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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 MARCH 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 000-23597
EXTENDED SYSTEMS INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 82-0399670
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5777 NORTH MEEKER AVENUE, BOISE, ID 83713
---------------------------------------------------
(Address of principal executive 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 12(b)-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the Registrant's Common Stock as of April
30, 2003, was 13,842,877.
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EXTENDED SYSTEMS INCORPORATED
FORM 10-Q
FOR THE NINE MONTHS ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheets as of March 31, 2003
and June 30, 2002 ............................................... 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended March 31, 2003 and 2002 ................... 4
Condensed Consolidated Statements of Comprehensive Loss for
the Three and Nine Months Ended March 31, 2003 and 2002 ......... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2003 and 2002 ............................ 5
Notes to Condensed Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations ....................................... 16
-------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 37
----------------------------------------------------------
Item 4. Controls and Procedures ......................................... 37
-----------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 38
-----------------
Item 5. Other Information ............................................... 38
-----------------
Item 6. Exhibits and Reports on Form 8-K ................................ 38
--------------------------------
(Items 2, 3, and 4 of Part II are
not applicable and have been omitted)
SIGNATURES ...................................................... 39
CERTIFICATIONS .................................................. 40
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
MARCH 31, 2003 JUNE 30, 2002
------------ ------------
ASSETS
Current:
Cash and cash equivalents............................... $ 3,679 $ 5,439
Receivables, net ....................................... 5,767 4,284
Prepaids and other ..................................... 628 1,719
------------ ------------
Total current assets ............................... 10,074 11,442
Property and equipment, net ................................. 5,543 5,786
Goodwill .................................................... 12,506 1,941
Intangibles, net ............................................ 1,386 1,202
------------ ------------
Total assets........................................ $ 29,509 $ 20,371
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable........................................ $ 2,594 $ 2,377
Accrued expenses ....................................... 3,178 2,739
Deferred revenue ....................................... 2,327 2,167
Accrued restructuring .................................. 799 --
Short-term debt ........................................ 290 --
Current portion of long-term debt ...................... 434 --
Capital leases ......................................... 25 --
------------ ------------
Total current liabilities .......................... 9,647 7,283
Non-current:
Accrued restructuring .................................. 97 --
Long-term debt ......................................... 434 --
Capital leases ......................................... 48 --
Other long-term liabilities ............................ 127 --
------------ ------------
Total non-current liabilities ...................... 706 --
------------ ------------
Total liabilities .................................. 10,353 7,283
Commitments and contingencies--Note 9
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; 13,821 and 11,208
shares issued and outstanding ....................... 14 11
Additional paid-in capital ............................. 44,202 34,053
Accumulated deficit..................................... (24,002) (20,124)
Accumulated other comprehensive loss ................... (1,058) (852)
------------ ------------
Total stockholders' equity ......................... 19,156 13,088
------------ ------------
Total liabilities and stockholders' equity.......... $ 29,509 $ 20,371
============ ============
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenue:
License fees and royalties ................. $ 5,696 $ 5,011 $ 16,012 $ 14,787
Services and other ......................... 1,665 816 4,141 2,372
---------- ---------- ---------- ----------
Total net revenue ...................... 7,361 5,827 20,153 17,159
Cost of net revenue:
License fees and royalties ................. 287 351 854 996
Services and other ......................... 785 338 2,311 866
---------- ---------- ---------- ----------
Total cost of net revenue .............. 1,072 689 3,165 1,862
---------- ---------- ---------- ----------
Gross profit ..................... 6,289 5,138 16,988 15,297
Operating expenses:
Research and development ................... 1,709 2,406 5,558 7,950
Acquired in-process research and development -- -- 430 --
Marketing and sales ........................ 3,830 3,360 10,761 10,314
General and administrative ................. 1,240 1,143 3,747 3,273
Amortization of goodwill ................... -- 231 -- 694
Restructuring charges ...................... 361 -- 497 --
---------- ---------- ---------- ----------
Total operating expenses ............... 7,140 7,140 20,993 22,231
---------- ---------- ---------- ----------
Loss from operations ................... (851) (2,002) (4,005) (6,934)
Other expense (income), net .................... (42) 33 58 (50)
Interest expense ............................... 65 35 264 44
---------- ---------- ---------- ----------
Loss before income taxes ............... (874) (2,070) (4,327) (6,928)
Income tax benefit ............................. (79) (1,700) (133) (1,746)
---------- ---------- ---------- ----------
Loss from continuing operations ........ (795) (370) (4,194) (5,182)
Income from discontinued operations, net of tax 147 147 316 152
---------- ---------- ---------- ----------
Net loss ............................... $ (648) $ (223) $ (3,878) $ (5,030)
========== ========== ========== ==========
Basic and diluted earnings (loss) per share:
Loss from continuing operations ............ $ (0.06) $ (0.03) $ (0.31) $ (0.47)
Earnings from discontinued operations ...... 0.01 0.01 0.02 0.01
---------- ---------- ---------- ----------
Net loss per share ............................. $ (0.05) $ (0.02) $ (0.29) $ (0.46)
========== ========== ========== ==========
Number of shares used in per share calculations:
Basic and diluted .......................... 13,821 11,083 13,221 11,013
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss .......................... $ (648) $ (223) $ (3,878) $ (5,030)
Change in currency translation, net (167) 10 (207) 31
---------- ---------- ---------- ----------
Comprehensive loss ............ $ (815) $ (213) $ (4,085) $ (4,999)
========== ========== ========== ==========
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)
NINE MONTHS ENDED MARCH 31,
------------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (3,878) $ (5,030)
Adjustments to reconcile net loss to net cash used by operating activities:
Provision for bad debts ............................................... 110 238
Provision for excess and obsolete inventory ........................... 86 3
Depreciation and amortization ......................................... 1,418 2,213
Acquired in-process research and development .......................... 430 --
Interest expense related to warrants .................................. 151 --
Other ................................................................. 132 42
Changes in assets and liabilities, net of effect of acquisitions:
Receivables ........................................................ (871) 1,495
Inventories ........................................................ 25 317
Prepaids and other assets .......................................... 359 476
Deferred revenue ................................................... (331) 653
Accrued payroll expenses ........................................... 4 (1,113)
Accounts payable and accrued expenses .............................. (609) (1,884)
------------ ------------
Net cash used by operating activities .......................... (2,974) (2,590)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................................ (82) (51)
Acquisition - AppReach, net of cash acquired .............................. -- (15)
Acquisition - ViaFone, net of cash acquired ............................... 1,119 --
Other investing activities ................................................ 156 77
------------ ------------
Net cash provided by investing activities ...................... 1,193 11
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock ................................ 101 614
Borrowings on line of credit .............................................. 290 --
Payments on long-term debt ................................................ (342) --
------------ ------------
Net cash provided by financing activities ...................... 49 614
Effect of exchange rate changes on cash ................................... (28) 8
------------ ------------
Net decrease in cash and cash equivalents ................................. (1,760) (1,957)
CASH AND CASH EQUIVALENTS:
Beginning of period ....................................................... 5,439 6,585
------------ ------------
End of period ............................................................. $ 3,679 $ 4,628
============ ============
The accompanying notes are an integral part of
the condensed consolidated financial statements
5
EXTENDED SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying condensed consolidated financial
statements include Extended Systems Incorporated, a Delaware corporation, and
its subsidiaries. We have eliminated all significant intercompany accounts and
transactions. Tabular amounts are in thousands, except percentages and per share
amounts.
