10-Q 1 a05-13127_110q.htm 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended June 30, 2005

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission file number 000-31511

 

@ROAD, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

94-3209170

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

47071 Bayside Parkway

Fremont, CA 94538

(Address of principal executive offices, including zip code)

 

510-668-1638

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   ý     No     o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   ý     No     o

 

As of August 1, 2005 there were 60,740,400 shares of the registrant’s Common Stock outstanding.

 

 



 

INDEX

 

PART I.

FINANCIAL INFORMATION

2

 

Item 1. Financial Statements.

2

 

Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004.

2

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004.

3

 

Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2005, December 31, 2004 and June 30, 2004.

4

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004.

5

 

Notes to Condensed Consolidated Financial Statements.

6

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

18

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

33

 

Item 4. Controls and Procedures.

34

PART II.

OTHER INFORMATION

34

 

Item 1. Legal Proceedings.

34

 

Item 4. Submission of Matters to a Vote of Security Holders.

34

 

Item 6. Exhibits.

35

 

1



 

 PART I. FINANCIAL INFORMATION

 

 Item 1. Financial Statements.

 

@Road, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data) (unaudited)

 

 

 

June 30,
2005

 

December 31,
2004

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

44,874

 

$

14,494

 

Short-term investments

 

63,309

 

103,222

 

Accounts receivable, net

 

7,558

 

7,960

 

Inventories

 

7,237

 

3,593

 

Deferred product costs

 

15,948

 

11,104

 

Prepaid expenses and other

 

2,142

 

1,542

 

 

 

 

 

 

 

Total current assets

 

141,068

 

141,915

 

Property and equipment, net

 

5,165

 

3,668

 

Deferred product costs

 

7,311

 

5,947

 

Deferred tax assets

 

88

 

 

Goodwill

 

21,055

 

 

Intangible assets, net

 

31,623

 

 

Other assets

 

238

 

680

 

 

 

 

 

 

 

Total assets

 

$

206,548

 

$

152,210

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

12,313

 

$

5,666

 

Accrued liabilities

 

7,282

 

5,529

 

Deferred revenue and customer deposits

 

13,308

 

11,347

 

 

 

 

 

 

 

Total current liabilities

 

32,903

 

22,542

 

Deferred revenue

 

9,454

 

4,830

 

Other long-term liabilities

 

473

 

2

 

 

 

 

 

 

 

Total liabilities

 

42,830

 

27,374

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 10,000 shares authorized, 98 shares designated as redeemable preferred stock, shares issued and outstanding: 78 at June 30, 2005 and none at December 31, 2004

 

7,929

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.0001 par value, 250,000 shares authorized, shares issued and outstanding: 60,696 at June 30, 2005 and 54,805 at December 31, 2004

 

271,194

 

232,016

 

Notes receivable from stockholders

 

(8

)

 

Accumulated other comprehensive loss

 

(81

)

(179

)

Accumulated deficit

 

(115,316

)

(107,001

)

 

 

 

 

 

 

Total stockholders’ equity

 

155,789

 

124,836

 

 

 

 

 

 

 

Total liabilities, redeemable preferred stock and stockholders’ equity

 

$

206,548

 

$

152,210

 

 

See notes to condensed consolidated financial statements.

 

2



 

@Road, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data) (unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Revenues:

 

 

 

 

 

 

 

 

 

Hosted

 

$

19,685

 

$

18,331

 

$

39,175

 

$

36,223

 

Licensed

 

941

 

 

1,443

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

20,626

 

18,331

 

40,618

 

36,223

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of hosted revenue (excluding intangibles amortization included below)

 

9,227

 

8,669

 

18,751

 

17,037

 

Cost of licensed revenue (excluding intangibles amortization included below)

 

1,473

 

 

2,173

 

 

Intangibles amortization

 

1,010

 

11

 

1,467

 

21

 

In-process research and development

 

 

 

5,640

 

 

Sales and marketing

 

5,832

 

3,082

 

10,479

 

6,193

 

Research and development

 

3,849

 

1,431

 

6,424

 

2,798

 

General and administrative

 

3,942

 

2,371

 

8,389

 

4,553

 

Terminated acquisition costs

 

 

2,017

 

 

2,017

 

Stock compensation (*)

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

25,333

 

17,581

 

53,323

 

32,623

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations

 

(4,707

)

750

 

(12,705

)

3,600

 

 

 

 

 

 

 

 

 

 

 

Other income, net:

 

 

 

 

 

 

 

 

 

Interest income, net

 

729

 

329

 

1,347

 

583

 

Other expense, net

 

(154

)

(13

)

(152

)

(7

)

 

 

 

 

 

 

 

 

 

 

Total other income, net

 

575

 

316

 

1,195

 

576

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income before tax

 

(4,132

)

1,066

 

(11,510

)

4,176

 

Benefit from income taxes

 

3,195

 

 

3,195

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(937

)

1,066

 

(8,315

)

4,176

 

Preferred stock dividends

 

(124

)

 

(181

)

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to common stockholders

 

$

(1,061

)

$

1,066

 

$

(8,496

)

$

4,176

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.02

)

$

0.02

 

$

(0.14

)

$

0.08

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(0.02

)

$

0.02

 

$

(0.14

)

$

0.07

 

 

 

 

 

 

 

 

 

 

 

Shares used in calculating net (loss) income per share:

 

 

 

 

 

 

 

 

 

Basic

 

60,551

 

54,185

 

58,977

 

53,978

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

60,551

 

57,414

 

58,977

 

57,856

 

 

 

 

 

 

 

 

 

 

 

(*) Stock compensation:

 

 

 

 

 

 

 

 

 

Cost of hosted revenue

 

$

 

$

 

$

 

$

 

Cost of licensed revenue

 

 

 

 

 

Sales and marketing

 

 

 

 

1

 

Research and development

 

 

 

 

1

 

General and administrative

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

$

 

$

 

$

4

 

 

See notes to condensed consolidated financial statements.

