<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to ____________ .
Commission File Number: 000-27687
-----------------------------
BSQUARE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1650880
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3150 139TH AVENUE SE, SUITE 500, BELLEVUE WA 98005
(Address of principal executive offices) (Zip Code)
(425) 519-5900
(Registrant's telephone number, including area code)
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 [ ].
As of May 2, 2000, there were 32,625,346 shares of the registrant's
common stock outstanding.
Page 1 of 25 pages.
Exhibit Index at Page 22.
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BSQUARE CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets - 3
Condensed Consolidated Statements of Income - 4
Condensed Consolidated Statements of Cash Flows - 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BSQUARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,358 $ 55,604
Short-term investments 26,869 27,368
Accounts receivable, net 6,491 4,302
Prepaid expenses and other current assets 579 609
--------- ---------
Total current assets 93,297 87,883
Furniture, equipment and leasehold improvements, net
5,693 7,239
Deposits and other assets 1,422 211
--------- ---------
Total assets $ 100,412 $ 95,333
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 306 $ 653
Accrued expenses 4,921 4,424
Deferred revenue 4,269 1,130
--------- ---------
Total current liabilities 9,496 6,207
--------- ---------
Shareholders' equity:
Blue Water Systems, Inc. Series A Preferred
stock, no par value: authorized 500,000
shares, issued and no shares outstanding in
2000 and 15,151 shares outstanding in 1999 -- 250
Common stock, no par value: authorized
50,000,000 shares, issued and outstanding,
32,592,108 shares in 2000 and 32,556,224 in
1999 91,722 90,827
Deferred stock option compensation (697) (868)
Cumulative foreign currency translation
adjustment (36) (15)
Accumulated deficit (73) (1,068)
--------- ---------
Total shareholders' equity 90,916 89,126
--------- ---------
Total liabilities and shareholders'
equity $ 100,412 $ 95,333
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
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BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenue:
Service $ 12,284 $ 8,562
Product 1,008 605
-------- --------
Total revenue 13,292 9,167
-------- --------
Cost of revenue:
Service 6,197 4,108
Product 152 77
-------- --------
Total cost of revenue 6,349 4,185
-------- --------
Gross profit 6,943 4,982
-------- --------
Operating expenses:
Research and development 2,044 1,643
Selling, general and administrative 3,520 2,502
Amortization of deferred stock option
compensation 171 118
-------- --------
Total operating expenses 5,735 4,263
-------- --------
Income from operations 1,208 719
Other income (expense) net:
Interest income, net 826 54
Acquisition related expenses (620) --
-------- --------
Income before income taxes 1,414 773
Provision for income taxes 419 344
-------- --------
Net income $ 995 $ 429
======== ========
Basic earnings per share $ 0.03 $ 0.02
======== ========
Weighted average shares outstanding used to
compute basic earnings per share 32,566 18,458
======== ========
Diluted earnings per share $ 0.03 $ 0.02
======== ========
Weighted average shares outstanding to
compute diluted earnings per share 35,628 28,468
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 995 $ 429
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 604 546
Deferred income taxes (229) (172)
Amortization of deferred stock option
compensation 171 118
Loss on disposal of assets 81 --
Changes in operating assets and liabilities:
Accounts receivable (2,193) 670
Prepaid expenses and other current assets 49 (17)
Deposits and other assets 22 (99)
Accounts payable and accrued expenses 1,603 985
Deferred revenue 3,138 380
-------- --------
Net cash provided by operating activities 4,241 2,840
-------- --------
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold
improvements (343) (559)
Maturity of short-term investments, net 500 1,583
Purchase of an investment (1,250) --
-------- --------
Net cash (used in) provided by investing
activities (1,093) 1,024
-------- --------
Cash flows from financing activities:
Payments on long-term obligations (6) (51)
Proceeds from exercise of stock options and warrants 644 2
-------- --------
Net cash provided by (used in) financing
activities 638 (49)
-------- --------
Effect of exchange rate changes on cash (32) 6
-------- --------
Net increase in cash and cash equivalents 3,754 3,821
Cash and cash equivalents, beginning of period 55,604 5,473
-------- --------
Cash, and cash equivalents, end of period $ 59,358 $ 9,294
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
BSQUARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
BSQUARE Corporation (the "Company" or "BSQUARE") pursuant to the rules and
regulations of the Securities and Exchange Commission and include the accounts
of the Company. Certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the unaudited financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position at March
31, 2000, its operating results and cash flows for the three-months ended March
31, 2000 and 1999. These financial statements and the notes should be read in
conjunction with the Company's financial statements and notes thereto contained
in the Company's annual report on Form 10-K for the year ended December 31, 1999
(File No. 000-27687) filed with the Securities and Exchange Commission. Interim
results are not necessarily indicative of results for a full year.
2. ACQUISITION OF BLUEWATER SYSTEMS, INC.
On January 5, 2000, the Company acquired BlueWater Systems, Inc. in a
transaction accounted for as a pooling of interests. BlueWater Systems, formerly
located in Edmonds, Washington is dedicated to the design of software
development tool kits and system integration services for the creation of
Windows-based intelligent computing devices. The transaction was effected
through the exchange of 261,391 shares of BSQUARE common stock for all of the
issued and outstanding common shares of BlueWater Systems. The consolidated
financial statements of BSQUARE have been restated for all periods prior to the
merger to include the accounts and operations of BlueWater Systems, Inc. In
connection with the acquisition, the Company incurred $620,000 ($515,000 after
taxes, or $0.01 per diluted share) of acquisition-related costs which were
charged to operations during the three months ended March 31, 2000.
The following table presents a reconciliation of revenue and net income
previously reported by BSQUARE to those presented in the accompanying condensed
consolidated financial statements:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999
---------------
(in thousands)
<S> <C>
Revenue:
BSQUARE Corporation $ 8,809
BlueWater Systems, Inc. 358
-------
Combined $ 9,167
=======
Net income (loss):
BSQUARE Corporation $ 432
BlueWater Systems, Inc. (3)
-------
Combined $ 429
=======
</TABLE>
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3. COMPREHENSIVE INCOME
Components of comprehensive income consist of the following:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Net income $ 995 $ 429
Foreign currency translation adjustment (21) (13)
----- -----
Comprehensive income $ 974 $ 416
===== =====
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, information provided by us, statements made by our
employees or information included in our filings with the Securities and
Exchange Commission may contain statements that are "forward-looking statements"
involving risks and uncertainties. In particular, statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to our revenue, profitability, sufficiency of capital to meet working
capital and capital expenditure requirements may be forward-looking statements.
