UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-31511
-------------------------------------------------------------
AT 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.)
47200 Bayside Parkway
Fremont, CA 94538
(Address of principal executive offices, including zip code)
510-668-1638
(Registrant's telephone number, including area code)
-------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of November 5, 2001 there were 46,394,665 shares of the registrant's
Common Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of September 30,
2001 and December 31, 2000.
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2001 and
2000.
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
At Road, Inc.
Condensed Consolidated Balance Sheets
(In thousands, unaudited)
September 30, 2001 December 31, 2000
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 45,625 $ 69,280
Short-term investments - 5,198
Restricted short-term investments 2,199 2,135
Accounts receivable, net 5,240 4,252
Inventories 9,495 6,976
Deferred product costs and other current assets 9,384 7,410
---------- ----------
Total current assets 71,943 95,251
Property and equipment, net 5,511 7,108
Deferred product costs, intangibles and other assets 9,531 9,083
---------- ----------
Total assets $ 86,985 $ 111,442
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,493 $ 3,610
Accrued liabilities 5,289 5,557
Deferred revenue 5,888 3,912
---------- ----------
Total current liabilities 15,670 13,079
Deferred revenue and other long-term liabilities 4,802 3,597
---------- ----------
Total liabilities 20,472 16,676
---------- ----------
Common stock ($0.0001 par value, 250,000,000 authorized, shares issued 168,898 171,208
and outstanding: 46,185,817 in 2001 and 46,071,979 in 2000)
Deferred stock compensation (3,114) (8,123)
Notes receivable from stockholders (2,770) (3,309)
Accumulated other comprehensive loss - (10)
Accumulated deficit (96,501) (65,000)
---------- ----------
Total stockholders' equity 66,513 94,766
---------- ----------
Total liabilities and stockholders' equity $ 86,985 $ 111,442
========== =========
See accompanying notes to the condensed consolidated financial statements.
3
At Road, Inc
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Service $ 5,550 $ 2,353 $ 13,818 $ 4,877
Product 1,980 698 5,020 1,535
-------- -------- -------- --------
Total revenues 7,530 3,051 18,838 6,412
Costs and expenses:
Cost of service revenue 3,375 1,758 9,503 3,887
Cost of product revenue 3,933 1,885 9,461 5,267
Sales and marketing 4,201 4,435 14,100 11,286
Research and development 1,575 2,466 .6,015 6,631
General and administrative 2,692 3,153 9,700 6,876
Restructuring charges (30) -- 218 --
Amortization of intangibles 414 414 1,242 825
Stock compensation (*) 880 2,859 2,463 9,814
-------- -------- -------- --------
Total costs and expenses 17,040 16,970 52,702 44,586
-------- -------- -------- --------
Loss from operations (9,510) (13,919) (33,864) (38,174)
Interest income, net 517 666 2,363 1,840
-------- -------- -------- --------
Net Loss $ (8,993) $(13,253) $(31,501) $(36,334)
======== ======== ======== ========
Basic and diluted
net loss per share $ (0.20) $ (2.13) $ (0.72) $ (8.07)
======== ======== ======== ========
Shares used in calculating basic
and diluted net loss per share 44,213 6,221 43,634 4,502
======== ======== ======== ========
Pro forma basic and diluted
net loss per share $ (0.38) $ (1.14)
======== ========
Shares used in calculating pro
forma basic and diluted net loss per share 35,073 31,910
======== ========
Stock compensation (*)
Cost of service revenue $ 20 $ 57 $ 67 $ 153
Cost of product revenue 46 109 159 358
Research and development 137 856 122 2,440
General and administrative 614 1,389 2,106 5,475
-------- -------- -------- --------
Total $ 880 $ 2,859 $ 2,463 $ 9,814
======== ======== ======== ========
See accompanying notes to the condensed consolidated financial statements.
4
At Road, Inc.
Condensed Consolidated Statements of Cashflow
(In thousands, unaudited)
Nine months ended September 30,
Cash flows from operating activities: 2001 2000
--------- ---------
Net loss $(31,501) $(36,334)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,452 2,042
Amortization - stock compensation 2,463 9,814
Common stock issued for consulting services 4 --
Provision for bad debts and sales returns 1,108 1,020
Change in assets and liabilities:
Accounts receivable (2,096) (4,407)
Inventories (2,519) (5,436)
Prepaid expenses and other (3,437) (6,616)
Accounts payable 883 3,496
Accrued and other liabilities (292) 1,963
Deferred revenue 3,216 4,583
-------- --------
Net cash used in operating activities (28,719) (29,875)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (613) (6,788)
Proceeds from sale of property and equipment -- 100
Purchase of short-term investments -- (61)
Proceeds from maturities of short-term investments 5,134 11,299
Purchase of short-term restricted investments -- (89)
Cash paid in purchase of Differential Corrections, Inc. and Hynet
Technologies assets, net of cash acquired -- (3,363)
Other assets (227) (1,367)
-------- --------
Net cash provided by (used in) investing activities 4,294 (269)
-------- --------
Cash flows from financing activities:
Proceeds from sales of preferred stock -- 32,049
Proceeds from sales of common stock 475 794
Issuance of note receivable related to previous issuance of common stock -- (80)
Proceeds from repayments of shareholder notes 295 --
Initial public offering costs -- (1,627)
-------- --------
Net cash provide by financing activities 770 31,136
-------- --------
Net increase (decrease) in cash and cash equivalents (23,655) 992
Cash and cash equivalents:
Beginning of period 69,280 22,714
-------- --------
End of period $ 45,625 $ 23,706
======== ========
Supplemental disclosure of cash flow information:
Non-cash financing activities:
Issuance of common stock for notes receivable $ 34 $ 1,470
======== ========
Purchase of Differential Corrections, Inc. and Hynet Technologies assets:
Value of stock issued -- 1,592
Cash paid -- 4,014
Liabilities assumed -- 215
Assets acquired (including intangibles of $4,969) $ -- $ 5,821
Repurchase of common stock through cancellation of
notes receivable $ 278 $ --
======== ========
See accompanying notes to the condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements were prepared by At
Road, Inc., without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes the disclosures which are made are adequate to make the
information presented not misleading. In the opinion of management the financial
statements include all adjustments necessary to fairly present the financial
condition, results of operations, and cash flows for such periods. Results of
operations for the periods presented are not necessarily indicative of results
for any other interim period or for the full year. These financial statements
should be read in conjunction with the Company's consolidated and audited
financial statements and notes thereto in its Form 10-K (No. 000-31511), filed
on March 30, 2001 with the SEC.
