SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended March 31, 2008 or
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from _________ to _________
Commission File Number:
0-27166
(Exact Name of Registrant as Specified in its Charter)
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Minnesota
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41-1641815
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification Number)
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965 Prairie Center Drive, Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices) (Zip Code)
Registrants telephone number, including area code:
(952) 707-5600
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
þ
No
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
þ
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APPLICABLE ONLY TO CORPORATE ISSUERS
As of April 30, 2008, the following securities of the Registrant were outstanding: 8,749,346 shares
of Common Stock, $.01 par value per share, 1,888,147 shares of Series B Preferred Stock, 1,269,036
shares of Series C Preferred Stock and 1,566,580 shares of Series D Preferred Stock.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
XATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
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Three months ended
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Six months ended
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March 31,
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March 31,
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2008
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2007
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2008
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2007
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Net sales
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$
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12,129
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$
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8,162
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$
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19,816
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$
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15,936
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Costs and expenses
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Cost of goods sold
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6,009
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4,670
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10,067
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8,851
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Selling, general and administrative
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5,759
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3,438
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9,475
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6,495
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Research and development
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1,439
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1,024
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2,479
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2,198
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Total costs and expenses
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13,207
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9,132
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22,021
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17,544
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Operating loss
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(1,078
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)
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(970
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)
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(2,205
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)
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(1,608
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)
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Interest income
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110
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|
101
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241
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192
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Interest expense
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(370
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)
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(6
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)
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(387
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)
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(13
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)
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Loss before income taxes
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(1,338
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)
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(875
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)
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(2,351
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)
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(1,429
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)
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Income tax expense
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Net loss
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(1,338
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)
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(875
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)
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(2,351
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)
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(1,429
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)
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Preferred stock dividends
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(47
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)
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(46
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)
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(94
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)
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(92
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)
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Preferred stock deemed dividends
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(43
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)
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(95
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)
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Net loss to common shareholders
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$
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(1,385
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)
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$
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(921
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)
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$
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(2,488
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)
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$
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(1,616
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)
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Net loss per common share basic and diluted
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$
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(0.17
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)
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$
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(0.12
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)
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$
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(0.30
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)
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$
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(0.20
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)
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Weighted average common and
common share equivalents basic and diluted
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8,306
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7,921
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8,234
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7,883
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
XATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
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March 31,
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September 30,
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2008
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2007
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(Unaudited)
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ASSETS
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Current Assets
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Cash and cash equivalents
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$
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8,036
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$
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13,675
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Accounts receivable, less allowances for doubtful accounts and sales
returns of $773 at March 31, 2008 and $256 at September 30, 2007
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9,196
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3,280
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Inventories
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3,876
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2,672
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Deferred product costs
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1,098
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752
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Current portion of investment in sales-type leases
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955
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Prepaid expenses and other current assets
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1,596
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393
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Total current assets
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24,757
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20,772
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Equipment and leasehold improvements, net
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4,070
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1,583
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Intangible assets
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13,372
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Goodwill
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1,303
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Deferred product costs, net of current portion
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1,936
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1,798
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Investment in sales-type leases, net of current portion
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759
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Other assets
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676
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Total assets
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$
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46,873
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$
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24,153
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current Liabilities
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Accounts payable
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$
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5,194
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$
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3,419
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Current portion of long-term obligations and deferred rent
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2,237
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|
161
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Accrued expenses
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4,821
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|
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3,548
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Deferred revenue
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4,382
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3,105
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Total current liabilities
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16,634
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10,233
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Long-term obligations, net of current portion
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16,387
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220
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Deferred rent, net of current portion
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854
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98
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Deferred revenue, net of current portion
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6,502
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6,524
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Total liabilities
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40,377
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17,075
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Shareholders Equity
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Preferred stock, no par, 10,000 shares authorized:
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Series B, 4% convertible, 2,250 shares designated;
shares issued and outstanding: 1,888 at March 31, 2008
and 1,851 at September 30, 2007
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5,058
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|
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4,921
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Series C, convertible, 1,400 shares designated;
1,269 shares issued and outstanding at March 31, 2008
and September 30, 2007
|
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4,845
|
|
|
|
4,845
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Series D, convertible, 1,600 shares designated;
1,567 shares issued and outstanding at March 31, 2008
and September 30, 2007
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5,937
|
|
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|
5,937
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Common stock, par value $0.01 per share; 25,000 shares
authorized; shares issued and outstanding: 8,749 at March 31, 2008
and 8,516 at September 30, 2007
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87
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|
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|
85
|
|
Additional paid-in capital
|
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|
27,527
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|
|
|
25,760
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Accumulated deficit
|
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|
(36,958
|
)
|
|
|
(34,470
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)
|
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|
|
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Total shareholders equity
|
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|
6,496
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|
|
|
7,078
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|
|
|
|
|
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Total liabilities and shareholders equity
|
|
$
|
46,873
|
|
|
$
|
24,153
|
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
XATA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands)
(Unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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Series B
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Series C
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Series D
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Additional
|
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Unearned
|
|
|
|
|
|
|
Preferred Stock
|
|
Preferred Stock
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-In
|
|
Stock-Based
|
|
Accumulated
|
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|
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|
Shares
|
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Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
1,779
|
|
|
$
|
4,579
|
|
|
|
1,269
|
|
|
$
|
4,845
|
|
|
|
|
|
|
$
|
|
|
|
|
7,963
|
|
|
$
|
80
|
|
|
$
|
23,246
|
|
|
$
|
(900
|
)
|
|
$
|
(26,660
|
)
|
|
$
|
5,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued on exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Issuance of restricted shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900
|
)
|
|
|
900
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,021
|
|
|
|
|
|
|
|
|
|
|
|
2,021
|
|
Forfeiture of restricted shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
1
|
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
605
|
|
Issuance of preferred stock and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,567
|
|
|
|
5,279
|
|
|
|
|
|
|
|
|
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
|
6,018
|
|
Preferred stock dividends
|
|
|
72
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(185
|
)
|
|
|
(2
|
)
|
Preferred stock deemed dividends
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(817
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,808
|
)
|
|
|
(6,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
1,851
|
|
|
|
4,921
|
|
|
|
1,269
|
|
|
|
4,845
|
|
|
|
1,567
|
|
|
|
5,937
|
|
|
|
8,516
|
|
|
|
85
|
|
|
$
|
25,760
|
|
|
|
|
|
|
|
(34,470
|
)
|
|
|
7,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued on exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Issuance of restricted shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
882
|
|
Forfeiture of restricted shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
1
|
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
844
|
|
Preferred stock dividends
|
|
|
37
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
Preferred stock deemed dividends
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
1,888
|
|
|
$
|
5,058
|
|
|
|
1,269
|
|
|
$
|
4,845
|
|
|
|
1,567
|
|
|
$
|
5,937
|
|
|
|
8,749
|
|
|
$
|
87
|
|
|
$
|
27,527
|
|
|
$
|
|
|
|
$
|
(36,958
|
)
|
|
$
|
6,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
XATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,351
|
)
|
|
$
|
(1,429
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation of fixed assets and amortization of intangibles
|
|
|
882
|
|
|
|
491
|
|
Amortization of debt financing costs
|
|
|
42
|
|
|
|
|
|
Stock based compensation
|
|
|
883
|
|
|
|
927
|
|
Changes in assets and liabilities, net of the impact of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(1,636
|
)
|
|
|
662
|
|
Inventories
|
|
|
1,591
|
|
|
|
434
|
|
Deferred product costs
|
|
|
(484
|
)
|
|
|
1,416
|
|
Prepaid expenses and other assets
|
|
|
(727
|
)
|
|
|
(9
|
)
|
Lease equipment receivable
|
|
|
110
|
|
|
|
|
|
Accounts payable
|
|
|
(1,213
|
)
|
|
|
99
|
|
Accrued expenses
|
|
|
(1,220
|
)
|
|
|
(499
|
)
|
Deferred rent
|
|
|
59
|
|
|
|
|
|
Deferred revenue
|
|
|
1,254
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,810
|
)
|
|
|
2,050
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of equipment and leasehold improvements
|
|
|
(2,506
|
)
|
|
|
(95
|
)
|
Additions to system development costs
|
|
|
|
|
|
|
(160
|
)
|
Purchase of GeoLogic Solutions, Inc., net of cash acquired
|
|
|
(16,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(18,677
|
)
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Borrowings on bank line of credit
|
|
|
16,224
|
|
|
|
|
|
Payments on long-term obligations
|
|
|
(89
|
)
|
|
|
(45
|
)
|
Payments on financing costs
|
|
|
(339
|
)
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
605
|
|
Proceeds from options exercised and warrants issued
|
|
|
52
|
|
|
|
27
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
15,848
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(5,639
|
)
|
|
|
2,382
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
13,675
|
|
|
|
6,354
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
8,036
|
|
|
$
|
8,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
251
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities
|
|
|
|
|
|
|
|
|
Preferred stock deemed dividends
|
|
|
43
|
|
|
|
95
|
|
Preferred stock dividends payable
|
|
|
64
|
|
|
|
62
|
|
Preferred stock dividends paid
|
|
|
94
|
|
|
|
92
|
|
Issuance of warrants in consideration for financing fees
|
|
|
535
|
|
|
|
|
|
Issuance of sellers note
|
|
|
2,000
|
|
|
|
|
|
Issuance of common stock in consideration for GeoLogic purchase
|
|
|
300
|
|
|
|
|
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Presentation
The accompanying unaudited consolidated financial statements were prepared by XATA Corporation (the
Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for
interim financial statements. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures made herein are adequate to make the
information presented not misleading.
