pound sterling to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries, thereby limiting our risk that would otherwise
result from changes in currency exchange rates. While these instruments are
subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed.
These forward contracts do not qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and, as such, the
contracts are recorded in the consolidated balance sheet at fair value. We
report a net currency gain or loss based on changes in the fair value of forward
contracts combined with the changes in fair value of the underlying asset or
liability being managed. As of June 30, 2004, we had forward contracts with a
nominal value of approximately $10.8 million that matured within 30 days in
place against the Canadian dollar, euro and British pound sterling. We had no
forward contracts in place as of June 30, 2003. We recognized a net currency
exchange loss of approximately $206 thousand for the fiscal year ended June 30,
2004, a net currency exchange gain of approximately $261 thousand for the fiscal
year ended June 30, 2003 and a net currency exchange loss of approximately $129
thousand for the fiscal year ended June 30, 2002.
EARNINGS OR LOSS PER SHARE. We compute basic earnings or loss per share by
dividing net income or loss by our weighted average number of common shares
outstanding during the period. We compute diluted earnings or loss per share by
dividing net income or loss by the weighted average number of common shares
outstanding increased by the additional common shares that would be outstanding
if we had issued the potential dilutive common shares. We exclude from the
diluted earnings or loss per share computations stock options and warrants to
the extent that their effect would have been antidilutive.
Our diluted earnings or loss per share computations exclude the following common
stock equivalents, as the impact of their inclusion would have been
antidilutive:
2004 2003 2002
---- ---- ----
Stock options................................ 3,214 3,269 2,787
Warrants..................................... 35 35 35
REVENUE. License and royalty revenue consists principally of fees earned from
the licensing of our software, as well as royalty fees earned upon the shipment
or activation of products that incorporate our software. Revenue from software
license fees is recognized when the licensed product is delivered, collection is
reasonably assured, the fee for each element of the transaction is fixed or
determinable, persuasive evidence of an arrangement exists, and vendor-specific
objective evidence exists for all undelivered elements of the arrangement.
Portions or all of the revenue may be deferred in cases where the license
arrangement calls for the future delivery of products or services for which we
do not have vendor-specific objective evidence to allocate a portion of the
total fee to the undelivered element. In such cases, revenue is recognized when
the undelivered elements are delivered or vendor-specific objective evidence of
the undelivered elements becomes available. However, if such undelivered
elements consist of services that are essential to the functionality of the
software, license and service revenue is recognized using contract accounting,
generally on a percentage of completion basis. If license arrangements include
the rights to unspecified future products, revenue is recognized over the
contractual or estimated economic term of the arrangement. Royalty revenue is
generally recognized when reported to us, which occurs after shipment or
activation of the related products. In cases where the arrangement with a
customer provides for a prepaid nonrefundable royalty, we generally recognize
revenue when persuasive evidence of an arrangement exits, delivery has occurred,
the fee is fixed or determinable and collection of the resulting receivable is
reasonably assured.
60
Service revenue consists of consulting, support and maintenance, and other
services. Revenue for consulting and other services, including training revenue,
is generally recognized as services are performed. Support and maintenance
includes both updates and technical support. Support and maintenance revenue is
recognized ratably over the term of the agreement, and generally represents a
fixed percentage of license fees incurred under the contract. Where software
license agreements include a combination of consulting, support and maintenance,
and other services, any fees related to undelivered elements are unbundled from
the arrangement based on their vendor specific objective evidence of fair value
and the residual fees after the unbundling are allocated to the delivered
elements and recognized as revenue ("the residual method"). For certain of our
products, we do not sell maintenance separately, but do provide minimal support,
patches bug fixes and other modifications to ensure that the products comply
with their warranty provisions. Accordingly, we allow for warranty costs at the
time the product revenue is recognized.
RESEARCH AND DEVELOPMENT COSTS are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS. Under Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, 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, which is typically demonstrated
by initial beta shipment. The period between the achievement of technological
feasibility and the general release of our products has been of short duration
and therefore, no costs have been capitalized.
ADVERTISING COSTS are expensed as incurred. Our advertising costs were $1.3
million in fiscal 2004, $1.0 million in fiscal 2003 and $1.5 million in fiscal
2002.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK. Our cash equivalents are
highly liquid investments with original maturities of three months or less,
readily convertible to known amounts of cash. We consider the amounts we report
as cash equivalents and receivables as reasonable approximations of their fair
values. We made these estimates of fair value in accordance with the
requirements of Statement of Financial Accounting Standard No. 107, `Disclosure
about Fair Value of Financial Instrument.' We based the fair value estimates on
market information available to us as of June 30, 2004. The use of different
market assumptions and estimation methodologies could have a material effect on
our estimated fair value amounts.
From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and British Pound, to hedge payments and
receipts of foreign currencies related to the purchase and sale of goods to our
international subsidiaries. While these hedging instruments are subject to
fluctuations in value, these fluctuations are generally offset by the value of
the underlying exposures being hedged. We do not hold or issue financial
instruments for speculative purposes.
Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash and trade accounts receivable. Our cash balances
held in financial institutions may, at times, exceed federally insured amounts.
We invest cash through high-credit-quality financial institutions and, by
policy, limit the concentration of credit exposure by restricting investments
with any single obligor. We perform ongoing credit evaluations on customers and
generally do not require collateral.
PROPERTY AND EQUIPMENT are stated at cost and depreciated using the
straight-line method over estimated useful lives of 7 to 15 years for land
improvements, 7 to 40 years for buildings, 3 to 5 years for computer equipment
and 5 to 7 years for furniture and fixtures. Our depreciation and amortization
expense for property and equipment was $893 thousand in fiscal 2004, $1.2
million in fiscal 2003 and $1.3 million in fiscal 2002. We remove the net book
value of property and equipment retired or otherwise disposed of from our books
and include the net gain or loss in the determination of our results of
operations.
IMPAIRMENT OF LONG-LIVED ASSETS. We review the carrying value of long-lived
assets, comprised mainly of property and equipment, goodwill and intangible
assets, for impairment whenever events and circumstances indicate that we may
not recover the carrying value of an asset from the estimated future cash flows
expected to result from its use and eventual disposition. In cases where
expected future cash flows are less than the carrying value, we recognize an
impairment loss equal to an amount by which the carrying value exceeds the fair
value of assets. No assets were considered impaired at June 30, 2004, 2003 or
2002.