Note 2 - Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share is computed by dividing the loss
attributable to common stockholders by the weighted average number of shares of
common stock outstanding for the period (excluding shares subject to
repurchase). Diluted loss per common share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Common share equivalents are excluded
from the computation in loss periods, as their effect would be antidilutive. Pro
forma basic and diluted net loss per common share is computed by dividing the
loss attributable to common stockholders by the weighted average number of
common shares outstanding for the period (excluding shares subject to
repurchase) plus the weighted average number of common shares resulting from the
conversion of outstanding shares of convertible preferred stock upon the closing
of the Company's initial public offering in September 2000.
The following is a reconciliation of the denominators used in calculating basic
and diluted net loss per share (in thousands):
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Weighted average common shares outstanding 46,170 10,112 46,166 8,752
Weighted average common shares outstanding subject
to repurchase (1,957) (3,891) (2,532) (4,250)
------- ------- ------- -------
Shares used in computation, basic and diluted 44,213 6,221 43,634 4,502
======= ======= ======= =======
Weighted average preferred stock outstanding 28,852 27,408
------- -------
Shares used in computing pro forma per share amounts
on a converted basis 35,073 31,910
======= =======
6
The total number of options, restricted stock subject to repurchase, and
preferred stock excluded from the diluted net loss per share computation for the
three and nine months ended September 30, 2001 and 2000 were as follows (in
thousands):
Three and nine months ended
September 30,
2001 2000
---- ----
Convertible preferred stock -- 28,890
Shares of common stock subject to repurchase 1,813 3,526
Outstanding options and stock purchase rights 6,052 5,015
Note 3 - Balance Sheet Items
Inventories consist of raw materials, work in process and finished goods, and
are stated at the lower of cost (average cost) or market and consist of the
following (in thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials $5,837 $4,681
Work in process 988 774
Finished goods 2,670 1,521
------ ------
Total $9,495 $6,976
====== ======
Deferred product costs and other current assets consists of the following (in
thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
Current deferred product costs $9,038 $6,598
Prepaid expenses and other 346 812
------ ------
Total $9,384 $7,410
====== ======
7
Deferred product costs, intangibles, and other assets consists of the following
(in thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
Purchased technology, net $ 2,485 $ 3,727
Non-current deferred product costs 5,168 3,706
Other 1,878 1,650
-------- -------
Total $ 9,531 $ 9,083
======== =======
Deferred revenue and other long-term liabilities consists of the following (in
thousands):
September 30, 2001 December 31, 2000
--------------------- -----------------
Deferred revenue $ 4,456 $ 3,217
Other long-term liabilities 346 380
-------- -------
Total $ 4,802 $ 3,597
======== =======
Note 4 - Restructuring of Operations
During June 2001, the Company adopted a formal plan to reduce operating costs in
response to a general downturn in the economy. In connection with these actions,
a pre-tax restructuring charge of approximately $248,000 was recorded in June
2001. The principal actions of the plan involved reducing the number of
employees by approximately 11 percent. All areas of the Company were affected by
the reduction of 29 employees. The restructuring expense was comprised of
severance and related costs. The total restructuring expense paid by September
30, 2001 was $218,000. The remaining $30,000 of costs will not be incurred and
has been reversed during the three months ending September 30, 2001.
Note 5 - Comprehensive Income (Loss)
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, requires that an enterprise report, by major components
and as a single total, the change in its net assets during the period from
non-owner sources. At September 30, 2001 and 2000, accumulated other
comprehensive income, comprised of unrealized income on short-term investments,
were zero and $7,000 respectively.
Note 6 - Segment Reporting
In the three and nine months ended September 30, 2001 and 2000, the Company
operated in a single reportable segment. The Company plans to evaluate
additional segment disclosure requirements as it expands its operations. The
Company had no significant revenues from customers outside of the United States
in the three and nine months ended September 30, 2001
8
and 2000 and had no significant long-lived assets deployed outside the United
States as of September 30, 2001.
Note 7 - Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133
became effective for the Company on January 1, 2001. This statement did not have
an impact on the Company's financial position, results of operations or cash
flows during the three and nine months ended September 30, 2001.
Note 8 - New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. Management does not expect
the adoption of SFAS No. 141 to have an impact on the financial position,
results of operations or cash flows of the Company.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will be tested annually for
impairment. The Company will adopt SFAS No. 142 for its fiscal year beginning
January 1, 2002. The Company does not expect the adoption of SFAS No. 142 to
have an impact on the financial position, results of operations or cash flows of
the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Except for the historical information contained herein, the matters discussed in
this Form 10-Q are forward-looking statements involving risks and uncertainties
that could cause actual results to differ materially from those in such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to, general economic and political conditions, our historical and
future losses, limited operating history, the infancy of the wireless data
industry where there is no established market for our products and services, our
ability to adapt to rapid technological change, our reliance on a limited number
of customers and our dependence on wireless networks, network infrastructure and
positioning systems owned and controlled by others. Further information
regarding these and other risks is included in our annual report on Form 10-K
(No. 000-31511), dated March 30, 2001 and in our other filings with the SEC. You
should read the
9
following description of our financial condition and results of operations in
conjunction with our financial statements and notes thereto included in this
Form 10-Q, in our Form 10-K for the year ended December 31, 2000 and in our
other filings with the SEC.
OVERVIEW
We integrate Global Positioning System technology, wireless communications and
the Internet to enable companies to efficiently manage their mobile resources
with location-relevant and time-sensitive information. Our service is an
easy-to-use, cost-effective, Internet-based service for vehicle management that
provides location, reporting, dispatch, messaging, and management services. Our
service allows customers to use our web site to track the movement of their
vehicles, employees, and goods and services, and provides for two-way messaging
between our customers and their mobile workers. We believe our service provides
significant value to our customers by reducing the costs and increasing the
efficiency of their operations.