The words "expect," "anticipate," "plan," "believe," "seek," "estimate" and
similar expressions are intended to identify such forward-looking statements.
Such statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that could cause our future results to
differ materially from those expressed in any forward-looking statements made by
or on behalf of us. Many such factors are beyond our ability to control or
predict. Readers are accordingly cautioned not to place undue reliance on
forward-looking statements. We disclaim any intent or obligation to update
publicly any forward-looking statements, whether in response to new information
or future events or otherwise. Important factors that may cause our actual
results to differ from such forward-looking statements include, but are not
limited to, the factors discussed elsewhere in this report in the section
entitled "Certain Factors That May Affect Future Results."
OVERVIEW
We are a leading provider of software solutions that enable the
development and proliferation of a wide variety of intelligent computing devices
based on the Microsoft Windows-based operating systems. Intelligent computing
devices, or ICDs, are classes of non-personal computer devices that offer
electronic connectivity. We work with semiconductor vendors and original
equipment manufacturers to provide software products and engineering services
for the development of intelligent computing devices.
We enable the rapid and low-cost deployment of intelligent computing
devices by providing a variety of software products and services for the
development, integration and deployment of Windows-powered operating systems
with industry-specific applications. We also develop software applications that
are licensed to end users to provide intelligent computing devices with
additional functionality. Our products and services are marketed and supported
on a worldwide basis through a direct sales force augmented by distributors.
To date, we have derived substantially all of our revenue from the
provision of services to Microsoft, semiconductor vendors and original equipment
manufacturers. We also generate product revenue from software sales and royalty
licenses. We perform our services under both time-and-materials contracts and
fixed-fee contracts. We also receive a small portion of service revenue from the
provision of contract support services upon the purchase of our software
products. We sell our packaged software products through standard retail
channels, our direct sales force and through indirect channels, such as
resellers. In addition, we receive royalty payments from original equipment
manufacturers related to the bundling of our software on their intelligent
computing devices and, more recently, from the license to them of software
products contained in our intelligent computing device integration tool kits.
7
<PAGE> 8
MICROSOFT MASTER DEVELOPMENT AND LICENSE AGREEMENT
For the three months ended March 31, 2000 and 1999, approximately 77%
and 81% of our revenue, respectively, was generated under our master development
and license agreement with Microsoft. We anticipate that we will continue to
receive a substantial portion of our revenue from the provision of services to
Microsoft. The master agreement, the current renewable term of which concludes
in July 2000, includes a number of project-specific work plans. We bill
Microsoft on a time-and-materials basis, although each project has a maximum
dollar cap, and recognize revenue generated under the master agreement as the
services are rendered. The master agreement and each of the individual work
plans may be modified or terminated by Microsoft at any time. While we
anticipate that our relationship with Microsoft will remain strong, we are
unable to predict the magnitude and number of future projects for Microsoft.
RESULTS OF OPERATIONS
The following table presents certain financial data as a percentage of
total revenue for the three-month periods ended March 31, 2000 and 1999. Our
historical operating results are not necessarily indicative of the results for
any future period.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
2000 1999
---- ----
<S> <C> <C>
Revenue:
Service 92% 93%
Product 8 7
---- ----
Total revenue 100 100
---- ----
Cost of revenue:
Service 47 45
Product 1 1
---- ----
Total cost of revenue 48 46
---- ----
Gross margin 52 54
---- ----
Operating expenses:
Research and development 15 18
Selling, general and administrative 27 27
Amortization of deferred stock option compensation 1 1
---- ----
Total operating expenses 43 46
---- ----
Income from operations 9 8
---- ----
Interest income (expense), net:
Interest income, net 7 --
Merger related expenses (5) --
---- ----
Income before income taxes 11 8
Provision for income taxes 3 3
---- ----
Net income 8% 5%
==== ====
</TABLE>
REVENUE
Revenue consists of service and product revenue, which includes software
license fees and royalties. Total revenue increased 45% to $13.3 million for the
three months ended March 31, 2000, from $9.2 million for the three months ended
March 31, 1999. Revenue outside of the U.S. totaled $1.2 million and $140,000
for the three months ended March 31, 2000 and 1999, respectively.
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<PAGE> 9
SERVICE REVENUE. Service revenue increased 43% to $12.3 million for the
three months ended March 31, 2000 from $8.6 million for the three months ended
March 31, 1999. This increase was due to an increase in the number and size of
consulting service projects. As a percentage of total revenue, service revenue
did not change materially.
PRODUCT REVENUE. Product revenue increased 67% to $1.0 million for the
three months ended March 31, 2000, from $605,000 for the three months ended
March 31, 1999. This increase resulted primarily from an increase in sales of
platform technology products, the CE Validator quality assurance test suite, and
third-party products. As a percentage of total revenue, product revenue did not
change materially.
COST OF REVENUE
COST OF SERVICE REVENUE. Cost of service revenue consists primarily of
salaries and benefits for software developers and quality assurance personnel,
plus an allocation of facilities and depreciation costs. Cost of service revenue
increased 51% to $6.2 million for the three months ended March 31, 2000, from
$4.1 million for the three months ended March 31, 1999. The increase in absolute
dollars resulted primarily from the hiring and training of additional employees
to support an increased number of projects. At March 31, 2000 and 1999, we had
approximately 251 and 188 employees, respectively, engaged in engineering
consulting. Cost of service revenue as a percentage of related service revenue
was 50% and 48% for the three months ended March 31, 2000 and 1999,
respectively. The increase in cost of service revenue as a percentage of the
related service revenue in 2000 was primarily the result of an increase in
software engineering compensation due to competitive employee recruiting and
retention pressures in the greater-Seattle area.