In the opinion of management, the consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present the financial
condition, results of operations, and cash flows for the periods presented. Results of operations
for the periods presented are not necessarily indicative of results to be expected for any other
interim period or for the full year. These consolidated financial statements should be read in
conjunction with the Companys financial statements and notes thereto in its Form 10-K for the year
ended September 30, 2007 and Annual Report to Shareholders filed with the SEC.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary GeoLogic Solutions, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Revenue Recognition
The Company derives its revenue from sales of hardware, software and related services, and from
application service contracts. The Company recognizes revenue in accordance with Statement of
Position (SOP) 97-2,
Software Revenue Recognition
, as amended by SOP 98-9, Modification of SOP
97-2,
Software Revenue Recognition with Respect to Certain Transactions
, and Securities and
Exchange Commission Staff Accounting Bulletin (SAB) 104,
Revenue Recognition in Financial
Statements
.
Software revenue is recognized under SOP 97-2 and SAB 104 when (i) persuasive evidence of an
arrangement exists (for example a signed agreement or purchase order), (ii) delivery has occurred,
as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or determinable
and payable within twelve months, and (iv) collectability is probable and supported by credit
checks or past payment history.
With regard to software arrangements involving multiple elements, the Company allocates revenue to
each element based on the relative fair value of each element. The Companys determination of fair
value of each element in multiple-element arrangements is based on vendor-specific objective
evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged
when the same element is sold separately. The Company has
7
analyzed all of the elements included in its multiple-element arrangements and has determined that
it has sufficient VSOE to allocate revenue to consulting services and post-contract customer
support (PCS) components of its license arrangements. The Company sells its consulting services
separately, and has established VSOE on this basis. VSOE for PCS components are determined based
upon the customers annual renewal rates for these elements. Accordingly, assuming all other
revenue recognition criteria are met, revenue from licenses is recognized upon delivery, and
revenue from PCS components are recognized ratably over the applicable term, typically one year.
Software sales contracts for OpCenter and MobileMax, as well as sales contracts for XATANET that
were entered into prior to January 1, 2006 include software application service arrangements. The
terms of those contracts did not meet the requirements described in Emerging Issues Task Force
(EITF) 00-03,
Application of AICPA Statement of Position 97-2 to Arrangements That Include the
Right to Use Software Stored on Another Entitys Hardware
, to account for it under SOP 97-2 and SAB
104 and resulted in the recognition of all revenue ratably over the term of the agreement. During
the fiscal year ending September 30, 2006, we changed the terms of all new XATANET contracts, such
that all the requirements of EITF 00-03 related to software delivery are met and the contracts are
accounted for under SOP 97-2. For these new XATANET contracts, revenue is recognized based on the
multiple element arrangement accounting described above.
Use of Estimates
Preparing financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Basis of Presentation
Certain amounts from prior years financial statements have been reclassified to conform to the
current year presentation. These reclassifications had no effect on net loss to common
shareholders or shareholders equity.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three
months or less when purchased by the Company.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk,
consist primarily of cash equivalents, accounts receivable and sales-type leases receivable. The
Companys cash equivalents consist of checking and money market accounts, which, at times, exceed
federally insured limits. The Company has not experienced any losses in such accounts.
The majority of the Companys accounts receivable and investment in sales-type leases receivable
are due from companies with fleet trucking operations in a variety of industries. In general, the
Company does not require collateral or other security to support accounts receivable,
8
although sales-type leases receivable are secured by a retained security interest in the leased
equipment. Accounts receivable are typically due from customers within 30 days and are stated at
amounts due from customers net of an allowance for doubtful accounts and sales returns. Accounts
receivable outstanding longer than the contractual payment terms are considered past due. To
reduce credit risk, management performs ongoing evaluations of its customers financial condition.
The Company determines its allowance for doubtful accounts based upon a number of factors,
including the length of time trade receivables are past due, the Companys previous loss history,
the customers current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The provision for doubtful accounts is recorded as a
charge to operating expenses. The balance of the allowance for doubtful accounts at March 31, 2008
and September 30, 2007 was $669,000 and $130,000, respectively.
The Company determines its allowance for sales returns by considering several factors, including
history of prior sales credits issued. The Company regularly assesses the allowance for sales
returns and increases it as needed. The provision for sales returns is recognized as a reduction
of revenues. Unexpected or significant future changes in trends could result in a material impact
to future statements of operations or cash flows. At March 31, 2008 and September 30, 2007, the
Company had an allowance for sales returns of $104,000 and $126,000, respectively.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, sales-type lease receivables, accounts payable and debt
obligations, approximate fair value.
Inventories
Inventories consist of finished goods, parts and accessories, and repaired and refurbished
inventories, and are stated at the lower of cost or market. Cost is determined on the standard
cost method, which approximates the first-in, first-out method. Inventories consist of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Parts and accessories
|
|
$
|
1,025
|
|
|
$
|
1,021
|
|
Finished goods
|
|
|
2,629
|
|
|
|
1,651
|
|
Repair and refurbished
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
3,876
|
|
|
$
|
2,672
|
|
|
|
|
|
|
|
|
Investment in Sales-Type Leases
As the result of the acquisition of GeoLogic Solutions, Inc. on January 31, 2008, the Company
acquired GeoLogic Solutions, Inc.s investment in sales-type leases. The Company records the
investment in sales-type leases at the present value of the future minimum lease payments. There
is no guaranteed residual value associated with the leased devices. The receivables generally have
terms of five years and are collateralized by a security interest in the related equipment. The
Company records subscriber revenue on these leased devices as the ongoing service is provided over
the term of the related lease agreement and recognizes interest income
9
as the lease payments are
billed to the customers. Future minimum lease payments to the Company under non-cancelable
sales-type leases as of March 31, 2008 are as follows (in thousands):
|
|
|
|
|
Years ending September 30,
|
|
|
|
|
2008
|
|
$
|
586
|
|
2009
|
|
|
932
|
|
2010
|
|
|
347
|
|
2011
|
|
|
53
|
|
|
|
|
|
Total minimum lease payments
|
|
|
1,918
|
|
Less: amount representing interest (at 11.71%)
|
|
|
(204
|
)
|
|
|
|
|
Present value of net minimum sales-type lease payments
|
|
|
1,714
|
|
Less: current installments of investment in sales-type leases
|
|
|
(955
|
)
|
|
|
|
|
Investment in sales-type leases, excluding current installments
|
|
$
|
759
|
|
|
|
|
|
Interest income from sales-type leases was approximately $37,000 for the two month period
subsequent to the acquisition of GeoLogic Solutions, Inc.
Other Assets
Included in other assets are debt financing costs which are amortized to interest expense over the
term of the related financing agreement on a straight-line basis, which approximates the interest
method. The carrying value of our prepaid debt financing costs is approximately $833,000, net of
accumulated amortization of $42,000 as of March 31, 2008.
Equipment and Leasehold Improvements
Equipment is stated at cost and depreciated using the straight-line method over estimated useful
lives of approximately three to seven years. Leasehold improvements are depreciated over the
shorter of the lease term or their estimated useful lives (three to fifteen years).