From July 1996 through June 1998, our operations consisted primarily of various
start-up activities relating to our current business, including development of
Global Positioning System technologies, recruiting personnel and raising
capital. We did not recognize any revenues 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 and directed our
focus to provide location-relevant and time-sensitive information services and
solutions to companies managing mobile resources.
In the second half of 1998, we introduced FleetASAP(sm), a service that
leverages existing infrastructure, including the Global Positioning System,
wireless networks and the Internet, to enable companies to efficiently manage
their mobile resources. Our service includes a proprietary hardware and software
platform that integrates wireless Internet connectivity with a Global
Positioning System receiver. The platform is installed in each vehicle and
receives signals transmitted from Global Positioning System satellites to
determine the location and velocity of the vehicle. These data are transmitted
over wireless networks and the Internet to our Wireless Applications Processing
Center. Our customers can then retrieve the subscriber information from our web
site using an Internet browser. Because the customer data and solution software
reside at our Wireless Applications Processing Center, our customers do not need
to make a substantial investment in acquiring and supporting capital equipment,
such as proprietary hardware, software and data networking equipment, to use our
service.
Since 1998, we have derived substantially all of our revenues from the sale of
our service and the associated hardware. Our service revenue is comprised of
monthly fees. In general, our customers can contract to receive our service for
terms of one, two or three years and can purchase enhanced features for
additional fees. As more customers pay for use of our service, the impact on our
service revenue is compounded.
Our product revenue consists primarily of sales of the Internet Location Manager
and the Internet Data Terminal. The selling prices of our hardware are often
below our costs. Additionally, we defer hardware costs (not in excess of related
deferred product revenue); as a result, we expense
10
a portion of the hardware costs at the time of shipment and the remaining
deferred hardware costs are amortized ratably over the minimum service contract
period.
We recognize service revenue over the period during which services are
performed, generally commencing with product installation. Product revenue is
deferred and recognized ratably over the minimum service contract period.
Allowances for sales returns are recorded at the time product revenue is
recognized.
To date, we have not sold our service outside the U.S. and Canada; however, we
intend to expand our service offerings to additional countries in 2002. We do
not expect that revenues from international sales will be material in 2002.
We will incur substantial stock compensation expense in future periods, which
represents non-cash charges incurred as a result of the issuance of stock
options to employees and consultants. The charge related to options granted to
employees is recorded based on the difference between the deemed fair value of
the common stock and the option exercise price of such options at the date of
grant, which is amortized on an accelerated basis over the option-vesting
period. The charge related to options granted to consultants is calculated at
the end of each reporting period based on the Black-Scholes model, which
approximates fair value and is amortized based on the term of the consulting
agreement or service period. The amount of the charge in each period related to
options granted to consultants can fluctuate depending on our stock price and
volatility. As of September 30, 2001, deferred stock compensation was $3.1
million, which will be amortized in future periods.
Since inception, we have invested substantially in research and development,
business development, marketing, advertising, the building of sales channels,
and our overall infrastructure. We anticipate that such investments will
continue to grow in the near future. We have incurred losses in each year since
inception and expect to incur net losses at least for the foreseeable future. As
of September 30, 2001, we had an accumulated deficit of $96.5 million. Net
losses have been incurred in each quarter in 2001 and 2000. Our limited
operating history makes it difficult to forecast future operating results. Even
if we were to achieve profitability in any period, we may not sustain or
increase profitability on a quarterly or annual basis.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2001 and 2000
Service Revenue
Service revenue, which is comprised of monthly fees, increased from $2.4 million
to $5.6 million for the three months ended September 30, 2000 and 2001,
respectively. Service revenue increased from $4.9 million to $13.8 million for
the nine months ended September 30, 2000 and 2001, respectively. This growth is
consistent with the increases in our installed base of subscribers.
11
Product Revenue
Product revenue rose from $698,000 for the three months ended September 30, 2000
to $2.0 million for the same period in 2001. Product revenue rose from $1.5
million for the nine months ended September 30, 2000 to $5.0 million for the
same period in 2001. This growth is consistent with the increases in our
installed base of subscribers.
Cost of Service Revenue
Cost of service revenue consists of employee salaries and expenses related to
the delivery and support of our services, costs and expenses associated with
connecting our services to wireless networks and the Internet, and depreciation
of our Wireless Applications Processing Center. Cost of service revenue
increased from $1.8 million to $3.4 million for the three months ended September
30, 2000 and 2001, respectively. Cost of service revenue increased from $3.9
million to $9.5 million for the nine months ended September 30, 2000 and 2001,
respectively. The growth in cost of service revenue resulted from increases in
direct service delivery expenses, service infrastructure and personnel costs.
Cost of Product Revenue
Cost of product revenue consists of the cost of our hardware, including the
Internet Location Manager, Internet Data Terminal and related parts, as well as
costs associated with the final assembly, test, delivery, and installation of
our products. Also included in cost of product revenue are routine inventory
provisions, spare parts, material variances and repair costs. The selling prices
of our hardware are often below cost. Additionally, we defer hardware costs (not
in excess of related deferred product revenue) and, as a result, we expense a
portion of the hardware costs at the time of shipment and the remaining deferred
hardware costs are amortized ratably over the minimum service contract period.
This practice may continue for the foreseeable future as we continue to expand
our installed base and as we view product installation as enabling our core
service business. We expect the impact of this practice on future liquidity will
be minimal as our service revenue stream expands.
Cost of product revenue rose from $1.9 million for the three months ended
September 30, 2000 to $3.9 million for the same period in 2001. Cost of product
revenue rose from $5.3 million for the nine months ended September 30, 2000 to
$9.5 million for the same period in 2001. The increase in cost of product
revenue was attributable primarily to the expansion of our services and the
resulting increase in the number of subscribers using our services.
