Exhibit 99.01
Independent Auditors' Report
To the Stockholder of @ Road, Inc.:
We have audited the accompanying consolidated balance sheets of @Road, Inc.
and its subsidiaries (collectively the "Company") as of December 31, 2006 and
2005, and the related consolidated statements of operations, stockholders'
equity and comprehensive income and cash flows for each of the three years in
the period ended December 31, 2006. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2006 and 2005, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on January 1,
2006, the Company adopted Statement of Financial Accounting Standards No.
123(R), Share-Based Payment.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
April 30, 2007
@ROAD, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
-------------------------------------------
2006 2005
-------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents...................... $ 39,874 $ 25,773
Short-term investments......................... 53,682 77,643
Accounts receivable
(net of allowances
of $122 and $376)............................. 15,644 12,475
Inventories.................................... 14,282 6,087
Deferred product costs......................... 18,324 16,187
Deferred tax assets............................ 1,108 1,448
Prepaid expenses and other..................... 2,807 2,566
-------------------- ---------------------
Total current assets......................... 145,721 142,179
Property and equipment, net.................... 8,333 6,195
Deferred product costs......................... 27,443 16,995
Deferred tax assets............................ 42,471 39,843
Goodwill....................................... 13,341 13,341
Intangible assets, net......................... 23,292 27,333
Other non-current assets....................... 853 400
-------------------- ---------------------
Total assets................................. $ 261,454 $ 246,286
==================== =====================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 4,555 $ 6,653
Accrued liabilities............................ 11,429 8,751
Deferred revenue and customer deposits......... 21,942 15,495
Redeemed preferred stock....................... 3,125 --
Derivative instrument.......................... 7,004 1,457
-------------------- ---------------------
Total current liabilities.................... 48,055 32,356
Deferred revenue................................. 25,893 17,333
Deferred tax liabilities......................... -- 323
Derivative instrument............................ -- 1,457
Other long-term liabilities...................... 388 461
-------------------- ---------------------
Total liabilities............................ 74,336 51,930
Commitments and contingencies (Note 12)
Preferred stock, $0.001 par value, 10,000
shares authorized, 98 shares designated
as redeemable preferred stock, shares issued
and outstanding: 77 in 2006 and 78 in 2005. 5,553 8,184
Stockholders' equity:
Common stock, $0.0001 par value, 250,000 shares
authorized, shares issued and outstanding:
62,258 in 2006 and 61,154 in 2005.............. 272,888 265,347
Notes receivable from stockholders............... -- (7)
Accumulated other comprehensive loss............. (19) (78)
Accumulated deficit.............................. (91,304) (79,090)
-------------------- ---------------------
Total stockholders' equity................... 181,565 186,172
-------------------- ---------------------
Total liabilities, redeemable preferred
stock and stockholders' equity............. $ 261,454 $ 246,286
==================== =====================
See notes to consolidated financial statements.
1
@ROAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
------------------------------------------
2006 2005 2004
------------- -------------- -------------
Revenues:
Hosted........................................................... $ 84,302 $ 79,945 $ 75,234
Licensed......................................................... 15,381 12,911 --
------------- -------------- -------------
Total revenues................................................. 99,683 92,856 75,234
Costs and expenses:
Cost of hosted revenue (excluding intangibles
amortization included below) 45,727 39,657 34,825
Cost of licensed revenue (excluding intangibles
amortization included below) 4,921 4,949 --
Intangibles amortization......................................... 4,040 3,487 28
Sales and marketing.............................................. 22,565 21,398 12,336
Research and development......................................... 15,942 13,024 6,192
General and administrative....................................... 21,506 17,506 12,022
In-process research and development -- 5,640 --
Impairment of intangible assets -- 2,270 --
Terminated acquisition costs..................................... -- -- 2,138
------------- -------------- -------------
Total costs and expenses....................................... 114,701 107,931 67,541
------------- -------------- -------------
(Loss) income from operations...................................... (15,018) (15,075) 7,693
------------- -------------- -------------
Other income, net:
Interest income.................................................. 4,499 3,039 1,532
Change in derivative instrument liability........................ (4,110) 2,256 --
Other income (expense), net...................................... 161 (103) (4)
------------- -------------- -------------
Total other income, net........................................ 550 5,192 1,528
------------- -------------- -------------
Net (loss) income before income taxes.............................. (14,468) (9,883) 9,221
Benefit from income taxes.......................................... 2,254 37,794 --
------------- -------------- -------------
Net (loss) income.................................................. (12,214) 27,911 9,221
Preferred stock dividends.......................................... (503) (436) --
------------- -------------- -------------
Net (loss) income attributable to common stockholders.............. (12,717) 27,475 $ 9,221
============= ============== =============
Net (loss) income per share:
Basic............................................................ $ (0.21) $ 0.46 $ 0.17
============= ============== =============
Diluted.......................................................... $ (0.21) $ 0.45 $ 0.16
============= ============== =============
Shares used in calculating net (loss) income per share:
Basic............................................................ 61,629 59,928 54,296
============= ============== =============
Diluted.......................................................... 61,629 61,353 57,435
============= ============== =============
See notes to consolidated financial statements.
