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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission File Number 000-23597
EXTENDED SYSTEMS INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 82-0399670
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5777 NORTH MEEKER AVENUE, BOISE, ID 83713
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (208) 322-7575
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of such stock on December 31, 2002 as
reported on the Nasdaq National Market, was approximately $19 million. Shares of
common stock held by each officer and director and by each person who own 5% or
more of the outstanding shares of common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of September 19, 2003, there were 14,037,622 shares outstanding of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders, to be filed subsequently, are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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EXTENDED SYSTEMS INCORPORATED
FISCAL YEAR 2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I.
Item 1. Business 4
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 40
Item 9A. Controls and Procedures 40
PART III.
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management 41
Item 13. Certain Relationships and Related Transactions 42
Item 14. Principal Accountant Fees and Services 42
Item 15. Controls and Procedures 42
PART IV.
Item 16. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 42
Signatures 69
3
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS. IN THIS FORM 10-K, THE WORDS "EXPECTS," "ANTICIPATES," "BELIEVES,"
"INTENDS," "WILL" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS,
WHICH ARE BASED UPON INFORMATION CURRENTLY AVAILABLE TO US, SPEAK ONLY AS OF THE
DATE HEREOF AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. WE ASSUME NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE
RESULTS AND MARKET PRICE OF STOCK." YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED IN OTHER DOCUMENTS THAT WE FILE FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION, INCLUDING OUR QUARTERLY REPORTS ON FORM 10-Q TO BE
FILED IN FISCAL 2004. ALL PERIOD REFERENCES ARE TO OUR FISCAL YEARS ENDED JUNE
30, 2004, 2003, 2002 AND 2001, UNLESS OTHERWISE INDICATED.
PART I
ITEM 1. BUSINESS
OVERVIEW
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Founded in 1984, we are a corporation incorporated under the laws of the state
of Delaware with our headquarters located in Boise, Idaho. Our Internet website
address is HTTP://WWW.EXTENDEDSYSTEMS.COM. On the "Investor Relations" section
of our website, we post links to the following filings as soon as reasonably
practicable after they are electronically filed with or furnished to the United
States Securities and Exchange Commission (SEC): our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended. All such filings are available free
of charge. Information on our website does not constitute a part of this Annual
Report on Form 10-K.
We provide mobile information management products designed to enhance enterprise
productivity and increase enterprise competitiveness. Enterprise organizations
and their employees are increasingly relying on mobile devices to access
time-sensitive and critical information and enable personal information
management, enterprise automation and mobile workforce management. Our mobile
information management products empower users to access, collect, synchronize,
and push information on demand from various locations and from a variety of
devices. These devices include mobile phones, pagers and personal digital
assistants, which operate using the Palm OS, Windows CE, PocketPC, Symbian OS,
and RIM-based device platforms.
Our mobile information management products feature:
o software that enables data synchronization, device management, real-time
access to data and pro-active "push" of data to a mobile device;
o mobile application development platforms and tools for building custom
mobile applications;
o mobile application modules for sales, service and pharmaceutical
professionals that connect to back-end enterprise applications;
o short range wireless connectivity technology based on Bluetooth and
Infrared Data Association standards; and
o embedded client/server relational database management systems (RDBMS) for
stand-alone, networked, Internet and mobile database applications.
We design our products and technologies to provide innovative, reliable and
cost-effective mobile computing to enterprises, users, manufacturers of mobile
devices, application developers and telecommunications service providers. Our
products enable:
o users to synchronize information between mobile devices and personal
computers or enterprise systems for offline access of enterprise data such
as email, calendar, and mission-critical database information;
o users to proactively push information from an enterprise system to a mobile
device via a wireless connection;
o users to access enterprise information from a mobile device on a real-time
online basis;
o users and enterprises to increase their efficiency and productivity by
using their mobile devices for a variety of new tasks;
o device manufacturers and application developers to design products to
better meet the needs of enterprises and users; and
o telecommunications service providers to enhance their revenue
opportunities.
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We have relationships with or sell our products to leading mobile communications
and computing companies and corporate enterprises, including 3Com, Avaya, Bell
Mobility, British Airways, DaimlerChrysler, EDS, Ericsson, Goldman Sachs,
Hewlett-Packard, IBM, Intel, Janssen-Cilag, Microsoft, Motorola, O2, Palm, RIM,
Sharp, Siemens T-Mobile, and UBS Warburg.
INDUSTRY BACKGROUND
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The use of mobile devices has increased tremendously as handheld computers,
mobile phones, pagers and personal digital assistants have achieved popular
acceptance and become more advanced and powerful. Improvements in mobile
technology and wireless infrastructure are facilitating greater bandwidth,
thereby enabling both data and voice transmission. IDC, a leading provider of
technology intelligence and market data, predicts that the United States
population of mobile workers will reach 104.6 million by 2006.
Meanwhile, competition and deregulation in the wireless communications industry
have resulted in downward pressure on wireless service rates. Consequently,
service providers are attempting to maximize revenue opportunities by developing
new services and encouraging usage, while simultaneously reducing the costs
associated with customer turnover and the deployment of new services. As a
result, mobile device manufacturers and application developers face pressure
from service providers to increase the usability and value of their devices and
applications. Many of these manufacturers and developers seek to utilize data
communications capabilities to do so. However, the absence of common standards
for data communications has historically prevented the widespread adoption and
promotion of data communications across the mobile communications industry. To
address this situation, industry consortia were formed to develop industry-wide
standards and protocols for wireless communication. These consortia have
developed various complementary protocols, including Bluetooth protocols for
short-range radio-frequency communication, IrDA infrared communication protocols
created by the Infrared Data Association, SyncML data synchronization protocols
and the Wireless Application Protocol (WAP). Service providers, device
manufacturers and application developers are integrating these data
communication capabilities to improve functionality and deliver an array of
mobile communications products and services.
Enterprises seek to evolve their business by investing in solutions that
leverage existing infrastructure, increase employee productivity, maintain
corporate data security and deliver a clear return on investment. As a result,
mobile devices are being used for:
o PERSONAL INFORMATION MANAGEMENT. Users employ mobile devices in conjunction
with their primary computers for tasks such as contact management,
scheduling and e-mail access.
o ENTERPRISE AUTOMATION. Enterprises deploy mobile devices for tasks within
the enterprise such as inventory control and management, quality assurance
and data entry and access.
o MOBILE WORKFORCE MANAGEMENT. Enterprises deploy mobile devices for tasks
outside the enterprise such as sales force automation, real-time
collaboration and data access.
Unfortunately, providing flexible information access has historically been a
cumbersome and expensive proposition and typically required that users make a
wired connection to the network wherever and whenever they required access. In
addition, with the increased use of mobile devices, many users currently must
employ several devices simultaneously. Although they all may require access to
the same information, these devices often run applications on separate
platforms. For example, a mobile worker using a laptop for corporate e-mail may
also use a personal digital assistant with personal contact information, and a
mobile phone with an embedded directory, each of which functions with different
operating systems, platforms and data delivery formats. To facilitate user
productivity, this information must be pushed, synchronized, accessed and
managed across devices and applications. Thus, users require simple, secure
tools to access, collect, synchronize, and push information.
Enterprises, users, device manufacturers, application developers and service
providers require solutions that provide secure, wireless data delivery and
connectivity between disparate mobile devices and between mobile devices and the
application information which resides on personal computers or the enterprise
network. Ideally, this type of solution should:
o provide cost-effective and seamless access to information regardless of
location;
o implement end-to-end security to ensure corporate data remains protected;
o increase user productivity by connecting a variety of mobile devices to
access and manage information;
o enable device manufacturers and application developers to enhance the value
and usability of their devices and applications, facilitating greater
market acceptance and increased use; and
o allow telecommunications service providers to take advantage of data
communication capabilities to drive increased usage and user loyalty.
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OUR SOLUTION
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We design, develop, sell and support mobile infrastructure software that
securely and efficiently extends enterprise applications to mobile and wireless
environments. Our software includes mobile data management and wireless
connectivity solutions. We have designed our products to:
o ENABLE MOBILE DATA MANAGEMENT. Our mobile data management products enable
enterprises and users to access, synchronize and manage information between
mobile devices and personal computers or enterprise networks. We believe
enterprises can reduce their initial capital investment in computer hardware
and software and their network administrative costs by using our technology
to deploy applications on mobile devices. Using our products, users can
manage information between their mobile devices and personal computers;
enterprise groupware applications, such as Microsoft Exchange and Lotus
Domino; enterprise applications, such as Siebel and SAP; or enterprise
databases via LDAP, JDBC, XML data sources, and ODBC or OLEDB-compliant
database connectors. In addition, enterprises can securely and efficiently
deploy and manage a variety of mobile devices and extend their applications
and databases across a distributed network and over the Internet.
o INCREASE PRODUCTIVITY AND USABILITY OF MOBILE DEVICES. Our mobile information
management products improve the management of information and applications
and provide convenient, wireless connectivity. These products enable users to
share data and information between their mobile devices while accessing
information from the Internet, personal computers or enterprise networks on
demand. Enterprises can utilize devices to extend their network applications
cost-effectively to other applications. We believe our mobile information
management products help mobile users and enterprises increase their
productivity by using mobile devices for a variety of new tasks, thereby
increasing their use of these devices.
o INCREASE VALUE AND USAGE OF MOBILE DEVICES AND COMMUNICATIONS SERVICES. Our
platforms and technologies provide the tools to enable device manufacturers
and application developers to design and enhance products to meet the needs
of both enterprises and users. Because our technology enables cost-effective
communication and the ability to easily manage many disparate devices, we
believe device manufacturers and application developers are able to increase
the value of the products they sell, thereby encouraging increased adoption
of those products. In addition, we believe the increased adoption of mobile
devices will, in turn, drive increased usage of and loyalty to providers of
mobile communications services, thereby increasing service providers' revenue
opportunities and minimizing their costs.
o ENABLE WIRELESS CONNECTIVITY. Our products facilitate enterprise automation
and effective mobile workforce management by providing wireless connectivity
between disparate mobile devices and between mobile devices and personal
computers or enterprise networks. Our products enable mobile workers to
access networks or peripherals within enterprise facilities and enable
enterprises to extend applications to users beyond the network environment
and over the Internet, without physical connections.