We have prepared these condensed consolidated financial statements without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). In the opinion of management, these unaudited condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of our financial
position as of March 31, 2003, and our results of operations and cash flows for
the three and nine months ended March 31, 2003 and March 31, 2002. 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, 2003. 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 as filed with the SEC on September 23, 2002. The
condensed consolidated balance sheet at June 30, 2002 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.
As a result of discontinuing our infrared hardware business in the first quarter
of fiscal 2003, disposing of our Singapore subsidiary in the fourth quarter of
fiscal 2002, and disposing of our printing solutions business in the fourth
quarter of fiscal 2001, we have reclassified our consolidated statement of
operations and other related disclosures for all periods presented to present
the results of these businesses as discontinued operations. We have made other
reclassifications to the consolidated financial statements to conform the
presentations. These reclassifications had no impact on the net loss for the
years presented.
CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency. We translate assets and liabilities of international
subsidiaries into U.S. dollars using exchange rates in effect at the balance
sheet date, and we report gains and losses from this translation process as a
component of comprehensive income or loss. We translate revenue and expenses
into U.S. dollars using the average exchange rate for the period.
From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and the British pound sterling to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries, thereby limiting our risk that would otherwise
result from changes in currency exchange rates. While these instruments are
subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed.
These forward contracts do not qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and, as such, the
contracts are recorded in the consolidated balance sheet at fair value. We
report a net currency gain or loss based on changes in the fair value of forward
contracts combined with the changes in fair value of the underlying asset or
liability being managed. As of March 31, 2003, we had no forward contracts in
place. We had forward contracts with a nominal value of $1.9 million in place
against the euro and British pound sterling at June 30, 2002 that matured within
30 days. We recognized a net currency exchange gain of $36,000 for the three
months ended March 31, 2003 and a net currency exchange loss of $26,000 for the
three months ended March 31, 2002. We recognized net currency exchange losses of
$82,000 and $67,000 for the nine months ended March 31, 2003 and 2002,
respectively.
EARNINGS OR LOSS PER SHARE. We compute basic earnings or loss per share by
dividing net income or loss by our weighted average number of common shares
outstanding during the period. We compute diluted earnings or loss per share by
dividing net income or loss by the weighted average number of common shares
outstanding increased by the additional common shares that would be outstanding
if we had issued the potential dilutive common shares. We exclude stock options
and warrants from the diluted earnings or loss per share computations to the
extent that their effect would have been antidilutive.
6
Our diluted earnings or loss per share computations exclude the following common
stock equivalents, as the impact of their inclusion would have been antidilutive
as of March 31:
2003 2002
---- ----
Stock options....................... 3,501 2,912
Warrants............................ 35 35
ACCOUNTING CHANGES. We completed the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets," effective July 1, 2002. SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. SFAS No. 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard requires, upon adoption, the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles and reclassification of certain intangibles out of
previously reported goodwill. Impairment of existing goodwill and other
intangibles must be tested at least annually thereafter. We expect to perform
our annual impairment test in the fourth quarter of each fiscal year.
As of the beginning of fiscal 2003, we discontinued amortization of
approximately $1.9 million of net goodwill as required by SFAS No. 142. Because
an assembled workforce no longer meets the definition of an identifiable
intangible asset, we reclassified the net assembled workforce balance on our
books of $138,000 to goodwill as of the beginning of fiscal 2003. In lieu of
amortization, we performed an impairment review of our goodwill balance upon the
initial adoption of SFAS No. 142. We concluded that there was no impairment in
our recorded goodwill.
In accordance with SFAS No. 142, the effect of adopting this accounting change
is reflected prospectively. The following table presents comparative financial
information showing the effects that discontinuance of goodwill amortization
would have had on the income statement for the three and nine months ended March
31:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss:
Reported net loss ................ $ (648) $ (223) $ (3,878) $ (5,030)
Goodwill amortization (1) ......... -- 231 -- 694
---------- ---------- ---------- ----------
Adjusted net loss ................ $ (648) $ 8 $ (3,878) $ (4,336)
========== ========== ========== ==========
Basic and diluted loss per share:
Reported loss per share ........... $ (0.05) $ (0.02) $ (0.29) $ (0.46)
Goodwill amortization (1) ......... -- 0.02 -- 0.07
---------- ---------- ---------- ----------
Adjusted basic and diluted loss per
share ............................. $ (0.05) $ 0.00 $ (0.29) $ (0.39)
Number of shares used in per share
calculations ...................... 13,821 11,083 13,221 11,013
(1) Includes $19,000 of amortization for the three months ended March 31, 2002
and $56,000 of amortization for the nine months ended March 31, 2002
related to assembled workforce assets that were reclassified as goodwill
effective July 1, 2002.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," which
supersedes various existing standards on accounting for long-lived assets. This
new standard establishes a single accounting method under which long-lived
assets to be disposed of by sale are measured at the lower of book or fair value
less cost to sell. Additionally, this statement expands the reporting of
discontinued operations to include components of an entity that have been or
will be disposed of rather than limiting such discontinuance to a segment of a
business. We adopted this statement as of July 1, 2002, and the adoption of this
statement did not have a material effect on our consolidated financial
statements.
RECENTLY ISSUED ACCOUNTING STANDARDS. Effective January 1, 2003, we adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities",
which supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This new
standard requires companies to recognize costs associated with exit or disposal
activities when the costs are incurred rather than at the date of a commitment
to an exit or disposal plan. Costs covered by the standard include lease
termination costs and certain employee severance costs that are
7
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity. Adoption of this statement had no material effect on
our financial position or results of operations.
Effective January 1, 2003, we adopted the disclosure provisions of FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued, including a reconciliation of
changes in the entity's product warranty liabilities. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The adoption of this interpretation did not
have a material effect on our financial position or results of operations.
Disclosure of our guarantees, indemnifications, and warranties is included in
Note 9.
Effective January 1, 2003, we adopted the interim disclosure provisions of SFAS
No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format. The
transition and annual disclosure requirements are effective for our fiscal year
beginning July 1, 2003. We currently plan to continue accounting for stock-based
compensation under Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," and do not anticipate changing to
the fair value method of accounting.
We apply APB No. 25 and its related interpretations to measure compensation
expense for stock-based compensation plans. If compensation expense for
stock-based compensation plans had been determined under SFAS No. 123, our net
loss would have been equal to the pro forma amounts indicated below for the
three and nine months ended March 31, 2003 and 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss attributed to common shares, as reported ................ $ (648) $ (223) $ (3,878) $ (5,030)
Less:
Total stock-based employee compensation expense determined
under a fair value based method for all grants, net of tax effects (1,291) (1,444) (4,275) (5,151)
-------- -------- -------- --------
Net loss attributable to common shares, proforma ................. $ (1,939) $ (1,667) $ (8,153) $(10,181)
======== ======== ======== ========
Basic and diluted loss per share:
Net loss, as reported ................................... $ (0.05) $ (0.02) $ (0.29) $ (0.46)
Net loss, proforma ...................................... $ (0.14) $ (0.15) $ (0.62) $ (0.92)
We determined the fair value of options at the date of grant using the
Black-Scholes option-pricing model. We assumed no future dividends will be paid.
The other weighted-average assumptions and the weighted-average fair values of
stock options are as follows for the three and nine months ended March 31, 2003
and 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Risk-free interest rate:
Option plans ................................................ 3.6% 4.9% 3.9% 4.6%
Purchase plan ............................................... 3.7% 3.7% 3.7% 3.7%
Expected life in years:
Option plans ................................................ 7.6 7.6 7.6 7.6
Purchase plan ............................................... 0.5 0.5 0.5 0.5
Volatility factor ................................................ 102.4% 106.6% 102.4% 106.6%
Dividend yield ................................................... 0% 0% 0% 0%
8
NOTE 2. DISCONTINUED OPERATIONS
In the first quarter of fiscal 2003, we adopted a formal plan to exit our
infrared hardware business as a result of an expected decline in sales of these
products and our desire to increase our focus on our core software businesses.