2
@ROAD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands)
Notes Accumulated
Deferred Receivable Other Stock-
Common Stock Stock from Comprehensive Accumulated holders' Comprehensive
Shares Amount Compensation Stockholders Loss Deficit Equity Income
BALANCES, January 1, 2004 53,700 $ 228,441 $ (4) $ (87) $ -- $ (116,222) $ 112,128
Net income......... 9,221 9,221 $ 9,221
Change in unrealized (loss)
on short-term investments (179) (179) (179)
------------
Comprehensive income $ 9,042
============
Shares issued under 464 2,135 2,135
employee stock purchase
plan.............
Exercise of stock options 641 1,440 1,440
Collection of notes
receivable from
stockholders..... 87 87
Amortization of deferred
stock compensation 4 4
------- --------- ------------ ----------- ----------- ---------- -----------
BALANCES, December 31, 2004.. 54,805 232,016 -- -- (179) (107,001) 124,836
Net income......... 27,911 27,911 $ 27,911
Change in unrealized (loss)
on short-term investments 101 101 101
------------
Comprehensive income $ 28,012
============
Shares issued upon 5,454 24,228 24,228
acquisition of Vidus, net
of issuance costs of $478
Fully vested options issued
upon acquisition of Vidus 531 531
Shares issued under
employee stock purchase
plan............. 580 1,678 1,678
Exercise of stock options 315 578 578
Issuance of note receivable
from stockholder. (11) (11)
Collection of note
receivable from
stockholder...... 4 4
Dividends on preferred stock (436) (436)
Excess tax benefit on the
exercise of employee
stock options (See "Note
15--Income Taxes") 6,752 6,752
------- --------- ------------ ----------- ----------- ---------- ------------
BALANCES, December 31, 2005.. 61,154 265,347 -- (7) (78) (79,090) 186,172
Net loss........... (12,214) (12,214) $ (12,214)
Change in unrealized (loss)
on short-term investments 59 59 59
------------
Comprehensive income $ (12,155)
============
Shares issued under 643 1,992 1,992
employee stock purchase
plan.............
Exercise of stock options 461 1,488 1,488
Collection of notes
receivable from
stockholders..... 7 7
Excess tax benefit on the
exercise of employee
stock options 214 214
Dividends on redeemable
preferred stock.. (503) (503)
Employee stock compensation
expense.......... 4,350 4,350
------------------------------------------------------------------------------------------
BALANCES, December 31, 2006.. 62,258 $ 272,888 $ -- $ -- $ (19) $ (91,304) $ 181,565
==========================================================================================
See notes to consolidated financial statements.
