10-K 1 a06-3153_110k.htm ANNUAL REPORT PURSUANT TO SECTION 13 AND 15(D)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

(Mark One)

 

x

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

For the fiscal year ended December 31, 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

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

47071 Bayside Parkway

Fremont, CA 94538

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: 510-668-1638

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large Accelerated Filer o

 

Accelerated Filer x

 

Non-Accelerated Filer 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 x

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $122,887,300 as of June 30, 2005, based upon the closing sale price on the NASDAQ National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were 61,214,911 shares of the registrant’s Common Stock issued and outstanding as of February 15, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

The information required under Part III of this report on Form 10-K is incorporated herein by reference from the definitive proxy statement to be filed in connection with the registrant’s 2006 annual meeting of stockholders.

 




TABLE OF CONTENTS

PART I

 

 

 

 

Item 1.

 

Business

 

1

Item 1A.

 

Risk Factors

 

11

Item 1B.

 

Unresolved Staff Comments

 

20

Item 2.

 

Properties

 

21

Item 3.

 

Legal Proceedings

 

21

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

21

PART II

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity and Related Stockholder Matters

 

22

Item 6.

 

Selected Financial Data

 

23

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 8.

 

Financial Statements and Supplementary Data

 

44

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 

 

44

Item 9A.

 

Controls and Procedures

 

44

Item 9B.

 

Other Information

 

49

PART IV

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

49

 

 

Report of Independent Registered Public Accounting Firm

 

53

 

 

Consolidated Balance Sheets—December 31, 2005 and 2004

 

54

 

 

Consolidated Statements of Operations—Years ended December 31, 2005, 2004 and 2003 

 

55

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income—Years ended December 31, 2005, 2004 and 2003

 

56

 

 

Consolidated Statements of Cash Flows—Years ended December 31, 2005, 2004 and 2003 

 

57

 

 

Notes to Consolidated Financial Statements

 

58

 




Except for the historical information contained in this Report on Form 10-K, the matters discussed in this Report are forward-looking statements involving risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Potential risks and uncertainties include, but are not limited to, fluctuations in quarterly results, customer acceptance of our products and services, our ability to adapt to rapid technological change, our dependence on wireless networks, network infrastructure and positioning systems owned and controlled by others and general economic and political conditions. Further information regarding these and other risks is included in this Report and in our other filings with the Securities and Exchange Commission (“SEC”).

PART I

Item 1.                        Business

Overview

@Road®, Inc. is a leading provider of mobile resource management (“MRM”) solutions, a category of business productivity solutions designed to enable the effective management of mobile resources. Currently, we market and sell our solutions to a range of customers in North America and Europe.

@Road, Inc. was incorporated in 1996 under the laws of the State of Delaware. From July 1996 through June 1998, our operations consisted primarily of various start-up activities relating to our MRM solutions, including development of global positioning system (“GPS”) technologies, recruiting personnel and raising capital. We did not recognize any revenue prior to June 1998, and our expenses consisted of research and development, sales and marketing, and general and administrative expenses. In 1998, we expanded our strategy to provide location-relevant and time-sensitive information solutions to companies managing mobile resources. In the second half of 1998, we introduced the first version of a MRM solution that is now called @Road GeoManagerSM iLM®, which provides location, reporting, dispatch, messaging, and other management services to help companies manage their mobile resources more efficiently. Subsequent to the introduction of @Road GeoManager iLM, we introduced a number of additional MRM solutions, including @Road PathwaySM and @Road PorticoSM.

On February 18, 2005, we acquired Vidus™ Limited (“Vidus”), a provider of dynamic field service automation software located in Ipswich, United Kingdom. Vidus markets and sells a software solution called Taskforce™ primarily to utility and telecommunications companies in Europe. In January of 2006, Vidus changed its name to @Road, Ltd. All references herein to “Vidus” or “@Road, Ltd.” shall mean our subsidiary, @Road, Ltd., formerly named Vidus Limited.

During 2005, we completed a substantial portion of the migration of subscribers away from cellular digital packet data (“CDPD”) wireless provided by wireless carriers to more up-to-date network protocols. We ended our migration initiative in February 2006. Some of our wireless carrier partners, such as AT&T Wireless and Verizon Wireless notified us as early as 2002 that they were planning to discontinue their CDPD networks over a period of years. Today, CDPD is an older wireless technology and has largely been superseded in the industry by more modern protocols, such as code division multiple access (“CDMA”) 1XRTT, general packet radio service ("GPRS"), evolution-data optimized (“EvDO”) and enhanced data rates for GSM evolution (“EDGE”). At December 31, 2004, we still served approximately 64,000 subscribers on CDPD networks. At December 31, 2005, this number was approximately 19,000 subscribers. During 2005, we were required to dedicate considerable resources to our effort to switch CDPD subscribers to other protocols. Now that we have concluded our CDPD migration initiative, we plan to reallocate these resources to other business functions.

In 2004, we were selected by SBC Services, Inc. (now AT&T), to provide mobile resource management solutions for up to 35,000 of their field service technicians. At December 31, 2005, we had

1




deployed our solutions to approximately 32,000 field service technicians under our agreement with SBC (AT&T).

Strategy

We believe that leaders in the global MRM market are evaluated on a number of criteria, including size, technology leadership, financial strength, strength of customer base, breadth and depth of strategic relationships, ability to manage large solution deployments and management experience. We believe that based on these criteria, we are a leader in the MRM market. Our objective is to enhance our leadership position in the global MRM market. Key elements of our strategy are:

·       Further penetrate vertical markets in which we have or are developing leading reference customers.   We have developed relationships with leading companies in selected vertical markets, such as telecommunications, utilities and construction. We seek to leverage our relationships with these customers and our knowledge of their MRM needs to attract other potential medium- to large-sized customers in these markets. In other vertical markets, we intend to replicate the model of deploying our solutions with a leading reference customer and leveraging this relationship and our MRM market expertise to attract other customers in those markets.

·       Create new value-added services for our customers.   We intend to continue to add new features and functionality to our solutions and develop new platforms that take advantage of advancements in hosted applications, business analytics, optimization, data processing and wireless communications. We expect to continue to release new features that synthesize the information currently retrieved by our existing solutions and which arise from working closely with our customers. We expect some of these features to be incorporated into our solutions as free enhancements, while others will be offered for additional fees. We intend to continue to use our international capabilities to help develop and support new features and functionality for our solutions. In addition, we intend to continue to develop an open platform architecture to allow our customers and partners to integrate third-party applications with our solutions.

·       Expand our solutions internationally.   We intend to identify new geographic markets for which our solutions can satisfy evolving customer demands. We currently market all our solutions in the United States and Canada, and certain of our solutions in Europe. We intend to expand the set of solutions offered in Europe in future periods. We believe that leveraging our technology leadership position, our experience with customers in the United States and Canada and the distribution resources of resellers, agents and wireless carriers internationally will help us establish customer awareness and acceptance of our solutions in international markets.

·       Acquire or invest in complementary businesses and technologies.   We intend to supplement our customer base, revenue, solutions and geographic presence by selectively acquiring or investing in complementary businesses and technologies.

@Road Solutions

Our MRM solutions are designed to allow customers to improve productivity by enabling the effective management of the activities of their mobile workers, assets, goods and services. In addition, our solutions are designed to enable customers to increase the utility of their mobile resources and decrease their costs of operations by enhancing scheduling of mobile workers in both pre-planned static and real-time dynamic work environments and by facilitating business processes, such as event confirmation and forms processing in the field. Our solutions also provide location, reporting, routing, auditing, messaging, and other management services.

2




As a result of our development and ongoing management of a complex MRM infrastructure integrating wireless communications, location-based technologies, software applications, transaction processing and the Internet, our solutions offer a secure, scalable, upgradeable, enterprise-class platform, available in hosted, on-premise or hybrid environments, that connect mobile workers in the field to corporate data on-demand.

Our customers can deploy and use our solutions in several ways, including:

·       Hosted—Customers manage their mobile resources over the Internet by logging on to our website and using certain of our applications that are hosted by us at data centers in the United States.

·       Licensed—Customers can manage their mobile resources by installing certain of our software at their premises and using the applications with their internal information technology infrastructure.

·       Hybrid—Customers can manage their mobile resources by deploying MRM solutions that contain both Hosted and Licensed elements in a configuration responsive to their needs.

Additionally, our solutions are designed to be compatible with a number of third-party applications as well as the commercial or proprietary applications of our customers. Our solutions are capable of communicating with customers’ applications and third-party applications by using application programming interfaces or by using our continuous data feed service called DirectData.

@Road combines three elements of MRM—Field Force Management, Field Service Management and Field Asset Management—to create solutions for a variety of industries, including telecommunications, utilities, construction, transportation, field services, waste management and facilities management. Our solutions can be summarized as follows:

·       Field Force Management (“FFM”):   Our FFM solutions are designed to help companies better manage their mobile workers. These solutions include hosted applications and in–field hardware integrating cellular or satellite wireless communications, GPS capability, Internet–enabled applications and hosted customer information databases.

·       Field Service Management (“FSM”):   Our FSM solutions are designed to help companies better manage their mobile workers’ work. These solutions include licensed software applications providing automated static, or pre-planned, as well as dynamic routing and scheduling of mobile workers using a customer’s actual work orders and a set of constraint—based variables.

·       Field Asset Management (“FAM”):   Our FAM solutions are designed to help companies better manage their mobile workers’ assets in the field. These solutions include hosted applications and in-field hardware to capture and assess vehicle diagnostics information and data arising from sensors installed in vehicles.

We believe that customers use an anticipated or expected return on investment as a primary selection criterion when evaluating MRM solutions. We believe that the benefits of our solutions that drive a rapid return on investment for our customers include the following:

·       Improved productivity of mobile resources;

·       Decreased costs of operations of mobile resources;

·       Improved efficiency of a customer’s overall operations; and

·       Improved responsiveness to our customers’ customers.

In addition, we offer multi-year subscription contracts that allow our customers to pay us on a monthly basis and minimize upfront cash commitments. We believe a monthly payment subscription model further accelerates a customer’s return on investment in our solutions.

3




More on @Road Field Force Management Solutions

Our FFM solutions integrate wireless communications, location-based technologies, software applications, transaction processing and the Internet, and are designed to provide customers with detailed information about the activities and locations of their mobile workers. These solutions provide current and historical data relating to a customer’s mobile resources in a variety of hosted formats, including activity reports, maps and completed business forms. Our FFM solutions are grouped into three lines of products: @Road GeoManager, @Road Pathway and @Road Portico.

Our customers generally contract to receive our FFM solutions for terms of one to five years and are provided the option to purchase value-added service features for additional fees. Upon the completion of the initial term of a customer’s contract, the customer’s services continue on a month-to-month basis. Our revenue is derived from monthly fees for our FFM solutions and any purchased value-added features, and monthly or upfront fees for the in-vehicle hardware devices enabling the mobile resource to utilize our FFM solutions.

@Road GeoManager

@Road GeoManager is our flagship FFM solution and is designed to provide comprehensive MRM for customers in all our target markets. We commence implementation of the GeoManager solution with the deployment of a hardware device to each of the customer’s mobile resources, such as service vehicles or trucks. We refer to each mobile resource with such a hardware device as a ‘‘subscriber.’’  The GeoManager solution operates with in-vehicle hardware and mobile telephones. Our proprietary Internet Location Manager (“iLM”) hardware device is installed in a vehicle and integrates a GPS receiver and a wireless modem with our operating and diagnostic software. To deploy the GeoManager solution using a mobile telephone, customers download our operating and diagnostic software to mobile telephones over the appropriate wireless network.

The in-vehicle and hand-held hardware devices send and receive a variety of information at regular intervals and on-demand. Such data includes location, velocity, time, operational diagnostics and business information. These data are transmitted to our data centers using wireless networks and the Internet. If a wireless connection to a hardware device is not available, the hardware device will typically store up to five days of captured data and seek to transmit the data when a wireless connection is next available.

The GeoManager solution provides customers a variety of features and reports, including a MapView feature that allows them to locate mobile workers in real-time using an on-screen map. Users are able to establish personal “Landmarks” on the map representing their customers’ sites, common stops and other locations, in order to more easily view arrival and departure times to and from desired locations. Our two-way messaging service feature permits text communication between a field worker such as a technician or driver, and a user of our solution connected to the Internet, such as an operations manager or dispatcher.

