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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 000-23597
EXTENDED SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 82-0399670
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5777 NORTH MEEKER AVENUE, BOISE, ID 83713
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (208) 322-7575
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of such stock on December 31, 2003 as
reported on the Nasdaq National Market, was approximately $52 million. Shares of
common stock held by each officer and director and by each person who own 5% or
more of the outstanding shares of common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of September 24, 2004, there were 15,101,701 shares outstanding of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders, to be filed subsequently, are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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EXTENDED SYSTEMS INCORPORATED
FISCAL YEAR 2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I.
Item 1. BUSINESS 4
Item 2. PROPERTIES 16
Item 3. LEGAL PROCEEDINGS 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 17
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 19
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 46
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 46
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 47
Item 9A. CONTROLS AND PROCEDURES 47
Item 9B. OTHER INFORMATION 47
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 47
Item 11. EXECUTIVE COMPENSATION 48
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 48
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 49
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 50
SIGNATURES 76
3
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS. IN THIS FORM 10-K, THE WORDS "MAY", "SHOULD", "EXPECTS,"
"ANTICIPATES," "BELIEVES," "INTENDS," "WILL", "SHOULD", "ESTIMATES", "PREDICTS",
"POTENTIAL", "CONTINUE", "STRATEGY", "PLANS", "OUTLOOK", "COULD", "PROJECT",
"FORECAST" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH
ARE BASED UPON INFORMATION CURRENTLY AVAILABLE TO US, SPEAK ONLY AS OF THE DATE
HEREOF AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. WE ASSUME NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE
RESULTS AND MARKET PRICE OF STOCK." YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED IN OTHER DOCUMENTS THAT WE FILE FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION, INCLUDING OUR QUARTERLY REPORTS ON FORM 10-Q TO BE
FILED IN FISCAL 2005. ALL PERIOD REFERENCES ARE TO OUR FISCAL YEARS ENDED JUNE
30, 2005, 2004, 2003 AND 2002, UNLESS OTHERWISE INDICATED.
PART I
ITEM 1. BUSINESS
OVERVIEW
We provide the expertise and solutions to help companies streamline their
business processes and accelerate product development through our adaptive
mobility software. Our software allows corporate enterprises, application
developers and device manufacturers to share, exchange, collaborate, manage and
deploy data effectively and easily across a wide range of mobile devices. This
creates a mobile ecosystem that accelerates companies into the mobile world.
Examples of our successes include:
o Deployment of our mobile applications in approximately 2,500
enterprise companies such as ThyssenKrupp, Airbus, BASF, and
DaimlerChrysler.
o Our software is being used in application development by approximately
1,500 independent software developers working for application software
vendors such as HDC Healthcare, QAD, Unique Solutions, m.able, and The
Messaging Architects.
o Integration of our technology into mobile devices or shipped together
with mobile phones by device manufacturers such as Siemens, Motorola,
SonyEricsson, palmOne, Panasonic, LG Electronics, Toshiba and Hewlett
Packard.
Founded in 1984, we are incorporated under the laws of the state of Delaware
with our headquarters located in Boise, Idaho. Our Internet address is
HTTP://WWW.EXTENDEDSYSTEMS.COM. On the "Investor Relations" section of our web
site, we post links to the following filings as soon as reasonably practicable
after they are electronically filed with or furnished to the United States
Securities and Exchange Commission (SEC): our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended. All such filings are available free
of charge. Information on our web site does not constitute a part of this Annual
Report on Form 10-K.
Our strategy is to:
o Build and maintain a full range of mobile products, technologies and
services that address the mobile application, mobile data management
and wireless connectivity needs of our customers.
o Deploy a worldwide sales, marketing, support and consulting
organization to serve our global 5000 customer base. Our organization
allows us to build customer intimacy with these enterprise customers
and facilitate their deployment of our software across multiple
geographies and industries.
o Provide leadership in the mobile connectivity market by continuing to
leverage alliances with wireless operators, mobile device
manufacturers and application developers within a variety of
industries. We also plan to maintain and expand our alliances with top
device manufacturers, semiconductor companies and application
developers that have a deep knowledge of their respective customer
base and industry. These
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alliances enhance our ability to develop innovative technology
products and influence the development of new platforms and protocols.
o Build a portfolio of mobile applications that are based on our
OneBridge Mobile Platform to market and sell to our customers through
both our direct to enterprise sales force and through our existing
global network of resellers, distributors and other channel partners.
These mobile applications will be developed internally by our
engineers and will be licensed from independent software development
companies.
o Acquire complementary businesses and technologies and integrate them
into our mobile strategy. In order to broaden our product offering and
extend our distribution channels, we have in the past and intend in
the future to pursue acquisitions of, and investments in, companies
with complementary products, technologies or distribution networks.
o Maintain and grow our existing base of network application developers
that use our enterprise database solutions as part of the applications
they offer to their customers. Additionally, we plan to expand our
application developer partnership network by marketing and
communicating the advantages of our recent product expansion and
enhancements.
INDUSTRY BACKGROUND
The use of mobile devices has increased tremendously as notebook computers,
personal digital assistants (PDAs) and mobile phones have achieved acceptance
and have become more advanced and increasingly capable of running complex
applications. Improvements in mobile technology and wireless infrastructure are
facilitating the ability to exchange both personal and corporate information,
thereby enabling mobile devices to be used for both data and voice applications.
IDC, a leading provider of technology and market data, predicts that 38.8
million converged mobile devices (devices that support both voice and data
capabilities) will ship in 2005 and 99.4 million will ship in 2008. IDC also
predicts that the United States population of mobile workers will reach 104.6
million by 2006. InStat/MDR, an analyst firm that follows the Bluetooth market,
forecasts Bluetooth chipset unit shipments will increase from 69 million in 2003
to 720 million in 2008; a compound annual growth rate of 60 percent. Revenue
from Bluetooth chips alone will reach $1.7 billion in 2008.
Mobile device manufacturers, corporate enterprises and application developers
face pressure to provide increased mobile functionality and proven value
propositions for their devices and applications. Many of these manufacturers,
enterprises and developers seek to incorporate mobile data communication
capabilities to enhance existing services or expand into new markets. Providing
flexible information access has historically been cumbersome and expensive
because it required combining products from multiple companies to arrive at a
mobile solution. The mobile ecosystem alone, while providing much of the
enabling technology, isn't sufficient to meet the needs of enterprises seeking a
solution that requires security and flexible support for applications across a
broad range of networks and devices.
There is a growing awareness of how mobile solutions can positively impact
company profitability, competitiveness, workforce productivity, time-to-market
and market leadership. Interest in the enabling devices and software has
resulted in the creation of a new market category. As companies have become
confident in the positive returns on investment from mobility projects, they
have been increasingly funding mobility projects to streamline their business
processes. Additionally mobile device manufacturers have increased their
reliance on short-range wireless connectivity software vendors to accelerate
their product development cycles.
With the growing adoption of ever-more powerful mobile devices based on multiple
operating systems, the availability of wireless networks using a myriad of
different technologies, and the requirement of mobile devices to support a wide
range of applications, a mobile middleware solution is required for enterprises
to deploy these technologies given the complexity inherent in a highly
heterogeneous ecosystem. These requirements include:
CORPORATE ENTERPRISES
Enterprises seek to advance their business by investing in mobility solutions
that use existing infrastructures, streamline business processes, increase
employee productivity, maintain corporate data security and deliver a clear
return on investment. As a result, enterprises require a solution that provides:
o MIDDLEWARE PLATFORM. Enterprises need a solution that enables
corporate information and data to be accessed, viewed and updated by
workers that are disconnected from the traditional wired corporate
infrastructure. The solutions must support a constantly evolving and
wide-range of mobile devices and
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operating systems. Additionally, the solution needs to support the
ability to access data from the multiple and often disparate
information systems that comprise the enterprise's IT environment. The
solution needs to support both the applications enterprises have
deployed today plus the applications they plan for the future.
o MOBILE MANAGEMENT AND SECURITY. Enterprises require data security. In
addition, enterprises increasingly require the ability to manage and
deploy mobile devices and applications with a similar infrastructure
so that enterprises can leverage their existing security protocols and
preferences.
o GROUPWARE APPLICATION. Enterprises have become dependent on the
exchange of e-mail, contact and calendar information. It is important
for them to be able to deploy this type of data on mobile devices
efficiently, cost effectively and easily.
o MOBILE WORKFORCE APPLICATIONS. Enterprise workforces have become
increasingly mobile to improve productivity and enhance customer
interaction. Enterprises require proven applications that can be
deployed on mobile devices for tasks such as sales force automation,
field service management, real-time collaboration and data access.
MOBILE APPLICATION DEVELOPERS
Application developers seek to expand their business by developing and selling
applications that will meet the demands of their customers. Increasingly their
customers are requesting applications for the mobile workforce that improve
workforce productivity and maintain data security. As a result, application
developers require a solution that provides:
o MIDDLEWARE PLATFORM. Application development organizations need a
solution that enables them to broaden their product offering by
mobilizing existing applications or developing new mobile applications
that they market and sell to enterprises. The solutions need to
support the current wide-range of mobile devices and operating systems
available in the marketplace plus evolve as new devices and operating
system updates come to market. The solutions must also provide
connectivity and the ability to extract information and data from the
wide-range enterprise application systems available in the
marketplace.
o MOBILE MANAGEMENT AND SECURITY. Applications development organizations
require a solution that assures their products can exchange data
securely and that their products are able to manage and deploy mobile
devices and applications.
o DATABASE SYSTEM. Application development organizations often choose a
database that is designed for lowest total cost of ownership and is
easy to manage across servers and mobile devices. Other important
aspects include the speed and reliability of the database as well as
the product's ability to scale and easily increase the number of
client users.