Equipment and leasehold improvements consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Office furniture and equipment
|
|
$
|
3,886
|
|
|
$
|
3,353
|
|
Leasehold improvements
|
|
|
2,055
|
|
|
|
78
|
|
Engineering and manufacturing equipment
|
|
|
683
|
|
|
|
574
|
|
Operating-lease equipment
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,748
|
|
|
|
4,005
|
|
Less: accumulated depreciation
|
|
|
(2,678
|
)
|
|
|
(2,422
|
)
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net
|
|
$
|
4,070
|
|
|
$
|
1,583
|
|
|
|
|
|
|
|
|
Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
10
impairment loss would be
recognized when the sum of the undiscounted future net cash flows expected to result from the use
of the asset and its eventual disposition is less than its carrying amount.
Goodwill and Intangible Assets
As of March 31, 2008, the Company had a goodwill balance of $1.3 million that resulted from the
Companys acquisition of GeoLogic Solutions, Inc. on January 31, 2008. The Company records
goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair
value. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets,
the Company will
review goodwill for impairment at least annually or more frequently if an event occurs indicating
the potential for impairment. Intangible assets are carried at cost less accumulated amortization.
The Company amortizes the cost of identified intangible assets on a straight-line basis over their
expected economic lives. In accordance with SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, the Company reviews intangible assets that have finite useful lives
when an event occurs indicating the potential for earlier impairment.
The Company reviews for impairment using facts or circumstances, either internal or external,
indicating that it may not recover the carrying value of the asset. The Company measures
impairment losses related to long-lived assets based on the amount by which the carrying amounts of
these assets exceed their fair values. The Company measures fair value under SFAS No. 144, which
is generally based on the present value of estimated future cash flows. The Companys analysis is
based on available information and on assumptions and projections it considers to be reasonable and
supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on
the Companys best estimate of projected future cash flows. If necessary, the Company performs
subsequent calculations to measure the amount of the impairment loss based on the excess of the
carrying value over the fair value of the impaired assets.
Based on the preliminary allocation of the purchase price, intangible assets subject to
amortization were as follows as of March 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Life (years)
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired customer contracts
|
|
|
8.0
|
|
|
$
|
13,500
|
|
|
$
|
(281
|
)
|
|
$
|
13,219
|
|
Other intangibles
|
|
|
6.3
|
|
|
|
158
|
|
|
|
(5
|
)
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
13,658
|
|
|
$
|
(286
|
)
|
|
$
|
13,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Future amortization expense, as of March 31, 2008, is expected to be as follows (in thousands):
|
|
|
|
|
Years Ending September 30,
|
|
|
|
|
2008
|
|
$
|
857
|
|
2009
|
|
|
1,713
|
|
2010
|
|
|
1,713
|
|
2011
|
|
|
1,713
|
|
2012
|
|
|
1,713
|
|
Thereafter
|
|
|
5,663
|
|
|
|
|
|
Total expected amortization expense
|
|
$
|
13,372
|
|
|
|
|
|
Product Warranties
The Company sells its hardware products with a limited warranty, with an option to purchase
extended warranties. The Company provides for estimated warranty costs at the time of sale and for
other costs associated with specific items at the time their existence and amount are determinable.
Factors affecting the Companys product warranty liability include the number of units sold,
historical and anticipated rates of claims and cost per claim. The Company periodically assesses
the adequacy of its product warranty liability based on changes in these factors.
At March 31, 2008 and September 30, 2007, the Company had an accrual for product warranties
included in accrued expenses of $1,085,000 and $911,000, respectively.
Shipping Costs
Shipping costs, which are classified as a component of cost of goods sold, were $113,000 and
$86,000 for the three months ended March 31, 2008 and 2007 and $193,000 and $156,000 for
the six months ended March 31, 2008 and 2007, respectively. Customer billings related to shipping
fees are reported as net sales.
Advertising Costs
Advertising costs consist primarily of ad campaigns, catalog brochures, promotional items and trade
show expenses and are expensed as incurred. Advertising costs, which are included in selling,
general and administrative expenses, were $129,000 and $29,000 for the three months ended March 31,
2008 and 2007 and $289,000 and $193,000 for the six months ended March 31, 2008 and 2007,
respectively.
Research and Development Costs
Research and development expenses are charged to expense as incurred. Such expenses include
product development costs which have not met the capitalization criteria of Statement of Financial
Accounting Standards SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed
. No research and development costs were capitalized during the six month
ended March 31, 2008, and $160,000 were capitalized during the six months ended March 31, 2007.
Income taxes
The Company accounts for income taxes following the provisions of SFAS No. 109,
Accounting for
Income Taxes
. SFAS No. 109 requires that deferred income taxes be recognized for the
12
future tax
consequences associated with differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end, based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect taxable earnings. The
effect of changes in tax rates is recognized in the period in which the rate change occurs.
Valuation allowances are established by the Company when necessary to reduce deferred tax assets to
the amount more likely than not to be realized. The Company has provided a full valuation
allowance against the net deferred tax assets as of March 31, 2008 and September 30, 2007.
Recently Issued Accounting Standards
Accounting for Uncertainty in Income Taxes (FIN 48)
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48, an interpretation of FASB Statement No. 109 Accounting for Income Taxes,
prescribes a recognition threshold and measurement process for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on the de-recognition, classification, accounting in interim periods and
disclosure requirements for uncertain tax positions. The Company adopted the provisions of FIN 48
effective for the fiscal year beginning October 1, 2007. FIN 48 had no material effect on the
Companys consolidated financial statements.
Fair Value Measurements (SFAS 157)
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements but does not require
any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. The
Company is determining what impact, if any, this Statement will have on the financial statements.
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities,
which permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the impact, if any, the
adoption of SFAS No. 159 will have on its financial statements.
Note 2. GeoLogic Solutions, Inc. Acquisition
On January 31, 2008, the Company acquired all of the outstanding stock of GeoLogic Solutions, Inc.
(GeoLogic). The results of operations of GeoLogic have been included in the Companys
consolidated results of operations since the date of acquisition. GeoLogic provides mobile
communications and tracking systems for the transportation industry. The acquisition enhanced the
Companys product portfolio and broadened its addressable market.
13
The total purchase price included $15.3 million in cash, 90,689 shares of common stock (valued at
$0.3 million) of the Company and $2.0 million in debt obligations to the seller of GeoLogic
Solutions, Inc. The Company also incurred $1.4 million of transaction costs in connection with the
acquisition. The Company incurred additional debt of $16.2 million in connection with the
acquisition of GeoLogic.
The components of the purchase price and the preliminary allocation to the assets and liabilities
based on their estimated fair values at the date of acquisition are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
15,277
|
|
Debt obligations
|
|
|
|
|
|
|
2,000
|
|
Common stock
|
|
|
|
|
|
|
300
|
|
Transaction costs
|
|
|
|
|
|
|
1,420
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
$
|
18,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
557
|
|
|
|
|
|
Other current assets
|
|
|
6,777
|
|
|
|
|
|
Property and equipment
|
|
|
578
|
|
|
|
|
|
Other assets
|
|
|
1,690
|
|
|
|
|
|
Current liabilities
|
|
|
(5,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
|
|
|
|
4,194
|
|
Acquired customer contracts
|
|
|
|
|
|
|
13,500
|
|
Goodwill
|
|
|
|
|
|
|
1,303
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
18,997
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma results of operations for the three and six month periods ended March 31, 2008
and 2007, as if the purchase had occurred at the beginning of the periods indicated are as follows
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
For the Six Months Ended
|
|
|
Ended March 31,
|
|
March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Net sales
|
|
$
|
13,628
|
|
|
$
|
13,560
|
|
|
$
|
26,102
|
|
|
$
|
26,870
|
|
Net loss to common shareholders
|
|
$
|
(2,860
|
)
|
|
$
|
(3,991
|
)
|
|
$
|
(6,419
|
)
|
|
$
|
(10,412
|
)
|
Net loss per common share basic and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.50
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(1.31
|
)
|
Weighted average common and common
share equivalents basic and diluted
|
|
|
8,397
|
|
|
|
8,012
|
|
|
|
8,325
|
|
|
|
7,974
|
|
Pro forma adjustments relate to amortization of intangible assets, interest expense resulting from
acquisition financing and certain other adjustments. The above unaudited pro forma consolidated
results of operations are for comparative purposes only and are not necessarily
14
indicative of
results that would have occurred had the acquisition been consummated as of the beginning of the
periods presented, nor are they necessarily indicative of future results.