@Road Pathway

Our @Road Pathway solution is designed to be a mid-level FFM solution, with more features than our Portico solution (discussed below) but fewer than our GeoManager solution. The Pathway solution provides customers a number of features and reports, including a MapView feature that allows them to locate mobile workers on-demand using an on-screen map. Customers are able to establish personal Landmarks in order to view arrival and departure times to and from desired locations.

The Pathway solution is deployed in substantially the same manner as our GeoManager solution, which requires either the installation of a hardware device in each of the customer’s vehicles or installation of our software on each user’s mobile telephone.

4




@Road Portico

Our @Road Portico solution is designed to be an entry-level FFM solution, with fewer features than GeoManager or Pathway. The Portico solution provides customers with a MapView feature that allows them to locate mobile workers on-demand using an on-screen map. It also allows customers to use reports or on-demand alerts to help users manage productivity in the field.

The Portico solution is deployed in substantially the same manner as the GeoManager option that requires the installation of a hardware device in each of the customer’s vehicles.

More on the @Road Field Service Management Solution

Our FSM solution is a licensed software program that uses constraint-based variables and current information about the status of work orders and mobile resources to provide optimized scheduling and routing data to our customers. This solution is currently delivered to our customers in the form of a software license relating to the number of workers the application is intended to manage. This solution, called Taskforce, was acquired in connection with our acquisition of Vidus in February 2005.

We currently offer Taskforce as a licensed software solution and expect to offer it on a managed services basis and hosted basis in the future. Our customers contract to receive our FSM solution on a licensed basis, which generally includes licensing, installation, training and support and maintenance fees.

Taskforce

Taskforce is an intelligent software application that enables customers to automatically schedule their mobile workers, such as technicians or telecommunications engineers. The software allocates workers to the jobs in the field in a manner designed to reduce operational inefficiencies. This is achieved by reducing travel and other non-productive time and ensuring that the mobile worker has the necessary skills and equipment to complete the job allocated to that worker. Taskforce can adapt to changing and unpredictable circumstances, such as traffic delays, as the schedule produced by the software is constantly updated during the day. This dynamic responsiveness to changing conditions helps to ensure that an appropriate worker arrives at the customer’s premises when expected.

More on @Road Field Asset Management Solutions

Our FAM solutions are integrated with our FFM solutions and are designed to help customers better manage their assets in the field by providing current and historical information relating to the use and operation of those assets. Examples of our FAM solutions include Vehicle Diagnostics and Status Sensors.

Our customers generally contract to receive our FAM solutions in connection with the purchase of our FFM solutions. Upon the completion of the initial term of a customer’s contract, the customer’s services continue on a month-to-month basis. Our revenue is derived from monthly fees for our FAM solutions, and monthly or upfront fees for the in-vehicle hardware device, if any, enabling the mobile resource to utilize our FAM solutions.

Vehicle Diagnostics

Our Vehicle Diagnostics solution for both heavy (J1708) and light-duty (OBD II) vehicles is an add-on option to our GeoManager solution. This service is designed to connect with the vehicle’s data bus and retrieve engine and other vehicle diagnostic data so our customers can remotely monitor engine performance for proactive intervention and prevention of vehicle downtime.

5




Status Sensors

We offer SwitchStatus and TempStatus sensor solutions. The SwitchStatus solution monitors and reports on the status of one to four switches located in a vehicle. SwitchStatus may be used to monitor the occurrence of specific events such as when the ignition switch on a vehicle is turned off, or when a vehicle door is opened or closed.

The TempStatus solution monitors and reports on the temperature in a compartment of a vehicle, such as a refrigeration compartment. This solution is designed for segments in which the temperature of a vehicle’s compartment is important, such as the food and chemical distribution markets.

Customers

We market and sell our solutions to a broad range of customers in the United States, Europe and Canada. The number of mobile resources enabled with our solutions on either a subscription or a per seat license basis has grown from 135 as of December 31, 1998, to approximately 188,000 as of December 31, 2005. We categorize a customer in a small, medium or large-sized customer group by reference to the total number of subscribers to our services or user licenses relating to our software for that customer. Small-sized customers have 100 or fewer subscribers or user licenses, medium-sized customers have 101 to 1,000 subscribers or user licenses, and large-sized customers have more than 1,000 subscribers or user licenses. Currently, we have customers in the following industries:

·  Telecommunications

 

·  Courier/Delivery

·  Field Service

 

·  Distribution

·  Construction

 

·  Security

·  Facilities/Waste Management

 

·  Cable/Broadband

·  Freight and Passenger Transportation

 

·  Utilities

 

In 2005, 2004 and 2003, one customer, Verizon Communications, represented 13%, 17% and 17% of total revenues, respectively. No other customer comprised 10% or more of total revenues during any of those periods. We do not expect revenues from Verizon Communications to exceed 10% of our total revenues in 2006. During 2006, we expect that revenues from AT&T may comprise more than 10% of our total revenues.

Research and Development

We concentrate our research and development activities on software development, services and device engineering. Our research and development resources and personnel are located in the United States, the United Kingdom and India. To enhance our existing solutions and to introduce new solutions to our existing and potential customers, we focus on the following key areas:

·       Software.   We intend to continue to develop our software solutions by offering new releases enhancing our existing software applications. In addition to other offerings announced in 2005, we announced the release of Taskforce 7, which includes a Microsoft .Net architecture and enables end users to use Internet-based tools to book appointments directly with our customers’ appointment booking systems.

·       Services.   We intend to continue to develop our services by offering new features and options while enhancing existing features. In addition to other offerings announced in 2005, we announced a vehicle diagnostics service, which provides our customers access to their vehicle diagnostic information over the Internet. This service is designed to help remote field asset managers quickly identify engine problems and diagnose such problems to better utilize maintenance and repair resources.

6




·       Devices.   We intend to continue to develop and release devices to add new features as well as to enhance existing features. In addition to other offerings announced in 2005, we announced our iLM 3100-W series device, which adds third generation wireless data communications such as EDGE and EvDO and a Wi-Fi hotspot connectivity to our line of Internet Location Manager devices.

We spent $13.0 million, $6.2 million and $5.5 million on research and development activities in 2005, 2004 and 2003, respectively. As of December 31, 2005, we had 137 employees in research and development.

Technology

Our technology efforts focus on creating new solutions and enhancing the reliability, availability and features of our existing solutions while maintaining a scalable and cost-effective architecture. Our proprietary technologies are designed to work with technologies from other companies. We expect to continue to develop additional proprietary technology where feasible and to purchase or license technology where cost-effective. Our technology efforts focus on the following areas:

·       Access and Internet technology.   The delivery of our solutions can be complex in part because it involves the continuous collection, storage and processing of data from subscribers in the field and from work order and customer service systems deployed by our customers, as well as the processing of requests from users and third party applications accessing our data centers from the Internet. To manage the throughput of customer information and to deliver our solutions to our customers, we use secure Internet connections between our data centers and customers and between our data centers and the wireless networks transmitting customer information.

·       Software applications.   We have a software development organization that designs, builds and tests new software for use with our solutions. This organization includes personnel and other resources in Fremont, California, Ipswich, England and Chennai, India. We have created a specially designed environment that is intended to accelerate the development and testing of new software without impacting the availability of our solutions to existing customers. We also design, build and test software for installation in the hardware devices that are used to deliver our solutions, including the iLM, Internet Data Terminal or iDT (our messaging and business forms field client device) and mobile telephones.

·       Wireless technology.   Our hosted solutions currently operate on several wireless networks offered by a number of wireless carriers, including GPRS, CDMA 1XRTT, EDGE, EvDO, and Integrated Digital Enhanced Network (“iDEN”). Certain of our hosted solutions also are designed to use satellite wireless communications.

·       Information technology.   We have an information technology organization dedicated to maintaining and enhancing our data centers. By using our data centers, we relieve our customers of the development and operations burden of managing wireless communications protocols, location technologies, hosted software applications, transaction processing infrastructure and Internet technologies. Our data centers include servers located in Redwood City, California and Ashburn, Virginia and at our network operations center in Fremont, California. We maintain variable-speed capacity connections between our data centers and the Internet and dedicated connections to the wireless networks we use. In addition, our data centers automatically replicate customer data on a minute-by-minute basis. In the event of a power failure, our systems would be powered by a backup power supply.

7




Key Alliances and Relationships

We intend to continue to establish relationships with third parties for the purpose of accelerating the adoption of our solutions. We believe that establishing strategic relationships will facilitate our technological leadership and provide early access to emerging technologies and new customers. Some of our existing relationships include:

·       Wireless carriers.   We have established relationships with Bell Mobility, Cingular Wireless (which acquired AT&T Wireless, and therefore our relationship with AT&T Wireless, in October 2004), Nextel Partners, Sprint (which acquired Nextel Communications and therefore, our relationship with Nextel Communications, in August 2005), TELUS Mobility and Verizon Wireless to provide wireless connectivity between our subscribers and the Internet. With Bell Mobility, Nextel Partners, TELUS Mobility and Verizon Wireless, our customers generally have separate contracts for wireless communications with the carrier. With Sprint and Cingular Wireless, we contract with the carriers to provide wireless communications which are bundled with our solutions, to certain customers, while other customers contract directly with these carriers for wireless communications. In addition, we have established a relationship with Nextel Communications (now Sprint) by which it can resell certain @Road solutions in exchange for monthly fees.

·       System Integrators.   We have established relationships with third parties who assist us in marketing and selling our solutions. For example, we have established a relationship with LogicaCMG, enabling it to integrate our Taskforce solution with LogicaCMG products and market the combined solution in the United States utilities industry.

Sales and Marketing

Our sales and marketing objective is to achieve broad market penetration through vertical marketing and targeted sales activities. We currently market and sell our solutions through several sales channels, including the following:

·       Strategic sales force.   We have a team of sales employees focused on marketing and selling our solutions to enterprise accounts. Enterprise accounts are defined as prospects with greater than 1,000 mobile resources. The sales process with enterprise accounts often requires many months of activity, is competitive and requires a pilot test of our solutions. This sales force includes personnel in the United States, Europe and Australia.

·       Major account sales force.   We have a team of sales employees focused on marketing and selling our solutions to major accounts. Major accounts are defined as customers with 101 to 1,000 mobile resources. This sales force is geographically dispersed throughout the United States and in the United Kingdom.

·       Inside sales force.   We have a team of sales employees focused on marketing and selling our solutions to small business customers and selling additional solutions to existing customers. This sales force is located in Fremont, California.

·       Agent sales force.   We have a team of sales employees who manage a network of sales agents focused on marketing and selling our solutions. These sales agents are geographically dispersed throughout the United States. Participants in the agent sales program are compensated for the sales of our solutions. Sales agents facilitate sales of our solutions through their own efforts and work with wireless carrier alliances to increase our customer base.

·       Wireless carrier sales force.   We have a team of sales employees focused on marketing and selling our solutions with the sales personnel of wireless carriers. These wireless carriers include Cingular Wireless, Sprint and Verizon Wireless. These carrier alliances market or facilitate sales of our

8




solutions through their own sales channels or work with our dedicated wireless carrier sales force to increase our customer base.

Our marketing department is engaged in a variety of activities, such as awareness and lead generation programs, development of collateral and sales tools, public relations, seminars, direct mail, trade shows, and co-marketing with third parties.

We spent $21.4 million, $12.3 million and $11.4 million on sales and marketing activities in 2005, 2004 and 2003, respectively. As of December 31, 2005, our sales and marketing team consisted of 117 employees.

Competition

We face strong competition for our solutions, and this competition is expected to increase in the future. We compete primarily on the basis of functionality, integration capability, deployment expertise, ease of use, quality, price, service availability, customer service and corporate financial strength. As the demand for MRM solutions increases, the quality, functionality and breadth of competing products and services will likely improve and new competitors will likely enter our market. In addition, the widespread adoption of industry standards and the deployment of high-speed wireless data networks may make it easier for new market entrants or existing competitors to improve their existing products and services, to offer some or all of the products and services we offer or may offer in the future, or to offer new products and services that we do not offer. We also do not know to what extent network infrastructure developers and wireless network operators will seek to provide integrated wireless communications, GPS, software applications, transaction processing, and Internet solutions, including access devices developed internally or through captive suppliers.