MOBILE DEVICE MANUFACTURERS
Mobile device manufacturers include companies who develop and market equipment
such as cellular phones, PDAs, converged devices, notebooks and even
automobiles. Device manufacturers seek to accelerate their time-to-market and
revenues with new mobile devices and applications that incorporate the latest
technologies and standards. As a result, manufacturers require a solution that
provides:
o MOBILE STANDARDS. With short development cycles and a requirement to
support a wide-range of mobile standards, manufacturers look for
solutions that support standards such as Bluetooth, IrDA and SyncML to
reduce the complexity of their product release.
o MOBILE PROFILES. The value of mobile devices is through the exchange
of information. Manufacturers want a solution that will communicate
with other devices but also has the framework to exchange data with a
wide range of applications.
o GROUPWARE APPLICATION. One of the first types of applications deployed
with mobile devices is exchange of contact, calendar and e-mail data
from the phone, PDA or converged device to a computer. Device
manufacturers often choose to bundle software that allows the mobile
devices to exchange this data with desktop and laptop PCs, enterprise
servers or the head unit of an automobile.
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OUR SOLUTION
We design, develop, sell and support adaptive mobile software that accelerates
development and deployment of solutions for corporate enterprises, applications
developers and device manufacturers. We have designed our products to:
o ENABLE MOBILE DATA MANAGEMENT. Our products enable enterprises,
developers and device manufacturers to access, synchronize and manage
information between mobile devices and computers, either directly to
the desktop or through enterprise networks. Using our products,
enterprises can connect their users wirelessly to a wide range of
devices; manage information between their mobile devices application
servers such as enterprise messaging including, Microsoft Exchange and
IBM Notes; enterprise applications, such as customer resource
management (CRM) and enterprise resource management (ERP) including
Siebel and SAP; or enterprise databases via JDBC, XML data sources,
and ODBC database connectors.
o INCREASE PRODUCTIVITY AND USABILITY OF MOBILE DEVICES. Our adaptive
mobility products and services improve the management of information
and applications and provide convenient, wireless connectivity. These
products enable users to share data between their mobile devices on
demand accessing information over the wireless internet to enterprise
applications and database servers. We believe our products help mobile
users, developers and enterprises increase their productivity by using
mobile devices for a variety of new tasks.
o INCREASE VALUE AND USAGE OF MOBILE DEVICES AND COMMUNICATIONS
SERVICES. Our products provide the tools to enable device
manufacturers and application developers to design and enhance
products to meet the needs of both enterprises and users. Because our
technology enables cost-effective communication and the ability to
easily manage many disparate devices, we believe device manufacturers
and application developers are able to increase the value of the
products they sell, thereby encouraging increased adoption of those
products. In addition, we believe the increased adoption of mobile
devices will, in turn, drive increased usage of and loyalty to
providers of mobile communications services, thereby increasing
service providers' revenue opportunities and minimizing their costs.
o ENABLE WIRELESS CONNECTIVITY. Our products facilitate enterprise
automation and effective mobile workforce management by providing
wireless connectivity between disparate mobile devices and between
mobile devices and personal computers or enterprise networks. Our
products enable mobile workers to access networks or peripherals
within enterprise facilities and enable enterprises to extend
applications to users beyond the network environment and over the
Internet, without physical connections.
Our solutions for enterprise, developer and device manufacturers include:
ENTERPRISE MOBILITY SOLUTIONS
Our OneBridge family of products includes our OneBridge mobile middleware
platform, which provides the foundation upon which enterprise applications can
be extended to mobile workers. Increasing the productivity of mobile workers
through mobile applications requires a dependable, fault tolerant architecture
that ensures high availability of the application and data even when the
wireless networks are not available. The OneBridge platform delivers high
availability mobile business solution based on an open architecture model, which
allows enterprises to optimize their solutions over the current heterogeneous
environment of devices and networks. The product is offered in two
components--mobile platform and enterprise applications. The platform provides
the foundation for support for a wide range of mobile devices, communication for
both wired and wireless environments, authentication of users, enhanced device
security features, encryption of data, software deployment, reporting tools and
device management. Our enterprise applications provide a comprehensive suite of
pre-built applications that extends existing enterprise systems to mobile
devices such as groupware applications, sales force automation (SFA), customer
relationship management (CRM) and enterprise resource planning (ERP)
applications.
ONEBRIDGE MOBILE PLATFORM
o ONEBRIDGE MOBILE DATA SUITE gives enterprises the power to extend
enterprise applications to mobile workers. Our platform supports
mobile operating systems such as Microsoft Pocket PC, Microsoft Smart
Phone, Microsoft Windows, Palm OS, Symbian and browser-enabled mobile
phones. It provides a comprehensive set
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of mobility engines for pushing data, synchronizing data, accessing
data in real-time and creating transaction extensions to enterprise
applications. It also addresses issues such as encryption,
authenticated access, configuration and deployment of mobile devices.
Built on industry standard technologies like WAP, XML, LDAP, Web
Services and SyncML, it provides the capability to connect enterprise
applications to mobile applications. OneBridge Mobile Data Suite also
offers advanced adapters into various enterprise servers such as
Microsoft Exchange, IBM Notes, Siebel Sales, SAP, TIBCO, Microsoft SQL
Server, Oracle Database Server and others allowing existing systems to
be extended to a mobile world.
o ONEBRIDGE MOBILE SECURE enables enterprises to extend the
organization's security, data management, and access management
standards and policies to mobile devices. It allows administrators to
manage mobile users, mobile devices and mobile data whether the device
is connected, periodically connected or unconnected to the enterprise.
ONEBRIDGE MOBILE APPLICATIONS
o ONEBRIDGE MOBILE GROUPWARE delivers e-mail and PIM (calendar, contacts
and tasks) data to mobile workers when and where they need it
regardless of the device used, the connection method or the groupware
application. OneBridge Mobile Groupware provides users the option to
proactively "push" data to their device, access information online in
real-time, or synchronize data for use offline. OneBridge Mobile
Groupware supports both Lotus Domino and Microsoft Exchange servers
and Novell GroupWise through a third party partner, The Messaging
Architects.
o ONEBRIDGE MOBILE SALES allows an enterprise sales team using
smartphones or handheld devices to manage contacts, opportunities,
sales orders, and to update forecasting information while leveraging
existing SFA, ERP, and other enterprise solutions in the field.
o ONEBRIDGE MOBILE PHARMA is designed specifically for sales associates
within the pharmaceutical and related industries, that allows sales
associates to review and edit practitioner and institution
information, plan and report on their visits with target physicians,
share clinical studies, track samples, and even submit expense reports
and timesheets during downtime between appointments.
o ONEBRIDGE MOBILE FIELD SERVICE is a series of templates customers can
leverage to build a proprietary mobile solution that integrates with
their existing field service processes. It gives field technicians the
ability manage work orders, schedule appointments, prepare for service
calls en route, retrieve and update spare parts inventories, and
gather customer information and electronic signatures.
o XTNDCONNECT PC is a flexible desktop-based solution that enables
enterprise mobile users to synchronize and manage contacts, calendars,
tasks, e-mail, and notes between their mobile device and popular
personal computer applications such as Microsoft Outlook, Microsoft
Outlook Express and IBM Lotus Notes.
ENTERPRISE DATABASE SOLUTIONS
We provide enterprise developers, application software developers and value
added resellers with an enterprise database solution. We offer a complete, high
performance client/server data management system for stand-alone, networked,
Internet, and mobile database applications. Our product offering allows
developers the flexibility to combine powerful SQL statements and relational
data access methods with the performance and control of navigational commands.
It provides native development interfaces designed to leverage existing
knowledge of popular development environments. Using optimized data access it
provides security, stability, and data integrity with zero administration. Our
enterprise database solutions offer application developers a product that can
meet their demands for proven reliability, performance, and functionality as
well as a cost-effective solution for virtually any application development
environment.
o ADVANTAGE DATABASE SERVER is a scalable, client/server relational
database management system for networked, stand-alone, mobile and
Internet database applications. It allows developers to combine
powerful SQL statements and relational data access methods with the
performance and control of navigational commands and is designed to
deliver a low total cost of ownership with zero administration, making
it ideally suited for business environments without database
administrators.
o ADVANTAGE LOCAL SERVER allows Advantage Windows and Linux applications
access to data files located locally, in shared environments, and in
peer-to-peer environments. The Advantage Local Server is a
non-
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client/server solution and can be used to access data on computers
that are not running the Advantage Database Server. The Advantage
Local Server is a DLL for Windows and a shared object for Linux.
Advantage Local Server resides on the client machine and is called
directly, instead of sending requests to a remote Advantage Database
Server.
o ADVANTAGE REPLICATION allows Advantage Database Server customers to
maintain identical database information at distributed locations.
Advantage Replication is available via Extended Systems OneBridge
Mobile Data Suite. Replication allows for the synchronization of data
and/or subsets of data in a database across one or more systems. Using
replication, a consistent view of a database can be maintained.
OneBridge allows for scheduled replication of an Advantage database
from a corporate server to branch servers, as well as replication from
an Advantage server to a desktop, laptop, or mobile device.
o ADVANTAGE CLIENT SOLUTIONS AND DEVELOPMENT TOOLS are native and
seamless in their integration into existing applications allowing
replacement of existing database drivers with fully compatible
Advantage drivers. Advantage clients allow for development of new
applications in a wide variety of environments.
