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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 __________
_________________
Commission File Number 000-23597
EXTENDED SYSTEMS INCORPORATED
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(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 offices) (Zip Code)
Registrant's telephone number, including area code: (208) 322-7575
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the Registrant's Common Stock as of
September 30, 2004, was 15,097,542.
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EXTENDED SYSTEMS INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September
30, 2004 (unaudited) and June 30, 2004 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Loss
for the Three Months Ended September 30, 2004 and 2003
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2004 and 2003 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 6. Exhibits 39
(Items 1,3, 4 and 5 of Part II are not applicable and
have been omitted)
SIGNATURES 40
CERTIFICATIONS 41
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
SEPTEMBER 30, JUNE 30,
2004 2004
---------- ----------
ASSETS
Current:
Cash and cash equivalents ................................................. $ 7,121 $ 7,225
Receivables, net of allowances of $469 and $446 ........................... 6,939 6,772
Prepaid and other ......................................................... 1,318 1,449
---------- ----------
Total current assets .................................................. 15,378 15,446
Property and equipment, net .................................................... 4,212 4,331
Construction in progress ....................................................... 783 384
Goodwill ....................................................................... 12,489 12,489
Intangibles, net ............................................................... 502 576
Other long-term assets ......................................................... 128 130
---------- ----------
Total assets .......................................................... $ 33,492 $ 33,356
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable .......................................................... $ 1,152 $ 1,664
Accrued expenses .......................................................... 4,245 3,531
Deferred revenue .......................................................... 3,624 3,569
Accrued restructuring ..................................................... 40 116
Current portion of long-term debt ......................................... 217 325
Current portion of capital leases ......................................... 24 25
---------- ----------
Total current liabilities ............................................. 9,302 9,230
Non-current:
Long-term debt ............................................................ 4,800 4,800
Capital leases ............................................................ 12 17
Other long-term liabilities ............................................... 153 153
---------- ----------
Total non-current liabilities ......................................... 4,965 4,970
---------- ----------
Total liabilities ..................................................... 14,267 14,200
Commitments and contingencies--Note 10
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; 15,098 and 15,078 shares issued and outstanding.............. 15 15
Additional paid-in capital ................................................ 48,045 48,005
Treasury stock; $0.001 par value per share, 4 and 0 common shares ......... -- --
Accumulated deficit ....................................................... (27,087) (27,134)
Unamortized stock-based compensation ...................................... (64) (231)
Accumulated other comprehensive loss ...................................... (1,684) (1,499)
---------- ----------
Total stockholders' equity ............................................ 19,225 19,156
---------- ----------
Total liabilities and stockholders' equity ............................ $ 33,492 $ 33,356
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements
3
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2004 2003
---------- ----------
Revenue:
License fees and royalties ................... $ 5,801 $ 5,771
Services and other ........................... 2,045 1,784
---------- ----------
Total net revenue ........................ 7,846 7,555
Costs and expenses:
Cost of license fees and royalties ........... 67 82
Cost of services and other ................... 885 1,103
Amortization of purchased technology ......... 74 189
Research and development ..................... 1,710 1,668
Marketing and sales .......................... 3,384 3,194
General and administrative ................... 1,376 1,181
Restructuring charges ........................ -- 1,068
Patent litigation fees, license and settlement -- 569
Non-cash stock compensation .................. 148 --
---------- ----------
Total costs and expenses ................. 7,644 9,054
---------- ----------
Income (loss) from operations ............ 202 (1,499)
Other income, net ................................. 3 60
Interest expense .................................. (133) (34)
---------- ----------
Income (loss) before income taxes ........ 72 (1,473)
Income tax provision .............................. 25 4
---------- ----------
Income (loss) from continuing operations . 47 (1,477)
Discontinued operations, net of tax:
Income from discontinued operations ...... -- 41
---------- ----------
Net income (loss) ........................ $ 47 $ (1,436)
========== ==========
Basic and diluted earnings (loss) per share:
Earnings (loss) from continuing operations ... $ 0.00 $ (0.11)
Earnings from discontinued operations ........ 0.00 0.01
---------- ----------
Net earnings (loss) per share ..................... $ 0.00 $ (0.10)
========== ==========
Number of shares used in per share calculations:
Basic ........................................ 15,089 14,011
Diluted ...................................... 15,317 14,011
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2004 2003
---------- ----------
Net income (loss)................................ $ 47 $ (1,436)
Change in currency translation................... (185) (57)
---------- ----------
Comprehensive loss........................... $ (138) $ (1,493)
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements
4
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 47 $ (1,436)
Adjustments to reconcile net loss to net cash used by operating
activities:
Provision for bad debts ............................................... 11 21
Depreciation and amortization ......................................... 240 446
Stock compensation .................................................... 149 437
Changes in assets and liabilities:
Receivables ........................................................ (149) (100)
Prepaid and other assets ........................................... (17) (28)
Accounts payable and accrued expenses .............................. 39 648
Deferred revenue ................................................... 36 (414)
---------- ----------
Net cash provided (used) by operating activities ............... 356 (426)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................... (444) (153)
Other investing activities ................................................ -- 19
---------- ----------
Net cash used by investing activities .......................... (444) (134)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale-and-leaseback of building .............................. -- 4,800
Proceeds from the issuance of common stock ................................ 58 180
Payments on long-term debt ................................................ (114) (114)
---------- ----------
Net cash provided (used) by financing activities ............... (56) 4,866
Effect of exchange rate changes on cash ................................... 40 3
---------- ----------
Net increase (decrease) in cash and cash equivalents ...................... (104) 4,309
CASH AND CASH EQUIVALENTS:
Beginning of period ....................................................... 7,225 3,502
---------- ----------
End of period ............................................................. $ 7,121 $ 7,811
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements
5
EXTENDED SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed 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 accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. These accounting principles were applied on a basis consistent with
those of the consolidated financial statements contained in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2004. We have prepared these
condensed consolidated financial statements without audit or review. Other than
the failure to have these condensed consolidated financial statements reviewed
by an independent registered public accounting firm, these financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). In the opinion of management, these unaudited
and unreviewed condensed consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our financial position as of September 30, 2004, and our
results of operations and cash flows for the three months ended September 30,
2004 and September 30, 2003. The results for these interim periods are not
necessarily indicative of the expected results for any other interim period or
the year ending June 30, 2005. These condensed consolidated financial statements
should be read in conjunction with our audited consolidated financial statements
and related notes thereto included in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2004. The condensed consolidated balance sheet at
June 30, 2004 was derived from audited financial statements but does not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements.
