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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, 2000
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. / /
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing price of such stock as of September 8, 2000,
as reported by The Nasdaq Stock Market, was approximately $279 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 conclusive.
As of September 8, 2000, there were 10,412,918, 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 held on October 25, 2000, are incorporated by reference in
Part III of this Form 10-K to the extent stated herein.
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1
EXTENDED SYSTEMS INCORPORATED
FISCAL YEAR 2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I.
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 34
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
PART III.
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
SIGNATURES 59
2
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS. IN THIS FORM 10-K, THE WORDS "EXPECTS," "ANTICIPATES," "BELIEVES,"
"INTENDS," "WILL" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS,
WHICH ARE BASED UPON INFORMATION CURRENTLY AVAILABLE TO US, SPEAK ONLY AS OF THE
DATE HEREOF AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. WE ASSUME NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE
RESULTS AND MARKET PRICE OF STOCK." YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED IN OTHER DOCUMENTS THAT WE FILE FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION, INCLUDING OUR QUARTERLY REPORTS ON FORM 10-Q TO BE
FILED IN FISCAL 2001. ALL PERIOD REFERENCES ARE TO OUR FISCAL YEARS ENDED JUNE
30, 2001, 2000, 1999 AND 1998, UNLESS OTHERWISE INDICATED.
PART I
ITEM 1. BUSINESS
OVERVIEW
We provide mobile information management products designed to increase the
efficiency of mobile computing and communications. Enterprises and users are
increasingly relying on mobile devices to access time-sensitive and critical
information and enable personal information management, enterprise automation
and mobile workforce management. Our mobile information management products
empower users to access, collect, synchronize and print information on demand
from various locations and from a variety of devices. These devices include
mobile phones, pagers and personal digital assistants, which operate using the
Palm OS, Windows CE and Symbian EPOC operating systems. Our mobile information
management products feature:
- - mobile data synchronization and management software and applications;
- - wireless connectivity technology based on Bluetooth and Infrared Data
Association standards;
- - client/server database management systems with remote access capabilities;
and
- - software and appliances that enable enterprises to use the Internet.
We design our products and technologies to provide cost-effective and reliable
mobile computing to enterprises, users, manufacturers of mobile devices,
application developers and telecommunications service providers. Our products
enable:
- - synchronization of information between disparate mobile devices and between
mobile devices and personal computers or enterprise networks;
- - access to 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;
- - users and enterprises to increase their efficiency and flexibility by using
their mobile devices for a variety of new tasks, thereby increasing their
use of these devices; and
- - device manufacturers and application developers to design products to
better meet the needs of enterprises and users, and telecommunications
service providers to enhance their revenue opportunities.
We have relationships with or sell our products to leading mobile communications
and computing companies and corporate enterprises, including 3Com, British
Airways, Casio, Compaq, DaimlerChrysler, Enron, Ericsson, Fujitsu,
Hewlett-Packard, IBM, Intel, iPlanet, Microsoft, Motorola, Nokia, One2One,
Orange, Palm, Sharp, Siemens and Toshiba.
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INDUSTRY BACKGROUND
The use of mobile devices has increased tremendously as laptop and handheld
computers, mobile phones, pagers and personal digital assistants have achieved
popular acceptance and become more advanced and powerful. Improvements in mobile
technology and wireless infrastructure are facilitating greater bandwidth,
thereby enabling both data and voice transmission. Gartner Group-Dataquest, an
industry research firm, projects that the number of mobile phone users will grow
to 1.4 billion by 2003. Gartner Group-Dataquest also projects that worldwide
sales of mobile devices other than mobile phones will increase to 55 million
units per year by 2003.
Meanwhile, competition and deregulation in the wireless communications industry
have resulted in downward pressure on wireless service rates. Consequently,
service providers are attempting to maximize revenue opportunities by developing
new services and encouraging usage, while simultaneously reducing the costs
associated with customer turnover and the deployment of new services. As a
result, mobile device manufacturers and application developers face pressure
from service providers to increase the usability and value of their devices and
applications. Many of these manufacturers and developers seek to utilize data
communications capabilities to do so. However, the absence of common standards
for data communications has historically prevented the widespread adoption and
promotion of data communications across the mobile communications industry. To
address this situation, industry consortia were formed to develop industry-wide
standards and protocols for wireless communication. These consortia have
developed various complementary protocols, including protocols for short-range
radio-frequency communication, known as Bluetooth, infrared communication
protocols created by the Infrared Data Association, known as IrDA, data
synchronization protocols, known as SyncML, and the Wireless Application
Protocol, known as WAP. Service providers, device manufacturers and application
developers are integrating these data communication capabilities to improve
functionality and deliver an array of mobile communications products and
services.
Enterprises seek to increase productivity through the easy, secure and
cost-effective management of information access, collaboration and the use of
mobile devices. Increasingly, users need secure, reliable and efficient access
to critical information on demand. In addition, users need access to enterprise
network information from many locations, both within and outside an enterprise's
facilities, and through various mobile devices. As a result, mobile devices are
being used for:
- - PERSONAL INFORMATION MANAGEMENT. Users employ mobile devices in conjunction
with their primary computers for tasks such as contact management,
scheduling and e-mail access.
- - ENTERPRISE AUTOMATION. Enterprises deploy mobile devices for tasks within
the enterprise such as inventory control and management, quality assurance,
data entry and access.
- - MOBILE WORKFORCE MANAGEMENT. Enterprises deploy mobile devices for tasks
outside the enterprise such as sales force automation, real-time
collaboration and data access.
Unfortunately, providing flexible information access has been a cumbersome and
expensive proposition and has historically required that users make a wired
connection to the network wherever they required access. In addition, with the
increased use of mobile devices, many users currently must employ several
devices simultaneously. Although they all may require access to the same
information, these devices often run applications on separate platforms. For
example, a mobile worker using a laptop for corporate e-mail may also use a
personal digital assistant with personal contact information, and a mobile phone
with an embedded directory, each of which functions with different operating
systems, platforms and data delivery formats. To facilitate user productivity,
this information must be synchronized and managed across devices and
applications. Thus, users require simple, secure tools to access, collect,
synchronize and print information.
Enterprises, users, device manufacturers, application developers and service
providers demand a solution that provides data management and wireless
connectivity between disparate mobile devices, and between mobile devices and
the information and applications which reside on personal computers or the
enterprise network. This type of solution must allow:
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- - enterprises to provide cost-effective and seamless access to information
regardless of location;
- - users to increase their productivity by connecting a variety of mobile
devices to access and manage information;
- - device manufacturers and application developers to enhance the value and
usability of their devices and applications, facilitating greater market
acceptance and increased use; and
- - telecommunications service providers to take advantage of data
communication capabilities to drive increased usage and user loyalty.
OUR SOLUTION
We develop and market mobile information management products that enable secure,
reliable and efficient access, collection, synchronization and printing of
information on demand. We have designed our products to:
- - ENABLE MOBILE DATA MANAGEMENT. Our mobile data management products enable
enterprises and users to synchronize information between disparate mobile
devices and between mobile devices and personal computers or enterprise
networks. We believe enterprises can reduce their initial capital
investment in computer hardware and software, and their network
administrative costs by using our technology to deploy applications on
mobile devices. Using our products, users can manage information between
their mobile devices and personal computers, enterprise server
applications, such as Microsoft Exchange and Lotus Domino, or custom
database applications. In addition, enterprises can securely and
efficiently deploy and manage a variety of mobile devices, and extend their
applications and databases across a distributed network and over the
Internet.
- - ENABLE UNIVERSAL MOBILE 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. Enterprises can use our
products to reduce or eliminate their remote access toll charges and their
total cost of ownership associated with supporting remote and Internet
access. 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.
- - INCREASE EFFICIENCY AND USABILITY OF MOBILE DEVICES. Our mobile information
management products improve the management of information and applications
and provide convenient, wireless connectivity. These products enable users
to share data and information between their mobile devices while accessing
information from the Internet, personal computers or enterprise networks on
demand. Enterprises can utilize devices to extend their network
applications cost effectively to other applications. We believe our mobile
information management products help mobile users and enterprises increase
their efficiency by using mobile devices for a variety of new tasks,
thereby increasing their use of these devices.
- - INCREASE VALUE AND USAGE OF MOBILE DEVICES AND COMMUNICATIONS SERVICES. Our
platforms and technologies provide the tools to enable device manufacturers
and application developers to design and enhance products to meet the needs
of both enterprises and users. Because our technology enables
cost-effective communication and the ability to easily manage many
disparate devices, we believe device manufacturers and application
developers are able to increase the value of the products they sell,
thereby encouraging increased adoption of those products. In addition, we
believe the increased adoption of mobile devices will in turn drive
increased usage of and loyalty to providers of mobile communications
services, thereby increasing service providers' revenue opportunities and
minimizing their costs.
STRATEGY
Our objective is to become the leading provider of mobile information management
products. To achieve this objective, we have adopted the following strategies:
- - CONTINUE TO DEVELOP AND MAINTAIN A BROAD ARRAY OF MOBILE INFORMATION
MANAGEMENT PRODUCTS AND TECHNOLOGIES. We are committed to building and
maintaining a full range of mobile information management products and
technologies that address the data management and wireless connectivity
5
needs of enterprises and mobile users across a broad range of mobile
devices. Our products support the current leading mobile device platforms,
including the Palm OS, Windows CE, and Symbian EPOC platforms. Furthermore,
we are committed to designing our technology and products to be compatible
with new and emerging protocols. By continuing to provide a broad range of
products, we believe we can successfully meet the mobile information needs
of users and enterprises, while enhancing the ability of service providers,
device manufacturers, and application developers to increase the value of
their own products and services.
- - LEVERAGE RELATIONSHIPS WITH LEADING MOBILE DEVICE MANUFACTURERS AND
APPLICATIONS DEVELOPERS. We maintain relationships with leading hardware
and software vendors, including 3Com, Compaq, Ericsson, Hewlett-Packard,
IBM, Intel, Lotus, Microsoft, Motorola, NEC, Palm, Sharp and Toshiba. We
believe that these relationships allow us to develop leading-edge products
and technology and influence the development of new platforms and
protocols. We also believe these relationships will continue to help us
achieve broader distribution of our products and technologies, making them
pervasive in the mobile information management market. For example, we
collaborated with Microsoft on the development of synchronization products
for the Windows CE operating system and with Palm to provide Bluetooth
technology for use in the Palm OS.
- - CONTINUE OUR LEADERSHIP IN THE DEVELOPMENT OF STANDARDS FOR MOBILE
COMMUNICATIONS. We actively work with industry consortia to develop
wireless standards and protocols. These consortia are comprised of industry
leaders, device manufacturers and software developers, and we actively
participate on the leading standards boards and technical committees of
these consortia. For example, we were a founding member of the Infrared
Data Association, which developed the IrDA protocol. As a result of our
efforts in IrDA, we were invited by the founders of Bluetooth to
participate in the Bluetooth early adopter group and were recently accepted
as an associate member of the Bluetooth Special Interest Group. Extended
Systems is also a supporting member of the SyncML Initiative. We believe
our leadership in these consortia will continue to make our mobile
information management products and technologies an integral part of mobile
communications solutions.
- - TARGET RESOURCES ON GLOBAL CUSTOMERS. Our products are currently included
in the mobile devices of industry leaders such as Ericsson, Motorola
and Palm. We believe the integration of our technology in leading mobile
devices provides a significant opportunity to reach the enterprises and
mobile workers who are the primary users of these devices. In addition, we
have invested substantial resources to develop our international marketing,
sales and support infrastructure. Although our products are appropriate for
use by enterprises of all sizes, we believe large multi-national
enterprises are the most lucrative market for our products. We intend to
continue to focus resources to sell to large enterprises and to
international markets that are adopting the use of mobile communications
most rapidly.
- - ACQUIRE COMPLEMENTARY BUSINESSES AND TECHNOLOGIES. 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. For example, in August 1999, we acquired Advance Systems, a
developer of server-based synchronization software for portable computing
devices and high-end mobile phones. Our acquisition of Advance Systems has
further strengthened our relationships with IBM and Microsoft. In October
1998 and November 1998, we completed acquisitions of Rand Software, a
developer of data synchronization software, and Parallax Research, a
developer of infrared connectivity products. In April 1997, we acquired
Counterpoint Systems Foundry, a developer of connectivity software. The
Counterpoint acquisition formed the basis for our Bluetooth technology. In
addition, over time we have augmented our sales and marketing presence in
France, Germany and the United Kingdom by acquiring distributors in those
countries.
OUR PRODUCTS
We offer products in two business segments: mobile information management and
printing solutions.
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MOBILE INFORMATION MANAGEMENT
We design, manufacture, sell and service products that enable secure, reliable
and efficient access, collection, synchronization and printing of information on
demand. This segment consists of mobile data management products and universal
mobile connectivity products.
MOBILE DATA MANAGEMENT PRODUCTS
Our mobile data management products enable information to be transferred
directly between corporate applications and mobile devices through a variety of
connections and provide database applications in distributed environments for
mobile users.
Our mobile data management products consist of mobile data synchronization and
management products and client/server database products. These products provide
individual users and large enterprises with the management tools necessary to
cost effectively use and deploy mobile devices for personal information
management and mobile workforce deployment.
TARGET
PRODUCT DESCRIPTION CUSTOMERS/RELATIONSHIPS
- ------------------------------------------------------------------------------------------------------------------
Mobile Synchronization and Data Management Products:
- ------------------------------------------------------------------------------------------------------------------
XTNDConnect Server It is a software application that: - Enterprises that are
- allows information to be transferred directly deploying mobile devices.
between enterprise network applications and mobile - Application
devices through a variety of connections; developers who design
- provides IT staff centralized control, data vertical mobile
security and management for mobile devices; applications. Examples of
- supports Palm OS, Windows CE, Pocket PC and vertical markets include
Symbian EPOC devices; healthcare, finance, legal
- enables users to easily synchronize data with and automotive.
servers, including Microsoft Exchange and Lotus Domino - XTNDConnect Server
and with ODBC-compliant databases such as DB2, Oracle, serves as the foundation
Sybase and Advantage Database Server; and for IBM's Mobile Connect
- assures the secure transfer of corporate data to product.
and from mobile devices using Certicom encryption. - Microsoft recommends
We added XTNDConnect Server to our product line when we XTNDConnect Server for use
purchased Advance Systems. with Microsoft Exchange and
Windows CE.
- ------------------------------------------------------------------------------------------------------------------
XTNDConnect PC It is a software application that: - Enterprises and users
- allows a user to manage and synchronize personal through electronic commerce.
information such as contacts, calendar, tasks and - Original equipment
email between a mobile device and popular personal manufacturers, such as
computer applications; personal digital assistant,
- supports devices including Palm OS, Windows CE mobile phone, pager, laptop
and Pocket PC devices; and computer and digital camera
- supports many popular personal computer manufacturers.
applications including Microsoft Outlook, Lotus Notes, - Ericsson bundles
Act!2000, and Goldmine. XTNDConnect PC with select
We added this product to our product line when we WAP-enabled phones.
purchased Rand Software. - AnyDay.com uses
XTNDConnect PC to allow
users to update and share
data using AnyDay.com's
Web-based on-line personal
information management
service.
- ------------------------------------------------------------------------------------------------------------------
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TARGET
PRODUCT DESCRIPTION CUSTOMERS/RELATIONSHIPS
- --------------------------------------------------------------------------------------------------------------------
Client/Server Database Products:
- --------------------------------------------------------------------------------------------------------------------
Remote Procedure An extendable, embedded, middleware server that: - Application developers
Middleware Server - simplifies distributed application development; who design vertical mobile
- provides a suite of programming tools designed applications.
specifically for Delphi for the fastest middleware
development possible; and
- is particularly useful for mobile environments to
offload application processing from the handheld
device to the server allowing more sophisticated
applications to be deployed.
We believe middleware architecture can provide many
benefits over traditional two-tier database
applications, such as centralized business rules,
abstraction.
- --------------------------------------------------------------------------------------------------------------------
Advantage Database A high performance client/server database management - Application developers
Server system for standalone, networked, mobile and Internet who design vertical mobile
database applications that: applications.
- provides developers the flexibility to combine
SQL statements and relational data access methods
with the performance and control of navigational
commands;
- includes native SQL support as well as a client
interface, supporting common application
development tools such as Delphi, Visual Objects
and Visual Basic, as well as any applications with
an ODBC interface;
- works in both Novell NetWare and Windows NT server
environments and improves multi-user performance by
efficiently allocating database operations between
the client and the server.
- --------------------------------------------------------------------------------------------------------------------
Advantage Internet A software product that provides non-HTML-based data - Application developers
Server access through the Internet using existing Advantage who design vertical mobile
Database Server applications. applications.
Remote users can experience the same security, integrity,
and performance on a corporate local area network while
accessing data remotely using the Internet as a virtual
private network.
- --------------------------------------------------------------------------------------------------------------------
Advantage Software tools used by database application developers - Application developers
Development to develop, debug and deploy reliable applications who design vertical mobile
Tool Kits running in an Advantage Database Server environment. applications.
- --------------------------------------------------------------------------------------------------------------------
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UNIVERSAL MOBILE CONNECTIVITY PRODUCTS
Our universal mobile connectivity products permit users to wirelessly connect
and exchange data using either Bluetooth short-range radio-frequency or IrDA
infrared technology, thereby eliminating cables, connectors and physical
attachments. In addition, our universal mobile connectivity products enable
users and enterprises to cost effectively access the Internet.
Our universal mobile connectivity products consist of:
- - Embedded short-range wireless Bluetooth protocol software;
- - Embedded IrDA protocol software, test systems and Windows application
software;
- - IrDA wireless connectivity hardware; and
- - Enterprise Internet solutions.
TARGET
PRODUCT DESCRIPTION CUSTOMERS/RELATIONSHIPS
- --------------------------------------------------------------------------------------------------------------------
Embedded Short-Range Wireless Bluetooth Protocol Software:
- --------------------------------------------------------------------------------------------------------------------
XTNDAccess Blue A Bluetooth software development kit that: - Original equipment
SDK-Embedded - provides an efficient way to add reliable manufacturers that integrate
Bluetooth Protocol Bluetooth radio communications to any embedded device Bluetooth into their
Software including personal digital assistants, mobile phones, products.
pagers, laptop computers, digital cameras, portable - Licensed by Palm Computing
office equipment, watches, medical equipment; for inclusion in future
industrial automation products and more. releases of Palm OS.