 

3



 

@Road, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Six Months Ended June 30, 2005 and 2004

and the Six Months Ended December 31, 2004

(In thousands) (unaudited)

 

 

 

Common Stock

 

Deferred Stock

 

Notes
Receivable
From

 

Accumulated
Other
Comprehensive

 

Accumulated

 

Stockholders’

 

Total
Comprehensive

 

 

 

Shares

 

Amount

 

Compensation

 

Stockholders

 

Loss

 

Deficit

 

Equity

 

Income (Loss)

 

BALANCES, January 1, 2004

 

53,700

 

$

228,441

 

$

(4

)

$

(87

)

$

 

$

(116,222

)

$

112,128

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

4,176

 

4,176

 

$

4,176

 

Unrealized (loss) on short-term investments

 

 

 

 

 

 

 

 

 

(188

)

 

 

(188

)

(188

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under employee stock purchase plan

 

243

 

1,129

 

 

 

 

 

 

 

 

 

1,129

 

 

 

Exercise of stock options

 

473

 

1,202

 

 

 

 

 

 

 

 

 

1,202

 

 

 

Collection of notes receivable from stockholders

 

 

 

 

 

 

 

50

 

 

 

 

 

50

 

 

 

Amortization of deferred stock compensation

 

 

 

 

 

4

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, June 30, 2004

 

54,416

 

230,772

 

 

(37

)

(188

)

(112,046

)

118,501

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,045

 

5,045

 

$

5,045

 

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,054

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under employee stock purchase plan

 

221

 

1,006

 

 

 

 

 

 

 

 

 

1,006

 

 

 

Exercise of stock options

 

168

 

238

 

 

 

 

 

 

 

 

 

238

 

 

 

Collection of notes receivable from stockholders

 

 

 

 

 

 

 

37

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, December 31, 2004

 

54,805

 

232,016

 

 

 

(179

)

(107,001

)

124,836

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(8,315

)

(8,315

)

$

(8,315

)

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

98

 

 

 

98

 

98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(8,217

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued upon acquisition of Vidus, net of issuance costs of $478

 

5,454

 

37,699

 

 

 

 

 

 

 

 

 

37,699

 

 

 

Options issued upon acquisition of Vidus

 

 

 

531

 

 

 

 

 

 

 

 

 

531

 

 

 

Shares issued under employee stock purchase plan

 

295

 

849

 

 

 

 

 

 

 

 

 

849

 

 

 

Exercise of stock options

 

142

 

280

 

 

 

 

 

 

 

 

 

280

 

 

 

Issuance of notes receivable to stockholder

 

 

 

 

 

 

 

(11

)

 

 

 

 

(11

)

 

 

Collection of notes receivable from stockholder

 

 

 

 

 

 

 

3

 

 

 

 

 

3

 

 

 

Dividends on redeemable preferred stock

 

 

 

(181

)

 

 

 

 

 

 

 

 

(181

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, June 30, 2005

 

60,696

 

$

271,194

 

$

 

$

(8

)

$

(81

)

$

(115,316

)

$

155,789

 

 

 

 

See notes to condensed consolidated financial statements.

 

4



 

@Road, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands) (unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(8,315

)

$

4,176

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

In-process research and development

 

5,640

 

 

Deferred income taxes

 

(3,195

)

 

Depreciation and amortization

 

2,615

 

617

 

Write-off of deferred acquisition costs

 

 

1,095

 

Loss on disposal of property and equipment

 

48

 

 

Amortization of deferred stock compensation

 

 

4

 

Provision (reversal) for inventory reserves

 

138

 

(48

)

(Reversal) for doubtful accounts and sales returns

 

(46

)

(413

)

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,746

 

1,709

 

Inventories

 

(3,782

)

(775

)

Deferred product costs

 

(6,208

)

(237

)

Prepaid expenses and other

 

254

 

(178

)

Accounts payable

 

6,107

 

(1,564

)

Accrued and other liabilities

 

(1,198

)

72

 

Deferred revenue and customer deposits

 

2,315

 

32

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(3,881

)

4,490

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(1,671

)

(704

)

Purchase of short-term investments

 

(54,235

)

(94,972

)

Proceeds from the sale of short-term investments

 

94,246

 

 

Acquisition of Vidus, net of cash acquired

 

(5,211

)

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

33,129

 

(95,676

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from sale of common stock

 

1,129

 

2,331

 

Proceeds from payments on notes receivable issued to stockholders

 

3

 

50

 

 

 

 

 

 

 

Net cash provided by financing activities

 

1,132

 

2,381

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

30,380

 

(88,805

)

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

14,494

 

103,669

 

 

 

 

 

 

 

End of period

 

$

44,874

 

$

14,864

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Issuance of common stock, preferred stock and options in connection with the acquisition of Vidus

 

$

46,456

 

$

 

 

 

 

 

 

 

Dividends on redeemable preferred stock

 

$

181

 

$

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short-term investments

 

$

98

 

$

(188

)

 

See notes to condensed consolidated financial statements.

 

5



 

@Road, Inc.