PRODUCT WARRANTY AND SUPPORT. We offer warranties and free support on certain
products and record an accrual for the estimated future costs associated with
warranty claims and support, which is based upon historical experience and our
estimate of the level of future costs. Warranty costs are reflected in our
statement of operations as a cost of net revenues.
61
INCOME TAXES. We recognize deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities. We record a
valuation allowance against deferred tax assets when it is more likely than not
that such assets will not be realized.
Our consolidated income tax provision or benefit is allocated to continuing and
discontinued operations based principally on the taxable income or loss and tax
credits directly attributable to each operation. Such allocations reflect each
operation's contribution to our consolidated federal taxable income or loss and
the consolidated federal tax asset or liability and tax credit position. We
credited tax benefits that cannot be used by the operation generating those
benefits but can be used on a consolidated basis to the operation that generated
such benefits. Accordingly, the amounts of taxes payable or refundable allocated
to each operation may not necessarily be the same as that which would have been
payable or refundable had each operation filed a separate income tax return.
NOTE 3. STOCK-BASED COMPENSATION
We apply Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting
for Stock Issued to Employees" and its related interpretations to measure
compensation expense for stock-based compensation plans. Under APB No. 25, we
generally recognize no compensation expense with respect to stock option grants
and shares issued under our employee stock purchase plan. Our stock option plans
allow for the issuance of restricted stock awards, under which shares of our
common stock are issued at par value to employees or directors, subject to
vesting restrictions, and for which compensation expense equal to the fair
market value on the date of grant is amortized over the vesting period.
Had we elected to recognize stock-based compensation expense based on the grant
date fair value as prescribed by SFAS No. 123, our net loss would have been
equal to the pro forma amounts indicated below for the years ended June 30:
2004 2003 2002
-------- -------- --------
Net loss, as reported ........................................... $ (3,250) $ (3,760) $ (7,190)
Add: Stock-based compensation included in reported net loss ..... 598 -- 37
Less: Stock-based compensation determined under SFAS No. 123 .... (5,152) (5,652) (6,748)
-------- -------- --------
Pro forma net loss .............................................. (7,804) (9,412) (13,901)
Basic and diluted loss per share:
As reported ..................................................... (.23) (.28) (.65)
Pro forma ....................................................... (.54) (.70) (1.26)
We estimated the fair value of shares and options issued pursuant to our
stock-based compensation plans at the date of grant using the Black-Scholes
option-pricing model, which was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
Option valuation models require the input of assumptions, including the expected
stock price volatility. Our options have characteristics significantly different
from those of traded options, and changes in the input assumptions can
materially affect the fair value estimates. The following weighted-average
assumptions and weighted-average fair values were used in determining our
stock-based compensation under SFAS No. 123 for the years ended June 30:
2004 2003 2002
------------------------------------------
Risk-free interest rate:
Option plans ........... 3.75-4.51% 4.6% 4.6%
Purchase plan .......... 3.84-4.42% 3.3% 3.7%
Expected life in years:
Option plans ........... 7.69-7.63 7.6 7.6
Purchase plan .......... 0.5-1.44 0.5 0.7
Volatility factor:
Option plans ........... 100.-103% 103% 113%
Purchase plan .......... 100-103% 103% 113%
Dividend yield .............. 0.0% 0.0% 0.0%
62
Weighted average fair value:
Option plans............ $ 3.61 $ 2.37 $ 4.30
Purchase plan........... $ 1.17 $ 0.83 $ 3.29
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
Our selected cash payments and non-cash activities were as follows for the years
ended June 30:
2004 2003 2002
----------------------------------------
Income taxes paid (refunded), net ........ $ 105 $ 26 $ (1,375)
Stock issued in business combinations .... -- 9,894 204
Deferred compensation .................... 679 -- (41)
Interest paid ............................ 393 91 41
NOTE 5. DISCONTINUED OPERATIONS
We exited our infrared hardware business in the first quarter of fiscal 2003, we
sold our wholly owned subsidiary, Extended Systems Singapore Pte Limited, in the
fourth quarter of fiscal 2002 and we sold the assets of our printing solutions
segment in the fourth quarter of fiscal 2001. The results of these operations
have been accounted for as discontinued operations for all periods presented in
accordance with SFAS No. 144 and Accounting Principles Bulletin No. 30. Amounts
in the financial statements and related notes for all periods shown have been
reclassified to reflect the discontinued operations. Operating results for the
discontinued operations are reported, net of tax, under "Income (loss) from
discontinued operations" on the accompanying Statements of Operations.
The following summarizes the results of discontinued operations:
FOR THE YEARS ENDED JUNE 30,
2004 2003 2002
--------------------------------
Net revenue ..................................................... $ 169 $ 1,488 $ 2,687
Gross profit .................................................... 145 696 1,175
Income tax provision ............................................ 52 273 491
Income (loss) from discontinued operations, net of taxes ........ 88 458 278
Gain (loss) on sale of discontinued operations, net of taxes .... -- -- (335)
Earnings (loss) per share from discontinued operations:
Basic and diluted ...................................... 0.00 0.03 (0.01)
NOTE 6. RESTRUCTURING CHARGES
We recorded approximately $1.4 in workforce reduction costs during fiscal 2004.
These workforce reduction costs consisted primarily of severance, benefits, and
other costs related to the resignations of Steven Simpson, our former President
and Chief Executive Officer, and Karla Rosa, our former Vice President of
Finance and Chief Financial Officer and the termination of 18 employees in our
research and development, marketing and sales, administration and operations
groups. Of the terminated employees, 14 were located in the United States and 4
were in Europe. The restructuring charges included $554 thousand of non-cash
compensation resulting from the accelerated vesting of employee stock options
and restricted stock that is not included in the table below. The balance as of
June 30, 2004 will be paid in the first two quarters of fiscal 2005.
During fiscal 2003, we recorded approximately $597 thousand in workforce
reduction costs, consisting primarily of severance, benefits, and other costs
related to the termination of 31 employees in research and development,
marketing and sales, operations, and administration, of which 24 were located in
the United States, 3 in Canada and 4 in Europe. We also assumed a restructuring
liability in connection with our acquisition of ViaFone in the first quarter of
fiscal 2003. Prior to our acquisition of the company, ViaFone had implemented a
restructuring program that resulted in charges for workforce reduction costs,
costs related to closing its office in France and excess facilities costs
related to lease commitments for space no longer used in Brisbane, California.