If we are unable to compete successfully, our business may suffer and our sales cycles could lengthen, resulting in a loss of market share or revenues. We face competition from a number of different business productivity solution providers, including:

·       Solutions developed internally by our prospective customers’ information technology staffs, particularly by large companies;

·       Discrete means of communication with mobile workers, such as pagers, two-way radios, hand-held devices and wireless telephones;

·       Solutions targeted at specific vertical markets, such as services offered by Qualcomm that monitor assets in the long-haul transportation sector;

·       Solutions designed to help companies schedule and route their mobile workers; and

·       Solutions offered by smaller market entrants.

Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do. Additionally, many of these companies have greater name recognition and more established relationships with our target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can.

9




Raw Materials

See the risk factor under Item 1A below entitled “We depend on a limited number of third parties to manufacture and supply certain components of our solutions,” which is incorporated herein by this reference.

Intellectual Property

We rely on a combination of patent, trade secret, trademark and copyright laws, nondisclosure agreements and other contractual restrictions to protect our proprietary technology. As of December 31, 2005, we possessed 21 patents, which we believe cover various aspects of our hosted solutions and elements of our licensed software solutions. We also have numerous additional patents pending in jurisdictions throughout the world. We have filed and intend to continue to file patent applications in any country where we believe there is a strategic, technological or business justification.

As part of our confidentiality procedures, we generally enter into nondisclosure agreements with our employees, consultants, distributors and corporate alliances and limit access to and distribution of our software, documentation and other proprietary information. In the event that a third party breaches the confidentiality provisions or other obligations in one or more of our agreements or misappropriates or infringes our intellectual property or the intellectual property licensed to us by third parties, our business could be seriously harmed. Third parties may independently discover or invent competing technologies or reverse engineer our trade secrets, software or other technology. Furthermore, laws in some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. Therefore, the measures we take to protect our proprietary rights may not be adequate.

Third parties may claim that our current or future products or services infringe their proprietary rights or assert other claims against us. As the number of entrants into our market increases, the possibility of an intellectual property or other claim against us grows. Any intellectual property or other claim, with or without merit, would be time-consuming and expensive to litigate or settle and could divert management attention from focusing on our core business. As a result of such a dispute, we may have to pay damages, incur substantial legal fees, develop costly non-infringing technology, if possible, or enter into license agreements, which may not be available on terms acceptable to us, if at all. Any of these results would increase our expenses and could decrease the functionality of our solutions, which would make our solutions less attractive to our current or potential customers. We have agreed in some of our agreements, and may agree in the future, to indemnify other parties for any expenses or liabilities resulting from claimed infringements of the proprietary rights of third parties.

Employees

As of December 31, 2005, we had 582 employees, 344 of whom were located in the United States, 127 of whom were located in India and 111 of whom were located in the United Kingdom. Our future success is substantially dependent on the performance of our executives, senior management and key technical personnel, and on our ability to find and retain highly qualified technical and managerial personnel. We believe relationships with our employees are good.

Segments

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

Effective with the acquisition of Vidus, we report the results of our operations in two segments: Hosted and Licensed. The segments are managed separately because each offers different products and

10




serves different segments of the market. The Hosted segment provides FFM and FAM solutions that connect mobile workers in the field to corporate data on demand, help measure overall mobile workforce performance and manage mobile assets. The Licensed segment provides customers with our FSM solution, which 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.

The financial information used by our chief operating decision-maker includes net revenue from external customers, gross margin and net income (loss) for each of these segments.

For an analysis of financial information about geographic areas as well as our segments, see “Note 12—Segment Reporting” to our consolidated financial statements incorporated herein.

Available Information

Our primary Internet address is www.road.com. We make our periodic SEC reports (Forms 10-Q and Forms 10-K) and current reports (Forms 8-K) available free of charge through our website as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules.

Item 1A.                Risk Factors

In addition to the other information contained in this Report, the following factors should be carefully considered in evaluating our business and prospects. The risks and uncertainties described below are intended to be ones that are specific to us or our industry and that we deem material, but they are not the only ones that we face.

On February 18, 2005, we acquired Vidus. The combined company may not realize expected benefits because of integration and other challenges.

If the combined company fails to meet the challenges involved in integrating operations and products successfully or otherwise fails to realize any of the anticipated benefits of the acquisition, then the results of operations of the combined company could be seriously harmed. Realizing the benefits of the acquisition, if any, will depend in part on the successful integration of technology, operations and personnel. The integration of the companies is a complex, time-consuming and expensive process that could significantly disrupt the business of the combined company.

The combined company may not successfully integrate the operations of @Road and Vidus in a timely manner, or at all, and the combined company may not realize the anticipated benefits of the acquisition to the extent, or in the timeframe, anticipated. The anticipated benefits of the acquisition are based on projections and assumptions, including successful integration, not actual experience. In addition to the integration risks discussed above, the combined company’s ability to realize those benefits could be adversely affected by practical or legal constraints on its ability to combine operations.

If the value of Vidus’ goodwill and or intangibles becomes impaired, we may be required to incur significant costs that would adversely affect our financial results.

Under the purchase method of accounting, the combined company allocated the total estimated purchase price of $46.3 million to Vidus’ tangible assets, purchased technology and other intangible assets and liabilities assumed based on their fair values as of the date of completion of the acquisition, and recorded the excess of the purchase price over those fair values as goodwill. The combined company will incur amortization expense over the useful lives of amortizable intangible assets acquired in connection with the acquisition. In addition, to the extent the value of goodwill and or intangibles becomes impaired, the combined company may be required to incur material charges relating to the impairment of these

11




assets. Any potential impairment charge could have a material impact on the combined company’s results of operations and could have a material adverse effect on the market value of our common stock.

If wireless communications providers on which we depend for services decide to adopt new wireless technologies, or abandon or do not continue to expand their wireless networks, our operations may be disrupted, we may lose customers and our revenues could decrease.

Currently, our solutions function on GPRS, CDMA 1xRTT, EvDO, EDGE and iDEN networks. These protocols cover only portions of the United States, Europe and Canada. We recently completed a costly and time consuming migration from CDPD, to the protocols set forth above, after wireless communications providers abandoned their CDPD networks in favor of newer technology. If wireless communications providers abandon the protocols upon which our solutions now function in favor of other types of wireless technology, we may not be able to provide services to our customers, or we may be forced to incur considerable costs in order to adapt our solutions to new protocols. In addition, if cellular carriers do not expand their coverage areas, we will be unable to meet the needs of customers who may wish to use our services outside the current cellular coverage area.

Any material weakness or significant deficiency identified in our internal controls could have an adverse effect on our business.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their internal control structure and procedures for financial reporting. As part of our first quarter 2005 and fourth quarter 2005 closing processes and assessments of internal control over our financial reporting, we identified two internal control deficiencies that constituted material weaknesses. The first material weakness concerned our interpretation and implementation of various complex accounting principles in the area of non-recurring transactions, and the second concerned our calculation and timely review of the annual tax provision for 2005. Please see Item 9A Controls and Procedures in Part II of this Report. There can be no assurance that there will not be other significant deficiencies or material weaknesses that would be required to be reported in the future. In addition, we expect the evaluation process and any required remediation, if applicable, will increase our accounting, legal and other costs, and may divert management resources from other business objectives and concerns.

Our stock price is volatile, which may cause you to lose money and could lead to costly litigation against us that could divert our resources.

From time to time, stock markets experience dramatic price and volume fluctuations, particularly for shares of technology companies. These fluctuations can be unrelated to the operating performance of these companies. Broad market fluctuations may reduce the market price of our common stock and cause you to lose some or all of your investment. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive nature and growth rate of our business and the MRM market, the market price of our common stock may rise and fall in response to:

·       quarterly variations in operating results;

·       failure to achieve operating results anticipated by securities analysts and investors;

·       changes in estimates of our financial performance or changes in recommendations by securities analysts;

·       announcements of technological or competitive developments;

·       the gain or loss of a significant customer or order;

·       disposition of shares of our common stock held by large investors; and

·       acquisitions or strategic alliances by us or our competitors.

12




When the market price of a company’s stock drops significantly, stockholders often institute securities class action lawsuits against that company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources from our business.

We face competition from internal development teams of potential customers and from existing and potential competitors, and if we fail to compete effectively, our ability to acquire new customers could decrease, our revenues would decline and our business would suffer.

The market for MRM solutions is competitive and is expected to become even more competitive in the future. If we do not compete effectively, competition could harm our business and limit our ability to acquire new customers and grow revenues, which in turn could result in a loss of our market share and decline in revenues. We believe that our solutions face competition from a number of business productivity solutions, including:

·       solutions developed internally by our prospective customers’ information technology staff, particularly by large customer prospects;

·       discrete means of communication with mobile workers, such as pagers, two-way radios, handheld devices and cellular telephones;

·       solutions targeted at specific vertical markets, such as a service offered by Qualcomm that monitors assets in the long-haul transportation sector;

·       solutions designed to help companies schedule and route their mobile workers; and

·       solutions offered by smaller market entrants, many of which are privately held and operate on a regional basis.

In addition, we believe that our solutions face competition from manufacturing companies that seek to enter the mobile resource management market, such as Trimble Navigation.

We may also face competition from our current and potential alliances, such as wireless carriers, that may develop their own solutions, develop solutions with captive and other suppliers or support the marketing of solutions of other competitors.

We also face numerous challenges associated with overcoming the following competitive factors:

·       Size and resources.   Many of our current and potential competitors have access to substantially greater financial, marketing, distribution, engineering and manufacturing resources than we do, which may enable them to react more effectively to new market opportunities and customer requirements. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer more attractive terms than we can.

·       Name recognition.   Many of our current and potential competitors have greater name recognition and market presence than we do, which may allow them to more effectively market and sell solutions to our current and potential customers.

·       Limits of product and service offerings.   Although we offer a broad range of mobile resource management solutions, a customer prospect may require functionality that we do not offer, which may enable current and potential competitors to exploit the areas in which we do not develop solutions.

·       Customer relationships.   Many of our current and potential competitors have pre-existing relationships with our large customer prospects, which may allow them to more effectively market and sell competitive MRM solutions.

13




As we seek to serve larger customers, we face competition from businesses with greater financial resources, and we may be unable to compete effectively with these businesses.

The existing market is competitive. Competition is particularly vigorous for larger customers, which is a customer segment we have worked to serve. We expect competition to increase further as companies develop new products and/or modify their existing products to compete directly with ours. In addition, competitors may reduce prices to customers and seek to obtain our customers through cost-cutting and other measures. To the extent these companies compete effectively with us, our business could be adversely affected by extended sales cycles, fewer sales, and lower prices, revenue and margins.

Under the terms of our customer contracts for our hosted solutions, once the contract period expires, a customer may terminate our services with little or no notice.

Our customer contracts for our hosted solutions typically provide for a contract period of one, two or three years. Under the terms of a typical contract, a customer will often be subject to a termination fee if it chooses to terminate the contract before the contract period expires. Once the contract period has expired, and unless a customer has executed a new contract, the terms of the contract will remain in force on a month-to-month basis, allowing the customer to terminate the contract by giving very short notice and without incurring any termination fee. The termination of a significant number of customer contracts or customer contracts providing a material portion of our revenues, could cause our business to suffer and adversely affect our financial results.

Our business is subject to the risks associated with international operations.

We recently began offering our products and services in the United Kingdom and Europe, and we have operations in India. A significant portion of our revenue is derived from our international operations. We have limited experience operating in these foreign jurisdictions. As a result, our operating results and financial condition could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including United States taxes on foreign subsidiaries), the enactment of new laws affecting our activities, government regulation of our activities, and changes in the value of the United States dollar relative to the local currency in which our products are sold and our goods and services are purchased.

Our quarterly operating results are subject to fluctuations, and our stock price may decline if we do not meet the expectations of investors and analysts.

Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control. These factors include, but are not limited to:

·       changes in the market for MRM solutions;

·       delays in market acceptance or implementation of our solutions by customers;

·       changes in length of sales cycles of, or demand by, our customers for existing and additional solutions;

·       changes in the productivity of our distribution channels;

·       introduction of new solutions by us or our competitors;

·       changes in our pricing policies or those of our competitors or suppliers;

·       changes in our mix of sources of revenues;

·       general economic and political conditions;

14




·       wireless networks, positioning systems and Internet infrastructure owned and controlled by others; and

·       any need to migrate to new wireless networks, which could cause our solutions to be incompatible with new wireless networks or become out of date.

Our expense levels are based, in part, on our expectation of future revenues. Additionally, a substantial portion of our expenses is relatively fixed. As a result, any shortfall in revenues relative to our expectations could cause significant changes in our operating results from quarter to quarter. We believe period-to-period comparisons of our revenue levels and operating results are not meaningful. You should not rely on our quarterly revenues and operating results to predict our future performance. Our operating results have been, and in some future quarters our operating results may be, below the expectations of public market analysts and investors and, as a result, the price of our common stock may fall.

Our success depends upon our ability to develop new solutions and enhance our existing solutions. If we cannot deliver the features and functionality our customers demand, we will be unable to retain or attract new customers.

If we are unable to develop new solutions, are unable to enhance and improve our solutions successfully in a timely manner, or fail to position and/or price our solutions to meet market demand, we may not attract new customers, existing customers may not expand their use of our solutions, and our business and operating results will be adversely affected. If our enhancements to existing solutions do not deliver the functionality that our customer base demands, our customers may choose not to renew their agreements with us when they reach the end of their initial contract periods, and our business and operating results will be adversely affected. If we cannot effectively deploy, maintain and enhance our solutions, our revenues may decrease, we may not be able to recover our costs, and our competitive position may be harmed.

If one or more of the agreements we have with wireless communications providers is terminated and as a result, we are unable to offer our solutions to customers within a wireless communications provider’s coverage area, we may be unable to deliver our solutions, we may lose customers, and our revenues could decrease.

Our existing agreements with wireless communications providers may, in some cases be terminated immediately upon the occurrence of certain conditions or with prior written notice. If one or more of our wireless communications providers decides to terminate or not to renew its contract with us, we may incur additional costs relating to obtaining alternate coverage from another wireless communications provider outside of its primary coverage area, or we may be unable to replace the coverage at all, causing a complete loss of services to our customers in that coverage area.

We have a history of losses, have only recently become profitable and may not sustain or increase profitability in the future.

We have only recently become profitable and may not sustain or increase profitability in the future. As of December 31, 2005, we had an accumulated deficit of approximately $78.4 million. To sustain profitability, we will need to generate significant revenues to offset our cost of revenues and our sales and marketing, research and development and general and administrative expenses. We may not achieve or sustain our revenue or profit goals and may incur losses in the future. Changes such as increases in our pricing for solutions or the pricing of competing solutions may harm our ability to increase sales of our solutions to new and existing customers. If we are not able to expand our customer base and increase our revenue from new and existing customers, we may be unprofitable.

15




We may establish alliances or acquire technologies or companies in the future, which could result in the dilution of our stockholders and disruption of our business, which could reduce our revenues or increase our costs.

We are continually evaluating business alliances and external investments in technologies related to our business. Acquisitions of companies, divisions of companies, businesses or products and strategic alliances entail numerous risks, any of which could materially harm our business in several ways, including:

·       diversion of management’s attention from our core business objectives and other business concerns;

·       failure to integrate efficiently businesses or technologies acquired in the future with our pre-existing business or technologies;

·       potential loss of key employees from either our pre-existing business or the acquired business;

·       dilution of our existing stockholders as a result of issuing equity securities; and

·       assumption of liabilities of the acquired company.

Some or all of these problems may result from current or future alliances, acquisitions or investments. Furthermore, we may not realize any value from these alliances, acquisitions or investments.

We depend on a limited number of third parties to manufacture and supply certain components of our solutions.

We rely on a limited number of sole suppliers for certain components of our solutions. We do not have long-term agreements with these suppliers. If these parties do not perform their obligations, or if they cease to supply the components needed for our solutions, we may be unable to find other suppliers and our business would be seriously harmed. We cannot be sure that alternative sources for these components will be available when needed, or if available, that these components will be available on commercially reasonable terms. These sole suppliers include Motorola, which supplies microcontrollers for use in our Internet Location Manager and Micronet, which supplies our iDT.

It is our practice to attempt to maintain no more than a three to nine month supply of microcontrollers, iDT devices and other components and devices needed for our solutions. Although we believe that we have sufficient quantities of such components and devices to last the next three to nine months, if our agreements with these or other suppliers and manufacturers are terminated or expire, if we are unable to obtain sufficient quantities of these products or components critical for our solutions, if the quality of these products or components is inadequate, or if the terms for supply of these products or components become commercially unreasonable, our search for additional or alternate suppliers and manufacturers could result in significant delays, added expense and our inability to maintain or expand our customer base. Any of these events could require us to take unforeseen actions or devote additional resources to provide our products and services and could harm our ability to compete effectively.

A disruption of our services or of our software applications due to accidental or intentional security breaches may harm our reputation, cause a loss of revenues and increase our expenses.

Unauthorized access, computer viruses and other accidental or intentional actions could disrupt our information systems or communications networks or could adversely impact the functionality and security of our software products. We expect to incur significant costs to protect against the threat of security breaches and to alleviate problems caused by any breaches. Currently, the wireless transmission of our customers’ proprietary information is not protected by encryption technology. If a third party were to misappropriate our customers’ proprietary information or adversely impact the operations of our customers, we could be subject to claims, litigation or other potential liabilities that could seriously harm our revenues and result in the loss of customers.

16




System or network failures could reduce our sales, increase costs or result in liability claims.

Any disruption to our services, information systems or communications networks or those of third parties could result in the inability of our customers to receive our services for an indeterminate period of time. Our hosted solutions and related operations depend upon our ability to maintain and protect our computer systems at data centers located in Ashburn, Virginia and Redwood City, California, and our network operations center in Fremont, California. The facilities in California are in or near earthquake fault zones. Our services may not function properly and we may not be able to adequately support and maintain our software products if our systems fail, if there is an interruption in the supply of power, or if there is an earthquake, fire, flood or other natural disaster, or an act of war or terrorism. Within each of our data centers, we have fully redundant systems; however, in the event of a system or network failure, the process of shifting access to customer data from one data center to the other would be performed manually, and could result in a further disruption to our services and our ability to adequately support and maintain our software products. Any disruption to our services could cause us to lose customers or revenue, or face litigation, customer service or repair work that would involve substantial costs and could distract management from operating our business.

Our success and ability to compete depend upon our ability to secure and protect patents, trademarks and other proprietary rights.

Our success and ability to compete depend on our ability to protect our proprietary rights to the technologies used to implement and operate our solutions in the United States, the United Kingdom and in other countries. In the event that a third party breaches the confidentiality provisions or other obligations in one or more of our agreements or misappropriates or infringes our intellectual property rights or the intellectual property rights licensed to us by third parties, our business could be seriously harmed. To protect our proprietary rights, we rely on a combination of trade secrets, confidentiality and other contractual provisions and agreements, and patent, copyright and trademark laws, which afford us only limited protection. Third parties may independently discover or invent competing technologies or reverse engineer our trade secrets, software or other technology. Furthermore, laws in some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. Therefore, the measures we take to protect our proprietary rights may not be adequate.

Claims that we infringe third-party proprietary rights could result in significant expenses or restrictions on our ability to provide our solutions.

Third parties may claim that our current or future solutions infringe their proprietary rights or assert other claims against us. As the number of entrants into our market increases, the possibility of an intellectual property or other claim against us grows. Any intellectual property or other claim, with or without merit, would be time-consuming and expensive to litigate or settle and could divert management’s attention from our core business. As a result of such a dispute, we may have to pay damages, incur substantial legal fees, develop costly non-infringing technology, if possible, or enter into license agreements, which may not be available on terms acceptable to us, if at all. Any of these results would increase our expenses and could decrease the functionality of our solutions, which would make our solutions less attractive to our current or potential customers. We have agreed in some of our agreements, and may agree in the future, to indemnify other parties for any expenses or liabilities resulting from claimed infringements of the proprietary rights of third parties.

If our customers do not have access to sufficient capacity on reliable wireless networks, we may be unable to deliver our services, our customers’ satisfaction could decline and our revenues could decrease.

Part of our ability to grow and maintain profitability depends on the ability of wireless carriers to provide sufficient network capacity, reliability and security to our customers. Even where wireless carriers provide coverage to entire metropolitan areas, there are occasional lapses in coverage, for example due to

17




tunnels blocking the transmission of data to and from wireless modems used with our solutions. These effects could make our services less reliable and less useful, and customer satisfaction could suffer.

We depend on GPS technology owned and controlled by others. If we do not have continued access to GPS technology or satellites, we will be unable to deliver a majority of our solutions and revenues will decrease.

A majority of our solutions rely on signals from GPS satellites built and maintained by the United States Department of Defense. GPS satellites and their ground support systems are subject to electronic and mechanical failures and sabotage. If one or more satellites malfunction, there could be a substantial delay before they are repaired or replaced, if at all, our products and services may cease to function, and customer satisfaction would suffer.

In addition, the United States government could decide to discontinue operation and maintenance of GPS satellites or to charge for the use of GPS. Furthermore, because of ever-increasing commercial applications of GPS and international political unrest, United States government agencies may become increasingly involved in the administration or the regulation of the use of GPS signals in the future. If factors such as the foregoing affect GPS, for example by affecting the availability, quality, accuracy or pricing of GPS technology, our business will suffer.

Defects or errors in our solutions could result in the cancellation of or delays in the implementation of our solutions, which would damage our reputation and harm our financial condition.

We must develop our solutions quickly to keep pace with the rapidly changing MRM market. Solutions that address this market are likely to contain undetected errors or defects, especially when first introduced or when new versions are introduced. We may be forced to delay commercial releases of new solutions or updated versions of existing solutions until such errors or defects are corrected, and in some cases, we may need to implement enhancements to correct errors that were not detected until after deployment of our solutions. Even after testing and release, our solutions may not be free from errors or defects, which could result in the cancellation or disruption of our services or dissatisfaction of customers. In some cases, customers may terminate their agreements with us without penalty if the solution we have provided does not meet the specifications agreed upon by the parties. Such contract terminations or customer dissatisfaction would damage our reputation and result in lost revenues, diverted development resources, and increased support and warranty costs.

The production or reporting of inaccurate information could cause the loss of customers and expose us to legal liability.

The accurate production and reporting of information is critical to our customers’ businesses. If we fail to accurately produce and report information, we could lose customers, our reputation and ability to attract new customers could be harmed, and we could be exposed to legal liability. We may not have insurance adequate to cover losses we may incur as a result of these inaccuracies.

Our success depends on our ability to maintain and expand our sales channels.

To increase our market awareness, customer base and revenues, we need to expand our direct and indirect sales operations. There is strong competition for qualified sales personnel, and we may not be able to attract or retain sufficient new sales personnel to expand our operations. New sales personnel require training, and it takes time for them to achieve full productivity, if at all. In addition, we believe that our success is dependent on the expansion of our indirect distribution channels, including our relationships with wireless carriers, independent sales agents and resellers. These sales channel alliances require training in selling our solutions and it will take time for these alliances to achieve productivity, if at all. We may not be able to establish relationships with additional distributors on a timely basis, or at all. Our independent sales agents and resellers, many of which are not engaged with us on an exclusive basis, may not devote adequate resources to promoting and selling our solutions.

18




We depend on recruiting and retaining qualified personnel, and our inability to do so may result in a loss in sales, impair our ability to effectively manage our operations or impair our ability to develop and support our solutions.

Because of the technical nature of our solutions and the market in which we compete, our success depends on the continued services of our current executive officers and our ability to attract and retain qualified personnel with expertise in wireless communications, GPS technologies, hosted software applications, transaction processing and the Internet. Competitors and others have recruited our employees in the past and may attempt to do so in the future. In addition, new employees generally require substantial training, which requires significant resources and management attention. Even if we invest significant resources to recruit, train and retain qualified personnel, there can be no assurances that we will be successful in our efforts.

From time to time, we are or may be subject to litigation that could result in significant costs to us.