Notes To Condensed Consolidated Financial Statements

(unaudited)

 

Note 1 —Summary of Significant Accounting Policies

 

Basis of Consolidation and Presentation

 

The accompanying condensed consolidated financial statements include @Road, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany accounts and transactions are eliminated upon consolidation.

 

The accompanying condensed consolidated financial statements were prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in 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 which are made herein are adequate to make the information presented not misleading.

 

In the opinion of management, the 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 condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto in its Form 10-K for the year ended December 31, 2004 (Commission File No. 000-31511), dated March 15, 2005 and filed with the SEC. The condensed consolidated balance sheet as of December 31, 2004 was derived from the Company’s audited consolidated financial statements.

 

Estimates

 

The preparation of 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, revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to provisions for doubtful accounts, legal and other contingencies, income taxes, goodwill and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

 

Certain Significant Risks and Uncertainties

 

The Company participates in a dynamic high-technology industry and believes that changes in any of the following areas could have a material adverse effect on its future financial position, results of operations or cash flows: the ability of @Road to integrate Vidus operations successfully; the ability of @Road to transition its customers from CDPD wireless networks; the ability of @Road to accelerate or continue to grow as a result of its investment initiatives; the ability of @Road and its alliances to market, sell and support @Road products and services; the timing of purchasing and implementation decisions by prospects and customers; the dependence of @Road on mobile data systems technology, wireless networks, network infrastructure and positioning systems owned and controlled by others; advances and trends in new technologies and industry standards; competition; changes in the overall demand for solutions offered by the Company; market acceptance of the Company’s products and services; development of sales channels; changes in third-party manufacturers, key suppliers, certain strategic or customer relationships; litigation or claims against the Company based on intellectual property, product, regulatory or other factors; and the Company’s ability to attract and retain employees necessary to support its growth.

 

Motorola is the sole supplier of microcontrollers used in the Company’s products. Micronet is the sole supplier of our Internet Data Terminal.  Everex is the sole supplier of our Internet Wireless Manager. The Company expects to rely on these suppliers as the sole source for these components and devices for the next several years.

 

Foreign Currency Transactions

 

The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and liabilities are translated at the current exchange rate at the end of the period, non-monetary assets and liabilities are translated at historical rates and revenues and expenses are translated at average exchange rates in effect during the period. Transaction gains and losses have not been significant to date and are included in Other income, net.

 

Stock-Based Compensation

 

The Company accounts for stock-based employee compensation issued under compensatory plans using the intrinsic value method, which calculates compensation expense based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the option exercise price.

 

6



 

Accounting principles generally accepted in the United States require companies who choose to account for stock option grants using the intrinsic value method to also determine the fair value of option grants using an option pricing model, such as the Black-Scholes model, and to disclose the impact of fair value accounting in a note to the financial statements.

 

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of SFAS No. 123 (SFAS 148). The Company did not elect to voluntarily change to the fair value based method of accounting for stock based employee compensation and record such amounts as charges to operating expense. The impact of recognizing the fair value of option grants and stock grants under the Company’s employee stock purchase plan as an expense under SFAS 148 would have substantially reduced the Company’s operating results, as follows (in thousands, except per share amounts):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income as reported

 

$

(937

)

$

1,066

 

$

(8,315

)

$

4,176

 

Add: stock-based employee compensation expense included in reported net (loss) income, net of tax effect

 

 

 

 

4

 

Less: stock-based employee compensation expense determined under fair value based method, net of tax effect

 

(1,901

)

(1,644

)

(4,479

)

(3,987

)

 

 

 

 

 

 

 

 

 

 

Pro forma net (loss) income

 

(2,838

)

(578

)

(12,794

)

193

 

Preferred stock dividends

 

(124

)

 

(181

)

 

 

 

 

 

 

 

 

 

 

 

Pro forma net (loss) income attributable to common stockholders

 

$

(2,962

)

$

(578

)

$

(12,975

)

$

193

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) income per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

(0.02

)

$

0.02

 

$

(0.14

)

$

0.08

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

(0.05

)

$

(0.01

)

$

(0.22

)

$

0.00

 

 

 

 

 

 

 

 

 

 

 

Diluted net (loss) income per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

(0.02

)

$

0.02

 

$

(0.14

)

$

0.07

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

(0.05

)

$

(0.01

)

$

(0.22

)

$

0.00

 

 

The weighted average fair value of options granted in the three months ended June 30, 2005 and 2004, were $1.29 and $6.67, respectively. The weighted average fair value of options granted in the six months ended June 30, 2005 and 2004, were $2.78 and $9.31, respectively. The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The Company’s calculations are based on a single option valuation approach and forfeitures are recognized as they occur. The following weighted average assumptions were used for each respective period:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Stock Option Plans:

 

 

 

 

 

 

 

 

 

Risk free interest rate

 

3.66

%

3.85

%

3.72

%

3.32

%

Expected volatility

 

78

%

104

%

91

%

105

%

Expected life (in years)

 

2.31

 

5.00

 

3.66

 

5.00

 

Expected dividend

 

$

0.00

 

$

0.00

 

$

0.00

 

$

0.00

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Employee Stock Purchase Plan:

 

 

 

 

 

 

 

 

 

Risk free interest rate

 

3.14

%

1.07

%

2.60

%

1.04

%

Expected volatility

 

57

%

66

%

87

%

69

%

Expected life (in years)

 

0.5

 

0.5

 

0.5

 

0.5

 

Expected dividend

 

$

0.00

 

$

0.00

 

$

0.00

 

$

0.00

 

 

The Company accounts for stock-based arrangements issued to non-employees using the fair value based method, which calculates the compensation expense based on the fair value of the stock options granted using the Black-Scholes option pricing model at the date of grant, or over the period of performance, as appropriate.