As a part of that plan, we wrote down our infrared hardware inventory to its
estimated net realizable value. Additionally, in June 2002, we sold our wholly
owned subsidiary, Extended Systems Singapore Pte Limited, and in May 2001, we
sold the assets of our printing solutions segment. The results of these
operations have been accounted for as discontinued operations for all periods
presented in accordance with SFAS No. 144 and Accounting Principles Bulletin No.
30. Amounts in the financial statements and related notes for all periods shown
have been reclassified to reflect the discontinued operations. Operating results
for the discontinued operations are reported, net of tax, under "Income from
discontinued operations" on the accompanying Statements of Operations.
The following summarizes the results of discontinued operations:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net revenue ..................................................... $ 520 $ 563 $ 1,143 $ 1,961
Gross profit .................................................... 239 423 480 880
Income tax provision ............................................ 87 172 188 253
Income from discontinued operations,
net of taxes ............................................... 147 147 316 152
Earnings per share from discontinued operations:
Basic and diluted .......................................... $ 0.01 $ 0.01 $ 0.02 $ 0.01
NOTE 3. RESTRUCTURING CHARGES
We recorded $361,000 in workforce reduction costs during the third quarter of
fiscal 2003, consisting primarily of severance, benefits, and other costs
related to the termination of 13 employees in research and development and
marketing and sales, of which 9 were located in the United States, 3 in Canada
and 1 in Europe. We paid $143,000 of these charges in the third quarter of
fiscal 2003. We will pay $115,000 of the accrued charges in the fourth quarter
of fiscal 2003 and the remaining balance of $103,000 will be paid out in the
first quarter of fiscal 2004.
We recorded $136,000 in workforce reduction costs during the first quarter of
fiscal 2003, consisting primarily of severance, benefits, and other costs
related to the termination of 16 employees in research and development,
marketing and sales, manufacturing, and administration, of which 14 were located
in the United States and 2 in Europe. All of these charges were paid in the
first quarter of fiscal 2003.
During the first quarter of fiscal 2003 we also assumed a restructuring
liability in connection with our acquisition of ViaFone, Inc. ("ViaFone"). Prior
to our acquisition of the company, ViaFone had implemented a restructuring
program that resulted in charges for workforce reduction costs, costs related to
closing its office in France and excess facilities costs related to lease
commitments for space no longer used in Brisbane, California. At the time we
completed the ViaFone acquisition, there were $993,000 of future lease
commitments that had been accrued but not yet paid, $266,000 of workforce
reduction liabilities and $30,000 of liabilities relating to the closure of
ViaFone's French office.
As of March 31, 2003, the workforce reduction liabilities and liabilities
related to closing ViaFone's French office had been paid in full, and the
balance of future lease commitments assumed was $679,000. We will pay $145,000
in each of the next four quarters and $99,000 in the final quarter of fiscal
2004 for these lease commitments.
A summary of the restructuring costs is outlined as follows:
Workforce
Reduction Facilities and
Costs Other Costs Total
-------- -------- --------
Balance at June 30, 2002 .......................................... $-- $-- $--
Restructuring charges incurred in first quarter of fiscal 2003 .... 136 -- 136
Restructuring accrual assumed with ViaFone acquisition ............ 266 1,023 1,289
Cash payments ..................................................... (227) (24) (251)
-------- -------- --------
Balance at September 30, 2002 ..................................... 175 999 1,174
9
Cash payments ..................................................... (141) (175) (316)
-------- -------- --------
Balance at December 31, 2002 ...................................... 34 824 858
Restructuring charges incurred in third quarter of fiscal 2003 .... 361 -- 361
Adjustment to the accrual assumed with ViaFone acquisition ........ (14) -- (14)
Cash payments ..................................................... (164) (145) (309)
-------- -------- --------
Balance at March 31, 2003 ......................................... $ 217 $ 679 $ 896
======== ======== ========
NOTE 4. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
We recorded $11 million of goodwill upon closing of the ViaFone acquisition in
the first quarter of fiscal 2003. In the second and third quarters of fiscal
2003, we adjusted the purchase price allocation to reflect a reduction in
accrued acquisition costs and revisions to the fair values of certain assets
acquired and liabilities assumed at the date of acquisition. These adjustments
resulted in a net decrease to goodwill of approximately $198,000 and $346,000,
respectively. No goodwill was impaired or written off in the first nine months
of fiscal 2003. The changes in the carrying amount of goodwill for the nine
months ended March 31, 2003 are as follows:
Balance as of June 30, 2002........................................... $ 1,941
Reclassification of certain intangibles to goodwill in connection
with SFAS 142......................................................... 138
Acquisitions during the period........................................ 10,971
Post-acquisition adjustments in the second quarter of fiscal 2003..... (198)
Post-acquisition adjustments in the third quarter of fiscal 2003...... (346)
-------
Balance as of March 31, 2003.......................................... $12,506
=======
Upon closing of the ViaFone acquisition in the first quarter of fiscal 2003, we
acquired purchased technology valued at $780,000 with an amortization period of
five years. Customer relationship assets acquired with the ViaFone acquisition
were valued at $80,000 with an amortization period of five years. Other
identifiable intangible assets, excluding goodwill, consist of the following:
AS OF MARCH 31, 2003 AS OF JUNE 30, 2002
----------------------------------------- -----------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Purchased technology ..... $ 3,691 $ (2,376) $ 1,315 $ 2,911 $ (1,848) $ 1,063
Assembled workforce (1) -- -- -- 375 (237) 138
Customer relationships 80 (9) 71 -- -- --
Non-compete covenants .... 6 (6) -- 6 (6) --
Other .................... 5 (5) -- 5 (4) 1
---------- ---------- ---------- ---------- ---------- ----------
Total .................... $ 3,782 $ (2,396) $ 1,386 $ 3,297 $ (2,095) $ 1,202
========== ========== ========== ========== ========== ==========
(1) As part of our adoption of SFAS No. 142, we reclassified $138,000 of net
assembled workforce to goodwill as of July 1, 2002.
Amortization of other intangible assets, reported as a component of cost of net
revenue, was $189,000 and $146,000 for the three months ended March 31, 2003 and
2002, respectively. Amortization of other intangible assets, reported as a
component of cost of net revenue, was $537,000 and $437,000 for the nine months
ended March 31, 2003 and 2002, respectively. Based on the identified intangible
assets recorded at March 31, 2003, the estimated future amortization expense for
the remaining three months of fiscal year 2003 and fiscal years 2004, 2005,
2006, 2007 and 2008 is $189,000, $621,000, $204,000, $172,000, $172,000, and
$29,000, respectively.
