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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
_________________
Commission File Number 000-23597
EXTENDED SYSTEMS INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 82-0399670
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5777 NORTH MEEKER AVENUE, BOISE, ID 83713
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 322-7575
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the Registrant's Common Stock as of
December 31, 2004, was 15,170,363.
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EXTENDED SYSTEMS INCORPORATED
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
--------------------
Condensed Consolidated Balance Sheets as of December
31, 2004 (unaudited) and June 30, 2004 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended December 31, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the Three and Six Months Ended December 31, 2004 and 2003
(unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2004 and 2003 (unaudited) 6
Condensed Consolidated Statements of Stockholders' Equity for
the Six Months Ended December 31, 2004 (unaudited) 7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations 15
-----------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
----------------------------------------------------------
Item 4. Controls and Procedures 39
-----------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 39
-----------------
Item 4. Submission of Matters to a Vote of Security Holders 40
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Item 6. Exhibits 41
(Items 2, 3, and 5 of Part II are not applicable and
have been omitted)
SIGNATURES 42
CERTIFICATIONS 43
2
PART I. FINANCIAL INFORMATON
ITEM 1. FINANCIAL STATEMENTS
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
DECEMBER 31, JUNE 30,
2004 2004
---------- ----------
ASSETS
Current:
Cash and cash equivalents $ 5,140 $ 7,225
Receivables, net of allowances of $633 and $446 9,819 6,772
Prepaid and other 1,077 1,449
---------- ----------
Total current assets 16,036 15,446
Property and equipment, net 4,142 4,331
Construction in progress 911 384
Goodwill 12,489 12,489
Intangibles, net 459 576
Other long-term assets 122 130
---------- ----------
Total assets $ 34,159 $ 33,356
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable $ 1,675 $ 1,664
Accrued expenses 4,283 3,531
Deferred revenue 3,169 3,569
Accrued restructuring -- 116
Current portion of long-term debt 108 325
Current portion of capital leases 20 25
---------- ----------
Total current liabilities 9,255 9,230
Non-current:
Long-term debt 4,800 4,800
Capital leases 11 17
Other long-term liabilities 153 153
---------- ----------
Total non-current liabilities 4,964 4,970
---------- ----------
Total liabilities 14,219 14,200
Commitments and contingencies - Note 10
Stockholders' equity:
Preferred stock; $0.001 par value per share; 5,000 shares authorized;
no shares issued or outstanding -- --
Common Stock; $0.001 par value per share; 75,000 shares authorized;
15,170 and 15,078 shares issued and outstanding 15 15
Additional paid-in capital 48,453 48,005
Treasury stock; $0.001 par value per share; 4 and 0 common shares -- --
Accumulated deficit (25,991) (27,134)
Unamortized stock-based compensation (139) (231)
Accumulated other comprehensive loss (2,398) (1,499)
---------- ----------
Total stockholders' equity 19,940 19,156
---------- ----------
Total liabilities and stockholders' equity $ 34,159 $ 33,356
========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements
3
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue:
License fees and royalties $ 7,640 $ 7,057 $ 13,441 $ 12,828
Services and other 2,301 1,450 4,346 3,234
---------- ---------- ---------- ----------
Total net revenue 9,941 8,507 17,787 16,062
Costs and expenses:
Cost of license fees and royalties 129 144 196 226
Cost of services and other 1,060 1,033 1,945 2,136
Amortization of identifiable intangibles 43 155 117 344
Research and development 1,918 1,496 3,628 3,164
Marketing and sales 3,819 3,490 7,203 6,684
General and administrative 1,354 1,458 2,730 2,639
Restructuring charges -- 261 -- 1,329
Patent litigation fees, license and settlement -- 776 -- 1,345
Non-cash stock compensation 291 168 439 168
---------- ---------- ---------- ----------
Total costs and expenses 8,614 8,981 16,258 18,035
---------- ---------- ---------- ----------
Income (loss) from operations 1,327 (474) 1,529 (1,973)
Other income (expense), net (91) (18) (88) 42
Gain on sale of land -- 1,058 -- 1,058
Interest expense (133) (145) (266) (179)
---------- ---------- ---------- ----------
Income (loss) before income taxes 1,103 421 1,175 (1,052)
Income tax provision 7 9 32 13
---------- ---------- ---------- ----------
Income (loss) from continuing operations 1,096 412 1,143 (1,065)
Discontinued operations, net of tax:
Income from discontinued operations -- 47 -- 88
---------- ---------- ---------- ----------
Net income (loss) $ 1,096 $ 459 $ 1,143 $ (977)
========== ========== ========== ==========
Basic earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.07 $ 0.03 $ 0.07 $ (0.08)
Earnings from discontinued operations -- -- -- 0.01
---------- ---------- ---------- ----------
Net earnings (loss) per share $ 0.07 $ 0.03 $ 0.07 $ (0.07)
========== ========== ========== ==========
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.07 $ 0.03 $ 0.07 $ (0.08)
Earnings from discontinued operations -- -- -- 0.01
---------- ---------- ---------- ----------
Net earnings (loss) per share $ 0.07 $ 0.03 $ 0.07 $ (0.07)
========== ========== ========== ==========
Number of shares used in per share calculations:
Basic 15,119 14,083 15,104 14,036
Diluted 15,207 14,597 15,264 14,036
The accompanying notes are an integral part of the condensed consolidated financial statements
4
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss) $ 1,096 $ 459 $ 1,143 $ (977)
Change in currency translation (714) (302) (899) (360)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 382 $ 157 $ 244 $ (1,337)
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements
5
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
DECEMBER 31,
--------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 1,143 $ (977)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Provision for bad debts 117 29
Depreciation and amortization 404 845
Stock compensation 439 667
Gain on sale of property and equipment -- (998)
Changes in assets and liabilities:
Receivables (2,909) (388)
Prepaid and other assets 393 75
Accounts payable and accrued expenses (598) (678)
Deferred revenue (523) (106)
---------- ----------
Net cash used by operating activities (1,534) (1,531)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (589) (235)
Proceeds from sale of property and equipment -- 1,561
Other investing activities -- 19
---------- ----------
Net cash provided (used) by investing activities (589) 1,345
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale-and-leaseback of building -- 4,800
Proceeds from the issuance of common stock 100 891
Payments on long-term debt and capital leases (228) (229)
---------- ----------
Net cash provided (used) by financing activities (128) 5,462
Effect of exchange rates on cash 166 71
---------- ----------
Net increase (decrease) in cash and cash equivalents (2,085) 5,347
CASH AND CASH EQUIVALENTS:
Beginning of period 7,225 3,502
---------- ----------
End of period $ 5,140 $ 8,849
========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements
6
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER TOTAL
--------------------- PAID-IN EARNINGS DEFERRED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION LOSS EQUITY
------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2004 15,078 $ 15 $ 48,005 $(27,134) $ (231) $ (1,499) $ 19,156
Net Income 1,143 1,143
Translation Adjustment (899) (899)
Stock issued from stock option
exercises 40 100 100
Compensatory options 214 214
Restricted stock grants 56 152 (152) --
Restricted stock amortization 238 238
Restricted stock repurchase (4) (18) 6 (12)
------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2004 15,170 $ 15 $ 48,453 $(25,991) $ (139) $ (2,398) $ 19,940
======= ======== ======== ======== ======== ======== ========
7
EXTENDED SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include Extended
Systems Incorporated, a Delaware corporation, and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Tabular amounts are in thousands, except years, percentages and
per share amounts.