- is on the Bluetooth Qualified Product List, - Licensed by Motorola
certified for Object Push, File Transfer, Dial-up to implement Bluetooth
Networking, LAN Access, FAX, Cordless Telephone, transport technology in
Headset and Intercom profiles; Motorola products.
- provides support for Multi-transport OBEX and - Ported to run on Fujitsu's
IrMC; and picoJava-II based
- includes source code and complete documentation chip.
for implementing Bluetooth into mobile devices.
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Embedded IrDA Protocol Software, Test Systems and Windows Applications Software:
- --------------------------------------------------------------------------------------------------------------------
JetBeam/ A complete IrDA infrared software development kit that - Original equipment
QuickBeam provides an efficient way to add reliable IrDA-compliant manufacturers that integrate
Suite for Windows communications to any embedded device including digital IrDA into their products.
cameras and handheld organizers such as mobile phones, - JetBeam/QuickBeam has
watches and the Palm Organizer. been included in Palm OS and
all Palm devices starting
with the Palm III.
- --------------------------------------------------------------------------------------------------------------------
IrDA Infrared Test A standalone testing and certification system for - Original equipment
Tools IrDA-enabled devices. manufacturers for the
We added wireless connectivity tools to our product line design, development and
in 1999 through the acquisition of Genoa's IrDA testing testing of infrared
tools. implementation in mobile
devices.
- --------------------------------------------------------------------------------------------------------------------
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TARGET
PRODUCT DESCRIPTION CUSTOMERS/RELATIONSHIPS
- --------------------------------------------------------------------------------------------------------------------
IrDA Wireless Connectivity Hardware:
- --------------------------------------------------------------------------------------------------------------------
XTNDAccess hardware XTNDAccess hardware products enable mobile users to link - Original equipment
products portable and stationary devices together for mobile manufacturers that
information management applications such as incorporate or bundle our
synchronization, file transfer, access to local area products into personal
networks, intranets and the Internet all without a single digital assistants, mobile
physical connection. We have engineered the hardware, phones, pagers, laptop
embedded software stacks, Windows drivers and user computers, digital cameras
applications included with each wireless connectivity and other mobile devices.
hardware product. Products include: - Enterprise customers
- XTNDACCESS IRDA PRINTER ADAPTER: a wireless link through our distributors and
between a mobile device and a printer with a serial through e-commerce.
port.
- XTNDACCESS IRDA PC ADAPTER: a
wireless link between a mobile device
and a desktop personal computer with
a serial port.
- XTNDACCESS IRDA NETWORK ADAPTER: a wireless
access point for connection to a local area network.
- XTNDACCESS IRDA DOCK: a wireless dock for mouse,
keyboard, printer and network access.
- XTNDACCESS IRDA USB ADAPTER: a wireless link
between a mobile device and a desktop personal computer
with a USB port.
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Enterprise Internet Solutions:
- --------------------------------------------------------------------------------------------------------------------
ExtendNet 4000 Our second-generation Linux-based Internet appliance that: - Small and medium-sized
- Provides on-demand Internet access, integrated enterprises through our
e-mail communications, integrated Web publishing and network of value-added
solid network protection for multiple users. resellers.
- Reduces Internet access costs. - We also co-market this
- Combines multiple Internet technologies with product with original
ease-of-use and reliability. equipment manufacturers and
- Provides a number of communications options, application developers
enabling the user to scale the device's capacity to the including Hewlett-Packard,
environment, such as V.90 modems, dual Ethernet and Citrix and DSL.net.
ISDN.
- --------------------------------------------------------------------------------------------------------------------
ExtendNet VPN A hardware product that provides a cost-effective and - Small and medium-sized
scalable means to connect mobile users to their enterprise enterprises through our
local area network over the Internet. network of value added
resellers.
- --------------------------------------------------------------------------------------------------------------------
PRINTING SOLUTIONS
We provide printing solutions, including our ExtendNet print server family of
products, which enable the effective deployment of complex printing applications
across distributed networks worldwide. We design our network products to provide
effective management of devices locally and across a global network. Our
products share a common industry-standard Simple Network Management Protocol
architecture that enables network administrators to effectively manage our
products within the network environment. We have also combined our infrared
technology with an existing line of network print servers, providing users with
a
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wireless connection for walk-up printing. Our printing solutions products
enable enterprises to manage complex printing applications across global
networks, while permitting comprehensive management of network printers from any
location on the network. In addition, our printing solutions products
incorporate technology innovations such as web-based printer management,
fiber-based networks and wireless infrared connections for mobile and handheld
users.
We sell our printing solutions products primarily to enterprises through
multiple indirect channels, primarily distributors and resellers. We also sell
our printing solutions products to original equipment manufacturers.
Our printing solutions consist of four core products: ExtendNet for 100 Base-T,
ExtendNet for 10 Base-T, ExtendNet for 100 Base-FX and PocketPrintServer. We
also provide custom print servers to a number of original equipment
manufacturers, including Minolta, Oki Data and Zebra Technologies.
TECHNOLOGY
We have focused our technology development efforts on mobile data management
software, wireless connectivity software and features that enhance the
performance of our enterprise Internet solutions products. Important technology
features of our products are described below.
MOBILE DATA MANAGEMENT SOFTWARE TECHNOLOGIES:
XTNDCONNECT SERVER. Our technology allows the update and exchange of data with
enterprise server applications such as Microsoft Exchange, Lotus Notes and
custom corporate databases, and helps system administrators manage mobile
devices with IT application deployment, backup, restore and client logging
utilities. Technological features of XTNDConnect Server meet the following needs
of IT organizations:
- - management and configuration of every user and every mobile device using
our administration program, which supports Microsoft Management Console
plug-in technology for remote monitoring;
- - customized synchronization using enhanced filtering technologies,
particularly useful for synchronization using GSM, CDMA or CDPD;
- - advanced security implementing elliptical curve encryption technologies
that permit highly-secure connections, while consuming minimal bandwidth
and battery power on the mobile device;
- - enhanced application access using a built-in VBScript Engine, enabling the
server to enforce business rules, launch server-based applications and
establish new communications sessions on-the-fly;
- - broad communications options enabling any wired, wireless or cellular
connection, including physical or wireless TCP/IP, GSM, CDMA, iDEN,
Internet, PPP, cradle, IrDA or Bluetooth; and
- - support for Microsoft Exchange, Lotus Domino or any ODBC-compliant data
storage format, custom plug-ins to support proprietary applications and our
proprietary replication wizard for synchronization of database records.
XTNDCONNECT PC. Our technology incorporates a single engine to synchronize
information between mobile devices and personal computer applications, and
supports Palm OS, Windows CE, Pocket PC and CASIO Pocket Viewer devices and
Ericsson R320 mobile phones using our proprietary rapid transfer technology. In
addition, we have extended our synchronization technology through our Internet
alliances to online personal information managers such as Anyday.com. Data
record translation capabilities synchronize many disparate device formats and
application data types, for example, allowing joint synchronization with Palm
OS, Microsoft Windows CE and Pocket PC devices. Auto-Connect technology permits
the automatic synchronization of devices upon connection and can be supported on
Bluetooth and IrDA, as well as cable and cradle connections.
REMOTE PROCEDURE MIDDLEWARE (RPM) SERVER. Our software reduces bandwidth needs
across slow remote connections, such as cellular GSM or CDPD, while easing the
processing burden on the mobile device itself. We have also designed the RPM
Server to process business rules and data on the mid-tier applications level,
speeding up end-user application performance and saving server processing
cycles.
ADVANTAGE DATABASE SERVER. We have developed algorithms for burst-mode
transmission of data records across the LAN or WAN, including transaction
processing, filter optimization, enhanced locking algorithms and support for a
wide variety of communications protocols.
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WIRELESS CONNECTIVITY SOFTWARE TECHNOLOGIES:
MULTI-TRANSPORT OBEX. Multi-transport OBEX, or Object Exchange, allows disparate
mobile devices to exchange abstract information types (objects) without
pre-existing configuration of drivers, file type or protocols between the two
devices. Our Multi-transport OBEX is agnostic to the type of physical
connection, isolating the communications media from the applications using the
connection and allowing synchronization through a wireless connection such as
Bluetooth or IrDA or through a physical connection such as USB or serial.
IRMC MOBILE COMMUNICATIONS. IrMC mobile communications form the basis for
universal data exchange synchronization among devices such as laptop and
handheld computers, mobile phones and pagers and personal digital assistants. We
have ported this software to the Bluetooth protocol stacks, implementing several
of the key Bluetooth profile identifiers for original equipment manufacturers.
The IrMC Level 4 Sync Server is a required profile for mobile devices and was
adapted from our work with the Infrared Data Association.
XTNDACCESS BLUE SDK. Bluetooth radio communications technology allows high-speed
interconnection, over distances of up to 10 meters, of personal digital
assistants, personal computers and mobile phones, without the use of cables,
connectors or docking cradles. With its small memory footprint, we believe
XTNDAccess Blue SDK is one of the market's first embedded implementations of
Bluetooth stacks for small, inexpensive mobile devices such as personal digital
assistants, pagers, cameras and mobile phones. XTNDAccess Blue SDK includes an
embedded operating system application of all modules from Hardware Control
Interface to the OS abstraction layer. Within this protocol set is software for
functions such as a Hardware Control Interface Driver, Service Discovery
Protocol, RFCOMM, OBEX API and TCS Binary.
INTERNET TECHNOLOGIES:
The technologies we have integrated into our ExtendNet enterprise Internet
solutions include:
- - open source architecture of the Linux operating system, including Web
browser-based intuitive administration interfaces;
- - security firewalls including NAT, packet-filtering, stateful packet
inspection and Web-filtering, and support for customized firewall rules;
- - web-caching, embedded local mass storage;
- - integrated SMTP/POP3/IMAP4 e-mail server;
- - automatic connection management agent;
- - DHCP server and reporting agents for network services;
- - VPN PPTP proxy support;
- - VPN Multiple PPTP clients via single IP address;
- - IP Port Forwarding;
- - DNS support;
- - local and remote automatic back-up and restore functionality for
configuration and user data; and
- - proactive system status monitoring and notification.
MARKETING AND SALES
As of June 30, 2000, we had an in-house marketing and sales staff of 136
full-time equivalent employees, who are largely responsible for generating
end-user demand for our products by soliciting prospective customers, providing
technical advice with respect to our products and working with distributors and
original equipment manufacturers to sell our products. We conduct our marketing
and sales activities primarily from our offices in Boise, Idaho and Bozeman,
Montana, and our international offices in France, Germany, Italy, the
Netherlands, Singapore and the United Kingdom. In addition, we have significant
distributor relationships in Brazil, Canada, Germany, Japan, Spain, Sweden and
Switzerland. Our marketing and sales staff actively participates with
distributors and resellers in the selling process, which provides users with the
level of support needed for the successful integration of solutions in
enterprise networks.
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SERVICE AND SUPPORT
As of June 30, 2000, we had 41 full-time equivalent employees as service and
support personnel at our facilities in Bozeman, Montana and Boise, Idaho and at
our international offices. In addition, our independent and international
distributors provide service and support to international customers. We believe
that service and support are critical components of customer satisfaction and
the success of our business. Our commitment to service and support enables us to
interact regularly with our customers' network administrators and to identify
and respond to their needs on an ongoing basis. We offer a wide range of
customer support services under our ExtendAssist Program. This program includes
a technical support hotline to provide a range of telephone support to our
customers through a toll-free number. In addition, we maintain a technical
support group comprised of engineers and technicians, 24-hour automated support,
and an on-line bulletin board, which contains in-depth technical information.
Through ExtendAssist, our engineering staff provides technical support through
e-mail. We also provide on-line services to distribute technical advice and
software updates.
RESEARCH AND DEVELOPMENT
As of June 30, 2000, we had 105 full-time equivalent employees devoted to our
research and development activities, primarily at our facilities in Boise,
Idaho; Bristol, England; Corvallis, Oregon and Singapore. We believe our success
depends upon our ability to develop, introduce and manufacture new products and
enhance existing products, allowing us to offer our customers products that
achieve increasing levels of capability, performance and reliability. Our
research and development efforts are currently focused on:
- - short-range wireless technologies;
- - communications applications;
- - data synchronization and management; information transfer;
- - new mobile connectivity platforms;
- - thin-client/server data access;
- - Internet connectivity; communications protocols;
- - enterprise network management tools; and
- - advanced networking platforms.
During the fiscal 2000, fiscal 1999 and fiscal 1998, research and development
expenses were $9.6 million, $6.8 million and $6.4 million, respectively,
representing 17%, 13% and 13%, respectively, of our net revenue. In connection
with our acquisition of Advance Systems in August 1999, we incurred an
in-process research and development charge of $2.4 million. We also recorded
$758,000 in acquired in-process research and development charges in the second
quarter of fiscal 1999 as a result of our acquisitions of Rand Software and
Parallax Research. We anticipate that we will commit substantial resources to
research and development in the future. We will continue to add development
expertise through our recruiting and hiring efforts, as well as through
continued acquisitions of engineering-oriented technology companies.
MANUFACTURING
As of June 30, 2000, we had 42 full-time equivalent employees in our
manufacturing operations, primarily at our Boise, Idaho facility. Our
manufacturing operations consist mainly of materials procurement, final
assembly, testing, quality assurance and shipping. We rely on third-party
suppliers for components used in our products. We subcontract other
manufacturing functions, including the production of our printed circuit boards
and some final product assembly and testing. We intend to continue to
subcontract a majority of our manufacturing functions. With our acquisition of
Parallax Research, we added the local ability to manage our manufacturing
relationships with subcontractors in Asia. The only product assembly we perform
is final assembly, which consists of the integration of major components into a
final product and the preparation of that product for shipment. We perform
testing and quality assurance of some of our products primarily at our Boise,
Idaho facility. Our Boise, Idaho facility is ISO 9001 certified.
13
COMPETITION
The markets for our products are rapidly evolving and intensely competitive.
Furthermore, the markets for our mobile data management and universal mobile
connectivity products are relatively new and characterized by frequent product
introductions, changing protocols and rapidly developing technology. As mobile
devices continue to grow in power and usage and become a major component of
enterprise information management, we expect new competitors to enter these
markets and existing competitors to expend increasing resources to develop
mobile data management and universal mobile connectivity products. As a result,
we expect competition in these markets to intensify.
MOBILE SYNCHRONIZATION AND DATA MANAGEMENT
Our mobile synchronization and data management products compete primarily with
products offered by Puma Technology, fusionOne, Aether Software and Starfish
Software, a subsidiary of Motorola. We believe that the primary competitive
factors for these products are:
- - the ability to support a broad range of mobile device platforms and
synchronize information with a broad range of databases and applications;
and
- - speed and security of synchronization.
CLIENT/SERVER DATABASE
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:
- - ease of integration into developers' applications;
- - speed;
- - reliability; and
- - scalability, or the ability to increase the number of client users.
UNIVERSAL MOBILE CONNECTIVITY
Our universal mobile connectivity products compete primarily with products
offered by Widcomm, Digianswer (a subsidiary of Motorola) and ACTiSYS. We
believe that the primary competitive factors for these products are:
- - the ability to support a broad range of user profiles and mobile device
platforms; and
- - interoperability between mobile devices.
ENTERPRISE INTERNET SOLUTIONS
Our enterprise Internet solutions products compete primarily with products
offered by IBM, Cobalt Networks, eSoft and Ramp Networks. We believe that the
primary competitive factors for these products are:
- - security of access;
- - scalability in terms of number of users and communication speeds;
- - pricing; and
- - customer service and support.
PRINTING SOLUTIONS
Our printing solutions products compete with print server products offered
primarily by Hewlett-Packard, Intel and Lexmark. Hewlett-Packard is also our
largest customer, to whom we provide our XTNDAccess IrDA Printer Adapter for
bundling with one of its mid-range printers. We also compete with the print
server products developed internally by printer manufacturers. We believe that
the primary competitive factors for these printer server products are customer
service and support, and product performance.
In addition, our products compete on the basis of ease of use, reliability and
price. We also compete on the basis of brand name and reputation, the
effectiveness of our internal marketing and sales efforts, the success of our
independent distributor relationships, breadth of product line and strength of
customer relationships.
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INTELLECTUAL PROPERTY
To protect our proprietary rights, we rely generally on copyright, trademark and
trade secret laws, and confidentiality agreements with many of our employees and
consultants. Despite these protections, third parties might obtain and use our
technologies without authorization or develop similar technologies
independently. The steps we have taken may not prevent misappropriation of our
intellectual property, particularly in countries other than the United States
where laws or law enforcement practices may not protect our proprietary rights
as fully as in the United States.
We have entered into source code and design document escrow agreements with a
limited number of our customers requiring release of design details in some
circumstances. These agreements generally provide that these parties will have a
limited, non-exclusive right to use the code in the event that there is a
bankruptcy proceeding by or against us, if we cease to do business or if we fail
to meet our support obligations. We also provide our source code to foreign
language translation service providers and consultants to use in limited
circumstances.
We have 17 registered trademarks and applications pending for nine additional
trademarks. We cannot assure you that any of our 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 nine patents that expire in 2010 and beyond. Our provisional
patent applications and any future patent applications may not be granted, any
patent of ours may be challenged, invalidated or circumvented and the rights
granted under any patent of ours may not provide competitive advantages to us.
If a blocking patent has issued or issues 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, 2000, we had 379 employees, and 387 full-time equivalent
employees. None of our employees is represented by a labor union or is subject
to a collective bargaining agreement with respect to his or her employment with
us. We believe that our relations with our employees are good.
ITEM 2. PROPERTIES
We own our corporate headquarters in Boise, Idaho, which consists of
approximately 100,000 square feet of space located on 24 acres of land. We use
our headquarters facility for research and development, manufacturing, marketing
and sales, customer support and administration. In addition, we own a facility
of approximately 20,000 square feet in Bozeman, Montana. We use this facility
primarily for marketing, sales and customer support. We believe that our current
facilities in Boise and Bozeman are adequate to meet our needs for at least the
next 12 months. We lease sales, support and development offices throughout the
United States, Europe and Asia. We believe that our existing field sales,
support and development 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.