OUR STRATEGY
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Our objective is to become the leading provider of mobile solutions for the
enterprise. In order to achieve our objective, we have adopted the following
strategies:
o We will continue to develop and maintain a broad array of mobile
information management products, technologies and services that demonstrate
our technical excellence. We are committed to building and maintaining a
full range of mobile products, technologies, and services that address the
data management and wireless connectivity needs of enterprises and users
across a broad range of mobile devices and communications protocols.
o We will focus resources on building customer intimacy with top enterprise
customers. We have invested substantial resources to develop our worldwide
marketing, sales and support infrastructure. Although our products are
appropriate for enterprises of all sizes, we believe large multi-national
enterprises are the most lucrative market for our products. We intend to
continue to focus resources to sell to large enterprises and to
international markets that are adopting the use of mobile communications
most rapidly.
o We will demonstrate industry leadership by continuing to leverage alliances
with leading mobile device manufacturers and applications developers. We
believe it is critical to focus on continuing to demonstrate industry
leadership through alliance validation. We maintain relationships with
leading hardware and software vendors, including Ericsson, Hewlett-Packard,
Motorola and Siemens. We believe that these relationships will enable us to
develop leading-edge products and technology and influence the development
of new platforms and protocols.
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o We will continue to acquire and integrate complementary businesses and
technologies into our mobile strategy. In order to broaden our product
offering and extend our distribution channels, we have in the past and
intend in the future to pursue acquisitions of, and investments in,
companies with complementary products, technologies or distribution
networks.
OUR PRODUCTS
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Our mobile information management segment includes mobile data management and
wireless connectivity software solutions.
MOBILE DATA MANAGEMENT SOLUTIONS
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MOBILE GROUPWARE SOLUTIONS
Our mobile groupware solutions offer organization-wide mobility of existing
groupware and support systems.
ONEBRIDGE MOBILE GROUPWARE (formerly known as XTNDConnect Server) is a platform
independent server-based information synchronization and management solution for
the enterprise. It delivers e-mail and PIM (calendar, contacts, tasks) data to
mobile workers when and where they need it regardless of the device used, the
connection method or the groupware application. OneBridge Mobile Groupware
provides users the option to proactively "push" data to their device, access
information online in real-time, or synchronize data offline. At the same time,
OneBridge Mobile Groupware provides enterprise IT managers advanced deployment
tools, robust device management and reporting tools, and secure delivery of data
in both wired and wireless environments.
XTNDCONNECT PC is a flexible desktop-based solution that enables individual
mobile users to synchronize and manage contacts, calendars, tasks, e-mail, and
notes between their mobile device and popular personal computer applications.
Synchronization is supported between a desktop or laptop computer and Windows
CE, Pocket PC, Palm O/S, Casio Pocket Viewer mobile devices and selected mobile
phones from Sony Ericsson and Siemens.
XTNDCONNECT PC PIM SDK is a software development kit that provides enterprises
and internet service providers with an efficient way to add reliable
synchronization capabilities to their Internet portal or other application using
our XTNDConnect PC technology.
MOBILE SOLUTIONS PLATFORM AND TOOLS
Our OneBridge Mobile Solutions Platform provides the foundation upon which
enterprise applications can be extended to mobile workers. Our platform can be
deployed to most popular devices, accessed by most back-end enterprise system
and provides the ability to build mobile applications using the development
environment of choice. This comprehensive platform was designed so that
enterprises can leverage their existing security protocols and preferences,
scale the use of the platform to respond to changes within the organization, and
utilize mobile devices already deployed in the field.
Our platform architecture offers a range of tools for both sophisticated and
less technical application designers and addresses data synchronization,
cross-platform APIs, online/offline transaction support, and real-time,
browser-based solutions for continuous connectivity. It also offers advanced
connectivity into various enterprise servers such as Siebel, SAP, TIBCO, MS SQL
Server, Oracle and others allowing any existing system to be extended to a
mobile computer.
ONEBRIDGE MOBILE DATA SUITE gives developers the power to easily extend
enterprise applications to mobile workers. It provides seamless integration and
easy deployment of existing or custom database applications, synchronization of
the data between the server and mobile device and automatically addresses issues
of encryption, authenticated access, data sharing, and support. Advanced APIs
offer programmers a number of options for synchronizing data, accessing remote
objects, executing transactions, and more generally, greater flexibility to
extend business processes to mobile applications.
ONEBRIDGE PRESENTATION SERVER offers developers a complete system for developing
and deploying mobile, browser-based applications. The solutions developed with
OneBridge Presentation Server allow users to access business applications from
kiosks, hotel web portals, mobile computers, and even mobile phones. Developers
have the ability to design the application with OneBridge Designer. OneBridge
Presentation Server, then, will automatically format
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the application appropriately when a device connects to ensure that the user
gets the optimum experience on whatever device or connection is used resulting
in broader device support and better user acceptance of the solution.
MOBILE BUSINESS SOLUTIONS
Extended Systems offers a suite of mobile business application modules that give
customers the ability to extend a variety of off-the-shelf and existing
mission-critical enterprise applications to mobile workers. These pre-built
application modules provide the conduit from our mobile solutions platform to an
enterprise's sales force automation (SFA), customer relationship management
(CRM) and enterprise resource planning (ERP) applications.
BUSINESS SOLUTIONS FOR SALES allows an enterprise's sales team using phones or
handheld devices to manage contacts, opportunities, sales orders, and to update
forecasting information while leveraging existing SFA, ERP, and other enterprise
solutions in the field.
BUSINESS SOLUTIONS FOR PHARMACEUTICALS is designed specifically for sales
associates within the pharmaceutical and related industries, that allows sales
associates to review and edit practitioner and institution information, plan and
report on their visits with target physicians, share clinical studies, track
samples, and even submit expense reports and timesheets during downtime between
appointments.
BUSINESS SOLUTIONS FOR FIELD SERVICE gives field technicians the ability manage
work orders, schedule appointments, prepare for service calls en route, retrieve
and update spare parts inventories, and gather customer information and
electronic signatures whenever and wherever they need it.
ADVANTAGE
ADVANTAGE DATABASE SERVER is a scalable, high performance client/server
relational database management system for networked, stand-alone, mobile and
Internet database applications. It allows developers the flexibility to combine
powerful SQL statements and relational data access methods with the performance
and control of navigational commands.
ADVANTAGE LOCAL SERVER is a non-client/server solution for accessing data
located on local drives as well as computers on the network that are not running
the Advantage Database Server. It allows both single-user and multiple-user
access to data files.
ADVANTAGE REPLICATION allows Advantage Database Server customers to maintain
identical database information at distributed locations or easily create a
briefcase mode via use of our OneBridge Mobile Groupware (formerly XTNDConnect
Server).
Advantage client solutions and development tools are native and seamless in
their integration into existing applications allowing replacement of existing
database drivers with fully compatible Advantage drivers. Advantage clients
allow for quick and easy development of new applications in a wide variety of
development environments.
WIRELESS CONNECTIVITY PRODUCT SOLUTIONS
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Our wireless connectivity product solutions permit users to wirelessly connect
and exchange data using either Bluetooth short-range radio frequency or IrDA
(Infrared Data Association) infrared technology, thereby creating easy to use
wireless connections.
We have developed a complete suite of embedded software development kits (SDKs)
for use by device manufacturers including handset and PDA manufacturers,
original equipment manufacturers (OEM), original design manufacturers (ODM) and
contract electronics manufacturers (CEM). Our Bluetooth, IrDA (including IrFM
Financial Messaging), and SyncML protocols help manufacturers streamline the
development process and rapidly integrate wireless connectivity and
synchronization into mobile phones, PDAs and other mobile devices as well as
Microsoft PCs.
We have also developed stand-alone testing systems for IrDA enabled devices. Our
XTNDAccess IrDA Test Suite is the first and only qualified test tool for
infrared for financial messaging (IrFM). IrFM is a specification that defines
the exchange of financial payment and transaction information between mobile
devices and point-of-sale (POS) terminals. All IrFM products are required to
pass this test suite in order to obtain certification.
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XNTDACCESS FOR IRDA is a complete infrared software development kit that
provides an efficient way to add reliable IrDA-compliant communications to
embedded devices. The XTNDAccess IrFM SDK we have developed is an add-on to the
XTNDAccess IrDA SDK and provides the source code, tools and documentation
required to implement IrFM on a Personal Trusted Device (PTD) or a POS terminal.
It allows applications to perform a full array of financial messaging
transactions by the IrFM Point and Pay Profile.
XTNDACCESS FOR BLUETOOTH provides an efficient way to add reliable Bluetooth
radio communications to embedded devices. This software development kit is on
the Bluetooth Qualified Product List and is certified for Object Push, File
Transfer, Dial-up Networking, LAN Access, FAX and Cordless.
XTNDACCESS FOR SYNCML is a client toolkit that enables developers to implement
the SyncML synchronization protocol for a wide range of embedded devices. It is
certified compliant by the SyncML Initiative.
OUR TECHNOLOGY
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We focus our technology development efforts on mobile data management software
and wireless connectivity software. Important technology features of our
products are described below.