 

7



 

Revenue Recognition

 

The Company follows specific and detailed guidelines in recognizing revenue in accordance with the provisions of AICPA Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-4 and Statement of Position 98-9, as well as Accounting Research Bulletin No. 45, Long-Term Construction-Type Contracts and Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The Company recognizes revenue when the price is fixed and determinable, upon persuasive evidence of an agreement, when it has fulfilled its obligations under any such agreement and upon a determination that collectibility is probable.

 

The Company’s revenues are derived from two sources, hosted revenues and licensed revenues. Hosted revenues are derived from monthly fees for its MRM solutions and upfront or monthly fees for the hardware device enabling the mobile resource to utilize its MRM solution. Licensed revenues are derived from providing license, installation, training and post contract customer support services to end users.

 

Monthly fees for the Company’s MRM hosted solutions are recognized ratably over the minimum contract period, which commences (a) upon installation where customers have installed its proprietary hardware devices in mobile worker vehicles or (b) upon the creation of subscription licenses and a customer account on its website where customers have elected to use its MRM solution with a location- or wireless application protocol- enabled mobile telephone. Upfront fees for the Company’s MRM hosted solution primarily consist of amounts for the Internet Location Manager, Internet Data Terminal and a ruggedized personal digital assistant. The Company defers upfront fees at installation and recognizes them ratably over the minimum contract period, generally two or three years. Renewal rates for its MRM solution are not considered priced at a bargain in comparison to the upfront fees (as described in Staff Accounting Bulletin No. 104, Revenue Recognition). Changes to the pricing of the upfront fees for the Company’s MRM solutions in the future could result in the recognition of upfront fees over periods that extend beyond the minimum contract period.

 

Historically, the fees for the Company’s proprietary hardware devices have often been at or below its costs. Costs not in excess of related contractual revenue are deferred at the time of shipment and amortized ratably over the minimum contract period. Costs in excess of related contractual revenue are expensed to cost of hosted revenue at the time of shipment.

 

For arrangements with multiple elements, such as licenses and post-contract customer support services, the Company allocates revenue to each element of a transaction based upon its fair value as determined in reliance on vendor specific objective evidence. Vendor specific objective evidence of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices when sold separately, and post-contract customer support services is additionally measured by the renewal rate. If the Company cannot objectively determine the fair value of any undelivered element included in license arrangements, it defers revenue until all elements are delivered, all services have been performed or fair value can objectively be determined. When the fair value of a license element has not been established, the Company uses the residual method to record license revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the fee is allocated to the delivered elements and is recognized as revenue.

 

Licensed revenues associated with the fees for the license of the Company’s taskforce product and related customization and installation are generally recognized using the percentage-of-completion method of accounting over the period that services are performed. For agreements accounted for under the percentage-of-completion method, the Company determines progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. The Company periodically evaluates the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, the Company has not incurred any such losses. Costs incurred in advance of billings are recorded as costs in excess of related billings on uncompleted contracts. If the amount of revenue recognized exceeds the amounts billed to customers, the excess amount is recorded as unbilled accounts receivable. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as customer deposits. Revenue recognized in any period is dependent on the Company’s progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue the Company recognizes in any period.

 

The Company derives post-contract customer support fees from post-contract customer support contracts, which are generally initially purchased at the same time as a license for its taskforce product. Post-contract customer support can include telephone and email support and the right to receive unspecified upgrades on a when-and-if-available basis. Post-contract customer support may generally be renewed on an annual basis. The Company recognizes revenue for post-contract customer support, based on vendor specific objective evidence of fair value, ratably over the term of the post-contract customer support period. It generally determines vendor specific objective evidence of post-contract customer support based on the stated fees for post-contract customer support renewal set forth in the original license agreement. If the Company is unable to establish vendor specific objective evidence of fair value, it recognizes all fees ratably over the term of the post-contract customer support, when the only undelivered element is post-contract customer support.

 

Comprehensive (Loss) Income

 

SFAS No. 130, Reporting Comprehensive Income, requires that an enterprise report,

 

8



 

by major components and as a single total, the change in its net assets during the period from non-owner sources.  Accumulated other comprehensive loss was comprised of unrealized losses of $81,000 and $179,000 on short-term investments at June 30, 2005 and December 31, 2004, respectively.

 

Goodwill and intangible assets

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. Identifiable intangible assets are comprised of core developed technology, order backlog, customer relationships, trademarks and trade names, and other intangible assets. Identifiable intangible assets that have finite useful lives are being amortized over their useful lives of ten years for core developed technology, three years for order backlog and ten years for customer relationships. Trademarks and trade names have indefinite lives and as such are not amortized but are tested at least annually for impairment.  The fair value assigned to in-process research and development and other identifiable intangible assets was estimated by discounting to present value the cash flows attributable to the technology once it had reached technological feasibility.  The Company follows the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, under which goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test.

 

Long-lived assets and goodwill

 

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 in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An asset is considered impaired if its carrying amount exceeds the future net undiscounted cash flow that the asset is expected to generate. If an asset is considered to be impaired, the amount of impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The Company assesses the recoverability of long-lived and intangible assets by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows.