At the time we completed the ViaFone acquisition, there were $993 thousand of
future lease commitments that had been accrued but not yet paid, $266 thousand
of workforce reduction liabilities and $30 thousand of liabilities relating to
the closure of ViaFone's French office. As of June 30, 2004, the commitments
recorded in fiscal 2003 had been paid in full.
63
During fiscal 2002, we recorded approximately $213 thousand in workforce
reduction costs, consisting primarily of severance, benefits and other costs
related to the termination of approximately 25 employees in research and
development, marketing and sales, and administration. Of those terminated, 21
were located in the United States and 4 were in Europe. All amounts due were
paid in the fourth quarter of fiscal 2002.
A summary of the restructuring costs is outlined as follows:
Workforce Facilities
Reduction and Other
Costs Costs Total
-------- -------- --------
Balance at June 30, 2001 ...................................... 1,096 -- 1,096
Restructuring charges incurred in fiscal 2002 ................. 213 -- 213
Cash payments ................................................. (1,309) -- (1,309)
-------- -------- --------
Balance at June 30, 2002 ...................................... $ -- $ -- $ --
Restructuring charges incurred in fiscal 2003 ................. 597 -- 597
Restructuring accrual assumed with ViaFone acquisition ........ 266 1,023 1,289
Adjustment to the accrual assumed with ViaFone acquisition .... (14) -- (14)
Cash payments ................................................. (661) (489) (1,150)
-------- -------- --------
Balance at June 30, 2003 ...................................... $ 188 $ 534 $ 722
Restructuring charges incurred in fiscal 2004 ................. 897 -- 897
Other adjustments ............................................. (13)A (340)B (353)
Cash payments ................................................. (956) (194) (1,150)
-------- -------- --------
Balance at June 30, 2004 ...................................... $ 116 $ -- $ 116
======== ======== ========
(A) An adjustment was made to the accrual for workforce reduction costs to
account for amounts paid to certain former employees who were paid amounts
less than originally provided.
(B) As a result of the Brisbane lease termination during the second quarter of
fiscal 2004, the balance of restructuring charges related to this lease as
of October 31, 2003 was reversed.
NOTE 7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The changes in the carrying amount of goodwill are as follows (in thousands):
Balance as of June 30, 2002 ..................................................... $ 1,941
Reclassification of certain intangibles in connection with SFAS 142 adoption .... 138
Net goodwill acquired during the period ......................................... 10,410
--------
Balance as of June 30, 2003 ..................................................... 12,489
Net goodwill acquired during the period ......................................... --
--------
Balance as of June 30, 2004 ..................................................... $ 12,489
========
Other identifiable intangible assets consist of the following (in thousands):
AS OF JUNE 30,
---------------------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
---------------------------------------------------------------------------------------
Purchased technology ...... $ 3,691 $ (3,165) $ 526 $ 3,691 $ (2,561) $ 1,130
Customer relationships .... 80 (30) 50 80 (13) 67
Non-compete covenants ..... 6 (6) -- 6 (6) --
Other ..................... 5 (5) -- 5 (5) --
---------------------------------------------------------------------------------------
Total ..................... $ 3,782 $ (3,206) $ 576 $ 3,782 $ (2,585) $ 1,197
=======================================================================================
Amortization of other intangible assets was $621 thousand for fiscal 2004 and
$726 thousand for fiscal year 2003. The purchased technology and customer
relationship assets are being amortized over five years. Based on the identified
intangible assets recorded at June 30, 2004, the estimated future amortization
expense for fiscal years 2005, 2006, 2007, and 2008 is $204 thousand, $172
thousand, $172 thousand, and $28 thousand, respectively.
64
NOTE 8. BUSINESS COMBINATIONS
VIAFONE, INC. In August 2002, we completed our acquisition of ViaFone. ViaFone
was a privately held, leading provider of real-time, mobile platform and mobile
applications that connect field sales and service employees with critical
business systems, information and processes of their enterprise. As a result of
the acquisition, we expected to benefit from the licensing of ViaFone's software
technology and from the addition of an experienced professional services
organization. We also expected to benefit from the strong cross-selling
opportunities present within each company's customer base and strategic
relationships. The adjusted total purchase price of $10.6 million consisted of
$9.9 million of Extended Systems common stock (2,550,000 shares issued based on
the average stock price for the five trading days surrounding May 28, 2002) and
$0.7 million of direct transaction costs. The total purchase price decreased by
$87 thousand in the second quarter of fiscal 2003 due to an $87 thousand
decrease in direct transaction costs resulting from the true-up of accrued
transaction costs at the time of payment. In exchange for the Extended Systems
common stock issued, all outstanding shares of ViaFone common and preferred
stock were acquired. As part of the acquisition agreement, an additional 450,000
shares of Extended Systems common stock were issued to shareholders of ViaFone
and placed in an escrow fund for a period of up to one year to be used as the
exclusive source of reimbursement to us for breaches of certain terms of the
agreement, including, among other provisions, failure of ViaFone to achieve
certain revenue and net loss targets for the nine months ended September 30,
2002. ViaFone did not meet these revenue and net loss targets, and all 450,000
shares held in escrow were returned to us in December 2002 to satisfy our claims
against the escrow. In accordance with the applicable provisions of the Delaware
General Corporation Law, all 450,000 shares automatically became treasury stock.
The transaction was accounted for as a purchase pursuant to SFAS No. 141. The
purchase price was allocated as follows:
AMORTIZATION
PERIOD AMOUNT
-------- --------
Existing technology .................... 5 yrs. $ 780
In-process research and development .... n/a 430
Net tangible assets/liabilities (1) .... n/a (1,041)
Customer relationships ................. 5 yrs. 80
Goodwill (2) ........................... n/a 10,410
--------
Purchase price (3) ..................... $ 10,659
========
(1) This amount reflects a net adjustment of $111 thousand in the second
quarter, a net adjustment of $346 thousand in the third quarter and a net
adjustment of $17 thousand in the fourth quarter to the fair values of
certain assets acquired and liabilities assumed from ViaFone.