3
@ROAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
---------------------------------------------
2006 2005 2004
------------- -------------- --------------
Cash flows from operating activities:
Net (loss) income.............................................. $ (12,214) $ 27,911 $ 9,221
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization................................ 7,350 6,095 1,286
Change in derivative instrument liability.................... 4,110 (2,256) --
Employee stock compensation expense........................... 4,350 -- --
Provision for inventory valuation............................ 140 365 214
Loss on disposal of property and equipment................... 75 65 24
Provision for product return costs........................... (6) 238 --
Allowance (reduction) for doubtful accounts.................. (253) (674) (724)
Deferred taxes............................................... (2,397) (44,661) --
Excess tax benefit on the exercise of employee stock options. (214) 6,752 --
In-process research and development.......................... -- 5,640 --
Impairment of intangible assets.............................. -- 2,270 --
Write-off of deferred acquisition costs...................... -- -- 1,095
Amortization of deferred stock compensation.................. -- -- 4
Change in assets and liabilities, net of effect of
acquisition:
Accounts receivable........................................ (2,916) (2,172) (127)
Inventories................................................ (8,335) (2,859) (1,382)
Deferred product costs..................................... (12,579) (16,369) 2,140
Prepaid expenses and other................................. (694) (332) (1,021)
Accounts payable........................................... (2,212) 447 609
Accrued and other liabilities.............................. 2,605 1,533 33
Deferred revenue and customer deposits..................... 15,007 12,381 (156)
------------- -------------- --------------
Net cash (used in) provided by operating activities...... (8,183) (5,626) 11,216
------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment............................. (5,407) (4,178) (2,652)
Purchases of short-term investments............................ (61,351) (127,367) (161,836)
Proceeds from maturities of short-term investments............. 85,371 153,047 60,435
Acquisition of Vidus, net of cash acquired..................... -- (6,857) --
------------- -------------- --------------
Net cash provided by (used in) investing activities...... 18,613 14,645 (104,053)
------------- -------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock............................. 3,480 2,256 3,575
Proceeds from payments on note receivable issued to stockholders 7 4 87
Payment for redemption of redeemable preferred stock......... (30) -- --
Excess tax benefit on the exercise of employee stock options. 214 -- --
------------- -------------- --------------
Net cash provided by financing activities................ 3,671 2,260 3,662
------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents............. 14,101 11,279 (89,175)
Cash and cash equivalents:
Beginning of year.............................................. 25,773 14,494 103,669
------------- -------------- --------------
End of year.................................................... $ 39,874 $ 25,773 $ 14,494
============= ============== ==============
Supplemental disclosure of cash flow information:
============= ============== ==============
Cash paid for income taxes..................................... $ 116 $ 55 $ --
============= ============== ==============
Dividends accrued on preferred stock........................... $ 503 $ 436 $ --
============= ============== ==============
Change in unrealized gain (loss) on short-term investments,
net of tax effects $ 59 $ 101 $ (179)
============= ============== ==============
Non-cash investing and financing activities:
Issuance of common stock, preferred stock and options in
connection with the acquisition of Vidus..................... $ -- $ 38,155 $ --
============= ============== ==============
Fixed assets acquired not paid at year end $ 115
=============
See notes to consolidated financial statements.
4
@ROAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Note 1. Organization and Summary of Significant Accounting Policies
Organization
@Road, Inc. commenced operations on July 1, 1996 and is a leading
provider of mobile resource management ("MRM").
Acquisition of @Road by Trimble Navigation Limited ("Trimble")
On December 10, 2006, the Company announced that it entered into a
definitive agreement to be acquired by Trimble. On February 16, 2007 the
acquisition was approved at a stockholder's meeting and closed. Under the
terms of the transaction, Trimble acquired all of the outstanding shares of
@Road for $7.50 per share. @Road shareholders received $5.00 per share in cash
and the remaining $2.50 per share in Trimble stock.
Principles of Consolidation
The consolidated financial statements include @Road, Inc. and its
wholly-owned subsidiaries (collectively, the "Company"). Intercompany accounts
and transactions are eliminated upon consolidation.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses during the reporting period. On
an on-going basis, the Company evaluates its estimates, including those
related to revenue recognition, stock-based compensation, intangible assets
and goodwill, allowance for doubtful accounts, income taxes and legal and
other contingencies. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
remaining maturity at purchase of 90 days or less to be cash equivalents.
Short-term Investments
Short-term investments represent highly liquid debt instruments purchased
with a remaining maturity date at purchase of greater than 90 days and are
stated at fair value. The differences between amortized cost (cost adjusted
for amortization of premiums and accretion of discounts which are recognized
as adjustments to interest income) and fair value representing unrealized
holding gains or losses, are recorded separately as accumulated other
comprehensive income within stockholders' equity, net of related estimated tax
provisions or benefits. Additionally, the Company assesses whether an
other-than-temporary impairment loss on its investments has occurred due to
declines in fair value or other market conditions. The Company did not
consider any declines in fair value to be other than temporary. While the
Company's intent is to hold debt securities to maturity or reset date, they
are classified as available-for-sale because the sale of such securities may
be required prior to maturity or reset. Any gains and losses on the sale of
debt securities are determined on a specific identification basis.