NOTE 5. BUSINESS COMBINATIONS
In August 2002, we completed our acquisition of ViaFone. ViaFone was a privately
held, leading provider of real-time, mobile platform and mobile applications
that connect field sales and service employees with critical business systems,
information and processes of their enterprise. As a result of the acquisition,
we expect to benefit from the licensing of ViaFone's software technology and
from the addition of an experienced professional services organization. We also
expect to benefit from the strong cross-selling opportunities present within
each company's customer base and strategic relationships. The adjusted total
purchase price of $10.6 million consisted of $9.9 million of Extended Systems
common stock (2,550,000 shares issued based on the average stock price for the
five trading days
10
surrounding May 28, 2002) and $0.7 million of direct transaction costs. The
total purchase price decreased by $87,000 in the second quarter of fiscal 2003
due to an $87,000 decrease in direct transaction costs resulting from the
true-up of accrued transaction costs at the time of payment. In exchange for the
Extended Systems common stock issued, all outstanding shares of ViaFone common
and preferred stock were acquired. As part of the acquisition agreement, an
additional 450,000 shares of Extended Systems common stock were issued to
shareholders of ViaFone and placed in an escrow fund for a period of up to one
year to be used as the exclusive source of reimbursement to us for breaches of
certain terms of the agreement, including, among other provisions, failure of
ViaFone to achieve certain revenue and net loss targets for the nine months
ended September 30, 2002. ViaFone did not meet these revenue and net loss
targets, and all 450,000 shares held in escrow were returned to us in December
2002 to satisfy our claims against the escrow. In accordance with the applicable
provisions of the Delaware General Corporation Law, all 450,000 shares
automatically became treasury stock.
The transaction was accounted for as a purchase pursuant to SFAS No. 141. The
purchase price was allocated as follows:
AMORTIZATION
PERIOD AMOUNT
------------ -------
Existing technology..................... 5 yrs. $ 780
In-process research and development..... n/a 430
Net tangible assets/liabilities (1)..... n/a (1,058)
Customer relationships.................. 5 yrs. 80
Goodwill (2)............................ n/a 10,427
--------
Purchase price (3)...................... $10,659
========
(1) This amount reflects a net adjustment of $111,000 in the second quarter
and a net adjustment of $346,000 in the third quarter to the fair values
of certain assets acquired and liabilities assumed from ViaFone.
(2) This amount reflects a reduction in accrued direct acquisition costs of
$87,000 and net adjustments to the fair values of certain assets acquired
and liabilities assumed from ViaFone in the second and third quarters of
fiscal 2003 of $111,000 and $346,000, respectively.
(3) This amount reflects a reduction in accrued direct acquisition costs of
$87,000.
The adjusted estimated fair value of tangible assets acquired and liabilities
assumed as of the purchase date are as follows:
Current assets............................... $ 4,722
Property and equipment....................... 589
--------
Total assets acquired........................ 5,311
Current liabilities.......................... (4,960)
Deferred revenue............................. (491)
Non-current liabilities...................... (918)
--------
Net tangible assets acquired................. $ (1,058)
========
Pursuant to SFAS No. 142, goodwill related to the acquisition is not amortized
and will be tested at least annually for impairment. This goodwill is not
deductible for tax purposes.
The purchased in-process research and development was charged to operations at
the time of acquisition as it had not yet reached technological feasibility and
had no alternative future use. The value assigned to in-process research and
development was determined by estimating the costs to develop the purchased
in-process research and development into a commercially viable product,
estimating the resulting net cash flows from sale of those products once
commercially viable, and discounting the net cash flows back to their present
values using discount rates of either 19% or 21%, depending on the technology.
These rates were based on the industry segment for the technology, the nature of
the products to be developed, the length of time to complete development, and
the overall maturity and history of the development team. The in-process
research and development percentage of completion was estimated to range from
50% to 80%. As of March 31, 2003, the projects in-process at the time of
acquisition had been completed with no material differences in the cost to
complete from that originally estimated.
The results of operations for the three and nine months ended March 31, 2003
include the operations of ViaFone from August 31, 2002. The following unaudited
pro forma consolidated results of continuing operations assume the ViaFone
acquisition occurred at the beginning of each period presented:
11
PRO FORMA (UNAUDITED) PRO FORMA (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net revenue from continuing operations ... $ 7,361 $ 6,633 $ 20,503 $ 19,772
Loss from continuing operations .......... (795) (3,698) (7,474) (21,128)
Loss per share from continuing operations:
Basic and diluted ........................ $ (0.06) $ (0.27) $ (0.57) $ (1.56)
The pro forma information above is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the
acquisition occurred at the beginning of fiscal 2002, nor is it indicative of
results of operations for any future period.
NOTE 6. RECEIVABLES AS OF AS OF
MARCH 31, JUNE 30,
2003 2002
---------- ----------
Accounts receivable ................ $ 6,663 $ 5,109
Other receivables .................. 98 67
Allowance for doubtful accounts .... (994) (892)
---------- ----------
$ 5,767 $ 4,284
========== ==========
NOTE 7. PROPERTY AND EQUIPMENT AS OF AS OF
MARCH 31, JUNE 30,
2003 2002
---------- ----------
Land and land improvements ......... $ 1,007 $ 897
Buildings .......................... 5,793 5,864
Computer equipment ................. 5,699 5,443
Furniture and fixtures ............. 2,286 2,302
---------- ----------
14,785 14,506
Less accumulated depreciation ...... (9,242) (8,720)
---------- ----------
$ 5,543 $ 5,786
========== ==========
AS OF AS OF
NOTE 8. ACCRUED EXPENSES MARCH 31, JUNE 30,
2003 2002
---------- ----------
Accrued payroll and related benefits $ 1,519 $ 1,211
Other .............................. 1,659 1,528
---------- ----------
$ 3,178 $ 2,739
========== ==========
NOTE 9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. We currently lease office space at our locations in Brisbane,
California; Herrenberg, Germany; Toronto, Canada; Corvallis, Oregon; Paris,
France; Bristol, England; Los Gatos, California; American Fork, Utah;
`s-Hertogenbosch, the Netherlands; and Atlanta, Georgia. We also lease certain
equipment under non-cancelable operating and capital leases. Lease expense under
operating lease agreements was $222,000 and $92,000 for the three months ended
March 31, 2003 and 2002, respectively. Lease expense under operating lease
agreements was $566,000 and $298,000 for the nine months ended March 31, 2003
and 2002, respectively.
12
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 March 31, 2003, the loan balance was $868,000.
Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations are as follows (in thousands):
YEAR ENDING JUNE 30,
--------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
------ ------ ------ ------ ------ ------ ------
Restructuring-related commitments:
Operating leases (1) ............... $ 145 $ 534 $ -- $ -- $ -- $-- $ 679
Other commitments:
SVB debt principal (2) ............. 109 434 325 -- -- -- 868
SVB debt interest .................. 16 46 11 -- -- -- 73
Post-retirement benefits ........... 11 14 14 14 14 72 139
Capital leases (2) ................. 10 28 28 12 7 -- 85
Operating leases ................... 192 658 233 162 148 278 1,671
------ ------ ------ ------ ------ ------ ------
Total other commitments ............... 338 1,180 611 188 169 350 2,836
------ ------ ------ ------ ------ ------ ------
Total commitments ..................... $ 483 $1,714 $ 611 $ 188 $ 169 $ 350 $3,515
====== ====== ====== ====== ====== ====== ======
(1) The restructuring accrual related to the Brisbane lease obligation is
reported both as an accrued expense in the current liabilities section and
in the non-current liabilities section of the balance sheet, depending on
the timing of when payments are due.
(2) The term debt and capital leases are reported on the balance sheet as
current and non-current liabilities, depending on the timing of when
payments are due.
Non-current capital lease obligations are as follows (in thousands):
AS OF
MARCH 31,
2003
--------
Gross capital lease obligations ................ $ 85
Less imputed interest .......................... (12)
--------
Present value of net minimum lease payments .... 73
Less current portion ........................... (25)
--------
Non-current capital lease obligations .......... $ 48
========
GUARANTEES. We have provided a letter of credit that secures our rental payments
at our Brisbane, California 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 renewed
annually for successive one-year terms until the expiration of our lease on May
31, 2004. The maximum potential amount of future payments we could be required
to make under this letter of credit as of March 31, 2003 is $120,000.
We have also 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
March 31, 2003 is approximately $25,000.