(2) This amount reflects a reduction in accrued direct acquisition costs of
$87 thousand and net adjustments to the fair values of certain assets
acquired and liabilities assumed from ViaFone in the second, third and
fourth quarters of fiscal 2003 of $111 thousand, $346 thousand and $17
thousand respectively.
(3) This amount reflects a reduction in accrued direct acquisition costs of
$87 thousand.
The adjusted estimated fair value of tangible assets acquired and liabilities
assumed as of the purchase date are as follows:
Current assets ...................................... $ 4,722
Property and equipment .............................. 589
--------
Total assets acquired ............................... 5,311
Current liabilities ................................. (4,943)
Deferred revenue .................................... (491)
Non-current liabilities ............................. (918)
--------
Net tangible assets acquired ........................ $ (1,041)
========
Pursuant to SFAS No. 142, goodwill related to the acquisition is not amortized
and will be tested at least annually for impairment. This goodwill is not
deductible for tax purposes.
The purchased in-process research and development was charged to operations at
the time of acquisition as it had not yet reached technological feasibility and
had no alternative future use. The value assigned to in-process research and
development was determined by estimating the costs to develop the purchased
in-process research and development into a commercially viable product,
estimating the resulting net cash flows from sale of those products once
commercially viable, and discounting the net cash flows back to their present
values using discount rates of either 19% or 21%, depending on the technology.
These rates were based on the industry segment for the
65
technology, the nature of the products to be developed, the length of time to
complete development, and the overall maturity and history of the development
team. The in-process research and development percentage of completion was
estimated to range from 50% to 80%. As of June 30, 2004, the projects in-process
at the time of acquisition had been completed with no material differences in
the cost to complete from that originally estimated.
The results of operations for the fiscal year 2003 include the operations of
ViaFone from August 31, 2002. The following unaudited pro forma consolidated
results of continuing operations assume the ViaFone acquisition occurred at the
beginning of each period presented:
PRO FORMA (UNAUDITED)
FOR THE YEARS ENDED
JUNE 30,
----------------------
2003 2002
-------- --------
Net revenue from continuing operations ........ $ 27,884 $ 23,992
Loss from continuing operations ............... (7,498) (21,447)
Loss per share from continuing operations:
Basic and diluted ............................. $ (0.56) $ (1.58)
The pro forma information above is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the
acquisition occurred at the beginning of fiscal 2002 or 2003, nor is it
indicative of results of operations for any future period.
APPREACH, INC. In February 2002, we acquired all of the outstanding stock of
AppReach, Inc. for 33,950 shares of our Common Stock valued at $204 thousand
plus acquisition expenses of approximately $18 thousand. AppReach, based in
Baltimore, Maryland, specialized in the development of enterprise software that
extends customer resource management (CRM) applications to mobile and wireless
devices.
A summary of the net assets acquired at the date of the acquisition is as
follows:
Net working capital ............................................. $ (20)
Property and equipment .......................................... 5
Goodwill ........................................................ 237
--------
Net assets acquired as of date of acquisition .............. $ 222
========
This transaction was accounted for by the purchase method of accounting in
accordance with Statement of Financial Accounting Standards No. 141, "Business
Combinations," and accordingly, the results of operations of the company have
been included in the consolidated statement of operations since the acquisition
date.
NOTE 9. RECEIVABLES
AS OF JUNE 30,
2004 2003
----------------------
Accounts receivable ............................ $ 7,181 $ 6,338
Other receivables .............................. 147 98
Allowance for doubtful accounts ................ (425) (792)
----------------------
$ 6,903 $ 5,644
======================
NOTE 10. PROPERTY AND EQUIPMENT
AS OF JUNE 30,
2004 2003
----------------------
Land and land improvements...................... $ 533 $ 1,007
Buildings....................................... 5,927 5,798
Computer equipment.............................. 4,030 5,702
Furniture and fixtures.......................... 2,285 2,308
----------------------
12,775 14,815
Less accumulated depreciation................... (8,444) (9,522)
----------------------
$ 4,331 $ 5,293
======================
66
NOTE 11. ACCRUED EXPENSES
AS OF JUNE 30,
2004 2003
---------------------
Accrued payroll and related benefits ........... $ 1,623 $ 1,336
Accrued warranty and support costs ............. 156 141
Other .......................................... 1,485 1,411
---------------------
$ 3,264 $ 2,888
=====================
NOTE 12. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. We currently lease office space at our locations in Boise, Idaho;
Herrenberg, Germany; Toronto, Canada; Corvallis, Oregon; Paris, France; Bristol,
England; San Diego, California; American Fork, Utah; and `s-Hertogenbosch, the
Netherlands. We also lease certain equipment under non-cancelable operating and
capital leases. Lease expense under operating lease agreements was $578,000,
$894,000 and $391,000 for the fiscal years ended June 30, 2004, 2003 and 2002,
respectively.
On September 26, 2003, we closed a transaction with Hopkins Financial Services
for the sale-and-leaseback of our headquarters building and land in Boise,
Idaho. Because we have a 10-year option to repurchase the building and land at a
price of $5.1 million and we sublet more than a small portion of the building
space, the sale-and-leaseback was recorded as a financing transaction and is
shown as $4.8 million of long-term debt on our balance sheet at June 30, 2004.
As part of the agreement, we entered into a 10-year master lease for the
building with annual lease payments equal to 9.2% of the sale price, or
approximately $442 thousand. We are also obligated to pay all expenses
associated with the building during our lease, including the costs of property
taxes, insurance, operating expenses and repairs.
Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank ("SVB"). We restructured that
debt into a term loan due in 30 equal monthly installments bearing interest at
8%. The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005. At June 30, 2004, the loan balance was $325 thousand.
Our minimum future contractual commitments associated with our operational
indebtedness and lease obligations as of June 30, 2004 are as follows (in
thousands):
YEAR ENDING JUNE 30,
------------------------------------------------------------------------
THERE-
2005 2006 2007 2008 2009 AFTER TOTAL
------------------------------------------------------------------------
SVB debt principal (1) ............................. $ 325 $ -- $ -- $ -- $ -- $ -- $ 325
SVB debt interest .................................. 11 -- -- -- -- -- 11
Payment pursuant to building sale-and-leaseback .... 442 442 442 442 442 1,875 4,085
Capital leases (1) ................................. 28 12 7 -- -- -- 47
Operating leases ................................... 522 351 284 253 251 63 1,724
Post-retirement benefits ........................... 17 17 17 17 17 67 152
------------------------------------------------------------------------
Total commitments ................................ $1,345 $ 822 $ 750 $ 712 $ 710 $2,005 $6,344
========================================================================
(1) This amount is reported on the balance sheet as a liability.