 

The Company evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. The Company plans to conduct its initial annual impairment test in August 2005 and annually thereafter. There were no events or circumstances from the close of the acquisition through June 30, 2005 that would require an interim assessment.

 

Recently Issued Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payments (SFAS 123R), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.

 

The statement eliminates the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires that such transactions be accounted for using a fair value based method and recognized as expenses in the consolidated statement of operations. The statement requires companies to assess the most appropriate model to calculate the value of the options. The Company currently uses the Black-Scholes option pricing model to value options and is assessing which model it may use upon adoption of such standard. The use of an alternative model to value options may result in a different fair value than the use of the Black-Scholes option pricing model.

 

There are a number of other requirements under the new standard that will result in a different accounting treatment than that currently required. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and for stock issued under the Company’s employee stock purchase plan.

 

The Company will also be required to determine the transition method to be used at date of adoption. The allowed transition methods include modified prospective and modified retroactive adoption alternatives. Under the modified retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. This method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R. In April 2005, the SEC deferred the effective date of SFAS 123R. The effective date of SFAS 123R for the Company’s consolidated financial statements is January 1, 2006.

 

While the Company has not completed its assessment of the impact of SFAS 123R, it expects that this statement will have a significant impact on the Company’s consolidated financial statements as the Company

 

9



 

will be required to expense the fair value of its stock option grants and stock purchases under its employee stock purchase plans rather than disclose the impact on its consolidated net (loss) income attributable to common stockholders within its footnotes, as is its current practice.

 

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies that abnormal inventory costs such as the costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of SFAS 151 are effective for fiscal years beginning after July 1, 2005. The Company does not expect that the adoption of SFAS 151 will have a material impact on its consolidated statement of operations and financial condition.

 

On June 7, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS 154). SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements.

 

Note 2 — Basic and Diluted Net (Loss) Income per Share

 

Basic net (loss) income per share is computed by dividing the net (loss) income for the period by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing the net (loss) income for the period by the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares, composed of unvested restricted common stock and incremental common shares issuable upon the exercise of stock options, are included in diluted net (loss) income per share (using the treasury stock method) to the extent such shares are dilutive. Potentially dilutive shares that are anti-dilutive, as calculated based on the weighted average closing price of the Company’s common stock for the period, are excluded from the calculation of diluted net (loss) income per share. Common share equivalents are excluded from the computation in loss periods, as their effect would be anti-dilutive.

 

The following table sets forth the computation of basic and diluted net (loss) income per share for the periods indicated (in thousands, except per share amount):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to common stockholders (numerator)

 

$

(1,061

)

$

1,066

 

$

(8,496

)

$

4,176

 

Shares (denominator):

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

60,551

 

54,185

 

58,977

 

53,990

 

Weighted average common shares outstanding subject to repurchase

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

Shares used in computation

 

60,551

 

54,185

 

58,977

 

53,978

 

Diluted

 

 

 

 

 

 

 

 

 

Dilution impact from option equivalent shares

 

 

3,110

 

 

3,713

 

Dilution impact from employee stock purchase plan

 

 

119

 

 

153

 

Add back weighted average common shares subject to repurchase

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Shares used in computation

 

60,551

 

57,414

 

58,977

 

57,856

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.02

)

$

0.02

 

$

(0.14

)

$

0.08

 

Diluted

 

$

(0.02

)

$

0.02

 

$

(0.14

)

$

0.07

 

 

Employee stock options to purchase approximately 9.0 million shares with a weighted average exercise price of $5.00 and approximately 1.4 million shares with a weighted average exercise price of $11.71 for the three months ended June 30, 2005 and 2004, respectively, were outstanding, but were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.  Employee stock options to purchase approximately 9.0 million shares with a weighted average exercise price of $5.00 and approximately 623,000 shares with a weighted average exercise price of $13.10 for the six months ended June 30, 2005 and 2004, respectively, were outstanding, but were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

 

10



 

Note 3 — Acquisition of Vidus

 

On February 18, 2005, the Company completed the acquisition of Vidus Limited (“Vidus”) in a transaction accounted for as a business combination using the purchase method. As consideration for the acquisition, the Company issued approximately 5.5 million shares of its common stock valued at $38.2 million and newly created redeemable preferred stock (“preferred stock”) in face amount of approximately $7.7 million and extinguished for cash existing debt of approximately $5.5 million in exchange for all of the outstanding shares of Vidus capital stock, and the Company issued approximately 146,000 vested options with a fair value of $531,000. Under the terms of the grants, each option has been classified as a non-qualified stock option, is fully vested, has an exercise price ranging from $0.67 to $2.00 per share and has a one-year term. The Company incurred acquisition related costs of $2.6 million, of which $478,000 was allocated to the issuance of common stock. The purchase price of approximately $54.6 million was preliminarily allocated among the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date.

 

The total estimated consideration is subject to an adjustment for a period of one year if the average closing price of the Company’s common stock for any ten consecutive trading days during such period does not meet at least an average market price per share of $7.00. The one year period begins on the date ten days after the date the SEC declares the Company’s registration statement effective covering the common shares issued in the transaction. The fair value of the Company’s common stock was derived from this guaranteed market price per share of $7.00.  The fair value of the stock options was determined using the Black-Scholes option pricing model with the following assumptions: no dividend yield, expected volatility of 96%, expected life of one year and a risk-free interest rate of 3.09%.

 

The Vidus acquisition was accounted for under SFAS No. 141, Business Combinations (SFAS 141) and certain specified provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142).  The results of operations of Vidus were included in the Company’s Condensed Consolidated Statement of Operations from February 19, 2005.