The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These accounting principles were applied on a basis consistent with
those of the consolidated financial statements contained in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2004. We have prepared these
condensed consolidated financial statements without audit pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). In the
opinion of management, these unaudited condensed consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our financial position as of
December 31, 2004, and our results of operations and cash flows for the three
months and six months ended December 31, 2004 and December 31, 2003. The results
for these interim periods are not necessarily indicative of the expected results
for any other interim period or the year ending June 30, 2005. These condensed
consolidated financial statements should be read in conjunction with our audited
consolidated financial statements and related notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2004. The
condensed consolidated balance sheet at June 30, 2004 was derived from audited
financial statements but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires that we make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of our financial statements. It
also requires that we make estimates and assumptions that affect the reported
amounts of our revenue and expenses during the reporting periods. Our actual
results could differ from those estimates.
We have a history of incurring losses from operations and have an accumulated
deficit of approximately $26 million as of December 31, 2004. For the six months
ended December 31, 2004, we recorded income from operations of approximately
$1.5 million, but operating activities used $1.5 million of cash. At December
31, 2004, we had cash and cash equivalents of $5.1 million.
We believe our existing working capital and borrowing capacity will be
sufficient to fund our anticipated working capital and capital expenditure
requirements through at least December 31, 2005. We cannot be certain, however,
that the underlying assumed levels of revenues and expenses will be accurate. If
operating results were to fail to meet our expectations, we could be required to
seek additional sources of liquidity. These sources of liquidity could include
raising funds through public or private debt financing, borrowing against our
line of credit or offering additional equity securities. If additional funds are
raised through the issuance of equity securities, substantial dilution to our
stockholders could result. In the event additional funds are required, adequate
funds may not be available when needed or may not be available on favorable
terms, which could have a negative effect on our business and results of
operations.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING DEVELOPMENTS. On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123(R), "Share-Based Payment". SFAS No. 123(R) requires companies
to measure all stock-based compensation awards using a fair value method and
record such expense in their consolidated financial statements. In addition, the
adoption of SFAS No. 123(R) will require additional accounting related to the
income tax effects and additional disclosure regarding the cash flow effects
resulting from share-based payment arrangements. SFAS No. 123(R) is effective
beginning the first quarter of our fiscal year ending June 30, 2006. We are
currently assessing the impact of SFAS No. 123(R) on our stock-based
compensation programs. However, we expect that the requirement to expense stock
options and other equity interests that have been or will be granted to
employees will significantly increase our operating expenses and result in lower
earnings per share.
CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency. We translate assets and liabilities of international
subsidiaries into U.S. dollars using exchange rates in effect at the balance
sheet date, and we report gains and losses from this translation process as a
component of comprehensive income or loss. We translate revenue and expenses
into U.S. dollars using a weighted average exchange rate for the period.
From time to time, we enter into foreign currency forward contracts, typically
against the euro, Canadian dollar, and British pound sterling to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries, thereby limiting our risk that would otherwise
result from changes in currency exchange rates. Although these instruments are
subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed.
These forward contracts do not qualify for hedge accounting under SFAS No. 133,
"Accounting for Derivative
8
Instruments and Hedging Activities", and, as such, the contracts are recorded in
the consolidated balance sheet at fair value. We report a net currency gain or
loss based on changes in the fair value of forward contracts combined with the
changes in fair value of the underlying asset or liability being managed. We had
no forward contracts in place as of December 31, 2004. As of December 31, 2003,
we had forward contracts with a nominal value of approximately $8.5 million,
which matured within 30 days, in place against the Canadian dollar, euro and
British pound sterling. We recognized net currency exchange losses of
approximately $130 thousand and $213 thousand for the three and six months ended
December 31, 2004 and a net currency exchange loss of approximately $30 thousand
and a gain of approximately $29 thousand for the three and six months ended
December 31, 2003.
EARNINGS OR LOSS PER SHARE. We compute basic earnings or loss per share by
dividing net income or loss by our weighted average number of common shares
outstanding during the period. We compute diluted earnings or loss per share by
dividing net income or loss by the weighted average number of common shares
outstanding increased by the additional common shares that would be outstanding
if we had issued the potentially dilutive common shares. We exclude stock
options and warrants from diluted earnings or loss per share to the extent that
their effect would have been antidilutive.
Our diluted earnings or loss per share computations exclude the following common
stock equivalents, as the impact of their inclusion would have been antidilutive
for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Stock options 2,660 2,504 2,298 3,504
Warrants 35 35 35 35
RECLASSIFICATIONS. We have reclassified certain prior year amounts to conform to
the current year presentation, including a reclassification between components
of income (loss) from operations, between components of current assets and
between components of current liabilities. These reclassifications had no impact
on net income (loss), income (loss) from operations, total costs and expenses,
total current assets or total current liabilities for the periods presented.
REVENUE RECOGNITION. To recognize software revenue we apply the provisions of
Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2), as amended
by SOP 98-9, and 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 had assessed our ability to collect
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 had allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support, 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 a contractual relationship with one of our customers stipulates the
submission of a royalty report to us, revenue is generally recorded when the
royalty report is received and recognized in the period that the report covers.
If a royalty report is not received by the desired date to facilitate the
closing of the books for a given fiscal period and there exists the basis to
make a fair and reasonable estimate of the revenue related to that royalty
report, this estimate will be recorded as revenue. Estimated royalty fees and
revenues are subsequently adjusted based upon actual amounts realized. If the
actual amount realized differs materially from the recorded estimate and is
reported to us after an estimate has been recorded and before financial results
are announced externally, the recorded amount will be adjusted to reflect the
actual amount realized. If the amount differs, and is reported after
9
financial results are announced externally or does not differ materially, the
adjustment will be made in the subsequent fiscal period. In cases where the
arrangement with our customer provides for a prepaid nonrefundable royalty, we
recognize revenue when persuasive evidence of an arrangement exits, delivery has
occurred, the fee is fixed or determinable and collection of the resulting
receivable is reasonably assured.
We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we recognize revenue from
training services as these services are performed. For professional services
that involve significant implementation, customization, or modification of our
software that is essential to the functionality of the software, we generally
recognize both the service and related software license revenue over the period
of the engagement, using the percentage-of-completion method. We recognize no
more than 90% of the total contract amount until project acceptance is obtained.
In cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, or where
significant uncertainty about the project completion or customer acceptance
exists, we defer the contract revenue under the completed contract method of
accounting until the uncertainty is sufficiently resolved or the contract is
complete and accepted by the customer. If we were to make different judgments or
use 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.
NOTE 3. STOCK-BASED COMPENSATION PLANS
We apply Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting
for Stock Issued to Employees" and its related interpretations to measure
compensation expense for stock-based compensation plans. Under APB No. 25, we
generally recognize no compensation expense with respect to stock option grants
and shares issued under our employee stock purchase plan. Our stock option plans
allow for the issuance of restricted stock awards, under which shares of our
common stock are issued at par value to employees or directors, subject to
vesting restrictions, and for which compensation expense equal to the fair
market value on the date of grant less par value paid is amortized over the
vesting period.
Had we elected to recognize stock-based compensation expense based on the grant
date fair value as prescribed by SFAS No. 123, our net loss would have been
equal to the pro forma amounts indicated below for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss), as reported $ 1,096 $ 459 $ 1,143 $ (977)
Add: Stock-based compensation included in
reported net income (loss) 291 119 439 556
Less: Stock-based compensation determined
under SFAS No. 123 (917) (2,206) (1,808) (3,342)
-------- -------- -------- --------
Pro forma net income (loss) $ 470 $ (1,628) $ (226) $ (3,763)
======== ======== ======== ========
Basic and diliuted earnings (loss) per share:
As reported $ 0.07 $ 0.03 $ 0.07 $ (0.07)
Pro forma $ 0.03 $ (0.12) $ (0.01) $ (0.27)
We estimated the fair value of shares and options issued pursuant to our
stock-based compensation plans at the date of grant using the Black-Scholes
option-pricing model, which was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
Option valuation models require the input of assumptions, including the expected
stock price volatility. Our options have characteristics significantly different
from those of traded options, and changes in the input assumptions can
materially affect the fair value estimates. The following weighted-average
assumptions and weighted-average fair values were used in determining our
stock-based compensation under SFAS No. 123 for the options granted during the
following periods:
10
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Risk-free interest rate:
Option plans 3.92% 3.85% 3.92-4.13% 3.85-4.04%
Purchase plan 0% 3.84% 0% 0-3.84%
Expected life in years:
Option plans 7.6 7.6 7.6 7.6
Purchase plan -- 0-0.97 -- 0-0.97
Volatility factor:
Option plans 98.9% 103.1% 98.9-99.1% 101.7-103.1%
Purchase plan 0% 103.1% 0% 0.0-103.1%
Dividend yield 0% 0% 0% 0%
Weighted average fair value:
Option plans $ 1.41 $ 3.12 $ 1.81 $ 3.33
Purchase plan $ -- $ 1.15 $ -- $ 1.15
============ ============ ============ ============
On December 31, 2004 our Employee Stock Purchase Plan (the "Plan") was
terminated. No purchase of stock was made from the Plan for the six-month
purchase period ending December 31, 2004. In order to replace the number of
shares of stock and the discounted purchase price employees were expecting to
receive under the terms of the Plan, the Board of Directors granted
non-qualified stock options with an exercise price below the fair market value
on the date of grant to employees that were participants in the Plan. This grant
resulted in a non-cash stock compensation expense of $214 thousand for the three
months ended December 31, 2004.
NOTE 4. DISCONTINUED OPERATIONS
We exited our infrared hardware business in the quarter ended September 30,
2002, we sold our wholly owned subsidiary, Extended Systems Singapore Pte
Limited, in the quarter ended June 30, 2002 and we sold the assets of our
printing solutions segment in the quarter ended June 30, 2001. The results of
these operations have been accounted for as discontinued operations for all
periods presented in accordance with SFAS No. 144 and Accounting Principles
Board Opinion No. 30. Operating results for the discontinued operations are
reported, net of tax, under "Income from discontinued operations" on the
accompanying Statements of Operations.
The following summarizes the results of discontinued operations for the
following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net revenue $ -- $ 29 $ -- $ 169
Gross profit -- 76 -- 145
Income tax provision -- 29 -- 52
Income, net of tax -- 47 -- 88
Earnings per share:
Basic and diluted $ -- $ -- $ -- $ 0.01
NOTE 5. RESTRUCTURING CHARGES
We did not incur restructuring charges for the three and six months ended
December 31, 2004. We recorded approximately $261 thousand and $1.3 million in
workforce reduction costs during the three and six months ended December 31,
2003 that consisted primarily of severance, benefits, and other costs related to
the resignation of Steven Simpson, our former President and Chief Executive
Officer, and Karla Rosa, our former Vice President of Finance and Chief
Financial Officer, and the termination of thirteen employees from our marketing
and sales, research and development, administration and operations groups. Of
the terminated employees, nine were located in the United States and four were
in Europe. The restructuring charge included $62 thousand and $499 thousand of
non-cash compensation resulting from the accelerated vesting of employee stock
options during the three and six months ended December 31, 2003, respectively.
A summary of changes in the accrued restructuring balance for the six months
ended December 31, 2004 is as follows:
11
WORKFORCE
REDUCTION
COSTS
--------
Balance at June 30, 2004 $ 116
Costs incurred in first quarter of fiscal 2005 --
Cash payments (76)
--------
Balance at September 30, 2004 40
Costs incurred in second quarter of fiscal 2005 --
Cash payments (40)
--------
Balance at December 31, 2004 $ --
========
NOTE 6. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Goodwill and other identifiable intangible assets relate to our acquisitions of
Rand Software Corporation in 1998, Oval (1415) Limited in 1999, and AppReach and
ViaFone Inc. in 2002.
Goodwill is reviewed annually for impairment or more frequently if indicators of
impairment arise. We completed our annual impairment assessment in the quarter
ended June 30, 2004 and concluded that goodwill was not impaired. The carrying
amount of goodwill as of December 31, 2004 and June 30, 2004 was approximately
$12.5 million.
Other identifiable intangible assets consisted of the following:
AS OF DECEMBER 31, 2004 AS OF JUNE 30, 2004
------------------------------------------------ ------------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------ ------------ ------------ ------------ ------------ ------------
Purchased technology $ 3,691 $ (3,275) $ 416 $ 3,691 $ (3,165) $ 526
Customer relationships 80 (37) 43 80 (30) 50
Non-compete covenants 6 (6) -- 6 (6) --
Other 5 (5) -- 5 (5) --
------------ ------------ ------------ ------------ ------------ ------------
$ 3,782 $ (3,323) $ 459 $ 3,782 $ (3,206) $ 576
============ ============ ============ ============ ============ ============
Amortization of identifiable intangible assets was $43 thousand and $117
thousand for the three and six months ended December 31, 2004 and was $155
thousand and $344 thousand for the three and six months ended December 31, 2003.