1
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash equivalents,
short-term investments and accounts receivable. The Company's cash equivalents
and short-term investments consist of checking and savings accounts, money
market accounts and highly liquid debt instruments with four financial
institutions. The Company sells its products and services primarily to
companies in the United States and Europe. The Company does not require
collateral or other security to support accounts receivable. To reduce credit
risk, management performs ongoing evaluations of its customers' financial
condition. The Company maintains an allowance for doubtful accounts receivable
based upon its historical experience. Unexpected or significant future changes
in trends could result in a material impact to future statements of operations
or cash flows. The allowance for doubtful accounts is recorded as a charge to
operating expense, while the provision for sales returns is recognized as a
reduction of revenues.
At December 31, 2006, SBC Services and BellSouth comprised 17% and 13% of
outstanding accounts receivable, respectively. At December 31, 2005, SBC
Services comprised 43% of outstanding accounts receivable.
Inventories
Inventories consist of raw materials, work in process and finished goods,
and are stated at the lower of average cost or market. Inventories are
accounted for on an average cost basis and the adequacy of inventory reserves
is reviewed on a quarterly basis. The Company writes down inventory based on
forecasted demand and technological obsolescence. These factors are impacted
by market and economic conditions, technology changes, new product
introductions and changes in strategic direction and require estimates that
may include uncertain elements. Actual demand may differ from forecasted
demand and such differences may have a material effect on recorded inventory
values.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of approximately three to
five years. Leasehold improvements and capital lease assets are amortized over
the shorter of the lease term or their estimated useful lives.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value
of the net tangible and identifiable intangible assets acquired in a business
combination. The Company follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets
("SFAS 142"), under which goodwill is no longer subject to amortization.
Intangible assets resulting from the acquisitions of entities accounted
for using the purchase method of accounting are estimated by management based
on the fair value of assets received. Identifiable intangible assets are
comprised of core developed technology, order backlog, customer relationships,
trademarks and trade names and other intangible assets. Identifiable
intangible assets that have finite useful lives are being amortized over their
useful lives of ten years for core developed technology, three years for order
backlog and ten years for customer relationships. Trademarks and trade names
have indefinite lives and as such are not amortized but are tested at least
annually for impairment.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. An asset is considered
impaired if its carrying amount exceeds the future net cash flow that the
asset is expected to generate. If an asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair market value. The Company assesses the
recoverability of long-lived and intangible assets by determining whether
2
the unamortized balances can be recovered through undiscounted future net cash
flows of the related assets. The amount of impairment if any, is measured
based on projected discounted future net cash flows.
The Company evaluates goodwill, at a minimum, on an annual basis and
whenever events and changes in circumstances suggest that the carrying amount
may not be recoverable. Impairment of goodwill is tested at the reporting unit
level by comparing the reporting unit's carrying amount, including goodwill,
to the fair value of the reporting unit. The fair values of the reporting
units are estimated using a combination of the income or discounted cash flows
approach. If the carrying amount of the reporting unit exceeds its fair value,
goodwill is considered impaired and a second step is performed to measure the
amount of impairment loss, if any.
The Company conducted its initial annual impairment test as of August 31,
2006 and determined there was no impairment. There were no events or
circumstances from that date through December 31, 2006 indicating that a
further assessment was necessary. For the year ended December 31, 2005 the
company determined that the Vidus trade name was impaired. See Note 3 -
"Business Combinations, Goodwill and Intangible Assets" for further
discussion.
Income Taxes
The Company accounts for income taxes under an asset and liability
approach. Deferred income taxes reflect the impact of temporary differences
between assets and liabilities recognized for financial reporting purposes and
such amounts recognized for income tax reporting purposes, net operating loss
carry forwards and other tax credits measured by applying currently enacted
tax laws. Valuation allowances are provided when necessary to reduce deferred
tax assets to an amount that is more likely than not to be realized.
Revenue Recognition
The Company follows specific and detailed guidelines in recognizing
revenue in accordance with the provisions of AICPA Statement of Position 97-2,
Software Revenue Recognition , as amended by Statement of Position 98-4,
Deferral of the Effective Date of the Provisions of SOP 97-2 and Statement of
Position 98-9, Modification of SOP 97-2 , as well as Accounting Research
Bulletin No. 45, Long-Term Construction-Type Contracts and Statement of
Position 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts . The Company recognizes revenue when the price is
fixed and determinable, persuasive evidence of an agreement exists, the
obligations under any such agreement are fulfilled and collectibility is
probable.