 

 

The following table summarizes the estimated fair values of the tangible assets acquired and the liabilities assumed at the date of acquisition (in thousands):

 

Cash

 

$

1,269

 

Accounts receivable

 

1,669

 

Prepaid expenses and other

 

412

 

Property and equipment

 

1,022

 

Notes receivable from stockholder

 

11

 

 

 

 

 

Total tangible assets acquired

 

4,383

 

 

 

 

 

Accounts payable

 

(540

)

Accrued liabilities

 

(2,148

)

Deferred revenue

 

(4,270

)

 

 

 

 

Total tangible liabilities assumed

 

(6,958

)

 

 

 

 

Net tangible liabilities assumed

 

$

(2,575

)

 

Under the purchase method of accounting, the Company allocated the total purchase price to the acquired net tangible and intangible assets based upon their estimated fair market value as of the date of acquisition, February 18, 2005. The intangible assets recognized, apart from goodwill, represented contractual or other legal rights of Vidus and those intangible assets of Vidus that could be clearly identified. These intangible assets were identified and valued through interviews and analysis of data provided by Vidus concerning development projects, their stage of development, the time and resources needed to complete them and, if applicable, their expected income generating ability. There were no other contractual or other legal rights of Vidus clearly identifiable by management, other than those identified below. The preliminary allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows (in thousands):

 

Fair value of net tangible liabilities assumed

 

$

(2,575

)

Intangible assets acquired:

 

 

 

Core developed technology

 

18,410

 

Order backlog

 

5,500

 

Customer relationships

 

3,660

 

Trademarks and trade names

 

5,520

 

 

 

 

 

 

 

33,090

 

 

 

 

 

In-process research and development

 

5,640

 

Costs allocated to common stock issued

 

478

 

Deferred tax liability

 

(6,354

)

Deferred tax asset

 

3,247

 

Goodwill

 

21,055

 

 

 

 

 

Purchase price

 

$

54,581

 

 

11



 

Core developed technology. Core developed technology of approximately $18.4 million relates to the Vidus taskforce technology. At the date of acquisition, the developed technology was complete and had reached technological feasibility. Any costs to be incurred in the future will relate to the ongoing maintenance of the developed technology and will be expensed as incurred. To estimate the fair value of the developed technology, an income approach was used with a discount rate of 35%, which included an analysis of future cash flows and the risks associated with achieving such cash flows. The developed technology is being amortized over its estimated useful life of ten years.

 

Order backlog and Customer relationships. The Order backlog of approximately $5.5 million and the Customer relationships of approximately $3.7 million represented the fair value of the post-contract customer support obligations and existing customer relationships. To estimate the fair value of the Order backlog and the Customer relationships, an income approach was used with a discount rate of 30%. The order backlog and Customer relationships are amortized over their estimated useful lives of three years for Order backlog and ten years for Customer relationships.

 

Trademarks and trade names. Vidus and its product name, taskforce, have strong name recognition in European field service management, telecommunications, cable, and utilities markets. To estimate the fair value of the trademarks and trade names, an income approach was used with a discount rate of 40%. The Company expects to continue to produce and market the taskforce line of product and utilize the Vidus trade name in Europe. Therefore, an analysis of various economic factors indicated there was no limit to the period of time the trademark and trade names would contribute to future cash flows. Because cash flow is expected to continue indefinitely, the trademark and trade names are not being amortized, but tested for impairment annually and whenever events indicate that an impairment may have occurred.

 

In-process research and development. Development projects that had reached technological feasibility were classified as developed technology, and the value assigned to developed technology was capitalized. Expensed in-process research and development of approximately $5.6 million reflected research projects that had not reached technological feasibility or had no alternative future use at the time of the acquisition. In order to achieve technological feasibility, the Company estimated the hours required to complete the projects to cost approximately $5.7 million. The Company estimated the fair value assigned to in-process research and development using the income approach, which discounts to present value the cash flows attributable to the technology once it had reached technological feasibility using a discount rate of 40%. The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time incurred to develop the in-process technology into a commercially viable technology or product, while considering the relative difficulty of completing the various tasks and overcoming the obstacles necessary to attain technological feasibility. The weighted average stage of completion for all projects, in the aggregate, was approximately 80% as of the acquisition date. Cash flows from sales of products incorporating those technologies commenced in fiscal 2005.

 

Goodwill. Goodwill of approximately $21.4 million represented the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition allows the Company to integrate its technology with Vidus’ technology for dynamic scheduling, dispatching, routing and appointment booking of mobile workers, cross-sell the companies’ solutions and further develop the combined technologies to provide customers seamlessly integrated services. The acquisition also creates the ability to expand the Company’s business to Europe and other international markets. These opportunities, along with the ability to hire the Vidus workforce, were significant contributing factors to the establishment of the purchase price, resulting in the recognition of a significant amount of goodwill. In accordance with SFAS 142, the Company is not amortizing goodwill. The Company will carry the goodwill at cost and test it for impairment annually and whenever events indicate that an impairment may have occurred. The goodwill and intangible assets were allocated to its licensed reporting segment.  The goodwill is not deductible for tax purposes.