The purchased technology and customer relationship assets are being amortized
over five years. Based on the identifiable intangible assets recorded at
December 31, 2004, the estimated future amortization expense for the remainder
of fiscal 2005 and fiscal 2006, 2007, and 2008 is $86 thousand, $172 thousand,
$172 thousand, and $29 thousand, respectively.
NOTE 7. RECEIVABLES
AS OF DECEMBER 31, AS OF JUNE 30,
2004 2004
------------------ ------------------
Accounts receivable $ 10,452 $ 7,218
Allowance for doubtful accounts and product returns (633) (446)
------------------ ------------------
$ 9,819 $ 6,772
================== ==================
NOTE 8. PROPERTY AND EQUIPMENT
AS OF DECEMBER 31, AS OF JUNE 30,
2004 2004
------------------ ------------------
Land and land improvements $ 533 $ 533
Buildings 5,927 5,927
Computer equipment 4,656 4,030
Furniture and fixtures 1,896 2,285
------------------ ------------------
13,012 12,775
Less accumulated depreciation (8,870) (8,444)
------------------ ------------------
$ 4,142 $ 4,331
================== ==================
12
NOTE 9. ACCRUED EXPENSES
AS OF DECEMBER 31, AS OF JUNE 30,
2004 2004
------------------ ------------------
Accrued payroll and related benefits $ 1,991 $ 1,623
Accrued warranty and support costs 127 156
Other 2,165 1,752
------------------ ------------------
$ 4,283 $ 3,531
================== ==================
NOTE 10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. We currently lease office space at our locations in Boise, Idaho;
Herrenberg, Germany; Toronto, Canada; Corvallis, Oregon; Paris, France; Bristol,
England; San Diego, California; American Fork, Utah; and `s-Hertogenbosch, the
Netherlands. We also lease certain equipment under non-cancelable operating and
capital leases. Lease expense under operating lease agreements was $168 thousand
and $179 thousand for the three months ended December 31, 2004 and 2003,
respectively. For the six months ended December 31, 2004 and 2003, operating
lease expense was $303 thousand and $406 thousand, respectively.
On September 26, 2003, we closed a transaction with Hopkins Financial Services
for the sale-and-leaseback of our headquarters building and land in Boise,
Idaho. Because we have a 10-year option to repurchase the building and land at a
price of $5.1 million and we sublet more than a small portion of the building
space, the sale-and-leaseback was recorded as a financing transaction and is
shown as $4.8 million of long-term debt on our balance sheet at December 31,
2004. As part of the agreement, we entered into a 10-year master lease for the
building with annual lease payments equal to 9.2% of the sale price. We are also
obligated to pay all expenses associated with the building during our lease,
including the costs of property taxes, insurance, operating expenses and
repairs.
Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank ("SVB"). We restructured that
debt into a term loan due in 30 equal monthly installments bearing interest at
8%. The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005. At December 31, 2004, the loan balance was $108 thousand.
Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations as of December 31, 2004 are as
follows:
YEAR ENDING JUNE 30,
-------------------------------------------------------------------------
2005 2006 2007 2008 2009 THEREAFTER TOTAL
-------- -------- -------- -------- -------- -------- --------
SVB debt principal (1) $ 108 $ -- $ -- $ -- $ -- $ -- $ 108
SVB debt interest 1 -- -- -- -- -- 1
Monthly payments pursuant to building
sale-and-leaseback 221 442 442 442 442 1,875 3,864
Capital leases (1) 14 11 6 -- -- -- 31
Operating leases 316 442 319 258 256 64 1,655
Post-retirement benefits (1) 17 17 17 17 17 68 153
-------- -------- -------- -------- -------- -------- --------
$ 677 $ 912 $ 784 $ 717 $ 715 $ 2,007 $ 5,812
======== ======== ======== ======== ======== ======== ========
(1) These amounts are reported on the balance sheet as liabilities.
Non-current capital lease obligations are as follows:
AS OF
DECEMBER 31, 2004
------------
Gross capital lease obligations $ 33
Less: Imputed interest (2)
------------
Present value of net minimum lease payments 31
Less: Current portion (20)
------------
Non-current capital lease obligations $ 11
============
GUARANTEES. We have provided a guarantee that secures our rental payments at our
Bristol, England location. We could be required to perform under this guarantee
if we were to default with respect to any of the terms, provisions, covenants,
or conditions of the lease agreement. This guarantee is valid until the
expiration of our lease on January 13, 2005. The maximum potential
13
amount of future payments we could be required to make under this letter of
credit as of December 31, 2004 is approximately $25 thousand.
INDEMNIFICATIONS. We enter into standard indemnification agreements in our
ordinary course of business. Pursuant to these agreements, we indemnify, defend,
hold harmless, and agree to reimburse the indemnified party for losses suffered
or incurred by the indemnified party in connection with any U.S. patent,
copyright or other intellectual property infringement claim by any third party
with respect to our products. The term of these indemnification agreements is
generally perpetual any time after execution of the agreement. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited. To date, we have not incurred costs to
defend lawsuits or settle claims related to these indemnification agreements.
As permitted under Delaware law, we have agreements whereby we indemnify our
officers and directors for certain events or occurrences while the officer or
director is, or was, serving at our request in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have a director and officer
insurance policy that limits our exposure and may enable us to recover a portion
of any future amounts paid. We have not incurred costs to defend lawsuits or
settle claims related to these indemnification agreements.
From time to time we enter into indemnification agreements in our ordinary
course of business with certain service providers, such as financial
consultants, whereby we indemnify such service providers from claims, losses,
damages, liabilities, or other costs or expenses arising out of or related to
their services. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited. To date,
we have not incurred costs to defend lawsuits or settle claims related to these
indemnity obligations.
WARRANTIES. We offer warranties on both our software products and discontinued
hardware products. We record an accrual for the estimated future costs
associated with warranty claims based upon our historical experience and our
estimate of future costs. We also include in the warranty reserve an accrual for
the estimated future costs associated with free support that we provide on
certain products. The adequacy of our warranty reserve is reviewed at least
quarterly and if necessary, adjustments are made.
The following table reconciles the changes in our warranty reserve for the six
months ended December 31, 2004:
Balance at June 30, 2004 $ 156
Net changes in warranty accrual for the three months ended September 30, 2004 --
--------
Balance at September 30, 2004 156
Net changes in warranty accrual for the three months ended December 31, 2004 (29)
--------
Balance at December 31, 2004 $ 127
========
LINE OF CREDIT. We have a loan and security agreement with SVB under which we
can access up to $2.5 million of financing in the form of a demand line of
credit. Our borrowing capacity is limited to 80% of eligible accounts
receivable. Interest on any borrowings is payable at prime and certain of our
assets collateralize the line of credit. We are required to maintain certain
financial ratios under the terms of the agreement, which will expire on August
30, 2006. As of December 31, 2004, we had no outstanding borrowings on the line
of credit, and we were in compliance with all financial covenants required under
the line of credit.