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.
We have a history of incurring losses from operations and have an accumulated
deficit of approximately $27.1 million as of September 30, 2004. For the three
months ended September 30, 2004, we recorded net income from operations of
approximately $202 thousand and positive cash flows from operations of
approximately $356 thousand. At September 30, 2004, we had cash and cash
equivalents of $7.1 million. We believe our existing working capital and
borrowing capacity will be sufficient to fund our anticipated working capital
and capital expenditure requirements through at least September 30, 2005.
We cannot be certain, however, that the underlying assumed levels of revenues
and expenses will be accurate. If operating results were to fail to meet our
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. SIGNIFICANT ACCOUNTING POLICIES
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 euro, Canadian dollar, 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 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
6
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 September 30, 2004, we had forward contracts with a nominal
value of approximately $12.9 million, which matured within 30 days, in place
against the euro, Canadian dollar, and British pound sterling. We had no forward
contracts in place as of September 30, 2003. We recognized a net currency
exchange loss of $83 thousand for the quarter ended September 30, 2004 and a net
currency exchange gain of $59 thousand for the quarter ended September 30, 2003.
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 potentially 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
for the three months ended September 30:
2004 2003
-------- --------
Stock options........................................ 2,433 3,314
Warrants............................................. 35 35
RECLASSIFICATIONS. We have reclassified certain prior year amounts to conform to
the current year presentation, including a reclassification between components
of income (loss) from operations, between components of current assets and
between components of current liabilities. These reclassifications had no impact
on net income (loss), income (loss) from operations, total costs and expenses,
total current assets or total current liabilities for the years presented.
NOTE 3. STOCK-BASED COMPENSATION PLANS
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 less par value paid 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 three months ended
September 30:
2004 2003
-------- --------
Net income (loss), as reported....................... $ 47 $ (1,436)
Add: Stock-based compensation included in
reported net income (loss)..................... 148 437
Less: Stock-based compensation determined under
SFAS No. 123.................................. (891) (1,136)
-------- --------
Pro forma net loss .................................. $ (696) $ (2,135)
Basic and diluted earnings (loss) per share:
As reported................................. $ 0.00 $ (0.10)
Pro forma................................... $ (0.05) $ (0.15)
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 options granted during the
three months ended September 30:
7
2004 2003
-------- --------
Risk-free interest rate:
Option plans................................ 4.13% 4.04%
Purchase plan............................... -- --
Expected life in years:
Option plans................................ 7.6 7.6
Purchase plan............................... -- --
Volatility factor:
Option plans................................ 99.1% 101.7%
Purchase plan............................... -- --
Dividend yield................................... -- --
Weighted average fair value:
Option plans................................ $3.20 $4.28
Purchase plan............................... -- --
NOTE 4. DISCONTINUED OPERATIONS
We exited our infrared hardware business in the quarter ended September 30,
2002, we sold our wholly owned subsidiary, Extended Systems Singapore Pte
Limited, in the quarter ended June 30, 2002 and we sold the assets of our
printing solutions segment in the quarter ended June 30, 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. Operating results for the discontinued operations are reported,
net of tax, under "Income from discontinued operations" on the accompanying
Statements of Operations.
The following summarizes the results of discontinued operations for the three
months ended September 30:
2004 2003
------ ------
Net revenue................................................. $ -- $140
Gross profit................................................ -- 69
Income tax provision........................................ -- 23
Income from discontinued operations, net of taxes........... $ -- $ 41
Earnings per share from discontinued operations:
Basic and diluted........................................ $ -- $.01
NOTE 5. RESTRUCTURING CHARGES
We did not incur restructuring charges for the three months ended September 30,
2004. We recorded approximately $1.1 million in workforce reduction costs during
the three months ended September 30, 2003 that consisted primarily of severance,
benefits, and other costs related to the resignation of Steven Simpson, our
former President and Chief Executive Officer, and the termination of ten
employees from our marketing and sales, research and development, administration
and operations groups. Of the terminated employees, seven were located in the
United States and three were in Europe. The restructuring charge included $437
thousand of non-cash compensation resulting from the accelerated vesting of
employee stock options.
A summary of accrued restructuring charges at September 30, 2004 is as follows:
WORKFORCE REDUCTION
COSTS
-------------------
Balance at June 30, 2004.................................. $ 116
Costs incurred in first quarter of fiscal 2005............ --
Cash payments............................................. (76)
-----
Balance at September 30, 2004............................. $ 40
=====
8
NOTE 6. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Goodwill and other identified intangible assets relate to our acquisitions of
Rand Software Corporation in 1998, Oval (1415) Limited in 1999, and AppReach and
ViaFone Inc. in 2002.
Goodwill is reviewed annually for impairment or more frequently if indicators of
impairment arise. We completed our annual impairment assessment in the quarter
ended June 30, 2004 and concluded that goodwill was not impaired. The carrying
amount of goodwill as of September 30, 2004 and June 30, 2004 was approximately
$12.5 million.
Other identifiable intangible assets consist of the following (in thousands):
AS OF SEPTEMBER 30, AS OF JUNE 30,
2004 2004
------------------------------ ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ ------ -------- ------------ ------
Purchased technology...... $3,691 $(3,236) $455 $3,691 $(3,165) $526
Customer relationships.... 80 (33) 47 80 (30) 50
Non-compete covenants..... 6 (6) -- 6 (6) --
Other..................... 6 (6) -- 5 (5) --
-------- ------------ ------ -------- ------------ ------
Total $3,783 $(3,281) $502 $3,782 $(3,206) $576
======== ============ ====== ======== ============ ======
Amortization of other intangible assets was $74 thousand and $189 thousand for
the quarters ended September 30, 2004 and 2003, respectively. The purchased
technology and customer relationship assets are being amortized over five years.