MOBILE DATA MANAGEMENT SOFTWARE TECHNOLOGIES:
ONEBRIDGE MOBILE GROUPWARE (FORMERLY XTNDCONNECT SERVER). Our technology allows
the update and exchange of data with enterprise server applications such as
Microsoft Exchange, Lotus Notes and any databases accessible via ADO (OLE DB),
ODBC or via our custom SDK, and helps system administrators manage mobile
devices with IT application deployment, backup, restore, installation,
configuration and reporting. Technological features of OneBridge Mobile
Groupware meet the following needs of IT organizations:
o management and configuration of users and mobile devices using our
administration program, which supports Microsoft Management Console plug-in
technology for remote monitoring;
o customized synchronization using enhanced filtering technologies, which is
particularly useful for synchronization using wireless protocols such as
Mobitex, GSM, GPRS, CDMA, CDPD, 1XRTT, 3G, or iMode;
o advanced security implementing elliptical curve encryption technologies that
permit highly-secure connections, while consuming minimal bandwidth and
battery power on the mobile device;
o broad communications options enabling any wired, wireless or cellular
connection, including physical or wireless TCP/IP, GSM, CDMA, iDEN, Internet,
PPP, cradle, IrDA or Bluetooth; and
o support for Microsoft Exchange, Lotus Notes or any database accessible via
ADO (OLE DB), ODBC or via our custom SDK, custom plug-ins to support
proprietary applications and our proprietary replication wizard for
synchronization of database records.
XTNDCONNECT PC. XTNDConnect PC is a desktop synchronization solution with
technology that allows users to synchronize common data types (such as contacts,
calendar, email, and notes) between mobile devices and popular applications on
their personal computer. Our technology incorporates a single engine to
synchronize information between personal computer applications (such as
Microsoft Outlook, Lotus Notes, Lotus Organizer and ACT!) and mobile devices
(such as Palm OS, Windows CE, Pocket PC, Casio Pocket Viewer and Siemens and
Ericsson mobile phones). In addition, we have extended our synchronization
technology through our Internet alliances to online personal information
managers and provide support for devices using industry-accepted synchronization
standards (such as IrMC and SyncML). Data record translation capabilities
synchronize many disparate device formats and application data types, for
example, allowing joint synchronization with Palm OS, Microsoft Windows CE and
Pocket PC devices. Auto-Connect technology permits the automatic synchronization
of devices upon connection and can be supported on Bluetooth and IrDA, as well
as cable and cradle connections.
ONEBRIDGE MOBILE DATA SUITE. OneBridge Mobile Data Suite is an out-of-the-box
database synchronization solution that gives IT administrators the power to
easily extend custom mobile applications out to mobile device users. It supports
all popular server and device databases. Technological features include:
o seamless connectivity to any server database accessible via ADO (OLE DB) or
ODBC;
o end-to-end encryption to ensure corporate data remains protected;
o field-level synchronization reconciliation and priority;
o GUI-based extensive field mapping including data type translation;
o call-back functions to plug into business logic;
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o support for authentication standards already in place at an enterprise,
allowing IT administrators to maintain their existing security
infrastructure; and
o device management functionality, such as backup and restore, file rename
and delete, registry key modification, device information gathering and
allowing IT administrators to set up the necessary actions to automatically
deploy and configure applications.
ONEBRIDGE PRESENTATION SERVER. OneBridge Presentation Server is a server-based,
enterprise-class platform that adheres to mainstream industry standards
including Java, XML, XSL, VoiceXML and Open API framework to extend applications
to most mobile handheld devices. The multi-tier architecture of the platform
scales easily and securely on various configurations of enterprise IT systems,
as well as to existing and emerging mobile device technology, and allows for a
distributed-network configuration with load-balancing capabilities. Secure
connections are supported through a variety of standard security protocols,
including SSL, VPN and WTLS, as well as a number of third-party security
solutions. Users can be authenticated based on a number of parameters and global
login capabilities enable authenticated users to access different enterprise
applications without having to log into each one individually. The platform
supports most wireless handheld devices, whether online or offline, with dynamic
application rendering for mobile and smart phones, Pocket PC and Palm OS
personal digital assistants (PDAs) and RIM pagers. In addition, the universal
device library maintains specific details of each device interface and tailors
the presentation behavior of any application running on the platform. A full
spectrum of alerting capabilities, including e-mail, WAP alerts, SMS, voice
outbound calls and others are supported.
MOBILE BUSINESS SOLUTIONS PRODUCTS. The underlying foundation for our Mobile
Business Solutions products is our Mobile Solutions Platform, with pre-built
connectors that seamlessly integrate with enterprise's existing systems. These
products contain a complete set of customization tools that make it easy to
tailor our applications to suit an enterprise's specific integration, user
interface, and workflow requirements.
ADVANTAGE DATABASE SERVER. We have developed algorithms for burst-mode
transmission of data records across the LAN or WAN. Advantage Database Server
has an advanced filter optimization engine, enhanced locking algorithms and
support for a wide variety of communications protocols. Its transaction
processing engine is subject to a patent that we hold.
WIRELESS CONNECTIVITY SOFTWARE TECHNOLOGIES:
XNTDACCESS FOR IRDA. We helped create the IrDA standard and continue to offer
the most complete IrDA software development kits and test tools available on the
market. The majority of IrDA devices on the market today were developed using
our development tools. More than 200 companies have used the XTNDAccess IrDA SDK
to build IrDA into mobile phones, PDAs, printers, medical and industrial
equipment, vending machines, and numerous other devices.
The XTNDAccess IrFM SDK we have developed is an add-on to the XTNDAccess IrDA
SDK and provides the source code, tools and documentation required to implement
IrFM on a Personal Trusted Device (PTD) or a POS terminal. It allows
applications to perform a full array of financial messaging transactions using
the IrFM Point and Pay Profile.
XTNDACCESS FOR BLUETOOTH. Bluetooth radio communication technology allows
multiple wireless connections over distances of up to 10 meters. It is used
primarily by mobile devices that require long battery life and the ability to
transfer data or connect to other devices or PCs. With its small memory
footprint, easy portability and complete functionality, we believe the
XTNDAccess Blue SDK is one of the market's first and best Bluetooth development
kits for mobile devices such as personal digital assistants, pagers, MP3 players
cameras and mobile phones as well as automobile hands-free, printer and medical
device implementations. The XTNDAccess Blue SDK is compatible with virtually all
embedded operating systems and can be used in systems with no operating system
at all.
XTNDACCESS FOR SYNCML. Our XTNDAccess SyncML SDK is a client toolkit that
enables developers to implement the SyncML synchronization protocol for a wide
range of embedded devices. Designed for client devices such as cell phones,
smart phones, and personal digital assistants, the kit provides a complete set
of tools including portable source code, easy-to-use APIs and comprehensive
documentation. The XTNDAccess SyncML SDK is designed to ensure immediate support
for XTNDConnect PC and OneBridge Mobile Groupware as well as other SyncML
compliant synchronization servers.
10
RESEARCH AND DEVELOPMENT
- ------------------------
As of June 30, 2003, we had 62 full-time equivalent employees devoted to our
research and development activities, primarily at our facilities in Boise,
Idaho; Bristol, England; and Toronto, Canada. We believe our success depends
upon our ability to develop and introduce new products and enhance existing
products, allowing us to offer our customers products that achieve increasing
levels of capability, performance and reliability. Our research and development
efforts are currently focused on: o mobile server platforms; o mobile
transactions via synchronization, push and real-time technologies; o mobile
device management; o mobile applications; o secure information transfer; o thick
and thin-client support for mobile devices; and o short-range wireless
technologies. During fiscal 2003, 2002 and 2001, research and development
expenses from continuing operations were $7.2 million, $10.0 million and $12.4
million, respectively, representing 26%, 45% and 46%, respectively, of our net
revenue from continuing operations. In connection with our acquisition of
ViaFone in August 2002, we incurred an in-process research and development
charge of $430,000 in fiscal 2003. We anticipate that we will continue to commit
substantial resources to research and development in the future. We will
continue to add specific development expertise, as needed, through our
recruiting and hiring efforts, as well as through continued acquisitions of
engineering-oriented technology companies.
MARKETING AND SALES
- -------------------
As of June 30, 2003, we had an in-house marketing and sales staff of 80
full-time equivalent employees, who are largely responsible for generating
end-user demand for our products by soliciting prospective customers, providing
technical advice with respect to our products and working with distributors and
original equipment manufacturers to sell our products. We conduct our marketing
and sales activities primarily from our offices in Boise, Idaho and our
international offices in Canada, France, Germany, the Netherlands, and the
United Kingdom. In addition, we supplement our direct marketing and sales
organization with our indirect channel. We have distributor relationships in
Asia, Europe and South America.
SERVICE AND SUPPORT
- -------------------
As of June 30, 2003, we had 20 full-time equivalent personnel in our
professional services group located primarily in Toronto, Canada; Bristol,
England and Boise, Idaho. Our professional services personnel are committed to
providing customers with the solutions and skills necessary to develop a
thorough, proven mobile strategy within their organization and they are able to
assist customers in all stages of the mobile application development life cycle,
from initial analysis through delivery. We provide business analysis, strategy
planning, design and development, testing, solutions deployment, and maintenance
and on-going management services.
At June 30, 2003 we had 31 full-time equivalent support personnel primarily at
our offices in Boise, Idaho; Bristol, England; and Herrenberg, Germany. We
believe that service and support are critical components of customer
satisfaction and the success of our business. Our commitment to service and
support enables us to interact regularly with our customers' network
administrators and to identify and respond to their needs on an ongoing basis.
We offer a wide range of customer support services under our ExtendAssist
Program. This program includes a technical support hotline to provide a range of
telephone support to our customers through a toll-free number. In addition, we
maintain a technical support group comprised of engineers and technicians,
24-hour automated support, and an on-line bulletin board, which contains
in-depth technical information. Through ExtendAssist, our engineering staff
provides technical support through e-mail. We also provide on-line services to
distribute technical advice and software updates. In addition to our internal
support, our independent distributors provide some service and support to
customers.