Sales and Marketing Expenses
Sales and marketing expenses consist of employee salaries, sales commissions,
and marketing and promotional expenses. Sales and marketing expenses decreased
from $4.4 million for the three months ended September 30, 2000 to $4.2 million
for the same period in 2001. Sales and marketing headcount decreased from 97 at
September 30, 2000 to 91 at September 30, 2001. Sales and marketing expenses
grew from $11.3 million for the nine months ended September 30, 2000 to $14.1
million for the same period in 2001. Increases in sales commissions and
marketing
12
campaigns comprised the majority of the increase. As our sales channels expand,
we expect that sales and marketing expenses may grow.
Research and Development Expenses
Research and development expenses consist of employee salaries and costs related
to development personnel and consultants, as well as expenses associated with
software and hardware development. Research and development expenses decreased
from $2.5 million for the three months ended September 30, 2000 to $1.6 million
for the same period in 2001. Research and development expenses decreased from
$6.6 million for the nine months ended September 30, 2000 to $6.0 million for
the same period in 2001. Research and development headcount decreased from 90 at
September 30, 2000 to 69 at September 30, 2001. Decreases in compensation and
consultant expenses accounted for the majority of the decrease in expenses.
General and Administrative Expenses
General and administrative expenses consist of employee salaries, related
executive, administrative, and accounting expenses, professional fees,
recruiting expenses and provisions for doubtful accounts. General and
administrative expenses decreased from $3.2 million for the three months ended
September 30, 2000 to $2.7 million for the same period in 2001. The decrease was
due to a reduction in consulting and employee related expenses. General and
administrative headcount decreased from 52 to 50 at September 30, 2000 and 2001,
respectively. General and administrative expenses grew from $6.9 million for the
nine months ended September 30, 2000 to $9.7 million for the same period in
2001. Salaries and other compensation, professional fees and provisions for
doubtful accounts accounted for the majority of the increase. We expect that
general and administrative expenses may continue to increase as we incur such
expenses in anticipation of the growth of the business and our operation as a
public company.
Restructuring Charges
During the second quarter 2001 and in response to a general downturn in the
economy, the Company undertook a formal plan to lower its cost structure and
reorganized itself to more effectively develop, market and sell mobile resource
management products and services. This effort resulted in the total number of
employees being reduced by approximately 11 percent. Restructuring expenses,
which comprised severance and related costs, were $218,000 for the nine months
ended September 30, 2001, net of reversals.
Intangible Amortization
Intangibles amortization relates to the intangible assets purchased from
Differential Corrections, Inc. in April 2000. These expenses are being amortized
over an estimated useful life of three years.
In June 2001, The Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations. SFAS No. 141 requires that all business combinations
initiated after June 30,
13
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. Management does not expect the adoption of SFAS No. 141
to have an impact on the financial position, results of operations or cash flows
of the Company.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. The Company will adopt SFAS No. 142 for its fiscal year
beginning January 1, 2002. The company does not expect the adoption of SFAS No.
142 to have a material effect on its financial position, results of operations
or cash flows.
Stock Compensation Expense
Deferred stock compensation expense related to stock option grants to employees
and consultants was $2.5 million at September 30, 2001. Stock compensation
expense is amortized on an accelerated basis over the vesting period of
individual awards. Amortization of deferred stock compensation expense decreased
from $2.9 million for the three months ended September 30, 2000 to $880,000 for
the same period ended September 30, 2001. Amortization of deferred stock
compensation expense decreased from $9.8 million for the nine months ended
September 30, 2000 to $2.5 million for the same period in 2001. These decreases
were the result of lower amortization in later periods under the accelerated
amortization method and reversals of stock compensation expense previously
recognized on the unvested portion of stock options held by employees terminated
in 2001.
Interest Income, net
Net interest income is comprised of interest earned on cash, cash equivalents,
and short-term investments. Net interest income decreased from $666,000 for the
three months ended September 30, 2000 to $517,000 for same period in 2001. Net
interest income increased from $1.8 million for the nine months ended September
30, 2000 to $2.4 million for the same period in 2001. This increase resulted
from yields on investments in debt securities of the capital raised in our
initial public offering.
Income Taxes
Since inception, we have incurred net losses for federal and state tax purposes.
Except for minimum state income and franchise taxes, we have not recognized any
tax provision or benefit.
Net Loss
Net loss decreased from $13.3 million for the three months ended September 30,
2000 to $9.0 million for the same period in 2001. Net loss decreased from $36.3
million for the nine months
14
ended September 30, 2000 to $31.5 million for the same period in 2001. Our
operating costs decreased from $13.3 million to $9.7 million for the three month
period ended September 30, 2000 and 2001, respectively, and from $35.4 million
to $33.7 million for the nine month period ended September 30, 2000 and 2001,
respectively. The impact of this reduction in expenses was accompanied by an
increase in revenues from $3.0 million to $7.5 million for the three month
period ended September 30, 2000 and 2001, and an increase in revenues from $6.4
million to $18.8 million for the nine month period ended September 30, 2000 and
2001, respectively.
We believe period-to-period comparisons of our operating results are not
necessarily meaningful. You should not rely on them to predict our future
performance. The amount and timing of our operating expenses may fluctuate
significantly in the future as a result of a variety of factors.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, we held $45.6 million in cash and cash equivalents and
$2.2 million in restricted short-term investments.
We currently have a $2.0 million revolving line of credit facility. The line,
against which letters of credit may be issued, is collateralized by a restricted
certificate of deposit of $2.2 million. At September 30, 2001, we had two
standby letters of credit outstanding for a total of $895,000. The line of
credit expires on December 1, 2001.
Net cash used in operating activities was $28.7 million and $29.9 million for
the nine months ending September 30, 2001 and 2000, respectively. Cash used in
operating activities was attributed primarily to net losses and increases in
accounts receivable, inventory and deferred product costs, offset in part by
amortizations of deferred stock compensation, depreciation, increases in
accounts payable and deferred revenues.
Net cash provided by (used in) investing activities was $4.3 million and
$(269,000) for the nine months ending September 30, 2001 and 2000, respectively.
Cash provided by (used in) financing activities in each period was attributed to
proceeds from the sale of short-term investments reduced by the purchase of
fixed and other assets.
Net cash provided by financing activities was $770,000 and $31.1 million for the
nine months ending September 30, 2001 and 2000, respectively. Cash provided by
financing activities in each period was primarily attributed to proceeds from
the issuance of our stock.