MOBILE DEVICE SOLUTIONS
Our mobile embedded products help manufacturers to streamline the development
process and rapidly integrate short-range wireless connectivity and
synchronization into converged mobile devices, mobile phones, PDAs, Microsoft
PC's and other mobile devices. Our products permit device manufacturers to
wirelessly connect and exchange data using either Bluetooth short-range radio
frequency or IrDA (Infrared Data Association) infrared technology, thereby
creating easy-to-use wireless connections. We have developed a complete suite of
embedded software development kits (SDKs) for use by device manufacturers
including handset and PDA manufacturers, original equipment manufacturers (OEM),
original design manufacturers (ODM) and contract electronics manufacturers
(CEM).
o XTNDACCESS BLUE SDK provides an efficient way to add reliable
Bluetooth radio communications and mobile profiles to embedded
devices. This software development kit is on the Bluetooth Special
Interest Group (SIG) Qualified Product List and includes certified
mobile profiles for Generic Access Service Discovery, Serial Port, FAX
and Dial-up Networking. Additional profile support is also available.
o XNTDACCESS IRDA SDK is a complete infrared software development kit
that provides an efficient way to add reliable IrDA-compliant
communications to embedded devices. The XTNDAccess IrFM SDK is an
add-on to the XTNDAccess IrDA SDK and provides the source code, tools
and documentation required to implement IrFM (infrared for financial
messaging) on a Personal Trusted Device (PTD) or a Point of Sales
(POS) terminal. It allows applications to perform a full array of
financial messaging transactions utilizing the IrFM Point and Pay
Profile.
o XTNDAccess IrDA Test Suite is a complete financial messaging and
object exchange (OBEX) application test tool and provides a set of
customizable tests that enable developers to quickly and easily test
their IrFM, POS, and PTD devices as well as OBEX-based mobile
communications applications. The test suite reduces the cost and time
needed to develop, test and debug IrFM and OBEX-based products.
o XTNDACCESS DATA SYNC CLIENT SDK is a client toolkit that enables
developers to implement the Data Sync synchronization protocol for a
wide range of embedded devices. Designed for client devices such as
cell phones, smart phones and personal digital assistant, the kit
provides a complete set of tools including portable source code,
easy-to-use API's and comprehensive documentation.
o XTNDCONNECT PC provides device manufacturers with a synchronization
solution that manages contacts, calendars, tasks, e-mail, and notes
between their mobile device and popular personal computer applications
such as Microsoft Outlook, Microsoft Outlook Express and Lotus Notes.
It is bundled with devices and supports 26 languages.
COMPETITION
The markets for our products are rapidly evolving and intensely competitive.
Further, the markets for our mobile product solutions are relatively new and
characterized by frequent product introductions, changing protocols and rapidly
developing technology. As mobile devices continue to grow in power and usage and
become a major component of enterprise information management, we expect new
competitors to enter these markets and existing
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competitors to expend increasing resources to develop enterprise mobility
database and mobile device solutions. As a result, we expect competition in
these markets to intensify.
ENTERPRISE MOBILITY SOLUTIONS
MOBILE APPLICATION SOLUTIONS
Our mobile groupware solutions and other mobile applications compete primarily
with products offered by iAnywhere, IBM, Infowave, Intellisync, Microsoft, JP
Mobile and RIM. We also compete with numerous smaller companies with customized
product offerings that focus on a particular vertical mobile application. We
believe that the primary competitive factors for these products are:
o ability to support a broad range of mobile device platforms and
multiple modes of synchronization such as push and browse;
o ability to combine groupware, device management, security and mobile
applications in a single platform;
o ability to support Microsoft Exchange, IBM Notes and Novell GroupWise
environments;
o speed and security of synchronization;
o ability to quickly and easily extend enterprise platforms, such as
SAP, Siebel, Oracle and DB2data, and applications to mobile devices;
and
o the solution providers' experience in the vertical market segment.
MOBILE PLATFORMS SOLUTIONS
Our mobile solutions platforms and tools compete primarily with products offered
by Dexterra, Everypath, iAnywhere (a division of Sybase), IBM, SAP, Intellisync
and Microsoft. We believe that the primary competitive factors for these
products are:
o ability to support a broad range of mobile device platforms and
multiple modes of synchronization such as push and browse;
o ability to combine groupware, device management, security and mobile
applications in a single platform;
o ability to quickly and easily extend enterprise platforms, such as
SAP, Siebel, Oracle and DB2data, and applications to mobile devices;
and
o the solution providers' experience in the vertical market segment.
ENTERPRISE DATABASE SOLUTIONS
Our client/server database products compete primarily with products offered by
Microsoft, through its SQL Server product, Interbase, Pervasive Software and
Oracle, through its Oracle Lite server product. We believe that the primary
competitive factors for these products are:
o ease of integration into developers' applications;
o the total cost of ownership;
o ease of use without a database administrator; and
o speed and reliability.
MOBILE DEVICE SOLUTIONS
Our short-range wireless connectivity product solutions and embedded desktop
synchronizations products compete primarily with in-house development and
products offered by IVT Corporation, Link Evolution, Open Interface, Agilent,
Intellisync, Embednet, CSR, Broadcom, Stonestreet One, and Telica. We believe
that the primary competitive factors for these products are:
o ability to support a broad range of user profiles and mobile device
platforms;
o interoperability between mobile devices;
o easy porting to any device platform; and
o on-going support for the latest industry specifications.
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We believe our solutions are differentiated from our competitors. Some of our
competitors, particularly platform providers, generate a substantial amount of
their sales from non-mobile solutions. Due to their less dedicated focus on the
mobility market, their solution offerings meets a narrower range of customer
mobility needs. For example, they tend to focus on a more limited set of mobile
devices or enterprise application solutions. We believe that our combined focus
on 1) delivering mobile application solutions that address specific business
requirements for our customers, 2) continuing our commitment to deliver an open
architected platform, and 3) securing the support of a growing number of
application vendors will continue to allow us to be successful. We have also
established a large customer base that relies on our solutions to streamline
their business processes and accelerate product development through our mobility
solutions. In addition, the mobility market is relatively new and is
characterized by frequent product introductions and new technology standards
that require a research and development and marketing organization that can
adapt and deliver solutions that meet customer needs. We believe our focus on
mobile solutions, our existing customer base and our flexibility to adapt to the
evolving market gives us an important differentiator in the marketplace.
PRODUCT DEVELOPMENT/RESEARCH AND DEVELOPMENT
OUR PRODUCT DEVELOPMENT OBJECTIVES ARE TO:
o develop the infrastructure and applications to provide solutions for
mobilizing and provisioning back-end enterprise systems;
o provide customers solutions of high quality, robust functionality, and
low overall total cost of ownership; and
o use industry and technology standards, where appropriate, across the
broadest array of enterprise devices.
Our product development staff is organized into teams consisting of software
engineers, software quality assurance engineers, technical writers, project
leads, and product managers. Working closely with our customers, analysts, and
sales & marketing consultants, we determine product functionality based upon
market requirements. We also factor in user feedback, which we obtain from our
sales force, technical support and professional services groups. In addition, we
strive to incorporate standard technologies where possible to minimize research
and development costs and ensure interoperability with other business solutions
employed by our customers.
In August 2003, we released a major upgrade to the OneBridge Mobile Groupware
platform, version 4.0. The platform helps enterprises to manage and extend the
Groupware solution to a variety of mobile devices through wired and wireless
connectivity. It provides users with the ability to browse, sync and push their
e-mail and contacts, calendar and task (PIM) information from both thin-client
and rich-client devices so they are up-to-date wherever they are. In addition,
it provides IT organizations with the ability to manage and secure a host of
different devices using a central server-based management system through the
authentication of users using established corporate authentication systems,
end-to-end encryption using FIPS 140-2 compliant encryption algorithms, and
software & hardware inventory tracking and management. Because OneBridge Mobile
Groupware is part of the OneBridge Mobile Solutions Platform, enterprises can
add support for other enterprise systems like CRM, ERP and custom applications
to this platform and implement an integrated mobile platform solution.
In September 2003, we announced that the company is strengthening its database
management offering with the release of Advantage Database Server 7.0.
Significant new functionality incorporated into the company's Advantage Database
Server includes triggers, communications compression, full text search, and a
type-4 JDBC driver. With these product enhancements, Extended Systems continues
to provide commercial application developers with a client/server database
management solution that can be deployed on a variety of platforms.
In November 2003, we announced that the Advantage .NET Data Provider now
includes a seamless interface to any .NET development language. Advantage .NET
Data Provider creates a native interface for developers using Advantage Database
Server and any .NET development language, including Visual Studio .NET and
Borland C#Builder. With the addition of native access to .NET, Advantage
Database Server now provides a RDBMS solution for virtually any application
development environment on the market.
In December 2003, we released the XTNDAccess Car SDK, a software development kit
that enables the telematics industry to integrate user-friendly Bluetooth
wireless technology into the head unit of an automobile. XTNDAccess Car SDK will
help the telematics industry reduce development costs and shorten time-to-market
while ensuring strict compliance with the Bluetooth Special Interest Group's
(SIG) interoperability standards.
In January 2004, we released our OneBridge Mobile Groupware 4.1 product that
enabled mobile device users to have live, instant access to business
intelligence residing on corporate databases. Extended Systems is using its
IP-based
11
push technology, which currently enables users to have immediate access to
e-mail and to push other essential data into the field. Mobile employees -- such
as field service workers or sales representatives -- are now able to receive and
deliver information from and to corporate databases wirelessly, without user
initiation. Instant data delivery and real-time access to information in the
field can enable companies to boost productivity, improve accuracy, speed
response times and ultimately increase bottom-line profits.
In February 2004, we introduced the ExtendConnect Mobile Suite. There are three
major components to ExtendConnect Mobile Suite. The package includes a client
embedded SyncML SDK, a Windows communication suite, and our XTNDConnect PC
desktop synchronization software, which is bundled with mobile phones for use by
individuals. XTNDConnect PC supports Microsoft Outlook, IBM Notes, and other
groupware applications. Because a single experienced mobile solutions provider
provides all elements, cell phone manufacturers are assured that integration of
end-to-end data synchronization will be easy.
We maintain global development operations and have development centers in Boise,
Idaho; Toronto, Canada and Bristol, UK. We also have smaller development teams
in Corvallis, Oregon and Alpine, Utah. During the second half of fiscal 2004, we
began an initiative to add offshore development resources through an outsourcing
arrangement with a third party company in India. Operations in India are the
beginning of an outsourcing effort to expand our development capability and
capacity while maintaining our quality standards. We expect this operation to
continue to grow through the next fiscal year.