Note 3. Stock-Based Compensation
In February 2007 the Company adopted the 2007 Long Term Incentive and Stock Option Plan (the 2007
Plan). The 2007 Plan permits the granting of incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified options that do not
meet the requirements of Section 422. Stock appreciation rights and restricted stock awards may
also be granted under the 2007 Plan. A total of 500,000 shares of the Companys common stock were
originally reserved for issuance pursuant to options granted or shares awarded under the 2007 Plan.
The 2007 Plan has an evergreen provision in which the maximum number of Shares that may be issued
under the 2007 Plan shall be cumulatively increased on January 1, 2008 and on each January 1
thereafter for nine years by the lesser of (i) 500,000 Common Shares, (ii) 3% of the Companys
outstanding Common Shares, on an as-converted basis, as of the preceding December 31 and (iii) a
number of Common Shares determined by the Board or Committee. The Company has 103,149 shares
authorized and available for future equity awards as of March 31, 2008. Generally, the options
that are granted under the 2007 Plan are exercisable for a period of five to ten years from the
date of grant and vest over a period of up to three years from the date of grant.
Stock Options
Effective October 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123(R) (SFAS 123(R)),
Share-Based Payment,
which requires the
measurement and recognition of compensation expense for all share-based payment awards to employees
and directors based on estimated fair values. SFAS 123(R) superseded the Companys previous
accounting methodology using the intrinsic value method under APB Opinion No. 25.
The Company adopted SFAS 123(R) using the modified prospective transition method. Under this
transition method, compensation expense is recognized for periods subsequent to adoption date for
all share-based awards granted prior to, but not yet vested, as of September 30, 2006, based on the
grant date fair value estimated in accordance with the original provision of SFAS 123 and
compensation expense for all share-based awards granted subsequent to September 30, 2006 based on
the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In
accordance with the modified prospective transition method, the Companys financial statements for
periods prior to adoption have not been restated to reflect the impact of SFAS 123(R).
15
The fair value of each option is estimated at the grant date using the Black-Scholes option-pricing
model. The weighted average fair value at the date of grant and the assumptions used to determine
such values are indicated in the following table (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Number of shares granted
|
|
|
275
|
|
|
|
544
|
|
|
|
296
|
|
|
|
854
|
|
Fair value
|
|
$
|
0.80
|
|
|
$
|
1.84
|
|
|
$
|
0.80
|
|
|
$
|
1.82
|
|
Risk-free interest rate
|
|
|
2.12
|
%
|
|
|
4.68
|
%
|
|
|
2.22
|
%
|
|
|
4.65
|
%
|
Expected volatility
|
|
|
31.13
|
%
|
|
|
35.17
|
%
|
|
|
30.97
|
%
|
|
|
35.67
|
%
|
Expected life (in years)
|
|
|
3.7
|
|
|
|
4.4
|
|
|
|
3.7
|
|
|
|
4.1
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimates the volatility of the common stock at the date of grant based on a historical
volatility rate, consistent with SFAS 123(R) and Securities and Exchange Commission Staff
Accounting Bulletin No. 107 (SAB 107). The decision to use historical volatility was based upon
the lack of traded common stock options. The expected term is estimated consistent with the
simplified method identified in SAB 107, whose use was extended by Securities and Exchange
Commission Staff Accounting Bulletin No. 110 (SAB 110). The simplified method calculates the
expected term as the average of the vesting and contractual terms of the award.
The risk-free interest rate assumption is based on observed interest rates appropriate for the term
of the options. The Company uses historical data to estimate pre-vesting option forfeitures and
records share-based compensation expense only for those awards that are expected to vest. The fair
value of stock options are amortized over the vesting period of the awards utilizing a
straight-line method.
The following table summarizes information relating to outstanding stock option activity for the
period ended March 31, 2008 (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2007
|
|
|
1,232
|
|
|
$
|
5.01
|
|
Granted
|
|
|
296
|
|
|
|
3.01
|
|
Exercised
|
|
|
(15
|
)
|
|
|
2.98
|
|
Cancelled
|
|
|
(158
|
)
|
|
|
4.29
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2008
|
|
|
1,355
|
|
|
$
|
4.68
|
|
|
|
|
|
|
|
|
|
|
16
Total intrinsic value of stock options exercised during the six months ended March 31, 2008 was
$2,000. The intrinsic value of stock options outstanding and stock options outstanding and
exercisable was $113,000 and $10,000 as of March 31, 2008, respectively. Information regarding
options outstanding and exercisable at March 31, 2008 is as follows (number of shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Range of
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
exercise
|
|
Number of
|
|
Contractual Life
|
|
Weighted Average
|
|
Number of
|
|
Contractual Life
|
|
Weighted Average
|
price
|
|
Shares
|
|
(Years)
|
|
Exercise Price
|
|
Shares
|
|
(Years)
|
|
Exercise Price
|
$2.85 $2.99
|
|
|
270
|
|
|
|
5.3
|
|
|
$
|
2.99
|
|
|
|
25
|
|
|
|
9.7
|
|
|
$
|
2.99
|
|
$3.03 $3.99
|
|
|
56
|
|
|
|
3.5
|
|
|
|
3.70
|
|
|
|
31
|
|
|
|
1.2
|
|
|
|
3.78
|
|
$4.33 $4.98
|
|
|
96
|
|
|
|
4.8
|
|
|
|
4.79
|
|
|
|
37
|
|
|
|
6.0
|
|
|
|
4.92
|
|
$5.03 $5.40
|
|
|
933
|
|
|
|
4.5
|
|
|
|
5.22
|
|
|
|
392
|
|
|
|
4.5
|
|
|
|
5.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,355
|
|
|
|
4.7
|
|
|
$
|
4.68
|
|
|
|
485
|
|
|
|
4.7
|
|
|
$
|
4.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognizes compensation expense ratably over the vesting period of the options.
Compensation expense was $218,000 and $143,000 for the three month periods ended March 31, 2008 and
2007; and $372,000 and $212,000 for the six months month periods ended March 31, 2008 and 2007,
respectively. As of March 31, 2008, there was approximately $1,097,000 of total unrecognized
compensation costs related to stock option awards that are expected to be recognized over a
weighted average period of 2.1 years.
Restricted Stock Awards
The Company currently grants restricted shares of common stock in addition to stock options as part
of its long-term incentive compensation to employees. The fair value of restricted stock awards is
determined based on the closing market price of our stock on the date of grant. Restricted stock
awards vests over a period of one to six years for employees and vests immediately for directors.
Shares granted may be sold once vested.
The following table summarizes information relating to restricted stock activity as of March 31,
2008 (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
Shares
|
|
Value
|
|
|
|
|
|
|
|
|
|
Restricted stock outstanding at September 30, 2007
|
|
|
361
|
|
|
$
|
5.22
|
|
Granted
|
|
|
138
|
|
|
|
3.00
|
|
Vested
|
|
|
(127
|
)
|
|
|
4.95
|
|
Forfeited
|
|
|
(10
|
)
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
|
Restricted stock outstanding at March 31, 2008
|
|
|
362
|
|
|
$
|
4.47
|
|
|
|
|
|
|
|
|
|
|
The Company recognizes compensation expense ratably over the vesting period of the restricted
stock. Compensation expense was $283,000 and $378,000 for the three months ended March 31,
2008 and 2007; and $511,000 and $715,000 for the six months ended March 31, 2008 and 2007,
respectively. The weighted average grant date fair value of restricted stock awards was $3.00 and
$5.38 for the six months ended March 31, 2008 and 2007, respectively.
17
At March 31, 2008, the Company had $1,045,000 of unrecognized compensation costs related to
non-vested restricted stock awards that are expected to be recognized over a weighted average
period of 2.3 years.
Note 4. Commitments
Leases
The Company leases its office, warehouse, and certain office equipment under non-cancelable
operating leases. The facility leases require that the Company pay a portion of the real estate
taxes, maintenance, utilities and insurance.