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. 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
13
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 enables 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 in unlimited. We have
not incurred costs to defend lawsuits or settle claims related to these
indemnifications.
WARRANTIES. We offer warranties on both our software products and discontinued
hardware products as explained below:
Software Products
-----------------
We warrant that certain of our software products will perform
substantially in conformance with our standard published specifications
in effect at the time of delivery of those products for a period of
time, generally 30 to 90 days depending on the product. Under new
requirements issued by the European Commission, as of January 1, 2002
we generally warrant our products sold to businesses in the European
Union for a one-year period. If there is a failure of the product to
conform to specifications, we generally use reasonable commercial
efforts to promptly correct any non-conforming product or replace it
with a functionally equivalent product. If we are unable to correct or
replace a non-conforming product, we may choose to accept return of the
product and refund the license fees paid.
If our licensed product is not delivered or downloaded electronically,
we also warrant that the media (diskette or CD-ROM) on which such
product is delivered shall be free from defects in materials and
workmanship under normal use for a period of 90 days from the date of
shipment. If there is a media failure, we replace the media. If we are
unable to do so within a reasonable amount of time, the customer may
return the product and request a refund.
Additionally, we warrant that we will use commercially reasonable
efforts to provide the maintenance services as set forth in our annual
support and maintenance agreement in a professional and workmanlike
manner.
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.
Discontinued Hardware Products
------------------------------
For our discontinued hardware products we offer warranties for a period
of time, generally ranging from one to three years. We record an
accrual for the estimated future costs associated with warranty claims
based upon our historical experience and our estimate of the level of
future costs. We assess the adequacy of our warranty reserve on a
quarterly basis and make adjustments, if needed.
The following table reconciles the changes in our warranty reserve for the three
months ended March 31, 2003:
Balance at December 31, 2002......................................... $ 125
Accrual for warranty reserve for sales made during the quarter
ended March 31, 2003................................................. 63
Warranty expirations during the quarter ended March 31, 2003......... (55)
-------
Balance at March 31, 2003............................................ $ 133
=======
LINE OF CREDIT. On January 15, 2002, we entered into a loan and security
agreement with Silicon Valley Bank, under which we can access up to $5.0 million
of financing in the form of a demand line of credit. Our borrowing capacity is
limited to 75% of eligible accounts receivable, net of current payments due on
our long-term debt. Certain of our assets collateralize the line of credit.
Interest on any borrowings will be paid at prime plus one percent but not less
than 5.5%. The line of credit agreement requires us to maintain certain
financial ratios and expires on January 15, 2004. As of March 31, 2003, we had
borrowed $290,000 on this line of credit and were in compliance with all
financial covenants required under the line of credit. We repaid the balance in
full in April of 2003.
14
LITIGATION. On April 22, 2002, Pumatech, Inc. filed a patent infringement action
against us in the U.S. District Court in Northern California. An amended
complaint was filed on May 28, 2002. The action alleges that our XTNDConnect
server and desktop synchronization products infringe on seven of Pumatech's
synchronization-related patents, that our alleged use of the trademark
"Satellite Forms" constitutes trademark infringement, and that other alleged
actions constitute unfair competition and interference with contract. The action
seeks an injunction against further sales of our server and desktop
synchronization products and use of the allegedly infringing trademark, as well
as unspecified damages and attorneys' fees. On June 25, 2002, we filed an answer
and counterclaim in response to Pumatech's complaint in which we deny Pumatech's
charges, raise a number of affirmative defenses and request a declaration from
the court that Pumatech synchronization software patents are invalid and not
infringed by our products. On December 11, 2002, Pumatech filed a second amended
complaint, which adds allegations that unspecified synchronization products
infringe an eighth Pumatech patent. On December 31, 2002, we filed an amended
answer and counterclaim in which we deny all of Pumatech's charges, including
this additional charge, and amend our defenses and counterclaims to include this
additional patent. We believe that Pumatech's claims are without merit, and we
intend to defend the suit vigorously. Discovery and other pretrial proceedings
are on-going; trial is currently scheduled for April, 2004. We have petitioned
for reexamination of three of the Pumatech patents, and Pumatech has sought to
reissue a fourth to correct errors in the claims. The U.S. Patent Office has
granted our petition to reexamine one of the patents and we are awaiting a
determination on the remaining two petitions. Litigation is inherently
uncertain, and we may not prevail in our defenses or counterclaims against the
claims. In addition, litigation is frequently expensive and time-consuming, and
management may be required to spend significant time in the defense of the suit;
such costs and the diversion of management time could have a material adverse
effect on our business. The ultimate outcome of any litigation is uncertain and
the range of loss that could occur upon resolution of this matter is not
estimable. We cannot estimate the costs of any potential settlement. Were an
unfavorable outcome to occur, the impact could be material to our financial
position, results of operations, or cash flows.
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 10. INCOME TAXES
For the three and nine months ended March 31, 2003, we recorded income tax
expense related primarily to foreign withholding taxes of $8,000 and $55,000,
respectively. For the three months ended March 31, 2003, the income tax expense
associated with discontinued operations was $87,000. The tax benefit of $79,000
for continuing operations consists of $8,000 of foreign withholding taxes,
offset by a tax benefit of $87,000. For the nine months ended March 31, 2003,
the income tax expense associated with discontinued operations was $188,000. The
tax benefit of $133,000 for continuing operations consists of $55,000 of foreign
withholding taxes, offset by a tax benefit of $188,000. The income tax benefit
for the three and nine months ended March 31, 2002 includes the benefit of an
income tax refund of $1.6 million.
NOTE 11. 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.
At March 31, 2003, we had one operating segment. Our mobile information
management segment provides the expertise, strategy and solutions to help
enterprise organizations realize their business goals through mobile technology.
Our software and services portfolio includes data synchronization and device
management solutions; mobile applications for sales, service and pharmaceutical
professionals; mobile application development tools and services; embedded
client/server database management systems; and Bluetooth and IrDA wireless
connectivity software. We sell our mobile information management solutions
primarily to enterprises, application developers, resellers and original
equipment manufacturers.
In the three and nine months ended March 31, 2003 and 2002, no customer
accounted for more than 10% of our net revenue from continuing operations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements. The words "expects," "anticipates,"
"believes," "intends," "will" and similar expressions identify forward-looking
statements that are based upon information currently available to us, speak only
as of the date hereof and are subject to certain risks and uncertainties. These
forward-looking statements include, but are not limited to, statements
regarding:
o levels of software product license fees and royalties;
o anticipated royalties from Bluetooth products;
o levels of international sales;
o levels of service revenue;
o levels of original equipment manufacturer sales;
o anticipated gross margin;
o staffing and expense levels;
o future profitability;
o future results of operations;
o future operating cash flows;
o levels of accounts receivable;
o levels of capital expenditures;
o anticipated costs of research and development;
o anticipated costs of marketing and sales;
o anticipated revenue from discontinued operations;
o anticipated reductions in operating costs;
o sufficiency of working capital and borrowing capacity;
o anticipated cash funding needs;
o claims made by Pumatech, Inc.;
o expected benefits from our acquisition of ViaFone, Inc.;
o future acquisitions; and
o effects of fluctuations in exchange rates.
We assume no obligation to update any forward-looking statements and 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." You should also carefully review the risk factors
described in other documents that we file from time to time with the Securities
and Exchange Commission, including our 2002 Annual Report on Form 10-K filed on
September 23, 2002 and other Quarterly Reports on Form 10-Q that we have filed,
or will file, in fiscal 2003. All period references are to our third fiscal
quarters ended March 31, 2003 and 2002, the nine months ended March 31, 2003 and
2002 and our fiscal years ended June 30, 2003 and 2002, unless otherwise
indicated. All tabular amounts are in thousands, except percentages.