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ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on The Nasdaq National Market System under the symbol
"XTND". The following table sets forth the high and low bid prices of our common
stock:
HIGH LOW
Fiscal Year 2000
Fourth Quarter, ended June 30, 2000............................ $112.94 $25.50
Third Quarter, ended March 31, 2000............................ 150.00 37.50
Second Quarter, ended December 31, 1999........................ 48.00 6.00
First Quarter, ended September 30, 1999........................ 6.88 4.25
Fiscal Year 1999
Fourth Quarter, ended June 30, 1999............................ 4.88 4.25
Third Quarter, ended March 31, 1999............................ 5.94 4.00
Second Quarter, ended December 31, 1998........................ 8.00 4.13
First Quarter, ended September 30, 1998........................ 7.13 6.00
On September 8, 2000, the last reported per shares sale price of our common
stock on The Nasdaq National Market was $64.625 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 134 stockholders of record as
of September 8, 2000. Because many of such shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders.
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.
On March 4, 1998, we commenced and completed an initial public offering of
1,300,000 shares of our common stock, $0.001 par value per share, at a public
offering price of $8.00 per share pursuant to a Registration Statement on Form
S-1 (File No. 333-42709) filed with the Securities and Exchange Commission. All
of the shares we registered were sold. Volpe Brown Whelan & Company and Needham
& Company, Inc. were the managing underwriters of our offering. The aggregate
gross proceeds from the offering (prior to deduction of underwriting discounts
and commissions and expenses of offering) were $10.4 million. In addition to the
above, selling stockholders sold 482,500 shares of common stock, including the
exercise of the underwriters' over-allotment option consisting of 232,500
shares. We paid underwriting discounts and commissions of $728,000 and other
expenses of approximately $1.1 million in connection with the offering and the
our net proceeds in the offering were $8.6 million.
From March 4, 1998, the effective date of our registration statement, to June
30, 2000, we used these net proceeds for the following:
- - $5.0 million for the acquisition of Oval, parent company of Advance
Systems;
16
- - $1.9 million towards the payoff of our long-term debt;
- - $1.0 for the acquisitions of Rand Software and Parallax Research; and
- - $666,000 for investments in strategic business relationships.
None of these payments were made directly or indirectly to our directors,
officers, 10% stockholders or affiliates.
On August 4, 1999, we acquired all of the outstanding stock of Oval (1415)
Limited for $5.5 million in cash and 625,000 shares of our common stock valued
at $3.0 million. On October 23, 1998, we acquired all of the outstanding stock
of Rand Software for $710,000 in cash and 104,998 shares of our common stock
valued at $735,000. We have not registered the shares issued in either
transaction in reliance upon Section 4(2) of the Securities Act of 1933, as
amended, and therefore the 104,998 shares issued to former stockholders of Rand
Software and 625,000 shares issued to former stockholders of Oval are subject to
certain restrictions on resale.
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 and employee amounts.
FOR THE YEARS ENDED JUNE 30, 2000 1999 1998 1997 1996
---------------------------------------------------------------------
Net revenue.................................. $56,512 $50,689 $50,004 $39,535 $34,670
Gross profit................................. 28,397 25,487 29,294 24,248 19,841
Research and development..................... 9,614 6,815 6,351 5,259 4,362
Acquired in-process research and
development................................. 2,352 758 - - -
Marketing and sales.......................... 17,787 15,930 13,838 10,802 9,007
Amortization of intangibles.................. 891 61 - - -
Income (loss) from operations................ (6,670) (1,780) 5,765 5,308 4,199
Net income (loss)............................ (4,985) (1,462) 3,298 2,676 2,279
Per share amounts:
Earnings (loss) - basic................... (0.52) (0.17) 0.45 0.39 0.33
Earnings (loss) - diluted................. (0.52) (0.17) 0.44 0.38 0.32
AS OF JUNE 30, 2000 1999 1998 1997 1996
--------------------------------------------------------------------
Cash and cash equivalents...................... $6,191 $9,668 $15,006 $6,621 $5,729
Total assets................................... 44,221 40,799 40,147 25,677 21,338
Long-term debt................................. - 67 7,617 7,210 6,151
Book value per share........................... 3.66 3.09 3.22 2.04 1.78
Total stockholders' equity..................... 37,715 26,595 26,592 14,025 11,522
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-K CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS, INCLUDING THOSE SET FORTH
UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK" AND
ELSEWHERE IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 2000.
ALL YEARLY REFERENCES ARE TO OUR FISCAL YEARS ENDED JUNE 30, 2001, 2000, 1999
AND 1998, UNLESS OTHERWISE INDICATED. ALL TABULAR AMOUNTS ARE IN THOUSANDS,
EXCEPT PERCENTAGES.
17
RESULTS OF OPERATIONS
We classify our product offerings into three segments:
- - mobile information management;
- - printing solutions; and
- - other products.
Our mobile information management segment includes both mobile data management
and universal mobile connectivity products that enable users to access, collect,
synchronize and print information on demand. The products in our mobile
information management segment include data synchronization and management
software, wireless connectivity products, enterprise Internet appliances and
client/server database management systems with remote access capabilities. We
sell our mobile information management products primarily to original equipment
manufacturers, enterprises, application developers and computer resellers both
directly and through our e-commerce storefronts on the Internet. We derive
revenue from:
- - sales of hardware products;
- - software license fees;
- - non-recurring development fees that are generated when we adapt our
products to a customer's specifications;
- - support and maintenance fees; and
- - royalties.
We believe that net revenue from mobile information management products will
generate a larger percentage of net revenue as we continue to focus our research
and development and our marketing and sales efforts on our mobile information
management products and as our mobile information management products continue
to achieve increased market acceptance. Our future results of operations will be
highly dependent upon the success of recently introduced products and the
success of our recent acquisitions.
Our printing solutions segment includes our maturing network print server and
non-network printer sharing products sold primarily through our worldwide
distribution channel to computer resellers and Fortune 1000 companies. We also
sell printing solutions products to a number of original equipment
manufacturers. Our net revenue and income from operations from the printing
solutions segment decreased from last year, partially due to decreased unit
sales of both network print server and non-network printer sharing products as
we shifted resources to support our mobile information management products. We
derive revenue primarily from sales of hardware products and, to a lesser
extent, from non-recurring development fees and royalties. We expect net revenue
and income from operations from our printing solutions products will continue to
decline over the next several quarters and will continue to become a smaller
percentage of our net revenue. Although our printing solutions segment is not
our primary focus for the future, we will continue to update these products,
adding emerging technologies such as fiber and mobile connectivity options.
Our other products segment has primarily consisted of our mechanical port
replicator products. We derived revenue from sales of hardware products. In
December 1998, we exited the mechanical port replicator business.
We derive a substantial portion of our net revenue from international sales,
principally from our international sales subsidiaries, original equipment
manufacturers and from a limited number of distributors. In fiscal 2000, 1999
and 1998, sales outside of North America represented 69%, 63% and 44% of our net
revenue, respectively. We experienced a slow-down in sales in Europe in the
fourth quarter of fiscal 2000 due to a slow-down in technology purchases by
customers and we may face a further decrease in sales in Europe in the first
quarter of fiscal 2001 as a result of typical seasonality in Europe and certain
other regions in the summer months when business activities decrease. We expect
that international sales will continue to represent a substantial portion of net
revenue in the foreseeable future. In fiscal 2000, 1999 and 1998, sales to
customers in Asia represented 29%, 21% and 7% of net revenue, respectively.
Increasing revenue from Asian customers was primarily related to sales to large
multi-national original equipment manufacturers that incorporate or bundle our
products with their products and sell their products worldwide.
18
Several of our products, in particular our ExtendNet print servers, XTNDAccess
wireless connectivity products, and XTNDConnect data synchronization and
management software, are sold to original equipment manufacturers. We intend to
continue to increase sales to original equipment manufacturers in the future,
particularly with our mobile information management products. In fiscal 2000 and
1999, sales of mobile information management products and services to
Hewlett-Packard accounted for 23% and 13% of our net revenue, respectively.
Substantially all of our net revenue derived from Hewlett-Packard is generated
by sales of our XTNDAccess IrDA Printer Adapter for bundling with one of its
mid-range printers. Hewlett-Packard also licenses and purchases other mobile
information management products. In April 2000, Hewlett-Packard notified us that
it is no longer bundling our XTNDAccess IrDA Printer Adapter with
Hewlett-Packard printers sold in North America, but is offering our product as a
free accessory to their customers with the purchase of the Hewlett-Packard
printer. Unit sales and net revenue from Hewlett-Packard in the fourth quarter
of fiscal 2000 declined 36% from the previous quarter and we expect our revenue
from Hewlett-Packard, primarily in Asia, to continue to decline in future
quarters.
Revenue from original equipment manufacturer sales has in the past and is
expected in the future to fluctuate on a quarterly basis, as demand in the
original equipment manufacturer market is difficult to predict and dependent on
the timing of original equipment manufacturer projects and the effectiveness of
their marketing efforts.
We market and sell some of our products, primarily our printing solution
products, through multiple indirect channels, primarily distributors and
resellers. We support our indirect channels with our own marketing and sales
organization. In fiscal 1999, sales to Ingram Micro accounted for 10% of our net
revenue, primarily from printing solutions products. We provide most of our
distributors and resellers with price protection rights and limited product
return rights for stock rotation. Stock rotation rights permit distributors to
return products to us for credit against an offsetting purchase order, but are
limited based upon amounts purchased by a given distributor during the preceding
quarter. Price protection rights require that we grant retroactive price
adjustments for inventories of our products held by distributors or resellers if
we lower our prices for those products.
We expanded our product offerings in our mobile information management segment
with our August 1999 acquisition of Oval (1415) Limited. Oval, based in Bristol,
England, was the parent company of Advance Systems Limited, a developer of
server-based synchronization and data management software for portable computing
devices and high-end mobile phones, and Zebedee Software Limited, a software
consulting company.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Net revenue......................... $56,512 11.5% $50,689 1.4% $50,004
The increase in net revenue in fiscal 2000 from fiscal 1999 was due primarily to
a 60% increase in net revenue from our mobile information management products.
The increase was offset, in part, by a 31% decrease in net revenue from our
printing solutions products.
Net revenue was relatively flat in fiscal 1999 compared to fiscal 1998. The
slight increase in net revenue was primarily the result of our mobile
information management products, which grew 107% from fiscal 1998. The increase
in revenue from mobile information management products was offset by an 88%
decline in revenue from our other products segment, primarily our mechanical
port replicator products, which declined 87% from fiscal 1998, and a 19% decline
in revenue from our printing solutions segment. As a result of our
discontinuance of the mechanical port replicator products, we recorded product
returns and a provision for product returns totaling $1.0 million in fiscal
1999.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Gross profit........................ $28,397 11.4% $25,487 (13.0)% $29,294
Gross margin........................ 50.2% 50.3% 58.6%
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Our cost of net revenue consists primarily of costs associated with components,
out-sourced manufacturing of particular subassemblies, in-house labor associated
with assembly, testing, shipping and quality assurance, amortization of
purchased technology and royalties for the use of third-party software. The
slight decrease in gross margin for fiscal 2000 from fiscal 1999 was the result
of increased shipments of lower margin mobile information management hardware
products to original equipment manufacturers, partially offset by an increase in
sales of mobile information management software products.
The decrease in our gross margin in fiscal 1999 from fiscal 1998 was primarily
the result of an increase in unit sales of lower margin mobile information
management hardware products and a shift in product mix in the printing
solutions segment to lower priced and lower margin products. The decrease in
gross margin was also the result of an increase in the allowance for port
replicator returns of $1.0 million and an increase in the inventory valuation
allowance for port replicators of $1.4 million. The decrease was partially
offset by increased royalty, license and non-recurring development fee revenue
in our mobile information management segment and increased sales of mobile
information management software products.
We expect that gross margin in our printing solutions segment may continue to
decline as a result of a continued shift in product mix toward lower margin
products. We also expect that increased sales of our mobile information
management software products will continue to have a positive impact on our
gross margin.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Research and development............... $ 9,614 41.1% $ 6,815 7.3% $6,351
as a % of net revenue................ 17.0% 13.4% 12.7%
Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, facilities costs and
travel expenses. The increase in research and development expenses in fiscal
2000 from fiscal 1999 was primarily the result of additional personnel costs in
our mobile information management segment as a result of our acquisitions of
Advance Systems in August 1999, Rand Software in October 1998 and Parallax
Research in November 1998. At June 30, 2000, we had 105 full-time equivalent
engineers, a 38% increase from the 76 full-time equivalent engineers on staff at
June 30, 1999.
The increase in research and development expenses for fiscal 1999 from fiscal
1998 was principally due to increased personnel costs in our mobile information
management segment primarily as a result of our acquisitions of Rand Software
and Parallax Research. The increase was partially offset by reduced personnel
costs in our printing solutions and other products segments.
We expect research and development expenses to continue to increase in the
future, primarily as a result of increased staffing in our mobile information
management segment, although these expenses may vary as a percentage of net
revenue.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Marketing and sales ................... $ 17,787 11.7% $ 15,930 15.1% $13,838
as a % of net revenue ............... 31.5% 31.4% 27.7%
Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our marketing, sales and support personnel and
promotional expenses. The increases in marketing and sales expenses for fiscal
2000 from fiscal 1999 and fiscal 1998 were primarily due to increased personnel
costs and promotional activities for the mobile information management segment
both domestically and at our European subsidiaries. These increases were
partially offset by decreased promotional activities within our printing
solutions segment and our other products segment.
20
We expect marketing and sales expenses to continue to increase in the future,
primarily in our mobile information management segment, although these expenses
may vary as a percentage of net revenue.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
General and administrative................ $4,423 19.4% $3,703 10.9% $3,340
as a % of net revenue................... 7.8% 7.3% 6.7%
General and administrative expenses generally consist of salaries and other
personnel costs of our finance, management information systems, human resources
and other administrative employees and professional services expenses. The
increase in general and administrative expenses in fiscal 2000 from fiscal 1999
was primarily attributable to increased costs subsequent to our acquisition of
Advance Systems and an increase in professional services expenses. The increase
was also attributable to an in increase in our premiums for directors' and
officers' insurance as a result of an increase in our coverage limit resulting
from a significant increase in our market capitalization and the current market
environment for directors' and officers' insurance.
The increase in general and administrative expenses in fiscal 1999 from fiscal
1998 was principally attributable to increased fees for professional services as
a result of operating as a publicly traded company and increased administrative
expenses subsequent to our acquisition of Parallax.
We expect general and administrative expenses to continue to increase in the
future as our operations continue to expand, although these expenses may vary as
a percentage of net revenue.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Amortization of intangibles ....... $ 891 1,360.7% $ 61 100% $ --
as a % of net revenue ........... 1.6% 0.1% 0%
Amortization of intangibles in fiscal 2000 and 1999 is the result of goodwill
and other intangibles, which arose from our acquisitions of Advance Systems,
Rand Software and Parallax Research.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Income tax provision (benefit) ........... $ (2,001) 189.2% $ (692) (138.1)% $1,815
as a % of income (loss) before taxes ... 28.6% 32.1% 35.5%
The change in the income tax benefit for fiscal 2000 from fiscal 1999 was
attributable to an increase in the loss before income taxes. The change in the
effective tax rate for fiscal 2000 from the prior year was primarily the result
of valuation allowances on deferred tax assets arising from our acquisition of
Advance Systems and on foreign tax credit carryforwards. Although realization is
not assured, we believe it is more likely than not that the remaining net
deferred tax asset will be realized.
The change in the income tax provision or benefit for fiscal 1999 from the prior
year was primarily due to a loss before income taxes in fiscal 1999. The change
in our effective tax rate from fiscal 1999 from fiscal 1998 is primarily the
result of non-deductible expenses associated with our Rand Software and Parallax
Research acquisitions, acquired in-process research and development expenses and
amortization of intangibles.
RESULTS OF OPERATIONS BY SEGMENT
The discussion below addresses the operating results attributable to each of our
three product segments.
21
MOBILE INFORMATION MANAGEMENT SEGMENT
Our mobile information management segment includes both mobile data management
and universal mobile connectivity products that enable users to access, collect,
synchronize and print information on demand. Our products in our mobile
information management segment include data synchronization and management
software, wireless connectivity products, enterprise Internet solutions and
client/server database management systems with remote access capabilities.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Net revenue ................ $ 39,053 60.1% $ 24,400 107.1% $ 11,784
Loss from operations ....... (5,737) (1,003.3)% (520) 36.4% (818)
Net revenue from mobile information management products grew to 69% of our net
revenue for fiscal 2000, up from 48% in fiscal year 1999 and 24% in fiscal year
1998.
The increase in net revenue for fiscal 2000 from fiscal 1999 was due primarily
to increased unit sales of XTNDAccess hardware products to original equipment
manufacturers, increased license fees from our XTNDConnect data synchronization
and management products, increased unit sales of Internet appliance products,
increased license fees from XTNDAccess wireless connectivity products and
increased license revenue from Advantage Database Server products. The increase
was partially offset by a decrease in the average selling price of hardware
products sold to original equipment manufacturers.
The increase in net revenue in fiscal 1998 from fiscal 1997 was the result of
increased unit sales of hardware products to original equipment manufacturers
and Internet access products, and increased license revenue for Advantage
Database Server products.
The increased loss from operations for our mobile information management segment
in fiscal 2000 from fiscal 1999 was primarily the result of an acquired
in-process research and development charge of $2.4 million from our August 1999
acquisition of Advance Systems and increased amortization associated with this
acquisition. The loss was also attributed to increases in spending for research
and development projects for both mobile data management and universal mobile
connectivity products and increased spending in marketing and sales for all
mobile information management products worldwide. Our mobile information
management segment recorded an acquired in-process research and development
charge of $758,000 in fiscal 1999 related to the acquisitions of Rand Software
and Parallax Research.