Approximate future minimum rental commitments, excluding common area costs under these
non-cancelable operating leases, are as follows (in thousands):
|
|
|
|
|
Years ending September 30,
|
|
|
|
|
2008
|
|
$
|
1,017
|
|
2009
|
|
|
781
|
|
2010
|
|
|
795
|
|
2011
|
|
|
604
|
|
2012
|
|
|
421
|
|
Thereafter
|
|
|
993
|
|
|
|
|
|
Total
|
|
$
|
4,611
|
|
|
|
|
|
Rental expense, including common area costs, was $329,000 and $76,000 for the three months ended
March 31, 2008 and 2007, respectively, and $496,000 and $147,000 for the six months ended March 31,
2008 and 2007, respectively.
401(k) Plan
The Company has a 401(k) plan covering substantially all employees and the plan is operated on a
calendar year basis. The Company provides an employer matching contribution equal to 50% of an
employees contribution for employee deferrals of up to 6% of their compensation. Matching
contributions were $68,000 and $36,000 for the three months ended March 31, 2008 and 2007,
respectively, and $108,000 and $71,000 for the six months ended March 31, 2008 and 2007,
respectively.
Note 5. Financing Arrangements
In connection with the financing of the acquisition of GeoLogic Solutions, Inc., the Company
entered into a three-year secured credit facility with Silicon Valley Bank (SVB) consisting of a
$10.0 million revolving line of credit bearing interest at a floating rate equal to 0.5% over SVBs
Prime Rate. The credit facility is secured by substantially all the assets of the Company.
Interest is paid monthly in arrears, and the entire amount of any outstanding principal is due at
maturity on January 30, 2011. The credit agreement contains certain financial covenants which impose a
minimum level of net worth and fixed charge coverage ratio.
18
Also in connection with the acquisition of GeoLogic Solutions, Inc., the Company entered into a
four year secured credit facility consisting of an $8.0 million term loan with Partners for Growth
II, L.P. (PFG) bearing interest at a fixed rate of 14.5%, subject to adjustment under various
circumstances. Under the terms of the loan agreement, the Company must comply with financial
covenants specifying minimum levels of net worth and fixed charge coverage ratio. The loan is
secured by substantially all the assets of the Company and is subordinate to the security interest
of SVB. Interest is payable monthly, and the Company is required to make periodic principal
payments on specified dates over the term of the loan with the remainder of the unpaid principal
due at maturity on January 31, 2012.
In addition to the preceding sources of financing, the Company also issued $2.0 million of debt
obligations to the seller (the Seller Notes) in conjunction with the acquisition of GeoLogic.
The Seller Notes bear interest at an annual rate of 11% and mature in full on January 31, 2009. A
portion of the Seller Notes with a principal amount of $525,000 are convertible into common stock
of the Company upon maturity, in the event the Company does not repay such Seller Notes in full.
The conversion amount for such Seller Notes is $3.308 per share. The Seller Notes are subordinate
to the security interests of SVB and PFG.
Long- term obligations and notes payable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Senior secured revolving credit facility
|
|
$
|
8,223
|
|
|
$
|
|
|
Secured term loan
|
|
|
8,000
|
|
|
|
|
|
Capitalized leases
|
|
|
292
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
16,515
|
|
|
|
381
|
|
Less current maturities
|
|
|
128
|
|
|
|
161
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
$
|
16,387
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated notes
|
|
$
|
1,475
|
|
|
$
|
|
|
Subordinated convertible notes
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
2,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Note 6. Shareholders Equity
Common Stock
The Company is authorized to issue up to 25,000,000 shares of common stock.
Preferred Stock
The Company has authorized an undesignated class of preferred stock of 10,000,000 shares. The Board
of Directors can issue preferred stock in one or more series and fix the terms of such stock
without shareholder approval. Preferred stock may include the right to vote as a series on
19
particular matters, preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions.
Series B
The Companys Board of Directors has authorized the sale of up to 1,700,000 shares of Series B
Preferred Stock through a private placement. In December 2003, the Company has sold 1,613,000 shares of Series B
Preferred Stock for $4,097,000, or $2.54 per share. Each share of the Preferred Stock is
convertible into one share of the Companys common stock. The price per share of the Series B
Preferred Stock and the conversion price for the common stock were equal to the market value of
the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of
the definitive agreements. The Series B Preferred Stock pays an annual cumulative dividend of 4%
of the original issue price (payable semi-annually). The dividend is payable in additional shares
of Series B Preferred Stock rather than cash, at the option of the holders, and has a
non-participating preferred liquidation right equal to the original issue price plus accrued unpaid
dividends.
For the six months ended March 31, 2008 and 2007, the Company issued 37,000 and 36,000 shares,
respectively, of Series B Preferred Stock for payment of accrued dividends. Based on the market
value of the Companys common stock on the date of the dividend payment, the payment of the
dividend in additional shares of Series B Preferred Stock resulted in a non-cash dividend of
$137,000 and $185,000, for the six months ended March 31, 2008 and 2007, respectively.
The Series B Preferred Stock is redeemable at the option of the holder at 100% of the original
purchase price plus accrued and unpaid dividends at any time after five years from the date of
issuance, or at any time if there is a significant adverse judgment against the Company, the
Company defaults on its debts or files for bankruptcy, or in the event of a change of control.
However, the Company may decline to redeem any or all of the Preferred Stock at its sole option and
discretion, and in such case the annual cumulative dividend on the Series B Preferred Stock will
increase from 4% to 10%. The Company may redeem the Series B Preferred Stock at its option after
five years from the date of issuance if the market price of its common stock is greater than three
times the conversion price on each of the sixty consecutive days prior to the redemption date.
Series C
The Companys Board of Directors has authorized the sale of up to 1,400,000 shares of Series C
Preferred Stock through a private placement. In September 2005, the Company has sold 1,269,000 shares of Series C
Preferred Stock for $5,000,000, or $3.94 per share. Each share of the Series C Preferred Stock is
convertible into one share of the Companys common stock. The price per share of Series C
Preferred Stock and the conversion price for the common stock is equal to the market value of the
common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the
definitive agreements. The Series C Preferred Stock does not pay a dividend,
unless the Company declines to redeem the stock upon demand of the holders after an Acceleration
Event (as defined in the Certificate of Designation of the Series C Preferred Stock). In that
case, the Series C Preferred Stock pays an annual cumulative dividend of 4% of the original issue
price (payable in cash). The Series C Preferred Stock has a non-participating liquidation right
equal to the original issue price, plus accrued unpaid dividends which are senior
20
to our common
stock and junior to the Series B Preferred Stock. The Company may redeem the Series C Preferred
Stock at its option after five years from the date of issuance at the original issue price, plus
accrued unpaid dividends, if the market value of the common stock is at least three times the then
effective conversion price for a specified period.
Series D
The Companys Board of Directors has authorized the sale of up to 1,600,000 shares of Series D
Preferred Stock through a private placement. In June 2007, the Company has sold 1,567,000 shares of Series D
Preferred Stock for $6,000,000, or $3.83 per share. Each share of the Series D Preferred Stock is
convertible into one share of the Companys common stock. The price per share of Series D
Preferred Stock and the conversion price for the common stock is equal to the market value of the
common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the
definitive agreements. The Series D Preferred Stock does not pay a dividend, unless the Company
declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in
the Certificate of Designation of the Series D Preferred Stock). In that case, the Series D
Preferred Stock pays an annual cumulative dividend of 4% of the original issue price (payable in
cash). The Series D Preferred Stock has a non-participating liquidation right equal to the
original issue price, plus accrued unpaid dividends which are senior to our common stock and junior
to the Series B and Series C Preferred Stock. The Company may redeem the Series D Preferred Stock
at its option after five years from the date of issuance at the original issue price, plus accrued
unpaid dividends, if the market value of the common stock is at least three times the then
effective conversion price for a specified period.
Common Stock Warrants
The Company has issued warrants for the purchase of common stock to directors, consultants and
placement agents. Compensation expense associated with the warrants has not been material. The
Company has also issued warrants as a component of preferred stock offerings and debt financing.