Based on the identified intangible assets recorded at September 30, 2004, the
estimated future amortization expense for the remainder of fiscal 2005 and
fiscal 2006, 2007, and 2008 is $129 thousand, $172 thousand, $172 thousand, and
$29 thousand, respectively.
AS OF AS OF
SEPTEMBER 30, JUNE 30,
NOTE 7. RECEIVABLES 2004 2004
------------ ------------
Accounts receivable..................... $ 7,408 $ 7,218
Allowance for doubtful accounts and
product returns....................... (469) (446)
------------- ------------
$ 6,939 $ 6,772
============= ============
AS OF AS OF
SEPTEMBER 30, JUNE 30,
NOTE 8. PROPERTY AND EQUIPMENT 2004 2004
------------- ------------
Land and land improvements.............. $ 533 $ 533
Buildings............................... 5,927 5,927
Computer equipment...................... 4,072 4,030
Furniture and fixtures.................. 2,322 2,285
------------- ------------
12,854 12,775
Less accumulated depreciation........... (8,642) (8,444)
------------- ------------
$ 4,212 $ 4,331
============= ============
9
AS OF AS OF
SEPTEMBER 30, JUNE 30,
NOTE 9. ACCRUED EXPENSES 2004 2004
------------ ------------
Accrued payroll and related benefits......... $ 1,710 $ 1,623
Accrued warranty and support costs........... 156 156
Other 2,379 1,752
------------ ------------
$ 4,245 $ 3,531
============ ============
NOTE 10. 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 $135 thousand
and $227 thousand for the three months ended September 30, 2004 and 2003,
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 September 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. 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 September 30, 2004, the loan balance was $217 thousand.
Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations as of September 30, 2004 are
as follows (in thousands):
YEAR ENDING JUNE 30,
--------------------------------------------------
2005 2006 2007 2008 2009 THEREAFTER TOTAL
------ ------ ------ ------ ------ ------ ------
SVB debt principal (1) $ 217 $ -- $ -- $ -- $ -- $ -- $ 217
SVB debt interest 5 -- -- -- -- -- 5
Payment pursuant to building sale-and-leaseback 331 442 442 442 442 1,875 3,974
Capital leases (1) 21 12 7 -- -- -- 40
Operating leases 420 328 266 234 232 58 1,538
Post-retirement benefits 17 17 17 17 17 67 152
------ ------ ------ ------ ------ ------ ------
Total commitments $1,011 $ 799 $ 732 $ 693 $ 691 $2,000 $5,926
====== ====== ====== ====== ====== ====== ======
(1) This amount is reported on the balance sheet as a liability.
Non-current capital lease obligations are as follows (in thousands):
As of
September 30, 2004
------------------
Gross capital lease obligations $ 40
Less imputed interest (4)
----
Present value of net minimum lease payments 36
Less current portion (24)
----
Non-current capital lease obligations $ 12
====
10
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 13, 2005. The maximum potential amount of
future payments we could be required to make under this letter of credit as of
September 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
indemnity obligations.
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 three
months ended September 30, 2004:
Balance at June 30, 2004..................................... $ 156
Net additions to warranty accrual for the three months
ended September 30, 2004.................................... --
------
Balance at September 30, 2004................................ $ 156
======
LINE OF CREDIT. We have a loan and security agreement with SVB under which 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. 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. As of September 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.
LITIGATION. On June 29, 2004 AppForge, Inc. ("AppForge") filed a complaint
against us 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 of our European subsidiaries. ESI-Idaho and
AppForge are parties to a distribution and license agreement related to certain
AppForge software. AppForge alleges that the defendant Extended Systems
companies have used AppForge's technology and trademarks in a manner not
authorized by the parties' agreement. We believe that our 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 Extended
Systems 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. Our four European
11
subsidiaries have moved for dismissal of the case on the ground they are not
subject to personal jurisdiction in Delaware.
We believe that we have meritorious defenses against this action, and we will
continue to vigorously defend it.
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 11. INCOME TAXES
For the three months ended September 30, 2004, we recorded income tax expense
related primarily to foreign withholding taxes of $25 thousand. For the three
months ended September 30, 2003, we recorded income tax expense related
primarily to foreign withholding taxes of $27 thousand, and of this amount $4
thousand was associated with continuing operations and $23 thousand was
associated with discontinued operations.
NOTE 12. BUSINESS SEGMENT, GEOGRAPHIC AREA 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.
We classify our product offerings into one operating segment, the adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. Our products in the adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions that we sell to enterprises, original
equipment manufacturers, application developers, distributors and valued-added
resellers.
Our headquarters is located in the United States. We have research and
development facilities in the United States, United Kingdom and Canada. We
conduct sales, marketing and customer service activities throughout the world,
and we have sales offices in North America and Western Europe. The following
table presents our geographic revenue information based on the location of the
selling entity.
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
NET REVENUE FROM CONTINUING OPERATIONS: 2004 2003
----------------------
North America .................................... $4,401 $4,625
Germany........................................... 2,079 1,340
Other countries................................... 1,366 1,590
----------------------
Total net revenue from continuing operations.... $7,846 $7,555
======================
Substantially all of our long-lived assets are in the United States.
No customer accounted for more than 10% of our net revenue from continuing
operations in the three months ended September 30, 2004 or 2003.
NOTE 13. RESTRICTED STOCK
In our fiscal year ended June 30, 2004, the Company granted shares of restricted
stock to employees and directors with a purchase price equal to $0.001 per
share. The issuance of the restricted stock grants resulted in unamortized
stock-based compensation based on the closing price of Extended Systems common
stock on the date of the stock grants. This compensation is being amortized as a
non-cash compensation charge as the restrictions lapse.
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.
12
During the three months ended September 30, 2004 the Company recognized stock
compensation expense of $148 thousand related to the above restricted stock
grants. There was no compensation expense related to restricted stock grants in
the three months ended September 30, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
- ------------
We begin Management's Discussion and Analysis of Financial Condition and Results
of Operations with an overview to give the reader management's perspective on
our results for the first quarter of fiscal 2005 and our general outlook for the
remainder of 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 the first quarter of
fiscal 2005 compared to the first quarter of fiscal 2004. We then provide an
analysis of our liquidity and capital resources.