From time to time, we are or may be subject to litigation in the ordinary course of business relating to any number or type of claims, including claims for damages related to errors and malfunctions of our products and services or their deployment. A securities, product liability, breach of contract, or other claim could seriously harm our business because of the costs of defending the lawsuit, diversion of employees’ time and attention, and potential damage to our reputation. Some of our agreements with customers, suppliers and other third parties contain provisions designed to limit exposure to potential claims. Limitation of liability provisions contained in our agreements may not be enforceable under the laws of some jurisdictions. As a result, we could be required to pay substantial amounts of damages in settlement or upon the determination of any of these types of claims. Although we carry general liability and directors and officers insurance, our insurance may not cover potential claims or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liabilities that may be imposed.

Government regulations and standards could subject us to increased regulation, increase our costs of operations or reduce our opportunities to earn revenue.

In addition to regulations applicable to businesses in general, we may also be subject to direct regulation by United States governmental agencies, including the Federal Communications Commission, Department of Defense, Department of Commerce or the State Department. These regulations may impose licensing requirements, privacy safeguards relating to certain subscriber information, or safety standards, for example with respect to human exposure to electromagnetic radiation and signal leakage. A number of legislative and regulatory proposals under consideration by federal, state, provincial, local and foreign governmental organizations may lead to laws or regulations concerning various aspects of the Internet, wireless communications and GPS technology, including on-line content, user privacy, taxation, access charges and liability for third-party activities. Additionally, it is uncertain how existing laws governing issues such as taxation on the use of wireless networks, intellectual property, libel, user privacy and property ownership will be applied to our solutions. The adoption of new laws or the application of existing laws may expose us to significant liabilities and additional operational requirements, which could decrease the demand for our solutions and increase our cost of doing business. Wireless communications providers who supply us with airtime are subject to regulation by the Federal Communications Commission, and regulations that affect them could also increase our costs or limit our ability to provide our solutions.

Fluctuations in the value of foreign currencies could result in decreased revenues, increased product costs and operating expenses.

We have customers, suppliers and manufacturers that are located outside the United States. Some transactions relating to supply and development agreements may be conducted in currencies other than the United States dollar, and fluctuations in the value of foreign currencies relative to the United States dollar

19




could cause us to incur currency exchange costs. In addition, some of our transactions denominated in United States dollars may be subject to currency exchange rate risk. We cannot predict the effect of exchange rate fluctuations on our future operating results. Should there be a sustained increase in average exchange rates for the local currencies in these countries, our suppliers and manufacturers may request a price increase at the end of the contract period.

Geopolitical, economic and military conditions, including terrorist attacks and other acts of war, may materially and adversely affect the markets on which our common stock trades, the markets in which we operate, our operations and our profitability.

Terrorist attacks and other acts of war, and any response to them, may lead to armed hostilities and such developments would likely cause instability in financial markets. Armed hostilities and terrorism may directly impact our facilities, personnel and operations which are located in the United States, the United Kingdom and India, as well as those of our customers and suppliers. Furthermore, severe terrorist attacks or acts of war may result in temporary halts of commercial activity in the affected regions, and may result in reduced demand for our solutions. These developments could have a material adverse effect on our business and the trading price of our common stock.

As of February 15, 2006, a limited number of stockholders own approximately 29% of our stock and may act, or prevent certain types of corporate actions, to the detriment of other stockholders.

Our directors, officers and greater than 5% stockholders own, as of February 15, 2006, approximately 29% of our outstanding common stock. Accordingly, these stockholders may, if they act together, exercise significant influence over all matters requiring stockholder approval, including the election of a majority of the directors and the determination of significant corporate actions. This concentration could also have the effect of delaying or preventing a change in control that could otherwise be beneficial to our stockholders.

Our certificate of incorporation and bylaws and state law contain provisions that could discourage a takeover.

We have adopted a certificate of incorporation and bylaws, which in addition to state law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include the following:

·       establishing a classified board in which only a portion of the total board members will be elected at each annual meeting;

·       authorizing the board to issue preferred stock;

·       prohibiting cumulative voting in the election of directors;

·       limiting the persons who may call special meetings of stockholders;

·       prohibiting stockholder action by written consent; and

·       establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

We have adopted a certificate of incorporation that permits our board to issue shares of preferred stock without stockholder approval, which means that our board could issue shares with special voting rights or other provisions that could deter a takeover. In addition to delaying or preventing an acquisition, the issuance of a substantial number of shares of preferred stock could adversely affect the price of our common stock and dilute existing stockholders.

Item 1B.               Unresolved Staff Comments

None.

20




Item 2.                        Properties

We have offices in California, India, the United Kingdom and Germany.

Location

 

 

 

Ownership

 

Square
Feet

 

Primary Use

 

Lease
Expiration

Fremont, CA

 

Leased

 

102,544

 

Corporate headquarters

 

5/16/2010

Chennai, India

 

Leased

 

10,050

 

Research and development, customer service

 

5/31/2006

Chennai, India

 

Leased

 

37,910

 

Research and development, customer service

 

1/31/2009

Ipswich, United Kingdom

 

Leased

 

10,494

 

Research and development, customer service, sales and marketing

 

9/28/2014

Derby, United Kingdom

 

Leased

 

2,500

 

Customer service

 

9/30/2008

 

While we believe our existing facilities are adequate to meet our immediate needs, it may become necessary to lease or acquire additional or alternative space to accommodate any future growth.

For a discussion of the accounting treatment of our leased properties, see “Note 13—Commitments and Contingencies” to our consolidated financial statements, included elsewhere in this Report.

Item 3.                        Legal Proceedings

From time to time, we institute or are subject to claims in legal proceedings arising in the normal course of our business. We do not believe that we are party to any pending legal action that could reasonably be expected to have a material adverse effect on our business, financial condition, or operating results.

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

None.

21




PART II

Item 5.        Market for Registrant’s Common Equity and Related Stockholder Matters

Price Range of Common Stock

Our common stock has been listed for quotation on the NASDAQ National Market under the symbol “ARDI” since our initial public offering on September 28, 2000. The following table shows the high and low sales prices of our common stock as reported by the NASDAQ National Market for the period indicated.

 

 

High

 

Low

 

Quarter ended March 31, 2004

 

$

16.82

 

$

10.58

 

Quarter ended June 30, 2004

 

13.55

 

7.05

 

Quarter ended September 30, 2004

 

7.55

 

3.10

 

Quarter ended December 31, 2004

 

6.91

 

4.01

 

Quarter ended March 31, 2005

 

6.65

 

3.93

 

Quarter ended June 30, 2005

 

4.00

 

2.47

 

Quarter ended September 30, 2005

 

4.85

 

2.60

 

Quarter ended December 31, 2005

 

5.74

 

4.16

 

Quarter ended March 31, 2006 (through February 28, 2006)

 

4.22

 

5.65

 

 

At December 31, 2005, there were approximately 112 holders of record of our common stock, although we believe that there is a significantly larger number of beneficial owners of our common stock.

The market price of our common stock has been and may continue to be subject to wide fluctuations in response to a number of events and factors, such as quarterly variations in our operating results, announcements of technological innovations or new products or services or customers by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have particularly affected the market prices of many high technology companies and have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations, as well as general political, economic and market conditions, may adversely affect the market price for our common stock.

Dividend Policy

We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not currently anticipate declaring any cash dividends on our common stock in the foreseeable future.

We intend to pay dividends accrued on redeemable preferred stock upon redemption.

Recent Sales of Unregistered Securities

On February 18, 2005, we issued (a) approximately 5,454,000 shares of our common stock, par value $0.0001 per share, (b) approximately 24,000 shares of our Series A-1 Redeemable Preferred Stock, $0.001 par value per share, (c) approximately 44,000 shares of our Series A-2 Redeemable Preferred Stock, $0.001 par value per share, (d) approximately 5,000 shares of our Series B-1 Redeemable Preferred Stock, $0.001 par value per share, and (e) approximately 5,000 shares of our Series B-2 Redeemable Preferred Stock, $0.001 par value per shares, all in connection with our acquisition of all the outstanding capital stock of Vidus. The fair values of issued common and non-convertible redeemable preferred stock as purchase consideration for Vidus stock were $24.7 million and $12.9 million, respectively. These issuances were

22




made in reliance on Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and on Section 4(2) of the Securities Act, and were made without general solicitation or advertising. Shares issued in reliance on Section 4(2) of the Securities Act were issued only to accredited investors. Shares issued in reliance on Regulation S were issued in an “offshore transaction’’ as defined under Regulation S, to persons other than “U.S. Persons.’’ Such persons represented to us that they would resell the shares only in compliance with Regulation S. The certificates evidencing those shares bear a legend restricting transfer except pursuant to Regulation S.

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during the quarter ended December 31, 2005.

Item 6.                        Selected Financial Data

The selected consolidated financial data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, the consolidated financial statements, the related notes and other information contained in this Report.

 

 

Years Ended December 31,

 

 

 

2005(1)

 

2004

 

2003

 

2002

 

2001

 

 

 

(In thousands, except per share amounts)

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Hosted

 

$

79,945

 

$

75,234

 

$

63,363

 

$

44,420

 

$

27,450

 

Licensed

 

12,911

 

 

 

 

 

Total revenues

 

92,856

 

75,234

 

63,363

 

44,420

 

27,450

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of hosted revenue (excluding intangibles amortization included below)

 

39,657

 

34,825

 

35,516

 

30,609

 

26,489

 

Cost of licensed revenue (excluding intangibles amortization included below)

 

4,949

 

 

 

 

 

Intangibles amortization

 

3,487

 

28

 

455

 

1,670

 

1,656

 

In-process research and development

 

5,640

 

 

 

 

 

Impairment of intangible assets

 

2,270

 

 

 

 

 

Sales and marketing

 

21,398

 

12,336

 

11,433

 

10,818

 

17,255

 

Research and development

 

13,024

 

6,192

 

5,472

 

6,200

 

7,822

 

General and administrative

 

17,506

 

12,022

 

9,516

 

9,168

 

15,296

 

Terminated acquisition costs

 

 

2,138

 

 

 

 

Restructuring charges

 

 

 

 

 

218

 

Total costs and expenses

 

107,931

 

67,541

 

62,392

 

58,465

 

68,736

 

(Loss) income from operations

 

(15,075

)

7,693

 

971

 

(14,045

)

(41,286

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

3,039

 

1,532

 

686

 

964

 

2,662

 

Interest expense

 

 

 

(11

)

(15

)

(9

)

Change in derivative instrument liability

 

2,256

 

 

 

 

 

Investment impairment charge

 

 

 

 

(1,035

)

 

Other (expense) income, net

 

(103

)

(4

)

16

 

(106

)

(14

)

Total other income (expense), net

 

5,192

 

1,528

 

691

 

(192

)

2,639

 

Net (loss) income before income taxes

 

(9,883

)

9,221

 

1,662

 

(14,237

)

(38,647

)

Benefit from income taxes

 

38,482

 

 

 

 

 

Net income (loss)

 

28,599

 

9,221

 

1,662

 

(14,237

)

(38,647

)

Preferred stock dividends

 

(436

)

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

28,163

 

$

9,221

 

$

1,662

 

$

(14,237

)

$

(38,647

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

$

0.17

 

$

0.03

 

$

(0.31

)

$

(0.88

)

Diluted

 

$

0.46

 

$

0.16

 

$

0.03

 

$

(0.31

)

$

(0.88

)

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

 

 

 

 

 

 

 

 

 

 

 

Basic

 

59,928

 

54,296

 

49,978

 

46,134

 

43,892

 

Diluted

 

61,353

 

57,435

 

54,282

 

46,134

 

43,892

 

 

23




 

 

 

As of December 31,

 

 

 

2005(1)

 

2004

 

2003

 

2002

 

2001

 

 

 

(In thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,773

 

$

14,494

 

$

103,669

 

$

35,659

 

$

40,164

 

Restricted and non-restricted short-term investments

 

77,643

 

103,222

 

2,000

 

2,241

 

2,216

 

Working capital

 

109,823

 

119,373

 

108,120

 

45,771

 

51,300

 

Total assets

 

246,974

 

152,210

 

139,016

 

70,550

 

78,474

 

Redeemable preferred stock

 

8,184

 

 

 

 

 

Total stockholders’ equity

 

$

186,860

 

$

124,836

 

$

112,128

 

$

50,167

 

$

60,411

 

 

 

 

Years Ended December 31,

 

 

 

2005(1)

 

2004

 

2003

 

2002

 

2001

 

 

 

(In thousands)

 

Consolidated Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(5,626

)

$

11,216

 

$

9,454

 

$

(6,653

)

$

(34,717

)

Investing activities

 

14,645

 

(104,053

)

(1,276

)

(780

)

4,364

 

Financing activities

 

2,260

 

3,662

 

59,832

 

2,928

 

1,237

 

Net increase (decrease) in cash and cash equivalents

 

$

11,279

 

$

(89,175

)

$

68,010

 

$

(4,505

)

$

(29,116

)


(1)          On February 18, 2005, we completed the acquisition of Vidus. Financial information, including the results of operations, for Vidus is included from the date of acquisition.