The loss from operations for our mobile information management segment decreased
in fiscal 1999 as compared to the prior year primarily as a result of increased
gross profit from mobile information management products. This increase in gross
profit was partially offset by a significant increase in our spending for mobile
information management research and development projects for both our wireless
connectivity hardware and software products and the acquired in-process research
and development charges of $758,000 from our fiscal 1999 acquisitions. We also
increased our spending in marketing and sales for all mobile information
management products worldwide.
PRINTING SOLUTIONS SEGMENT
The printing solutions segment includes our maturing network print server and
non-network printer sharing products, sold primarily through our worldwide
distribution channel to computer resellers and Fortune 1000 companies.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Net revenue .......................... $ 17,509 (31.1)% $ 25,415 (18.7)% $ 31,244
Income (loss) from operations ........ (839) (137.2)% 2,256 (67.3)% 6,897
22
In fiscal 2000, 1999 and 1998, 31%, 50% and 62%, respectively, of our net
revenue was derived from sales of our printing solutions products.
The decrease in net revenue for fiscal 2000 from fiscal 1999 was principally due
to decreased unit sales of both network print server products and non-network
printer sharing products worldwide.
The decrease in net revenue for fiscal 1999 from the prior year was principally
due to decreased unit sales of both non-networked printer sharing and network
print server products coupled with a decrease in the average selling prices
caused by a shift in product mix to lower priced products. The decrease was
partially offset by an increase in unit sales of print servers to original
equipment manufacturers at a slightly lower average selling price than in the
prior year.
Income (loss) from operations from our printing solutions segment decreased in
fiscal 2000 from fiscal 1999 and fiscal 1998 primarily due to decreased gross
profit from both network print server and non-network printer sharing products
partially offset by a decrease in operating expenses as we shifted resources to
support our mobile information management products.
23
OTHER PRODUCTS SEGMENT
The primary component of our other products segment is our mechanical port
replicator products, which we discontinued in December 1998.
FISCAL YEAR ENDED JUNE 30,
2000 % CHANGE 1999 % CHANGE 1998
Net revenue......................... $(50) (105.7)% $ 874 (87.5)% $6,976
Loss from operations................ (94) 97.3% (3,516) (1,019.8)% (314)
BUSINESS COMBINATION
OVAL
In August 1999, we acquired all of the outstanding stock of Oval (1415) Limited
for $5.5 million in cash, including acquisition expenses, and 625,000 shares of
our Common Stock valued at $3.0 million. We accounted for this transaction by
the purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations," and, accordingly, Oval's results of
operations have been included in our consolidated statement of operations since
the acquisition date.
Oval, based in Bristol, England, was the parent company of Advance Systems
Limited and Zebedee Software Limited. Advance Systems was the developer of
XTNDConnect Server, formerly ASL-Connect, a server-based data synchronization
and management software for portable computing devices and high-end mobile
phones that allows the update and exchange of data with enterprise applications
such as Microsoft Exchange, Lotus Notes and corporate databases. Zebedee
Software was a software consulting company. Substantially all of the net assets
owned by, and operations of, the Oval consolidated group were attributable to
Advance Systems, therefore, we will refer to Advance Systems herein when
referring to the acquisition.
A summary of the net assets acquired at the date of the acquisition is as
follows:
Net working capital.................................................. $112
Property and equipment............................................... 45
Developed technology, goodwill and other intangibles................. 5,984
Acquired in-process research and development......................... 2,352
-----------
$8,493
===========
Valuation of the intangible assets acquired from Advance Systems, including
acquired in-process research and development, developed technology and goodwill
was determined by independent appraisers. Based upon such independent
appraisals, we estimated that, in aggregate, the fair value of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use was $2.4 million. We expensed the
amount allocated to acquired in-process research and development as a charge to
operations in the first quarter of fiscal 2000.
The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from such projects were based on our estimates
and excluded amounts expected to result from existing products and technologies.
Projected net revenue included the expected evolution of the technology and the
reliance of future technologies on the in-process technologies over time, but
excluded amounts expected to result from existing products and technologies. We
based the estimated cost of net revenue and estimated operating expenses on our
cost structure and that of comparable companies.
24
The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 50%
to 65%. The discount rates were based on various factors such as:
- - the stage of completion at the acquisition date;
- - the complexity of the work completed as of the acquisition date;
- - costs incurred as of the valuation date;
- - difficulties of completing the remaining development in a reasonable time;
- - technical uncertainties of the remaining tasks; and
- - the costs remaining to complete the projects.
We used a portion of the acquired in-process research and development to further
enhance Advance Systems' existing server-based synchronization technology by
implementing a plug-in architecture. This type of design allows users and third
party software providers to develop small software components that plug into our
XTNDConnect Server product and extend the range of applications supported by
XTNDConnect Server. In September 1999, we implemented the first phase of this
architecture with the release of XTNDConnect Server Version 2.2, which supports
IBM's DB2 Everywhere 1.1 (DB2E) handheld relational database and Microsoft's
ActiveX Data Object (ADO) interface and provides other enhanced management
tools. The acquired in-process research and development assigned to this project
was valued at $943,000 as of the date of the acquisition. We incurred an
estimated $69,000 to complete Version 2.2.
In November and December 1999, we released versions of XTNDConnect Server that
support encryption, Lotus Notes/Domino R5 and Symbian's EPOC operating system.
The acquired in-process research and development assigned to this project was
valued at $1.2 million at the date of the acquisition. This project was
approximately 60% complete at the time of the acquisition and required an
estimated $41,000 to complete.
We will use the remaining acquired in-process research and development to
provide further enhancements to the architecture of our XTNDConnect Server
product line, which at the time of the acquisition were only approximately
10-15% complete. The acquired in-process research and development assigned to
this project was valued at $186,000 as of the date of the acquisition. We expect
to incur an additional $123,000, from the date of the acquisition, to develop
the in-process technology into a commercially viable product with the nature of
the efforts principally relating to development and testing that is required to
establish that the product can be produced to meet its design specifications,
including functions, features and technical performance requirements. The
primary risk with the completion of this project is the overall scope and
complexity. We expect to complete this project by December 2000.
RAND SOFTWARE AND PARALLAX RESEARCH
In October 1998, we acquired all of the outstanding stock of Rand Software for
$710,000 in cash and 104,998 shares of our Common Stock valued at $735,000. In
November 1998, we acquired a controlling interest in Parallax Research for
$347,000 in cash and by assuming $375,000 in debt. In May 1999, we acquired the
remaining outstanding stock of Parallax Research for $91,000 in cash. These
transactions were accounted for by the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations," and, accordingly, the results of operations of both companies
have been included in our consolidated statement of operations since the
acquisition dates.
Rand Software was the developer of XTNDConnect PC, formerly Harmony, a data
synchronization and management software providing support for mobile devices
such as Windows CE handheld personal computers. This synchronization technology
allows mobile devices to update and exchange data with enterprise applications
such as Microsoft Exchange, Microsoft Outlook, Lotus Notes and Symantec Act!.
Parallax Research develops infrared connectivity products primarily for sale to
original equipment manufacturers and manages our relationships with our
manufacturers in Asia.
25
A summary of the total net assets acquired at the date of the acquisitions is as
follows:
Net working capital............................................................. $(146)
Property and equipment.......................................................... 114
Developed technology, goodwill and other intangibles............................ 1,532
Acquired in-process research and development.................................... 758
-----------
$2,258
===========
The valuation of the intangible assets acquired from Rand Software and Parallax
Research, including the acquired in-process research and development, developed
technology and goodwill, was determined by independent appraisers. Based upon
these independent appraisals, we estimated that, in aggregate, the fair value of
acquired in-process research and development that had not yet reached
technological feasibility and had no alternative future use was $758,000. The
amount allocated to acquired in-process research and development was expensed as
a charge to operations in the second quarter of fiscal 1999.
The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from these projects were based on estimates we
made. Projected net revenue included the expected evolution of the technology
and the reliance of future technologies on the in-process technologies over
time, but excluded amounts expected to result from existing products and
technologies. We based the estimated cost of sales and estimated operating
expenses on our cost structure and that of comparable companies.
The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 25%
to 35%. The discount rates were based on various factors such as:
- - lack of operating history;
- - aggressive projections for some products;
- - reliance on original equipment manufacturers;
- - management depth; and
- - product diversification.
Rand Software's research and development in-process on the date of the
acquisition related to a server-based data synchronization software product that
was estimated to be approximately 14% complete and would require an estimated
$464,000 and 38 man-months of time to complete. Development in process at the
time of the acquisition of Rand Software was subsequently utilized to develop a
web-based synchronization product and will continue to be incorporated into
additional mobile information management products, including products
complementary to the server-based product acquired with Advance Systems in
August 1999.
We used acquired in-process research and development from Parallax Research to
develop new products using the developing fast infrared technology standard. A
product being developed for an original equipment manufacturer, to be used in a
printer-based product, accounted for a substantial majority of the acquired
in-process research and development from Parallax Research. All projects in
process at the time of the acquisition were completed in fiscal 1999 at an
estimated cost of $58,000.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Net cash used by operating activities in fiscal 2000 was $2.6 million and was
primarily a result of the payment of the discount upon maturity of our long-term
debt and an increase in receivables, principally income taxes receivable. These
cash uses were partially offset by our net loss, adjusted for such items as
depreciation and amortization and acquired in-process research and development,
and a decrease in inventory. The net cash used by operating activities in fiscal
1999 of $197,000 was primarily a result of an increase in receivables,
inventories and prepaids and other assets and a decrease in payables. These cash
26
uses were partially offset by our net loss, adjusted for such items as the
provision for write-down of inventory, depreciation and amortization and
acquired in-process research and development.
Accounts receivable was $10.3 million at June 30, 2000 and 1999. We expect that
accounts receivable may increase in the event that net revenue increases and as
net revenue from original equipment manufacturers and international customers
represents a higher percentage of our net revenue.
Net cash used by investing activities in fiscal 2000 was $3.4 million, which
consisted primarily of cash payments for the acquisition of Oval, the parent
company of Advance Systems. Net cash used by investing activities in fiscal 1999
was $5.5 million, which reflected the net purchases of available-for-sale
securities, the purchase of property and equipment and the net cash paid in our
acquisitions of Rand Software and Parallax Research.
We currently plan to incur aggregate capital expenditures of approximately $1.4
million during fiscal 2001, primarily for software, system improvements and
personal computers.
Net cash provided by financing activities in fiscal 2000 was $2.7 million, which
consisted primarily of proceeds from the issuance of common stock under our
stock plans, partially offset by payments on our long-term debt. Net cash
provided by financing activities in fiscal 1999 was $413,000, which resulted
primarily from the issuance of common stock under our stock plans.
We have an uncollateralized bank revolving line of credit of $10.0 million that
expires on October 31, 2000. Interest on borrowings is at the lender's prime
rate minus 1%. There were no borrowings under this line at June 30, 2000 or
1999. The line of credit agreement have restrictive covenants that require us to
maintain particular financial ratios.
We believe that our existing working capital and borrowing capacity, coupled
with the funds generated from our operations, will be sufficient to fund our
anticipated working capital, capital expenditures and debt payment requirements
through fiscal 2001. In the longer term, we may require additional sources of
liquidity to fund future growth. These sources of liquidity may include
additional equity offerings, which could result in dilution to our stockholders,
or additional debt financing.
In addition to our acquisitions of Rand Software and Parallax Research in fiscal
1999 and our acquisition of Advance Systems in fiscal 2000, we intend to
continue to pursue strategic acquisitions of, or strategic investments in,
companies with complementary products, technologies or distribution networks in
order to broaden our product offerings and to provide a more complete mobile
information management product offering. We have no additional commitments or
agreements regarding any transaction of this kind; however, we may acquire
businesses, products or technologies in the future. We may require additional
financing in the future and, if we were required to obtain additional financing
in the future, sources of capital may not be available on terms favorable to us,
if at all.
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES
We derive a substantial portion of our net revenue from international sales,
principally through our international subsidiaries and through a limited number
of original equipment manufacturers and independent distributors. Sales made by
our international subsidiaries, excluding our Singapore subsidiary, are
generally denominated in foreign currency. Fluctuations in exchange rates
between the U.S. dollar and other currencies could harm our business.
We have not experienced significant costs as a result of the introduction of a
European single currency, known as the Euro, introduced on January 1, 1999. At
an appropriate point before the end of the transition period, December 31, 2001,
product prices in participating countries will be denominated in the Euro and
converted to local denominations. During the transition period, our financial
systems located in the participating countries will be converted from local
denominations to the Euro. We do not presently expect that the transition to the
Euro will significantly affect our foreign currency exchange and hedging
activities. Further, we do not expect that the transition to the Euro will
result in any significant increase in costs to us and all costs associated with
the transition to the Euro will be expensed to operations as incurred. While we
27
will continue to evaluate the impact of the transition of the Euro, based on
currently available information, we do not believe that the introduction of the
Euro will harm our business.
From time to time, we enter into foreign currency forward contracts, typically
against the Euro and British Pound, to hedge payments and receipts of foreign
currencies related to transactions with international subsidiaries. While these
hedging instruments are subject to fluctuations in value, these fluctuations are
generally offset by the value of the underlying exposures being hedged. Gains
and losses on these foreign currency receivables would generally be offset by
corresponding losses and gains on the related hedging instruments, resulting in
minimal net exposure for us. We do not hold or issue financial instruments for
speculative purposes. If we implement hedging activities in the future for
foreign currency transactions, we may not be successful in these hedging
activities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. The statement requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. We are currently
evaluating the impact that this standard may have on our operations. This
statement is effective for our first quarter of fiscal 2001.
The Securities and Exchange Commission issued Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements," in December 1999. This bulletin
summarizes the Securities and Exchange Commission's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
We are currently evaluating the impact that this bulletin may have on our
operations. We are required to adopt this bulletin by our fourth quarter of
fiscal 2001.
In March 2000 the Financial Accounting Standards Board issued Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of Accounting Principles Board Opinion No. 25." Financial
Accounting Standards Board Interpretation No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 and was effective as of July 1, 2000.
This interpretation is not expected to impact our results of operations or
financial position.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
OUR QUARTERLY AND ANNUAL OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
AND MAY FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our operating results have fluctuated significantly in the past and we expect
that they will continue to do so in the future. If our operating results fall
below the expectations of securities analysts and investors, the price of our
stock may fall. Some of the factors that may cause fluctuations in our operating
results include, but are not limited to:
- - changes in the buying patterns of our original equipment manufacturer
customers;
- - changes in customer demand for our products;
- - announcements or introductions of new products or services by our
competitors;
- - delays in developing and introducing new products and services;
- - changes in our pricing policies as a result of increased competition;
- - the mix of distribution channels through which we sell our products;
- - the market acceptance of our new and enhanced products and the products of
our original equipment manufacturers;
- - the emergence of new technologies or industry standards;
- - the timing of customer orders, which can be influenced by fiscal year-end
buying pressure and seasonal trends;
- - a shift in the mix of products sold, resulting in increased sales of
lower-margin products;
- - the discontinuation of any of our product offerings, which could result in
product returns and inventory writeoffs; and
- - changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation.
28
OUR STOCK PRICE MAY BE VOLATILE AND COULD DROP SIGNIFICANTLY, RESULTING IN THE
PARTIAL OR TOTAL LOSS OF YOUR INVESTMENT.
The trading price of our common stock may significantly fluctuate, which may
cause your investment to decrease in value. For example, during the year ended
June 30, 2000, the price of our common stock ranged from $4.25 to $150.00 per
share. The following factors may have a significant impact on the market price
of our common stock:
- - quarter-to-quarter variations in operating results;
- - announcements of technological innovations or new products by us or our
competitors;
- - general conditions in the computer and mobile device industry; price and
trading volume volatility in the public stock markets generally; and
- - changes in security analysts' earnings estimates or recommendations
regarding us, our competitors or our customers.
For additional information regarding the historical trading prices of our common
stock, see "Market For Registrant's Common Equity and Related Stockholder
Matters."
WE DEPEND ON A NUMBER OF KEY BUSINESS RELATIONSHIPS AND, IF WE FAIL TO MAINTAIN
THESE RELATIONSHIPS OR ARE UNABLE TO DEVELOP NEW RELATIONSHIPS, OUR BUSINESS
WOULD SUFFER.
An important element of our strategy involves entering into key business
relationships with other companies that relate to product development, joint
marketing and the development of protocols for mobile communications. If we fail
to maintain our current relationships or are unable to develop new
relationships, our business would suffer. Some of these relationships impose
substantial product support obligations on us, which may not be offset by
significant revenue. The benefits to us may not outweigh or justify our
obligations in these relationships. Also, in order to meet our current or future
obligations to original equipment manufacturers, we may be required to allocate
additional internal resources to original equipment manufacturers' product
development projects which may delay the completion dates of our other current
product development projects.
Our existing key business relationships do not, and any future key business
relationships may not, provide us any exclusive rights. Many of the companies
with which we have established and intend to establish key business
relationships have multiple strategic relationships, and these companies may not
regard their relationships with us as significant. Most of these relationships
may be terminated by either party with little notice. In addition, these
companies may attempt to develop or acquire products that compete with our
products either on their own or in collaboration with others, including our
competitors. Further, our existing business relationships may interfere with our
ability to enter into other relationships.
IF SPECIFIC INDUSTRY-WIDE STANDARDS AND PROTOCOLS, SUCH AS BLUETOOTH, WAP AND
IRDA, UPON WHICH OUR PRODUCTS ARE OR WILL BE BASED, DO NOT ACHIEVE WIDESPREAD
ACCEPTANCE, OUR BUSINESS WOULD BE HARMED.
We have designed a number of our current and upcoming products to conform to
industry-standard infrared, short-range radio and networking standards and
protocols, such as the short-range radio communication protocol known as
Bluetooth, the Wireless Application Protocol (WAP), and the communication
protocol created by the Infrared Data Association, known as IrDA. If these
standards and protocols do not achieve acceptance, our business would be harmed.
Even if accepted, these industry-wide specifications may not be widely adopted,
or competing specifications may emerge. In addition, technologies based on these
standards and specifications may not be adopted as the standard or preferred
technologies for wireless connectivity, thereby discouraging manufacturers of
personal computers and mobile devices from bundling or integrating these
technologies in their products.