Non-current capital lease obligations are as follows (in thousands):
As of
June 30, 2004
--------
Gross capital lease obligations ...................... $ 47
Less imputed interest ................................ (5)
--------
Present value of net minimum lease payments .......... 42
Less current portion ................................. (25)
--------
Non-current capital lease obligations ................ $ 17
========
GUARANTEES. We have provided a guarantee that secures our rental payments at our
Bristol, England location. We could be required to perform under this guarantee
if we were to default with respect to any of the terms, provisions, covenants,
or conditions of the lease agreement. This guarantee is valid until the
expiration of our lease on January
67
13, 2005. The maximum potential amount of future payments we could be required
to make under this letter of credit as of June 30, 2004 is approximately $25
thousand.
INDEMNIFICATIONS. We enter into standard indemnification agreements in our
ordinary course of business. Pursuant to these agreements, we indemnify, defend,
hold harmless, and agree to reimburse the indemnified party for losses suffered
or incurred by the indemnified party in connection with any U.S. patent,
copyright or other intellectual property infringement claim by any third party
with respect to our products. The term of these indemnification agreements is
generally perpetual any time after execution of the agreement. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited. To date, we have not incurred costs to
defend lawsuits or settle claims related to these indemnification agreements.
As permitted under Delaware law, we have agreements whereby we indemnify our
officers and directors for certain events or occurrences while the officer or
director is, or was, serving at our request in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have a director and officer
insurance policy that limits our exposure and may enable us to recover a portion
of any future amounts paid. We have not incurred costs to defend lawsuits or
settle claims related to these indemnification agreements.
From time to time we enter into indemnification agreements in our ordinary
course of business with certain service providers, such as financial
consultants, whereby we indemnify such service providers from claims, losses,
damages, liabilities, or other costs or expenses arising out of or related to
their services. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited. To date,
we have not incurred costs to defend lawsuits or settle claims related to these
indemnifications.
WARRANTIES. We offer warranties on both our software products and discontinued
hardware products. We record an accrual for the estimated future costs
associated with warranty claims based upon our historical experience and our
estimate of future costs. We also include in the warranty reserve an accrual for
the estimated future costs associated with free support that we provide on
certain products. The adequacy of our warranty reserve is reviewed at least
quarterly and if necessary, adjustments are made.
The following table reconciles the changes in our warranty reserve for the year
ended June 30, 2004:
Balance at June 30, 2002............................................. $ 175
Net decrease in warranty accrued for the year ended June 30, 2003.... (34)
------
Balance at June 30, 2003............................................. $ 141
Net additions to warranty accrual for the year ended June 30, 2004... 7
------
Balance at June 30, 2004............................................. $ 148
======
LINE OF CREDIT. We had a loan and security agreement with SVB at June 30, 2004
under which we could access up to $5.0 million of financing in the form of a
demand line of credit. As of June 30, 2004, we had no outstanding borrowings on
the line of credit and we were in compliance with all financial covenants
required under the line of credit. Our borrowing capacity was limited to 75% of
eligible accounts receivable. Certain of our assets collateralized the line of
credit and interest on any borrowings were payable at prime plus one percent,
but not less than 5.5%. The line of credit agreement required us to maintain
certain financial ratios. We renewed and restructured our loan and security
agreement with SVB and under the new terms can access up to $2.5 million of
financing in the form of a demand line of credit. Our borrowing capacity is
limited to 80% of eligible accounts receivable. Interest on any borrowings is
payable at prime and certain of our assets collateralize the line of credit. We
are required to maintain certain financial ratios under the terms of the
agreement, which will expire on August 30, 2006.
LITIGATION. On March 4, 2004 we mutually agreed with Intellisync Corporation
("Intellisync"), formerly known as Pumatech, Inc., to settle the patent
infringement lawsuit initiated by Intellisync on April 22, 2002. Both companies
agreed to settle all claims and to immediately terminate litigation proceedings.
In connection with the settlement, we made a one-time payment to Intellisync of
$2.0 million and received a license to certain Intellisync patents. This payment
covers estimated past and future royalties on revenue related to our products
shipped and covered under Intellisync's licensed patents. Both companies have
agreed there will be no further patent litigation actions for a period of five
(5) years and that Intellisync will release all of our customers from any claims
of infringement relating to their purchase and future use of our products. For
the year ended June 30, 2004, based on revenues related to our products covered
by the license, we expensed $1.6 million of the one-time payment. The balance of
$430 thousand was capitalized and will be amortized over future years. During
the year ended June 30, 2004, $32 thousand was amortized.
68
We are also, from time-to-time, a party to legal disputes and proceedings
arising in the ordinary course of general business activities. After taking into
consideration legal counsel's evaluation of such disputes, we do not believe
their outcome will have a material effect on our financial position or results
of operations.
NOTE 13. STOCKHOLDERS' EQUITY
WARRANTS. In connection with entering into the line of credit agreement with
Silicon Valley Bank on January 15, 2002, we issued warrants to purchase 35,000
shares of Extended Systems common stock at an exercise price of $7.35 per share.
The warrants vested immediately upon issuance and expire seven years from the
date of the grant. The fair value of these warrants at the date of grant was
$210 thousand and was amortized and reported as interest expense. These warrants
were fully amortized as of June 30, 2003.
STOCKHOLDER RIGHTS PLAN. On June 5, 2003, our Board of Directors adopted a
stockholder rights plan in which preferred stock purchase rights were
distributed as a rights dividend at the rate of one right for each share of
common stock held as of the close of business on June 19, 2003. The rights plan
is designed to deter coercive or unfair takeover tactics and to prevent an
acquirer from gaining control of Extended Systems without offering a fair price
to all of our stockholders.