As of September 30, 2001 approximately $3.0 million of our gross accounts
receivable were over 90 days old. We believe we have adequately provided
allowances as of September 30, 2001 for any such amounts that may ultimately
become uncollectible. We defer product costs at time of shipment and expense any
amounts in excess of the related product revenue at that time. Generally, we
record accounts receivable from our customers and defer related product revenue
upon installation. Both deferred product cost and revenue are recognized ratably
over the minimum service contract period. As we grow our business, deferred
product costs will generally exceed deferred revenue due to our practice of
recording deferred product costs at time of shipment versus deferred revenue at
time of installation.
15
We believe that our cash and cash equivalents and short-term investments will be
sufficient to meet our anticipated cash needs for operating expenses, working
capital and capital expenditures for at least the next 12 months. If cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to obtain a larger credit facility or to sell additional equity or
debt securities, which may not be available on commercially reasonable terms or
at all, and which could dilute existing stockholders.
RISK FACTORS
In addition to the other information contained in this Report, the following
factors should be considered in evaluating our business and prospects:
DUE TO OUR LIMITED OPERATING HISTORY IT IS DIFFICULT TO PREDICT FUTURE OPERATING
RESULTS OR OUR STOCK PRICE.
An evaluation of our business is difficult because we have a limited operating
history. We commenced operations in July 1996 and commercially offered our first
services in the second half of 1998. We may not continue to grow or achieve
profitability. We face a number of risks encountered by early-stage companies in
the Global Positioning System, wireless communications and Internet information
industries, including:
. the uncertainty of market acceptance of our services;
. our need to introduce reliable and robust products and services that meet
the demanding needs of customers;
. our need to expand our marketing, sales and support organizations, as well
as our distribution channels;
. our ability to anticipate and respond to market competition;
. our need to manage expanding operations;
. our dependence on wireless carriers;
. limited coverage of wireless networks; and
. migration to new networks, which could cause our products to be
incompatible or out of date.
Our business strategy may not be successful, and we may not successfully address
these risks.
WE HAVE HISTORICALLY INCURRED LOSSES AND THESE LOSSES MAY INCREASE IN THE
FUTURE.
We have never been profitable. As of September 30, 2001, we had an accumulated
deficit of $96.5 million. In order to become profitable and sustain
profitability, we will need to generate significant revenues to offset our cost
of revenues, and sales and marketing, research and development and general and
administrative expenses. We may not achieve or sustain our revenue or profit
goals and our losses may grow in the future. In order to facilitate the sale of
our services, we often sell our hardware below cost. As a result, we have
experienced, and expect to continue to experience, negative gross margins on the
sale of our hardware. See
16
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
IF WE DO NOT INCREASE REVENUE FROM THE SALE OF OUR SERVICES TO NEW AND EXISTING
CUSTOMERS, OUR BUSINESS MAY NOT BE SUCCESSFUL.
Our success depends on our ability to increase revenue from the sale of our
services to new and existing customers and on market acceptance of our services.
We may not be able to achieve widespread adoption of our services. Furthermore,
changes such as increases in our pricing for products and services may harm our
ability to increase sales of our products and services to new and existing
customers. If we are not able to expand our customer base and increase our
revenue from new and existing customers, our business will be seriously harmed.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND EXPAND OUR SALES CHANNELS.
In order 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 in our business, and we may not be able to attract
and retain sufficient new sales personnel to expand our operations. New sales
personnel will require training and will take time to achieve full productivity.
In addition, we believe that our success is dependent on expansion of our
indirect distribution channels, including our relationships with wireless
carriers, independent sales agents and distribution partners. To date, we have
relationships with a limited number of these wireless carriers, independent
sales agents and distribution partners. These sales channel parties require
training in selling our products and services and it will take time for these
parties to achieve productivity. We may not be able to establish relationships
with additional distributors on a timely basis, or at all, and our distributors
may not devote adequate resources to promoting and selling our services.
WE HAVE LIMITED RESOURCES AND MAY BE UNABLE TO MANAGE OUR ANTICIPATED GROWTH IN
OPERATIONS.
If we fail to develop and maintain our services as we experience rapid growth,
demand for our services and our revenues could decrease. Our development and
expansion has placed, and will continue to place, significant strain on our
managerial, operational, and financial resources. Due to the limited deployment
of our services, we are unable to assess our ability to grow the business and
manage a substantially larger number of customers and additional services.
IF WE CANNOT DELIVER THE FEATURES AND FUNCTIONALITY OUR CUSTOMERS DEMAND, WE
WILL BE UNABLE TO RETAIN OR ATTRACT NEW CUSTOMERS.
Our success depends upon our ability to determine the features and functionality
our customers demand and to design and implement services that meet their needs
in an efficient manner. We cannot assure you that we can successfully determine
customer requirements or that our future services will adequately satisfy
customer demands. To date, the design of our services has been
17
based on our internal efforts and feedback from our existing and potential
customers. In addition, we may experience difficulties that could delay or
prevent the successful development, introduction or marketing of new services
and service enhancements. If we cannot effectively deploy, maintain and enhance
our services, our expenses may increase, we may not be able to recover our costs
and our competitive position may be harmed.
WE DEPEND ON WIRELESS NETWORKS OWNED AND CONTROLLED BY OTHERS. IF OUR CUSTOMERS
DO NOT HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON RELIABLE NETWORKS, WE MAY
BE UNABLE TO DELIVER SERVICES AND OUR REVENUES COULD DECREASE.
Our ability to grow and achieve 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 tall
buildings blocking the transmission of data to and from vehicles. These effects
could make our services less reliable and useful, and customer satisfaction
could suffer. Our financial condition could be seriously harmed if our wireless
carriers were to increase the prices of their services, or to suffer operational
or technical failures. If wireless carriers do not expand coverage, we may be
unable to offer our service to additional areas.
IF ONE OR MORE OF THE AGREEMENTS WE HAVE WITH WIRELESS CARRIERS IS TERMINATED,
WE MAY BE UNABLE TO OFFER OUR SERVICES TO OUR CUSTOMERS WITHIN THE CARRIER'S
COVERAGE AREA.