29
THE MOBILE DATA MANAGEMENT AND UNIVERSAL MOBILE CONNECTIVITY MARKETS ARE NEW AND
EVOLVING AND MAY NOT CONTINUE TO GROW, WHICH WOULD REDUCE DEMAND FOR OUR
PRODUCTS AND HARM OUR BUSINESS.
The mobile data management and universal mobile connectivity markets are still
emerging and may not continue to grow. Even if the markets grow, our products
that address these markets may not be successful. The success of these products
will rely to a large degree on the increased use of mobile devices, including
personal digital assistants, cell phones, pagers, laptop and handheld computers
and digital cameras. Enterprises and original equipment manufacturers may not
develop sufficient confidence in mobile devices to deploy our products to a
significant degree. Any inability to continue to penetrate the existing markets
for mobile data management and universal mobile connectivity products, the
failure of current markets to grow, new markets to develop or these markets to
be receptive to our products, could harm our business. The emergence of these
markets will be affected by a number of factors beyond our control.
IF ORIGINAL EQUIPMENT MANUFACTURERS REDUCE THEIR PURCHASES OF OUR PRODUCTS, OUR
OPERATING RESULTS AND FUTURE GROWTH COULD BE HARMED.
A significant portion of our net revenue in any quarter is typically derived
from sales to a limited number of original equipment manufacturers. For example,
in fiscal 2000 and 1999, sales of mobile information management products and
services to Hewlett-Packard accounted for 23% and 13% of our net revenue,
respectively. In April 2000, Hewlett-Packard notified us that it is no longer
bundling our XTNDAccess IrDA Printer Adapter with Hewlett-Packard printers sold
in North America, but is offering our product as a free accessory to their
customers with the purchase of the Hewlett-Packard printer. As a result, unit
sales and net revenue from Hewlett-Packard declined 36% in the fourth quarter of
fiscal 2000 from the previous quarter.
In the event that these or other original equipment manufacturers reduce their
purchases of our products, our operating results and future growth could be
harmed. In addition, any significant deferral of purchases of our products by
original equipment manufacturers could harm our quarterly operating results.
Sales to original equipment manufacturers frequently involve lengthy sales
cycles, typically six to 12 months, and may be subject to a number of
significant risks over which we have little or no control, including:
- - competing products or technology that original equipment manufacturers may
incorporate into their systems or internally develop;
- - original equipment manufacturers' budgetary constraints and internal
acceptance review procedures;
- - the timing of original equipment manufacturers' budget cycles;
- - the timing of original equipment manufacturers' competitive product
evaluation processes; and
- - the effectiveness of original equipment manufacturers' marketing efforts of
for their own products.
WE INTEND TO PURSUE ADDITIONAL ACQUISITIONS, AND ANY ACQUISITIONS COULD PROVE
DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR
ADVERSELY AFFECT OUR OPERATING RESULTS.
As part of our strategy, we intend to continue to pursue the acquisition of
companies that either complement or expand our existing business. If we fail to
properly evaluate and execute acquisitions, our business would be harmed. We may
not be able to properly evaluate the technology and accurately forecast the
financial impact of the transaction, including accounting charges and
transaction expenses. Acquisitions involve a number of risks and difficulties,
including:
- - expansion into new markets and business areas;
- - the integration of acquired technologies with our existing products and
technologies;
- - diversion of management's attention and other resources to the assimilation
of the operations and personnel of the acquired companies;
- - availability of equity or debt financing on terms favorable to us or our
stockholders;
- - integration of management information systems, personnel, research and
development and marketing, sales and support operations; and
- - potential adverse short-term effects on our operating results.
In addition, if we conduct acquisitions using debt or equity securities,
existing stockholders may be diluted, which could affect the market price of our
stock.
30
WE FORECAST CERTAIN COMPONENT INVENTORY PURCHASES AND MANY OF OUR EXPENSES BASED
ON EXPECTED NET REVENUE, WHICH IS DIFFICULT TO PREDICT. IF WE FAIL TO ACCURATELY
PREDICT NET REVENUE IN A PARTICULAR PERIOD, WE MAY BE UNABLE TO ADJUST OUR
COMPONENT INVENTORY PURCHASING AND EXPENSES IN THAT PERIOD, AND OUR OPERATING
RESULTS WOULD BE HARMED.
Our quarterly net revenue and operating results depend in large part on the
volume and timing of orders received within the quarter, which are difficult to
forecast. We typically operate with a relatively small order backlog and
significant component inventory purchases and portions of our expenses are fixed
in advance, based in large part on our forecast of future net revenue. In
addition, a majority of our net revenue results from the sale of products to a
limited number of original equipment manufacturers and distributors, which are
difficult to predict. None of our distributors or original equipment
manufacturers are obligated to purchase our products or certain component
inventory that is used in the manufacturer of our products except pursuant to
current purchase orders or purchase agreements. If net revenue is below
expectations in any given quarter, the adverse impact of the shortfall on our
operating results may be magnified by our inability to adjust component
inventory purchasing and spending to compensate for the shortfall. Also, we may
be required to record an increase in our provision for obsolete inventory if
certain component inventory that we purchase anticipating a higher level of
product sales cannot be returned to vendors and the inventory cannot be used in
the manufacturer of our other products. Therefore, a shortfall in actual net
revenue as compared to estimated net revenue could harm our operating results.
WE HAVE EXPERIENCED SEASONALITY IN OUR NET REVENUE, WHICH MAY CAUSE OUR
OPERATING RESULTS TO FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
We have experienced some seasonality in our net revenue and we expect to
continue to experience seasonality in the future. Net revenue in our first
fiscal quarter is typically lower than net revenue in the prior fourth fiscal
quarter, reflecting lower sales in Europe and other regions in the summer months
when business activities are reduced.
OUR MARKET IS BECOMING INCREASINGLY COMPETITIVE, WHICH COULD RESULT IN LOWER
PRICES FOR OUR PRODUCTS OR A LOSS OF MARKET SHARE.
We may not compete successfully against current or future competitors, some of
whom have longer operating histories, greater name recognition, more employees
and significantly greater financial, technical, marketing, public relations and
distribution resources. Increased competition may result in price reductions,
reduced margins, loss of market share and a change in our business and marketing
strategies, any of which could harm our business. The competitive environment
may require us to make changes in our products, pricing, licensing, services or
marketing to maintain and extend the market acceptance of our products. Price
concessions or the emergence of other pricing or distribution strategies by our
competitors or us may diminish our revenue.
We compete with:
- - mobile data management companies, including Puma Technology, fusionOne,
Aether Software and Starfish Software, a subsidiary of Motorola;
- - client/server database providers, including Microsoft, Interbase, Pervasive
Software and Oracle;
- - mobile connectivity companies, including Widcomm, Digianswer (a subsidiary
of Motorola) and ACTiSYS;
- - internet solutions providers, including IBM, Cobalt Networks, eSoft and
Ramp Networks;
- - print server manufacturers, including Hewlett-Packard, Intel and Lexmark;
and
- - internal research and development departments of original equipment
manufacturers, many of whom are our current customers.
As the markets for mobile data management and universal mobile connectivity
products grow, we expect competition from existing competitors to intensify and
new competitors, including original equipment manufacturers to whom we sell our
products, to introduce products that compete with ours.
31
IF OUR THIRD-PARTY MANUFACTURERS FAIL TO PROVIDE US WITH QUALITY, COST-EFFECTIVE
PRODUCTS IN A TIMELY MANNER OR IN SUFFICIENT VOLUMES TO MEET CUSTOMER DEMAND,
OUR BUSINESS AND OPERATING RESULTS MAY BE HARMED.
We maintain a limited in-house manufacturing capability for performing materials
procurement, final assembly, testing, quality assurance and shipping. We rely
primarily on independent subcontractors to manufacture our products and we
intend to continue our reliance upon third-party manufacturers in the future.
Some of our products are manufactured in their entirety by third parties. Our
reliance on third-party manufacturers involves a number of risks, including:
- - the potential inability to obtain an adequate supply of existing and new
products and reduced control over delivery schedules;
- - product quality; and
- - product cost.
For example, in December 1998, we announced our decision to exit the port
replicator business due in part to quality problems associated with the
third-party manufacturer of this product. Our decision to exit the port
replicator business was the primary cause of the decline in our net revenue in
the quarter ended December 31, 1998.
IF OUR THIRD-PARTY SUPPLIERS FAIL TO MAKE DELIVERIES THAT MEET OUR MANUFACTURING
SCHEDULES, OUR BUSINESS MAY BE HARMED.
We rely on third-party suppliers for components used in our products. Because
the manufacturing of our products can involve long lead times, in the event of
unanticipated increases in demand for our products, we could be unable to obtain
product components quickly enough to manufacture particular products in a
quantity sufficient to meet customer demand. As a result, our business may be
harmed. Some of the components used in our products, including particular
semiconductor components and infrared transmission components, are currently
available from a limited number of suppliers. From time to time, we have
experienced difficulty in obtaining components from suppliers due to increased
industry demand and a lack of available supply. We are currently experiencing
some difficulty in obtaining an adequate supply of flash memory for our printing
solutions products and some components commonly used in the manufacture of
mobile phones, such as resistors and capacitors, for our wireless connectivity
products. Any inability to obtain adequate deliveries, increased costs or other
circumstances that would require us to seek alternative suppliers could impair
our ability to ship our products on a timely basis. This could damage
relationships with current and prospective customers and increase the
manufacturing cost of our products, either of which would harm our business.
WE RELY UPON THIRD-PARTY DISTRIBUTORS AND RESELLERS, WHO MAY NOT DEVOTE
RESOURCES TO ADEQUATELY SUPPORT OUR PRODUCTS.
We sell some of our products, mainly our printing solutions products, primarily
through distributors and resellers. Our success depends on the continued sales
efforts of our network of distributors and resellers. Some of our existing
distributors currently distribute, or may in the future distribute, the products
of our competitors. These third-party distributors may not recommend our
products or may not devote sufficient resources to market or adequately support
our products.
We provide most of our distributors and resellers with limited product return
rights for stock rotation and with some price protection rights. We may
experience significant returns in the future and we may not make adequate
allowances to offset these returns. Price protection rights require that we
grant retroactive price adjustments for inventories of our products held by
distributors or resellers if we lower our prices for these products. The short
life cycles of our products and the difficulty in predicting future sales
increase the risk that new product introductions, price reductions by us or our
competitors or other factors affecting the markets in which we compete could
result in significant product returns. For example, in the quarter ended
December 31, 1998, we discontinued our mechanical port replicator products. As a
result, we recorded $1.4
32
million in after-tax charges for product returns, an allowance for product
returns and an increase in the inventory valuation allowance for port
replicators. Our distributors maintain inventory of the products they purchase
from us. Changes in inventory management policies at any of our key distributors
could harm our business.
WE DEPEND ON NON-EXCLUSIVE LICENSES FOR SOME OF THE TECHNOLOGY WE USE WITH OUR
PRODUCTS.
We license technology on a non-exclusive basis from several companies for use
with our products and anticipate that we will continue to do so in the future.
For example, we license authentication and encryption technology from Certicom
Corporation, which we include in our XTNDConnect Server products. Our inability
to continue to license this technology, or to license other necessary technology
for use with our products, could result in the loss of or delays in the
inclusion of important features of our products or result in substantial
increases in royalty payments that we would have to pay pursuant to alternative
third-party licenses, any of which could harm our business. In addition, the
effective implementation of our products depends upon the successful operation
of licensed software in conjunction with our products. Any undetected errors in
products resulting from this licensed software may prevent the implementation or
impair the functionality of our products, delay new product introductions and
injure our reputation.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP OR INTRODUCE NEW PRODUCTS.
The markets for our products are characterized by:
- - rapidly changing technologies;
- - evolving industry standards;
- - frequent new product introductions; and
- - short product life cycles.
Any delays in the introduction or shipment of new or enhanced products, the
inability of our products to achieve market acceptance or problems associated
with new product transitions could harm our business. The product development
process involves a number of risks. The development of new, technologically
advanced products is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. The introduction of new or enhanced products also requires us to manage
the transition from older products in order to minimize disruption in customer
ordering patterns, avoid excessive levels of older product inventories and
ensure that adequate supplies of new products can be delivered to meet customer
demand.
INTERNATIONAL SALES AND OPERATIONS REPRESENT A SUBSTANTIAL PORTION OF OUR NET
REVENUE. OUR BUSINESS MAY BE HARMED DUE TO RISKS ASSOCIATED WITH INTERNATIONAL
SALES AND OPERATIONS.
We derive a substantial portion of our net revenue from international sales. For
the year ended June 30, 2000, net revenue from sales outside of North America
accounted for approximately 69% of our net revenue. We expect that international
sales will continue to represent a substantial portion of our net revenue for
the foreseeable future. International sales are subject to a number of risks,
including:
- - changes in government regulations;
- - export license requirements;
- - tariffs, taxes and trade barriers;
- - fluctuations in currency exchange rates, which could cause our products to
become relatively more expensive to customers in a particular country and
lead to a reduction in sales in that country; longer collection and payment
cycles than those in the United States;
- - difficulty in staffing and managing international operations; and
- - political and economic instability, including instability caused by the
European monetary union and military actions.
33
CURRENCY EXCHANGE RATE FLUCTUATIONS COULD CAUSE OUR OPERATING RESULTS TO
FLUCTUATE.
The transactions made through our subsidiaries in France, Germany, Italy, the
Netherlands and the United Kingdom are primarily denominated in local
currencies. Accordingly, these international operations expose us to currency
exchange rate fluctuations which in turn could cause our operating results to
fluctuate. From time to time we enter into foreign currency forward contracts,
typically against the Euro and British Pound, to hedge our exposure to exchange
rate fluctuations resulting from intercompany transactions with our
international subsidiaries. The success of these hedging activities depends upon
estimates of intercompany balances denominated in various foreign currencies. To
the extent that these estimates are overstated or understated during periods of
currency volatility, we could experience unanticipated currency gains or losses.
IF ENTERPRISES AND INDIVIDUALS ARE RELUCTANT TO USE THE INTERNET TO MANAGE
INFORMATION, IT WILL HARM SALES OF SOME OF OUR PRODUCTS.
Sales of some of our products, including our mobile data management and our
enterprise Internet products in particular, largely depend upon on the increased
use of the Internet by enterprises as replacements for, or enhancements to,
their private networks. However, enterprises may be reluctant to use Internet
services or applications for functions that are important for their operations.
If enterprises determine that our mobile data management and enterprise Internet
products do not provide adequate security for dissemination of information over
the Internet, or if for any other reason customers fail to accept our
applications and services for use over the Internet, our business could be
harmed.
THE COMPLEX COMPUTER SOFTWARE AND HARDWARE PRODUCTS THAT WE PRODUCE MAY CONTAIN
DEFECTS FOR WHICH WE MAY BE LIABLE.
Software and computer hardware products as complex as those we offer may contain
undetected errors when first introduced or as new versions are released. These
errors could result in dissatisfied customers, product liability claims and the
loss of or delay in market acceptance of new or enhanced products, any of which
could harm our business. Testing of our products is particularly challenging
because it is difficult to simulate the wide variety of computing environments
in which our customers may deploy our products. For example, our mobile
information management products are used in a wide variety of telecommunications
environments. Changes in technology standards or an increase in the number of
telecommunications technologies used in the marketplace may create compatibility
issues with our products and our customers' environments. Accordingly, despite
testing by us and by current and potential customers, errors could be found
after commencement of commercial shipment. A successful product liability claim
brought against us could result in our payment of significant legal fees and
damages, which would harm our business.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS WILL SUFFER.
Any growth we experience is likely to place a significant strain on our
administrative, operational and financial resources and to increase demands on
our systems and controls, which could harm our business. Growth may also result
in an increase in the scope of responsibility for management personnel. We
anticipate that growth and expansion will require us to recruit, hire, train and
retain a substantial number of new engineering, executive, sales and marketing
personnel. In the current employment environment we have experienced difficulty
in recruiting qualified personnel, and continued difficulty in this regard could
limit our ability to grow. In addition, in order to manage our growth
successfully, we will need to continue to expand and improve our operational,
management and financial systems and controls. The failure to do so could harm
our business.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENT, TRADEMARK, COPYRIGHT OR
OTHER INTELLECTUAL PROPERTY RIGHTS FROM COMPETITORS, AND WE MAY BE REQUIRED TO
USE A SIGNIFICANT AMOUNT OF OUR RESOURCES TO DEFEND OURSELVES FROM INFRINGEMENT
CLAIMS MADE BY OTHERS.
Our patents, trademarks or copyrights may be invalidated, circumvented or
challenged, and the rights granted under these patents, trademarks and
copyrights may not provide us with any competitive advantage, which could harm
our business. Any of our pending or future patent applications may not be issued
with the scope of the claims we are seeking, if at all. In addition, others may
develop technologies that are similar or superior to our technology, duplicate
our technology or design around our patents. Further, effective intellectual
property protection may be unavailable or limited in some countries outside of
the United States.
34
If a court finds that we infringe on the intellectual property rights of any
third party, we could be subject to liabilities, which could harm our business.
As a result, we might be required to seek licenses from other companies or to
refrain from using, manufacturing or selling specific products or using specific
processes. Holders of patents and other intellectual property rights may not
offer licenses to use their patents or other intellectual property rights on
acceptable terms, or at all. Failure to obtain these licenses on commercially
reasonable terms or at all could harm our business.
In order to protect our proprietary rights, we may decide to sue third parties.
Any litigation, whether brought by or against us, could cause us to incur
significant expenses and could divert a large amount of management time and
effort. A claim by us against a third party could in turn cause a counterclaim
by the third party against us, which could impair our intellectual property
rights and harm our business.
THE LOSS OF KEY PERSONNEL, OR OUR INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, MAY HARM OUR BUSINESS.
Our success depends upon the continuing contributions of our key management,
engineering, sales and marketing personnel. The loss of key management or
technical personnel could harm our business. We do not maintain any key-person
life insurance policies. We believe that our success will also depend upon our
ability to attract and retain highly skilled management, engineering, sales and
marketing personnel. In particular, we are currently attempting to recruit new
engineering personnel; however, we may not be successful at hiring or retaining
these personnel.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Provisions in our restated certificate of incorporation and our bylaws may have
the effect of deterring hostile takeovers or delaying or preventing changes in
control or management of us, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
For example, our restated certificate of incorporation divides the board of
directors into three classes, each serving a staggered three-year term, and does
not permit action by written consent of the stockholders or cumulative voting.