MARKETING, SALES AND DISTRIBUTION
We market and sell our adaptive mobility products and professional services
directly to enterprise customers and original equipment manufacturers ("OEMs").
We also market and sell our products through indirect sales channels, including
value-added resellers ("VARs"), distributors and systems integrators ("SIs").
Our enterprise customers include global 2000 companies as well as small to
medium-sized businesses, primarily in Europe and the Americas. We plan to grow
our market presence in Asia and the Pacific Rim by expanding the number of
VAR's, partners and other distributors with customers and relationships in this
geography. Additionally we sell to several of the world's largest mobile phone
and wireless semiconductor companies who embed our technology into their
products.
We market and license our device manufacturer products to our OEM or original
design manufacturer (ODM) customers through our global network of VAR's and
distributors. We support these resellers and also sell some products directly,
with our team of sales and technical professionals located in North America. We
have entered into strategic relationships with many of the world's largest
telematics suppliers, mobile phone manufacturers and component suppliers for
sales of our mobile device manufacturer products. Our OEM/ODM customers
integrate our software into their products, bundle our products with their
products, and some endorse our products in the marketplace. Mobile device
manufacturers incorporating our products include Siemens, Sony-Ericsson,
Motorola, LG Electronics, PalmOne, Hewlett-Packard and Visteon. We work directly
with OEM/ODM's to identify the requirements of new products in the design phase
for later market launch. We develop a proposal to address the customers'
technical and business requirements and typically confirm our products will meet
the technical specifications before the sales transaction is completed. The
sales cycle to achieve a customer design win for these products ranges from one
to nine months based on the customer's time to market requirements. Once a
design win has been achieved, the products containing our software products can
take from one to twelve months to reach the intended customer market.
We market our enterprise mobility and enterprise database products through both
our direct sales representatives and through a sales channel comprised of VAR's,
distributors, systems integrators and other resellers. In North America we
market and license our enterprise mobility solutions primarily through our
direct sales organization although we are building our indirect sales channels
to reach additional customers in North America. Our North American sales
representatives and technical pre-sales staff are located in sales territories
throughout the United States and Canada. In our EMEA region (Europe, Middle East
and Africa), we market and license our products through both our direct sales
force and through other channel partners. We also have sales representatives
based at our corporate headquarters that support our resellers and work to
expand the number of resellers in the Pacific Rim, Asia and Latin America.
A component of our plan is to grow our market presence through expanding our
value added indirect channels including:
12
APPLICATION DEVELOPERS
We market our enterprise mobility products and enterprise database solutions to
application developers. Our growth plans include broadening the portfolio of
available applications that include our mobile platform and database software.
This entails developing new relationships with many of the leading application
developers across a range of vertical markets for both large and mid-tier
enterprises, including healthcare, manufacturing, financial services, and the
public sector. These well established application partners bring both domain
expertise and large installed customer bases providing a ready market in which
to adopt mobile solutions. These leading application vendors have back-end
applications that comprise a part of the existing legacy application
infrastructure for enterprises in their target markets, and are in the best
position to extend these applications into the mobile environment. Embedding our
mobile platform into their applications, these partners generate the sales and
distribute our products as an integral part of their mobile solution.
SYSTEM INTEGRATORS AND MANAGED SERVICES PROVIDERS
Another channel to market for our mobile software products is through systems
integrators (SI's) whose professional services capabilities and in-depth
knowledge of customer's legacy environments enable them to build custom
applications according to specific customer requirements. We have worked
together with some of the world's largest systems integrators who have used our
products to build mobile applications for their customers. Some of our systems
integrator relationships include T-Systems, Software AG, Hewlett Packard,
Electronic Data Systems (EDS), and Computer Sciences Corporation (CSC) and we
are working to increase these and other SI's use of our products. Most systems
integration partners are authorized resellers of our products and some like EDS
and CSC use our products to deliver managed services.
To assist our direct sales teams and support our resellers and other channel
partners, we engage in a variety of marketing activities. Our marketing
personnel assist in generating new sales opportunities by creating various
marketing programs, updating our Web site, targeting additional strategic
relationships, advertising in industry and other publications, and conducting
public relations campaigns. We also participate in a number of trade shows and
industry events. We communicate with our installed customer base via newsletters
and by hosting web-based seminars. Our public relations strategy is designed to
convey our messages to appropriate audiences, and we reinforce this through our
ongoing communications with a number of key industry analysts and members of the
press. As of June 30, 2004 we are committed to have our sales and technical
support personnel located close to our customer locations. We maintained sales
and technical support offices primarily in Boise, Idaho; Bristol, UK and
Herrenberg, Germany. We also maintain smaller regional sales and support offices
in Paris, France, San Diego California; Corvallis, Oregon and Hertogenbosch,
Netherlands.
SERVICE AND SUPPORT
PROFESSIONAL SERVICES
Our professional services organization is staffed by qualified employees with
experience in the mobile application field. We provide our clients, as well as
our implementation partners, with consulting and deployment services, mobile
application design and development, work flow process for mobile workers and
comprehensive training and support to help achieve business goals with a quicker
return on investment. The professional services team consists of project
managers, business analysts and technologists. Our professional services
include:
o Project Advisory Services. Our consultants assess current or planned
mobile application needs, develop and document the project plan, and
deliver the design specification. We provide a configuration and
implementation roadmap to help meet business goals, including an
analysis of return on investment and business change management.
o Project Implementations. Our professional services consultants
individually, or as members of our project teams, implement and assist
in the configuration of our solutions to accelerate the project
deployment schedule and ensure a successful implementation process.
Such activities include the design, configuration and testing of our
deliverables as well as training and supporting the customer
organization during the rollout and when the applications go live. The
implementation activities also include the development and
configuration of interfaces to other enterprise solutions - either
commercial or in-house legacy systems, as needed based on the project.
13
o Business Analysis. We offer consulting services targeted at ensuring
the ability of our customers and implementation partners to deliver a
working solution. This includes consulting to determine strategies to
mobilize applications and develop estimates for the return on
investment for these mobile deployments.
o Custom Mobile Application Development. We have developed and
implemented successful mobile applications at enterprises in the
financial services, telecommunications, pharmaceuticals, retail
services, transportation and logistics, field service and utilities,
public sector and education, manufacturing, life sciences and
healthcare and other industries. We use a simple and standardized
methodology when developing and implementing customized mobile
solutions, based on the following five-step process:
o discover the need for a mobile solution which incorporates
business analysis and strategy consulting
o define the customer's business objectives and the benefits of
mobile technology to the customer's organization including the
project scope definition and ROI justifications and business case
formulation
o design the best mobile solution for the customer's users and
their needs
o develop a mobile solution using our mobile development tools, and
o deploy the solution to the customer's mobile users
TECHNICAL SUPPORT
Commitment to customer service and technical support is an essential component
of our ability to provide high levels of customer satisfaction and ensure the
success of our business. Our technical support teams interact regularly with
customers' network administrators and application developers and respond to
their needs. In the process of supporting our existing customers, our team is
also able to identify requirements for future products or product enhancements.
We offer a wide range of customer support services including multiple support
programs tailored to meet the needs of our customers. We also provide access to
the Extend Source web site that allows our customers to access information and a
wide range of support tools such as our on-line knowledge base, FAQs and
technical notes. These support services include a technical support hotline to
provide telephone support to our customers through a toll-free number. In
addition to our internal support, our independent distributors and resellers
provide service and support to certain customers.
OUR CUSTOMERS
To date we have licensed our software products to over 2500 enterprise customers
and 1500 independent software developers. We sell our products to enterprises
both directly and through a variety of channel partners including value added
resellers, distributors and other channel partners. We also sell to application
developers and device manufacturers. Extended Systems has a worldwide customers
base and key relationships with Computer Science Corporation, EDS, Hewlett
Packard, Janssen-Cilag, Microsoft, Motorola, palmOne, PalmSource, Siemens,
Software AG, SonyEricsson, Symbian and Toshiba. By giving mobile workers
real-time access to business critical information, Extended Systems has helped
companies like FedEx, 20th Century Fox and Otis Elevator improve operating
efficiencies and increase customer satisfaction.
INTELLECTUAL PROPERTY
Our success is significantly dependent on our proprietary technology and other
intellectual property. To protect our proprietary rights, we rely generally on
patent, copyright, trademark and trade secret laws. Additionally, we maintain
confidentiality agreements with many of our employees, consultants and
customers. Despite these protections, third parties might obtain and use our
technologies without authorization or develop similar technologies
independently. The steps we have taken may not prevent misappropriation of our
intellectual property, particularly in countries other than the United States
where laws or law enforcement practices may not protect our proprietary rights
as fully as in the United States.
We have entered into source code and design document escrow agreements with a
limited number of our customers requiring release of design details in some
circumstances. These agreements generally provide that these parties will have a
limited, non-exclusive right to use the code in the event that there is a
bankruptcy proceeding by or against us, if we cease to do business or if we fail
to meet our support obligations. We also provide our source code to foreign
language translation service providers and consultants to use in limited
circumstances.
14
We own 26 registered trademarks. We cannot assure you that any of our current or
future trademark applications will be approved. Even if these applications are
approved, any trademarks may be successfully challenged by others or
invalidated. There may be third parties using names similar to ours of which we
are unaware. If our trademark applications are not approved or if our trademarks
are invalidated because of prior third-party registrations, our use of these
marks could be restricted unless we enter into arrangements with these third
parties, which might not be available on commercially reasonable terms, if at
all.
We have been issued 14 patents; of which one expires in 2007 and 13 expire in
2010 and beyond. We also have 16 patents pending. We cannot assure you that any
of our current or future patent applications will be granted. Any of our patents
may be challenged, invalidated or circumvented and the rights granted under any
of our patents may not provide competitive advantages to us. If a blocking
patent is issued in the future to a third party, and we are not able to
distinguish our technologies, processes or methods from those covered under the
patent, we may need to either obtain a license or develop noninfringing
technologies, processes or methods with respect to that patent. We may not be
able to obtain a license on commercially reasonable terms, if at all, or design
around the patent, which could impair our ability to sell our products. Any
proprietary rights with respect to our technologies may not be viable or of
value in the future since the validity, enforceability and scope of protection
of proprietary rights in Internet-related industries are uncertain and still
evolving.