LITIGATION. On June 29, 2004 AppForge, Inc. ("AppForge") filed a complaint
against us in the United States District Court for the District of Delaware. An
amended complaint was filed on August 12, 2004 joining Extended Systems of
Idaho, Inc. ("ESI-Idaho") and four of our European subsidiaries. ESI-Idaho and
AppForge are parties to a distribution and license agreement related to certain
AppForge software. AppForge alleges that the defendant Extended Systems
companies have used AppForge's technology and trademarks in a manner not
authorized by the parties' agreement. We believe that our use and distribution
of AppForge's software has been within the scope of the parties' agreement.
Since the parties' license agreement provides for arbitration of disputes,
ESI-Idaho filed a demand for arbitration with the American Arbitration
Association on August 3, 2004 seeking a declaration of the parties' respective
rights and obligations. At the same time, in the Delaware action, the Extended
Systems defendants have moved the Court for dismissal or a stay of the case,
because the parties' license agreement provides that arbitration is the sole
forum for resolution of disputes arising out of or related to the license and
distribution agreement. Our four European subsidiaries have moved for dismissal
of the case on the ground they are not subject to personal jurisdiction in
Delaware.
We believe that we have meritorious defenses against this action, and we will
continue to vigorously defend it.
We are also, from time-to-time, a party to legal disputes and proceedings
arising in the ordinary course of general business activities. After taking into
consideration legal counsel's evaluation of such disputes, we do not believe
their outcome will have a material effect on our financial position or results
of operations.
14
NOTE 11. INCOME TAXES
We recorded income tax expense from continuing operations of $7 thousand and $32
thousand for the three and six months ended December 31, 2004, respectively, and
$9 thousand and $13 thousand for the three and six months ended December 31,
2003, respectively. The expense related primarily to foreign withholding taxes.
For the three and six months ended December 31, 2003 we recorded $29 thousand
and $52 thousand, respectively, of income tax expense for discontinued
operations.
NOTE 12. BUSINESS SEGMENT, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS
We determine our reportable segments by evaluating our management and internal
reporting structure based primarily on the nature of the products offered to
customers and type or class of customers.
We classify our product offerings into one operating segment, the adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. Our products in the adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions that we sell to enterprises, original
equipment manufacturers, application developers, distributors and valued-added
resellers.
Our headquarters is located in the United States. We have research and
development facilities in the United States, United Kingdom and Canada. We
conduct sales, marketing and customer service activities throughout the world,
and we have sales offices in North America and Western Europe. The following
table presents our geographic revenue information based on the location of the
selling entity.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net revenue from Continuing Operations:
North America $ 5,162 $ 4,275 $ 9,563 $ 8,900
Germany 2,715 2,001 4,794 3,341
Other countries 2,064 2,231 3,430 3,821
-------- -------- -------- --------
Total net revenue $ 9,941 $ 8,507 $ 17,787 $ 16,062
======== ======== ======== ========
Substantially all of our long-lived assets are in the United States.
No customer accounted for more than 10% of our net revenue from continuing
operations in the three and six months ended December 31, 2004 or 2003.
NOTE 13. RESTRICTED STOCK
In our fiscal year ended June 30, 2004, we granted shares of restricted stock
with a purchase price equal to $.001 per share to certain employees. Annually,
we grant shares of restricted stock with a purchase price equal to $.001 per
share to directors on the date of the annual stockholders' meeting. The issuance
of restricted stock grants results in unamortized stock-based compensation based
on the closing price of Extended Systems common stock on the date of the stock
grants. This compensation is amortized as a non-cash compensation charge as the
restrictions lapse.
We amortize non-cash stock compensation charges on a straight-line basis over
the vesting period. The restricted stock awards granted to employees in our
fiscal year ended June 30, 2004 vested in full on October 31, 2004, the first
anniversary of the grant date. The restricted stock awards granted to directors
vest in the amount of one-third on the first anniversary of the grant date and
one-third in each of the following two years. If the director attends the
required number of board meetings held during the year, the restrictions on his
awards will lapse in full on the first anniversary of the grant date. If an
employee or director terminates service before vesting is complete, the
restricted stock is repurchased from the individual and any compensation expense
previously recognized is reversed, thereby reducing the amount of stock-based
compensation amortization during the period.
During the three and six months ended December 31, 2004, we recognized stock
compensation expense of $77 thousand and $226 thousand related to the above
restricted stock grants. Compensation expense related to restricted stock grants
was $112 thousand for the three and six months ended December 31, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
- ------------
We begin Management's Discussion and Analysis of Financial Condition and Results
of Operations with an overview to give the reader management's perspective on
our results for the second quarter of fiscal 2005 and our general outlook for
the remainder of the current fiscal year. This is followed by a discussion of
the critical accounting policies that we believe are important to understanding
the assumptions and judgments incorporated in our reported financial results. In
the next section, we discuss our
15
results of operations for the second quarter and first half of fiscal 2005
compared to the second quarter and first half of fiscal 2004. We then provide an
analysis of our liquidity and capital resources.
This discussion and other parts of this Quarterly Report on Form 10-Q contain
forward-looking statements (within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended). These 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 in this Quarterly Report on Form 10-Q 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 these
forward-looking statements. Factors that may cause a difference include, but are
not limited to, those discussed under the sections titled "Factors That May
Affect Future Results and Market Price of Stock" and "Liquidity, Capital
Resources and Financial Condition". The following discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and notes
thereto appearing elsewhere in this Quarterly Report on Form 10-Q. All yearly
references are to our fiscal years ended June 30, 2005 and 2004, unless
otherwise indicated. All tabular amounts are in thousands, except percentages.
OVERVIEW
- --------
We are a leading provider of software and services that delivers solutions to
help companies streamline their business processes and improve workforce
productivity through mobilizing corporate applications and data. We also provide
software and expertise that enable our mobile device manufacturer customers to
accelerate their product development cycles and enhance the functionality of new
products they bring to market. The users of our products are enterprise
employees that complete their jobs or portions of their jobs outside of the
company-owned facilities where they have traditionally accessed, viewed and
updated information through wired networks. Also advancing the adoption of
enterprise mobility solutions is the increased availability and capability of
powerful mobile devices, such as PDAs, mobile phones and smartphones.
Enterprises are increasingly realizing they can improve their competitiveness by
mobilizing corporate information.
We believe a full understanding of our operating results for the second quarter
of fiscal 2005 requires an understanding of how the mobility solutions market is
evolving and how this evolution influences our company's performance. Although
the mobility solutions market is still in the early phases of development,
organizations are increasingly developing a mobile computing strategy as part of
their plans to increase productivity, improve competitiveness and enhance
customer relationships. However, the slow growth recovery occurring in most
global economies coupled with customers demonstrating a very disciplined
approach to information technology spending continue to restrain information
technology spending and cause 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 dominant portion of our enterprise mobility software
revenue.