There are a limited number of wireless carriers offering services compatible
with our service. These wireless carriers have little overlap in their primary
service coverage areas. Our existing agreements with wireless carriers may be
terminated upon as little as fifteen-day written notice or immediately upon the
occurrence of certain conditions. If one or more of our wireless carriers
decides to terminate or not renew its contract with us, we may incur additional
costs relating to obtaining alternate coverage from another wireless carrier
outside of its primary coverage area, or we may be unable to replace the
coverage at all, causing a complete loss of service to our customers in that
coverage area.
WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES TO MANUFACTURE AND SUPPLY
CRITICAL COMPONENTS FOR OUR SERVICES.
If these parties do not perform their obligations, we may be unable to find
other suppliers or operate our business. A subscriber requires an Internet
Location Manager to use our service. To use our service with two-way messaging,
a subscriber requires an Internet Location Manager and an Internet Data
Terminal. The Internet Location Manager, which we install in each subscribing
vehicle, determines the vehicle's location, velocity and orientation and gathers
other information about the vehicle. The Internet Data Terminal, when installed
in subscriber's vehicle, adds the incremental ability to send and receive
messages to and from the vehicle. We cannot be sure that alternative sources for
key components used in the Internet Location Manager and the Internet Data
Terminal will be available when needed, or if available, that these components
will be available on commercially reasonable terms. We rely on sole suppliers
and manufacturers for a
18
number of key components for these products and do not have long-term agreements
with any of these suppliers and manufacturers. Our sole suppliers and
manufacturers of key components include:
. Taiwan Semiconductor Manufacturing Company, our sole manufacturer of
Global Positioning System receiver chips;
. Conexant Systems (formerly Philsar Electronics), our sole manufacturer of
radio frequency chips;
. Orient Semiconductor Electronics, our sole manufacturer of Internet
Location Managers; and
. Micronet, our sole supplier of Internet Data Terminals.
Additionally, Conexant Systems has notified us that it will discontinue
manufacturing our radio frequency chips. We believe that at the termination of
our relationship with Conexant Systems, we will have sufficient quantities of
radio frequency chips to meet our needs through 2002. We are in the process of
qualifying alternative sources for this component, however we cannot be sure
that alternative sources will be available when needed, or if available, that
the component will be available on commercially reasonable terms.
If our agreements with these or other suppliers and manufacturers are terminated
or expire, if we are unable to obtain sufficient quantities of these components,
or if the terms for supply of these products 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
subscriber base. Any of these events could require us to take unforeseen actions
or devote additional resources to provide our services and could harm our
ability to compete effectively.
WE DEPEND ON RECRUITING AND RETAINING QUALIFIED PERSONNEL AND OUR INABILITY TO
DO SO WOULD SERIOUSLY HARM OUR BUSINESS.
Because of the technical nature of our services 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 Global
Positioning System, wireless communications and Internet software expertise.
Competition for qualified personnel in these industries is intense, particularly
in the San Francisco Bay Area. Competitors and others have in the past, and may
in the future, attempt to recruit our employees. 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, we may not be successful in our efforts.
WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS, WHICH COULD REDUCE
OUR MARKET SHARE AND REVENUES.
The market for our services is competitive and is expected to become even more
competitive in the future. Our customers choose our services primarily on the
basis of the functionality, price, ease of use, quality and geographic coverage
of our services. If we are unable to compete
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successfully in these areas, competitive pressures may harm our business,
resulting in a loss of market share and revenues. Our current and potential
competitors include:
. other providers of vehicle-location services, such as Qualcomm, whose
OmniTRACS service uses satellite communication technology to manage fleets
of trucks that travel long distances;
. other wireless Internet companies, such as Aether Systems, Openwave and
Research in Motion;
. companies working on emergency-911 solutions, such as True Position;
. companies with solutions that integrate location, wireless communications
and call centers, such as General Motors; and
. companies that provide wireless, location-relevant applications, such as
SignalSoft.
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.
Our services also compete with alternative means of communication between
vehicles and their managers, including wireless telephones, two-way radios and
pagers. In addition, we expect that new competitors will enter the market for
location-relevant wireless information as businesses and consumers increasingly
demand information when they are mobile. Furthermore, the widespread adoption of
industry standards may make it easier for new market entrants or existing
competitors to offer the services we offer or may offer in the future.
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:
. delays in market acceptance or implementation by customers of our
services;
. changes in demand by our customers for existing and additional services;
. changes in or cancellations of our agreements with wireless carriers;
. introduction of new services 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;
. changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation;
. wireless data and Internet market conditions; and
. general economic and political conditions.
20
Our expense levels are based, in part, on our expectation of future revenues. 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. In some future quarter 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 AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS.
Our success depends on our ability to protect our proprietary rights to the
technologies used to implement and operate our services in the U.S. and in
foreign 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 on our intellectual property or the intellectual
property licensed to us by third parties, our business would 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 U.S. Therefore, the measures we take to protect
our proprietary rights may not be adequate.
A DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES
MAY HARM OUR REPUTATION, MAY CAUSE A LOSS OF REVENUES AND MAY INCREASE OUR
EXPENSES.
Unauthorized access, computer viruses and other accidental or intentional
actions could disrupt our systems. We expect to incur significant costs to
protect against the threat of security breaches and to alleviate problems caused
by any breaches. Currently, the transmission of our customers' proprietary
information is not protected by encryption technology. If a third party were to
misappropriate our customers' proprietary information, we could be subject to
claims, litigation or other potential liabilities that could seriously harm our
revenues and result in the loss of customers.
SYSTEM FAILURES COULD REDUCE OUR SALES, INCREASE COSTS OR RESULT IN LIABILITY
CLAIMS AND SERIOUSLY HARM OUR BUSINESS.
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 services may not
function properly if our systems fail, or 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. 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 distract management from
operating our business. We currently do not have fully
21
redundant systems for our services at an alternate site. Our operations depend
upon our ability to maintain and protect our computer systems in our principal
facilities in Fremont, California, which are on or near earthquake fault zones
and Philadelphia, Pennsylvania.