Other persons may claim that our technologies, processes or methods infringe
their patents. These claims may cause us to incur significant expenses and, if
successfully asserted against us, may cause us to pay substantial damages and
prevent us from selling some of our products, which would substantially harm our
business.
EMPLOYEES
As of June 30, 2004 we had 191 employees worldwide. None of our employees is
represented by a labor union or is subject to a collective bargaining agreement
with respect to his or her employment with us. We believe that our relations
with our employees are good.
EXECUTIVE OFFICERS
Our executive officers as of September 15, 2004 are as follows:
NAME AGE POSITION
- ---------------------- --- ------------------------------------------
Charles W. Jepson 58 Chief Executive Officer and President
Valerie A. Heusinkveld 45 Vice President of Finance, Chief Financial
Officer and Corporate Secretary
Nigel S. Doust 47 Vice President of Europe, Middle East and
Africa (EMEA)
Gregory T. Pappas 42 Vice President of Human Resources
Kerrin Pease 53 Vice President of Research and Development
Jeffrey M. Siegel 47 Vice President of Worldwide Marketing and
Chief Marketing Officer
Mark A. Willnerd 39 Vice.President of Business Development
CHARLES W. JEPSON was named Chief Executive Officer and President in August
2003. From February 2003 to August 2003, Mr. Jepson served as Vice President of
Sales and Marketing. He served as a member of our board of directors from
September 2001 to July 2003. Prior to joining us, Mr. Jepson was the Chairman,
President and CEO of Diligent Software Systems, a provider of e-procurement
software from July 2001 to October 2002. From June 2000 to July 2001, he was the
Senior Vice President of North American Field Operations at eGain
Communications, a provider of customer service software. From March 1998 to June
2000, Mr. Jepson was the President and Chief Executive Officer of Inference
Corporation, which was acquired by eGain in June 2000. From June 1997 to March
1998, Mr. Jepson was an independent consultant to small technology companies.
From March 1992 to May 1997, he was the President and Chief Executive Officer of
Interlink Computer Sciences.
VALERIE A. HEUSINKVELD was appointed Chief Financial Officer, Vice President of
Finance and Corporate Secretary in November 2003. Prior to joining the company,
Ms. Heusinkveld was an independent consultant to early stage companies in need
of hands-on management and seed capital. Before its sale to Cyprus
Semiconductor, she served as Chief Financial Officer at In-System Design, Inc.,
a fabless semiconductor company, from October 2000 until January 2002. From 1989
to 2000, Ms. Heusinkveld held senior management positions at TJ International,
Inc., where she was the Chief Financial Officer from December 1992 until the
sale of the company to Weyerhaeuser Company in 2000.
15
NIGEL S. DOUST has served as Vice President of EMEA since April 2003. Prior to
joining the company, Mr. Doust served as Vice President, International for
Diligent Software Systems, a provider of e-procurement software from September
2001 to February 2003. Prior to his tenure with Diligent, he was the Vice
President EMEA from 1999 to 2001 and Customer Service Director from 1998 to 1999
at eGain Communications. Previously he served as Divisional Manager, Business
Group Manager, and Technical Manager at Tangent International, a system
integrator.
GREGORY T. PAPPAS was appointed Vice President of Human Resources in July 2004.
Prior to joining the company, Mr. Pappas served as Vice President of Human
Resources and Administration for GlobalEnglish Corporation from 2000 to 2004.
From 1998 to 2000, he was Vice President of Human Resources and Administration
for Inference Corporation. From 1996 to 1998 Mr. Pappas was the Sr. Director of
Human Resources for Chordiant Software, Inc. and from 1993 to 1996, he held the
position of Human Resources Manager for Apple Computer, Inc. Prior to Apple
Computer, Mr. Pappas worked for the Northern Corporation in various operations
and human resources positions.
KERRIN PEASE has served as Vice President of Worldwide Research and Development
since November 2001. From 1999 to 2001, Mr. Pease served as Vice President,
Consulting and Development Americas, for GEAC Computer Corporation Limited, a
global provider of enterprise requirements planning (ERP) software and services.
From 1997 to 1999, Mr. Pease was Vice President, Consulting for Johnson Brown
Associates (JBA) International, a global provider of ERP software services. He
held various other positions with JBA from 1987 to 1997, including Product
Development Director, Operations Director UK/Europe and Regional Business
Manager. From 1980 to 1987, Mr. Pease served as Operations Manager for
Information Processing Services, a company that developed ERP products.
JEFFREY M. SIEGEL was appointed Vice President of Worldwide Marketing and Chief
Marketing Officer in May 2004. Prior to joining us, Mr. Siegel was the Vice
President, Enterprise for Symbian from 2002 to 2003 and Director of Market
Development at Microsoft from 2001 to 2002. Prior to Microsoft, he was Director
of Market Development for 3Com/Palm from 1997 to 2001 and held various positions
in enterprise sales and marketing for the computer systems group at HP from 1982
to 1997.
MARK A. WILLNERD was appointed Vice President of Business Development in
September 2002. Mr. Willnerd joined the Company in July 1989 and has held
numerous positions with increasing accountability throughout his tenure. Prior
to his appointment, he held the positions of Business Development Director and
Alliance and Product Manager for our products.
ITEM 2. PROPERTIES
Our corporate headquarters facility is located in Boise, Idaho where we conduct
research and development, marketing and sales, customer support, professional
services and administration activities. We currently lease our headquarters
facility pursuant to a sale-and-leaseback agreement that we entered into in
September 2003. Of the approximately 100,000 square foot facility that we lease,
approximately 52,000 square feet is unused space that we sublease to third
parties or have available for lease. We also lease sales, support, professional
services and development offices throughout the United States, Canada and
Europe. These leases expire at varying dates through 2013 and some include
renewals at our option. We believe that our existing facilities are adequate to
meet our current requirements and that suitable additional or substitute space
will be available as needed to accommodate expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
On June 29, 2004 AppForge, Inc. ("AppForge") filed a complaint against the
Company in the United States District Court for the District of Delaware. An
amended complaint was filed on August 12, 2004 joining Extended Systems of
Idaho, Inc. ("ESI-Idaho") and four European subsidiaries of the Company.
ESI-Idaho and AppForge are parties to a distribution and license agreement
related to certain AppForge software. AppForge alleges that the defendant ESI
companies have used AppForge's technology and trademarks in a manner not
authorized by the parties' agreement. The Company believes that its use and
distribution of AppForge's software has been within the scope of the parties'
agreement.
Since the parties' license agreement provides for arbitration of disputes,
ESI-Idaho filed a demand for arbitration with the American Arbitration
Association on August 3, 2004 seeking a declaration of the parties' respective
rights and obligations. At the same time, in the Delaware action, the ESI
defendants have moved the Court for dismissal or a stay of the case because the
parties' license agreement provides that arbitration is the sole forum for
resolution of disputes arising out of or related to the license and distribution
agreement.
16
We believe that we have meritorious defenses against this action and we will
continue to vigorously defend it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq National Market under the symbol
"XTND". The following table sets forth the high and low sales prices of our
common stock, based on the last daily sale, in each of our last eight fiscal
quarters:
HIGH LOW
----------------
FISCAL YEAR 2004
Fourth Quarter, ended June 30, 2004............ $ 7.15 $ 4.81
Third Quarter, ended March 31, 2004............ 6.58 4.35
Second Quarter, ended December 31, 2003........ 4.88 3.70
First Quarter, ended September 30, 2003........ 5.50 3.50
FISCAL YEAR 2003
Fourth Quarter, ended June 30, 2003............ $ 4.85 $ 1.61
Third Quarter, ended March 31, 2003............ 2.00 1.30
Second Quarter, ended December 31, 2002........ 2.48 1.40
First Quarter, ended September 30, 2002........ 3.30 1.40
On September 24, 2004, the last reported per share sale price of our common
stock on the Nasdaq National Market was $2.60 per share. The market for our
common stock is highly volatile. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results and Market Price of Stock."
According to our transfer agent's records, we had 317 stockholders of record as
of September 24, 2004. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these stockholders of
record.
We have not declared or paid any dividends on our common stock since September
1994. We currently anticipate that we will retain all future earnings for use in
the operation and expansion of our business and do not anticipate paying any
dividends in the foreseeable future.
The information required by this item regarding equity compensation plans is
incorporated by reference to the information set forth in Item 12 of this annual
report on Form 10-K.
We made no repurchase of our equity securities during our quarter ended June 30,
2004
17
ITEM 6. SELECTED FINANCIAL DATA
You should read the following consolidated selected financial data in
conjunction with our Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. Amounts are
in thousands, except per share amounts. As a result of discontinuing our
infrared hardware business in the first quarter of fiscal 2003, selling our
Singapore subsidiary in fiscal 2002 and selling certain assets and liabilities
of our printing solutions segment in fiscal 2001, we accounted for the results
of these operations as discontinued operations in accordance with Accounting
Principles Bulletin No. 30 and Statement of Financial Accounting Standards No.
144. Amounts for all periods in this Annual Report on Form 10-K, including the
financial statements and related notes, have been reclassified to reflect the
discontinued operations.