The following table summarizes information relating to
outstanding common stock warrants as of
March 31, 2008 (number of shares and intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Contractual Life
|
|
Aggregate Intrinsic
|
|
|
Number of Shares
|
|
Exercise Price
|
|
(Years)
|
|
Value
|
Warrants outstanding at September 30,
2007
|
|
|
1,538
|
|
|
$
|
3.61
|
|
|
|
2.89
|
|
|
$
|
44
|
|
Granted
|
|
|
457
|
|
|
|
3.31
|
|
|
|
4.84
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at March 31, 2008
|
|
|
1,995
|
|
|
$
|
3.54
|
|
|
|
2.95
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008, 457,000 warrants were issued in connection with the
debt incurred to finance the acquisition of GeoLogic Solutions, Inc. As of March 31, 2008,
1,995,000 common stock warrants were exercisable.
21
Note 7. Net Loss Per Share
Basic net loss per share is computed based on dividing the net loss applicable to common
shareholders by the weighted average number of common shares outstanding less unvested restricted
stock for the period. Diluted net loss per share reflects the potential dilution that could occur
if securities or other obligations to issue common stock such as options, warrants or convertible
preferred stock, were exercised or converted into common stock that then shared in the
earnings/(losses) of the Company. For all periods presented, diluted net loss per share is equal
to basic net loss per share because the effect of including such securities or obligations would
have been anti-dilutive.
At March 31, 2008 and 2007, the Company had options and warrants outstanding to purchase a total of
3,350,786 and 2,267,000 shares of common stock, at a weighted-average exercise price of $4.00 and
$4.33, respectively. Because the Company incurred net losses for the three and six month periods
ended March 31, 2008 and 2007, the inclusion of potential common shares in the calculation of
diluted net loss per common share would have an anti-dilutive effect.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward-looking Statements
Except for the historical information contained herein, the matters discussed in this Report on
Form 10-Q are forward-looking statements involving risks and uncertainties that could cause actual
results to differ materially from those in such forward-looking statements. Numerous factors,
risks and uncertainties affect the Companys operating results and could cause the Companys actual
results to differ materially from forecasts and estimates or from any other forward-looking
statements made by, or on behalf of, the Company, and there can be no assurance that future results
will meet expectations, estimates or projections. Risks and uncertainties about us include, but
are not limited to, the following:
|
|
|
although we expect to incur operating losses in the current fiscal
year, these losses may continue beyond the expected timeframe or in
excess of the expected magnitude, and we may be dependent upon
external investment to support our operations during periods in which
we incur operating losses;
|
|
|
|
|
we may encounter unexpected costs or difficulties relating to the
integration of the XATA and GeoLogic businesses;
|
|
|
|
|
we may be unable to adapt to technological change quickly enough to
grow or to retain our customer base;
|
|
|
|
|
we will continue to be dependent upon positioning systems and
communication networks owned and controlled by others, and
accordingly, their problems may adversely impact us;
|
|
|
|
|
for the foreseeable future, we are dependent upon the continued
receipt and fulfillment of
|
22
|
|
|
new orders for our current products;
|
|
|
|
|
our growth and profitability depend on our timely introduction and
market acceptance of new products, our ability to continue to fund
research and development activities, and our ability to establish and
maintain strategic partner relationships.
|
Further information regarding these and other risks is included in Risk Factors in Part 1, Item
1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2007, in this Form
10-Q and in our other filings we make with the SEC.
Overview
XATA is a leading provider of fleet management solutions to the truck transportation industry. Our
software-as-a-service (SaaS) fleet solution and value-added services enable customers to enhance
the productivity of fleet operations across the entire supply chain, resulting in reduced costs,
improved regulatory compliance and improved driver safety.
Over the past two decades, XATA has partnered with the nations largest private fleets and leasing
companies, including Sysco, Kelloggs snack division, Amoco, Coca Cola and Penske, to find and
develop technologies that provide information about their fleets and transform that data into
actionable intelligence.
On January 31, 2008, XATA completed its acquisition of GeoLogic Solutions, which provides the
commercial trucking industry with wireless asset management solutions in the for-hire segment of
the over-the-road transportation sector. GeoLogics mobile communications and tracking system,
MobileMax (MobileMax), has approximately 35,000 licensed users across North America.
XATA pioneered innovations, such as learned standards and paperless driver logs. We engineer
software that improves overall transportation operations and integrates fleet data with back-office
billing, payroll and routing systems.
Technology, People, Processes
XATA takes a three-prong approach to meeting its customers fleet management needs:
|
|
|
Technology.
Our web-based, on-demand scalable software includes a variety of web-based
enterprise applications, including XATANET
®
, our flagship application. XATANET
provides critical real-time information about our customers fleets, allows for paperless
driver logs and provides summary and granular reports on driver and vehicle performance. XATANET can also integrate with back-office applications, for a seamless flow
of information, and our software works with a variety of in-cab communications devices.
|
|
|
|
|
People.
Several XATA employees have been with our company for more than 15 years,
providing a thorough understanding of the trucking industry. With employee expertise in
safety, fleet management and technology, XATA is able to provide consultation services to
help organizations implement best practices for fleet productivity and develop specific
|
23
|
|
|
customer hardware and reporting requirements.
|
|
|
|
|
Processes.
All XATA processes are designed to make managing fleets easier. Drawing on
hundreds of successful implementations with a wide variety of fleets including
multibillion-dollar organizations, XATA carefully plans each phase of the implementation
and follows well established methodologies. The process begins with assessing our
customers objectives. Then, we develop a detailed implementation schedule that includes
all aspects of the project, from implementation to conversion, integration, training and
problem solving.
|
Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of our financial statements and are
based upon managements current judgments. Certain accounting policies, methods and estimates are
particularly important because of their significance to the financial statements. Note 1 of the
Notes to Financial Statements includes a summary of the significant accounting policies and methods
we use. The following is a discussion of what we believe to be the most critical of these policies
and methods.
Revenue Recognition.
We derive our revenue from sales of hardware, software and related services,
and from application service contracts. We recognize revenue in accordance with Statement of
Position (SOP) 97-2,
Software Revenue Recognition
, as amended by SOP 98-9, Modification of SOP
97-2,
Software Revenue Recognition with Respect to Certain Transactions
, and Securities and
Exchange Commission Staff Accounting Bulletin (SAB) 104,
Revenue Recognition in Financial
Statements
. Software revenue is recognized under SOP 97-2 and SAB 104 when (i) persuasive evidence
of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has
occurred, as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or
determinable and payable within twelve months, and (iv) collectibility is probable and supported by
credit checks or past payment history. Pursuant to certain contractual arrangements, revenues are
recognized for completed systems held at our warehouse pending the receipt of delivery instructions
from the customer.
With regard to software arrangements involving multiple elements, the Company allocates revenue to
each element based on the relative fair value of each element. The Companys determination of fair
value of each element in multiple-element arrangements is based on vendor-specific objective
evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged
when the same element is sold separately. The Company has analyzed all of the elements included in
its multiple-element arrangements and has determined that it has sufficient VSOE to allocate
revenue to consulting services and post-contract customer support (PCS) components of its license arrangements. The Company sells its consulting services
separately, and has established VSOE on this basis. VSOE for PCS components are determined based
upon the customers annual renewal rates for these elements. Accordingly, assuming all other
revenue recognition criteria are met, revenue from licenses is recognized upon delivery, and
revenue from PCS components are recognized ratably over the applicable term, typically one year.
24
Software sales contracts for OpCenter and MobileMax, as well as sales contracts for XATANET that
were entered into prior to January 1, 2006 include software application service arrangements. The
terms of those contracts did not meet the requirements described in Emerging Issues Task Force
(EITF) 00-03,
Application of AICPA Statement of Position 97-2 to Arrangements That Include the
Right to Use Software Stored on Another Entitys Hardware
, to account for it under SOP 97-2 and SAB
104 and resulted in the recognition of all revenue ratably over the term of the agreement. During
the fiscal year ending September 30, 2006, we changed the terms of all new XATANET contracts, such
that all the requirements of EITF 00-03 related to software delivery are met and the contracts are
accounted for under SOP 97-2. For these new contracts, revenue is recognized based on the multiple
element arrangement accounting described above.
Allowance for doubtful accounts and sales returns.
We grant credit to customers in the normal
course of business. The majority of our accounts receivable and investment in sales-type leases
receivable are due from companies with fleet trucking operations in a variety of industries. In
general, we do not require collateral or other security to support accounts receivable, although
sales-type leases receivable are secured by a retained security interest in the leased equipment.