COST OF PRODUCT REVENUE. Cost of product revenue consists of license
fees and royalties for third-party software, product media, product duplication
and manuals. Cost of product revenue increased 99% to $152,000 for the three
months ended March 31, 2000, from $77,000 for the three months ended March 31,
1999. As a percent of product revenue, cost of product sales was 15% for the
three months ended March 31, 2000 and 13% for the same period in 1999. The
increase in cost of product sales as a percent of related product revenue
relates to an increase in sales of third-party products.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for software developers, quality assurance
personnel, program managers plus an allocation of our facilities and
depreciation costs. Research and development expenses increased 24% to $2.0
million for the three months ended March 31, 2000, from $1.6 million for the
three months ended March 31, 1999. This increase resulted from an increase in
the number of software developers and quality assurance personnel to expand our
product offerings and to support development and testing activities. Research
and development expenses represented 15% and 18% of our total revenue for the
three months ended March 31, 2000 and 1999, respectively. The decrease in
research and development expenses as a percentage of total revenue for the three
months ended March 31, 2000 over the same period in 1999 reflects the more rapid
increase of our revenue compared to the growth in research and development
during this period. We anticipate that research and development expenses will
continue to increase in absolute dollars in future periods as we continue to
expand our market position.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 41% to $3.5 million for the three months ended March 31,
2000, from $2.5 million for the same period in 1999. This increase resulted
primarily from our investment in finance, executive, administration, sales and
marketing infrastructure, both domestically and internationally, which included
significant personnel-related expenses, travel expenses and related facility and
equipment costs, as well as investor relations, annual reporting and other costs
associated with having become a public company. Selling, general and
administrative expenses remained relatively constant at 27% of our total revenue
for the both three month periods in 2000 and 1999. We anticipate that selling,
general and administrative expenses will continue to increase in absolute
dollars in future periods as we expand our sales and marketing staff both
internationally and domestically.
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AMORTIZATION OF DEFERRED STOCK OPTION COMPENSATION. We recorded
amortization of deferred stock option compensation of $171,000 for the three
months ended March 31, 2000 and $118,000 for the same period in 1999, resulting
from stock option grants at prices below the deemed fair market value of our
common stock when we were a private company. Deferred stock option compensation
is amortized over the vesting periods of the options.
OTHER INCOME (EXPENSE), NET
Interest income, net consists primarily of earnings on our cash, cash
equivalents and short-term investment balances offset by interest expense
associated with debt obligations. Interest income, net was $826,000 for the
three months ended March 31, 2000 and $54,000 for the three months ended March
31, 1999. The increase resulted from higher average cash, cash equivalent and
short-term investment balances during the three-month period in 2000.
In January 2000, the Company acquired BlueWater Systems, Inc. in a
transaction accounted for as a pooling of interests. In connection with the
acquisition, the Company incurred $620,000 ($515,000 after taxes, or $0.01 per
diluted share) of acquisition-related costs which were charged to operations
during the three months ended March 31, 2000.
PROVISION FOR INCOME TAXES.
Our provision for federal, state and international income taxes was
$419,000 for the three months ended March 31, 2000 as compared to $344,000 for
the three months ended March 31, 1999, yielding effective rates of 30% during
that period in 2000 and 45% during the same period in 1999. The decrease in the
effective rate was due primarily to the tax benefit of interest income earned on
tax-exempt and tax-advantaged municipal securities held in our short-term
investment portfolio.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had $86.2 million of cash, cash equivalents and
short-term investments. This represents an increase of $3.3 million over
December 31, 1999. In October 1999, we completed an initial public offering of
4,000,000 shares of common stock and raised $54.4 million, net of offering
costs. Our working capital at March 31, 2000 was $83.8 million compared to $81.7
million at December 31, 1999.
Our operating activities resulted in net cash inflows of $4.2 million
for the three months ended March 31, 2000 and $2.8 million for the same period
in 1999. The sources of cash were primarily income from operations and increases
in deferred revenue, accounts payable and accrued liabilities, partially offset
by increases in accounts receivable.
Investing activities used $1.1 million for the three months ended March
31, 2000, compared to providing $1.0 million of cash for the three months ended
March 31, 1999. Investing activities in 2000 included $1.3 million for purchase
of an investment and $343,000 in capital equipment purchases. Investing
activities in 1999 included $1.6 million maturity of short-term investments and
$559,000 in capital equipment purchases.
Financing activities generated $638,000 for the three months ended March
31, 2000, primarily through the exercise of warrants by former BlueWater
Systems, Inc. Series A Preferred shareholders. Financing activities used $49,000
for the same period in 1999, primarily for repayment of long-term obligations.
We have a working capital revolving line of credit with Imperial Bank
that is secured by our accounts receivable. This facility allows us to borrow up
to the lesser of 80% of our eligible accounts receivable or $5.0 million and
bears interest at the bank's prime rate, which was 9.0% at March 22, 2000. The
facility expires in July 2000. The agreement under which the line of credit was
established contains certain covenants, including a provision requiring us to
maintain specified financial ratios. We were in compliance with these covenants
at March 31, 2000, and at that time there were no borrowings outstanding under
this credit facility. We also maintain with Imperial Bank a $1.5 million term
loan for equipment purchases, which bears interest at the bank's prime rate plus
0.25%, and a $4.0 million term loan for leasehold improvement purchases, which
bears interest at the bank's prime rate plus 0.50%. These facilities operate as
a revolver through June 2000, after which time any outstanding balances must be
paid over 36-month and 60-month terms, respectively. These loans also require us
to comply with certain
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<PAGE> 11
financial covenants, including a requirement that we maintain certain financial
ratios. We were in compliance with these covenants at March 31, 2000, and at
that time there were no borrowings outstanding under these facilities.
As of March 31, 2000, our principal commitments consisted of obligations
outstanding under operating leases. In October 1999, we began leasing
approximately 126,000 square feet in a single facility located in Bellevue,
Washington pursuant to a lease, which expires in 2009. The annual cost of this
lease is approximately $3.0 million, subject to annual adjustments. Although we
have no other material commitments, we anticipate an increase in our capital
expenditures and lease commitments consistent with our anticipated growth in our
operations, infrastructure and personnel.