This discussion and other parts of this Quarterly Report on Form 10-Q 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 Operations--Factors That May Affect Future
Results and Market Price of Stock" and "Liquidity, Capital Resources and
Financial Condition". The following discussion should be read in conjunction
with the Condensed Consolidated Financial Statements and notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q. All yearly references are to
our fiscal years ended June 30, 2005 and 2004, unless otherwise indicated. All
tabular amounts are in thousands, except percentages.
OVERVIEW
- --------
We are a leading provider of software and services that delivers 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 enable 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 PDAs, 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 first quarter
of fiscal 2005 requires an understanding of how the mobility solutions market is
evolving and how this evolution influences our company's 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 email application. Our mobile
solution that meets this need, OneBridge Mobile Groupware, comprises the
majority of our enterprise mobility software revenue, and revenue from this
product was a significant element of our revenue in fiscal 2004 and the first
quarter of fiscal 2005.
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 converged devices, adoption rates for these devices have increased.
To address the growth in this market, the rapid product development cycles, and
the demand for a robust feature set, device manufacturers have increasingly
turned
13
to third parties to provide the technology for short-range wireless connectivity
products. Our mobile device solutions revenue declined in the first fiscal
quarter of 2005 as handset manufacturers reduced the volume of shipments that
included our products, and we also experienced declines in pricing. However,
recent design wins for both mobile handsets and telematics products should
result in increased revenue from these products in the second quarter of fiscal
2005.
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 market awareness and developed
long-standing customer relationships. A significant portion of our revenue in
the first fiscal quarter of 2005 was derived from European customers purchasing
our enterprise mobility solutions and European device manufacturers introducing
successful converged devices that contained our mobile device solutions
products. Our first fiscal quarter occurs during the seasonally slow summer
period in Europe and has traditionally been our lowest revenue quarter of our
fiscal year for products marketed and sold in Europe.
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. Revenue from these products was essentially the same in the first
quarter of fiscal 2005 as compared to the prior year's first quarter.
Application developers that purchase our enterprise database products have
required a solution that is stable, mature and priced competitively in the
marketplace. We 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 the first
quarter of fiscal 2005.
In the remaining quarters of 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 those for field service, supply chain and logistics, healthcare, field sales
and education. Enterprises will choose vendors with knowledge of workflows and
business processes 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 declined in the first fiscal quarter of 2005 as compared
to the first quarter of last year by $1.4 million. However, the significant
decline was due primarily to restructuring charges and costs associated with
defending ourselves in a patent infringement case in the first quarter of last
year that did not recur in first quarter of fiscal 2005. Without these
expenditures, our operating expenses increased $227 thousand, while revenues
increased $291 thousand in the first quarter of fiscal 2005 as compared to the
prior year's first quarter. Due to the revenue growth and control of spending
increases, we experienced both income from operations and net income in the
first quarter of fiscal 2005.
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. The audited consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended June
30, 2004 contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies we
consider critical to an understanding of the consolidated financial statements
are highlighted below.
14
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 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 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. We recognize no
more than 90% of the total contract amount until project acceptance is obtained.
In cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, or where
significant uncertainty about the project completion or customer acceptance
exists, we defer the contract revenue under the completed contract method of
accounting until the uncertainty is sufficiently resolved or the contract is
complete and accepted by the customer. 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.
15
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 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 five year period 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 September 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.
16
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 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 quarters ended September 30,
2004 and 2003 translation adjustments of $185 thousand and $57 thousand,
respectively, were recorded as additions to our accumulated other comprehensive
loss. At September 30, 2004 and June 30, 2004, cumulative translation losses of
approximately $1.7 million and $1.5 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 periods 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 periods presented. 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.
17
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
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 OPERATIONS
- ---------------------
CONTINUING OPERATIONS
The following table sets forth the selected condensed consolidated financial
data, expressed as a percentage of total revenues for the three months ended
September 30, 2004 and 2003:
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
------ ------
Revenue:
License fees and royalties ................... 74% 76%
Services and other ........................... 26 24
------ ------
Total net revenue ........................ 100 100
Costs and expenses:
Cost of license fees and royalties ........... 1 1
Cost of services and other ................... 11 15
Amortization of purchased technology ......... 1 3
Research and development ..................... 22 22
Marketing and sales .......................... 43 42
General and administrative ................... 17 16
Restructuring charges ........................ -- 14
Patent litigation fees, license and settlement -- 8
Non-cash stock compensation .................. 2 --
------ ------
Total costs and expenses ................. 97 121
------ ------
Income (loss) from operations ............ 3 (21)
Other income, net ................................. -- 1
Interest expense .................................. (2) --
------ ------
Income (loss) before income taxes ........ 1 (20)
Income tax provision .............................. -- --
------ ------
Income (loss) from continuing operations . 1 (20)
Discontinued operations, net of tax:
Income from discontinued operations ...... -- 1
------ ------
Net income (loss) ........................ 1% (19)%
====== ======
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Revenue
- -------
The following table presents our license, support and maintenance, and
professional services revenue for the three months ended September 30, 2004 and
2003, and the percentage changes from the prior year.
18
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2004 % CHANGE 2003
--------------------------------
Revenue:
License fees and royalties........... $ 5,801 1% $ 5,771
Support and maintenance.............. 1,261 21 1,042
Professional services and other...... 784 6 742
--------- ---------
Total net revenue................ $ 7,846 4% $ 7,555
--------- ---------
We sell our adaptive mobility products to enterprises, original equipment
manufacturers, application developers, distributors and valued-added resellers.
No customer accounted for greater than 10% of revenue from continuing operations
in the first quarters of fiscal 2005 or 2004.
LICENSE FEES AND ROYALTIES. The majority of our product license revenue consists
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 primarily 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, the adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. Our products in the 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 each product line's percentage of license fee and royalty revenue for
the three months ended September 30, 2004 and 2003.