COMPETITION
- -----------
The markets for our products are rapidly evolving and intensely competitive.
Further, the markets for our mobile data management and wireless connectivity
product solutions are relatively new and characterized by frequent product
introductions, changing protocols and rapidly developing technology. As mobile
devices continue to grow in power and usage and become a major component of
enterprise information management, we expect new competitors to enter these
markets and existing competitors to expend increasing resources to develop
mobile data management and universal wireless product solutions. As a result, we
expect competition in these markets to intensify.
11
MOBILE DATA MANAGEMENT SOLUTIONS
- --------------------------------
MOBILE GROUPWARE SOLUTIONS
Our mobile groupware solutions compete primarily with products offered by Aether
Systems, iAnywhere (a division of Sybase), IBM, Infowave, JP Mobile, Pumatech,
RIM, and Synchrologic. We believe that the primary competitive factors for these
products are:
o the ability to support a broad range of mobile device platforms and
multiple modes of synchronization such as push and browse;
o support for both Exchange and Domino; and
o speed and security of synchronization.
MOBILE SOLUTIONS PLATFORMS AND TOOLS
Our mobile solutions platforms and tools compete primarily with products offered
by Everypath, iAnyware, Microsoft and Oracle. We believe that the primary
competitive factors for these products are:
o the ability to support a broad range of mobile device platforms and
multiple modes of synchronization such as push and browse;
o our ability to combine both groupware, device management, security and
mobile applications in a single platform;
o our ability to quickly and easily extend enterprise platforms, such as SAP,
Siebel, Oracle and DB2data, and applications to mobile devices; and
o our experience in the vertical market segment.
MOBILE BUSINESS SOLUTIONS
Our mobile business solutions compete primarily with products offered by Aether
Systems, Dexterra, Telispark and other development companies. We believe that
our primary competitive factors for these products are:
o the ability to support a broad range of mobile device platforms and
multiple modes of synchronization such as push and browse;
o our ability to combine both groupware, device management, security and
mobile applications in a single platform;
o our ability to quickly and easily extend enterprise platforms, such as SAP,
Siebel, Oracle and DB2data, and applications to mobile devices; and
o our experience in the vertical market segment.
ADVANTAGE
Our client/server database products compete primarily with products offered by
Microsoft, through its SQL Server product, Interbase, Pervasive Software and
Oracle, through its Oracle Lite server product. We believe that the primary
competitive factors for these products are:
o ease of integration into developers' applications;
o ease of use without a database administrator;
o speed;
o reliability; and
o scalability, or the ability to increase the number of client users.
WIRELESS CONNECTIVITY PRODUCT SOLUTIONS
- ---------------------------------------
Our wireless connectivity product solutions compete primarily with in-house
development and products offered by IVT Corporation, Open Interface and Widcomm.
We believe that the primary competitive factors for these products are:
o the ability to support a broad range of user profiles and mobile device
platforms;
o interoperability between mobile devices;
o easy porting to any device platform; and
o on going support for the latest industry specifications.
12
INTELLECTUAL PROPERTY
- ---------------------
Our success depends significantly on our proprietary technology and other
intellectual property. To protect our proprietary rights, we rely generally on
patent, copyright, trademark and trade secret laws, confidentiality agreements
with many of our employees and consultants and licensing agreements. Despite
these protections, third parties might obtain and use our technologies without
authorization or develop similar technologies independently. The steps we have
taken may not prevent misappropriation of our intellectual property,
particularly in countries other than the United States where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States.
We have entered into source code and design document escrow agreements with a
limited number of our customers requiring release of design details in some
circumstances. These agreements generally provide that these parties will have a
limited, non-exclusive right to use the code in the event that there is a
bankruptcy proceeding by or against us, if we cease to do business or if we fail
to meet our support obligations. We also provide our source code to foreign
language translation service providers and consultants to use in limited
circumstances.
We own 26 registered trademarks. We cannot assure you that any of our current or
future trademark applications will be approved. Even if these applications are
approved, any trademarks may be successfully challenged by others or
invalidated. There may be third parties using names similar to ours of which we
are unaware. If our trademark applications are not approved or if our trademarks
are invalidated because of prior third-party registrations, our use of these
marks could be restricted unless we enter into arrangements with these third
parties, which might not be available on commercially reasonable terms, if at
all.
We have been issued 14 patents, of which one expires in 2007 and 13 expire in
2010 and beyond. We also have 16 patents pending. We cannot assure you that any
of our current or future patent applications will be granted. Any of our patents
may be challenged, invalidated or circumvented and the rights granted under any
of our patents may not provide competitive advantages to us. If a blocking
patent is issued in the future to a third party, and we are not able to
distinguish our technologies, processes or methods from those covered under the
patent, we may need to either obtain a license or develop noninfringing
technologies, processes or methods with respect to that patent. We may not be
able to obtain a license on commercially reasonable terms, if at all, or design
around the patent, which could impair our ability to sell our products. Any
proprietary rights with respect to our technologies may not be viable or of
value in the future since the validity, enforceability and scope of protection
of proprietary rights in Internet-related industries are uncertain and still
evolving.
Other persons may claim that our technologies, processes or methods infringe
their patents. These claims may cause us to incur significant expenses and, if
successfully asserted against us, may cause us to pay substantial damages and
prevent us from selling some of our products, which would substantially harm our
business.
EMPLOYEES
- ---------
As of June 30, 2003 we had 221 employees and 216 full-time equivalent employees.
None of our employees is represented by a labor union or is subject to a
collective bargaining agreement with respect to his or her employment with us.
We believe that our relations with our employees are good.
EXECUTIVE OFFICERS
- ------------------
Our executive officers as of August 31, 2003 are as follows:
NAME AGE POSITION
- ---- --- --------
Charles W. Jepson...... 57 Chief Executive Officer and President
Karla K. Rosa........... 40 Vice President of Finance, Chief Financial
Officer and Corporate Secretary
Kerrin Pease............ 52 Vice President of Research and Development
Nigel S. Doust.......... 47 Vice President of Europe, Middle East and
Africa (EMEA)
Mark A. Willnerd........ 38 Vice President of Business Development
CHARLES W. JEPSON was named as our Chief Executive Officer and President in
August 2003. From February 2003 to August 2003, Mr. Jepson served as Vice
President of Sales and Marketing. He served as a member of our board of
directors from September 2001 to July 2003. Prior to joining us, Mr. Jepson was
the Chairman, President and CEO of Diligent Software Systems, a provider of
e-procurement software. From June 2000 to July 2001, he was the Senior
13
Vice President of North American Field Operations at eGain Communications, a
provider of customer service software. From March 1998 to June 2000, Mr. Jepson
was the President and Chief Executive Officer of Inference Corporation, which
was acquired by eGain in June 2000. From June 1997 to March 1998, Mr. Jepson was
an independent consultant to small technology companies. From March 1992 to May
1997, he was the President and Chief Executive Officer of Interlink Computer
Sciences.
KARLA K. ROSA has served as Vice President of Finance since December 1997 and as
Chief Financial Officer since April 1996. She was appointed to serve as our
Corporate Secretary in April 2003. From January 1996 to April 1996, Ms. Rosa was
Assistant Controller, from April 1992 to January 1996, Ms. Rosa was Treasury
Manager and from December 1991 to April 1996, Ms. Rosa was Tax Director. Prior
to joining us, Ms. Rosa was a manager in the Los Angeles and Boise offices of
Arthur Andersen & Co. Ms. Rosa is a Certified Public Accountant. Shereceived her
B.S. in accounting from Utah State University.
KERRIN PEASE has served as Vice President of Worldwide Research and Development
since November 2001. From 1999 to 2001, Mr. Pease served as Vice President,
Consulting and Development Americas, for GEAC Computer Corporation Limited, a
global provider of enterprise requirements planning (ERP) software and services.
From 1997 to 1999, Mr. Pease was Vice President, Consulting for Johnson Brown
Associates (JBA) International, a global provider of ERP software services,
where he managed large computer software research and development teams located
in the United States, United Kingdom, Ireland, Canada and Sri Lanka. Mr. Pease
held various other positions with JBA from 1987 to 1997, including Product
Development Director, Operations Director UK/Europe and Regional Business
Manager. From 1980 to 1987, Mr. Pease served as Operations Manager for
Information Processing Services, a company that developed ERP products. Mr.
Pease holds a bachelor's degree in Computer Science from Trinity College and
University.
NIGEL S. DOUST has served as Vice President of EMEA since April 2003. Prior to
joining the company, Mr. Doust served as Vice President, International for
Diligent Software Systems, an enterprise software company specializing in
providing solutions to enhance and accelerate a company's strategic sourcing
process. From 1999 to2001, Mr. Doust served in the VP EMEA role for eGain
Communications, a world-leader in web-based enterprise software solutions,
following a time as Customer Service Director from 1998 to1999. His management
experience includes roles as Divisional Manager, Business Group Manager, and
Technical Manager during his tenure with Tangent International, a System
Integrator with vertical markets in the technology and TelCo sectors. Mr.
Doust's background also encompasses 14 years of consulting engagements and
programming positions, including stints with Shell Chemicals and AGS Computers
Inc.
MARK A. WILLNERD was appointed our Vice President of Business Development in
September 2002. Prior to his appointment, he held the position of Business
Development Director from June 2001 to August 2002. From August 1998 to May 2001
he was Alliance and Product Manager for our MIM products and from April 1995 to
August 1998 he was Future Product Manager for our mobile connectivity products.
Since joining us in July 1989, Mr. Willnerd has also held various other
marketing positions. He earned a B.S. in Electrical Engineering from the
University of Wyoming.