Each right will entitle holders of Extended Systems common stock to buy a
fraction of a share of Extended Systems Preferred Stock at an exercise price of
$21 per fraction of a preferred share. Generally, the rights will be exercisable
only if a person or group acquires more than 15% of the common stock or
announces a tender or exchange offer which would result in its ownership of 15%
or more of the common stock.
If any person or group becomes the beneficial owner of 15% or more of the common
stock, referred to as a "flip-in event," each right not owned by such person or
related parties will entitle its holder to purchase, at the then current
exercise price of the right, common stock of Extended Systems having a value of
twice the right's exercise price. After the occurrence of a flip-in event and
before any person or affiliated group becomes the owner of 50% or more of the
then outstanding common stock, Extended Systems may also exchange one share of
common stock for each right outstanding. In addition, if Extended Systems is
involved in a merger or other business combination transaction with another
person in which its common stock is changed or converted, or sells or transfers
more than 50% of its assets or earning power to another person, each right that
has not previously been exercised will entitle its holder to purchase, at the
then current exercise price of the right, shares of common stock of such other
person having a value of twice the right's exercise price.
Extended Systems can redeem the rights at $0.001 per right at any time on or
prior to the fifth day after a public announcement is made that a person or
group has acquired ownership of 15% or more of our common stock. The rights will
expire on June 19, 2013, unless earlier redeemed or exchanged.
STOCK PLANS. We have four incentive stock option plans, adopted in 1984, 1994,
1998 and 2001. Our employees, directors and consultants are eligible for options
under these plans. Options granted before December 24, 1997 generally vest 20%
per year over a period of five years from the date of grant. Options granted
December 24, 1997 and after generally vest over a period of four years, vesting
25% on the first anniversary of the option and 1/48 per month thereafter. The
exercise price generally is equal to the fair market value of our common stock
on the date of grant or at a price determined by the compensation committee of
our Board of Directors. For the 1984 and 1994 plans, unexercised options
generally lapse ten years after issuance or upon the date the option holder
ceases to be an employee. Options granted under the 1998 and 2001 plan generally
lapse ten years after issuance or three months after the option holder ceases to
be an employee. Shares available for grant under these plans totaled 422,268 at
June 30, 2004.
We also had a restricted stock option plan, adopted in 1987. Our regular,
full-time employees and directors were eligible for options under this plan.
Terms of the options were determined at the date of grant. Unexercised options
generally lapse ten years after issuance or upon the date the option holder
ceases to be an employee or director. We recorded unearned compensation related
to these options at the date of the award based on the market value of the
shares and amortize unearned compensation over the periods during which the
restrictions lapse. The plan terminated in September 1997.
We adopted a director stock plan in 1998. Our directors are eligible for options
under this plan. Options are granted at the fair market value of our common
stock on the grant date. An initial grant of 20,000 shares per director will
vest over a period of three years, vesting one-third on the first anniversary of
the option and 1/36 per month thereafter. Subsequent grants of 10,000 shares
will be automatically granted to directors each year on the date of our annual
69
meeting provided that such directors have served on the Board for at least six
months. These subsequent options will vest in full on the earlier of the first
anniversary of the date of grant or the date of the next annual meeting of
stockholders. Unexercised options lapse ten years after issuance or one year
after the date the option holder ceases to be a director. Shares available for
grant under this plan totaled 136,902 at June 30, 2004.
We adopted an employee stock purchase plan in 1998. The plan is generally
implemented by 24-month offering periods beginning the first trading day on or
after June 30 and December 31 of each year. Each offering period contains up to
four purchase periods of six months duration. The purchase plan generally
permits eligible employees to purchase our common stock through payroll
deductions of up to 15% of an employee's compensation, except that no
participant's right to purchase shares may accrue at a rate that exceeds $25
thousand each calendar year. The price of stock purchased under the purchase
plan is 85% of the lower of the fair market value of our common stock on the
first day of an offering period or the last day of each six-month purchase
period. Employees may end their participation at any time during a purchase
period, and they will be paid their payroll deduction withheld within that
purchase period. Shares available for purchase under this plan totaled 421,810
at June 30, 2004.
STOCK OPTION ACTIVITY WEIGHTED-
AVERAGE
EXERCISE
PRICE OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------------------------
AS OF JUNE 30, 2001........................... 15.52 2,819 1,391
Granted.................................. 4.35 550 -
Became exercisable....................... - 556
Exercised................................ 6.26 (89) (89)
Canceled/expired......................... 16.86 (493) (170)
----------------------------------
AS OF JUNE 30, 2002........................... 13.44 2,787 1,688
==================================
Granted.................................. 2.37 1,299 -
Became exercisable....................... - - 694
Exercised................................ 3.64 (30) (30)
Canceled/expired......................... 11.78 (787) (294)
----------------------------------
AS OF JUNE 30, 2003........................... 9.54 3,269 2,058
==================================
Granted.................................. 4.72 1,820 -
Became exercisable....................... - - 173
Exercised................................ 5.41 (451) (451)
Canceled/expired......................... 11.83 (1,424) (211)
----------------------------------
AS OF JUNE 30, 2004........................... 8.11 3,214 1,569
==================================
The weighted-average remaining contractual life of options outstanding at June
30, 2004 was 7.41 years. The weighted-average per share exercise price of
options exercisable at June 30, 2004, 2003 and 2002 was $11.89, $11.52 and
$13.47, respectively.
WEIGHTED-
RANGE OF WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
STOCK OPTION NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
EXERCISE PRICES SHARES PRICE LIFE SHARES PRICE
- -------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------------
$ 1.33 - $2.850 654 $ 2.16 8.34 years 383 $ 2.29
3.19 - 5.00 1,490 4.54 8.67 297 4.20
5.10 - 6.96 447 6.26 6.25 290 6.38
7.05 - 10.89 300 8.39 3.97 286 8.44
13.19 - 27.50 21 17.22 6.54 18 17.42
34.00 - 40.00 184 35.33 6.01 178 35.32
45.06 - 66.00 118 48.31 1.90 117 48.29
---------- ----------
3,214 1,569
---------- ----------
RESTRICTED STOCK. On October 31, 2003, the Company granted 134,941 shares of
restricted stock to employees with a purchase price equal to $0.001. The
issuance of the restricted stock grants to employees resulted in an aggregate of
$595,000 of unamortized stock-based compensation, which is being amortized as a
non-cash compensation
70
charge as the restrictions lapse (the vesting period). The restricted stock
charge was calculated based on the closing price of Extended Systems common
stock on October 31, 2003.