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
smartphones and converged devices, adoption rates for these devices have
increased. To address the growth in this market, the rapid product development
cycles, and the demand for a robust feature set, device manufacturers have
increasingly turned to third parties to provide the technology for short-range
wireless connectivity products. Our mobile device solutions revenue declined in
the first half of fiscal of 2005 as handset manufacturers reduced the volume of
shipments that included our products, and we also experienced declines in
pricing.
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. We have gained market awareness in Europe and
developed long-standing customer relationships. A significant portion of our
revenue in the second fiscal quarter of 2005 and for the six months ended
December 31, 2004 was derived from European customers purchasing our enterprise
mobility solutions and European device manufacturers introducing successful
converged devices that contained our mobile device solutions products. Our
second fiscal quarter has historically produced strong revenue in our European
geographies. Our revenue from European customers that purchase our products in
either British pound sterling or euros is affected by changes in the exchange
rate between these currencies and the U.S. dollar. In both the first and second
quarter of fiscal 2005, the weakening of the U.S. dollar positively affected our
reported revenue.
In 1993, we introduced our first enterprise database products. We continue to
market and sell these products to application developers and enterprises to
support the data requirements of both mobile and traditional enterprise
applications. Revenue from these products was essentially the same in the first
half of fiscal 2005 as compared to the first half of fiscal 2004. Application
developers that purchase our enterprise database products have required a
solution that is stable, mature and priced competitively. We have developed an
extensive network of resellers that market these products globally. Because
these products do not require heavy research and development investment or
significant sales and marketing support, they have been an
16
important and significant source of positive cash flow to our company in the
first half of fiscal 2005. We expect this product line to continue the trend of
flat to slightly declining revenue for the remainder of fiscal 2005.
In the remaining quarters of fiscal 2005 we will continue to focus on revenue
growth by generating more sales of our solutions to enterprise customers and
mobile device manufacturers. We believe enterprise customers will continue the
trend of investing first in mobile mail and messaging software and later move
toward purchasing mobile applications that can have an immediate financial
impact. Examples of these mobile applications are field service, supply chain
and logistics, healthcare, field sales and education applications. Enterprises
will choose vendors with knowledge of workflows and business processes and those
that can provide a business case for investment. We expect to compete directly
with both larger companies that have significant resources and experience and
smaller companies that focus on a particular mobile vertical. We also expect to
experience longer sales cycles, which is typical for sales of larger, essential
business applications.
Our operating expenses declined in the second fiscal quarter of 2005 as compared
to the second quarter of last year by $367 thousand. However, the decline was
due primarily to restructuring charges and costs associated with defending
ourselves in a patent infringement case in the second quarter of last year that
did not recur in fiscal 2005. Without these expenditures, our operating expenses
increased $670 thousand primarily as a result of higher marketing and sales
expenses and research and development expenses. Revenue increased $1.4 million
in the second quarter of fiscal 2005 compared to the prior year's second
quarter. Due to revenue growth outpacing the spending increases, we experienced
both income from operations of $1.3 million and net income of $1.1 million in
the second quarter of fiscal 2005.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
- -------------------------------------------------
In preparing our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, we make
estimates, assumptions and judgments that can have a material impact on our net
revenue, operating income and net income (loss), as well as on the value of
certain assets on our consolidated balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on our consolidated financial statements, so
we consider these to be our critical accounting policies. The policies described
below are not intended to be a comprehensive list of all our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles, with no need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. The audited consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended June
30, 2004 contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies we
consider critical to an understanding of the consolidated financial statements
are highlighted below.
REVENUE RECOGNITION
- -------------------
Revenue recognition rules for software companies are very complex. We follow
specific and detailed guidelines in determining the proper amount of revenue to
be recorded; however, certain judgments must be made by management in
interpreting the rules and in applying our revenue recognition policy. Revenue
results are difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary significantly.
To recognize software revenue we apply the provisions of Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2), as amended by SOP 98-9, and
recognize revenue when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is
fixed or determinable and (4) collection of the resulting receivable is
reasonably assured.
At the time of a transaction, we assess whether the fee associated with our
revenue transactions is fixed or determinable, based on the payment terms
associated with the transaction. If payment terms are extended for a significant
portion of the fee or there is a risk that the customer will expect a
concession, we account for the fee as not being fixed or determinable. In these
cases, we recognize revenue as the fees become due and payable. If we had
assessed the fixed or determinable criterion differently, the timing and amount
of our revenue recognition may have differed materially from that reported.
At the time of the transaction we also assess whether or not collection is
reasonably assured, based on a number of factors, including past transaction
history with the customer and credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not reasonably assured, we defer recognition of the fee as revenue and
recognize revenue at the time collection becomes reasonably assured, which is
generally upon receipt of cash. If we had assessed our ability to collect
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
17
in the contracts, and the fair value of services, such as training or
consulting, is based upon separate sales by us of these services to other
customers. If we had allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support, 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 a contractual relationship with one of our customers stipulates the
submission of a royalty report to us, revenue is generally recorded when the
royalty report is received and recognized in the period that the report covers.
If a royalty report is not received by the desired date to facilitate the
closing of the books for a given fiscal period and there exists the basis to
make a fair and reasonable estimate of the revenue related to that royalty
report, this estimate will be recorded as revenue. Estimated royalty fees and
revenues are subsequently adjusted based upon actual amounts realized. If the
actual amount realized differs materially from the recorded estimate and is
reported to us after an estimate has been recorded and before financial results
are announced externally, the recorded amount will be adjusted to reflect the
actual amount realized. If the amount differs, and is reported after financial
results are announced externally or does not differ materially, the adjustment
will be made in the subsequent fiscal period. In cases where the arrangement
with our customer provides for a prepaid nonrefundable royalty, we recognize
revenue when persuasive evidence of an arrangement exits, delivery has occurred,
the fee is fixed or determinable and collection of the resulting receivable is
reasonably assured.
We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we recognize revenue from
training services as these services are performed. For professional services
that involve significant implementation, customization, or modification of our
software that is essential to the functionality of the software, we generally
recognize both the service and related software license revenue over the period
of the engagement, using the percentage-of-completion method. We recognize no
more than 90% of the total contract amount until project acceptance is obtained.
In cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, or where
significant uncertainty about the project completion or customer acceptance
exists, we defer the contract revenue under the completed contract method of
accounting until the uncertainty is sufficiently resolved or the contract is
complete and accepted by the customer. If we were to make different judgments or
use 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 assumed, with the remaining amount
being classified as goodwill. Certain intangible assets, such as "developed
technologies," are amortized to expense over time, while in-process research and
development costs ("IPR&D"), if any, are immediately expensed in the period the
acquisition is completed. Identifiable intangible assets are currently amortized
over a five-year period using the straight-line method.