WE DEPEND ON GLOBAL POSITIONING SYSTEM TECHNOLOGY OWNED AND CONTROLLED BY
OTHERS. IF WE DO NOT HAVE CONTINUED ACCESS TO GLOBAL POSITIONING SYSTEM
TECHNOLOGY AND SATELLITES, WE WILL BE UNABLE TO DELIVER OUR SERVICES AND OUR
REVENUES WILL DECREASE.
Our services rely on signals from Global Positioning System satellites built and
maintained by the U.S. Department of Defense. Global Positioning System
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,
and our services may cease and customer satisfaction would suffer.
In addition, the U.S. government could decide not to continue to operate and
maintain Global Positioning System satellites over a long period of time or to
charge for the use of the Global Positioning System. Furthermore, because of
ever-increasing commercial applications of the Global Positioning System, other
U.S. government agencies may become involved in the administration or the
regulation of the use of Global Positioning System signals in the future. If
factors such as the foregoing affect the Global Positioning System, for example
by affecting the availability and pricing of Global Positioning System
technology, our business will suffer.
OUR GLOBAL POSITIONING SYSTEM TECHNOLOGY DEPENDS ON THE USE OF RADIO FREQUENCY
SPECTRUM CONTROLLED BY OTHERS.
Global Positioning System technology is dependent on the use of radio frequency
spectrum. An international organization known as the International
Telecommunications Union controls the assignment of spectrum. If the
International Telecommunications Union reallocates radio frequency spectrum, our
services may become less useful or less reliable. This would, in turn, harm our
business. In addition, emissions from mobile satellites and other equipment
using other frequency bands may adversely affect the utility and reliability of
our services.
DEFECTS OR ERRORS IN OUR SERVICES COULD RESULT IN THE CANCELLATION OR DELAYS OF
OUR SERVICES, WHICH WOULD DAMAGE OUR REPUTATION AND HARM OUR FINANCIAL
CONDITION.
We must develop our services quickly to keep pace with the rapidly changing
Global Positioning System, wireless communications and Internet markets.
Products and services that address these markets are likely to contain
undetected errors or defects, especially when first introduced or when new
versions are introduced. Our services may not be free from errors or defects,
which could result in the cancellation or disruption of our services or
dissatisfaction of customers. This would damage our reputation, and result in
lost revenues, diverted development resources, and increased service and
warranty costs.
22
THE REPORTING OF INACCURATE LOCATION-RELEVANT INFORMATION COULD CAUSE THE LOSS
OF CUSTOMERS AND EXPOSE US TO LEGAL LIABILITY.
The accurate reporting of location-relevant information is critical to our
customers' businesses. If we fail to accurately report location-relevant
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.
CLAIMS THAT WE INFRINGE THIRD-PARTY PROPRIETARY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO PROVIDE OUR SERVICES.
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. This would increase our expenses and could decrease the functionality of
our service, which would make our services 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.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US.
We may be subject to claims for damages related to errors and malfunctions of
our hardware components or their installation. A product liability claim could
seriously harm our business because of the costs of defending against this type
of lawsuit, diversion of employees' time and attention, and potential damage to
our reputation. Some of our agreements with our customers contain provisions
designed to limit exposure to potential product liability 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.
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.
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
23
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 objective and
other business concerns;
. failure to integrate the acquired company into our pre-existing business;
. 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 MAY NEED AND MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL, WHICH COULD
PREVENT US FROM CARRYING OUT OUR BUSINESS STRATEGY.
We anticipate that our available cash resources will be sufficient to fund our
operating needs for the next 12 months, including the expansion of sales and
marketing and research and development programs during that period. Thereafter,
we may require additional financing in an amount that we cannot determine at
this time. If our plans or assumptions change or are inaccurate, we may be
required to seek capital sooner than anticipated. We may need to raise funds
through public or private debt or equity financings. If we need to raise
additional funds, we may not be able to do so on commercially reasonable terms,
or at all, and may not be able to continue to fund our operations.
IF OUR WIRELESS CARRIERS DECIDE TO ABANDON CELLULAR DIGITAL PACKET DATA OR
INTEGRATED DIGITAL ENHANCED NETWORK TECHNOLOGIES OR DO NOT CONTINUE TO EXPAND
THEIR CELLULAR DIGITAL PACKET DATA OR INTEGRATED DIGITAL ENHANCED NETWORK
SYSTEMS, WE MAY BE UNABLE TO DELIVER OUR SERVICES AND OUR SALES COULD DECREASE.
Our services function only on Cellular Digital Packet Data-enabled networks or
the Integrated Digital Enhanced Network. These protocols cover only portions of
the U.S. and Canada and may not gain widespread market acceptance. If wireless
carriers decide to abandon these protocols in favor of other types of wireless
technology, we may not be able to provide our current services to our customers.
In addition, if wireless carriers do not expand their coverage areas, we will be
unable to meet the needs of customers who wish to use our services outside the
current coverage area.
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN INCREASED
PRODUCT COSTS AND OPERATING EXPENSES.
24
We have suppliers and manufacturers that are located outside the U.S. Some
transactions relating to supply and development agreements may be conducted in
currencies other than the U.S. dollar, and fluctuations in the value of foreign
currencies relative to the U.S. dollar could cause us to incur currency exchange
costs. In addition, some of our transactions denominated in U.S. 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.
OUR BUSINESS WILL BE HARMED IF THE DEMAND FOR SERVICES BASED ON WIRELESS
COMMUNICATIONS DOES NOT GROW.
The markets for wireless data services and related products and services are
still emerging, and continued growth in demand for, and acceptance of, these
services remains uncertain. Current barriers to market acceptance of these
services include cost, reliability, functionality and ease of use. We cannot be
certain that these barriers will be overcome. Since the market for our services
is new and evolving, it is difficult to predict the size of this market or its
growth rate. Our financial performance will depend in large part upon the
continued demand for vehicle management services through wireless technologies.
We cannot assure you that a sufficient volume of customers will demand these or
other services based on these technologies. If the market for wireless on-line
vehicle management and other services grows more slowly than we currently
anticipate, our revenues may not grow.
IF THE USE OF THE INTERNET BY BUSINESSES DOES NOT CONTINUE TO GROW, OUR BUSINESS
WILL BE HARMED.