We currently anticipate that we will continue to experience significant
increases in our operating expenses for the foreseeable future as we enter new
markets for our products and services, increase research and development
activities and sales and marketing activities, develop new distribution channels
and broaden our professional service capabilities. We believe that our existing
cash and cash equivalents and available bank borrowings will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next 12 months. Although we believe that we will be able to meet
our anticipated cash needs after that time from cash generated from operations
and do not currently anticipate the need to raise additional capital, if we do
seek to raise additional capital, there can be no assurance that additional
financing will be available on acceptable terms, if at all. We may use a portion
of our cash to acquire additional businesses, products and technologies or to
establish joint ventures that we believe will complement our current or future
business. However, we have no specific plans, agreements or commitments to do
so, and are not currently engaged in any negotiations for any such acquisition
or joint venture. Pending such uses, we will invest our surplus cash in
government securities and other short-term, investment grade, interest-bearing
instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is the type of hedge transaction. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. We do not use derivative instruments, therefore the
adoption of this statement will not have any effect on our results of operations
or financial position.
In December 1999, SEC Staff Accounting Bulletin No. 101 ("SAB
101"),"Revenue Recognition in Financial Statements," was issued. This
pronouncement summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition. We are required to adopt
SAB 101 for the year ended December 31, 2001. We are currently reviewing the
requirements of SAB 101 and assessing its impact on our financial statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Liquidity and Capital
Resources" section of this Management's Discussion and Analysis of Financial
Condition and Results of Operations, the following additional factors may affect
our future results.
UNANTICIPATED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO FACTORS
SUCH AS ADVERSE CHANGES IN OUR RELATIONSHIP WITH MICROSOFT OR A DECLINE IN THE
MARKET FOR WINDOWS-BASED INTELLIGENT COMPUTING DEVICES COULD CAUSE OUR STOCK
PRICE TO DECLINE SIGNIFICANTLY.
Our operating results have fluctuated in the past, and we expect that
they will continue to do so. We believe that period-to-period comparisons of our
operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. If our operating results fall
below the expectations of stock analysts and investors, the price of our common
stock may fall. Factors that may cause our quarterly operating results to
fluctuate include:
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<PAGE> 12
- the failure or perceived failure of Windows CE, the operating system
upon which demand for the majority of our products and services is
dependent, to achieve widespread market acceptance;
- the failure of the intelligent computing device market to develop;
- adverse changes in our relationship with Microsoft, from whom a
substantial portion of our revenue is generated and on whom we rely to
continue to develop and promote Windows CE;
- our inability to develop and market new and enhanced products and
services on a timely basis;
- unanticipated delays, or announcement of delays, by Microsoft of Windows
product releases, which could cause us to delay our product
introductions and adversely affect our customer relationships;
- changes in demand for our products and services;
- increased competition and changes in our pricing as a result of
increased competitive pressure;
- our ability to control our expenses, a large portion of which are
relatively fixed and which are budgeted based on anticipated revenue
trends, in the event that customer projects, particularly Microsoft
projects, are delayed, curtailed or discontinued;
- changes in the mix of our services and product revenue, which have
different gross margins;
- underestimates by us of the costs to be incurred in significant
fixed-fee service projects; and
- varying customer buying patterns which are often influenced by year-end
budgetary pressures.
In addition, our stock price may fluctuate due to conditions unrelated
to our operating performance, including general economic conditions in the
software industry and the market for technology stocks.
SUBSTANTIALLY ALL OF OUR REVENUE, INCLUDING 77% OF OUR TOTAL REVENUE FOR THE
THREE MONTHS ENDED MARCH 31, 2000, IS GENERATED FROM OUR RELATIONSHIP WITH
MICROSOFT, WHICH CAN BE MODIFIED OR TERMINATED BY MICROSOFT AT ANY TIME.
For the year ended December 31, 1999 and for the three months ended
March 31, 2000, approximately 84% and 77% of our revenue, respectively, was
generated under our master development and license agreement with Microsoft. The
master agreement, the current renewable term of which concludes in July 2000,
includes a number of project-specific work plans. We bill Microsoft on a
time-and-materials basis, although each project has a maximum dollar cap. We
expect the revenue generated from work plans with Microsoft will continue to
comprise the majority of our revenue for the next several years. We presently
have dedicated approximately 190 of our 330 engineers to these projects.
However, the master agreement and each of the individual work plans may be
terminated or modified by Microsoft at any time. In addition, there is no
guarantee that Microsoft will continue to enter into additional work plans with
us. In the past, Microsoft has modified the timing and scope of certain
projects, requesting that our engineers be moved from one project to another.
For example, in late 1997 Microsoft decided to contract with us to provide
Windows CE support services to semiconductor vendors with whom we had previously
contracted directly. As a result, from late 1997 through late 1998 our revenue
shifted from being generated by a variety of semiconductor vendors to being
generated primarily by Microsoft. We do not believe that we could replace the
Microsoft revenue in the short- or medium-term if existing work plans were
canceled or curtailed, and such cancellations or curtailments would
substantially reduce our revenue. Microsoft is a publicly traded company that
files financial reports and information with the Securities and Exchange
Commission. These reports are publicly available under Microsoft's Exchange Act
filing number, 000-14278.
IF THE MARKET FOR THE WINDOWS CE OPERATING SYSTEM FAILS TO DEVELOP FULLY OR
DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR BUSINESS AND OPERATING RESULTS WILL BE
MATERIALLY HARMED.
Windows CE is one of many operating systems developed for the
intelligent computing device market and the extent of its future acceptance is
uncertain. Because all of our revenue through 1999 has been generated by
software products and services dependent on the Windows CE operating system, if
the market for Windows CE fails to develop fully or develops more slowly than we
expect, our business and operating results will be significantly harmed. Market
acceptance of Windows CE will depend on many factors, including:
- Microsoft's development and support of the Windows CE market. As the
developer and primary promoter of Windows CE, if Microsoft were to
decide to discontinue or lessen its support of the Windows CE operating
system, potential customers could select competing operating systems,
which would reduce the demand for our Windows CE-based software products
and services. In addition, Microsoft has developed a version of its
Windows NT operating system for intelligent computing devices and could
decide to shift its support to this operating system to the detriment of
Windows CE;
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<PAGE> 13
- the ability of the Windows CE operating system to compete against
existing and emerging operating systems for the intelligent computing
device market including: VxWorks from WindRiver Systems Inc., pSOS from
Integrated Systems, Inc., VRTX from Mentor Graphics Corporation, JavaOS
from Sun Microsystems, Inc. and LINUX. In particular, in the market for
palm-size devices, Windows CE faces intense competition from PalmOS used
on 3Com Corporation's Palm devices and to date has had limited success
in this market. In the market for cellular phones, Windows CE faces
intense competition from the EPOC operating system from Symbian, a joint
venture between several of the largest manufacturers of cellular phones,
which recently announced it has agreed to discuss cross-licensing its
technology with the Palm Computing unit of 3Com. Windows CE may be
unsuccessful in capturing a significant share of these two segments of
the intelligent computing device market, or in maintaining its market
share in those other segments of the intelligent computing device market
on which our business currently focuses, including the markets for
Internet-enabled television set-top boxes, handheld industrial devices,
consumer Internet appliances such as kiosk terminals and vehicle
navigational devices, and Windows-based terminals;
- the acceptance by original equipment manufacturers and consumers of the
mix of features and functions offered by Windows CE; and
- the willingness of software developers to continue to develop and expand
the applications that run on Windows CE. To the extent that software
developers write applications for competing operating systems that are
more attractive to intelligent computing device end users than those
available on Windows CE, potential purchasers could select competing
operating systems over Windows CE.