SIGNIFICANT EVENTS
- ------------------
On September 3, 2003, we entered into a definitive agreement with Hopkins
Financial Services for the sale-and-leaseback of our headquarters building and
land in Boise, Idaho. We closed the transaction on September 26, 2003. The sale
price of the building and land was $4.8 million. We received approximately $4.6
million in net cash proceeds after deducting fees related to the transaction and
entered into a 10-year master lease for the building with annual lease payments
equal to 9.2% of the sale price. We are also obligated to pay all expenses
associated with the building during our lease, including the costs of property
taxes, insurance, operating expenses and repairs. We have a 10-year option to
repurchase the building at a price of $5.1 million. Pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 98, "Accounting for Leases," the
sale-and-leaseback will be recorded as a financing transaction and will be
reflected as long-term debt on our balance sheet for our quarter ending
September 30, 2003.
On September 2, 2003, we entered into a definitive agreement with Brighton
Investments, LLC for the sale of approximately 16 acres of excess land adjacent
to our headquarters building in Boise, Idaho. Upon closing, we expect to receive
approximately $1.5 million in net cash proceeds after deducting fees related to
the transaction. We expect to report a gain of approximately $1.0 million on the
sale. We expect the transaction to close in the second quarter of fiscal 2004
subject to the satisfaction of customary closing conditions.
On August 19, 2003, Steven Simpson, our former President and Chief Executive
Officer, resigned from the company. In addition, we expect to complete a
workforce reduction of approximately 10 employees in the first quarter of fiscal
2004. As a result, we expect to record a restructuring charge of approximately
$1.2 million in the first quarter of fiscal
14
2004, consisting primarily of severance costs related to the resignation and
workforce reduction. The restructuring charge reflects approximately $450,000 in
non-cash compensation resulting from accelerated vesting of employee stock
options. Of the remaining $750,000, $300,000 is expected to be paid prior to the
end of September and $450,000,including $350,000 of severance payable to Mr.
Simpson, will be paid over the next 14 months. The company expects an operating
expense decrease of approximately $300,000 per quarter as a result of the
restructuring that will be completed in the first quarter of fiscal 2004.
In the first quarter of fiscal 2003, we adopted a formal plan to exit our
infrared hardware business as a result of an expected decline in sales of these
products and our desire to increase our focus on our core software businesses.
Throughout the year we continued to see revenue from this business as customers
placed final orders. As of June 30, 2003, the business had been successfully
wound-down, we have stopped accepting new orders and we are shipping final
orders.
ITEM 2. PROPERTIES
We lease our corporate headquarters in Boise, Idaho, which consists of
approximately 100,000 square feet of space located on approximately eight acres
of land. We use our headquarters facility for research and development,
marketing and sales, customer support, professional services and administration.
We also lease sales, support, professional services and development offices
throughout the United States, Canada and Europe. These leases expire at varying
dates through 2013 and some include renewals at our option. We currently have
approximately 52,000 square feet of unused space at our headquarters facility,
which we sublease to third parties or have available for lease. We believe that
our existing facilities are adequate to meet our current requirements and that
suitable additional or substitute space will be available as needed to
accommodate expansion of our operations.
We entered into a definitive agreement for the sale-and-leaseback of our
headquarters facility on September 3, 2003 which closed on September 26, 2003.
We also entered into a definitive agreement for the sale of approximately 16
acres of excess land adjacent to our headquarters building on September 2, 2003.
For additional information on these agreements, please refer to the "Significant
Events" heading under Item 1 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
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. On August 1, 2003 the Honorable Judge D. Lowell Jensen,
United States District Judge, issued his Claims Construction Ruling on the
interpretation, definition, and scope of the claims in the suit. We believe that
the Court's ruling has significantly narrowed claims in five of the Pumatech
patents. The Court also ruled that it could not correct an error that appears in
all asserted claims of Pumatech's '676 patent. This error must be corrected in
reissue proceedings in the Patent Office. Until the Patent Office issues
corrected claims, no synchronization software can infringe the '676 patent, and
it is unlikely that such a correction would have any retroactive effect. As a
result, if any of our products are ultimately held to be infringing this patent,
it is unlikely that Pumatech would be entitled to damages for any period prior
to the reissue date. We have petitioned the U.S. Patent Office for reexamination
of three of the Pumatech patents. The Patent Office has issued an Office Action
for each of the three patents rejecting all Pumatech patent claims over the
prior art for two of the patents and rejecting all claims on which we requested
reexamination for the other patent. As a result of the reexamination process, we
expect the patents to be significantly narrowed or rejected by the Patent Office
in their entirety. If the patents are amended and reissued, and we are
ultimately held to be infringing one of the reissued patents, it is unlikely
that Pumatech would be entitled to damages for any period preceding the reissue
date. Discovery and other pretrial proceedings are on going; trial is currently
scheduled for April 2004.
We believe that we have numerous meritorious defenses to Pumatech's claims and
we intend to continue to defend the suit vigorously. However, litigation is
inherently uncertain, and we may not prevail in our defenses or
15
counterclaims. If Pumatech prevails in one or more of its claims, we could be
required to pay substantial damages for past sales of infringing products, to
cease selling specific of our server or desktop synchronization products that
are held to infringe a Pumatech patent, to pay royalties on the sales of
specific products that are held to infringe a Pumatech patent, or some
combination of these results. We may also incur significant development costs to
redesign certain of our products to ensure that they are non-infringing. Any of
such outcomes could have a material adverse effect on our business and financial
position. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"XTND". The following table sets forth the high and low sales prices of our
common stock, based on the last daily sale, in each of our last eight fiscal
quarters:
HIGH LOW
----------------------
FISCAL YEAR 2003
Fourth Quarter, ended June 30, 2003............. $ 4.85 $ 1.61
Third Quarter, ended March 31, 2003............. 2.00 1.30
Second Quarter, ended December 31, 2002......... 2.48 1.40
First Quarter, ended September 30, 2002......... 3.30 1.40
FISCAL YEAR 2002
Fourth Quarter, ended June 30, 2002............. $ 5.75 $ 2.50
Third Quarter, ended March 31, 2002............. 8.00 5.05
Second Quarter, ended December 31, 2001......... 8.48 2.20
First Quarter, ended September 30, 2001......... 8.05 2.34
On September 19, 2003, the last reported per share sale price of our common
stock on the Nasdaq National Market was $4.68 per share. The market for our
common stock is highly volatile. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results and Market Price of Stock."
According to our transfer agent's records, we had 312 stockholders of record as
of September 19, 2003. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these stockholders of
record.
We have not declared or paid any dividends on our common stock since September
1994. We currently anticipate that we will retain all future earnings for use in
the operation and expansion of our business and do not anticipate paying any
dividends in the foreseeable future.
The information required by this item regarding equity compensation plans is
incorporated by reference to the information set forth in Item 12 of this annual
report on Form 10-K.
16
ITEM 6. SELECTED FINANCIAL DATA
You should read the following consolidated selected financial data in
conjunction with our Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. Amounts are
in thousands, except per share amounts. As a result of discontinuing our
infrared hardware business in the first quarter of fiscal 2003, selling our
Singapore subsidiary in fiscal 2002 and selling certain assets and liabilities
of our printing solutions segment in fiscal 2001, we accounted for the results
of these operations as discontinued operations in accordance with Accounting
Principles Bulletin No. 30 and Statement of Financial Accounting Standards No.
144. Amounts for all periods in this Annual Report on Form 10-K, including the
financial statements and related notes, have been reclassified to reflect the
discontinued operations.
FOR THE YEARS ENDED JUNE 30, 2003 2002 2001 2000 1999
--------------------------------------------------------------
Net revenue................................................ $ 27,534 $ 22,275 $ 26,910 $ 21,551 $ 14,196
Gross profit............................................... 23,203 19,722 19,634 14,398 6,949
Research and development................................... 7,173 10,030 12,446 6,979 4,118
Acquired in-process research and development............... 430 - - 2,352 166
Marketing and sales........................................ 14,482 13,489 17,542 10,818 8,594
General and administrative................................. 4,889 4,381 7,169 4,219 3,544
Amortization of goodwill................................... - 925 925 857 48
Restructuring charge....................................... 597 213 1,066 - -
Loss from operations....................................... (4,368) (9,316) (19,514) (10,827) (9,522)
Income tax provision (benefit)............................. (200) (2,257) 7,228 (3,436) (3,668)
Loss from continuing operations............................ (4,218) (7,133) (26,284) (7,739) (6,147)
Income (loss) from discontinued operations and gain (loss)
from sale of discontinued operations, (net)............. 458 (57) 2,810 2,754 4,685
Net income (loss).......................................... (3,760) (7,190) (23,474) (4,985) (1,462)
Loss per share from continuing operations:
Basic and diluted.................................... (0.31) (0.64) (2.48) (0.81) (0.73)
Earnings (loss) per share from discontinued
operations:
Basic and diluted.................................... 0.03 (0.01) 0.26 0.29 0.56
Earnings (loss) per share:
Basic and diluted.................................... (0.28) (0.65) (2.22) (0.52) (0.17)
AS OF JUNE 30, 2003 2002 2001 2000 1999
--------------------------------------------------------------
Cash and cash equivalents.................................. $ 3,502 $ 5,439 $ 6,585 $ 6,191 $ 9,668
Total assets............................................... 29,091 20,371 28,143 44,221 40,799
Long-term debt and other long-term liabilities............. 494 - - - 67
Total stockholders' equity................................. 19,256 13,088 18,938 37,715 26,595
For fiscal 2002, our income tax benefit from continuing operations of $2.3
million was partially offset by an income tax expense of $301,000 from
discontinued operations. This net benefit of $1.8 million was primarily the
result of a $1.6 million tax refund we received due to a net operating loss
carryback resulting from a temporary increase in the carryback period as part of
the Job Creation and Worker Assistance Act of 2002. The balance of the benefit
17
relates primarily to a reserve that was reversed when we sold our Singapore
subsidiary. Our income tax provision and loss from continuing operations for
fiscal 2001 includes a $14.0 million valuation allowance recorded against our
deferred tax assets. Our loss from continuing operations in fiscal 2001 also
includes $1.4 million in charges associated with the terminated merger with
Palm, Inc. included in general and administrative expenses. Our loss from
continuing operations for fiscal 1999 includes charges of $2.4 million related
to our exit from our port replicator business.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and other parts of this Annual Report on Form 10-K
contain forward-looking statements that involve risks, uncertainties and
assumptions. These forward-looking statements include, but are not limited to,
statements regarding:
o closing the transaction for the sale of our excess land;
o expected restructuring charges and related cash payments;
o levels of software product license fees and royalties;
o future profitability;
o levels of international sales;
o future operating cash flows;
o levels of service revenue;
o levels of hardware and other revenue;
o future costs of license fees and royalties, services and hardware and other
revenue;
o levels of original equipment manufacturer sales;
o claims made by Pumatech, Inc. and expected expenses associated with the
litigation;
o anticipated cost of revenue and gross margin;
o staffing and expense levels;
o levels of foreign currency exchange gain or loss;
o levels of interest income;
o future income from discontinued operations;
o levels of accounts receivable;
o levels of capital expenditures;
o anticipated cash funding needs; and
o future acquisitions.