Item 7.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and the related notes contained elsewhere in this Report. Except for the historical information contained herein, the matters discussed in this Report 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 our operating results and could cause our actual results to differ materially from forecasts and estimates or from any other forward-looking statements made by us or on our behalf and there can be no assurance that future results will meet expectations, estimates or projections. Further information regarding these and other risks is included in this Report on Form 10-K under the “Risk Factors,” and “Business” sections, elsewhere in this Report and in our other filings with the SEC.

The consolidated statement of operations for the interim periods in 2005 have been restated to reflect the effects of a derivative embedded in the redeemable preferred stock issued in connection with the acquisition of Vidus and the correction of an error in the tax provision relating to the reversal of the valuation allowance. See “Note 17—Quarterly Financial Data” to our consolidated financial statements, included elsewhere in this Report, for further discussion.

Overview

We are a leading provider of mobile resource management (“MRM”) solutions, a category of business productivity solutions designed to enable the effective management of mobile resources. Our MRM solutions allow customers to improve productivity by enabling the effective management of the activities of their mobile workers, assets, goods and services. Currently, we market and sell our solutions to a range of customers in North America and Europe. We offer Field Force Management (“FFM”) solutions, such as GeoManager, Pathway and Portico, designed to help companies better manage their mobile workers; Field

24




Service Management (“FSM”) solutions, such as our Taskforce software, designed to help companies better manage their mobile workers’ work; and Field Asset Management (“FAM”) solutions, such as Vehicle Diagnostics and StatusSensors, designed to help companies better manage their mobile workers’ assets in the field. At December 31, 2005, 188,000 mobile resources were enabled with our solutions, on either a subscription or a per seat license basis.

We report the results of our operations in two segments: Hosted and Licensed. The segments are managed separately because each offers different products and serves different segments of the market. The Hosted segment provides the FFM and FAM solutions that connect mobile workers in the field to corporate data on demand, help measure overall mobile workforce performance and manage mobile assets. The Licensed segment provides customers with our FSM solution, which 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 operation.

On February 18, 2005, we completed the acquisition of Vidus, a provider of dynamic field service optimization software. The financial results of Vidus are reflected in our consolidated results from February 19, 2005, the first day after the closing. The aggregate purchase price for the acquisition was $46.3 million. We accounted for the acquisition as a purchase transaction and, accordingly, the acquisition price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of the respective estimated fair values on the acquisition date. Acquired intangible assets related to the purchases totaled $33.1 million and goodwill resulting from the acquisition totaled $13.3 million. See “Note 1—Organization and Summary of Significant Accounting Policies” and “Note 3—Business Combinations, Goodwill and Intangible Assets” to our consolidated financial statements, included elsewhere in this Report on Form 10-K.

For the year ended December 31, 2005, it was determined that a valuation allowance reported against our deferred tax assets was no longer necessary based on our evaluation of current evidence and its effect on our estimate of future taxable income. Accordingly, we reversed our deferred tax valuation allowance with respect to approximately $42.9 million of our deferred tax assets, of which approximately $36.1 million was recorded as a benefit in the statement of operations and $6.8 million related to excess tax benefits from stock option deductions for which the benefit was recognized as a component of stockholders’ equity.

Critical Accounting Policies, Judgments and Estimates

General

The accompanying discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe there are several accounting policies that are critical to understanding our consolidated financial statements as these policies affect the reported amounts of revenue and expenses and involve management’s judgment regarding significant estimates. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures and discussed the development, selection and disclosure of significant estimates with the Audit Committee of our Board of Directors. To the extent that actual results differ from those estimates, our future results of operations may be affected.

Revenue Recognition

We follow 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

25




98-4, Deferral of the Effective Date of a Provision of SOP 97-2 and Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, 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. We recognize revenue when the price is fixed and determinable, persuasive evidence of an agreement exists, our obligations under any such agreement are fulfilled and collectibility is probable.

Our revenues are comprised of hosted revenue and licensed revenue. Hosted revenue is derived from monthly fees for our FFM and FAM solutions and monthly or upfront fees for in-vehicle hardware devices enabling a mobile resource to utilize these FFM or FAM solutions. Licensed revenue is comprised of license fees, installation, training and related post-contract customer support (“PCS”) service fees relating to our FSM solution.

Monthly fees for our hosted solutions are recognized ratably over the contract period, which commences (a) upon installation of our proprietary hardware devices in our customer’s mobile worker vehicles or (b) upon the creation of subscription licenses and a customer account on our website where customers have elected to use our solution with a mobile telephone. Upfront fees for our hosted solution primarily consist of amounts for the in-vehicle enabling hardware device and peripherals, if any. We defer upfront fees at installation and recognize them ratably over the minimum service contract period, generally one to five years. Product costs are also deferred and amortized over such period. Renewal rates for our hosted solutions are not considered priced at a bargain in comparison to the upfront fees (as described in Staff Accounting Bulletin No. 104, Revenue Recognition). If we cannot objectively determine the fair value of any undelivered element included in hosted arrangements, we defer revenue until all elements are delivered, all services have been performed or fair value can objectively be determined.

Licensed revenue associated with the fees for the license of our Taskforce product and related customization and installation services is 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, we determine 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. We periodically evaluate 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, we have not incurred any such losses.

If the amount of licensed revenue recognized under the percentage of completion method exceeds the amount 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 our progress toward completion of projects in progress.

For projects that were not complete as of December 31, 2005, 2004 and 2003, the following table illustrates the total direct labor hours incurred as a percentage of estimated total direct labor hours required to complete these projects.

 

 

Years Ended
December 31,

 

 

 

2005

 

2004

 

2003

 

Total direct labor hours incurred to date as a % of estimated total direct labor hours required to complete projects

 

 

9.4

%

 

 

 

 

 

 

 

 

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 we recognize in any period. Based on our results for the year ended December 31, 2005, a ten percent deviation from our estimated total direct labor hours required to complete projects uncompleted at

26




December 31, 2005 would have resulted in an insignificant increase or decrease in net income attributable to common stockholders.

We derive PCS fees from PCS agreements, which are generally initially purchased at the same time as a license for our Taskforce product. PCS can include telephone and email support and the right to receive unspecified upgrades on a when-and-if-available basis. PCS agreements may generally be renewed on an annual basis. We recognize revenue for PCS, based on vendor specific objective evidence (“VSOE”) of fair value ratably over the term of the PCS period. We generally determine VSOE of PCS based on the stated fees for PCS renewal set forth in the original license agreement. If we are unable to establish VSOE of fair value, we recognize the entire arrangement fee ratably over the term of the PCS, when the only undelivered element is PCS.

For arrangements with multiple elements, such as licenses, customization services and PCS services, we allocate revenue to each element based upon its fair value as determined by VSOE. VSOE for each element is based on normal pricing and discounting practices when the element is sold separately. VSOE for PCS services is measured by the stated renewal rate. If we cannot objectively determine the fair value of any undelivered element included in license arrangements, we defer revenue until the earliest to occur of the following: (a) all elements are delivered, (b) all services have been performed or only PCS services remain to be delivered, or (c) fair value can objectively be determined. When the fair value of a delivered element has not been established, we use 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 assuming all other criteria have been met.

Valuation of Intangible Assets and Goodwill

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS 141”), the purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired and their expected lives involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

At December 31, 2005, our goodwill totaled $13.3 million and our identifiable intangible assets totaled $27.3 million. In accordance with the provisions of SFAS 142, Goodwill and Other Intangible Assets, we assess the impairment of goodwill and indefinite lived identifiable intangible assets of our reportable units at least annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. This assessment is based upon a discounted cash flow analysis and analysis of our market capitalization. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to the business model or changes in operating performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results. We conducted our initial annual impairment test as of August 31, 2005 and determined there was no impairment. During the fourth quarter of 2005, we determined that the acquired Vidus trade name was impaired and as a result, reduced the carrying value of the trade name to zero. There were no other events or circumstances, except for the impairment of the Vidus trade name, from August 31, 2005 through December 31, 2005 indicating that a further assessment was necessary.

27




Allowance for Doubtful Accounts

Historically, we have had a significant number of small- to medium-sized companies utilizing our solutions. These customers are involved in diverse businesses. Our payment arrangements with customers generally provide 30 to 45 day payment terms. When customers contract with us, we assess their creditworthiness.

The nature of our relationship with customers is inherently long-term and we have extended and may extend payment terms on an exception basis. We regularly review our customers’ ability to satisfy their payment obligations and provide an allowance for doubtful accounts for specific receivables that we believe are not collectible. When these conditions arise, we suspend recognition of revenue until collection becomes probable or cash is collected. Beyond these specific customer accounts, we record an allowance based on the size and age of all receivable balances against which we have not established a specific allowance, current economic trends and historical experience with collections. The following table illustrates the allowance for doubtful accounts as a percentage of gross accounts receivable for 2005, 2004 and 2003 (in thousands, except percentages).

 

 

Years Ended December 31,

 

 

 

2005

 

2004

 

2003

 

Gross accounts receivable

 

$

12,851

 

$

9,026

 

$

8,530

 

Allowance for doubtful accounts

 

376

 

1,066

 

1,421

 

Allowance for doubtful accounts as a % of gross accounts receivable

 

2.9

%

11.8

%

16.7

%

 

Historically, our actual losses and credits have been consistent with these provisions. We believe that we can make reliable estimates for doubtful accounts; however, the size and diversity of our customer base, as well as overall economic conditions, may affect our ability to accurately estimate bad debt expense. Based on our results for the year ended December 31, 2005, a ten basis point deviation in the allowance for doubtful accounts as a percentage of gross accounts receivable would have resulted in an insignificant increase or decrease in net income attributable to common stockholders.

Deferred tax assets

We have substantial deferred tax assets that relate to prior periods’ losses, primarily in the United States and the United Kingdom. We evaluate these deferred tax assets in each tax jurisdiction by estimating the likelihood of generating future profits to realize these assets. In both jurisdictions, we have concluded that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets. A valuation allowance has been established for deferred tax assets which we do not believe meet the more likely than not criteria established by Statement of Financial Account Standards No. 109, Accounting for Income Taxes This evaluation of whether it is more likely than not that such deferred tax assets will be realized must be continuously evaluated due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our tax provision in our consolidated statement of operations. At December 31, 2005, we maintained an allowance on certain state net operating losses and state tax credits based on our assessment that it is more likely than not that the deferred tax asset related to these items will not be realized. The deferred tax asset, net of a valuation allowance of $334,000, totaled $47.8 million as of December 31, 2005 and was offset by deferred tax liabilities of $6.2 million.