IF THE MARKET FOR INTELLIGENT COMPUTING DEVICES FAILS TO DEVELOP FULLY OR
DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR REVENUE WILL NOT GROW AS FAST AS
ANTICIPATED, IF AT ALL.
The market for intelligent computing devices is emerging and the
potential size of this market and the timing of its development are not known.
As a result, our profit potential is uncertain and our revenue may not grow as
fast as we anticipate, if at all. We are dependent upon the broad acceptance by
businesses and consumers of a wide variety of Windows CE-based intelligent
computing devices, which will depend on many factors, including:
- the development of content and applications for intelligent computing
devices;
- the willingness of large numbers of businesses and consumers to use
devices such as handheld and palm-size PCs and handheld industrial data
collectors to perform functions currently carried out manually or by
traditional PCs, including inputting and sharing data, communicating
among users and connecting to the Internet; and
- the evolution of industry standards that facilitate the distribution of
content over the Internet to these devices via wired and wireless
telecommunications systems, satellite or cable.
IF MICROSOFT ADDS FEATURES TO ITS WINDOWS OPERATING SYSTEM THAT DIRECTLY COMPETE
WITH SOFTWARE PRODUCTS AND SERVICES WE PROVIDE, OUR REVENUE COULD BE REDUCED AND
OUR PROFIT MARGINS COULD SUFFER.
As the developer of Windows, Microsoft could add features to its
operating system that directly compete with the software products and services
we provide to our customers. Such features could include, for example, faxing,
hardware-support packages and quality-assurance tools. The ability of our
customers or potential customers to obtain software products and services
directly from Microsoft that compete with our software products and services
could harm our business. Even if the standard features of future Microsoft
operating system software were more limited than our offerings, a significant
number of our customers and potential customers might elect to accept more
limited functionality in lieu of purchasing additional software. Moreover, the
resulting competitive pressures could lead to price reductions for our products
and reduce our profit margins.
IF WE DO NOT MAINTAIN OUR FAVORABLE RELATIONSHIP WITH MICROSOFT, WE WILL HAVE
DIFFICULTY MARKETING OUR SOFTWARE PRODUCTS AND SERVICES AND MAY NOT RECEIVE
DEVELOPER RELEASES OF WINDOWS CE, AND OUR REVENUE AND OPERATING MARGINS WILL
SUFFER.
In the event that our relationship with Microsoft were to deteriorate,
then our efforts to market and sell our software products and services to
original equipment manufacturers could be adversely affected and our business
would be harmed. Microsoft has great influence over the development plans and
buying decisions of original equipment manufacturers utilizing Windows CE for
intelligent computing devices. Microsoft refers many of our original equipment
manufacturer customers to us. Moreover, Microsoft controls the marketing
campaigns related to
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<PAGE> 14
its operating systems, including Windows CE. Microsoft's marketing activities,
including trade shows, direct mail campaigns and print advertising, are
important to the continued promotion and market acceptance of Windows CE and,
consequently, of our Windows CE-based software products and services. We must
maintain mutually successful relationships with Microsoft so that we may
continue to participate in joint marketing activities with Microsoft, including
participating in "partner pavilions" at trade shows and listing our services on
Microsoft's website, and to receive referrals from Microsoft. In the event that
we are unable to continue our joint marketing efforts with Microsoft or fail to
receive referrals from Microsoft, we would be required to devote significant
additional resources and incur additional expenses to market our software
products and services directly to potential customers. In addition, we depend on
receiving from Microsoft developer releases of new versions of and upgrades to
Windows CE and related Microsoft software in order to timely develop and ship
our products and provide services. If we are unable to receive these developer
releases, our revenue and operating margins would suffer.
UNANTICIPATED DELAYS, OR ANNOUNCEMENT OF DELAYS, BY MICROSOFT OF WINDOWS CE
PRODUCT RELEASES COULD ADVERSELY AFFECT OUR SALES.
Unanticipated delays, or announcement of delays, in Microsoft's delivery
schedule for new versions of its Windows CE operating system could cause us to
delay our product introductions and impede our ability to complete customer
projects on a timely basis. These delays or announcements by Microsoft could
also cause our customers to delay or cancel their project development activities
or product introductions. Any resulting delays in, or cancellations of, our
planned product introductions or in our ability to commence or complete customer
projects may adversely affect our revenue and could cause our quarterly
operating results to fluctuate. For example, in 1998 Microsoft delayed the
release of a version of its Windows CE Platform Builder, which delayed our
introduction of a complementary product for an original equipment manufacturer
customer.
OUR MARKET IS BECOMING INCREASINGLY COMPETITIVE, WHICH MAY RESULT IN PRICE
REDUCTIONS, LOWER GROSS MARGINS AND LOSS OF MARKET SHARE.
The market for Windows CE-based software products and services is
becoming increasingly competitive. In addition, competition is intense for the
business of the limited number of original equipment manufacturer customers that
are capable of building and shipping large quantities of intelligent computing
devices. Increased competition may result in price reductions, lower gross
margins and loss of market share, which would harm our business. We face
competition from:
- our current and potential customers' internal research and development
departments that may seek to develop their own proprietary solutions;
- large professional engineering services firms;
- established intelligent computing device software and tools;
- small- and medium-size engineering services; and
- software and component distributors.