FOR THE YEARS ENDED JUNE 30, 2004 2003 2002 2001 2000
-----------------------------------------------------
Net revenue............................................................... $32,186 $27,534 $22,275 $ 26,910 $ 21,551
Gross margin.............................................................. 27,727 23,203 19,722 19,634 14,398
Restructuring charges..................................................... 1,446 597 213 1,066 -
Patent litigation fees, license and settlement............................ 3,425 1,240 - - -
Loss from operations...................................................... (3,798) (4,368) (9,316) (19,514)C (10,827)
Other income (expense), net............................................... 1,007 A 257 (4) 457 (89)
Interest expense.......................................................... (453) (307) (70) 1 (259)
Income tax provision (benefit)............................................ 94 (200) (2,257)B 7,228 D (3,436)
Loss from continuing operations........................................... (3,338) (4,218) (7,133) (26,284) (7,739)
Income (loss) from discontinued operations and gain (loss) from sale of
discontinued operations, (net)....................................... 88 458 (57) 2,810 2,754
Net loss.................................................................. (3,250) (3,760) (7,190) (23,474) (4,985)
Loss per share from continuing operations:
Basic and diluted................................................ (0.23) (0.31) (0.64) (2.48) (0.81)
Earnings (loss) per share from discontinued
operations:
Basic and diluted................................................ 0.00 0.03 (0.01) 0.26 0.29
Loss per share:
Basic and diluted................................................ (0.23) (0.28) (0.65) (2.22) (0.52)
Shares used in computing basic and diluted income (loss) per share........ 14,370 13,376 11,048 10,587 9,552
AS OF JUNE 30, 2004 2003 2002 2001 2000
-----------------------------------------------------
Cash and cash equivalents................................................. $ 7,225 $ 3,502 $ 5,439 $ 6,585 $ 6,191
Total assets.............................................................. 33,356 29,091 20,371 28,143 44,221
Long-term debt and other long-term liabilities............................ 4,970 494 - - -
Total stockholders' equity................................................ 19,156 19,256 13,088 18,938 37,715
(A) Other income (expense) includes $1.1 million of gain on the sale of excess
land at our Boise, Idaho headquarters facility.
(B) Our income tax benefit from continuing operations of $2.3 million was
partially offset by an income tax expense of $301 thousand from
discontinued operations. This net benefit of $1.8 million was primarily the
result of a $1.6 million tax refund we received due to a net operating loss
carryback resulting from a temporary increase in the carryback period as
part of the Job Creation and Worker Assistance Act of 2002. The balance of
the benefit relates primarily to a reserve that was reversed when we sold
our Singapore subsidiary.
(C) Our loss from operations includes $1.4 million in charges associated with
the terminated merger with Palm, Inc. included in general and
administrative expenses.
(D) Our income tax provision includes a $14.0 million valuation allowance
recorded against our deferred tax assets.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
INTRODUCTION
We begin Management's Discussion and Analysis of Results of Operations and
Financial Condition (MD&A) with and overview to give the reader management's
perspective on our results for fiscal 2004 and our general outlook for the
current fiscal year. This is followed by a discussion of the critical accounting
polices that we believe are important to understanding the assumptions and
judgments incorporated in our reported financial results. In the next section,
we discuss our Results of Operations for fiscal 2004 compared to fiscal 2003 and
for fiscal 2003 compared to fiscal 2002. We then provide an analysis of our
liquidity and capital resources.
This discussion and other parts of this Annual Report on Form 10-K contain
forward-looking statements (within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended). Such statements are based upon current
expectations that involve risks, uncertainties and assumptions, and we undertake
no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this report.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. These forward-looking statements
include words such as "may," "will," "should," "estimates," "predicts,"
"potential," "continue," "strategy," "believes," "anticipates," "plans,"
"expects," "intends," "outlook," "could," "estimate," "project," "forecast," or
similar expressions that are intended to identify forward-looking statements.
Our actual results may differ materially from the results discussed in such
forward-looking statements. Factors that may cause a difference include, but are
not limited to, those discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Factors That May Affect Future
Results and Market Price of Stock". The following discussion should be read in
conjunction with the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K. All yearly references
are to our fiscal years ended June 30, 2004, 2003 and 2002, unless otherwise
indicated. All tabular amounts are in thousands, except percentages.
OVERVIEW
We are a leading provider of software and services that deliver solutions to
help companies streamline their business processes and improve workforce
productivity through mobilizing corporate applications and data. We also provide
software and expertise that enables our mobile device manufacturer customers to
accelerate their product development cycles and enhance the functionality of new
products they bring to market. The users of our products are enterprise
employees that complete their jobs or portions of their jobs outside of the
company-owned facilities where they have traditionally accessed, viewed and
updated information through wired networks. Also advancing the adoption of
enterprise mobility solutions is the increased availability and capability of
powerful mobile devices such as PDA's, mobile phones and converged devices.
Enterprises are increasingly realizing they can improve their competitiveness by
mobilizing corporate information.
We believe a full understanding of our operating results for the year ended June
30, 2004, requires an understanding of how the mobility solutions markets are
evolving and influenced the elements that drove our company performance.
Although the mobility solutions market is still in the early phases of
development, organizations are increasingly developing a mobile computing
strategy as part of their plans to increase productivity, improve
competitiveness and enhance customer relationships. However, the slow growth
recovery occurring in most global economies continues to restrain information
technology spending and has caused enterprises to focus spending on mobile
technology investments that can achieve a 12 to 18 month payback. Many companies
launch their mobile strategy with a mobile contacts, calendar, task and e-mail
application. Our mobile solution that meets this need, OneBridge Mobile
Groupware comprises the majority of our enterprise mobility software revenues
and revenue from this product was a significant element of our growth in fiscal
2004.
Device manufacturers are also evolving their products to address this growing
enterprise mobility market. Notebooks, mobile phones and standard PDAs have been
the dominant mobile infrastructure devices. However, as mobile device designers
and marketers have launched campaigns to communicate the added value of smart
phones and converge devices, adoption rates for these devices have increased.
To address the growth in this market, the rapid products development cycles, and
the demand for a robust feature set, device manufacturers have increasingly
turned to third parties to provide the technology for short-range wireless
connectivity products. Our device manufacturer solutions revenue grew in fiscal
2004 as additional handset manufacturers selected our technologies and the
handset models that included our technology were introduced successfully into
the marketplace.
19
We believe Europe has been the global leader in the deployment of wireless
infrastructure. The coverage and data capacity of wireless networks developed
more rapidly in Europe than in other global markets and the market for mobility
solutions has grown in Europe. We have a long operating history in Europe with
offices in four countries and have gained both market awareness and developed
long-standing customer relationships. A significant portion of our revenue and
revenue growth was derived from both European customers purchasing our
enterprise mobility solutions and European device manufacturers introducing
successful converged devices that contained our device manufacturer products.
In 1993, we introduced our first enterprise database products. We continue to
market and sell these products to application developers and enterprises to
support the data requirements of both mobile and traditional enterprise
applications. These products grew in fiscal 2004 as the applications utilizing
our database were marketed successfully to companies in Europe and North
America. Application developers that purchase our enterprise database products
have required a solution that is stable and mature. We also have developed an
extensive network of resellers that market these products globally. As these
products do not require heavy research and development investment or significant
sales and marketing support, they have been an important source of positive cash
flow to our company.
In fiscal 2005 we will continue to focus on revenue growth by generating more
sales of our solutions to enterprise customers and mobile device manufacturers.
We believe enterprise customers will move toward purchasing mobile applications
that can have an immediate financial impact such as field service, supply chain
and logistics, healthcare, field sales and government and education. Enterprises
will choose vendors with knowledge of workflows and business process and those
that can provide a business case for investment. We expect to compete directly
with both larger companies that have significant resources and experience and
smaller companies that focus on a particular mobile vertical. We also expect to
experience longer sales cycles, which is typical for sales of larger, mission
critical business applications.
Our operating expenses increased in fiscal 2004 as compared to fiscal 2003 by
$4.1 million. However $3.0 million of the higher spending was the result of
higher restructuring charges and higher costs associated with defending
ourselves in a patent infringement case. Without these expenditures, our
operating expenses increased $1.1 million, while revenues increased $4.7 million
in fiscal 2004 as compared to fiscal 2003 as a result of the factors we outlined
above. Despite the revenue growth and control of expense increases, we continued
to experience losses from operations and net losses per share.
In response to these conditions, we realigned our management and sales
organization to support the strategic direction of the company. We restructured
many of our operations and sales territories in an effort to improve
organizational efficiencies, controlled our expense structure, and took
initiatives to increase sales productivity and drive a more profitable long-term
financial model. We expect to continue many of these activities over the next
several quarters, and doing so may put pressure on our financial results and
operations as we continue to position the company to participate in the growth
of the mobile solutions market.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements in conformity with accounting
principles generally accepted in the United States, we make estimates,
assumptions and judgments that can have a material impact on our net revenue,
operating income and net income (loss), as well as on the value of certain
assets on our consolidated balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on our consolidated financial statements, so
we consider these to be our critical accounting policies. The policies described
below are not intended to be a comprehensive list of all our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles, with no need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. Our audited consolidated financial statements and
notes thereto contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies
that we consider critical to an understanding of the consolidated financial
statements are highlighted below.
REVENUE RECOGNITION
Revenue recognition rules for software companies are very complex. We follow
specific and detailed guidelines in determining the proper amount of revenue to
be recorded; however, certain judgments must be made by management in
interpreting the rules and in applying our revenue recognition policy. Revenue
results are difficult to
20
predict, and any shortfall in revenue or delay in recognizing revenue could
cause our operating results to vary significantly.
To recognize software revenue we apply the provisions of Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2), as amended by SOP 98-9, and
recognize revenue when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is
fixed or determinable and (4) collection of the resulting receivable is
reasonably assured.
At the time of a transaction, we assess whether the fee associated with our
revenue transactions is fixed or determinable, based on the payment terms
associated with the transaction. If payment terms are extended for a significant
portion of the fee or there is a risk that the customer will expect a
concession, we account for the fee as not being fixed or determinable. In these
cases, we recognize revenue as the fees become due and payable. If we had
assessed the fixed or determinable criterion differently, the timing and amount
of our revenue recognition may have differed materially from that reported.
At the time of the transaction we also assess whether or not collection is
reasonably assured based on a number of factors, including past transaction
history with the customer and credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not reasonably assured, we defer recognition of the fee as revenue, and
recognize revenue at the time collection becomes reasonably assured, which is
generally upon receipt of cash. If we assessed collectability differently, the
timing and amount of our revenue recognition may have differed materially from
that reported.