SIGNIFICANT EVENTS
- ------------------
On August 30, 2002, we completed our acquisition of ViaFone, Inc. ("ViaFone"), a
privately-held, leading provider of real-time, mobile platform and mobile
applications that connect field sales and service employees with critical
business systems, information and processes of their enterprise. ViaFone merged
with and into a subsidiary of Extended Systems, and all outstanding shares of
ViaFone common and preferred stock were exchanged for approximately 3,000,000
newly issued shares of Extended Systems common stock in a tax-free transaction.
As part of the acquisition agreement, 450,000 of these shares were placed in an
escrow fund for a period of up to one year to be used as the exclusive source of
reimbursement to us for breaches of certain terms of the agreement, including,
among other provisions, failure of ViaFone to achieve certain revenue and loss
targets for the nine months ended September 30, 2002. ViaFone did not meet these
revenue and net loss targets, and all 450,000 shares held in escrow were
returned to us in December 2002 to satisfy our claims against the escrow. In
accordance with applicable provisions of the Delaware General Corporation Law,
all 450,000 shares automatically became treasury stock. We accounted for this
transaction using the purchase method of accounting pursuant to Statement of
Financial Accounting Standards No. 141, "Business Combinations." Accordingly,
the results of operations of ViaFone are included in our consolidated statement
of operations from the completion date of the acquisition.
16
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, and
consider these to be our critical accounting policies. The policies described
below are not intended to be a comprehensive list of all our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles, with no need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. Our audited consolidated financial statements and
notes thereto contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies
that we consider critical to an understanding of the consolidated financial
statements are highlighted below.
REVENUE RECOGNITION
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
generally 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 the 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 a significant portion of a fee is due after
90 days, 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 generally 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 had assessed collectibility 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 any undelivered element is 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 had 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 and bug fixes and, from time to time,
minor enhancements to ensure that the products comply with their warranty
provisions. Accordingly, we accrue 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
generally recognized when customers report to us the sale of their products to
their end user customer. In cases where the arrangement with our customer
provides for a prepaid nonrefundable royalty, we generally recognize revenue
when persuasive evidence of an arrangement exits, delivery has occurred, the fee
is fixed or determinable and collection of the resulting receivable is
reasonably assured.
We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we generally recognize revenue
from training services as these services are performed. For professional
services that involve significant implementation, customization, or modification
of our software that is essential to the functionality of the software, we
generally recognize both the service and related software license revenue over
the period of the engagement, using the percentage-of-completion method. In
cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, where significant
uncertainty about the project completion exists, or where an arrangement
provides for customer acceptance, we defer the contract revenue under the
completed contract method of accounting until the
17
uncertainty is sufficiently resolved or the contract is complete. If we were to
make different judgments or utilize different estimates of the total amount of
work we expect to be required to complete an engagement, the timing of our
revenue recognition from period to period, as well as the related margins, might
differ materially from that previously reported.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
We assess the impairment of identifiable intangibles and fixed assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important that could trigger an impairment
review include, but are not limited to: (1) significant operating
underperformance 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 equal to or below our 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 had made different judgments or utilized different estimates
our measurement of any impairment may have differed materially from that
reported.
We assess the impairment of our goodwill balance on at least an annual basis.
This impairment review involves a two-step process as follows:
o Step 1 -we compare the fair value of our reporting units to the
carrying value, including goodwill, of each of those units. For each
reporting unit where the carrying value, including goodwill, exceeds
the unit's fair value, we move on to step 2. If a unit's fair value
exceeds the carrying value, no further work is performed and no
impairment charge is necessary.
o Step 2 - we perform an allocation of the fair value of the reporting
unit to its identifiable tangible and non-goodwill intangible assets
and liabilities. This will derive an implied fair value for the
reporting unit's goodwill. We then compare the implied fair value of
the reporting unit's goodwill with the carrying amount of the reporting
unit's goodwill. If the carrying amount of the reporting unit's
goodwill is greater than the implied fair value of its goodwill, an
impairment charge is recognized for the excess.
If we were to make different judgments or utilize different estimates of fair
value, 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 March 31, 2003, 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 and foreign tax credits,
before they expire. This valuation allowance was recorded based on our recent
losses, 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 had made different judgments or utilized different estimates,
the amount or timing of the valuation allowance recorded may have differed
materially from that reported. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to
reduce the valuation allowance, potentially resulting in an income tax benefit
in the period of reduction, which could materially impact our financial position
and results of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts based on our ongoing 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 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 had made different
judgments or utilized different estimates, the timing and amount of our reserve
may have differed materially from that reported.
18
OVERVIEW
- --------
We classify our product offerings into one operating segment, our mobile
information management segment, which offers the expertise, strategy and
solutions to help enterprise organizations realize their business goals through
mobile technology. Our software and services portfolio includes online and
offline mobile groupware software; our mobile solutions platform; our mobile
business solutions for sales, service and pharmaceutical environments; embedded
client/server database software; and our infrared and Bluetooth wireless
connectivity software. Our future results of operations will be highly dependent
upon the success of this suite of software products.
We sell our mobile information management solutions primarily to enterprises,
application developers, resellers, and original equipment manufacturers both
directly and through our e-commerce storefronts on the Internet. We derive
revenue from:
o software license fees and royalties;
o support and maintenance fees; and
o professional services, including consulting services, training, and
non-recurring development fees that we generate when we adapt products to
customers' specifications.
We derive a significant amount of our revenue from sales to customers outside of
North America, principally from our international sales subsidiaries, overseas
original equipment manufacturers and from a limited number of international
distributors. Based on the region in which the customer resides, net revenue
from continuing operations may be analyzed as follows for the three and nine
months ended March 31:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
NET REVENUE PERCENTAGES BY REGION 2003 2002 2003 2002
-------- -------- -------- --------
North America .................................................... 55% 48% 51% 52%
International:
Europe
Comprehensive loss .......................................... 40 38 41 36
Asia .......................................................... 4 11 5 9
Other regions ................................................. 1 3 3 3
-------- -------- -------- --------
Total international ...................................... 45% 52% 49% 48%
-------- -------- -------- --------
Net revenue from continuing operations ........ 100% 100% 100% 100%
======== ======== ======== ========
In the third quarter of fiscal 2003, the percentage of our net revenue generated
from North American sales increased from the same period in fiscal 2002
primarily due to an increase in sales of our XTNDConnect and Advantage software
products sold in North America, sales of our OneBridge products in North America
and increased professional services customers in North America. The percentage
of our net revenue derived from international customers varies from quarter to
quarter as a result of customer buying patterns.
We expect that international sales will continue to represent a substantial
portion of our net revenue in the foreseeable future and will comprise between
45% and 55% of our net revenue in the fourth quarter of fiscal 2003.
Revenue generated from sales to original equipment manufacturers and to
companies that license our software to include in their own software offering
has fluctuated in the past. We expect it will also fluctuate in future quarters,
as such revenue is dependent upon the timing of customer projects and the
effectiveness of their marketing efforts.
We sell our products directly to end-user customers and also market and sell
many of our products through multiple indirect channels, primarily distributors
and resellers. In the three and nine months ended March 31, 2003 and 2002, no
customer accounted for more than 10% of our net revenue from continuing
operations.