As we develop new products, particularly products focused on specific
industries, we may begin competing with companies with whom we have not
previously competed. It is also possible that new competitors will enter the
market or that our competitors will form alliances, including alliances with
Microsoft, that may enable them to rapidly increase their market share.
Microsoft has not agreed to any exclusive arrangement with us nor has it agreed
not to compete with us. The barrier to entering the market as a provider of
Windows-based intelligent computing device software and services is low. In
addition, Microsoft has created a marketing program to encourage systems
integrators to work on Windows. These systems integrators are given the same
access by Microsoft to the Windows technology as we are, with respect to system
integration. New competitors may have lower overhead than us and may therefore
be able to offer advantageous pricing. We expect that competition will increase
as other established and emerging companies enter the Windows based intelligent
computing device market and as new products and technologies are introduced.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS
MAY BE ABLE TO USE OUR TECHNOLOGY OR TRADEMARKS, WHICH COULD WEAKEN OUR
COMPETITIVE POSITION, REDUCE OUR REVENUE AND INCREASE OUR COSTS.
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<PAGE> 15
If we fail to adequately protect our intellectual property, our
competitive position could be weakened and our revenue adversely affected. We
rely primarily on a combination of patent, copyright, trade secret and trademark
laws, confidentiality procedures and contractual provisions to protect our
intellectual property. These laws and procedures provide only limited
protection. We have applied for three patents relating to our engineering work.
These patents, if issued, may not provide sufficiently broad protection or they
may not prove to be enforceable against alleged infringers. There can be no
assurance that any of our pending patents will be granted. Even if granted,
patents may be circumvented or challenged and, if challenged, may be
invalidated. Any patents obtained may provide limited or no competitive
advantage to us. It is also possible that another party could obtain patents
that block our use of some, or all, of our products and services. If that
occurred, we would need to obtain a license from the patent holder or design
around their patent. The patent holder may or may not choose to make a license
available to us at all or on acceptable terms. Similarly, it may not be possible
to design around such a blocking patent.
In general, there can be no assurance that our efforts to protect our
intellectual property rights through patent, copyright, trade secret and
trademark laws will be effective to prevent misappropriation of our technology,
or to prevent the development and design by others of products or technologies
similar to or competitive with those developed by us. We frequently license the
source code of our products and the source code results of our services to
customers. There can be no assurance that customers with access to our source
code will comply with the license terms or that we will discover any violations
of the license terms or, in the event of discovery of violations, that we will
be able to successfully enforce the license terms and/or recover the economic
value lost from such violations. To license many of our software products, we
rely in part on "shrinkwrap" and "clickwrap" licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. As with other software products, our products are susceptible to
unauthorized copying and uses that may go undetected, and policing such
unauthorized use is difficult.
A significant portion of our marks include the word "BSQUARE" or the
preface "b." Other companies use forms of "BSQUARE" or the preface "b" in their
marks alone or in combination with other words, and we cannot prevent all such
third-party uses. We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would harm our
business.
The computer software market is characterized by frequent and
substantial intellectual property litigation, which is often complex and
expensive, and involves a significant diversion of resources and uncertainty of
outcome. Litigation may be necessary in the future to enforce our intellectual
property or to defend against a claim of infringement or invalidity. Litigation
could result in substantial costs and the diversion of resources and could harm
our business and operating results.
THIRD PARTIES COULD ASSERT THAT OUR SOFTWARE PRODUCTS AND SERVICES INFRINGE
THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD EXPOSE US TO ADDITIONAL COSTS
AND LITIGATION.
Third parties may claim that our current or future software products and
services infringe their proprietary rights, and these claims, regardless of
their merit, could increase our costs and harm our business. We have not
conducted patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, it is difficult
to determine whether our software products and services infringe third-party
intellectual property rights, particularly in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If we
were to discover that one of our software products violated a third party's
proprietary rights, we may not be able to obtain a license on commercially
reasonable terms, or at all, to continue offering that software product.
Moreover, any indemnification we obtain against claims that the technology we
license from third parties infringes the proprietary rights of others may not
always be available or may be limited in scope or amount. Even if we receive
broad third-party indemnification, these indemnitors may not have the financial
capability to indemnify us in the event of infringement. In addition, in some
circumstances we could be required to indemnify our customers for claims made
against them that are based on our solutions.
There can be no assurance that infringement or invalidity claims related
to the software products and services we provide or arising from the
incorporation by us of third-party technology, and claims for indemnification
from our customers resulting from such claims, will not be asserted or
prosecuted against us. We expect that software product developers will be
increasingly subject to infringement claims, as the number of products and
competitors in
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<PAGE> 16
the software industry grows and the functionality of products in different
industry segments overlaps. Such claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources in addition
to potential product redevelopment costs and delays.
IF WE DO NOT RESPOND ON A TIMELY BASIS TO TECHNOLOGICAL ADVANCES AND EVOLVING
INDUSTRY STANDARDS, OUR FUTURE PRODUCT SALES COULD BE NEGATIVELY IMPACTED.
The market for Windows-based software products and services is new and
evolving. As a result, the life cycles of our products are difficult to
estimate. To be successful, we must continue to enhance our current product line
and develop new products. We have experienced delays in enhancements and new
product release dates in the past and may be unable to introduce enhancements or
new products successfully or in a timely manner in the future. Our business may
be harmed if we must delay releases of our products and product enhancements or
if these products and product enhancements fail to achieve market acceptance
when released. In addition, our customers may defer or forego purchases of our
products if we, Microsoft, our competitors or major hardware, systems or
software vendors introduce or announce new products or product enhancements.
Such deferrals or failures to purchase would decrease our revenue.
OUR FIVE-YEAR OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS, AND WE CANNOT ASSURE YOU THAT OUR REVENUE GROWTH RATE WILL NOT
DECLINE OR THAT WE WILL BE ABLE TO SUSTAIN OR INCREASE OUR PROFITABILITY.
We were founded in July 1994, generated our first revenue in October
1994 and shipped our first product in November 1996. Accordingly, we have a
limited operating history and you should not rely on our past results to predict
our future performance. The rate of growth of our revenue over the prior year
was 245% from 1996 to 1997, 71% from 1997 to 1998, and 62% from 1998 to 1999.