For arrangements with multiple obligations (for instance, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method. This means that we defer revenue
from the total fees associated with the arrangement equivalent to the
vendor-specific objective evidence of fair value of the elements of the
arrangement that have not yet been delivered. The vendor-specific objective
evidence of fair value of an undelivered element is generally established by
using historical evidence specific to Extended Systems. For example, the
vendor-specific objective evidence of fair value for maintenance and support is
based upon separate sales of renewals to other customers or upon the renewal
rates quoted in the contracts, and the fair value of services, such as training
or consulting, is based upon separate sales by us of these services to other
customers. If we allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support, patches, bug fixes and other
modifications to ensure that the products comply with their warranty provisions.
Accordingly, we allow for warranty costs at the time the product revenue is
recognized.
When we license our software to original equipment manufacturers or to companies
that include our software in their software offering, royalty revenue is
recognized when customers report to us the sale of software to their end user
customer. In cases where the arrangement with our customer provides for a
prepaid nonrefundable royalty, we recognize revenue when persuasive evidence of
an arrangement exits, delivery has occurred, the fee is fixed or determinable
and collection of the resulting receivable is reasonably assured.
We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we generally recognize revenue
from training services as these services are performed. For professional
services that involve significant implementation, customization, or modification
of our software that is essential to the functionality of the software, we
generally recognize both the service and related software license revenue over
the period of the engagement, using the percentage-of-completion method. In
cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, where significant
uncertainty about the project completion exists, or where an arrangement
provides for customer acceptance, we defer the contract revenue under the
completed contract method of accounting until the uncertainty is sufficiently
resolved or the contract is complete. If we were to make different judgments or
utilize different estimates of the total amount of work we expect to be required
to complete an engagement, the timing of our revenue recognition from period to
period, as well as the related margins, might differ materially from that
previously reported.
BUSINESS COMBINATIONS AND ACQUIRED INTANGIBLE ASSETS
We account for our purchases of acquired companies in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
account for the related acquired intangible assets in accordance with SFAS No.
142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 141, we
allocate the cost of the acquired companies to the identifiable tangible and
intangible assets acquired and liabilities
21
assumed, with the remaining amount being classified as goodwill. Certain
intangible assets, such as "developed technologies," are amortized to expense
over time, while in-process research and development costs ("IPR&D"), if any,
are immediately expensed in the period the acquisition is completed.
Identifiable intangible assets are currently amortized over a weighted-average
of one to three years using the straight-line method.
The majority of entities we acquire do not have significant tangible assets and,
as a result, a significant portion of the purchase price is typically allocated
to intangible assets and goodwill. Our future operating performance will be
impacted by the future amortization of intangible assets, potential charges
related to IPR&D for future acquisitions, and potential impairment charges
related to goodwill. Accordingly, the allocation of the purchase price to
intangible assets and goodwill has a significant impact on our future operating
results. The allocation of the purchase price of the acquired companies to
intangible assets and goodwill requires us to make significant estimates and
assumptions, including estimates of future cash flows expected to be generated
by the acquired assets and the appropriate discount rate for these cash flows.
Should different conditions prevail, material write-downs of intangible assets
and/or goodwill could occur.
Under SFAS No. 142, goodwill is no longer subject to amortization. Rather, we
evaluate goodwill for impairment at least annually, during the fourth quarter of
each fiscal year, or more frequently if events and changes in circumstances
suggest that the carrying amount may not be recoverable. Impairment of goodwill
is tested at the reporting unit level by comparing the reporting unit's carrying
value, including goodwill, to the fair value of the reporting unit. The fair
values of the reporting units are estimated using a combination of the income,
or discounted cash flows, approach and the market approach, which utilizes
comparable companies' data. If the carrying amount of the reporting unit exceeds
its fair value, goodwill is considered impaired and we then compare the "implied
fair value" of the goodwill to its carrying amount to determine the impairment
loss, if any.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
We assess the impairment of identifiable intangibles, fixed assets and goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Goodwill is reviewed for impairment annually in accordance
with SFAS No. 142. Factors we consider important that could trigger an
impairment review include, but are not limited to: (1) significant under
performance relative to historical or projected future operating results, (2)
significant changes in the manner of our use of the acquired assets or the
strategy for our overall business, (3) significant negative industry or economic
trends, (4) a significant decline in our stock price for a sustained period, and
(5) our market capitalization relative to net book value. When we determine that
the carrying value of long-lived assets may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a market capitalization approach when the information is
readily available. When the information is not readily available, we use a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in our current business model to measure any impairment. If we
made different judgments or utilized different estimates our measurement of any
impairment may have differed materially from that reported.
INCOME TAXES
On a quarterly basis we evaluate our deferred tax asset balance for
realizability. To the extent we believe it is more likely than not that some or
all of our deferred tax assets will not be realized, we establish a valuation
allowance against the deferred tax assets. As of June 30, 2004 we had recorded a
valuation allowance against 100 percent of our net deferred tax assets due to
uncertainties related to our ability to utilize our deferred tax assets,
primarily consisting of certain net operating losses carried forward and foreign
tax credits, before they expire. This valuation allowance was recorded based on
our estimates of future U.S. and foreign jurisdiction taxable income and our
judgments regarding the periods over which our deferred tax assets will be
recoverable. If we made different judgments or utilized different estimates, the
amount or timing of the valuation allowance recorded may have differed
materially from that reported. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to
reduce the valuation allowance, potentially resulting in an income tax benefit
in the period of reduction, which could materially impact our financial position
and results of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
We maintain an allowance for doubtful accounts based on a continuous review of
customer accounts, payment patterns and specific collection issues. Where
specific collection issues are identified, we record a specific allowance based
on the amount that we believe will not be collected. For accounts where specific
collection issues are not identified, we record a reserve based on the age of
the receivable and historical collection patterns. If we made
22
different judgments or utilized different estimates, the timing and amount of
our reserve may have differed materially from that reported.
RESTRUCTURING
We report costs associated with employee terminations and other exit activity in
accordance with SFAS No. 112, "Employers' Accounting for Postemployment Benefits
- - an amendment of FASB Statements No. 5 and 43," and SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". We record employee
termination benefits as an operating expense when the benefit arrangement is
communicated to the employee and no significant future services are required. We
recognize facility lease termination obligations, net of estimated sublease
income, and other exit costs when we have future payment with no future economic
benefit or a commitment to pay the termination costs of a prior commitment.
These termination and other exit costs are reported at fair value.
DETERMINING FUNCTIONAL CURRENCIES FOR THE PURPOSE OF CONSOLIDATION
In preparing our consolidated financial statements, we are required to translate
the financial statements of the foreign subsidiaries from their functional
currencies, generally the local currency, into United States dollars. This
process results in exchange gains and losses, or cumulative translation
adjustments, which are included as a separate part of our net equity under the
caption "Accumulated other comprehensive loss."
Under the relevant accounting guidance, the computation method and treatment of
these translation gains or losses is dependent upon management's determination
of the functional currency of each subsidiary. The functional currency is
determined based on management judgment and involves consideration of all
relevant economic facts and circumstances affecting the subsidiary. Generally,
the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures is considered the
functional currency, but any dependency upon the parent and the nature of the
subsidiary's operations is also considered.
Cumulative translation adjustments include any gain or loss associated with the
translation of that subsidiary's financial statements when the functional
currency of any subsidiary is the local currency. However, if the functional
currency were deemed to be the United States dollar then any gain or loss
associated with the remeasurement of these financial statements would be
included within our statement of operations. If we dispose of any of our
subsidiaries, any cumulative translation gains or losses would be realized and
recorded within our statement of operations in the period during which the
disposal occurs. If we determine that there has been a change in the functional
currency of a subsidiary to the United States dollar, any translation gains or
losses arising after the date of change would be included within our statement
of operations.
Based on our assessment of the factors discussed above, we consider the relevant
subsidiary's local currency to be the functional currency for each of our
international subsidiaries. Accordingly, during the years ended June 30, 2004,
2003 and 2002, translation adjustments of $144 thousand, $503 thousand and $65
thousand, respectively, were recorded as additions to our accumulated other
comprehensive loss. At June 30, 2004 and 2003, cumulative translation losses of
approximately $1.5 million and $1.4 million were included as part of accumulated
other comprehensive loss, within our balance sheet. These translation losses
have accumulated since we formed our first foreign subsidiary in 1991. Had we
determined that the functional currency of our subsidiaries was the United
States dollar, we would have computed a remeasurement gain or loss using a
different method and such gain or loss would have been included in our results
of operations for each of the years presented.
The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the United States dollar and the significance of the assets, liabilities,
revenues and expenses denominated in foreign currencies. These currencies
include the euro, the British Pound Sterling and Canadian dollar. Any future
translation gains or losses could be significantly higher than those noted in
each of these years. In addition, if we determine that a change in the
functional currency of one of our subsidiaries has occurred at any point in time
or we sell or liquidate one of our subsidiaries, we would be required to include
any translation gains or losses from the date of change in our statement of
operations.
LEGAL CONTINGENCIES
From time-to-time we may be involved in various legal proceedings and claims.
Periodically, but not less than quarterly, we review the status of each
significant matter and assess our potential financial exposure. If the potential
loss from any legal proceeding or claim is considered probable and the amount
can be reasonably estimated, we accrue a liability for the estimated loss.
Significant judgment is required in both the determination of probability and
23
the determination as to whether an exposure is reasonably estimable. Due to the
uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending litigation and claims
and may revise our estimates. Such revisions could have a material impact on our
results of operations and financial condition.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth the selected consolidated financial data for the
periods indicated, expressed as a percentage of total revenues.