In addition, our Board of Directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by our
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. While we have no present intention to issue
shares of preferred stock, the issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. Further, we
are subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which prohibits us from engaging in a business
combination with an interested stockholder for three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our liquid investments are at fixed interest rates and,
therefore, the fair value of these instruments is affected by changes in market
interest rates. All of our liquid investments mature within 90 days or less of
June 30, 2000, therefore, we believe that the market risk arising from our
holdings of liquid investments is minimal.
Our capital lease is recorded at a fixed interest rate and, therefore, its fair
value is affected by changes in market interest rates. Because it expires in
September 2000, we believe that the market risk associated with our capital
lease is minimal.
35
Sales made by our international subsidiaries are generally denominated in the
foreign country's currency with the exception of our Singapore subsidiary.
Fluctuations in exchange rates between the U.S. dollar and other currencies
could materially harm our business.
From time to time, we enter into currency forward contracts to hedge payments
and receipts of currencies related to the purchase and sale of goods to our
international subsidiaries, thereby limiting our risk that would otherwise
result from changes in exchange rates. While these hedging instruments are
subject to fluctuations in value, these fluctuations are generally offset by the
value of the underlying exposures being hedged. We had $4.5 million in forward
contracts in place against the Euro and British pound sterling at June 30, 2000
that mature within 30 days. We had no forward contracts in place at June 30,
1999. The success of these hedging activities depends upon estimation of
intercompany balances denominated in various foreign currencies. To the extent
that these forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in Item 14 of this Form 10-K.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to our
definitive Proxy Statement for its 2000 Annual Meeting of Stockholders to be
held on October 25, 2000.
The following table sets forth certain information regarding our executive
officers and directors as of September 1, 2000.
NAME AGE POSITION
Steven D. Simpson............... 53 President, Chief Executive Officer and Director
Holmes T. Lundt................. 43 Vice President of Corporate Research and Development and
Business Development
Scott J. Ritchie................ 45 Vice President of Operations
Karla K. Rosa................... 37 Vice President of Finance and Chief Financial Officer
Bradley J. Surkamer............. 46 Vice President of International Sales and Marketing
Raymond A. Smelek............... 65 Chairman of the Board of Directors
John J. Katsaros................ 49 Director
John M. Russell................. 58 Director
S. Scott Wald................... 45 Director
Douglas B. Winterrowd........... 49 Chief Engineer and Director
STEVEN D. SIMPSON has served as our President and Chief Executive Officer and as
a director since January 1996. From January 1995 to January 1996, Mr. Simpson
served as Executive Vice President of Sales and Marketing. Prior to joining us,
Mr. Simpson was employed by Hewlett-Packard in various marketing and management
positions from 1978 to 1994. From 1991 to 1994, Mr. Simpson was General Manager
of the Boise LaserJet Printer Division. Mr. Simpson received a B.S. in Marketing
from the University of Utah and an M.B.A. from the University of Wyoming.
HOLMES T. LUNDT has served as Vice President of Corporate Research and
Development and Business Development since January 1996. From December 1994 to
January 1996, Mr. Lundt was Vice President of Research and Development. Since
joining us in 1984, Mr. Lundt has held various other positions including
36
Vice President of Marketing and Business Unit Manager of Network Printing. Mr.
Lundt received a B.S. in Electrical Engineering from Iowa State University and a
M.S. in Electrical Engineering from Stanford University.
SCOTT J. RITCHIE has served as Vice President of Operations since he joined us
in December 1995. From May 1978 to November 1995, Mr. Ritchie was employed by
Hewlett-Packard and held a number of positions in manufacturing and material
management, most recently as Materials Manager in the Disk Memory Division. Mr.
Ritchie received a B.B.A. in Management and an M.B.A. from Boise State
University.
KARLA K. ROSA has served as Vice President of Finance since December 1997 and as
Chief Financial Officer since April 1996. From January 1996 to April 1996, Ms.
Rosa was Assistant Controller, from April 1992 to January 1996, Ms. Rosa was
Treasury Manager and from December 1991 to April 1996, Ms. Rosa was Tax
Director. Prior to joining us, Ms. Rosa was a manager in the Los Angeles and
Boise offices of Arthur Andersen & Co. Ms. Rosa is a Certified Public
Accountant. Ms. Rosa received her B.S. in accounting from Utah State University.
BRADLEY J. SURKAMER has served as Vice President of International Sales and
Marketing since March 2000. From January 1999 to March 2000, Mr. Surkamer was
the Vice President of Technical Support and our Internet Business Unit Manager.
From January 1996 to January 1999 he served as Vice President of Technical
Support and Third-Party Marketing. Mr. Surkamer has held various other positions
since he joined us in November 1988 including Manager of Technical and
Third-party Marketing and Manager of Sales and Marketing. Mr. Surkamer received
a B.S. in Mathematics from the University of Montana and an M.B.A. from Northern
Arizona University.
RAYMOND A. SMELEK has served as Chairman of the Board of Directors since June
1995 and he has been a director since June 1994. From June 1994 to January 1996,
Mr. Smelek was our President and Chief Executive Officer. Prior to joining us,
Mr. Smelek was employed by Hewlett-Packard and held a number of positions, most
recently as Vice President and General Manager of the Mass Storage Group. Mr.
Smelek is also the President and Chief Executive Officer of the Network Group
and a director of Inference Corporation. Mr. Smelek received a B.S. in
Electrical Engineering from San Jose State University.
JOHN J. KATSAROS was appointed to our board of directors in July 2000. He is a
Vice President at Jupiter Communications, a global Internet commerce research
and consulting company. Prior to his position at Jupiter, Mr. Katsaros was the
President of Internet Research Group (formerly Collaborative Marketing), an
internet research and consulting firm, which was acquired by Jupiter in March
2000. He also serves on the board of directors of My Software, Inc. and
Inference Corporation. Mr. Katsaros holds a B.S. and M.S. in Electrical
Engineering from Lehigh University, as well as an M.B.A. from Santa Clara
University.
JOHN M. RUSSELL has been a director since April 1998. From December 1991 to
March 1994, Mr. Russell served as Vice President of Finance and Administration,
Chief Financial Officer and Secretary of Cisco. Mr. Russell received a B.A. from
the University of California, Berkeley. He is currently retired.
S. SCOTT WALD has been a director since July 1994. He was the founder of ASAP
Software Express and served as President and Chief Executive Officer of ASAP
Software Express from September 1985 to June 1998. Mr. Wald received a B.S. in
Business Administration and an M.B.A. from Arizona State University.
DOUGLAS B. WINTERROWD is a founder of Extended Systems and has been a director
since October 1995. Previously, he served as director from 1984 to 1992. Mr.
Winterrowd has served as Chief Engineer since February 1994 and, prior to this
time, held various positions with Extended Systems, including Program Manager,
Quality Assurance Manager, Technical Support Manager, Project Manager and Senior
Engineer. Mr. Winterrowd holds a B.S. and an M.S. in Electrical Engineering from
Montana State University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our 2000
Proxy Statement.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to our 2000
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to our 2000
Proxy Statement.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report:
Consolidated financial statements as of June 30, 2000 and
1999 and for each of the three years in the period
ended June 30, 2000:
Report of Independent Accountants............................. 41
Consolidated Statement of Operations.......................... 42
Consolidated Statements of Comprehensive Income (Loss)........ 42
Consolidated Balance Sheets................................... 43
Consolidated Statements of Stockholders' Equity............... 44
Consolidated Statements of Cash Flows......................... 45
Notes to Consolidated Financial Statements.................... 46
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts............... 60
All other schedules are omitted because they are not applicable or the
required information is shown in our consolidated financial statements
or the notes to our consolidated financial statements.
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation. (1)
3.2 Restated Bylaws. (2)
10.1 Form of Indemnification Agreement for directors and officers. (1)
10.2 1998 Stock Plan and form of agreement thereunder. (1)
10.3 1998 Employee Stock Purchase Plan and forms of participation agreements thereunder. (1)
10.3 1998 Employee Stock Purchase Plan and forms of participation agreements thereunder. (1)
10.4 1998 Directors Stock Option Plan and form of agreement thereunder. (1)
10.5 1994 Incentive Stock Option Plan. (1)
10.6 1987 Restricted Stock Option Plan, as amended. (1)
10.7 1984 Incentive Stock Option Plan, as amended. (1)
10.8 Extended Systems Incorporated Employee Stock Ownership Plan. (1)
10.9 Extended Systems Incorporated 401(k) Plan. (1)
10.10 Convertible Subordinated Promissory Notes and Warrant Purchase Agreement among the
Company, Summit Ventures II, L.P. and Summit Investors II, L.P. dated September 30, 1992.
(1)
10.10 Convertible Subordinated Promissory Notes and Warrant Purchase Agreement among the
Company, Summit Ventures II, L.P. and Summit Investors II, L.P. dated September 30,
1992.(1)
10.11 Zero Coupon Convertible Subordinated Promissory Note dated September 30, 1992 issued to
Summit Ventures II, L.P. (1)
10.11 Zero Coupon Convertible Subordinated Promissory Note dated September 30,
39
1992 issued to Summit Ventures II, L.P.
10.12 Zero Coupon Convertible Subordinated Promissory Note dated September 30, 1992 issued to
Summit Investors II, L.P. (1)
10.13 Summit Investors II, L.P. Convertible Subordinated Promissory Note dated September 30,
1992 issued to Summit Ventures II, L.P. (1)
10.14 Convertible Subordinated Promissory Note dated September 30, 1992 issued to Summit
Investors II, L.P. (1)
10.15 Shareholders' Agreement among the Company, Gary Atkins, Charles M. Jopson, Douglas B.
Winterrowd, Ted L. Wimer, Steven Bolen, Summit Ventures II, L.P. and Summit Investors II,
L.P. dated September 30, 1992. (1)
10.16 Sale, License and Noncompetition Agreement between the Company and Electronic Accessory
Specialist International, L.L.C. dated June 14, 1996, as amended. (1)
10.17 OEM Purchasing Agreement between the Company and Apexx Technology, Inc. dated August 14,
1997. (1)
10.18 Form of Distribution Agreement -- North America. (1)
10.19 Form of Distribution Agreement -- Europe. (1)
10.20 Registration Rights Agreement. (1)
10.21 Employment Agreement between the Company and Steven D. Simpson. (1)
10.22 Employment Agreement between the Company and Raymond A. Smelek. (1)
10.23 Employment Agreement between the Company and Thomas C. White. (3)
10.24 Employment Agreement between the Company and Holmes T. Lundt. (3)
10.25 Employment Agreement between the Company and Scott J. Ritchie. (3)
10.26 Employment Agreement between the Company and Bradley J. Surkamer (4)
10.27 Employment Agreement between the Company and Karla K. Rosa (4)
21.1 List of Subsidiaries of the Registrant. (1)
23.1 Consent of Independent Accountants. *
27.1 Financial Data Schedule. *
----------
(1) Incorporated by reference from the Registrant's Registration
Statement on Form S-1 (File No. 333-42709) filed with the
Commission on March 4, 1998.
(2) Incorporated by reference from our Quarterly Report on Form 10-Q
filed with the Commission on May 14, 1998.
(3) Incorporated by reference from our Quarterly Report on Form 10-Q
filed with the Commission on February 16, 1999.
(4) Incorporated by reference from our Annual Report on Form 10-K
filed with the Commission on September 28, 1999.
* Filed herewith.
(b) REPORTS ON FORM 8-K
Not applicable.
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Extended Systems Incorporated:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 39 present fairly, in all material
respects, the financial position of Extended Systems Incorporated and its
subsidiaries at June 30, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2000
in conformity with accounting principles generally accepted in the United
States. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) on page 39 present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of Extended Systems
Incorporated's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boise, Idaho
July 31, 2000
41
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
-------------------------------------------
Net revenue.......................................................... $ 56,512 $ 50,689 $ 50,004
Cost of net revenue.................................................. 28,115 25,202 20,710
-------------------------------------------
Gross profit................................................... 28,397 25,487 29,294
Operating expenses:
Research and development.......................................... 9,614 6,815 6,351
Acquired in-process research and development...................... 2,352 758 -
Marketing and sales............................................... 17,787 15,930 13,838
General and administrative........................................ 4,423 3,703 3,340
Amortization of intangibles....................................... 891 61 -
-------------------------------------------
Income (loss) from operations.................................. (6,670) (1,780) 5,765
Other expense (income), net.......................................... 57 (339) (40)
Interest expense..................................................... 259 713 692
-------------------------------------------
Income (loss) before income taxes.............................. (6,986) (2,154) 5,113
Income tax provision (benefit)....................................... (2,001) (692) 1,815
-------------------------------------------
Net income (loss).............................................. $(4,985) $(1,462) $ 3,298
===========================================
Earnings (loss) per share:
Basic............................................................. $ (0.52) $ (0.17) $ 0.45
Diluted........................................................... $ (0.52) $ (0.17) $ 0.44
Number of shares used in per share calculation:
Basic............................................................. 9,552 8,409 7,303
Diluted........................................................... 9,552 8,409 7,577
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED JUNE 30,
(IN THOUSANDS)
2000 1999 1998
-------------------------------------------
Net income (loss)................................................... $(4,985) $(1,462) $ 3,298
Change in currency translation...................................... (278) (225) (53)
-------------------------------------------
Comprehensive income (loss)................................... $(5,263) $(1,687) $ 3,245
===========================================
The accompanying notes are an integral part of the financial statements
42
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
(IN THOUSANDS, EXCEPT PAR VALUE)
2000 1999
----------------------------
ASSETS
Current:
Cash and cash equivalents.......................................................... $ 6,191 $ 9,668
Short-term investments............................................................. - 3,001
Receivables........................................................................ 12,499 11,589
Inventories........................................................................ 3,484 5,017
Prepaids and other................................................................. 1,200 945
Deferred income taxes.............................................................. 715 584
----------------------------
Total current assets............................................................ 24,089 30,804
Property and equipment, net........................................................... 7,817 8,300
Intangibles, net...................................................................... 6,237 1,402
Deferred income taxes................................................................. 5,785 -
Other assets.......................................................................... 293 293
----------------------------
Total assets.................................................................... $44,221 $40,799
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Current debt....................................................................... $ 67 $ 8,206
Accounts payable................................................................... 3,026 3,161
Accrued expenses................................................................... 2,643 2,441
Deferred revenue................................................................... 770 304
----------------------------
Total current liabilities....................................................... 6,506 14,112
Long-term debt........................................................................ - 67
Deferred income taxes................................................................. - 25
----------------------------
Total liabilities............................................................... 6,506 14,204
----------------------------
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; 10,309 and
8,600 shares issued and outstanding............................................. 10 9
Additional paid-in capital......................................................... 28,108 12,015
Retained earnings.................................................................. 10,540 15,525
Deferred compensation.............................................................. (264) (553)
Accumulated other comprehensive loss............................................... (679) (401)
----------------------------
Total stockholders' equity...................................................... 37,715 26,595
----------------------------
Total liabilities and stockholders' equity...................................... $44,221 $40,799
============================
The accompanying notes are an integral part of the financial statements
43
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK TREASURY STOCK
------------------------ -----------------------
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED DEFERRED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT COMPENSATION LOSS
--------------------------------------------------------------------------------------------------
BALANCE AT JULY 1, 1997 6,875 $ 7 $ 1,182 $ 14,004 8 $ (43) $ (1,002) $ (123)
Net income -- -- -- 3,298 -- -- -- --
Translation adjustment -- -- -- -- -- -- -- (53)
Stock issued 1,299 1 8,563 -- (1) 12 -- --
Treasury stock purchased, -- --
at cost -- -- -- -- 28 (205)
Employee stock plans 78 -- 288 (55) (35) 236 -- --
Compensatory options -- -- 814 (260) -- -- (72) --
------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 8,252 8 10,847 16,987 -- -- (1,074) (176)
Net loss -- -- -- (1,462) -- -- -- --
Translation adjustment -- -- -- -- -- -- -- (225)
Stock issued 105 1 734 -- -- -- -- --
Treasury stock purchased,
at cost -- -- -- -- (5) (43) -- --
Employee stock plans 243 -- 744 -- 5 43 -- --
Compensatory options -- -- (310) -- -- -- 521 --
------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 8,600 9 12,015 15,525 -- -- (553) (401)
Net loss -- -- -- (4,985) -- -- -- --
Translation adjustment -- -- -- -- -- -- -- (278)
Stock issued 625 -- 2,991 -- -- -- -- --
Employee stock plans 1,084 1 13,132 -- -- -- -- --
Compensatory options -- -- (30) -- -- -- 289 --
------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 10,309 $ 10 $ 28,108 $ 10,540 -- $ -- $ (264) $ (679)
================================================================================================
The accompanying notes are an integral part of the financial statements
44
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
(IN THOUSANDS)
2000 1999 1998
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $(4,985) $(1,462) $3,298
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Acquired in-process research and development................ 2,352 758 -
Provision for bad debts..................................... 7 341 118
Provision for write-down of inventory....................... 409 1,653 395
Depreciation and amortization............................... 3,014 1,617 1,229
Accretion of discount on long-term debt..................... 174 656 598
Payment of discount on long-term debt....................... (3,675) - -
Tax benefit from employee stock options..................... 5,683 - -
Deferred income taxes....................................... (5,941) (694) (99)
Stock option compensation................................... 259 211 482
Other....................................................... 10 103 20
Changes in assets and liabilities, net of effect of
acquisitions:
Receivables............................................... (1,121) (1,752) (2,166)
Inventories............................................... 1,064 (531) (2,505)
Prepaids and other assets................................. (274) (544) 4
Accounts payable and accrued expenses..................... 384 (553) 1,362
----------------------------------------------
Net cash provided (used) by operating activities....... (2,640) (197) 2,736
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. (1,061) (1,055) (2,393)
Sales of available-for-sale securities......................... 1,000 5,979 -
Maturities of available-for-sale securities.................... 2,001 750 -
Purchases of available-for-sale securities..................... - (9,730) -
Issuance of notes receivable................................... (315) (330) (824)
Acquisitions:
Oval (1415) Limited, net of cash acquired................... (5,273) - -
Rand Software Corporation, net of cash acquired............. - (686) -
Parallax Research Pte., net of cash acquired................ - (437) -
Other investing activities..................................... 216 51 13
----------------------------------------------
Net cash used by investing activities.................. (3,432) (5,458) (3,204)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock..................... 7,604 636 10,097
Payments on long-term debt..................................... (4,867) (262) (165)
Proceeds from the issuance of long-term debt................... - - 210
Financing costs relating to stock issuance..................... - - (1,098)
Other financing activities..................................... - 39 (172)
----------------------------------------------
Net cash provided by financing activities.............. 2,737 413 8,872
Effect of exchange rate changes on cash........................ (142) (96) (19)
----------------------------------------------
Net increase (decrease) in cash and cash equivalents........... (3,477) (5,338) 8,385
CASH AND CASH EQUIVALENTS:
Beginning of period............................................ 9,668 15,006 6,621
----------------------------------------------
End of period.................................................. $ 6,191 $ 9,668 $15,006
==============================================
The accompanying notes are an integral part of the financial statements
45
EXTENDED SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Extended Systems has two primary operating segments. Our mobile information
management segment includes both mobile data management and universal mobile
connectivity products that enable mobile users to access, collect, synchronize
and print information on demand. Our printing solutions segment provides printer
connectivity solutions in network and non-network computer environments.