The rate of growth of our revenue over prior periods may continue to decline. We
anticipate that our expenses will increase substantially in the foreseeable
future as we continue to develop our technology and expand our product and
service offerings. These efforts may prove more expensive than we currently
anticipate, and we may not succeed in increasing our revenue sufficiently to
offset these higher expenses. If we fail to increase our revenue to keep pace
with our expenses, we may experience losses.
IF WE ARE UNABLE TO MANAGE OUR GROWTH OUR BUSINESS WILL SUFFER.
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, technical, operational and financial
resources. From August 1996 to March 2000, we grew from 21 employees to 409
employees, and we expect rapid growth to continue for the foreseeable future. To
manage our growth, we must implement additional management information systems,
further develop our operational, administrative and financial systems and
expand, train and manage our work force. We will also need to manage an
increasing number of complex relationships with customers, marketing partners
and other third parties. We cannot guarantee that our systems, procedures or
controls will be adequate to support our current or future operations or that
our management will be able to effectively manage our expansion. Our failure to
do so could seriously harm our ability to deliver products and services in a
timely fashion, fulfill existing customer commitments and attract and retain new
customers.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO GREATER INTELLECTUAL PROPERTY,
MANAGEMENT, COLLECTIONS, REGULATORY AND OTHER RISKS.
In late 1998 we opened offices in Munich, Germany and Tokyo, Japan. For
the year ended December 31, 1999 and for the three months ended March 31, 2000,
less than 1% of our total revenue was generated by our international offices.
Our international operations expose us to a number of risks, including the
following:
- greater difficulty in protecting intellectual property due to less
stringent foreign intellectual property laws and enforcement policies;
- greater difficulty in managing foreign operations due to the lack of
proximity between our home office and our foreign operations;
- longer collection cycles in Japan than we typically experience in the
U.S.;
- unfavorable changes in regulatory practices and tariffs;
- adverse changes in tax laws;
- seasonal European sales declines in the summer months;
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<PAGE> 17
- the impact of fluctuating exchange rates between the U.S. dollar and
foreign currencies; and
- general economic and political conditions in Asian and European markets.
These risks could have a material adverse effect on the financial and
managerial resources required to operate our foreign offices, as well as on our
future international revenue, which could harm our business.
IF WE CONDUCT FUTURE ACQUISITIONS, THEY COULD PROVE DIFFICULT TO INTEGRATE,
DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER VALUE AND ADVERSELY AFFECT OUR
OPERATING RESULTS.
Although we currently have no specific understandings, commitments or
agreements for any acquisition, we may make investments in complementary
companies, services and technologies in the future. If we fail to properly
evaluate and execute acquisitions and investments, they may seriously harm our
business and prospects. To successfully complete an acquisition, we must
properly evaluate the technology, accurately forecast the financial impact of
the transaction, including accounting charges and transaction expenses,
integrate and retain personnel, combine potentially different corporate cultures
and effectively integrate products and research and development, sales,
marketing and support operations. If we fail to do any of these, we may suffer
losses or our management may be distracted from our day-to-day operations. In
addition, if we conduct acquisitions using debt or equity securities, existing
shareholders may be diluted, which could affect the market price of our stock.
IF WE ARE UNABLE TO LICENSE KEY SOFTWARE FROM THIRD PARTIES OUR BUSINESS COULD
BE HARMED.
We often integrate third-party software with our internally developed
software to provide software products and services for our original equipment
manufacturer customers. If our relationships with our third-party vendors were
to deteriorate, we might be unable to obtain licenses on commercially reasonable
terms, if at all, for newer versions of their software required to maintain
compatibility. In the event that we are unable to obtain additional licenses, we
would be required to develop this technology internally, which could delay or
limit our ability to introduce enhancements or new products or to continue to
sell existing products.
OUR SOFTWARE PRODUCTS OR THE THIRD-PARTY HARDWARE OR SOFTWARE INTEGRATED WITH
OUR SOFTWARE PRODUCTS AND SERVICES MAY SUFFER FROM DEFECTS OR ERRORS THAT COULD
IMPAIR OUR ABILITY TO SELL OUR SOFTWARE PRODUCTS AND SERVICES.
Software and hardware components as complex as those needed for
intelligent computing devices frequently contain errors or defects, especially
when first introduced or when new versions are released. We have had to delay
commercial release of certain versions of our software products until software
problems were corrected, and in some cases have provided product enhancements to
correct errors in released products. Some of our contracts require us to repair
or replace products that fail to work. To the extent that we repair or replace
products our expenses may increase resulting in a decline in our gross margins.
In addition, it is possible that by the time defects are fixed the market
opportunity may have been missed which may result in lost revenue. Moreover,
errors that are discovered after commercial release could result in loss of
revenue or delay in market acceptance, diversion of development resources,
damage to our reputation or increased service and warranty costs, all of which
could harm our business.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that these provisions may be ineffective under the laws of
certain jurisdictions. Although we have not experienced any product liability
claims to date, the sale and support of our software products and services
entail the risk of such claims and we may be subject to such claims in the
future. A product liability claim brought against us, whether successful or not,
could harm our business and operating results.
THE LENGTHY SALES CYCLE OF OUR PRODUCTS AND SERVICES MAKES OUR REVENUE
SUSCEPTIBLE TO FLUCTUATIONS.
Our sales cycle is typically three to six months because the expense and
complexity of our products and services generally require a lengthy customer
approval process, and may be subject to a number of significant risks over which
we have little or no control, including:
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<PAGE> 18
- customers' budgetary constraints and internal acceptance review
procedures;
- the timing of budget cycles; and
- the timing of customers' competitive evaluation processes.
In addition, to successfully sell our products and services, we
frequently must educate our potential customers about the full benefits of our
products and services, which can require significant time. If our sales cycle
lengthens unexpectedly, it could adversely affect the timing of our revenue
which could cause our quarterly results to fluctuate.
A SMALL NUMBER OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US.
Our executive officers, directors and principal shareholders holding
more than 5% of our common stock together control a majority of our outstanding
common stock. As a result, these shareholders, if they act together, could
control our management and affairs of the company and all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control of us and might affect the
market price of our common stock.
IT MIGHT BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SHAREHOLDERS.