Accounts receivable are typically due from customers within 30 days and are stated at amounts due
from customers net of an allowance for doubtful accounts and sales returns. Accounts receivable
outstanding longer than the contractual payment terms are considered past due. To reduce credit
risk, management performs ongoing evaluations of its customers financial condition. We determine
the adequacy of the allowance for doubtful accounts by considering a number of factors, including
the length of time trade receivables are past due, our previous loss history, the customers
current ability to pay its obligation, and the condition of the general economy and the industry as
a whole. The bad debt expense is included as a selling, general and administrative expense. The
balance of the allowance for doubtful accounts at March 31, 2008 and September 30, 2007 was
$669,000 and $130,000, respectively.
We determine our allowance for sales returns by considering several factors, including history of
prior sales credits issued. We regularly assess the allowance for sales returns and increase it as
needed. When we accept a product return or issue a sales credit for which we had specifically
increased the allowance, we write-off the associated accounts receivable and decrease the allowance
for sales returns. At March 31, 2008 and September 30, 2007, the Company had an allowance for
sales returns of $104,000 and $126,000, respectively.
Goodwill and Intangible Assets.
The Company records goodwill when the purchase price of net
tangible and intangible assets acquired exceeds their fair value. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets,
the Company reviews goodwill for impairment at least
annually or more frequently if an event occurs indicating the potential for impairment. Intangible assets are carried at cost less accumulated amortization. The Company amortizes the
cost of identified intangible assets on a straight-line basis over their expected economic lives.
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
,
the Company reviews intangible assets that have finite useful lives when an event occurs indicating
the potential for earlier impairment.
25
The Company reviews for impairment using facts or circumstances, either internal or external,
indicating that it may not recover the carrying value of the asset. The Company measures
impairment losses related to long-lived assets based on the amount by which the carrying amounts of
these assets exceed their fair values. The Company measures fair value under SFAS No. 144, which
is generally based on the present value of estimated future cash flows. The Companys analysis is
based on available information and on assumptions and projections it considers to be reasonable and
supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on
the Companys best estimate of projected future cash flows. If necessary, the Company performs
subsequent calculations to measure the amount of the impairment loss based on the excess of the
carrying value over the fair value of the impaired assets.
Product Warranties
. We sell our hardware products with a limited warranty, with an option to
purchase extended warranties. We provide for estimated warranty costs at the time of sale and for
other costs associated with specific items at the time their existence and amount are determinable.
Factors affecting the product warranty liability include the number of units sold, historical and
anticipated rates of claims and cost per claim. We periodically assess the adequacy of the product
warranty liability based on changes in these factors. At March 31, 2008 and September 30, 2007,
the Company had an accrual for product warranties of $1,085,000 and $911,000, respectively.
Capitalized system development costs
. System development costs incurred after establishing
technological feasibility are capitalized as capitalized system development costs in accordance
with Statement of Financial Accounting Standards No. 86, (SFAS No. 86),
Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed
. Costs that are capitalized are
amortized to cost of goods sold beginning when the product is first released for sale to the
general public. Amortization is at the greater of the amount computed using the ratio of current
gross revenues for the product to the total of current and anticipated future gross revenues or the
straight-line method over the estimated economic life of the product (two to five years).
Research and development costs.
We charge expenditures for research and development activities to
expense as incurred. Such expenses include product development costs and costs related to the
Companys internally developed software systems, which have not met the capitalization criteria of
Statement of Financial Accounting Standards SFAS No. 86,
Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed.
Income taxes
. We account for income taxes following the provisions of SFAS No. 109,
Accounting for
Income Taxes
. SFAS No. 109 requires that deferred income taxes be recognized for the future tax
consequences associated with differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected to affect taxable
earnings. The effect of changes in tax rates is recognized in the period in which the rate change
occurs. Valuation allowances are established when necessary to reduce deferred tax assets to the
amount more likely than not to be realized. We have provided a full valuation allowance against
the net deferred tax assets as of March 31, 2008 and September 30, 2007.
26
Results of Operations for the three months and six months ended March 31, 2008 and 2007
The following table sets forth certain Statements of Operations data as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
50.5
|
%
|
|
|
42.8
|
%
|
|
|
49.2
|
%
|
|
|
44.5
|
%
|
Selling, general and administrative
|
|
|
47.5
|
%
|
|
|
42.1
|
%
|
|
|
47.8
|
%
|
|
|
40.8
|
%
|
Research and development
|
|
|
11.9
|
%
|
|
|
12.5
|
%
|
|
|
12.5
|
%
|
|
|
13.8
|
%
|
Operating loss
|
|
|
(8.9
|
%)
|
|
|
(11.9
|
%)
|
|
|
(11.1
|
%)
|
|
|
(10.1
|
%)
|
Net loss
|
|
|
(11.0
|
%)
|
|
|
(10.7
|
%)
|
|
|
(11.9
|
%)
|
|
|
(9.0
|
%)
|
Net Sales
Net sales increased 48.6% to $12.1 million for the three months ended March 31, 2008 compared to
$8.2 million for the same period in fiscal 2007. The increase in sales for the three months ended
March 31, 2008 was driven by a 45.3% increase in XATANET subscription revenue and two months of
sales relating to the acquisition of GeoLogic Solutions, Inc. Comparable net sales, excluding
GeoLogic Solutions, Inc. sales, for the three months ended March 31, 2008 increased by 8.9% or $0.7
million versus the same period of fiscal 2007 as the Companys legacy OpCenter product sales
continue to decline consistent with expectations as new and existing customers launch or migrate to
XATANET systems. Net sales derived from recurring revenue increased 122.1% for the three months
ended March 31, 2008 compared to the same period in fiscal 2007, including recurring revenue
associated with the GeoLogic acquisition. Sales from recurring products continue to increase as
the result of increasing unit sales and low customer attrition. For the three months ended March
31, 2008, recurring revenue contributed 47.9% of total revenue compared to 32.0% of total revenue
for the comparable period in fiscal 2007.
Net sales increased 24.4% to $19.8 million for the six months ended March 31, 2008 compared to
$15.9 million for the same period in fiscal 2007. Net sales for the six months ended March 31,
2008 reflects the additional sales relating to the acquisition of GeoLogic Solutions, Inc. For
the six months ended March 31, 2008, comparable net sales increased by 4.0% or $0.6 million over
the same period in fiscal 2007 reflecting strong XATANET sales partially offset set by the
continuing decline in the Companys legacy OpCenter product. The net sales for the six months
ended March 31, 2008 reflects an increase in XATANET subscription revenue of 44.7%. For the six
months ended March 31, 2008, recurring revenue contributed 45.2% of total revenue compared to 31.0%
of total revenue for the comparable period in fiscal 2007.
Cost of Goods Sold
Cost of goods sold includes the direct product costs associated with fulfilling customer orders,
warranty costs related to previously sold systems, communication and facility costs, product repair
and refurbishment costs, and expenses associated with the enhancement of released products. Total
cost of goods sold was $6.0 million for the three months ended March 31, 2008 compared to $4.7 million for the three months ended March 31, 2007. Gross margin as a
27
percentage
of net sales increased 7.7 percentage points to 50.5% for the three months ended March 31, 2008
versus 42.8% in the same period last year. The improvement in gross margin was driven by higher
gross margin XATANET revenue and continuing growth in the higher margin recurring revenue products.
Total cost of goods sold was $10.1 million for the six months ended March 31, 2008 compared to $8.9
million for the six months ended March 31, 2007. Gross margin as a percentage of net sales
increased 4.7 percentage points to 49.2% for the six months ended March 31, 2008 versus 44.2% in
the same period of fiscal 2007.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of employee wages in our support, sales and
administration functions, marketing and promotional expenses, executive and administrative costs,
accounting and professional fees, recruiting costs and provision for doubtful accounts. Selling,
general and administrative expenses were $5.7 million and $9.5 million for the three months and six
months ended March 31, 2008, respectively. Selling, general and administrative expense reflects
the increased size of the organization including $0.3 million of intangible amortization related to
the acquisition of GeoLogic and investments in our brand strategy, professional services and direct
sales model.
Research & Development Expenses
Research and development expenses consist of employee salaries and expenses related to development
personnel and consultants, as well as expenses associated with software and hardware development.
Research and development expenses were $1.4 million and $2.5 million for the three months and six
months ended March 31, 2008, respectively. The Company did not capitalize any development costs
for the six months ended March 31, 2008 and capitalized $0.2 million development costs for the six
months ended March 31, 2007.