Our future success is dependent on continued growth in the use of the Internet
by businesses. The use and acceptance of the Internet by businesses may not
increase for a number of reasons, including the cost and availability of
Internet access and concerns about privacy, security and reliability.
Capacity constraints caused by growth in the use of the Internet may impede
further development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. If the necessary infrastructure,
products, services or facilities are not developed, or if the Internet does not
become a viable and widespread commercial medium, we may not be able to grow our
business.
GOVERNMENT REGULATIONS AND STANDARDS MAY HARM OUR BUSINESS AND COULD INCREASE
OUR COSTS OR REDUCE OUR OPPORTUNITIES TO EARN REVENUES.
In addition to regulations applicable to businesses in general, we may also be
subject to direct regulation by governmental agencies, including the Federal
Communications Commission and Department of Defense. These regulations may
impose licensing requirements 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,
25
provincial, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, wireless communications
and Global Positioning System 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 services. 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 services and increase our cost of doing business. Wireless
carriers 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 the provision of our services.
OUR PLATFORM CONTAINS ENCRYPTION TECHNOLOGY WHOSE EXPORT IS RESTRICTED BY LAW,
WHICH MAY SLOW OUR GROWTH OR RESULT IN SIGNIFICANT COSTS.
The U.S. government generally limits the export of encryption technology, which
our services incorporate. Foreign countries may impose similar regulatory
requirements. If any export approval that we receive is revoked or modified, if
our technology is unlawfully exported or if the U.S. government adopts new
legislation or regulations restricting export of our services and encryption
technology, we may not be able to distribute our services to potential customers
outside the U.S., which may seriously harm our business. We may need to incur
significant costs and divert resources to develop replacement technologies or
may need to adopt inferior substitute technologies to satisfy these export
restrictions. These replacement or substitute technologies may not be the
preferred security technologies of our customers, in which case, our business
may not grow. In addition, we may suffer similar consequences if the laws of any
other country limit the ability of third parties to sell encryption technologies
to us.
OUR STOCK PRICE IS VOLATILE, WHICH MAY CAUSE YOU TO LOSE MONEY AND MAY RESULT IN
COSTLY LITIGATION THAT COULD DIVERT OUR RESOURCES.
Stock markets have recently experienced 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 and emerging nature of our business, the market price of
our common stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order;
. changes in estimates of our financial performance or changes in
recommendations by securities analysts;
. security breaches; and
26
. disposition of shares of our common stock held by large investors.
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.
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 the
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 preferred shares could adversely affect
the price of our common stock and dilute existing stockholders.
A LIMITED NUMBER OF STOCKHOLDERS COLLECTIVELY CONTINUE TO OWN A MAJORITY OF OUR
COMMON STOCK AND MAY ACT, OR PREVENT CERTAIN TYPES OF CORPORATE ACTIONS, TO THE
DETRIMENT OF OTHER STOCKHOLDERS.
Our directors, officers and greater than 5 percent stockholders own
approximately 66 percent of our outstanding common shares. 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Short-Term Investments
At September 30, 2001, we held $2.2 million in restricted short-term
investments, consisting of certificates of deposits. If market interest rates
were to increase immediately and uniformly by 10 percent from levels at
September 30, 2001, the fair market value of the restricted short-term
investments would not decline. We generally expect to have the ability to hold
fixed income investments until maturity and therefore would not expect operating
results or cash flows to be affected to any significant degree by a sudden
change in market interest rates on short-term investments.
Foreign Currency Exchange Rate
We transact business primarily in U.S. dollars. We are subject, however, to
adverse movements in foreign currency exchange rates in those countries where we
conduct business. To date, the effect of fluctuations in foreign currency
exchange rates on expenses has not been material. Operating expenses incurred by
our subsidiary in India are denominated in Indian rupees. This subsidiary was
formed in November 1999 to perform research and development activities. We hold
fixed-price agreements denominated in U.S. dollars with key foreign-based
suppliers. Orient Semiconductor Electronics, in Taiwan, manufactures the
Internet Location Manager; Novatel, in Canada, provides the modem for the
Internet Location Manager; Taiwan Semiconductor Manufacturing Company, in
Taiwan, manufactures our Global Positioning System receiver chips; Conexant
Systems, in Canada, manufactures our radio frequency chips; and Micronet, in
Israel, supplies our Internet Data Terminal. Should there be a sustained
increase in average exchange rates for the local currencies in the foregoing
countries, our suppliers may request increased pricing on any new agreements. If
this were to occur for all of these currencies and with each of these suppliers,
a 10 percent increase in average exchange rates could increase our product costs
by approximately 8 percent.
We do not use derivative financial instruments for speculative trading purposes,
nor do we currently hedge any foreign currency exposure to offset the effects of
changes in foreign exchange rates. Similarly, we do not use financial
instruments to hedge operating expenses of our Indian subsidiary.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently involved in any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
On September 28, 2000, our Registration Statement on Form S-1 (No. 333-41372)
was declared effective by the Securities and Exchange Commission, pursuant to
which 7,000,000 shares of our common stock were offered and sold for our account
at a price of $9.00 per share, for an aggregate offering price of $63.0 million.
The offering was closed on October 4, 2000. The managing underwriters of the
offering were Credit Suisse First Boston Corporation, JP Morgan Chase and
Company (formerly Chase H&Q) and U.S. Bancorp Piper Jaffray.
We incurred the following expenses in connection with the offering:
Underwriting discounts and commissions $4,400,000
Other expenses 1,600,000
----------
Total Expenses $6,000,000
==========
All of such expenses were direct or indirect payments to others.
The net offering proceeds to us after deducting the total expenses above were
approximately $57.0 million. From the closing of the offering through the three
months ended September 30, 2001, we used such net offering proceeds, in direct
or indirect payments to others, as follows:
Investment in cash, cash equivalents and short-term,
interest bearing securities $43,000,000
Other working capital $14,000,000
-----------
Total $57,000,000
===========
Each of such amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change in
the use of proceeds described in the prospectus of our Registration Statement.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) The Company filed no reports on Form 8-K during the three months ended
September 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT ROAD, INC.
By: /s/ Thomas C. Hoster
---------------------------------
Thomas C. Hoster
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 13, 2001
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