The majority of entities we acquire do not have significant tangible assets and,
as a result, a significant portion of the purchase price is typically allocated
to intangible assets and goodwill. Our future operating performance will be
affected 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 effect 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
18
available. When the information is not readily available, we use a projected
discounted cash flow method using a discount rate commensurate with the risk
inherent in our current business model to measure any impairment. If we had made
different judgments or used 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 December 31, 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 had made different judgments or used 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 had made different
judgments or used 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 our international subsidiaries from their functional
currencies, generally the local currency, into U.S. 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's 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 U.S. 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 U.S. dollar, any translation gains or losses arising after the
date of change would be included within our statement of operations.
Based on our assessment of the factors discussed above, we consider the relevant
subsidiary's local currency to be the functional currency for each of our
international subsidiaries. Accordingly, during the quarters ended December 31,
2004 and 2003 translation adjustments of $714 thousand and $302 thousand,
respectively, were recorded as additions to our accumulated other comprehensive
loss. At December 31, 2004 and June 30, 2004, cumulative translation losses of
approximately $2.4 million and $1.5 million were included as part of accumulated
other comprehensive loss within our balance sheet. These translation losses have
accumulated since we formed our first non-U.S. subsidiary in 1991. Had we
determined that the functional currency of our subsidiaries was the U.S. dollar,
we would have computed a remeasurement gain or loss using a different method and
such gain or loss would have been included in our results of operations for each
of the periods presented.
19
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 U.S. dollar and the significance of the assets, liabilities, revenue and
expenses denominated in foreign currencies. These currencies include the euro,
the British pound sterling and Canadian dollar. Any future translation gains or
losses could be significantly higher than those noted in each of these periods
presented. In addition, if we determine that a change in the functional currency
of one of our subsidiaries has occurred at any point in time or we sell or
liquidate one of our subsidiaries, we would be required to include any
translation gains or losses from the date of change in our statement of
operations.
LEGAL CONTINGENCIES
- -------------------
From time to time we may be involved in various legal proceedings and claims.
Periodically, but not less than quarterly, we review the status of each
significant matter and assess our potential financial exposure. If the potential
loss from any legal proceeding or claim is considered probable and the amount
can be reasonably estimated, we accrue a liability for the estimated loss.
Significant judgment is required in both the determination of probability and
the determination as to whether an exposure is reasonably estimable. Due to the
uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending litigation and claims
and may revise our estimates. Such revisions could have a material impact on our
results of operations and financial condition.
RESULTS OF OPERATIONS
- ---------------------
CONTINUING OPERATIONS
- ---------------------
The following table sets forth the selected condensed consolidated financial
data, expressed as a percentage of total revenue, for the three and six months
ended December 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenue:
License fees and royalties 77% 83% 76% 80%
Services and other 23 17 24 20
-------- -------- -------- --------
Total net revenue 100 100 100 100
Costs and expenses:
Cost of license fees and royalties 1 2 1 1
Cost of services and other 11 12 11 13
Amortization of identifiable intangibles 1 2 1 2
Research and development 19 18 20 20
Marketing and sales 38 41 41 42
General and administrative 14 17 15 17
Restructuring charges -- 3 -- 8
Patent litigation fees, license and settlement -- 9 -- 8
Non-cash stock compensation 3 2 2 1
-------- -------- -------- --------
Total costs and expenses 87 106 91 112
-------- -------- -------- --------
Income (loss) from operations 13 (6) 9 (12)
Other income (expense), net (1) -- (1) --
Gain on sale of land -- 12 -- 6
Interest expense (1) (2) (2) (1)
-------- -------- -------- --------
Income (loss) before income taxes 11 4 6 (7)
Income tax provision -- -- -- --
-------- -------- -------- --------
Income (loss) from continuing operations 11 4 6 (7)
Discontinued operations, net of tax:
Income from discontinued operations -- 1 -- 1
-------- -------- -------- --------
Net income (loss) 11% 5% 6% (6)%
======== ======== ======== ========
20
COMPARISON OF THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
REVENUE
- -------
The following table presents our license fees and royalties, support and
maintenance, and professional services and other revenue for the three and six
months ended December 31, 2004 and 2003, and the percentage changes from the
prior year.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- ------------------------------------
2004 % CHANGE 2003 2004 % CHANGE 2003
-------- -------- -------- -------- -------- --------
Revenue:
License fees and royalties $ 7,640 8% $ 7,057 $ 13,441 5% $ 12,828
Support and maintenance 1,374 45 950 2,635 32 1,992
Professional services and other 927 85 500 1,711 38 1,242
-------- -------- -------- -------- -------- --------
Total net revenue $ 9,941 17% $ 8,507 $ 17,787 11% $ 16,062
======== ======== ======== ======== ======== ========
We sell our adaptive mobility products to enterprises, original equipment
manufacturers ("OEMs"), application developers, distributors and valued-added
resellers. No customer accounted for greater than 10% of revenue from continuing
operations in the second quarter or the first six months of fiscal 2005 or 2004.
LICENSE FEES AND ROYALTIES. The majority of our product license revenue consists
of fees related to products licensed to customers on a perpetual basis. Product
license fees can be associated with a customer's licensing of a given software
product for the first time or with a customer's purchase of the right to run a
previously licensed product on additional computing capacity or by additional
users. Our royalty revenue primarily consists of fees related to our OEM
customers periodically increasing the number of units they are authorized to use
of a licensed software product and these fees are normally paid on a quarterly
basis.
We classify our product offerings into one operating segment, the adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. Our products in the adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions.
The table below presents total net license fees and royalty revenue by product
line and each product line's percentage of license fees and royalty revenue for
the three and six months ended December 31, 2004 and 2003.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- ------------------------------------
2004 % CHANGE 2003 2004 % CHANGE 2003
-------- -------- -------- -------- -------- --------
License fees and royalties:
Enterprise Mobility Solutions $ 3,766 22% $ 3,076 $ 6,451 19% $ 5,426
% of license fees and royalty
revenue 50% 44% 48% 42%
Mobile Device Solutions 1,934 (6) 2,056 3,423 (11) 3,834
% of license fees and royalty
revenue 25% 29% 25% 30%
Enterprise Database Solutions 1,940 1 1,925 3,567 0 3,568
% of license fees and royalty
revenue 25% 27% 27% 28%
-------- -------- -------- -------- -------- --------
Total net revenue $ 7,640 8% $ 7,057 $ 13,441 5% $ 12,828
======== ======== ======== ======== ======== ========
We sell our enterprise mobility products to corporate customers either directly
through our field sales staff or through distributors, valued-added resellers
and other channel partners. License revenue from our enterprise mobility
products increased $690 thousand in the second quarter of fiscal 2005 compared
to the second quarter of fiscal 2004 and approximately $1 million for the six
months ended December 31, 2004 compared to the six months ended December 31,
2003. The increase in enterprise mobility product license revenue was the result
of several factors, including an OEM sale of our enterprise XTNDConnect PC
product for use in connection with a third party's mail and messaging software.