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" and elsewhere in this Annual Report on Form 10-K. 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 Quarterly Reports on Form 10-Q that we will file in fiscal 2004. All yearly
references are to our fiscal years ended June 30, 2004, 2003, 2002 and 2001,
unless otherwise indicated. All tabular amounts are in thousands, except
percentages.
SIGNIFICANT EVENTS
- ------------------
On September 3, 2003, we entered into a definitive agreement with Hopkins
Financial Services for the sale-and-leaseback of our headquarters building and
land in Boise, Idaho. We closed the transaction on September 26, 2003. The sale
price of the building and land was $4.8 million. We received approximately $4.6
million in net cash proceeds after deducting fees related to the transaction and
will entered into a 10-year master lease for the building with annual lease
payments equal to 9.2% of the sale price. We are also obligated to pay all
expenses associated with the building during our lease, including the costs of
property taxes, insurance, operating expenses and repairs. We have a 10-year
option to repurchase the building at a price of $5.1 million. Pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 98, "Accounting for
Leases," the sale-and-leaseback will be recorded as a financing transaction and
will be reflected as long-term debt on our balance sheet for our quarter ending
September 30, 2003.
On September 2, 2003, we entered into a definitive agreement with Brighton
Investments, LLC for the sale of approximately 16 acres of excess land adjacent
to our headquarters building in Boise, Idaho. Upon closing, we expect to receive
approximately $1.5 million in net cash proceeds after deducting fees related to
the transaction. We expect to report a gain of approximately $1.0 million on the
sale. We expect the transaction to close in the second quarter of fiscal 2004
subject to the satisfaction of customary closing conditions.
On August 19, 2003, Steven Simpson, our former President and Chief Executive
Officer, resigned from the company. In addition, we expect to complete a
workforce reduction of approximately 10 employees in the first quarter of fiscal
2004. As a result, we expect to record a restructuring charge of approximately
$1.2 million in the first quarter of fiscal 2004, consisting primarily of
severance costs related to the resignation and workforce reduction. The
restructuring charge reflects approximately $450,000 in non-cash compensation
resulting from accelerated vesting of employee
19
stock options. Of the remaining $750,000, $300,000 is expected to be paid prior
to the end of September and $450,000, including $350,000 of severance payable to
Mr. Simpson, will be paid over the next 14 months. The company expects an
operating expense decrease of approximately $300,000 per quarter as a result of
the restructuring that will be completed in the first quarter of fiscal 2004.
In the first quarter of fiscal 2003, we adopted a formal plan to exit our
infrared hardware business as a result of an expected decline in sales of these
products and our desire to increase our focus on our core software businesses.
Throughout the year we continued to see revenue from this business as customers
placed final orders. As of June 30, 2003, the business had been successfully
wound-down. We have stopped accepting new orders and we are shipping final
orders.
OVERVIEW
- --------
We classify our product offerings into one operating segment, our mobile
information management segment, which consists of products and services that
extend enterprise applications to mobile and wireless environments. The products
in our mobile information management segment include data synchronization and
management software, wireless connectivity products and client/server database
management systems with remote access capabilities. Until April 2001, we also
marketed and sold enterprise Internet appliances.
We sell our mobile information management products primarily to enterprises,
original equipment manufacturers, application developers and resellers 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 non-recurring development fees that we
generate when we adapt products to customers' specifications and consulting
services.
Our future results of operations will be highly dependent upon the success of
our software products and services, specifically our Mobile Groupware Solutions,
our Mobile Solutions Platforms and Tools, our Mobile Business Solutions, and our
Wireless Connectivity Software. We expect the license fees and royalties
generated by these products to continue to constitute a significant majority of
our revenue.
We derive a significant amount of our revenue from sales to customers outside of
the United States, 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 years
ended June 30:
NET REVENUE PERCENTAGES BY REGION 2003 2002 2001
----------------------
Domestic............................................... 50% 49% 42%
International:
Europe.............................................. 42 39 45
Asia................................................ 5 9 11
Other regions....................................... 3 3 2
----------------------
Total international.............................. 50 51 58
----------------------
Net revenue from continuing operations...... 100% 100% 100%
======================
The percentage of revenue from Europe as compared to other international revenue
increased in fiscal 2003 from fiscal 2002 as a result of an increase in
royalties from a European OEM customer and an increase in revenues caused by the
decrease in the strength of the US dollar as compared to the euro and British
pound sterling, which resulted in sales by our European subsidiaries being
greater in U.S. dollars than they would have been had the exchange rate remained
constant in fiscal 2003. The increase in domestic revenue as a percentage of our
total revenue from fiscal 2001 to 2002 is primarily due to a decrease in sales
of our Internet products in Europe and a decrease in sales of our XTND Access
hardware products to OEM customers located in Asia. We also saw an increase in
domestic sales of our Advantage Database Server products in fiscal 2002 in both
absolute dollars and as a percentage of our total Advantage Database Server
revenue.
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 throughout fiscal 2004.
20
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,
because demand in these markets is difficult to predict, as it is dependent upon
the timing of customer projects and the effectiveness of their marketing
efforts.
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. No customers accounted for greater than 10% of revenue from
continuing operations in fiscal 2003, 2002 or 2001.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
In preparing our consolidated financial statements in conformity with accounting
principles generally accepted in the United States, we make estimates,
assumptions and judgments that can have a material impact on our net revenue,
operating income and net income (loss), as well as on the value of certain
assets on our consolidated balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on our consolidated financial statements, so
we consider these to be our critical accounting policies. The policies described
below are not intended to be a comprehensive list of all our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles, with no need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. Our audited consolidated financial statements and
notes thereto contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies
that we consider critical to an understanding of the consolidated financial
statements are highlighted below.
REVENUE RECOGNITION
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
the shorter of our normal payment terms or 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 do not
request collateral from our customers. If we determine that collection of a fee
is not reasonably assured, we defer recognition of the fee as revenue, and
recognize revenue at the time collection becomes reasonably assured, which is
generally upon receipt of cash. If we assessed 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 an undelivered element is generally established by
using historical evidence specific to Extended Systems. For example, the
vendor-specific objective evidence of fair value for maintenance and support is
based upon separate sales of renewals to other customers or upon the renewal
rates quoted in the contracts, and the fair value of services, such as training
or consulting, is based upon separate sales by us of these services to other
customers. If we allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support and bug fixes and, from time to time,
minor enhancements to ensure that the products comply with their warranty
provisions. Accordingly, we allow for warranty costs at the time the product
revenue is recognized.
When we license our software to original equipment manufacturers or to companies
that include our software in their software offering, royalty revenue is
generally recognized when customers report to us the sale of software to their
end user customer. In cases where the arrangement with our customer provides for
a prepaid nonrefundable royalty,
21
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 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, fixed assets and goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Goodwill is reviewed for impairment annually in accordance
with SFAS No. 142, " Goodwill and Other Intangible Assets." Factors we consider
important that could trigger an impairment review include, but are not limited
to: (1) significant under performance relative to historical or projected future
operating results, (2) significant changes in the manner of our use of the
acquired assets or the strategy for our overall business, (3) significant
negative industry or economic trends, (4) a significant decline in our stock
price for a sustained period, and (5) our market capitalization relative to net
book value. When we determine that the carrying value of long-lived assets may
not be recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any impairment based on a market
capitalization approach when the information is readily available. When the
information is not readily available, we use a projected discounted cash flow
method using a discount rate commensurate with the risk inherent in our current
business model to measure any impairment. If we made different judgments or
utilized different estimates our measurement of any impairment may have differed
materially from that reported.
INCOME TAXES
On a quarterly basis we evaluate our deferred tax asset balance for
realizability. To the extent we believe it is more likely than not that some or
all of our deferred tax assets will not be realized, we establish a valuation
allowance against the deferred tax assets. As of June 30, 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 carried forward and foreign
tax credits, before they expire. This valuation allowance was recorded based on
our estimates of future U.S. and foreign jurisdiction taxable income and our
judgments regarding the periods over which our deferred tax assets will be
recoverable. If we made different judgments or utilized different estimates, the
amount or timing of the valuation allowance recorded may have differed
materially from that reported. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to
reduce the valuation allowance, potentially resulting in an income tax benefit
in the period of reduction, which could materially impact our financial position
and results of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts based on a continuous review of
customer accounts, payment patterns and specific collection issues. Where
specific collection issues are identified, we record a specific allowance based
on the amount that we believe will not be collected. For accounts where specific
collection issues are not identified, we record a reserve based on the age of
the receivable and historical collection patterns. If we made different
judgments or utilized different estimates, the timing and amount of our reserve
may have differed materially from that reported.