On December 11, 2003, the Company granted 32,681 shares of restricted stock to
directors with a purchase price equal to $0.001. The issuance of the restricted
stock grants to directors resulted in an aggregate of $152,000 of unamortized
stock-based compensation, which is being amortized as a non-cash compensation
charge as the restrictions lapse (the vesting period). The restricted stock
charge was calculated based on the closing price of Extended Systems common
stock on December 11, 2003.
The Company amortizes non-cash stock compensation charges on a straight-line
basis over the vesting period. The restricted stock awards granted to employees
vest 100% on the first anniversary of the grant date. The restricted stock
awards granted to directors vest in the amount of one-third on the first
anniversary of the grant date and one-third in each of the following two years.
If the director attends the required number of board meetings held during the
year, the restrictions on his awards will lapse in full on the first anniversary
of the grant date. If an employee or director terminates service before vesting
is complete, the restricted stock is repurchased from the individual and any
compensation expense previously recognized is reversed thereby reducing the
amount of stock-based compensation amortization during the period.
NOTE 14. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
FOR THE YEARS ENDED
JUNE 30,
----------------------------------
2004 2003 2002
----------------------------------
Current:
Federal ............................... $ -- $ -- $ --
State ................................. -- -- --
Foreign ............................... 145 73 (201)
Deferred:
Federal ............................... -- -- (1,566)
State ................................. -- -- --
Foreign ............................... -- -- --
----------------------------------
Income tax provision (benefit) .... $ 145 $ 73 $ (1,767)
==================================
FOR THE YEARS ENDED
JUNE 30,
----------------------------------
2004 2003 2002
----------------------------------
Continuing operations ...................... $ 93 $ (200) $ (2,257)
Discontinued operations .................... 52 273 490
----------------------------------
Income tax provision (benefit) .... $ 145 $ 73 $ (1,767)
==================================
Significant components of deferred income tax assets and liabilities are as
follows as of June 30:
2004 2003
----------------------
Intangible asset amortization .................... $ 1,489 $ 1,548
Federal and state loss carryforwards ............. 34,158 34,132
Foreign loss carryforwards ....................... 11,323 9,982
Other ............................................ 1,141 1,590
Valuation allowance .............................. (48,111) (47,252)
----------------------
Net deferred tax assets ................. $ -- $ --
======================
71
We recorded net deferred tax assets and liabilities of approximately $23.8
million upon the acquisition of ViaFone in fiscal 2003. The net deferred tax
assets are composed primarily of loss and tax credit carryforwards. The net
deferred tax assets and liabilities were reduced by a valuation allowance of
$23.8 million. If we determine that we will realize the tax attributes related
to ViaFone in the future, the related decrease in the valuation allowance will
reduce goodwill instead of the provision for taxes. The use of these loss and
tax credit carryforwards may be limited pursuant to Section 382 of the Internal
Revenue Code.
At June 30, 2004, we had available federal, state, and foreign net operating
loss carryforwards of approximately $85.5 million, $81.7 million, and $25.4
million, respectively. We also had unused research credits and foreign tax
credit carryforwards of approximately $1.0 million and $217 thousand,
respectively. If not utilized, the federal net operating loss and research
credit carryforwards will expire in fiscal years 2020 to 2024 and the state net
operating loss carryforwards will expire between fiscal 2005 and fiscal 2024. Of
the $25.4 million of foreign net operating loss carryforwards, approximately
$3.8 million will expire between fiscal 2006 and 2009 and the balance can be
utilized indefinitely. The available foreign tax credits expire between fiscal
2005 and fiscal 2006. If certain substantial changes in our ownership should
occur, as defined by Section 382 of the Internal Revenue Code, there may be an
annual limitation on the amount of carryforwards that we can utilize.
Deferred tax assets of approximately $12.0 million as of June 30, 2004 pertain
to certain net operating loss carryforwards and credit carryforwards resulting
from the exercise of employee stock options. When these assets are recognized
and the related valuation allowance against these assets is reduced,
approximately $5.6 million of the tax benefit will be accounted for as a credit
to additional paid-in capital rather than a reduction of the income tax
provision.
Our net deferred tax assets as of June 30, 2004 were reduced by valuation
allowances of $48.1 million as a result of management having concluded that
significant evidence does not exist under generally accepted accounting
principles to support a conclusion that it is more likely than not that these
assets will be realized in the future. The valuation allowance increased by $900
thousand in fiscal 2004 and $24.9 million in fiscal 2003.
We have not provided United States income taxes on the undistributed earnings of
our international subsidiaries, as such earnings are considered permanently
reinvested in these operations. While these earnings could become subject to
additional tax if repatriated, we do not anticipate repatriation.
Our effective income tax rate varies from the U.S. federal statutory rate as
follows for the years ended June 30:
2004 2003 2002
-----------------------------------
Federal tax rate ..................................................... (34.0)% (34.0)% (34.0)%
States taxes, net of federal benefit ................................. (3.4) (4.4) (2.7)
Earnings taxed in both U.S. and foreign jurisdictions ................ (2.5) 8.6 3.4
Earnings of subsidiaries taxed at different rates than U.S. rates .... (1.3) (2.7) (1.1)
In-process research and development .................................. -- 4.0 --
Net operating loss carryback due to tax law change ................... -- -- (17.5)
Valuation allowance .................................................. 30.7 23.2 30.9
Other, net ........................................................... 6.0 3.3 1.3
-----------------------------------
Effective income tax rate ....................................... (4.5)% (2.0)% (19.7)%
===================================
Losses before income taxes consist of the following:
FOR THE YEARS ENDED
JUNE 30,
------------------------------------
2004 2003 2002
------------------------------------
Subject to tax in:
United States .......................... $ 1,220 $ (2,973) $ (4,115)
Foreign jurisdictions .................. (4,324) (714) (4,842)
------------------------------------
Total loss before income taxes .... $ (3,104) $ (3,687) $ (8,957)
====================================
72
NOTE 15. BUSINESS SEGMENT, GEOGRAPHIC DATA AND MAJOR CUSTOMERS
We determine our reportable segments by evaluating our management and internal
reporting structure based primarily on the nature of the products offered to
customers and type or class of customers.