 

28




Results of Operations for the Years Ending December 31, 2005, 2004 and 2003

The following table sets forth selected statements of operations data as a percentage of our total revenues:

 

 

Years Ended December 31,

 

 

 

2005

 

2004

 

2003

 

Revenues:

 

 

 

 

 

 

 

Hosted

 

86.1

%

100.0

%

100.0

%

Licensed

 

13.9

 

 

 

Total revenues

 

100.0

 

100.0

 

100.0

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of hosted revenue (excluding intangibles amortization included below) 

 

42.7

 

46.3

 

56.1

 

Cost of licensed revenue (excluding intangibles amortization included below)

 

5.3

 

 

 

Intangibles amortization

 

3.8

 

 

0.7

 

In-process research and development

 

6.1

 

 

 

Impairment of intangible assets

 

2.4

 

 

 

Sales and marketing

 

23.0

 

16.4

 

18.1

 

Research and development

 

14.0

 

8.2

 

8.6

 

General and administrative

 

18.9

 

16.0

 

15.0

 

Terminated acquisition costs

 

 

2.8

 

 

Total costs and expenses

 

116.2

 

89.7

 

98.5

 

(Loss) income from operations

 

(16.2

)

10.3

 

1.5

 

Total other income (expense), net

 

5.6

 

2.0

 

1.1

 

Net (loss) income before income taxes

 

(10.6

)

12.3

 

2.6

 

Benefit from income taxes

 

41.4

 

 

 

Net income

 

30.8

 

12.3

 

2.6

 

Preferred stock dividends

 

(0.5

)

 

 

Net income attributable to common stockholders

 

30.3

%

12.3

%

2.6

%

 

Hosted Revenue, Cost of Hosted Revenue, Hosted Gross Margin

Hosted gross margin is calculated as follows:

 

 

Years Ended December 31,

 

 

 

2005

 

2004

 

2003

 

 

 

(In thousands, except percentages)

 

Hosted revenue

 

$

79,945

 

$

75,234

 

$

63,363

 

Cost of hosted revenue (excluding intangibles amortization)

 

39,657

 

34,825

 

35,516

 

Intangibles amortization

 

 

28

 

455

 

Total cost of hosted revenue

 

39,657

 

34,853

 

35,971

 

Hosted gross margin

 

$

40,288

 

$

40,381

 

$

27,392

 

Hosted gross margin percentage

 

50

%

54

%

43

%

 

29




Hosted Revenue

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Hosted revenue

 

$

79,945

 

 

6

%

 

$

75,234

 

 

19

%

 

$

63,363

 

As a percentage of total revenues

 

86

%

 

 

 

 

100

%

 

 

 

 

100

%

 

Hosted revenue is comprised of monthly fees for our FFM and FAM solutions, and monthly or upfront fees for in-vehicle hardware devices enabling a mobile resource to utilize these FFM and FAM solutions. Our hosted revenue is affected by a number of factors, including subscriber growth, the rate at which service features or add-ons are adopted, the pricing associated with the size and term of subscriber contracts and purchases of our in-vehicle hardware devices. Given the generally fixed nature of our arrangements with our subscribers and ratable revenue recognition, the impact on revenues of changes in current prices for hosted solutions is tempered. This is because revenues from new pricing are layered on top of revenues from existing subscribers.

As new subscribers purchase our in-vehicle hardware devices or as existing subscribers choose to purchase new in-vehicle hardware devices, the amount of deferred revenue recognized ratably over the expected life of the subscriber increases. This effect is tempered by subscribers purchasing solutions that are deployed through the use of a mobile telephone installed with our software application because we do not sell those devices and, therefore, do not recognize any revenues from sales of mobile telephones. A similar tempering effect may occur when a subscriber exceeds its expected life because recognition of deferred revenue is complete.

We describe the arrangements in which customers contract directly with wireless carriers for the wireless airtime component of our solutions as “unbundled”. Conversely, we describe arrangements in which we contract directly with customers for the wireless airtime portion as “bundled”. The nature of our relationship with the wireless carriers dictates whether we will be entering into a bundled or unbundled arrangement with a customer. Selection of the appropriate protocol is related primarily to optimal wireless coverage for a specific subscriber area of operation. We have observed an increase in the proportion of new subscribers being added on an unbundled basis, resulting in decreased revenue from such subscribers. Unbundled subscribers represented approximately 65%, 54% and 47% of our total subscribers at December 31, 2005, 2004 and 2003, respectively. We expect that this trend will continue through the next 12 to 18 months.

From 2004 to 2005, hosted revenue increased primarily as a result of an increase in the number of subscribers using our solutions, partially offset by a decrease in revenue per subscriber. The total number of subscribers using our solutions was approximately 156,000 and 133,000 at December 31, 2005 and 2004, respectively. Average monthly hosted revenue per subscription was approximately $46.69 for the year ended December 31, 2005, down from $48.56 for the same period in 2004. The decrease of $1.87 is primarily the result of new subscribers being added utilizing an unbundled arrangement.

From 2003 to 2004, hosted revenue increased primarily as a result of an increase in the number of subscribers using our solutions, partially offset by a decrease in revenue per subscriber. The total number of subscribers using our solutions was approximately 133,000 and 125,000 at December 31, 2004 and 2003, respectively. Average monthly hosted revenue per subscription was approximately $48.56 for the year ended December 31, 2004, down from $49.19 for the same period in 2003. The decrease of $0.63 is primarily the result of new subscribers being added utilizing an unbundled arrangement.

30




Cost of Hosted Revenue (excluding intangibles amortization)

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Cost of hosted revenue (excluding intangibles amortization)

 

$

39,657

 

 

14

%

 

$

34,825

 

 

-2%

 

 

$35,516

 

As a percentage of hosted revenues

 

50

%

 

 

 

 

46

%

 

 

 

 

56

%

 

Cost of hosted revenue consists of the amortization of the deferred cost of the in-vehicle enabling hardware devices; costs associated with the final assembly, testing, provision, delivery and installation of hardware and other costs such as provisions for inventory and repair costs; and expenses related to the delivery and support of our solutions. From 2004 to 2005, cost of hosted revenue increased primarily as a result of increases in direct product costs of $2.6 million, employee-related expenses of $2.4 million, facilities and communication expenses of $916,000, equipment and depreciation expenses of $459,000, cost of product returns of $238,000, inventory obsolescence of $152,000, warranty expense of $125,000, and travel expenses of $122,000, partially offset by a decrease in airtime costs of $2.5 million as the number of bundled subscribers decreased from the prior year and the reversal of an accrual in relation to telecommunication taxes. The increase in employee compensation expense was associated with an increase in average headcount. Cost of hosted revenue headcount increased to 205 at December 31, 2005 from 163 at December 31, 2004. We expect cost of hosted revenue to increase during the next 12 months, primarily resulting from headcount increases.

From 2003 to 2004, cost of hosted revenue decreased primarily as a result of decreases in the provision for inventory obsolescence of $1.2 million, other cost of products of $692,000 associated with lower product returns and direct service delivery expenses of $243,000, partially offset by an increase in employee-related expenses of $1.0 million and deferred cost of revenues recognized of $805,000, consistent with growth in subscribers using our solutions.

Hosted Gross Margin

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Hosted gross margin

 

$

40,288

 

 

0

%

 

$

40,381

 

 

47

%

 

$

27,392

 

 

As a percentage of hosted revenues

 

50

%

 

 

 

 

54

%

 

 

 

 

43

%

 

 

From 2004 to 2005, hosted gross margin decreased due to sales of new in-vehicle hardware devices at promotional prices in connection with AT&T Wireless and Verizon Wireless ceasing operations of their CDPD network, which necessitated that subscribers using these networks migrate to alternate wireless networks. To use an alternate network, existing in-vehicle hardware devices were replaced for subscribers that sought to migrate to alternative wireless networks.

From 2003 to 2004, hosted gross margin increased by 11%, primarily resulting from realizing higher margins on new sales of our in-vehicle hardware devices, which accounted for 7% of the increase; hosted cost of revenues, which includes fixed indirect expenses that generally increase at a rate slower than the growth in subscribers using our solutions which accounted for 3% of the increase; and intangibles becoming fully amortized which accounted for 1% of the increase.

Direct expenses generally increase at a rate proportional to the growth in our subscribers. Personnel costs and depreciation expense generally increase at a rate slower than the growth rate of our subscribers. As a result, we expect that our hosted gross margin will increase during the next 12 months.

31




Licensed Revenue, Cost of Licensed Revenue and Licensed Gross Margin

Licensed gross margin is calculated as follows:

 

 

Years Ended December 31,

 

 

 

2005

 

2004

 

2003

 

 

 

(In thousands, except percentages)

 

Licensed revenue

 

$

12,911

 

 

$

 

 

 

$

 

 

Cost of licensed revenue (excluding
intangibles amortization)

 

4,949

 

 

 

 

 

 

 

Intangibles amortization

 

3,487

 

 

 

 

 

 

 

Total cost of licensed revenue

 

8,436

 

 

 

 

 

 

 

Licensed gross margin

 

$

4,475

 

 

 

 

 

 

 

Licensed gross margin percentage

 

35

%

 

 

 

 

 

 

 

Licensed Revenue

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Licensed revenue

 

$

12,911

 

 

100

%

 

 

$

 

 

 

0

%

 

 

$

 

 

As a percentage of total revenues

 

14

%

 

 

 

 

 

0

%

 

 

 

 

 

 

0

%

 

 

Licensed revenue is comprised of license fees, installation, training and PCS service fees relating to our FSM solution, acquired in connection with our acquisition of Vidus in February 2005. The number of licensed users of our FSM solution totaled approximately 32,000 at December 31, 2005.

Cost of Licensed Revenue (excluding intangibles amortization)

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Cost of licensed revenue (excluding intangibles amortization)

 

$

4,949

 

 

100

%

 

 

$

 

 

 

0

%

 

 

$

 

 

As a percentage of licensed revenues

 

38

%

 

 

 

 

 

0

%

 

 

 

 

 

 

0

%

 

 

Cost of licensed revenue (excluding intangibles amortization) consists of employee related expenses in relation to installation services and the support of our ongoing PCS commitments. We expect the cost of licensed revenue to increase over the next twelve months as headcount increases and we continue to invest in fixed assets and infrastructure to support this segment.

Licensed Gross Margin

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Licensed gross margin

 

$

4,475

 

 

100

%

 

 

$

 

 

 

0

%

 

 

$

 

 

As a percentage of licensed revenues

 

35

%

 

 

 

 

 

0

%

 

 

 

 

 

 

0

%

 

 

Licensed gross margin was 35% in 2005 due in part to the amortization of intangible assets (discussed below). Direct expenses generally increase at a rate proportional to the growth in our end users. Personnel costs and depreciation expenses generally increase at a rate slower than the growth rate of our end users.

32




Amortization of intangible assets is expected to increase in 2006 and 2007 to approximately $4.0 million, after which it is expected to decrease as the intangible assets becomes fully amortized. We expect our licensed gross margin to increase during the next twelve months.

Intangibles Amortization

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Intangibles amortization

 

$

3,487

 

12,354

%

 

$

28

 

 

 

-94%

 

 

$

455

 

As a percentage of total revenues

 

4

%

 

 

 

0

%

 

 

 

 

 

1

%

 

In 2005, intangibles amortization related to the intangible assets acquired in connection with the purchase of Vidus in February 2005. These costs are being amortized over their estimated useful lives of three to ten years.

In 2004 and 2003, intangibles amortization related to the intangible assets purchased from Differential Corrections, Inc. in April 2000 and ConnectBusiness.com, Inc. in September 2002. The costs were amortized over their estimated useful lives of three and two years, respectively. As of December 31, 2004, these intangibles were fully amortized.

In-process Research and Development

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

In-process research and development

 

$

5,640

 

 

100

%

 

 

$

 

 

 

0

%

 

 

$

 

 

As a percentage of total revenues

 

6

%

 

 

 

 

 

0

%

 

 

 

 

 

 

0

%

 

 

For the year ended December 31, 2005, in-process research and development consisted of research projects undertaken by Vidus prior to its acquisition by us that had not reached technological feasibility and had no alternative future use at the time of the acquisition of Vidus. In order to achieve technological feasibility, we estimated the time required to complete the projects to cost approximately $5.7 million. We estimated the fair value assigned to in-process research and development using the income approach, which discounts to present value the cash flows expected to be attributable to the technology once it reaches 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 expected to be 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 2005. In 2005 expenditures to complete the acquired in-process research and development approximated the original estimates.

Impairment of Intangible Assets

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Impairment of intangible assets

 

$

2,270

 

 

100

%

 

 

$

 

 

 

0

%

 

 

$

 

 

As a percentage of total revenues

 

2

%

 

 

 

 

 

0

%

 

 

 

 

 

 

0

%

 

 

33




During the fourth quarter of 2005, management determined that Vidus would officially change its name to @Road, Ltd. As a result, we reduced the carrying value of the Vidus trade name to zero resulting in an impairment charge of $2.3 million. The impairment charge is included in Impairment of Intangible Assets in our Statement of Operations.