22
RESULTS OF CONTINUING OPERATIONS
The following section sets forth our results of continuing operations for the
fiscal years ended June 30, 2003, 2002, and 2001:
Net Revenue
- -----------
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------
2003 %CHANGE 2002 %CHANGE 2001
----------------------------------------------
Revenue:
License fees and royalties... $ 21,733 13% $ 19,176 (4)% $ 19,928
Services..................... 5,743 88 3,058 12 2,721
Hardware and other........... 58 41 41 (99) 4,261
-------- -------- --------
Total net revenue......... $ 27,534 24% $ 22,275 (17)% $ 26,910
-------- -------- --------
LICENSE FEES AND ROYALTIES. License and royalty revenue consists of fees for
licenses of our software products. The growth in revenue in fiscal 2003 compared
to fiscal 2002 was primarily attributable to an increase of 19% in license and
royalty revenue from our Mobile Groupware, Mobile Solutions Platforms and Tools
and Mobile Business Solutions Products. License fees and royalties net revenue
was also positively impacted by the decrease in the strength of the U.S. dollar
relative to the euro and the British pound sterling, which resulted in sales by
our European subsidiaries being greater in U.S. dollars than they would have
been had the exchange rate remained constant in 2003. Included in this increase
was an increase of $700,000 due to adding the OneBridge Presentation Server and
Mobile Business Solutions products to our product mix with the acquisition of
ViaFone. We also saw a 10% increase in sales of Advantage software licenses. The
decrease in license fees and royalties in fiscal 2002 compared to fiscal 2001
was due primarily to a 53% decrease in license fees and royalties from our
Wireless Connectivity Software products due to the timing of original equipment
manufacturer's development. This decrease was partially offset by a 43% increase
in revenue from our Mobile Groupware Solutions Products products caused by an
increase in licenses sold.
We expect revenue from license fees and royalties to increase in fiscal 2004.
This increase is expected to come primarily from increased licensing of our
OneBridge products, including our Groupware, Mobile Solutions Platform and
Mobile Business Solutions products.
SERVICES. Services 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 software products and non-recurring
engineering ("NRE"). The primary driver of the increase in service revenue for
fiscal 2003 as compared to fiscal 2002 was the 807% increase in professional
services we saw as a result of adding a dedicated professional services group to
our solutions kit in the first quarter of fiscal 2003 in connection with the
ViaFone acquisition. The majority of our professional services for fiscal 2003
related to implementations of our Mobile Solutions Platforms and Tools and
Mobile Business Solutions products. Our service revenue increased in fiscal 2002
from fiscal 2001 primarily due to an increase in support and maintenance revenue
generated from contracts on new licenses sold and contract renewals. The
increase was partially offset by a decrease in revenue from non-recurring
engineering and other consulting projects, which fluctuates as a result of the
timing of customer projects.
We expect service revenue to increase in fiscal 2004. Although we expect an
overall increase in the amount of billable hours of our professional services
group, service revenue may fluctuate from quarter to quarter based on the amount
of revenue we may be required to defer under our revenue recognition policy and
the timing of services engagements.
HARDWARE AND OTHER. Hardware and other revenue consists primarily of sales of
our enterprise Internet products which we stopped marketing in April 2001. The
increase in revenue in fiscal 2003 from fiscal 2002 was related to an increase
in units sold. The significant decrease in revenue in fiscal 2002 as compared to
fiscal 2001 was due primarily to a decrease in unit sales of our enterprise
Internet hardware products after April 2001.
We expect hardware and other revenue to remain relatively flat and insignificant
in amount in fiscal 2004.
23
Cost of Revenue
- --------------- FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------
GROSS GROSS GROSS
2003 MARGIN 2002 MARGIN 2001 MARGIN
-----------------------------------------------
License fees and royalties... $ 1,146 95% $ 1,346 93% $ 1,765 91%
Services..................... 3,209 44% 1,198 61% 1,742 36%
Hardware and other........... (24) 100% 9 78% 3,769 12%
LICENSE FEES AND ROYALTIES. The cost of license and royalty revenue consists
primarily of amortization of purchased technology and royalties for the use of
third-party software. The cost of license fees and royalties decreased 15% in
fiscal 2003 compared to fiscal 2002 primarily due to a decrease in
operations-related facilities and overhead costs, including reductions in
headcount resulting from our restructurings. In fiscal 2002, the cost of license
and royalty revenue decreased 24% compared to fiscal 2001, primarily
attributable to a decrease in operations-related costs related to headcount
reductions and other cost reductions resulting from the sale of our print server
business.
We expect the cost of license fees and royalties to increase in fiscal 2004 as a
result of an expected increase in revenue from license fees and royalties. An
expected reduction in operations costs and in amortization expense of purchased
technology, resulting from a portion of our purchased technology becoming fully
amortized in the first quarter of fiscal 2004, is expected to be offset by an
increase in royalty costs as a result of an expected increase in revenue.
Gross margin on license fees and royalties revenue increased in fiscal 2003 and
in fiscal 2002 as a result of the cost reductions described above. We expect
gross margin on license fees and royalties to be in a range of 93 to 96 percent
in fiscal 2004.
SERVICES. The cost of services consists primarily of compensation and benefits
for our professional services and post-sales support personnel. The cost of
services increased 168% in fiscal 2003 compared to fiscal 2002 primarily due to
the addition of a dedicated professional services organization in the first
quarter of fiscal 2003 in conjunction with our acquisition of ViaFone. The cost
of services decreased 31% in fiscal 2002 compared to fiscal 2001. This decrease
was primarily due to a decrease in personnel costs associated with post-sales
effort in our Internet and Advantage products and a decrease in professional
services costs related to our XTNDConnect products.
Gross margin on services revenue decreased in fiscal 2003 as compared to fiscal
2002. The decline is primarily the result of a higher mix of professional
services revenue in fiscal 2003, which typically generates lower margins than
support and maintenance revenue. The increase in gross margin in fiscal 2002
from fiscal 2001 was primarily due to the reduction in cost of services
described above.
We expect the cost of services to increase in fiscal 2004 as a result of an
expected increase in professional services revenue. We expect gross margin on
services to be in the range of 45 to 55 percent. This range is driven by the mix
between professional services and support and maintenance revenue and the
utilization rate of our professional services personnel. 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
lower or negative gross margins.
HARDWARE AND OTHER.
The cost of hardware and other revenue consists primarily of out-sourced
manufacturing and in-house labor costs associated with the manufacturing of our
mobile information management hardware products. The increase in gross margin
from hardware and other revenue from fiscal 2001 to 2002 was primarily the
result of a significant decrease in unit sales of mobile information management
hardware products, including XTNDAccess IrDA Printer Adapters and our enterprise
Internet appliance products. The negative cost of hardware and other revenue in
fiscal 2003 was primarily due to a decrease in the inventory accrual for
Internet appliance products at our German subsidiary.
We expect the cost of hardware and other revenue to be insignificant in fiscal
2004.
24
Research and Development Expenses
- ---------------------------------
FISCAL YEAR ENDED JUNE 30,
2003 %CHANGE 2002 %CHANGE 2001
--------------------------------------------------
Research and development.... $ 7,173 (28)% $10,030 (19)% $ 12,446
as a % of net revenue..... 26% 45% 46%
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 fiscal
2003 and fiscal 2002 as compared to the prior years was primarily the result of
a reduction in personnel costs and consulting costs subsequent to our
restructurings. We were able to reduce research and development costs in fiscal
2003 and fiscal 2002 as a result of completing the fundamental development work
for our OneBridge Mobile Groupware platform (formerly XTNDConnect Server) upon
which our current data synchronization and management product offerings are
built. At June 30, 2003 we had 62 full-time equivalent research and development
personnel, a decrease from the 79 full-time equivalent personnel at the same
time last year and 118 at June 30, 2001.
In connection with our acquisition of ViaFone in August 2002, we incurred an
in-process research and development charge of $430,000 in fiscal 2003.
In fiscal 2004, we expect our research and development costs to decrease as
compared to fiscal 2003 as a result of a reduction in personnel costs subsequent
to our restructurings.
Marketing and Sales Expenses
- ----------------------------
FISCAL YEAR ENDED JUNE 30,
2003 %CHANGE 2002 %CHANGE 2001
--------------------------------------------------
Marketing and sales......... $ 14,482 7% $ 13,489 (23)% $ 17,542
as a % of net revenue..... 53% 61% 65%
Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our sales, marketing, and pre-sales support staff, and
promotional expenses. The increase in marketing and sales expenses in fiscal
2003 compared to fiscal 2002 was primarily due to an increase in personnel costs
of approximately $1.2 million, offset in part by a decrease in promotional
expenses of approximately $600,000. The decrease in marketing and sales expenses
for fiscal 2002 compared to fiscal 2001 was primarily due to a reduction in
personnel costs subsequent to our restructurings in fiscal 2001 and 2002 and a
reduction in promotional expenses of approximately $2.2 million. At June 30,
2003, we had 104 full-time equivalent marketing, sales, and support personnel
and contractors, as compared to 112 full-time equivalent personnel and
contractors at the same time last year and 137 at June 30, 2001.
We expect marketing and sales expenses to increase in fiscal 2004 as a result of
an expected increase in revenue, although we expect these expenses to decrease
as a percentage of net revenue. We expect that the increase in marketing and
sales expenses in fiscal 2004 will be primarily attributable to increased sales
compensation.