 

The results of operations of Vidus are included in the Company’s Consolidated Statement of Operations from the date of the acquisition. If the Company had acquired Vidus at the beginning of the periods presented, the Company’s unaudited pro forma revenue, net loss, net loss attributable to common stockholders and net loss per share would have been as follows (in thousands, except per share amount):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

20,626

 

$

20,754

 

$

41,311

 

$

40,582

 

Net loss

 

(937

)

(2,771

)

(11,000

)

(2,859

)

Net loss attributable to common stockholders

 

(1,061

)

(2,897

)

(11,250

)

(3,111

)

Net loss per share (basic and diluted)

 

(0.02

)

(0.05

)

(0.19

)

(0.05

)

Shares used in computing net loss per share (basic and diluted)

 

60,551

 

54,185

 

60,423

 

59,432

 

 

These results are not necessarily indicative of what the actual results of operations would have been if the acquisition of Vidus had in

 

12



 

fact occurred on the dates or for the periods indicated, nor do they purport to project the results of operations for any future periods or as of any date. These results do not give effect to any cost savings, operating synergies, and revenue enhancements which may result from the acquisition of Vidus or the costs of achieving these cost savings, operating synergies, and revenue enhancements.  The in-process research and development charge of approximately $5.6 million is included in the net loss attributable to common stockholders for the six months ended June 30, 2005 and excluded for the three months ended June 30, 2005 and three and six months ended June 30, 2004.

 

Note 4 — Goodwill and Purchased Intangible Assets

 

SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their expected useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets.

 

Intangible assets were as follows (in thousands):

 

 

 

As of June 30, 2005

 

As of December 31, 2004

 

 

 

Carrying
Amount

 

Accumulated
Depreciation

 

Net

 

Carrying
Amount

 

Accumulated
Depreciation

 

Net

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Core developed technology

 

$

23,462

 

$

(5,720

)

$

17,742

 

$

5,052

 

$

(5,052

)

$

 

Order backlog

 

5,500

 

(666

)

4,834

 

 

 

 

Customer relationships

 

3,660

 

(133

)

3,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

32,622

 

(6,519

)

26,103

 

5,052

 

(5,052

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

5,520

 

 

5,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

38,142

 

$

(6,519

)

$

31,623

 

$

5,052

 

$

(5,052

)

$

 

 

For the three months ended June 30, 2005 and 2004, amortization of intangible assets was $1.0 million and $11,000, respectively, and for the six months ended June 30, 2005 and 2004, amortization of intangible assets was $1.5 million and $21,000, respectively. The estimated future amortization expense of purchased intangible assets as of June 30, 2005 is as follows (in thousands):

 

Remainder of 2005

 

$

2,020

 

2006

 

4,040

 

2007

 

4,041

 

2008

 

2,458

 

2009

 

2,207

 

Thereafter

 

11,337

 

 

 

 

 

Total

 

$

26,103

 

 

13



 

Note 5 — Short-Term Investments

 

Short-term investments included the following available-for-sale securities at June 30, 2005 and December 31, 2004 (in thousands):

 

 

 

June 30, 2005

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
(Losses)

 

Estimated
Fair Value

 

U.S. Government debt securities

 

$

47,680

 

$

 

$

(68

)

$

47,612

 

Municipal debt securities

 

8,880

 

 

(2

)

8,878

 

Corporate debt securities

 

6,830

 

 

(11

)

6,819

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

63,390

 

$

 

$

(81

)

$

63,309

 

 

 

 

December 31, 2004

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
(Losses)

 

Estimated
Fair Value

 

 

 

 

 

 

 

 

 

 

 

U.S. Government debt securities

 

$

51,782

 

$

 

$

(124

)

$

51,658

 

Municipal debt securities

 

31,354

 

2

 

(4

)

31,352

 

Corporate debt securities

 

20,265

 

 

(53

)

20,212

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

103,401

 

$

2

 

$

(181

)

$

103,222

 

 

Note 6 – Income Taxes

 

For the three and six months ended June 30, 2005, the Company recorded an income tax benefit of $3.2 million primarily relating to the Company’s current losses in the United Kingdom.  The Company currently has provided a full valuation allowance on its United States deferred tax assets. The Company intends to maintain its valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance. Likewise, the occurrence of future negative evidence with respect to the Company’s United Kingdom deferred tax assets could result in an increase to the valuation allowance. The Company’s income tax expense recorded in the future will be reduced or increased to the extent of offsetting decreases or increases to the Company’s valuation allowance. As of June 30, 2005 the Company had approximately $42.7 million in deferred tax assets in the United States against which the Company retained a full valuation allowance.  The deferred tax asset as of June 30, 2005 consisted of deferred tax assets in the United Kingdom of $6.4 million primarily relating to net operating losses with an unlimited carryforward period against which the deferred tax liabilities in the United Kingdom of $6.3 million have been offset.  The deferred tax liabilities primarily relate to the intangible assets.  As of December 31, 2004 the Company had approximately $43.2 million in deferred tax assets in the United States against which the Company retained a full valuation allowance.