Interest Income and Expense
Interest income increased by $49,000 for the six months ended March 31, 2008 as a result of higher
average cash balances and improved interest rates compared to the same period of fiscal 2007.
Interest expense increased by $0.4 million for the six months ended March 31, 2008 as the result of
the $18.2 million of debt incurred to finance the acquisition of GeoLogic Solutions, Inc.
Income Taxes
No income tax benefit or expense was recorded for the six month period ended March 31, 2008 or
2007. Because we have had continued operating losses and do not have objectively verifiable
positive evidence of future taxable income as prescribed by SFAS No. 109, we concluded that a full
valuation allowance was appropriate. Realization of deferred tax assets is dependent on future
taxable income during the periods when deductible temporary differences and carryforwards are
expected to be available to reduce taxable income. The amount of the net deferred tax asset
considered realizable could be increased in the future if we return to profitability and actual future taxable income is higher than currently estimated. At
28
September
30, 2007, we had federal net operating loss carryforwards of approximately $24.8 million.
Net Loss to Common Shareholders
We generated net losses to common shareholders of $2.5 million for the six months ended March 31,
2008, compared to net losses to common shareholder of $1.6 million for the six months ended March
31, 2007. The difference between net loss applicable to common shareholders and net loss relates
to the paid dividends and deemed dividends to the holders of the Series B Preferred Stock.
Liquidity and Capital Resources
As of March 31, 2008, we held approximately $8.0 million in cash and cash equivalents, and working
capital totaled $8.1 million. Cash used in operations was $2.8 million for the six months ended
March 31, 2008 driven by changes to working capital.
Cash used in investing activities of $20.6 million for the six months ended March 31, 2008 reflects
capital investments made for computer equipment and the new office facility and acquisition related
expenditures.
Our Series B Preferred Stock prohibits payment of dividends to the holders of any other capital
stock unless and until we have paid dividends accrued on the Series B Preferred Stock, which pays
an annual cumulative dividend of 4% of the original issue price. At the option of the Series B
Preferred Stock holders, such dividends are payable in additional shares of Series B Preferred
Stock rather than cash. For the six months ended March 31, 2008 and 2007, the Company issued
37,122 and 35,680 shares, respectively, of Series B Preferred Stock to the holders thereof for
payment of accrued stock dividends. We are further restricted from dividend payments by our
primary lender.
On January 31, 2008, the Company acquired all of the outstanding stock of GeoLogic Solutions, Inc.
(GeoLogic) for a total purchase price consisting of $15.3 million in cash, 90,689 shares of
common stock of the Company, and $2.0 million in Seller Notes. The Seller Notes bear interest at
an annual rate of 11% and mature in full on January 31, 2009. A portion of the Seller Notes with a
principal amount of $525,000 are convertible into common stock of the Company upon maturity, in the
event the Company does not repay such Seller Notes in full. The conversion price for such Seller
Notes is $3.308 per share.
In connection with financing the acquisition of GeoLogic, the Company entered into a three-year
senior secured credit facility with Silicon Valley Bank (SVB) consisting of a $10.0 million
revolving line of credit bearing interest at a floating rate equal to 0.5% over SVBs Prime Rate.
In addition, the Company entered into a four-year senior secured credit facility consisting of a
total of $8.0 million in term loans from Partners for Growth II, L.P. (PFG) and SVB bearing
interest at a fixed rate of 14.5%, subject to adjustment under various circumstances. In
connection with these loans, the Company issued warrants to purchase a total of 457,144 shares of
common stock of the Company to PFG and SVB. PFG and SVB paid an aggregate purchase price of $8,382
for these warrants, which have an exercise price of $3.31 per share and are exercisable anytime on
or before January 30, 2013.
29
We believe our existing funds, debt facilities and vendor terms will provide adequate cash to fund
operating needs and remain compliant with our debt covenants for the foreseeable future. However,
a protracted decline in revenue, significant revenue growth or an increase in product development
in the near term may require us to obtain external funding. No assurance can be given that we will
be able to secure any required additional financing when needed, or that such financing, if
obtained at all, will be on terms favorable or acceptable to us. If additional financing is
required and we are unable to secure such additional financing, we may need to implement measures
to slow our growth or reduce operating costs, including reductions to product development,
marketing and other operating activities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We have no history of investing in derivative financial instruments, derivative commodity
instruments or other such financial instruments, and do not anticipate making such investments in
the future. Transactions with international customers are entered into in U.S. dollars, precluding
the need for foreign currency hedges. Additionally, we invest in money market funds and fixed rate
U.S. government and corporate obligations, which experience minimal volatility. Thus, the exposure
to market risk is not material.
In connection with financing the acquisition of GeoLogic, the Company entered into a three-year
secured credit facility with Silicon Valley Bank (SVB) consisting of a $10.0 million revolving
line of credit bearing interest at a floating rate equal to 0.5% over SVBs Prime Rate. As a
result of this financing agreement, the Company is subject to market risk based on interest rate
volatility.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting
On March 31, 2008, our Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Rule 13a-15(e)). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and (ii) accumulated and communicated to the Chief
Executive Officer and Chief Financial Officer to allow timely decisions regarding required
disclosure.
There were no changes in our internal controls over financial reporting that occurred during our
most recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
30
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
In addition to the other information set forth in this report and our other SEC filings, you should
carefully consider the factors discussed under Risk Factors in Part I, Item 1A of our Annual
Report on Form 10-K for the year ended September 30, 2007, which could have a material impact on
our business, financial condition or results of operations. The risks described in our Annual
Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial may also adversely affect our
business, financial condition or results of operations. We are also subject to the following risk:
Our acquisition of GeoLogic is accompanied by a variety of risks, any of which may adversely
affect our business.
On January 31, 2008, we completed our acquisition of GeoLogic Solutions, Inc. This
acquisition is accompanied by a variety of risks commonly encountered in acquisitions of
businesses, which include:
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failure to achieve the financial and strategic goals for the acquired and combined
business;
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additional balance sheet leverage in connection with financing the acquisition;
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overpayment for the acquired companies or assets;
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difficulty and unexpected costs in assimilating the operations and personnel of the
acquired businesses;
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product liability and other exposure associated with acquired businesses or the sale of
their products;
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disruption of our ongoing business;
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dilution of our existing stockholders and earnings per share;
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unanticipated liabilities, legal risks and costs;
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retention of key personnel;
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distraction of management from our ongoing business; and
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impairment of relationships with employees and customers as a result of integration of
new management personnel.
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These risks could harm our business, financial condition or results of operations, particularly
given the significance of our acquisition of GeoLogic Solutions, Inc.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
31
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held on February 7, 2008. As of the record
date, January 2, 2008, there were 8,516,755 shares of Common Stock and 4,723,763 shares of Series B
and Series C Preferred Stock of the Company (which votes as if converted to Common Stock on 1 for 1
basis) entitled to vote at the meeting. There were in attendance at the meeting in person or by
proxy holders of approximately 13.2 million shares of voting stock, which is equivalent to
approximately 92% of the total number of eligible voting shares of the Company issued and
outstanding.
Matters voted upon and the results thereof are as follows:
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1.
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The number of directors was set at seven (7), and seven (7) directors (including
Christopher P. Marshall, who was elected by the holders of the Series B Preferred Stock,
voting separately by ballot as a class) were elected to serve for a one-year term expiring
when their successors are elected and qualified at the annual meeting in 2008.
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For
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Withheld
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John J. Coughlan
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11,557,012
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629,067
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Carl M. Fredericks
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11,603,688
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582,391
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Roger W. Kleppe
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11,603,688
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582,391
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Charles R. Stamp Jr.
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11,585,788
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600,291
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Thomas G. Hudson
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11,606,079
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580,000
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Chad M. Lindbloom
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11,608,479
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577,600
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Christopher P. Marshall
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1,888,147
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- 0 -
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Item 5. Other Information.
None
Item 6. Exhibits.
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31.1
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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32.2
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Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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32
SIGNATURES
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.
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Dated:
May 14, 2008
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XATA Corporation
(Registrant)
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by:
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/s/ Mark E. Ties
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Mark E. Ties
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Chief Financial Officer
(Signing as Principal Financial and Accounting
Officer, and as Authorized Signatory of
Registrant)
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33
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