We do not anticipate significant license revenue from this sale for the
remainder of fiscal 2005 since the contract was essentially completed in the
second quarter. Additionally, the weakening of the U.S. dollar versus the
British pound sterling and the euro increased reported revenue in the first half
of fiscal 2005. See "International Revenue" below for further discussion. The
increase in revenue recorded was also a result of our installed customer base
rolling out additional licenses of our OneBridge Mobile Groupware application
and sales of this product to new enterprise customers in both Europe and North
America. We believe these customers purchased OneBridge Mobile Groupware because
of its competitive total cost of ownership combined with the OneBridge platform
design, which enables customers to roll out future mobile applications, such as
mobile field service and mobile sales force automation applications, using the
same infrastructure as the devices that receive e-mail.
We sell our mobile device products either directly or through distributors,
primarily to OEMs that supply the mobile handset and the telematics industries.
License fees and royalty revenue from our mobile device products decreased $122
thousand in the second quarter of fiscal 2005 compared to the second quarter of
fiscal 2004 and decreased $411 for the first six months of fiscal 2005 compared
to the first six months of fiscal 2004. The decline in revenue was due primarily
to a lower level of royalties from a
21
European handset manufacturer. Although our products continue to be licensed by
the manufacturer, volumes and unit pricing for both the first and the second
quarter of fiscal 2005 were lower than the amounts for the previous year's
comparable quarters. We do not expect revenue from this customer to increase
significantly in the remaining quarters of fiscal 2005. Offsetting this decline
somewhat was approximately $450 thousand in the second quarter and $350 thousand
in the first quarter of revenue related to products embedded in handsets that
were shipped by our customers prior to the beginning of each of these quarters.
Revenue related to these shipments was not recognized in the quarter the
customer products were shipped due to the lack of timely reporting of royalties
by our customers or lack of appropriate customer signatures on the license
agreements.
Royalty revenue generated from sales to OEMs 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. We currently have a large opportunity to license our software to a
major semi-conductor manufacturer, which could, if it continues to develop and
close during the third quarter, positively impact revenue growth for this
product line in the third quarter of fiscal 2005. Without this significant
revenue opportunity, we expect this product to have flat to decreasing revenue
in comparison to quarterly results for the prior year. Additionally, quarterly
fluctuations in revenue can occur due to the nature of the arrangements with
customers, which can vary between quarterly royalty payments that become due as
devices are shipped by the manufacturer and one-time payments that allow the
customer either unlimited or a capped number of licenses. Finally, we have
experienced late royalty reporting from our customers, and despite efforts to
coordinate more closely with our customers, we anticipate late reporting could
recur in future quarters.
We sell our database products to enterprise customers and software developers
who write applications utilizing our product's data management capabilities.
License revenue from our enterprise database product lines in the first quarter
and second quarter of fiscal 2005 was approximately the same as the revenue
recorded in the first and second quarters of fiscal 2004. We anticipate flat to
declining revenue from this product line for the remainder of fiscal 2005.
SUPPORT AND MAINTENANCE. Support and maintenance revenue is derived
predominantly from our enterprise mobility products and represents the ratable
recognition of fees to enroll customers in our software maintenance and support
programs. Enrollment in these programs generally entitles customers to product
enhancements, technical support services and ongoing product 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 generally in the range of 15% to 20% of the discounted
price of the product. For software products sold through resellers that provide
support directly to their customers, this range has been 11% to 14%. Software
sold to mobile device solutions OEM customers generally does not include support
and maintenance agreements or the support and maintenance revenue is much lower
in comparison to the license revenue, as technical issues are generally resolved
before our software is embedded into our customers' devices and the sales
transaction is completed.
Support and maintenance revenue increased $424 thousand in the second quarter of
fiscal 2005 compared to the second quarter of fiscal 2004 and $643 thousand for
the six months ended December 31, 2004 compared to the six months ended December
31, 2003. This increase was the result of customers who had previously purchased
our OneBridge products renewing support and maintenance contracts combined with
the ratable recognition of revenue from new support and maintenance contracts
sold to customers purchasing our products for the first time in the second
quarter of fiscal 2005. Our support and maintenance revenue depends on both our
software license revenue and renewals of support and maintenance agreements by
our existing customers. Our support and maintenance revenue has increased as a
result of both support and maintenance sold with new licenses and support and
maintenance renewals. We expect that our support and maintenance revenue will
increase as our license revenue increases and decrease as our license revenue
decreases.
PROFESSIONAL SERVICES AND OTHER. Professional services and other revenue is
derived primarily from our work related to enterprise mobility products and
consists of fees for consulting, product installations, training, and developing
custom applications that utilize our middleware products such as OneBridge
Mobile Data Suite. Professional services revenue is driven by our customers
purchasing services to aid them in developing software solutions for their
mobile workforce in both Europe and North America. Additionally, we derive
professional services revenue as we perform custom modifications or porting of
our mobile device solutions products for OEM customers.
Professional services revenue increased $427 thousand in the second quarter of
fiscal 2005 compared to the second quarter of fiscal 2004 and increased $469
thousand for the six months ended December 31, 2004 compared to the six months
ended December 31, 2003. The increased revenue in the second quarter of fiscal
2005 was the result of increased customer demand for services from our
enterprise mobility group to build custom applications and assist with OneBridge
Mobile Groupware deployments. In the first quarter of fiscal 2005, our
professional services group substantially completed a significant project for
one of our European carrier partners to develop a mobile field service
application for use by its workers.
Based on the projects currently scheduled for the third quarter of fiscal 2005,
we expect professional services revenue in the third quarter of fiscal 2005 to
be approximately the same as the revenue in the second quarter of fiscal 2005.
Although we expect approximately the same amount of billable hours for our
professional services group, professional services 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.
22
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 OEMs and a number of international distributors. Based on the
region in which the customer resides, the table below presents total net revenue
by region and each region's percentage of total net revenue for the three and
six months ended December 31, 2004 and 2003.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- ------------------------------------
2004 % CHANGE 2003 2004 % CHANGE 2003
-------- -------- -------- -------- -------- --------
International revenue:
North America $ 3,376 11% $ 3,050 $ 6,666 6% $ 6,285
% of total net revenue 34% 36% 37% 39%
Europe 5,278 12 4,698 9,013 14 7,923
% of total net revenue 53% 55% 51% 49%
Asia Pacific and Rest of World 1,287 70 759 2,108 14 1,854
% of total net revenue 13% 9% 12% 12%
-------- -------- -------- -------- -------- --------
Total net revenue $ 9,941 17% $ 8,507 $ 17,787 11% $ 16,062
======== ======== ======== ======== ======== ========
Sales to North American customers increased $326 thousand in the second quarter
of fiscal 2005 compared to the second quarter of fiscal 2004 and increased $381
thousand in the six months ended December 31, 2004 compared to the six months
ended December 31, 2003. The sales increase was a result of a significant OEM
sale of our enterprise XTNDConnect PC product for use in connection with a third
party's mail and messaging software.
Sale