NET REVENUE
- -----------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------- -----------------------------------
2003 CHANGE 2002 2003 CHANGE 2002
-------- -------- -------- -------- -------- --------
Revenue:
License fees and royalties .... $ 5,696 14% $ 5,011 $ 16,012 8% $ 14,787
Services and other ............ 1,665 104 816 4,141 75 2,372
-------- -------- -------- -------- -------- --------
Total net revenue ........ $ 7,361 26% $ 5,827 $ 20,153 17% $ 17,159
======== ======== ======== ======== ======== ========
19
LICENSE FEES AND ROYALTIES. License and royalty revenue consists of fees for
licenses of our software products. Growth in revenue in the third quarter of
fiscal 2003 from the same period in fiscal 2002 was due primarily to the
addition of revenue from sales of our OneBridge mobile solutions that were added
with our acquisition of ViaFone on August 30, 2002 and an increase in license
revenue of 13% from our Advantage Database Server and 7% from our XTNDConnect
products.
The increase in license fees and royalty revenue for the nine months ended March
31, 2003 from the same period in fiscal 2002 was primarily due to the addition
of revenue from our OneBridge mobile solutions, and an 11% increase in revenue
from our XTNDConnect products. These increases were partially offset by a 15%
decrease in our Bluetooth and infrared software revenue resulting from a
decrease in the number of software development kits sold and from a reduction in
prepaid nonrefundable Bluetooth royalties.
We expect revenue from license fees and royalties to increase moderately in the
final quarter of fiscal 2003. This increase is expected to result primarily from
increased license and royalty revenue from our XTNDConnect products. Although we
are beginning to see shipment of Bluetooth products by some of our customers, we
do not currently anticipate that Bluetooth royalty revenue will be a material
component of our net revenue in the fourth quarter of fiscal 2003.
SERVICES AND OTHER. Services and other revenue consists primarily of support and
maintenance contracts sold to our customers and fees for professional services.
Our professional services typically consist of standard product installations,
training, significant customization of our standard license product, or
non-recurring engineering ("NRE"). The primary drivers of the increase in
service revenue for the three months ended March 31, 2003 from the same period
in fiscal 2002 were the increase in professional services we saw as a result of
adding our OneBridge mobile solutions in the first quarter of fiscal 2003 and a
92% increase in support and maintenance and professional services revenue
associated with our XTNDConnect products.
The increase in service revenue for the nine months ended March 31, 2003 from
the same period in fiscal 2002 was primarily due to the addition of professional
services associated with our OneBridge mobile solutions and a 104% increase in
support and maintenance and professional services revenue associated with our
XTNDConnect products. These increases were partially offset by a 49% decline in
service revenue associated with our Bluetooth and infrared software products.
We expect services revenue in the fourth quarter of fiscal 2003 to remain
relatively flat or increase slightly compared to third quarter levels. Although
we expect the amount of billable hours in our professional services group to
increase, all or a portion of the revenue related to such an increase may be
required to be deferred under our revenue recognition policy.
DEFERRED REVENUE. Deferred revenue consists of amounts invoiced to or received
from customers for which revenue has not been recognized. Deferred revenue
generally results from maintenance and support agreements, consulting or
training services not yet rendered, and license revenue deferred until the
requirements of our revenue recognition policy are met. We generally recognize
deferred revenue over the term of the maintenance and support agreements, as
consulting and training services are rendered, and as the requirements of our
revenue recognition policy are met. Deferred revenue was $2.3 million at March
31, 2003 compared to $2.2 million at June 30, 2002. We expect deferred revenue
to increase in future periods as service revenue becomes a larger percentage of
our overall net revenue.
GROSS MARGIN
- ------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------- -----------------------------------
2003 CHANGE 2002 2003 CHANGE 2002
-------- -------- -------- -------- -------- --------
Gross profit:
License fees and royalties .... $ 5,409 16% $ 4,660 $ 15,158 10% $ 13,791
Services and other ............ 880 84 478 1,830 22 1,506
-------- -------- -------- -------- -------- --------
Total gross profit ............ $ 6,289 22% $ 5,138 $ 16,988 11% $ 15,297
======== ======== ======== ======== ======== ========
20
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
CHANGE IN CHANGE IN
2003 MARGIN % 2002 2003 MARGIN % 2002
----- ----- ----- ----- ----- -----
Gross margin as a percentage of revenue:
License fees and royalties ........... 95% 2 93% 95% 2 93%
Services and other ................... 53 (6) 59 44 (20) 64
----- ----- ----- ----- ----- -----
Total gross margin ................... 85% (3) 88% 84% (5) 89%
===== ===== ===== ===== ===== =====
Our cost of net revenue consists primarily of costs associated with:
o personnel providing professional services;
o post-sales support;
o amortization of purchased technology;
o royalties for the use of third-party software; and
o other production-related activities.
In general, the costs of license fees and royalties represent a far smaller
percentage of license fees and royalties net revenue than service costs, which
have a much higher cost structure. Additionally, costs of license fees and
royalties, such as royalties for the use of third-party software, are generally
variable, based on license revenue volume. Services costs tend to be fixed
within certain services revenue ranges. We would expect that an increase in
service revenue as a percentage of our total net revenue would generate a lower
overall gross margin as a percentage of total net revenue. Also, given the high
level of fixed costs associated with the professional services group, our
inability to generate sufficient services revenue to absorb these fixed costs
could lead to negative services gross margins.
LICENSE FEES AND ROYALTIES. The increase in gross profit from license fees and
royalties for the three and nine months ended March 31, 2003 from the same
periods of fiscal 2002 is primarily due to the increase in net revenue. The
modest increase in gross margin for these same periods was primarily driven by a
decrease in operations-related overhead resulting from our restructurings,
offset partially by an increase in amortization of purchased technology from our
acquisition of ViaFone.
SERVICES AND OTHER. The growth in gross profit from services and other net
revenue in the three and nine months ended March 31, 2003 as compared to the
same periods in fiscal 2002 is primarily attributable to revenue generated by
the addition of a dedicated professional services organization in the first
quarter of fiscal 2003 in conjunction with our acquisition of ViaFone and an
increase in support and maintenance revenue from our XTNDConnect products. In
both periods, these increases were partially offset by a decline in NRE fees.
The decline in gross margin from services and other revenue in the three and
nine months ended March 31, 2003 as compared to the same periods in fiscal 2002
is primarily the result of a higher mix of professional services revenue in both
periods, which typically generates lower margins than support and maintenance or
NRE revenue. The utilization rate for professional services personnel increased
in the third quarter of fiscal 2003 as compared to the prior two quarters.
Because the costs of professional services personnel are generally fixed, the
increased utilization rate contributed to an increase in gross margin for the
third quarter.
We expect our overall gross margin will be in a range of 82% to 85% for the
fourth quarter of fiscal 2003. This range is primarily driven by an expected
increase in license fees and royalties net revenue and an expected increase in
services net revenue, as well as the expected mix between license fees and
services.
OPERATING EXPENSES
- ------------------
RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -------------------------------
2003 CHANGE 2002 2003 CHANGE 2002
------ ------ ------ ------ ------ ------
Research and development ......... $1,709 (29)% $2,406 $5,558 (30)% $7,950
As a % of net revenue ............ 23% 41% 28% 46%
21
Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, consulting costs and
facility expenses. The decrease in research and development expenses in the
three months ended March 31, 2003 from the same period in fiscal 2002 was
primarily the result of a reduction of approximately $945,000 in personnel costs
subsequent to our restructurings and the termination on December 31, 2002 of a
bonus plan in place for two former employees, offset in part by an increase of
approximately $233,000 in personnel costs related to the engineering personnel
added with the completion of the ViaFone acquisition. The decrease in research
and development expenses for the nine months ended March 31,2003 from the same
period in fiscal 2002 was primarily the result a reduction of approximately $2.9
million in personnel costs subsequent to our restructurings and the termination
of a bonus plan in place for two former employees, offset in part by an increase
of approximately $566,000 for the addition of ViaFone engineering personnel. At
March 31, 2003 we had 66 full-time equivalent research and development personnel
and contractors, including 11 added with the ViaFone acquisition, a decrease
from the 98 full-time equivalent personnel at the same time last year.