Sales and Marketing

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Sales and marketing

 

$

21,398

 

 

73

%

 

$

12,336

 

 

8

%

 

$

11,433

 

As a percentage of total revenues

 

23

%

 

 

 

 

16

%

 

 

 

 

18

%

 

Sales and marketing expenses consist of employee salaries, sales commissions, and marketing and promotional expenses. From 2004 to 2005, sales and marketing expenses increased primarily as a result of increases in employee-related expenses of $4.5 million, sales commissions of $1.3 million, marketing expenses of $864,000, consultant expenses of $757,000, facilities and communication expenses of $653,000, travel expenses of $550,000 and equipment and depreciation expense of $175,000. The increase in employee compensation expense was associated with an increase in the average headcount. Sales and marketing headcount increased to 117 at December 31, 2005 from 103 at December 31, 2004. We anticipate that sales and marketing expenses will increase in future periods as we expand our sales and marketing efforts, including, but not limited to, headcount growth and promotional expenses related to new solutions.

From 2003 to 2004, sales and marketing expenses increased primarily as a result of increases in employee-related expenses of $1.3 million and travel expenses of $238,000, partially offset by decreases in sales commission of $420,000 and promotional expenses of $324,000. Sales and marketing headcount increased to 103 at December 31, 2004 from 86 at December 31, 2003.

Research and Development

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Research and development

 

$

13,024

 

 

110

%

 

$

6,192

 

 

13

%

 

$

5,472

 

As a percentage of total revenues

 

14

%

 

 

 

 

8

%

 

 

 

 

9

%

 

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. From 2004 to 2005, research and development expenses increased primarily as a result of increases in employee-related expenses of $4.8 million, consultant expenses of $1.3 million, equipment and depreciation of $406,000, travel expenses of $270,000 and facilities and communications expenses of $121,000, partially offset by a decrease in prototype costs of $301,000. The increase in employee compensation expense was associated with an increase in the average headcount. Research and development headcount increased to 137 at December 31, 2005 from 84 at December 31, 2004. We anticipate that research and development expenses will increase in future periods as we develop and introduce new solutions and as a result of increases in employee-related expenses associated with those introductions.

34




From 2003 to 2004, research and development expenses increased primarily as a result of increases in employee-related expenses of $454,000 and external development expenses of $387,000. Research and development headcount increased to 84 at December 31, 2004 from 56 at December 31, 2003.

General and Administrative

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

General and administrative

 

$

17,506

 

 

46

%

 

$

12,022

 

 

26

%

 

$

9,516

 

As a percentage of total revenues

 

19

%

 

 

 

 

16

%

 

 

 

 

15

%

 

General and administrative expenses consist of employees salaries and related expenses for executive and administrative costs, accounting and professional fees, recruiting costs and allowance for doubtful accounts. From 2004 to 2005, general and administrative expenses increased primarily as a result of increases in employee-related expenses of $3.0 million, accounting and audit fees of $905,000, equipment and depreciation expense of $693,000, facilities and communications expenses of $330,000, legal fees of $294,000 and travel expenses of $283,000, partially offset by decreases in consulting fees of $379,000 and temporary employee-related expenses of $201,000. The increase in employee compensation expense was associated with an increase in the average headcount. General and administrative headcount increased to 88 at December 31, 2005 from 81 at December 31, 2004. We anticipate that general and administrative expenses will remain relatively flat in future periods.

From 2003 to 2004, general and administrative expenses increased primarily as a result of increases in Sarbanes-Oxley compliance costs of $2.2 million, employee-related expenses of $1.2 million and recruiting fees of $292,000, partially offset by decreases in the allowance for doubtful accounts of $597,000 and lower franchise and minimum state taxes of $278,000. General and administrative headcount increased to 81 at December 31, 2004 from 53 at December 31, 2003.

The allowance for doubtful accounts decreased $674,000, $724,000 and $127,000 in 2005, 2004 and 2003, respectively. The decreases in the allowance are primarily due to non-recurring favorable adjustments as a result of improvements in the collection history in our customer base that occurred during 2005, 2004 and 2003. We anticipate that the allowance for doubtful accounts will remain relatively stable in future periods.

Terminated Acquisition Costs

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Terminated acquisition costs

 

 

$

 

 

 

(100

)%

 

$

2,138

 

 

0

%

 

 

$

 

 

As a percentage of total revenues

 

 

0

%

 

 

 

 

 

3

%

 

 

 

 

 

0

%

 

 

On April 12, 2004, we entered into a Combination Agreement with MDSI Mobile Data Solutions, Inc. (“MDSI”) providing for the acquisition of MDSI. On July 27, 2004, the parties mutually agreed to terminate the Combination Agreement. As a result, for the year ended December 31, 2004, we expensed approximately $2.1 million of acquisition-related costs.

35




Other Income (Expense), Net

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Interest income

 

$

3,039

 

 

98

%

 

$

1,532

 

 

123

%

 

$

686

 

Interest expense

 

 

 

0

%

 

 

 

-100

%

 

(11

)

Change in derivative instrument liability

 

2,256

 

 

100

%

 

 

 

 

 

 

Other income (expense), net

 

(103

)

 

2,475

%

 

(4

)

 

-125

%

 

16

 

Total other income (expense), net

 

$

5,192

 

 

240

%

 

$

1,528

 

 

121

%

 

$

691

 

As a percentage of total revenues

 

6

%

 

 

 

 

2

%

 

 

 

 

1

%

 

From 2004 to 2005 and from 2003 to 2004, total other income (expense), net increased primarily due to larger invested balances and higher rates of return in 2004 and 2005. In 2005, we also recorded benefits of $2.3 million in relation to a derivative instrument embedded in the redeemable preferred stock issued as part of the Vidus acquisition. In 2003, interest expense consists primarily of interest expense related to the financing of directors’ and officers’ insurance costs. In 2005, 2004 and 2003, other income (expense), net consisted primarily of immaterial net foreign currency exchange losses and gains resulting from transactions with our wholly-owned subsidiaries in India and in the United Kingdom. We conduct operations primarily within the United States where inflation during 2005, 2004 and 2003 has been low and has not materially impacted our operating results. Foreign currency exchange gains were expensed as incurred.

Benefit from Income Taxes

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Benefit from income taxes

 

$

38,482

 

 

100

%

 

 

$

 

 

 

0

%

 

 

$

 

 

As a percentage of total revenues

 

41

%

 

 

 

 

 

0

%

 

 

 

 

 

 

0

%

 

 

The benefit from income taxes differs from the amount computed by applying the statutory U.S. federal rate primarily due to the reversal of the valuation allowance in the United States. For the year ended December 31, 2005, it was determined that a valuation allowance reported against our deferred tax assets was no longer necessary based on our evaluation of current evidence and its effect on our estimate of future taxable income. Accordingly, we reversed our deferred tax valuation allowance with respect to approximately $42.9 million of our deferred tax assets, of which approximately $36.1 million was recorded as a benefit in the statement of operations and $6.8 million related to excess tax benefits from stock option deductions for which the benefit was recognized as a component of stockholders’ equity. An income tax benefit of $3.3 million was recorded for the operating losses in the United Kingdom.

Through December 31, 2002, we incurred net losses for federal and state tax purposes, and except for only minimum state and franchise taxes recorded within general and administrative expenses, we have not recognized any tax provision or benefit. Net income earned for the years ended December 31, 2004 and 2003 was offset by the utilization of prior years’ net operating loss carry forwards; therefore, no income tax expense was provided.

Historically, we have adequately provided for actual tax liabilities. Unexpected or significant future changes in trends could result in a material impact to future consolidated statements of operations and cash flows.

36




Preferred Stock Dividends

 

 

Years Ended December 31,

 

 

 

2005

 

Percent
change

 

2004

 

Percent
change

 

2003

 

 

 

(In thousands, except percentages)

 

Preferred stock dividends

 

$

436

 

 

100

%

 

 

$

 

 

 

0

%

 

 

$

 

 

As a percentage of total revenues

 

0

%

 

 

 

 

 

0

%

 

 

 

 

 

 

0

%

 

 

Preferred stock dividends consist of dividends on redeemable preferred stock issued by us in connection with the acquisition of Vidus. The holders of our preferred stock are entitled to receive dividends at the rate of $6.50 per share annually. The dividends accrue day to day, whether or not earned or declared, from the date of the acquisition. The dividends are payable when and if declared by the Board of Directors or upon redemption of the preferred stock. Any accumulation of unpaid dividends on the preferred stock does not bear interest.

37




Quarterly Results of Operations (unaudited)

The following table presents certain unaudited consolidated statement of operations data for our eight most recent fiscal quarters. The information for each of these quarters is unaudited and has been prepared on the same basis as our audited consolidated financial statements appearing elsewhere in this Report. In the opinion of our management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our consolidated financial statements and related notes included elsewhere in this Report. We believe that results of operations for interim periods should not be relied upon as any indication of the results to be expected or achieved in any future period or any fiscal year as a whole.

 

 

Quarters Ended

 

 

 

December 31,
2005

 

September 30,
2005

 

June 30,
2005

 

March 31,
2005

 

December 31,
2004

 

September 30,
2004

 

June 30,
2004

 

March 31,
2004

 

 

 

(2)

 

(2)

 

(2)

 

(2)

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hosted

 

 

$

21,805

 

 

 

$

18,965

 

 

 

$

19,685

 

 

 

$

19,490

 

 

 

$

19,909

 

 

 

$

19,102

 

 

 

$

18,331

 

 

 

$

17,892

 

 

Licensed

 

 

5,464

 

 

 

6,004

 

 

 

941

 

 

 

502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

27,269

 

 

 

24,969

 

 

 

20,626

 

 

 

19,992

 

 

 

19,909

 

 

 

19,102

 

 

 

18,331

 

 

 

17,892

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of hosted revenue (excluding intangibles amortization included below)

 

 

10,668

 

 

 

10,238

 

 

 

9,227

 

 

 

9,524

 

 

 

9,206

 

 

 

8,582

 

 

 

8,669

 

 

 

8,368

 

 

Cost of licensed revenue (excluding intangibles amortization included below)

 

 

1,295

 

 

 

1,481

 

 

 

1,473

 

 

 

700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles amortization

 

 

1,010

 

 

 

1,010

 

 

 

1,010

 

 

 

457

 

 

 

 

 

 

7

 

 

 

11

 

 

 

10

 

 

In-process research and development

 

 

 

 

 

 

 

 

 

 

 

5,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of intangible assets

 

 

2,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

5,423

 

 

 

5,496

 

 

 

5,832

 

 

 

4,647

 

 

 

3,213

 

 

 

2,929

 

 

 

3,082

 

 

 

3,112

 

 

Research and development

 

 

3,113

 

 

 

3,487

 

 

 

3,849

 

 

 

2,575

 

 

 

1,698

 

 

 

1,695

 

 

 

1,431

 

 

 

1,368

 

 

General and administrative

 

 

4,393

 

 

 

4,724

 

 

 

3,942

 

 

 

4,447

 

 

 

4,227

 

 

 

3,240

 

 

 

2,371

 

 

 

2,184

 

 

Terminated acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

139

 

 

 

2,017

 

 

 

 

 

Total costs and expenses

 

 

28,172

 

 

 

26,436

 

 

 

25,333

 

 

 

27,990

 

 

 

18,326

 

 

 

16,592

 

 

 

17,581

 

 

 

15,042

 

 

(Loss) income from operations

 

 

(903

)

 

 

(1,467

)

 

 

(4,707

)

 

 

(7,998

)

 

 

1,583

 

 

 

2,510

 

 

 

750

 

 

 

2,850

 

 

Other income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

911

 

 

 

781

 

 

 

729

 

 

 

618

 

 

 

523

 

 

 

426

 

 

 

329

 

 

 

254

 

 

Change in derivative instrument liability(1)

 

 

1,484

 

 

 

4,845

 

 

 

(3,332

)

 

 

(741

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

32

 

 

 

17

 

 

 

(154

)

 

 

2

 

 

 

9

 

 

 

(6

)

 

 

(13

)

 

 

6