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
% %
2004 OF TOTAL 2003 OF TOTAL
--------- -------- --------- --------
License fees and royalties:
Enterprise Mobility Solutions $ 2,685 46% $ 2,350 41%
% change from prior year 14%
Mobile Device Solutions 1,489 26 1,778 31
% change from prior year (16)%
Enterprise Database Solutions 1,627 28 1,643 28
% change from prior year (1)%
--------- -------- --------- --------
Total net revenue $ 5,801 100% $ 5,771 100%
--------- -------- --------- --------
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. License revenue from our enterprise mobility
products increased $335 thousand in the first quarter of fiscal 2005 as compared
to the first quarter of fiscal 2004. The increase in enterprise mobility product
license revenue was the result of several factors, including a significant OEM
sale of our enterprise XTNDConnect PC product. The revenue growth was also a
result of our installed customer base rolling out additional licenses of our
OneBridge Mobile Groupware application and sales of this product to new
enterprise customers in both Europe and North America. We believe these
customers purchased OneBridge Mobile Groupware because of its competitive total
cost of ownership combined with the OneBridge platform 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
e-mail.
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. License and royalty revenue from our mobile device
products decreased $289 thousand in the first quarter of fiscal 2005 as compared
to the first quarter of fiscal 2004. The decline in revenue was due primarily to
a lower level of royalties from a European handset manufacturer. Although our
products continue to be licensed by the manufacturer, first quarter 2005 volumes
and
19
unit pricing were lower than the amounts for the previous year's comparable
quarter. As this manufacturer introduces the next series of their handset that
includes our products, we expect the volumes to increase in the second quarter
of fiscal 2005. Offsetting this decline somewhat was $350 thousand of revenue
related to products embedded in handsets that were shipped by our customers
prior to the beginning of the first quarter of fiscal 2005. Revenue related to
these shipments was not recognized previously, due to the lack of appropriate
customer signatures on the license agreeements. This revenue was recorded in the
first quarter of fiscal 2005.
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, 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 and initial
one-time payments that allow the customer either unlimited or a capped number of
licenses.
We sell our database products to enterprise customers and software developers
who write applications utilizing our product's data management capabilities.
License revenue from our enterprise database product lines in the first quarter
of fiscal 2005 was approximately the same as the revenue recorded in the first
quarter of fiscal 2004.
SUPPORT AND MAINTENANCE. Support and maintenance revenues are derived
predominantly from our enterprise mobility products and represent the ratable
recognition of fees to enroll customers 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
mobile device solutions OEM customers generally does not include support or
maintenance agreements, as technical issues are generally resolved before our
software is embedded into our customers' devices and the sales transaction is
completed.
Support and maintenance revenue increased 21% in the first quarter of fiscal
2005 as compared to the first quarter of fiscal 2004. 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 the first quarter of fiscal 2005. 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 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 is driven primarily by our customers purchasing
services to aid them in developing software solutions for their mobile
workforce. These services consist primarily of developing, testing and deploying
custom mobile applications for field service, sales force automation and mobile
consumer applications in both Europe and North America.
Professional services revenue in the first quarter of fiscal 2005 did not change
significantly from the revenue we reported in the first quarter of fiscal 2004.
In the first quarter of fiscal 2005, our professional services group
substantially completed a significant project for one of our European carrier
partners to develop a mobile field service application for use by its workers.
Although this project was completed, based on the current projects scheduled for
the second quarter of fiscal 2005, we expect professional services revenue in
the second quarter of fiscal 2005 to be approximately the same as the revenue in
the first quarter of fiscal 2005.
We expect professional services revenue to increase in the remaining quarters of
fiscal 2005, as more customers purchase services to develop custom applications;
however, there can be no assurances that we will be successful in obtaining
future professional services engagements. Although we expect an overall increase
in the amount of billable hours of our professional services 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.
20
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 a number of
international distributors. Based on the region in which the customer resides,
the table below presents total net revenue by region and each region's
percentage of total net revenue for the three months ended September 30, 2004
and 2003.
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
% %
2004 OF TOTAL 2003 OF TOTAL
----------------------------------------
North America ...................... $ 3,290 42% $ 3,235 43%
% change from prior year 2%
Europe ............................. 3,735 48% 3,225 43%
% change from prior year 16%
Asia Pacific and Rest of World ..... 821 10% 1,095 14%
% change from prior year (25)%
--------- -------- --------- --------
Total net revenue .............. $ 7,846 100% $ 7,555 100%
========= ======== ========= ========
Sales to domestic customers remained essentially the same in the first quarter
of fiscal 2005 as compared to the first quarter of fiscal 2004. Sales in Europe
grew $510 thousand in the first quarter of fiscal 2005 as compared to fiscal
2004. This growth was a result of increased license and professional services
revenues from our enterprise mobility and database products sold to our European
customers. 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 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. These increases were offset somewhat by the decline in the sales
of our mobile device solutions products to a major European handset
manufacturer.
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. Total reported revenue, including
revenue from our European customers invoiced in local currency, grew 4% between
the first quarter of fiscal 2005 and the first quarter of fiscal 2004, but had
the exchange rate for the U.S. dollar remained constant between those years,
revenue would have been essentially the same in both quarters. 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 solution products. We also sell our
enterprise mobility products in these regions through distributors and
value-added resellers. We sell our products in these regions in U.S. dollars and
do not have significant revenues derived from sales in foreign currencies from
this region. In the first quarter of fiscal 2005 revenue from these regions
declined $274 thousand. This decline reflects reduced shipments and purchases of
our products by our OEM customers from Asia Pacific for inclusion in handsets
manufactured in the region.