Certain provisions of our amended and restated articles of
incorporation, bylaws and Washington law may discourage, delay or prevent a
change in the control of us or a change in our management even if doing so would
be beneficial to our shareholders. Our board of directors has the authority
under our amended and restated articles of incorporation to issue preferred
stock with rights superior to the rights of the holders of common stock. As a
result, preferred stock could be issued quickly and easily with terms calculated
to delay or prevent a change in control of our company or make removal of our
management more difficult. In addition, as of this year's annual meeting of
shareholders, our board of directors will be divided into three classes. The
directors in each class will serve for three-year terms, one class being elected
each year by our shareholders. This system of electing and removing directors
may tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of our company because it generally makes it more
difficult for shareholders to replace a majority of our directors.
In addition, Chapter 19 of the Washington Business Corporation Act
generally prohibits a "target corporation" from engaging in certain significant
business transactions with a defined "acquiring person" for a period of five
years after the acquisition, unless the transaction or acquisition of shares is
approved by a majority of the members of the target corporation's board of
directors prior to the time of acquisition. This provision may have the effect
of delaying, deterring or preventing a change in control of our company. The
existence of these antitakeover provisions could limit the price that investors
might be willing to pay in the future for shares of our common stock.
IMPACT OF THE YEAR 2000
We have not experienced any adverse impacts from the transition to the
year 2000. We are also not aware of any material year 2000 problems with our
vendors, service providers, customers or distribution partners. Accordingly, we
do not anticipate incurring material expenses or experiencing any material
operational disruptions as a result of any year 2000 issues that may arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk. We do not hold derivative financial instruments or
equity securities in our investment portfolio. Our cash equivalents consist of
high-quality securities, as specified in our investment policy guidelines. The
policy limits the amount of credit exposure to any one issue or issuer to a
maximum of 20% of the total portfolio with the exception of treasury securities,
commercial paper and money market funds, which are exempt from size limitation.
The policy limits all short-term investments to mature in two years or less,
with the average maturity being one year or less. These securities are subject
to interest rate risk and will decrease in value if interest rates increase.
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Foreign Currency Risk. Currently, the majority of our sales and expenses
are denominated in U.S. dollars, and, as a result, we have not experienced
significant foreign exchange gains and losses to date. While we have conducted
some transactions in foreign currencies during the three months ended March 31,
2000 and expect to continue to do so, we do not anticipate that foreign exchange
gains or losses will be significant. We have not engaged in foreign currency
hedging to date, although we may do so in the future.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 5, 2000, the Company issued 261,391 shares of its common
stock in connection with the acquisition of BlueWater Systems, Inc. The issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 2, 2000, the following items were voted on at the Annual Meeting
of Shareholders:
PROPOSAL 1: Election of Directors. Two Class I directors are to be elected at
the Annual Meeting for a one-year term ending in 2001. Two Class II directors
are to be elected at the Annual Meeting for a two-year term ending in 2002. Two
Class III directors are to be elected for a three-year term ending in 2003. The
Board of Directors has nominated Scot E. Land and William L. Larson for election
as Class I directors. The Board has nominated Albert T. Dosser and Jeffrey T.
Chambers for election as Class II directors. The Board of Directors has
nominated William T. Baxter and David M. Moore for election as Class III
directors. The following nominees were elected as directors, each to hold office
until his successor is elected and qualified, by the vote set forth below:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
- ------- --- --------
<S> <C> <C>
William T. Baxter 26,650,980 31,838
Albert T. Dosser 25,650,880 31,938
Scot. E. Land 25,650,665 32,153
David M. Moore 25,649,880 32,938
Jeffrey T. Chambers 25,650,365 32,453
William L. Larson 25,650,080 32,738
</TABLE>
PROPOSAL 2: Ratify and approve an amendment to the stock option plan to annual
increase the number of shares reserved for issuance during each of the Company's
fiscal years beginning on January 1, 2000 by an amount equal to the lesser of
(A) four percent (4%) of the Company's outstanding shares at the end of such
fiscal year or (B) an amount determined by the Board of Directors. This proposal
was approved by the vote set forth below:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
24,005,650 1,660,572 16,596
</TABLE>
PROPOSAL 3: Approve an amendment to the Company's Amended and Restated Articles
of Incorporation to increase the number of authorized shares of Common Stock
from 50,000,000 shares to 150,000,000 shares. This proposal was approved by the
vote set forth below:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
24,006,998 1,666,107 9,713
</TABLE>
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<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11.1 Statement re: computation of net income per share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On January 18, 2000, the Company filed a Form 8-K under Items 2 and 7
announcing that the Company entered into a definitive agreement to acquire
BlueWater Systems, Inc.
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SIGNATURE
Pursuant to the requirements 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.
BSQUARE CORPORATION
(Registrant)
Brian V. Turner
-----------------------------
Date: May 5, 2000 Brian V. Turner
Senior Vice President of Operations,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
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BSQUARE CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF EXHIBIT
REGULATION S-K) DESCRIPTION
- --------------- -----------
<S> <C>
11.1 Statement re: computation of net income per share.
27.1 Financial Data Schedule.
</TABLE>
22
<PAGE> 1
EXHIBIT 11.1
BSQUARE CORPORATION
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
three-month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
-------- --------
<S> <C> <C>
Net income (numerator diluted) $ 995 $ 429
Less: Accretion of mandatorily redeemable
Convertible preferred stock -- (30)
-------- --------
Net income available to common shareholders (numerator basic) $ 995 $ 399
======== ========
Shares (denominator basic):
Weighted average common shares outstanding 32,566 18,458
======== ========
Basic earnings per share $ 0.03 $ 0.02
======== ========
Shares (denominator diluted) (1):
Weighted average common shares outstanding 32,566 18,458
Mandatorily redeemable convertible preferred stock -- 8,333
Common stock equivalents 3,062 1,677
-------- --------
Weighted average common shares and equivalents outstanding 35,628 28,468
======== ========
Diluted earnings per share $ 0.03 $ 0.02
======== ========
</TABLE>
(1) Share amounts presented for 1999 give effect to the issuance of 261,391
shares to the former shareholders of BlueWater Systems to effect its
acquisition by BSQUARE. The transaction was accounted for as a pooling
of interests.
23
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<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 59,358,000 9,294,000
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0 14,337,000
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<INTEREST-EXPENSE> (826,000) (54,000)
<INCOME-PRETAX> 1,414,000 773,000
<INCOME-TAX> 419,000 344,000
<INCOME-CONTINUING> 995,000 429,000
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<NET-INCOME> 995,000 429,000
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