The Company's revenues are comprised of hosted revenue and licensed
revenue. Hosted revenue is derived from monthly fees for the Company's Field
Force Management ("FFM") and Field Asset Management ("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") services fees relating to the Company's Field Service
Management ("FSM") Taskforce (TM) software solution.
Monthly fees for the Company's hosted solutions are recognized ratably
over the contract period, which commences (a) upon installation of the
Company's proprietary hardware devices in customers' mobile worker vehicles,
or (b) upon the creation of subscription licenses and a subscriber account on
its website where subscribers have elected to use an @ Road solution with a
mobile telephone. Upfront fees for the Company's hosted solution primarily
consist of amounts for the in-vehicle enabling hardware device and
peripherals, if any. The Company defers upfront fees at installation and
recognizes 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 the Company's 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 the Company cannot
objectively determine the fair value of any undelivered element included in
hosted arrangements, it defers revenue until all elements are delivered, all
services have been performed and the only remaining undelivered element is PCS
or fair value can objectively be determined.
Licensed revenue associated with the fees for the license of the
Company's FSM Taskforce product and related customization and installation
services is generally recognized using the percentage-of-completion method of
3
accounting over the period that services are performed. For agreements
accounted for under the percentage-of-completion method, the Company
determines progress to completion based on actual direct labor hours incurred
to date as a percentage of the estimated total direct labor hours required to
complete the project. The Company evaluates the actual status of each project
as of each balance sheet date to ensure that the estimates to complete each
contract remain accurate. A provision for estimated losses on contracts is
made in the period in which the loss becomes probable and can be reasonably
estimated. To date, the Company has not incurred any such losses. If the
amount of revenue recognized 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.
The Company derives PCS fees from PCS agreements, which are generally
initially purchased at the same time as a license for its 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. The Company recognizes revenue for
PCS, based on vendor specific objective evidence ("VSOE") of fair value,
ratably over the term of the PCS period. The Company generally determines VSOE
of PCS based on the stated fees for PCS renewal set forth in the original
license agreement. If the Company is unable to establish VSOE of fair value,
it recognizes all fees ratably over the term of the PCS, when the only
remaining undelivered element is PCS.
For arrangements with multiple elements, such as licenses, customization
services and PCS services, the Company allocates 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 the Company
cannot objectively determine the fair value of any undelivered element
included in license arrangements, it defers revenue until the earliest of
either: (a) all elements are delivered, (b) all services have been performed
or only PCS services remain to be delivered, or (c) fair value of any
remaining undelivered elements can objectively be determined. When the fair
value of a delivered element has not been established, the Company uses the
residual method to record license revenue if the fair value of all undelivered
elements is determinable. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the fee is
allocated to the delivered elements and is recognized as revenue, assuming all
other criteria have been met.
Pursuant to Emerging Issues Taskforce Issue 06-3, How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement ("EITF 06-3"), the Company elected to present taxes
collected from customers and remitted to governmental authorities net in its
financial statements consistent with the Company's historical presentation of
this information.
Advertising Costs
All advertising costs are expensed as incurred. Advertising costs, which
are included in sales and marketing expenses, were approximately $1.6 million,
$1.1 million and $370,000 in 2006, 2005 and 2004, respectively. Advertising
costs consist primarily of ad campaigns, catalog brochures, promotional items
and trade show expenses.
Research and Development Expenses
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, costs incurred in the research and development of new products and
enhancements to existing products are expensed as incurred until technological
feasibility has been established. The Company believes its current process for
developing products is essentially completed concurrently with the
establishment of technological feasibility which is evidenced by a working
model; accordingly, research and development costs incurred after the
establishment of technological feasibility have not been significant and,
therefore, no costs have been capitalized to date.
Costs related to software acquired, developed or modified solely to meet
the Company's internal requirements and for which there is no substantive plan
to market the software are capitalized in accordance with the provisions of
SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use ("SOP 98-1").
4
Costs incurred after the preliminary planning stage of the project and after
management has authorized and committed funds to the project are capitalized.
During 2006, the Company capitalized $1.1 million in accordance with SOP 98-1.
No costs were capitalized during 2005 and 2004.
Foreign Currency Transactions
The functional currency of the Company and its foreign subsidiaries is
the United States dollar. Accordingly, all monetary assets and liabilities are
translated at the current exchange rate at the end of the year, non-monetary
assets and liabilities are translated at historical rates and revenues and
expenses are translated at average exchange rates in effect during the period.