At June 30, 2004, we had only one operating segment. Our mobile information
management segment includes both mobile data management and wireless
connectivity solutions that enable mobile users to access, collect, synchronize
and print information on demand. Our products include wireless connectivity
products, data synchronization and management software and client/server
database management systems with remote access capabilities. We sell mobile
information management products primarily to original equipment manufacturers,
application developers, enterprises and computer resellers.
We based our geographic revenue information on the location of the selling
entity. Long-lived assets consist primarily of property and equipment.
AS OF JUNE 30,
------------------------------------------
2004 2003 2002
------------------------------------------
Long-lived assets:
United States .................................... $ 4,338 $ 4,724 $ 5,297
Germany .......................................... 190 216 239
Canada ........................................... 28 208 --
Other countries .................................. 158 145 250
------------------------------------------
Total ........................................ $ 4,714 $ 5,293 $ 5,786
==========================================
FOR THE YEARS ENDED
JUNE 30,
------------------------------------------
2004 2003 2002
------------------------------------------
Net revenue from continuing operations:
United States .................................... $ 16,075 $ 16,762 $ 15,282
Germany .......................................... 7,481 4,864 3,506
Other countries .................................. 8,630 5,908 3,487
------------------------------------------
Total ........................................ $ 32,186 $ 27,534 $ 22,275
==========================================
NOTE 16. DEFINED CONTRIBUTION PLAN
We established the Extended Systems Incorporated 401(k) Investment Plan, a
defined contribution benefit plan, effective January 1991. All regular United
States employees are eligible to participate. Each participant having completed
six months of service is eligible for a discretionary matching contribution to
his or her account, up to a maximum of three percent of his annual pretax
compensation. Our matching contributions to the plan were none in fiscal 2004,
$140 thousand in fiscal 2003 and $317 thousand in fiscal 2002.
73
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
----------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 2004:
Net revenue from continuing operations ................. $ 7,555 $ 8,507 $ 8,307 $ 7,817
Cost of license fees and royalties ..................... 82 144 132 24
Cost of services and other ............................. 951 842 911 752
Income (loss) from continuing operations ............... (1,477) 412 (2,085) (188)
Income from discontinued operations, net of tax ........ 41 47 -- --
Net income (loss) ...................................... (1,436) 459 (2,085) (188)
Income (loss) per share from continuing operations:
Basic .............................................. (.11) .03 (.14) (.01)
Diluted ............................................ (.11) .03 (.14) (.01)
Earnings per share from discontinued operations:
Basic .............................................. .00 .00 .00 .00
Diluted ............................................ .01 .00 .00 .00
Earnings (loss) per share:
Basic .............................................. (.11) .03 (.14) (.01)
Diluted ............................................ (.10) .03 (.14) (.01)
FOR THE YEAR ENDED JUNE 30, 2003:
Net revenue from continuing operations ................. $ 5,909 $ 6,883 $ 7,361 $ 7,381
Cost of license fees and royalties ..................... 272 295 287 292
Cost of services and other ............................. 545 981 785 874
Loss from continuing operations ........................ (1,992) (1,406) (795) (24)
Income from discontinued operations, net of tax ........ 28 140 147 142
Net income (loss) ...................................... (1,964) (1,266) (648) 118
Loss per share from continuing operations:
Basic .............................................. (.16) (.10) (.06) .00
Diluted ............................................ (.16) (.10) (.06) .00
Earnings per share from discontinued operations:
Basic .............................................. .00 .01 .01 .01
Diluted ............................................ .00 .01 .01 .01
Earnings (loss) per share:
Basic .............................................. (.16) (.09) (.05) .01
Diluted ............................................ (.16) (.09) (.05) .01
74
SCHEDULE II
EXTENDED SYSTEMS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED DEDUCTIONS BALANCE AT
BEGINNING TO PROFIT FROM END OF
OF PERIOD AND LOSS ALLOWANCE PERIOD
----------------------------------------------------------
Amount deducted in balance sheet from
the asset to which it applies:
Year ended June 30, 2004:
Allowance for doubtful accounts ..... $ 793 $ 166 $ (534) $ 425
Allowance for product returns ....... 38 -- (17) 21
Allowance for obsolete inventory .... 360 (80) (21) 259
Year ended June 30, 2003:
Allowance for doubtful accounts ..... 892 85 (184) 793
Allowance for product returns ....... 22 17 (1) 38
Allowance for obsolete inventory .... 380 86 106 360
Year ended June 30, 2002:
Allowance for doubtful accounts ..... 787 383 (278) 892
Allowance for product returns ....... 24 1 (3) 22
Allowance for obsolete inventory .... 348 24 8 380
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in Boise,
Idaho, on September 29, 2004.
EXTENDED SYSTEMS INCORPORATED
By: /s/ CHARLES W. JEPSON
-------------------------------------
CHARLES W. JEPSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles W. Jepson and Valerie A. Heusinkveld, and
each of them, his attorneys-in-fact, each with the power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments to this Annual Report on Form 10-K with all exhibits thereto and
all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully 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 Registrant and in
the capacities indicated on September 29, 2004.
SIGNATURE TITLE
--------- -----
/s/ CHARLES W. JEPSON President and Chief Executive Officer
- ---------------------------------- (Principal Executive Officer)
CHARLES W. JEPSON
/s/ VALERIE A. HEUSINKVELD Vice President of Finance, Chief
- ---------------------------------- Financial Officer and Corporate Secretary
VALERIE A. HEUSINKVELD (Principal Financial and Accounting
Officer)
/s/ RAYMOND A. SMELEK Director
- ----------------------------------
RAYMOND A. SMELEK
/s/ JAMES R. BEAN Director
- ----------------------------------
JAMES R. BEAN
/s/ ARCHIE CLEMINS Director
- ----------------------------------
ARCHIE CLEMINS
/s/ ROBERT FRANKENBERG Director
- ----------------------------------
ROBERT FRANKENBERG
/s/ RALPH GODFREY Director
- ----------------------------------
RALPH GODFREY
/s/ KLAUS-DIETER LAIDIG Director
- ----------------------------------
KLAUS-DIETER LAIDIG
/s/ JODY B. OLSON Director
- ----------------------------------
JODY B. OLSON
76