FOR THE YEARS ENDED JUNE 30,
----------------------------
2004 2003 2002
------------------------
Revenue:
License fees and royalties................... 78% 79% 86%
Services and other........................... 22 21 14
------------------------
Total net revenue........................ 100 100 100
Costs and expenses:
Cost of license fees and royalties........... 1 2 3
Cost of services and other................... 11 12 5
Amortization of purchased technology......... 2 3 3
Research and development..................... 20 26 45
Acquired in-process research and development. -- 1 --
Marketing and sales.......................... 48 53 61
General and administrative................... 14 13 19
Restructuring charges........................ 4 2 1
Patent litigation fees, license and
settlement.................................. 11 4 1
Non-cash stock compensation ................. 1 -- --
Amortization of goodwill..................... -- -- 4
------------------------
Total costs and expenses................. 112 116 142
------------------------
Loss from operations..................... (12) (16) (42)
Other income (expense), net....................... -- 1 --
Gain on sale of land.............................. 3 -- --
Interest expense.................................. (1) (1) --
------------------------
Loss before income taxes................. (10) (16) (42)
Income tax (benefit) provision.................... -- (1) (10)
------------------------
Loss from continuing operations.......... (10) (15) (32)
Discontinued operations, net of tax:
Income (loss) from discontinued
operations.............................. -- 1 --
------------------------
Net loss................................. (10)% (14)% (32)%
========================
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Revenue
The following table presents our license, support and maintenance, and
professional services revenue for the years ended June 30, 2004, 2003 and 2002,
and the percentage changes from the prior year.
FISCAL YEAR ENDED JUNE 30,
2004 %CHANGE 2003 %CHANGE 2002
------------------------------------------------------
Revenue:
License fees and royalties........ $ 25,028 15% $ 21,733 13% $ 19,176
Support and maintenance .......... 4,398 43% 3,082 43% 2,155
Professional services and other... 2,760 2% 2,719 188% 944
--------- --------- ---------
Total net revenue............. $ 32,186 17% $ 27,534 24% $ 22,275
========= ========= =========
24
We sell our adaptive mobility products to enterprises, original equipment
manufacturers, application developers, distributors and valued-added resellers.
No customers accounted for greater than 10% of revenue from continuing
operations in fiscal 2004, 2003 or 2002.
LICENSE FEES AND ROYALTIES. The majority of our product license revenues consist
of fees related to products licensed to customers on a perpetual basis. Product
license fees can be associated with a customer's licensing of a given software
product for the first time or with a customer's purchase of the right to run a
previously licensed product on additional computing capacity or by additional
users. Our royalty revenue consists of fees related to our OEM customers
periodically increasing the number of units they are authorized to use of a
licensed software product and are normally paid on a quarterly basis.
We classify our product offerings into one operating segment, our adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. The products in our adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions.
The table below presents total net license fees and royalty revenue by product
line and its percentage of total revenue for the years ended June 30, 2004, 2003
and 2002.
FOR THE FISCAL YEAR ENDED JUNE 30,
2004 % OF TOTAL 2003 % OF TOTAL 2002 % OF TOTAL
-----------------------------------------------------------
License fees and royalties:
Enterprise Mobility Solutions $ 11,301 45% $ 9,848 45% $ 8,840 46%
% change from prior year 15% 11%
Mobile Device Solutions 5,942 24% 4,740 22% 3,822 20%
% change from prior year 25% 24%
Enterprise Database Solutions 7,785 31% 7,145 33% 6,514 34%
% change from prior year 9% 10%
-----------------------------------------------------------
Total net revenue $ 25,028 100% $ 21,733 100% $ 19,176 100%
===========================================================
License revenue from our enterprise mobility products increased $1.5 million in
fiscal 2004 as compared to fiscal 2003. We sell our enterprise mobility products
to corporate customers either directly through our field sales staff or through
distributors, valued-added resellers and other channel partners. The increase in
enterprise mobility product license revenue in fiscal 2004 compared to fiscal
2003 was due primarily to the successful introduction of our new IP-based push
enabled OneBridge products in early 2004. These new products enhanced
functionality that was of particular interest to our customers that purchase our
mobile PIM and email application, OneBridge Mobile Groupware. Sales growth
resulted from both sales of our OneBridge Mobile Groupware to new customers and
our existing customers deploying the products to more users during the year. We
believe these customers also purchased OneBridge Mobile Groupware because of its
competitive total cost of ownership combined with the OneBridge product
platform's design which enables customers to roll out future mobile applications
such as mobile field service and mobile sales force automation applications on
the same devices that receive email. License revenue from our enterprise
mobility products increased $1.0 million in fiscal 2003 as compared to fiscal
2002. Included in this increase was $700 thousand of additional revenue from
adding the OneBridge Presentation Server and Mobile Business solutions products
to our product mix as a result of the Viafone acquisiton during fiscal 2003.
License and royalty revenue from our mobile device products increased $1.2
million in fiscal 2004 as compared to fiscal 2003. We sell our mobile device
products either directly or through distributors primarily to original equipment
manufacturers that supply the mobile handset and the telematics industries. As
handset manufacturers have increased the capability of these devices to
communicate with other devices or synchronize data with personal computers, the
demand for our products that enable this functionality has grown. During fiscal
2004, we experienced both new design wins with OEM manufacturers that licensed
our products and saw existing customers increase shipments of handsets that
include our products. The increase in mobile device product license revenue of
$918 thousand in fiscal 2003 as compared to fiscal 2002 was due primarily to
design wins and the resulting royalties paid for our XTNDConnect PC products by
mobile handset manufacturers.
Royalty revenue generated from sales to original equipment manufacturers has
fluctuated from quarter to quarter in the past. We expect it will also fluctuate
in future quarters, because demand in these markets is difficult to predict, as
it is dependent upon the timing of customer projects and the effectiveness of
their marketing efforts. Additionally,
25
fluctuations can occur due to the nature of the arrangements with customers,
which can vary between quarterly royalty payments that become due as devices are
shipped by the manufacturer to initial one-time payments that allow the customer
either unlimited or a capped number of licenses.
License revenue from our enterprise database product lines increased $640
thousand in fiscal 2004 as compared to fiscal 2003 as the applications developed
and sold by the value-added resellers using our database technology gained wider
acceptance in the marketplace. We sell our database products to enterprise
customers and software developers who write applications utilizing our product's
data management capabilities. Additionally in the second half of fiscal 2004, we
offered significant incentives and discounts for quantity-based purchases to our
customers that resulted in higher license revenues. The increase of $631
thousand in enterprise database product license revenue in fiscal 2003 as
compared to fiscal 2002 was due primarily to the addition of value-added
resellers purchasing new licenses and the applications developed and marketed
using our database technology gaining wider acceptance.
We expect revenue from license fees and royalties to increase in fiscal 2005 as
we introduce new products and enhance the functionality of our existing
products. We also anticipate our installed customer base for our OneBridge
Mobile Groupware, particularly in Europe, to purchase additional licenses as
they roll products out to additional users. Also, during fiscal 2004 many of our
customers and potential customers investigated the cost and benefits of
implementing mobile applications beyond email, and we expect our revenues to
grow as these customers purchase new or additional licenses of our OneBridge
Mobile Platform middleware to enable these applications.
SUPPORT AND MAINTENANCE. Support and maintenance revenues are derived dominantly
from our enterprise mobility products and represent the ratable recognition of
fees to enroll products in our software maintenance and support programs.
Enrollment in these programs generally entitles customers to product
enhancements, technical support services and ongoing updates for compatibility
with new mobile devices and mobile device operating systems. These fees are
generally charged annually and for software products sold directly to
enterprises have been in the range of 15% to 20% of the discounted price of the
product. For software products sold through resellers that provide support
directly to their customers this range has been 11 to 14%. Software sold to OEM
customers generally does not include support or maintenance agreements, as all
technical issues are resolved before the sales transaction is completed.
Support and maintenance revenue increased 43% in fiscal 2004 as compared to
fiscal 2003. This increase was the result of customers who had previously
purchased our OneBridge products continuing support and maintenance combined
with the ratable recognition of revenue from new support and maintenance
contracts sold to customers purchasing our products for the first time in fiscal
2004. Additionally, several resellers who had not previously purchased support
and maintenance contracts elected to purchase these programs during fiscal 2004.
In fiscal 2003, revenue from support and maintenance increased 10% from fiscal
2002. The increased revenue resulted from both sales of support and maintenance
contracts to both new and existing customers.
Our support and maintenance revenue depends on both our software license revenue
and renewals of maintenance agreements by our existing customers. Our
maintenance revenue has increased on a year over year basis in each of fiscal
2004, 2003, and 2002, as a result of both new licenses and support and
maintenance renewals. We expect that our support and maintenance revenue will
increase or decrease as our license revenue increases or decreases.
PROFESSIONAL SERVICES. Professional services revenue is derived primarily from
our work related to enterprise mobility products and consists of fees for
consulting, product installations, training, and developing custom applications
that utilize our middleware products such as OneBridge Mobile Data Suite.
Professional services revenue in fiscal 2004 did not change significantly from
the revenue we reported in fiscal 2003. The primary driver for our professional
services revenue was our customers purchasing services to aid them in developing
software solutions for their mobile workforce. These services consisted
primarily of work to develop, test and deploy custom mobile applications for
field service, sales force automation and mobile consumer applications in both
Europe and North America.
The increase in service revenue for fiscal 2003 as compared to fiscal 2002 was a
result of adding a dedicated professional services group to our solutions
offerings in the first quarter of fiscal 2003 in connection with the ViaFone
acquisition. The majority of our professional services for fiscal 2002 related
to significant customization of our software products to operate in specific
customer environments or for inclusion in handset products by our OEM customers.
We expect service revenue to increase in fiscal 2005, as more customers will
purchase services to develop custom applications. Although we expect an overall
increase in the amount of billable hours of our professional services
26
group, service revenue may fluctuate from quarter to quarter based on the amount
of revenue we may be required to defer under our revenue recognition policy and
the timing of services engagements.
INTERNATIONAL REVENUE
We derive a significant amount of our revenue from sales to customers outside of
the United States, principally from our European based sales force and channel
partners, overseas original equipment manufacturers