General and Administrative Expenses
- -----------------------------------
FISCAL YEAR ENDED JUNE 30,
2003 %CHANGE 2002 %CHANGE 2001
-----------------------------------------------
General and administrative.... $ 4,889 12% $ 4,381 (39)% $ 7,169
as a % of net revenue....... 18% 20% 27%
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 fees and directors' and
officers' insurance costs. The increase in general and administrative expenses
in fiscal 2003 compared to fiscal 2002 was primarily attributable to an increase
in legal fees of approximately $1.1 million related to our patent litigation
with Pumatech, offset in part by a decrease of approximately $400,000 in
personnel costs resulting from our restructurings in prior quarters and a
decrease in bad debt expense of approximately $300,000. The decrease in general
and administrative expenses in fiscal 2002 compared to fiscal 2001 was primarily
attributable to $1.4 million of expenses incurred in fiscal 2001 associated with
our terminated merger with Palm, Inc., a decrease of approximately $400,000 in
bad debt expense and a decrease in personnel costs subsequent to our
restructuring
25
completed in fiscal 2002. These decreases were offset in part by
an increase in legal fees in fiscal 2002 of approximately $160,000 related
primarily to our patent litigation with Pumatech.
We expect general and administrative expenses to increase in fiscal 2004 as a
result of an expected increase in legal fees associated with the Pumatech
litigation as we approach our April 2004 trial date and an expected increase in
directors' and officers' insurance. We also expect to report increased non-cash
compensation expense as a result of a change in the compensation plan for our
independent board of directors. At June 30, 2003, we had 21 full-time equivalent
employees in administration, as compared to 35 full-time equivalent personnel at
the same time last year and 55 at June 30, 2001. No general and administrative
personnel were added with our acquisition of ViaFone.
Amortization of Goodwill
- ------------------------
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 fiscal year
2003. Amortization of goodwill was $925,000 for fiscal 2002 and fiscal 2001 and
was reflected in our statement of operations as an operating expense.
We report amortization of non-goodwill intangibles, primarily consisting of
purchased technology, as a component of cost of license fees and royalty
revenue. Amortization of non-goodwill intangibles was $726,000 for fiscal 2003
and $582,000 for each of the fiscal years 2002 and 2001. The net increase in
fiscal 2003 compared to 2002 and 2001 results from the addition of non-goodwill
intangibles in connection with our acquisition of ViaFone. This increase was
partially offset by a decrease in amortization resulting from our adoption of
SFAS No. 142, which resulted in $138,000 of intangible assets, comprised of
assembled workforce intangibles, being reclassified as goodwill in the first
quarter of fiscal 2003.
We expect a decrease in amortization of non-goodwill intangibles in fiscal 2004
as a result of a portion of our purchased technology becoming fully amortized in
the first quarter in fiscal 2004.
Restructuring Charge
- --------------------
We recorded $597,000 in workforce reduction costs during fiscal 2003, consisting
primarily of severance, benefits, and other costs related to the termination of
31 employees in research and development, marketing and sales, manufacturing,
and administration, of which 24 were located in the United States, 3 in Canada
and 4 in Europe. As of June 30, 2003 we had paid $409,000 of these charges. The
remaining balance of $188,000 will be paid in the first two quarters of fiscal
2004.
During the first quarter of fiscal 2003 we also assumed a restructuring
liability in connection with our acquisition of ViaFone. Prior to our
acquisition of the company, ViaFone had implemented a restructuring program that
resulted in charges for workforce reduction costs, costs related to closing its
office in France and excess facilities costs related to lease commitments for
space no longer used in Brisbane, California. At the time we completed the
ViaFone acquisition, there were $993,000 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
June 30, 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 $534,000. We expect to pay $145,000 in each of the
next three 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
-----------------------------------
Restructuring charges incurred in fiscal 2001.................. $1,096 $ -- $1,096
Cash payments.................................................. -- -- --
-----------------------------------
Balance at June 30, 2001....................................... 1,096 -- 1,096
Restructuring charges incurred in fiscal 2002.................. 213 -- 213
Cash payments.................................................. (1,309) -- (1,309)
-----------------------------------
Balance at June 30, 2002....................................... $ -- $ -- $ --
Restructuring charges incurred in fiscal 2003.................. 597 -- 597
Restructuring accrual assumed with ViaFone acquisition......... 266 1,023 1,289
Adjustment to the accrual assumed with ViaFone acquisition..... (14) -- (14)
Cash payments.................................................. (661) (489) (1,150)
-----------------------------------
Balance at June 30, 2003....................................... $ 188 $ 534 $ 722
===================================
26
In the first quarter of fiscal 2004 we expect to record a restructuring charge
of approximately $1.2 million, consisting primarily of severance costs. This
charge is primarily related to severance charges resulting from the August
resignation of Steven Simpson, the company's former President and Chief
Executive Officer, in addition to a workforce reduction to be completed in the
first quarter of fiscal 2004. The restructuring charge reflects approximately
$450,000 in non-cash compensation resulting from accelerated vesting of employee
stock options. Of the remaining $750,000, $300,000 is expected to be paid prior
to the end of September and $450,000, including $350,000 of severance payable to
Mr. Simpson, will be paid over the next 14 months. The company expects an
operating expense decrease of approximately $300,000 per quarter as a result of
the restructuring that will be completed in the first quarter of fiscal 2004.
Other Expense (Income)
- ----------------------
FISCAL YEAR ENDED JUNE 30,
2003 %CHANGE 2002 %CHANGE 2001
----------------------------------------------------------
Foreign currency exchange (gain) loss..... $ (261) 302% $ 129 128% $ 1
Interest (income)......................... (39) (66) (115) (59) (281)
Other net expense (income)................ 43 (530) (10) (94) (177)
-- --- --
-------- -------- --------
$ (257) 6,525% $ 4 (101)% $ (457)
======== ======== ========
Other expense and income consists primarily of foreign currency exchange gains
or losses related to the mark-to-market of intercompany amounts owed to us by
our international subsidiaries and interest income earned on cash, cash
equivalents and short-term investment balances. We recognized a foreign currency
exchange gain in fiscal 2003 as a result of a decrease in the strength of the
U.S. dollar in the fourth quarter at a time when we were not entering into
foreign currency forward contracts. In fiscal 2002, we recognized an exchange
loss as a result of our intercompany balance forecasts differing from
projections in a period of currency volatility. For additional information on
our foreign currency exposure see Item 7A of this Form 10-K. Interest income
declined in fiscal 2003 and 2002 due to a decline in the amount of cash invested
and declines in short-term interest rates during fiscal 2003 and 2002.
We are not using foreign currency forward contracts to manage fluctuations in
the value of foreign currencies on transactions with our foreign subsidiaries
for the first quarter of fiscal 2004. As a result, we expect to report a foreign
exchange loss in a range of $50,000 to $100,000 in the first quarter of fiscal
2004 as a result of the U.S. dollar strengthening significantly relative to the
euro, British pound sterling and Canadian dollar in the first quarter. The
amount of any foreign currency exchange gain or loss for the remaining quarters
of fiscal 2004 will depend upon currency volatility, the amount of our
intercompany balances and whether we decide to enter into foreign currency
forward contracts in future quarters. We expect interest income to increase in
fiscal 2004 as a result of an expected increase in cash, cash equivalents and
short-term investments resulting from the sale-and-leaseback of our building in
Boise, Idaho, the expected sale of excess land and cash we expect to generate
from our operations in fiscal 2004.
Interest Expense
- ----------------
Interest expense consists primarily of warrant expense amortization related to
entering into our line of credit agreement with Silicon Valley Bank in January
2002 and interest paid on the Silicon Valley Bank term debt that we assumed in
connection with our acquisition of ViaFone in August 2002. Interest expense
increased to $307,000 in fiscal 2003 from $70,000 in fiscal 2002 primarily as a
result of interest expense related to our assumption of $1.1 million of term
debt in connection with the ViaFone acquisition and as a result of fiscal 2003
including a full year of warrant amortization. We had no interest expense or
debt in fiscal 2001.
We expect interest expense to increase by approximately $325,000 in fiscal 2004
as a result of entering into the sale-and-leaseback agreement for our building,
which will be accounted for as a financing transaction.
Income Tax Provision (Benefit)
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FISCAL YEAR ENDED JUNE 30,
2003 %CHANGE 2002 %CHANGE 2001
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Income tax provision (benefit)............ $ (200) 91% $ (2,257) (131)% $ 7,228
as a % of income (loss) before taxes...... (5)% (24)% 38%
27
The income tax benefit decreased in fiscal 2003 compared to fiscal 2002
primarily as a result of recording an income tax benefit of approximately $1.6
million in the third quarter of fiscal 2002 for the refund we received as a
result of the temporary increase in the net operating loss carryback period
created by the Job Creation and Worker Assistance Act of 2002. The change in the
income tax provision or benefit in fiscal 2002 compared to fiscal 2001 was
primarily a result of recording income tax expense in the fourth quarter of
fiscal 2001 to set up a full valuation allowance for our net deferred tax assets
and recognizing the $1.6 million income tax benefit in fiscal 2002.
We expect to record an income tax provision of approximately $125,000 in fiscal
2004 related to payments of foreign taxes. We expect that any provisions we
would otherwise record will be offset by our deferred tax assets.
BUSINESS COMBINATIONS
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In August 2002, we completed our acquisition of ViaFone. For information on this
acquisition and the acquisition of AppReach completed in February 2002, see
"Note 7. Business Combinations" in the Notes to Consolidated Financial
Statements of this report.
RESULTS OF DISCONTINUED OPERATIONS
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In each of our fiscal years ended 2003, 2002, and 2001, we exited a historical
business which no longer fit into the company's strategy for becoming the global
leader in providing mobile solutions for the enterprise.
In the first quarter of fiscal 2003, we adopted a formal plan to exit our
infrared hardware business as a result of an expected decline in sales of these
products and our desire to increase our focus on our core software businesses.
Throughout the year we continued to see revenue from this business as customers
placed final orders. As of June 30, 2003, the business has been successfully
wound-down. We have stopped accepting new orders and we are shipping final
orders.
On June 12, 2002, we completed the sale of Extended System