Transaction gains and losses have not been significant to date and are
included in Other income, net on the Company's consolidated statement of
operations.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to
cash flow, market, or foreign currency risks. In accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
certain derivatives are embedded in the Company's Series B Preferred Stock
that must be bifurcated and accounted for separately. The original host
instruments were initially reported, at fair value, as Preferred Stock and the
embedded derivatives were initially reported, at fair value, as liabilities.
Because these derivatives do not qualify as hedging instruments, changes in
fair values of such derivatives are reported as charges or credits to
operations.
Certain Significant Risks and Uncertainties
The Company participates in a dynamic high-technology industry and
believes that adverse changes in any of the following areas could have a
material adverse effect on its future financial position, results of
operations or cash flows: the ability of the Company to satisfy the complex
requirements imposed by large customers; the ability of the Company to
integrate @Road, Ltd. (formerly Vidus) operations successfully; the ability of
the Company to accelerate or continue to grow as a result of its investment
initiatives; the ability of the Company and its alliances to market, sell and
support the Company's solutions; the timing of purchasing and implementation
decisions by prospects and customers; competition; the dependence of the
Company on mobile data systems technology, wireless networks, network
infrastructure and positioning systems owned and controlled by others;
advances and trends in new technologies and industry standards; market
acceptance of the Company's existing or new solutions; development of sales
channels; changes in third-party manufacturers, key suppliers, certain
strategic or customer relationships; litigation or claims against the Company
based on intellectual property, product, regulatory or other factors; and the
Company's ability to attract and retain employees necessary to support its
growth.
Motorola is the sole supplier of microcontrollers and certain modems used
in the Company's products. Micronet is the sole supplier of the Company's
Internet Data Terminal (TM) ("iDT") device. Everex is the sole supplier of
the Company's Internet Location Manager--WiFi (" i LM(R)-W") device. The
Company expects to rely on these suppliers as the sole source for these
components and devices for the next several years.
Comprehensive Income
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. Accumulated other
comprehensive loss was comprised of unrealized gains (losses) of $19,000,
$78,000 and $(179,000) on short-term investments at December 31, 2006, 2005
and 2004, respectively.
Major Customers
In 2006, SBC Services represented 15.5% of total revenues. In 2005 and
2004, Verizon Communications, represented 13% and 17% of total revenues,
respectively. No other customers comprised 10% or more of total revenues.
5
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"), that
addresses the accounting for stock-based payment transactions in which an
enterprise receives employee services in exchange for either equity
instruments of the enterprise or liabilities that are based on the fair value
of the enterprise's equity instruments or that may be settled by the issuance
of such equity instruments. The statement eliminated the ability to account
for stock-based compensation transactions using the intrinsic value method as
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and generally requires that such
transactions be accounted for using a fair value based method and recognized
as expense in the consolidated statement of operations. SFAS 123R also
requires additional accounting for the tax benefit on employee stock options
and for stock issued under the Company's employee stock purchase plan. The
adoption of SFAS 123R on January 1, 2006, had a material impact on the
Company's results of operations and financial position. See "Note 10 --
Employee Benefit Plans" for additional disclosure related to SFAS 123R.
On June 7, 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes,
and Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements ("SFAS 154"). SFAS 154 changes the requirements for accounting and
reporting a change in accounting principle. Previously, most voluntary changes
in accounting principles were required to be recognized by way of a cumulative
effect adjustment within net income during the period of the change. SFAS 154
requires retrospective application to prior periods' financial statements,
unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 is effective for accounting
changes made in fiscal years beginning after December 15, 2005; however, SFAS
154 does not change the transition provisions of any existing accounting
pronouncements.
In July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48 prescribes a comprehensive
model for how a company should recognize, measure, present, and disclose in
its financial statements uncertain tax positions that the company has taken or
expects to take on a tax return. Under FIN 48, the financial statements will
reflect expected future tax consequences of such positions presuming the
taxing authorities' full knowledge of the position and all relevant facts, but
without considering time values. FIN 48 is effective for the Company beginning
January 1, 2007. The Company has not yet completed its evaluation of the
impact that adoption of FIN 48 will have on the Company's consolidated
statement of operations and financial condition.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Section N to Topic 1, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements ("SAB 108").