Cost of Revenue
- ---------------
The following table sets forth our costs of license fees and the royalties,
technical support and professional services for the three months ended September
30, 2004 and 2003, and dollar and percentage change from the prior year:
21
Three Months Ended September 30,
----------------------------------
Change
----------------
2004 $ % 2003
------- ------- ------- -------
Cost of licenses fees and royalties $ 67 $ (15) (18)% $ 82
As a % of license fees and royalty revenue 1% 1%
Cost of technical support services 467 (17) (4)% 484
As a % of support and maintenance revenue 37% 46%
Cost of professional services and other 418 (201) (32) 619
As a % of professional services and other revenue 53% 83%
------- ------- ------- -------
Total cost of revenue $ 952 $ (233) (20)% $ 1,185
======= ======= ======= =======
COST OF LICENSE FEES AND ROYALTIES. The cost of license and royalty revenue
consists primarily of royalties for the use of third-party software. The cost of
license fees and royalties remained relatively constant due to the fixed cost
nature of the licensing agreements we have arranged with third parties. As we
introduce new products into the marketplace such as OneBridge Mobile Secure and
OneBridge Mobile Sales, which incorporate technology from third parties, we
expect the cost of license fees and royalties to increase as we increase the
number of licenses we sell for these new products.
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 the first quarter of fiscal 2005 compared to prior year's
first quarter 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 mobility software solutions to
additional new customers.
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 margin was 47% for the
first quarter of fiscal 2005 as compared to 17% in the first quarter of fiscal
2004. The increased gross margin was the result of cost reductions related to a
reduced number of professional services staff resulting from transfers to the
research and development group or attrition. Additionally, we substantially
completed a significant professional services engagement for a field services
application that effectively optimized the resources of our European
professional services organization and was completed at a gross margin higher
than we have historically experienced.
We expect professional services revenue to grow in the remaining quarters of
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
three months ended September 30, 2004 and 2003 and the percentage change from
the prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Amortization of purchased technology...... $ 74 (61)% $ 189
as a % of net revenue.................. 1% 3%
Amortization decreased in the first quarter fiscal 2005 as compared to the first
quarter of fiscal 2004 as a result of the intangibles related to our acquisition
of Rand Software Corporation and Oval (1415) Limited becoming fully amortized in
the second quarter of fiscal 2004 and first quarter of fiscal 2005,
respectively.
We expect a decrease in amortization of other intangibles in the remaining
quarters of fiscal 2005 due to a portion of our purchased technology becoming
fully amortized in the first quarter of fiscal 2005.
22
Research and Development Expenses
- ---------------------------------
The following table presents our research and development expenses for the three
months ended September 30, 2004 and 2003 and the percentage change from the
prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Research and development.................. $ 1,710 3% $ 1,668
as a % of net revenue.................. 22% 22%
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
the cost of training our outsourced quality assurance and technical support
service provider. During the periods presented above, all software development
costs have been expensed.
Research and development expenses were approximately the same in the first
quarter of fiscal 2005 as compared to the first quarter of fiscal 2004. We
expect research and development costs to increase in the remaining quarters of
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 three
months ended September 30, 2004 and 2003 and the percentage change from the
prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Marketing and sales....................... $ 3,384 6% $ 3,194
as a % of net revenue.................. 43% 42%
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
and other marketing-related expenses including trade shows, promotional
materials, public relations and advertising.
The increased spending in the first quarter of fiscal 2005 as compared to the
first quarter of fiscal 2004 is primarily the result of $120 thousand in
increased sales salaries. 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 $37 thousand of increased travel costs for our sales
and marketing organization and $32 thousand of additional bad debt expense. We
also incurred $85 thousand of costs associated with the termination of the Vice
President of North American Sales in the first quarter of fiscal 2005. The
increases discussed above were partially offset by a $163 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.
We expect marketing and sales expenses to increase in fiscal 2005 as a result of
an expected increase in commissions paid caused by both an expected increase in
revenue and changes to our sales commission plans that increase the commission
rates as sales representatives increase cumulative sales totals in subsequent
quarters and approach annual quota targets.
General and Administrative Expenses
- -----------------------------------
The following table presents our general and administrative expenses for the
three months ended September 30, 2004 and 2003 and the percentage change from
the prior year.
23
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
General and administrative................ $ 1,376 17% $ 1,181
as a % of net revenue.................. 17% 16%
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 NASDAQ listing fees.
General and administrative expenses increased $195 thousand in the first quarter
of fiscal 2005 as compared to the first quarter of fiscal 2004. We incurred $67
thousand of 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. Additionally, the company instituted a bonus program to reward
its key personnel for the achievement of targeted operating income and a $106
thousand accrual for this program is included in the first quarter of fiscal
2005.
Restructuring Charges
- ---------------------
The following table presents our restructuring charges for the three months
ended September 30, 2004 and 2003 and the percentage change from the prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Restructuring charges..................... $ -- NM* $ 1,068
as a % of net revenue.................. --% 14%
* percentage change not meaningful
We did not incur restructuring charges in the first quarter of fiscal 2005. We
recorded approximately $1.1 million in workforce reduction costs during the
first quarter of fiscal 2004 that consisted primarily of severance, benefits,
and other costs related to the resignation of Steven Simpson, our former
President and Chief Executive Officer, and the termination of ten employees from
our marketing and sales, research and development, administration and operations
groups. Of the terminated employees, seven were located in the United States and
three were in Europe. The restructuring charge included $437 thousand of
non-cash compensation resulting from the accelerated vesting of employee stock
options.
A summary of accrued restructuring charges at September 30, 2004 is as follows:
WORKFORCE REDUCTION
COSTS
-------------------
Balance at June 30, 2004............................ $ 116
Costs incurred in first quarter of fiscal 2005...... --
Cash payments....................................... (76)
-------------------
Balance at September 30, 2004....................... $ 40
===================
Patent Litigation Fees, License and Settlement
- ----------------------------------------------
The following table presents our patent litigation, license and settlement
expense for the three months ended September 30, 2004 and 2003 and the
percentage change from the prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Patent litigation fees, license and
settlement............................. $ -- NM* $ 569
as a % of net revenue.................. --% 8%
* percentage change not meaningful
24
In April 2002, Intellisync Corporation filed a patent infringement action
against us 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 during the first quarter of fiscal
2004 is $569 thousand of legal and other costs to defend against the lawsuit.