For the fourth quarter of fiscal 2003, we expect our research and development
costs to be consistent with the level we saw in the third quarter of fiscal
2003.
MARKETING AND SALES EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2003 CHANGE 2002 2003 CHANGE 2002
------ ------ ------ ------ ------ ------
Marketing and sales .............. $3,830 14% $3,360 $10,761 4% $10,314
As a % of net revenue ............ 52% 58% 53% 60%
Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our marketing and sales staff, promotional expenses,
pre-sales support costs, and facilities costs. The increase in marketing and
sales expenses in the three months ended March 31, 2003 from the same period in
fiscal 2002 was primarily due to an increase of approximately $642,000 in
personnel and facilities costs, including an increase related to the ViaFone
acquisition and in commissions paid to the sales force. This was offset, in
part, by a decrease of approximately $122,000 in company-wide promotional
expenses. For the nine months ended March 31, 2003, the increase in marketing
and sales expenses was primarily due to an increase of approximately $799,000 in
personnel and facilities costs, offset, in part, by a decrease of approximately
$404,000 in company-wide promotional expenses. At March 31, 2003, we had 109
full-time equivalent marketing, sales, and support personnel and contractors,
including 7 added with the ViaFone acquisition, as compared to 117 full-time
equivalent personnel and contractors at the same time last year.
We expect marketing and sales expenses to decrease slightly in the last quarter
of fiscal 2003 as a result of the workforce reduction completed in the third
quarter of fiscal 2003 and other reductions in discretionary spending.
GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2003 CHANGE 2002 2003 CHANGE 2002
------ ------ ------ ------ ------ ------
General and administrative ....... $1,240 8% $1,143 $3,747 14% $3,273
As a % of net revenue ............ 17% 20% 19% 19%
General and administrative expenses primarily consist of salaries and other
personnel costs for our finance, management information systems, human resources
and other administrative groups, as well as professional service fees and
directors' and officers' insurance costs. The increase in general and
administrative expenses for the three months ended March 31, 2003 from the same
period in fiscal 2002 was primarily attributable to an increase in legal fees of
approximately $350,000, due largely to the Pumatech lawsuit. This increase was
partially offset by a decrease of approximately $97,000 in personnel costs
resulting from our restructuring in prior quarters and a decrease of
approximately $123,000 in our bad debt expense. The increase in general and
administrative expenses for the nine months ended March 31, 2003 as compared to
the same period in fiscal 2002 was primarily attributable to an increase in
legal fees of approximately $906,000, due largely to the Pumatech lawsuit,
offset in part by a decrease of
22
approximately $296,000 in personnel costs resulting from our restructuring in
prior quarters and a decrease of approximately $168,000 in our bad debt expense.
We expect general and administrative expenses in the fourth quarter of fiscal
2003 to be consistent with the level we saw in the third quarter of fiscal 2003.
At March 31, 2003, we had 31 full-time equivalent employees in administration,
as compared to 39 full-time equivalent personnel at the same time last year. No
general and administrative personnel were added with our acquisition of ViaFone.
AMORTIZATION OF INTANGIBLES
We report amortization of non-goodwill intangibles, primarily consisting of
purchased technology, as a component of our cost of net revenue. Amortization of
non-goodwill intangibles was $189,000 and $146,000 for the three months ended
March 31, 2003 and 2002, respectively. Amortization of non-goodwill intangibles
was $537,000 and $437,000 for the nine months ended March 31, 2003 and 2002,
respectively. The net increase in amortization of non-goodwill intangibles is a
result of the addition of non-goodwill intangibles from our acquisition of
ViaFone. This increase was partially offset by a decrease in amortization
resulting from our adoption of SFAS No. 142, which resulted in $138,000 of
intangible assets, comprised of assembled workforce intangibles, being
reclassified as goodwill in the first quarter of fiscal 2003.
As a result of our adoption of SFAS No. 142, which requires that goodwill no
longer be amortized, we did not record amortization of goodwill for the nine
months ended March 31, 2003. Amortization of goodwill was $231,000 and $694,000
for the three months and nine months ended March 31, 2002, respectively. This
amount was reflected in our statement of operations as an operating expense.
RESTRUCTURING CHARGES
For the three months ended March 31, 2003, we recorded a restructuring charge of
approximately $361,000 relating to severance and benefits for 13 terminated
employees in research and development and marketing and sales, of which 9 were
located in the United States, 3 in Canada and 1 in Europe. We paid $143,000 of
these charges in the third quarter of fiscal 2003. In the fourth quarter of
fiscal 2003, we will pay $115,000 of the accrued charges and the remaining
balance of $103,000 will be paid out in the first quarter of fiscal 2004. We
expect that operating costs will be reduced by approximately $200,000 each
quarter as a result of this restructuring.
During our first quarter ended September 30, 2002, we continued our efforts to
streamline operations and completed a restructuring plan to further reduce costs
and improve operating efficiencies. As a result, we recorded $136,000 in
workforce reduction costs during the quarter. The restructuring charge consisted
primarily of severance, benefits, and other costs related to the termination of
16 employees in research and development, marketing and sales, manufacturing,
and administration, of which 14 were located in the United States and 2 in
Europe. All of these charges were paid in the first quarter of fiscal 2003. We
expect that operating costs will be reduced by approximately $300,000 each
quarter as a result of this workforce reduction.
During the first quarter of fiscal 2003 we also assumed a restructuring
liability in connection with our acquisition of ViaFone. Prior to our
acquisition of the company, ViaFone had implemented a restructuring program that
resulted in charges for workforce reduction costs, costs related to closing its
office in France and excess facilities costs related to lease commitments for
space no longer used in Brisbane, California. At the time we completed the
ViaFone acquisition, there were $993,000 of future lease payments that had been
accrued but not yet paid, $266,000 of workforce reduction liabilities and
$30,000 of French office liabilities. As of March 31, 2003, the workforce
reduction liabilities and liabilities related to the closing ViaFone's French
office had been paid in full, and the balance of the future lease commitments
was $679,000. We will pay $145,000 in each of the next four quarters and $99,000
in the final quarter of fiscal 2004 for these lease commitments.
23
A summary of the restructuring costs is outlined as follows:
Workforce
Reduction Facilities and
Costs Other Costs Total
-------- -------- --------
Balance at June 30, 2002 .......................................... $-- $-- $--
Restructuring charges incurred in first quarter of fiscal 2003 .... 136 -- 136
Restructuring accrual assumed with ViaFone acquisition ............ 266 1,023 1,289
Cash payments ..................................................... (227) (24) (251)
-------- -------- --------
Balance at September 30, 2002 ..................................... 175 999 1,174
Cash payments ..................................................... (141) (175) (316)
-------- -------- --------
Balance at December 31, 2002 ...................................... 34 824 858
Restructuring charges incurred in third quarter of fiscal 2003 .... 361 -- 361
Adjustment to the accrual assumed with ViaFone acquisition ........ (14) -- (14)
Cash payments ..................................................... (164) (145) (309)
-------- -------- --------
Balance at March 31, 2003 ......................................... $ 217 $ 679 $ 896
======== ======== ========
In order to meet our objective to reach profitability, we may incur additional
restructuring charges in future quarters.
INCOME TAX BENEFIT
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2003 CHANGE 2002 2003 CHANGE 2002
------ ---