 

Note 7 — Balance Sheet Components

 

Inventories consist of raw materials, work in process and finished goods, and are stated at the lower of cost (average cost) or market and consisted of (in thousands):

 

 

 

June 30,
2005

 

December 31,
2004

 

Raw materials

 

$

2,220

 

$

1,025

 

Work in process

 

2,766

 

746

 

Finished goods

 

2,251

 

1,822

 

 

 

 

 

 

 

Total

 

$

7,237

 

$

3,593

 

 

Property and equipment consist of (in thousands):

 

 

 

June 30,
2005

 

December 31,
2004

 

Computers and software

 

$

14,787

 

$

13,196

 

Manufacturing and office equipment

 

656

 

352

 

Furniture and fixtures

 

474

 

494

 

Leasehold improvements

 

688

 

307

 

 

 

 

 

 

 

Total

 

$

16,605

 

$

14,349

 

Accumulated depreciation and amortization

 

(11,440

)

(10,681

)

 

 

 

 

 

 

Property and equipment, net

 

$

5,165

 

$

3,668

 

 

14



 

Accrued liabilities consist of (in thousands):

 

 

 

June 30,
2005

 

December 31,
2004

 

Accrued operating expenses

 

$

3,813

 

$

2,278

 

Accrued compensation and related benefits

 

3,373

 

2,855

 

Accrued installation charges

 

96

 

396

 

 

 

 

 

 

 

Total

 

$

7,282

 

$

5,529

 

 

Note 8 — Redeemable Preferred Stock

 

On February 18, 2005, the Board of Directors of the Company authorized the creation of four series of preferred stock and designated approximately 44,000, 44,000, 5,000, and 5,000 shares as Series A-1, A-2, B-1, and B-2 preferred stock, respectively, of which approximately 24,000, 44,000, 5,000, and 5,000 shares of Series A-1, A-2, B-1, and B-2 preferred stock, respectively, were issued and outstanding as of June 30, 2005.

 

Dividends

 

The holders of the Series A-1, A-2, B-1, and B-2 preferred stock are entitled to receive dividends at the rate of $6.50 per share annually.  The dividends are accrued from day to day, whether or not earned or declared, starting on February 18, 2005. The dividends are payable when and if declared by the Board of Directors. Any accumulation of unpaid dividends on the preferred stock does not bear interest.

 

Redemption

 

The holders of the Series A-1 and B-1 preferred stock may elect to redeem all or a portion of the shares on or after February 18, 2006 and the holders of the Series A-2 and B-2 preferred stock may elect to redeem all or a portion of the shares on or after February 18, 2007.

 

Each share of Series A-1 and A-2 preferred stock is redeemable for an amount equal to (i) $100 plus (ii) all declared or accumulated but unpaid dividends. Each share of Series B-1 and B-2 preferred stock is redeemable for an amount equal to (i) $100, plus (ii) all declared or accumulated but unpaid dividends, plus (iii) additional consideration if the Company’s common stock’s average closing sales price per share is not at least $7.00 for any 10 consecutive trading day period during a one year period commencing ten days after the SEC declares the Company’s registration statement effective covering the common shares issued in the acquisition.

 

On or after February 18, 2009, the Company may redeem all or any portion of the Series A-1, A-2, B-1, and B-2 preferred stock.

 

Liquidation

 

Series A-1, A-2, B-1, and B-2 preferred stockholders are entitled to receive, upon liquidation, an amount equal to their respective redemption price. The holders of the Series A-1, A-2, B-1, and B-2 preferred stock rank on a pari passu basis as to the receipt of such distributions and in preference to the holders of common stock.

 

Voting

 

Each outstanding share of preferred stock is entitled to eleven (11) votes on all matters, voting with the shares of common stock as a class.

 

The following table illustrates the activity for each series of preferred stock through June 30, 2005 (in thousands):

 

 

 

Series A-1

 

Series A-2

 

Series B-1

 

Series B-2

 

Total

 

Issued

 

$

2,352

 

$

4,424

 

$

486

 

$

486

 

$

7,748

 

Amounts accrued for dividends for the three months ending March 31, 2005

 

17

 

32

 

4

 

4

 

57

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2005

 

2,369

 

4,456

 

490

 

490

 

7,805

 

Amounts accrued for dividends for the three months ending June 30, 2005

 

37

 

71

 

8

 

8

 

124

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2005

 

$

2,406

 

$

4,527

 

$

498

 

$

498

 

$

7,929

 

 

15



 

Note 9 — Segment Reporting

 

Reportable segments are based upon the Company’s internal organization structure, the manner in which the operations are managed, the criteria used by the Company’s chief operating decision-maker to evaluate segment performance, the availability of separate financial information and overall materiality considerations.  The Company’s chief operating decision-maker is the CEO.

 

Effective with the acquisition of Vidus, the Company reports the results of its operations in two segments: Hosted and Licensed. The operating segments are managed separately because each offers different products and serves different markets. The Hosted segment provides MRM solutions that provide location, reporting, dispatch, messaging, and other management services and that are designed to be easy to implement and use. Customers using the Hosted MRM solutions can manage their mobile workers in several ways, including by logging onto the Company’s website, receiving their data directly into their existing software applications, using any telephone to access the Company’s speech-to-text voice portal or requesting information from its data centers using application programming interfaces. The Licensed segment provides customers with the Company’s taskforce product offering, a field service automation software solution.  taskforce is designed to enable a predictable and reliable customer experience from commitment to service fulfillment; and to help synchronize the call center and field service operations.

 

Hosted revenues are derived from monthly fees for the Company’s MRM solution and monthly or upfront fees for the hardware device enabling the mobile resource to utilize the MRM solution. Licensed revenues are derived from license fees, installation fees and training and post contract customer support services to end users.

 

Information about operations by segment is as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

Hosted

 

Licensed

 

Consolidated

 

Hosted

 

Licensed

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue from external customers

 

$

19,685

 

$

941

 

$

20,626

 

$

18,331

 

$

 

$

18,331

 

Cost of revenue

 

9,227

 

1,473

 

10,700

 

8,669

 

 

8,669

 

Intangibles amortization

 

 

1,010

 

1,010

 

11

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

10,458

 

(1,542

)

8,916

 

9,651