Non-cash Stock Compensation
- ---------------------------
The following table presents our non-cash stock compensation expense for the
three months ended September 30, 2004 and 2003 and the percentage change from
the prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Non-cash stock compensation............... $ 148 NM* $ --
as a % of net revenue.................. 2% --%
* 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 the remaining quarters of 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 three months
ended September 30, 2004 and 2003 and the percentage change from the prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Foreign currency exchange gain (loss)..... $ (83) NM*)% $ 59
Interest income........................... 21 NM* 3
Net rental income......................... 68 45 47
Other net income (expense)................ (3) NM* (49)
---------------------------------
Total other income (expense)..... $ 3 (95)% $ 60
====== =======
* 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.
We recognized a foreign currency loss in the first quarter of fiscal 2005
primarily due to our intercompany balance forecasts differing from our
projections in periods of currency volatility. We recognized a foreign currency
gain in the first quarter of fiscal 2004 as a result of the decrease in the
strength of the U.S. dollar at a time when we were not entering into foreign
currency forward contracts. For additional information on our foreign currency
exposure see Item 3 of this Form 10-Q.
25
Interest income increased in the first quarter of fiscal 2005 as compared to the
same period last year due to an increase the amount of invested cash generated
by the sale-and-leaseback of our headquarters building and the sale of excess
real estate in the first half of fiscal 2004.
The increase in net rental income in the first quarter of fiscal 2005 compared
to the first quarter of fiscal 2004 is due primarily to an increase in rent
received as a result of our leasing additional unused space at our headquarters
facility in Boise, Idaho.
The decrease in other expense in the first quarter of fiscal 2005 as compared to
the same period last year is due primarily to a decrease in sales and use tax
expense that was recorded in the first quarter of fiscal 2004 in connection with
a sales tax audit.
The amount of any foreign currency exchange gain or loss for the remainder of
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. We expect interest
income and net rental income to remain relatively constant.
Interest Expense
- ----------------
The following table presents our interest expense for the three months ended
September 30, 2004 and 2003 and the percentage change from the prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Interest expense.......................... $ 133 291% $ 34
as a % of revenue...................... 2% --%
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, and interest paid on the term debt that we assumed
in connection with our acquisition of ViaFone in August 2002. Interest expense
increased by approximately $99 thousand in the first quarter of fiscal 2005
compared to the first quarter of fiscal 2004 primarily as a result of entering
into the sale-and-leaseback agreement.
Income Tax Provision
- --------------------
The following table presents our income tax provision for the three months ended
September 30, 2004 and 2003 and the percentage change from the prior year.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Income tax provision ..................... $ 25 NM* $ 4
as a % of income (loss) before taxes... 35% NM*
* percentage not meaningful
We recorded an income tax provision in the first quarters of fiscal 2005 and
2004 consisting primarily of foreign withholding taxes for which no credit is
currently available against U.S. taxes due to our net loss position. We expect
to record an income tax provision in the remaining quarters of fiscal 2005
related primarily to payments of foreign withholding taxes.
DISCONTINUED OPERATIONS
- -----------------------
The following summarizes the results of discontinued operations:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 % CHANGE 2003
---------------------------------
Net revenue............................... $ -- NM* $ 140
Income from discontinued operations....... -- NM* 41
* percentage not meaningful
26
Our revenue from discontinued operations for the first quarter of fiscal 2004
consisted of revenue from our discontinued infrared hardware business, for which
we adopted a formal exit plan in the first quarter of fiscal 2003. Although our
infrared hardware business was discontinued in the first quarter of fiscal 2003,
we continued to see revenue throughout fiscal 2003 as customers continued to
place last-time orders and we saw revenue in the first quarter of fiscal 2004 as
we shipped final orders.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
- ----------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2004 2003
---------------------
Net cash provided (used) by operating
activities....................................... $ 356 $ (426)
Net cash provided by operating activities in the first fiscal quarter of 2005
was primarily the result of our net income plus the adjustments to net income
for non-cash expenses. Included in net income were non-cash charges for
depreciation and amortization of $240 thousand, which declined from the prior
year primarily as a result of assets becoming fully depreciated without
replacement purchases. Also included were $149 thousand of non-cash charges for
stock compensation related to the amortization of restricted stock grants made
during fiscal 2004.
Net cash used by operating activities in the first quarter of fiscal 2004 was
primarily the result of our net loss of $1.4 million. Included in the net loss
were non-cash charges for depreciation and amortization of $446 thousand. Also
included were non-cash charges for stock compensation of $437 thousand related
to the termination of employees including the former CEO. In addition to these
non-cash charges, accounts payable and accrued expenses increased by $648
thousand but this increase was partially offset by a decrease in deferred
revenue of $414 thousand.
Accounts receivable, net of allowances, increased from $6.8 million June 30,
2004 to $6.9 million at September 30, 2004. This increase in accounts receivable
is due to an increase in total net revenue. Our days sales outstanding for the
quarter ended September 30, 2004 was approximately 80 days, the same as for the
quarter ended June 30, 2004. We expect that our accounts receivable will
increase in fiscal 2005 as a result of an expected increase in net revenue.
Accounts receivable may also increase in the future if net revenue from
international customers becomes a higher percentage of our net revenue.
NET CASH USED BY INVESTING ACTIVITIES
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2004 2003
---------------------
Net cash used by investing activities............... $(444) $(134)
Net cash used by investing activities in the first quarter of fiscal 2005 was
related to expenditures for software and other expenses related to a project to
upgrade our accounting and transactional infrastructure. We plan to incur
aggregate capital expenditures of approximately $400,000 during the remainder of
fiscal 2005, primarily for tenant improvements, software, system improvements
and personal computers.
Net cash used by investing activities in the first quarter of fiscal 2004 was
primarily the result of tenant improvement we were required to make to the
subleased portion of the unused space at our headquarters building pursuant to
the sublease agreements.
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2004 2003
---------------------
Net cash provided (used) by financing activities.... $(56) $4,866
Net cash used for financing activities in the first quarter of fiscal 2005 was
primarily the result of $114 thousand of payments made on term debt assumed as
part of our acquisition of ViaFone in 2002. This use of cash was partially
offset by $58 thousand of proceeds from the issuance of common stock under our
stock option plans.