BASIS OF PRESENTATION. Our consolidated financial statements include Extended
Systems Incorporated, a Delaware corporation, and its subsidiaries. We have
eliminated all significant intercompany accounts and transactions. We have made
reclassifications to the consolidated financial statements to conform the
presentations. Tabular amounts are in thousands, except percentages and per
share amounts.
CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency except for our Singapore subsidiary that uses the U.S.
dollar as its 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 reflect gains and losses from this translation
process as a component of comprehensive income or loss. We translate revenue and
expenses into U.S. dollars using the average exchange rate for the period. We
recognized net currency exchange losses of $134,000, $97,000 and $83,000 for the
years ended June 30, 2000, 1999 and 1998, respectively.
USE OF ESTIMATES. 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 and our reported amounts of revenue and expense during the reporting
periods. Our actual results could differ from our estimates.
EARNINGS OR LOSS PER SHARE. We compute basic earnings or loss per share by
dividing net income or loss by our weighted average number of common shares
outstanding during the period. We compute diluted earnings or loss per share by
dividing net income or loss by the weighted average number of common shares
outstanding increased by the additional common shares that would be outstanding
if we had issued the potential dilutive common shares. We exclude from the
diluted earnings or loss per share computations stock options and potential
shares for convertible debt to the extent that their effect would have been
antidilutive.
REVENUE on hardware products is generally recognized when products are shipped
to customers, including when products are shipped to distributors and resellers,
net of an allowance for estimated product returns. As a result of the exit from
the mechanical port replicator business in December 1998, our net revenue for
the year ended June 30, 1999 includes port replicator returns and a provision
for port replicator returns totaling $1.0 million.
We recognize revenue earned under software license agreements when persuasive
evidence of a contract exists, software has been delivered and accepted, the fee
is fixed or determinable and collectibility is probable. For contracts with
multiple elements we allocate revenue to each element based on vendor specific
objective evidence of its fair value, which is based on the price when each
element is sold separately, or when not yet sold separately, the price
established by our management. We defer revenue for maintenance and support,
which is amortized over the support period, generally 12 months.
RESEARCH AND DEVELOPMENT COSTS are expensed as incurred.
ADVERTISING COSTS are expensed as incurred.
46
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK. Our cash equivalents are
highly liquid investments with original maturities of three months or less,
readily convertible to known amounts of cash. We consider the amounts we report
as cash equivalents, short-term investments, receivables and debt as reasonable
approximations of their fair values. We made these estimates of fair value in
accordance with the requirements of Statement of Financial Accounting Standard
No. 107, "Disclosure about Fair Value of Financial Instrument." We based the
fair value estimates on market information available to us as of June 30, 2000.
The use of different market assumptions and estimation methodologies could have
a material effect on our estimated fair value amounts.
We do not hold or issue financial instruments for speculative purposes.
From time to time, we enter into foreign currency forward contracts to hedge
payments and receipts of foreign currencies related to the purchase and sale of
goods to our international subsidiaries, thereby limiting our risk that would
otherwise result from changes in currency exchange rates. While these hedging
instruments are subject to fluctuations in value, these fluctuations are
generally offset by the value of the underlying exposures being hedged. We had
$4.5 million in forward contracts in place, which approximated fair value,
against the Euro and British pound sterling at June 30, 2000 that mature within
30 days. We had no such contracts in place at June 30, 1999.
Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash, short-term investments and trade accounts
receivable. Our cash balances held in financial institutions may, at times,
exceed federally insured amounts. We deposit cash in high-credit-quality
financial institutions and, by policy, limit the concentration of credit
exposure by restricting investments with any single obligor. A concentration of
credit risk may exist with respect to trade accounts receivable, as a majority
of our customers are North American, European and Asian manufacturers of
computer equipment and distributors. We perform ongoing credit evaluations on
customers and generally do not require collateral. We have not experienced
significant losses related to receivables.
SHORT-TERM INVESTMENTS include securities classified as available-for-sale at
amortized cost, which approximates fair value, and securities classified as
held-to-maturity at amortized cost. We recognize gains and losses based on
specific identification of the securities that are sold.
INVENTORIES are valued at the lower of cost (principally standard cost, which
approximates actual cost on a first-in, first-out basis) or market. Our cost of
net revenue for the year ended June 30, 1999, includes a provision for
write-down of port replicator inventory of $1.4 million.
PROPERTY AND EQUIPMENT is stated at cost and depreciated using the straight-line
method over estimated useful lives of 7 to 15 years for land improvements, 7 to
40 years for buildings, 3 to 5 years for computer equipment and 5 to 10 years
for furniture and fixtures. Our depreciation and amortization of property and
equipment was $1,491,000 in fiscal 2000, $1,402,000 in fiscal 1999 and
$1,142,000 in fiscal 1998. We remove the net book value of property and
equipment retired or otherwise disposed of from our books and include the net
gain or loss in the determination of our results of operations.
INTANGIBLE ASSETS consist primarily of purchased technology and the cost in
excess of fair value of the net assets of companies that we acquired in purchase
transactions and are carried at cost less accumulated amortization. We amortize
intangible assets over useful lives of 5 years using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS. We review the carrying value of long-lived
assets, comprised mainly of property and equipment and intangible assets,
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable. No assets were considered impaired at June 30, 2000 or
1999.
PRODUCT WARRANTY AND SUPPORT. We offer warranties and free support on certain
products and record an accrual for the estimated future costs associated with
warranty claims and support, which is based upon historical experience and our
estimate of the level of future costs.
47
DEFERRED INCOME TAXES. We recognize deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The statement requires entities to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. We are currently evaluating the impact
that this standard may have on our operations. This statement is effective for
our first quarter of fiscal 2001.
The Securities and Exchange Commission issued Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements," in December 1999. This bulletin
summarizes the Securities and Exchange Commission's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
We are currently evaluating the impact that this bulletin may have on our
operations. We are required to adopt this bulletin by our fourth quarter of
fiscal 2001.
In March 2000 the Financial Accounting Standards Board issued Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board Opinion No. 25." Financial
Accounting Standards Board Interpretation No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 and was effective as of July 1, 2000.
This interpretation is not expected to impact our results of operations or
financial position.
SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and noncash activities were as follows for the years
ended June 30:
2000 1999 1998
-------------------------------
Income taxes paid (refunded), net ........ $ (653) $ 1,085 $ 1,504
Stock issued in business combinations .... 2,991 735 --
Deferred compensation .................... (30) (310) 554
Interest paid ............................ 3,764 83 82
Interest paid for the year ended June 30, 2000 includes $3.7 million of accreted
discount on the zero coupon promissory notes paid in September 1999.
BUSINESS COMBINATIONS
OVAL (1415) LIMITED. In August 1999, we acquired all of the outstanding stock of
Oval (1415) Limited for $5.5 million in cash, including acquisition expenses,
and 625,000 shares of our common stock valued at $3.0 million. This transaction
was accounted for by the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations," and,
accordingly, Oval's results of operations have been included in our consolidated
statement of operations since the acquisition date.
Oval, based in Bristol, England, was the parent company of Advance Systems
Limited and Zebedee Software Limited. Advance Systems was the developer of
XTNDConnect Server, formerly ASL-Connect, a server-based data synchronization
and management software for portable computing devices and high-end mobile
phones that allows the update and exchange of data with enterprise applications
such as Microsoft Exchange, Lotus Notes and corporate databases. Zebedee
Software was a software consulting company. Substantially all of the net assets
owned by, and operations of, the Oval consolidated group are attributable to
Advance Systems, therefore, we will refer to Advance Systems in this section
when referring to net assets acquired in the acquisition.
48
A summary of the net assets acquired at the date of the acquisition is as
follows:
Net working capital.............................................. $ 112
Property and equipment........................................... 45
Developed technology, goodwill and other intangibles............. 5,984
Acquired in-process research and development..................... 2,352
---------------
$8,493
===============
The following unaudited pro forma consolidated results of operations assume the
Oval acquisition occurred at the beginning of the year ended June 30:
2000 1999
-------------------------------
(UNAUDITED)
Net revenue............................... $56,731 $51,993
Net loss.................................. (4,985) (1,921)
Loss per share:
Basic.................................. (0.52) (0.21)
Diluted................................ (0.52) (0.21)
Valuation of the intangible assets we acquired from Advance Systems, including
acquired in-process research and development, developed technology and goodwill
was determined by independent appraisers. Based upon these independent
appraisals, we estimated that, in aggregate, the fair value of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use was $2.4 million. The amount we
allocated to acquired in-process research and development was expensed as a
charge to operations in our first quarter of fiscal 2000.
The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from these projects were based on estimates we
made and excluded amounts expected to result from existing products and
technologies. Projected net revenue included the expected evolution of the
technology and the reliance of future technologies on the in-process
technologies over time, but excluded amounts expected to result from existing
products and technologies. We based the estimated cost of net revenue and
estimated operating expenses on our cost structure and that of comparable
companies.
The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 50%
to 65%. The discount rates were based on various factors such as:
- - the stage of completion at the acquisition date;
- - the complexity of the work completed as of the acquisition date;
- - costs incurred as of the valuation date;
- - difficulties of completing the remaining development in a reasonable time;
- - technical uncertainties of the remaining tasks; and
- - the costs remaining to complete the projects.
We used a portion of the acquired in-process research and development to further
enhance Advance Systems' existing server-based synchronization technology by
implementing a plug-in architecture. This type of design allows users and
third-party software providers to develop small software components that plug
into our XTNDConnect Server product and extend the range of applications
supported by XTNDConnect Server. In September 1999, we implemented the first
phase of this architecture with the release of XTNDConnect Server Version 2.2,
which supports IBM's DB2 Everywhere 1.1 (DB2E) handheld relational database and
Microsoft's ActiveX Data Object (ADO) interface, and provides other enhanced
management tools. The acquired in-process
49
research and development assigned to this project was valued at $943,000 as of
the date of the acquisition. We incurred an estimated $69,000 to complete
Version 2.2.
In November and December of 1999, we released versions of XTNDConnect Server
that support encryption, Lotus Notes/Domino R5 and Symbian's EPOC operating
system. The acquired in-process research and development assigned to this
project was valued at $1.2 million at the date of the acquisition. This project
was approximately 60% complete at the time of the acquisition and required an
estimated $41,000 to complete.
We will use the remaining acquired in-process research and development to
provide further enhancements to the architecture of our XTNDConnect Server
products, which at the time of the acquisition were only approximately 10-15%
complete. The acquired in-process research and development assigned to this
project was valued at $186,000 as of the date of the acquisition. We expect to
incur an additional $123,000, from the date of the acquisition, to develop the
in-process technology into a commercially viable product with the nature of the
efforts principally relating to development and testing that is required to
establish that the product can be produced to meet our design specifications,
including functions, features and technical performance requirements. The
primary risk with the completion of this project is the overall scope and
complexity. We expect to complete this project by December 2000.
RAND SOFTWARE AND PARALLAX RESEARCH. In October 1998, we acquired all of the
outstanding stock of Rand Software Corporation for $710,000 in cash and 104,998
shares of our Common Stock valued at $735,000. In November 1998, we acquired a
controlling interest in Parallax Research, Pte. for $347,000 in cash and by
assuming $375,000 in debt and, in May 1999, acquired the remaining outstanding
stock of Parallax for $91,000 in cash. We accounted for these transactions by
the purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations," and, accordingly, we have included the
results of operations of both companies in our consolidated statement of
operations since the acquisition dates. We have not presented pro forma results
of operations since the effects of these acquisitions were not material for the
periods presented.
Rand was the developer of Harmony, data synchronization software for mobile
devices such as Windows CE Handheld PCs and Palm-size computers. This
synchronization technology allows mobile devices to update and exchange data
with enterprise applications such as Microsoft Exchange, Microsoft Outlook,
Lotus Notes and Symantec Act!. Parallax develops infrared connectivity products
primarily for sale to original equipment manufacturers and manages our
relationship with our manufacturer in Asia.
A summary of the net assets acquired at the date of the acquisitions is as
follows:
Net working capital............................................... $ (146)
Property and equipment............................................ 114
Developed technology, goodwill and other intangibles.............. 1,532
Acquired in-process research and development...................... 758
---------------
$2,258
===============
Valuation of the intangible assets we acquired from Rand and Parallax, including
acquired in-process research and development, developed technology and goodwill
was determined by independent appraisers. Based upon such independent
appraisals, we estimated that, in aggregate, the fair value of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use was $758,000. We expensed the
amount allocated to acquired in-process research and development as a charge to
operations in our second quarter of fiscal 1999.
The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from such projects were based
50
on estimates we made and excluded amounts expected to result from existing
products and technologies. Projected net revenue included the expected evolution
of the technology and the reliance of future technologies on the in-process
technologies over time, but excluded amounts expected to result from existing
products and technologies. We based the estimated cost of net revenue and
estimated operating expenses on our cost structure and that of comparable
companies.
The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 25%
to 35%. The discount rates were based on various factors such as:
- - lack of operating history;
- - aggressive projections for certain products;
- - reliance on original equipment manufacturers;
- - management depth; and
- - product diversification.
We used acquired in-process research and development from Parallax to develop
new products using developing Fast IR technology standard. A product being
developed for an original equipment manufacturer, used in a printer-based
product, accounted for a substantial majority of the acquired in-process
research and development from Parallax. We completed all projects in process at
the time of the acquisition in fiscal 1999 at an estimated cost of $58,000.
Rand's research and development in-process on the date of the acquisition
related to a server-based data synchronization software product that was
estimated to be approximately 14% complete and would require an estimated
$464,000 and 38 man-months of time to complete. Development in-process at the
time of the acquisition of Rand was subsequently utilized to develop a web-based
synchronization product and will continue to be incorporated into additional
mobile information management products, including products complementary to the
server-based product acquired with Advance Systems in August 1999.
SHORT-TERM INVESTMENTS
We hold securities classified as available-for-sale at amortized cost, which
approximates fair value, and securities classified as held-to-maturity at
amortized cost. We had no short-term investments at June 30, 2000. At June 30,
1999, short-term investments were as follows:
Available-for-sale securities:
U.S. Government agency...................................... $ 2,001
State and local government.................................. 1,000
---------------
3,001
---------------
Held-to-maturity securities:
Municipal................................................... 1,650
U.S. Government agency...................................... 3,979
---------------
5,629
---------------
Total investments.............................................. 8,630
Less cash equivalents.......................................... (5,629)
---------------
Short-term investments...................................... $3,001
===============
RECEIVABLES
Receivables consisted of the following at June 30:
2000 1999
------------------------------
Accounts receivable............................... $10,332 $10,347
Income taxes receivable........................... 1,520 664
Other receivables................................. 848 796
Allowance for doubtful accounts................... (201) (218)
------------------------------
$12,499 $11,589
==============================
51
INVENTORIES
Inventories consisted of the following at June 30:
2000 1999
-----------------------------
Purchased parts......................................... $ 1,417 $2,060
Work in process......................................... 308 860
Finished goods.......................................... 1,759 2,097
-----------------------------
$3,484 $5,017
=============================
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
2000 1999
-----------------------------
Land and land improvements.............................. $ 949 $ 949
Buildings............................................... 6,416 6,400
Computer equipment...................................... 5,304 5,036
Furniture and fixtures.................................. 2,277 1,900
-----------------------------
14,946 14,285
Less accumulated depreciation........................... (7,129) (5,985)
-----------------------------
$7,817 $8,300
=============================
INTANGIBLE ASSETS
Intangible assets consisted of the following at June 30:
2000 1999
-----------------------------
Goodwill................................................ $ 4,066 $ 262
Purchased technology.................................... 3,128 1,218
Other intangibles....................................... 893 193
-----------------------------
8,087 1,673
Less accumulated amortization........................... (1,850) (271)
-----------------------------
$ 6,237 $1,402
=============================
ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30:
2000 1999
-----------------------------
Accrued payroll and related benefits.................... $ 1,145 $1,297
Accrued warranty and support costs...................... 435 230
Other................................................... 1,063 914
-----------------------------
$2,643 $2,441
=============================
LEASES
We lease certain office space and equipment. Total lease expense was $377,000 in
fiscal 2000, $226,000 in fiscal 1999 and $209,000 in fiscal 1998. Our minimum
future lease commitments for all operating leases are $382,000 in fiscal 2001,
$348,000 in fiscal 2002, $342,000 in fiscal 2003, $347,000 in fiscal 2004,
$269,000 in fiscal 2005, $238,000 in fiscal 2006 and $731,000 thereafter.
52
LONG-TERM DEBT
Long-term debt consists of the following as of June 30:
2000 1999
------------------------------
Zero coupon convertible subordinated promissory notes due September 1999..... $ - $7,451
10% convertible subordinated promissory notes due September 1999............. - 500
Capitalized lease obligation payable in monthly installments through
September 2000, interest imputed at 7.66%................................. 67 322
------------------------------
67 8,273
Less current portion......................................................... (67) (8,206)
------------------------------
$ - $ 67
==============================
The cost of computer equipment pledged as collateral under the capital lease was
$723,000 as of June 30, 2000 and 1999. The accumulated depreciation was $422,000
and $268,000 as of June 30, 2000 and 1999, respectively.
We have an uncollateralized bank revolving line of credit for $10.0 million that
expires on October 31, 2000. Interest on borrowings is at the lender's prime
rate minus 1%. We had no borrowings under this line as of June 30, 2000 or 1999.
The lease agreement and line of credit require us to maintain certain financial
ratios.
STOCKHOLDERS' EQUITY
We have three incentive stock option plans, adopted in 1984, 1994, and 1998.
Regular employees are eligible for options under these plans. Options granted
before December 24, 1997 generally vest 20 percent per year over a period of
five years from the date of grant. Options granted December 24, 1997 and after
generally vest over a period of four years, vesting 25 percent on the first
anniversary of the option and 1/48 per month thereafter. The exercise price
generally is equal to the fair market value of our Common Stock on the date of
grant or at a price determined by our directors. For the 1984 and 1994 plans,
unexercised options generally lapse ten years after issuance or upon the date
the option holder ceases to be an employee. Options granted under the 1998 plan
generally lapse ten years after issuance or 90 days after the option holder
ceases to be an employee. Shares available for grant under these plans totaled
309,546 at June 30, 2000.
We also had a restricted stock option plan, adopted in 1987. Our regular,
full-time employees and directors were eligible for options under this plan.
Terms of the options were determined at the date of grant. Unexercised options
generally lapse ten years after issuance or upon the date the option holder
ceases to be an employee or director. We recorded unearned compensation related
to these options at the date of the award based on the market value of the
shares and amortize unearned compensation over the periods during which the
restrictions lapse. The plan terminated in September 1997.
We adopted a director stock plan in 1998. Our directors are eligible for options
under this plan. Options are granted at the fair market value of our Common
Stock on the grant date. An initial grant of 15,000 shares per director will
vest over a period of three years vesting one-third on the first anniversary of
the option and 1/36 per month thereafter. Subsequent grants of 7,500 shares will
be automatically granted to directors each year provided that such directors
have served on the Board for at least 6 months. These subsequent options will
vest in full on the first anniversary of the date of grant. Unexercised options
lapse ten years after issuance or three months after the date the option holder
ceases to be a director. Shares available for grant under this plan totaled
182,083 at June 30, 2000.
We adopted an employee stock purchase plan in 1998. The plan is generally
implemented by 24-month offering periods beginning on June 30 and December 31
each year. Each offering period
53
contains up to four purchase periods of six months duration. The purchase plan
generally permits eligible employees to purchase our Common Stock through
payroll deductions of up to 15% of an employee's compensation, except that no
participant's right to purchase shares may accrue at a rate that exceeds $25,000
each calendar year. The price of stock purchased under the purchase plan is 85%
of the lower of the fair market value of our Common Stock on the first day of an
offering period or the last day of each six-month purchase period. Employees may
end their participation at any time during a purchase period, and they will be
paid their payroll deduction to date. Shares available for purchase under this
plan totaled 508,311 at June 30, 2000.
Stock option activity is summarized as follows for the years ended:
WEIGHTED-
AVERAGE
EXERCISE PRICE OUTSTANDING EXERCISABLE
-----------------------------------------------------
JULY 1, 1997......................................... $ 7.74 2,190 1,287
Granted........................................... 7.90 442 -
Became exercisable................................ - 319
Exercised......................................... 3.54 (86) (86)
Canceled/expired.................................. 5.89 (211) (46)
---------------------------------
JUNE 30, 1998........................................ 8.09 2,335 1,475
Granted........................................... 5.07 806 -
Became exercisable................................ - 311
Exercised......................................... 2.33 (145) (145)
Canceled/expired.................................. 6.47 (197) (114)
---------------------------------
JUNE 30, 1999........................................ 7.64 2,799 1,527
Granted........................................... 18.60 600 -
Became exercisable................................ - 486
Exercised......................................... 7.98 (808) (808)
Canceled/expired.................................. 7.18 (259) (75)
---------------------------------
JUNE 30, 2000........................................ 10.39 2,332 1,130
=================================
The weighted-average remaining contractual life of options outstanding at June
30, 2000 was 7.0 years. The weighted-average per share exercise price of options
exercisable at June 30, 2000, 1999 and 1998 was $8.47, $8.95 and $8.59,
respectively.
WEIGHTED-
AVERAGE
RANGE WEIGHTED- REMAINING WEIGHTED-
OF EXERCISE NUMBER OF AVERAGE CONTRACTUAL LIFE NUMBER OF AVERAGE
PRICES SHARES EXERCISE PRICE IN YEARS SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -----------------------------
$ 0.15 - $ 0.15 36 $0.15 3.3 36 $0.15
4.13 - 6.19 872 4.75 8.1 243 5.00
6.25 - 8.88 626 7.62 7.2 321 7.76
9.41 - 12.45 531 11.07 3.8 530 11.07
27.50 - 40.00 253 34.26 9.5 - -
42.50 - 77.00 14 55.15 9.7 - -
---------------- --------------
2,332 1,130
================ ==============
54
We have adopted the disclosure-only provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation." Had we
determined compensation expense for our stock option plans based on the fair
value at the grant date as prescribed by Statement of Financial Accounting
Standard No. 123, net income or loss would have changed to the pro forma amounts
indicated below for the years ended June 30:
2000 1999 1998
------------------------------------------------
As reported:
Net income (loss)....................................... $(4,985) $(1,462) $3,298
Earnings (loss) per share:
Basic................................................ (0.52) (0.17) 0.45
Diluted.............................................. (0.52) (0.17) 0.44
Pro forma:
Net income (loss)....................................... (8,240) (2,952) 2,806
Earnings (loss) per share:
Basic................................................ (0.86) (0.35) 0.38
Diluted.............................................. (0.86) (0.35) 0.37
We determined the fair value of options at the date of grant using the
Black-Scholes option-pricing model. We assumed no future dividends would be
paid. The other weighted-average assumptions and the weighted-average fair
values of stock options are as follows:
2000 1999 1998
-------------------------------------------------
Risk-free interest rate:
Option plans........................................... 6.2% 4.8% 5.6%
Purchase plan.......................................... 5.1% 4.8% 5.6%
Volatility factor......................................... 92% 69% 51%
Expected life in years:
Option plans........................................... 7.0 7.4 7.5
Purchase plan.......................................... 0.8 0.5 0.5
Fair value at grant date:
Exercise price equal to market price................... $19.24 $5.08 $7.62
Exercise price less than market price.................. $6.81 $ - $11.00
INCOME TAXES
Our income tax provision or benefit consists of the following:
2000 1999 1998
-------------------------------------------------
Current:
Federal................................................ $(1,398) $(104) $1,695
State.................................................. (71) (27) 236
Foreign................................................ 523 132 -
Deferred:
Federal................................................ (611) (409) (82)
State.................................................. (212) 9 2
Foreign................................................ (232) (293) (36)
-------------------------------------------------
Income tax provision (benefit)...................... $(2,001) $(692) $1,815
=================================================
55
The tax effects of temporary differences and carryforwards, which give rise to
the net deferred tax asset, are as follows as of June 30:
2000 1999
---------------------------------
Accrued stock option compensation........................................ $ 27 $ 34
Intangible asset amortization............................................ 1,101 -
Federal and state loss carryforwards..................................... 5,374 -
Foreign loss carryforwards............................................... 1,083 850
Allowance for obsolete inventory......................................... 269 310
Foreign tax credit carryforwards......................................... 217 133
Other.................................................................... 520 396
Valuation allowance...................................................... (717) -
---------------------------------
Deferred tax assets, net.............................................. 7,874 1,723
---------------------------------
Depreciation............................................................. 313 350
Deferred DISC income..................................................... 145 218
Basis difference in acquisitions......................................... 299 -
Other.................................................................... 617 596
---------------------------------
Deferred tax liabilities.............................................. 1,374 1,164
---------------------------------
Net deferred tax asset............................................. $6,500 $559
=================================
We have not provided U.S. income taxes on the undistributed earnings of our
international subsidiaries as such earnings are considered permanently
reinvested in these operations. While these earnings could become subject to
additional tax if repatriated, we do not anticipate repatriation.
At June 30, 2000, we had foreign operating loss carryforwards of approximately
$3.0 million, of which $800,000 expire between fiscal 2002 and fiscal 2005. We
have a federal net operating loss carryforward of $13.0 million that expires in
fiscal 2020 and state net operating loss carryforwards of $12.7 million that
expire between fiscal 2004 and fiscal 2020. We also have available foreign tax
credits of approximately $200,000 expiring between fiscal 2004 and fiscal 2005.
Our federal net operating loss carryforward and substantially all of our state
net operating loss carryforwards are attributable to tax deductions related to
the exercise of stock options. Because we do not recognize stock option
deductions as an expense for financial reporting purposes, we credit the
resulting tax benefit from these stock options to stockholders' equity.
In fiscal 2000, we established a $576,000 valuation allowance for deferred
income tax benefits related to our acquisition of Advance Systems that may not
be realized. We have also recorded a $141,000 valuation allowance for the amount
of our foreign tax credit carryforwards for which we will likely receive no
benefit. Realization of the net deferred tax assets is dependent on future
taxable income. We believe that it is more likely than not such assets will be
realized; however, ultimate realization could be negatively impacted by market
conditions and other variables not known or anticipated at this time.
Our effective income tax rate varies from the federal statutory rate as follows:
2000 1999 1998
-------------------------------------------------
Federal tax rate......................................... (34.0) % (34.0) % 34.0 %
States taxes, net of federal benefit..................... (3.2) (3.5) 3.2
Foreign sales corporation................................ (3.4) (8.8) (7.7)
Amortization of intangible assets........................ 0.8 3.4 -
Stock option compensation................................ 0.5 3.5 3.2
Acquired in-process research and development............. - 12.0 -
Research and experimental tax credit..................... - (2.3) (0.3)
56
Valuation allowance...................................... 10.3 - -
Other, net............................................... 0.4 (2.3) 3.1
-------------------------------------------------
Effective income tax rate............................. (28.6) % (32.0) % 35.5 %
=================================================
EARNINGS PER SHARE
The computation of our earnings or loss per share is as follows for the years
ended June 30:
BASIC EARNINGS NET EFFECT OF DILUTED
(LOSS) DILUTIVE EARNINGS (LOSS)
PER SHARE STOCK PER SHARE
-------------------------------------------------
2000
Net loss.............................................. $(4,985) - $(4,985)
Shares................................................ 9,552 - 9,552
----------------- ----------------
$(0.52) $(0.52)
================= ================
1999
Net loss.............................................. $(1,462) - $(1,462)
Shares................................................ 8,409 - 8,409
----------------- ----------------
$(0.17) $(0.17)
================= ================
1998
Net income............................................ $3,298 - $3,298
Shares................................................ 7,303 274 7,577
----------------- ----------------
$0.45 $ 0.44
================= ================
Our diluted earnings or loss per share computations exclude the shares below
because to do so would have been antidilutive:
2000 1999 1998
-------------------------------------------------
Stock options............................................. 2,332 2,799 1,583
Shares for convertible notes.............................. - 558 558
BUSINESS SEGMENT, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS
We determined 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.
Our mobile information management segment includes both mobile data management
and universal mobile connectivity solutions that enable mobile users to access,
collect, synchronize and print information on demand. Our products in the mobile
information management segment include wireless connectivity products, data
synchronization and management software, virtual private network remote access
servers, Internet access servers and client/server database management systems
with remote access capabilities. We sell mobile information management products
primarily to original equipment manufacturers, application developers,
enterprises and computer resellers.
Our printing solutions segment includes our maturing network print server and
non-network printer sharing products that we sell primarily through our
worldwide distribution channel to computer resellers and Fortune 1000 companies.
Our other products segment primarily includes our discontinued mechanical port
replicator products.
57
The accounting policies for our segments are the same as those described in the
Summary of Significant Accounting Policies. We had no intersegment sales. We
measure segment operating results based on income or loss from operations. We do
not generally distinguish our assets by reportable segment. We allocate
depreciation expense and other indirect expenses to reportable segments using
various methods such as percentage of square footage used to total square
footage and percentage of direct expense to total direct expenses.
Segment information is as follows for the years ended June 30:
2000 1999 1998
-------------------------------------------------
Net revenue:
Mobile information management.......................... $39,053 $24,400 $11,784
Printing solutions..................................... 17,509 25,415 31,244
Other products......................................... (50) 874 6,976
-------------------------------------------------
Total............................................... $56,512 $50,689 $50,004
=================================================
Income (loss) from operations:
Mobile information management.......................... $(5,737) $(520) $(818)
Printing solutions..................................... (839) 2,256 6,897
Other products......................................... (94) (3,516) (314)
-------------------------------------------------
Total............................................... $(6,670) $(1,780) $5,765
=================================================
Depreciation expense:
Mobile information management.......................... $895 $650 $395
Printing solutions..................................... 588 672 641
Other products......................................... 8 80 106
-------------------------------------------------
Total............................................... $1,491 $1,402 $1,142
=================================================
Our mobile information management segment's loss from operations includes an
acquired in-process research and development charge of $2.4 million recorded in
the first quarter of fiscal 2000 and charges of $758,000 recorded in our second
quarter of fiscal 1999.
Port replicator product returns and a provision for port replicator product
returns totaling $1.0 million are included in net revenue and the loss from
operations in our other products segment for our second quarter of fiscal 1999.
Also included in our other products loss from operations in our first and second
quarters of fiscal 1999 are provisions for write-down of port replicator product
inventory of $300,000 and $1.1 million, respectively.
Sales to an original equipment manufacturer accounted for 23% and 13% of net
revenue in fiscal 2000 and 1999, respectively, and were primarily in our mobile
information management segment. Sales to a distributor accounted for 10% and 23%
and of our net revenue in fiscal 1999 and 1998, respectively, and were primarily
in our printing solutions and other products segments.
We based our geographic revenue information on the location of the selling
entity. Long-lived assets consist primarily of property and equipment and
intangible assets.
Geographic data is as follows for the years ended June 30:
2000 1999 1998
------------------------------------------------
Net revenue:
United States.......................................... $23,271 $26,518 $37,119
Germany................................................ 12,530 13,729 9,748
Singapore.............................................. 13,782 6,149 -
Other countries........................................ 6,929 4,293 3,137
------------------------------------------------
Total............................................... $56,512 $50,689 $50,004
================================================
Long-lived assets:
United States.......................................... $13,455 $9,336
Germany................................................ 323 233
Other countries........................................ 320 178
---------------------------------
Total............................................... $14,098 $9,747
=================================
58
DEFINED CONTRIBUTION PLAN
We established the Extended Systems Incorporated 401(k) Investment Plan, a
defined contribution benefit plan, effective January 1991. All regular U.S.
employees are eligible to participate. For all participants having completed six
months of service, we make dollar-for-dollar matching contributions to the
participants' accounts up to a maximum of 3% of each participant's annual pretax
compensation. Our contributions to the plan were $309,000 in fiscal 2000,
$285,000 in fiscal 1999 and $259,000 in fiscal 1998.
QUARTERLY FINANCIAL DATA
Financial data is as follows for the quarters in our years ended June 30:
FIRST SECOND THIRD FOURTH
-----------------------------------------------------------------
(UNAUDITED)
2000
Net revenue............................ $13,089 $15,272 $14,896 $13,255
Gross profit........................... 6,111 7,231 7,746 7,309
Net income............................. (3,061) (468) (324) (1,132)
Earnings (loss) per share:
Basic............................... (0.34) (0.05) (0.03) (0.11)
Diluted............................. (0.34) (0.05) (0.03) (0.11)
1999
Net revenue............................ $13,543 $9,259 $13,388 $14,499
Gross profit........................... 7,726 3,561 7,517 6,776
Net income (loss)...................... 1,050 (2,941) 377 52
Earnings (loss) per share:
Basic............................... 0.13 (0.35) 0.04 0.01
Diluted............................. 0.12 (0.35) 0.04 0.01
COMMITMENTS
As of June 30, 2000, we were obligated to purchase an estimated $601,000 of
purchased parts and finished goods inventory that certain suppliers purchased or
manufactured based on our forecasts.
59
SCHEDULE II
EXTENDED SYSTEMS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF PROFIT AND FROM ACCRUALS END OF PERIOD
PERIOD LOSS
--------------------------------------------------------------
Amount deducted in balance sheet
from the asset to which it applies:
Year ended June 30, 2000:
Allowance for doubtful accounts $218 $ 7 $ (24) $201
Allowance for product returns 101 1,531 (1,535) 97
Allowance for obsolete inventory 824 409 (514) 719
Year ended June 30, 1999:
Allowance for doubtful accounts 319 341 (442) 218
Allowance for product returns 62 2,313 (2,274) 101
Allowance for obsolete inventory 278 1,653 (1,107) 824
Year ended June 30, 1998:
Allowance for doubtful accounts 207 118 (6) 319
Allowance for product returns 61 867 (866) 62
Allowance for obsolete inventory 238 395 (355) 278
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Boise, Idaho, on
September 20, 2000.
Extended Systems Incorporated
By: /s/ Steven D. Simpson
-------------------------------------
Steven D. Simpson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on September 20, 2000.
SIGNATURE TITLE
/s/ Steven D. Simpson
- ----------------------------------------------- President, Chief Executive Officer and Director
Steven D. Simpson (Principal Executive Officer)
/s/ Karla K. Rosa
- ----------------------------------------------- Vice President, Finance, and Chief Financial Officer
Karla K. Rosa (Principal Financial and Accounting Officer)
/s/ Raymond A. Smelek
- ----------------------------------------------- Director
Raymond A. Smelek
/s/ John J. Katsaros
- ----------------------------------------------- Director
John J. Katsaros
- ----------------------------------------------- Director
John M. Russell
/s/ S. Scott Wald
- ----------------------------------------------- Director
S. Scott Wald
/s/ Douglas B. Winterrowd
- ----------------------------------------------- Director
Douglas B. Winterrowd
61