Net cash provided from financing activities in the first quarter of fiscal 2004
was generated primarily 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
27
part of the agreement, we entered into a 10-year master lease for the building
with annual payments equal to approximately $442 thousand.
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 ("SPEs") which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited proposes. As of September 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 `s-Hertogenbosch, the
Netherlands. We also lease certain equipment under non-cancelable operating and
capital leases. Lease expense under operating lease agreements was $135 thousand
and $227 thousand for the three months ended September 30, 2004 and 2003,
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 September 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
28
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 September 30, 2004, the loan balance was $217 thousand.
Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations as of September 30, 2004 are
as follows (in thousands):
YEAR ENDING JUNE 30,
--------------------------------------------------
2005 2006 2007 2008 2009 THEREAFTER TOTAL
------ ------ ------ ------ ------ ------ ------
SVB debt principal (1) $ 217 $ -- $ -- $ -- $ -- $ -- $ 217
SVB debt interest 5 -- -- -- -- -- 5
Payment pursuant to building sale-and-leaseback 331 442 442 442 442 1,875 3,974
Capital leases (1) 21 12 7 -- -- -- 40
Operating leases 420 328 266 234 232 58 1,538
Post-retirement benefits 17 17 17 17 17 67 152
------ ------ ------ ------ ------ ------ ------
Total commitments $1,011 $ 799 $ 732 $ 693 $ 691 $2,000 $5,926
====== ====== ====== ====== ====== ====== ======
(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 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 September 30, 2004, we had forward
contracts with a nominal value of $12.9 million in place against the euro,
Canadian dollar and British pound sterling, which matured within 30 days. We had
no forward contracts in place as of September 30, 2003. We recognized a net
currency exchange loss of $83 thousand for the quarter ended September 30, 2004
and a net currency exchange gain of $59 thousand for the quarter ended September
30, 2003.
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 the fiscal year ended June 30, 1999, we have devoted
significant financial resources to the research and development of, and
marketing and sales for, our adaptive mobility 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
29
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 E-MAIL
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 integrators 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 coordinate 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 e-mail
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 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.
30
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 e-mail applications and 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 Lotus
Domino or Microsoft Exchange Server 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.
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
31
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 (the "Act") 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 of the Act. 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 enterprises and
increase our sales through independent software vendors, the lack of
predictability of our sales cycle will increase. The time required to close
orders remains difficult to accurately predict as a result of the overall
economic conditions, cautious capital spending by businesses 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;
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, Sybase, Inc. acquired
XcelleNet, Inc., Broadcom Corporation acquired Widcomm, Inc. and Infowave
Software Inc. acquired Telispark Inc. Changes resulting from these and other
consolidations may harm our competitive position. In addition, as the trend
toward consolidation continues, we may encounter increased
32
competition for attractive acquisition targets and may 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 e-mail 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
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 Sybase
company), 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;
33
o client/server database providers, including Borland, Microsoft, Oracle and
Pervasive Software;
o mobile connectivity companies, including IVT Corporation, Agilent,
EMBEDnet, CSR, Broadcom, Stonestreet One, Link Evolution and Open Interface
North America; 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 relationships 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 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. 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 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 September 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 approximately $502
thousand of net identifiable intangibles in the remainder of fiscal 2005 and
fiscal 2006 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
34
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 fiscal 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.
OUR BUSINESS MAY BE HARMED DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS, WHICH REPRESENT A SUBSTANTIAL PORTION OF OUR REVENUE.
In the first quarter of fiscal 2005, based on the region where the customer
resides, almost 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.
35
One or more of these risks could harm our future overseas 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;
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
for which it 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
revenue. 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
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 the first quarter
of fiscal 2005, 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 $743 thousand.
Although we are not currently required to record any compensation expense using
the fair value method in connection with option grants that have
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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 Condensed
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 RIGHTS PLAN, AS WELL AS PROVISIONS OF DELAWARE LAW, COULD IMPAIR A
TAKEOVER ATTEMPT.
We have provisions in our certificate of incorporation and bylaws, that 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 granting 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 shareholders.
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 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 integration of acquired technologies with our existing products and
technologies;
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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 3. 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
September 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 September 30, 2004, we had forward contracts with a
nominal value of approximately $12.9 million, which matured within 30 days, in
place against the euro, Canadian dollar, and British pound sterling. We had no
forward contracts in place as of September 30, 2003. We recognized a net
currency exchange loss of $83 thousand for the quarter ended September 30, 2004
and a net currency exchange gain of $59 thousand for the quarter ended September
30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures" as defined in Rules 13a -15(e)
and 15d -15(e) of the Securities Exchange Act of 1934 ("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 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
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
Quarterly Report on Form 10-Q, such officers have concluded that the Disclosure
Controls and Procedures are effective.
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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.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
During the first quarter of fiscal 2005 we repurchased 4,159 shares of
restricted common stock that were issued to employees subject to a right of
repurchase by the Company if an individual's employment with the Company
terminated prior to full vesting of such stock. As of September 30, 2004 there
were 142,031 shares of our restricted common stock issued to our employees and
directors that were subject to repurchase prior to vesting. Below is a table
showing the amount of our common stock repurchases for each month of the first
quarter of fiscal 2005:
(c) Total Number of (d) Maximum
Shares Purchased as Number of Shares
Part of Publicly that May Yet be
(a) Total Number (b) Average Price Announced Plans Purchased Under the
Period of Shares Purchased Paid per Share or Programs Plans or Programs
- ---------------------------------------------------------------------------------------------------------
July 1-31, 2004 2,225 $.001 -- --
August 1-31, 2004 1,609 $.001 -- --
September 1-30, 2004 325 $.001 -- --
-------
Total 4,159 $.001 -- --
ITEM 6. EXHIBITS
(A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Restated Certificate of Incorporation. (1)
3.2 Restated Bylaws. (2)
10.56 Separation Agreement between the Company and David Willis. *
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.
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Boise, Idaho, on November 15, 2004.
EXTENDED SYSTEMS INCORPORATED
By: /s/ CHARLES W. JEPSON
---------------------------
CHARLES W. JEPSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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