SAB 108 requires the evaluation of prior-year misstatements using both the
balance sheet approach and the income statement approach. In the initial year
of adoption should either approach result in quantifying an error that is
material in light of quantitative and qualitative factors, SAB 108 guidance
allows for a one-time cumulative-effect adjustment to beginning retained
earnings. In years subsequent to adoption, previously undetected misstatements
deemed material shall result in the restatement of previously issued financial
statements in accordance with FAS 154. SAB 108 is effective for the Company on
December 31, 2006. The adoption of SAB 108 did not have an impact on the
Company's consolidated statement of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosure requirements regarding fair value
measurement. Where applicable, SFAS 157 simplifies and codifies fair value
related guidance previously issued within generally accepted accounting
principles ("GAAP"). SFAS 157 will be effective for the Company beginning
January 1, 2008. The Company has not yet completed its evaluation of the
impact that adoption of SFAS 157 will have on the Company's consolidated
statement of operations and financial condition.
Note 2. Basic and Diluted Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing the net income
attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net
6
(loss) income per share is computed by dividing the net income attributable to
common stockholders for the period by the weighted average number of common
shares and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares, composed of unvested restricted common
stock and incremental common shares issuable upon the exercise of stock
options, are included in diluted net income per share (using the treasury
stock method) to the extent such shares are dilutive. Potentially dilutive
shares that are anti-dilutive, as calculated based on the weighted average
closing price of the Company's common stock for the period, are excluded from
the calculation of diluted net income per share. Common share equivalents are
excluded from the computation in loss periods, as their effect would be
anti-dilutive.
The following table sets forth the computation of basic and diluted net
(loss) income per share for the periods indicated (in thousands, except per
share amounts):
Years Ended December 31,
-----------------------------------------
2006 2005 2004
------------ ------------ ------------
Net (loss) income attributable to common shareholders (numerator)... $ (12,717) $ 27,475 $ 9,221
Shares (denominator): ============ ============ ============
Basic
Weighted average common shares outstanding...................... 61,629 59,928 54,299
Weighted average common shares outstanding subject to repurchase -- -- (3)
------------ ------------ ------------
Shares used in computation...................................... 61,629 59,928 54,296
Diluted
Dilution impact from option equivalent shares................... -- 1,416 3,134
Dilution impact from employee stock purchase plan............... -- 9 2
Add back weighted average common shares subject to
repurchase.................................................... -- -- 3
------------ ------------ ------------
Shares used in computation...................................... 61,629 61,353 57,435
============ ============ ============
Net (loss) income per share:
Basic............................................................. $ (0.21) $ 0.46 $ 0.17
============ ============ ============
Diluted........................................................... $ (0.21) $ 0.45 $ 0.16
============ ============ ============
For the periods presented, the Company had securities outstanding which
could potentially dilute basic income per share in the future, but which were
excluded from the computation of diluted net (loss) income per share in the
periods presented, as their effect would have been anti-dilutive due to the
net loss for the period or due to shares being subject to repurchase by the
Company. Such outstanding securities consist of the following (shares in
thousands):
Years Ended December 31,
-------------------------
2006 2005 2004
------- ------- -------
Outstanding options............................ 10,117 4,475 1,820
Weighted average exercise price
of outstanding options....................... $ 4.82 $ 7.31 $ 10.89
Note 3. Business Combinations, Goodwill and Intangible Assets
On February 18, 2005, the Company completed the acquisition of Vidus
Limited ("Vidus") in a transaction accounted for as a business combination
using the purchase method. As consideration for the acquisition, the Company
issued approximately 5.5 million shares of its common stock valued at $24.7
million, newly created redeemable preferred stock ("preferred stock") valued
at approximately $12.9 million, extinguished for cash existing debt of
approximately $5.5 million in exchange for all of the outstanding shares of
Vidus capital stock, and issued approximately 146,000 vested options with a
fair value of $531,000. Under the terms of the stock option grants, each
option has been classified as a non-qualified stock option, is fully vested,
has an exercise price ranging from $0.67 to $2.00 per share and has a one-year
term. The Company incurred acquisition related costs of $2.6 million, of which
$478,000 was allocated to the issuance of common stock. The purchase price of
approximately $46.3 million was allocated among the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis of their
estimated fair values on the acquisition date.
7
The shares of common stock issued in the acquisition were valued in
accordance with Emerging Issues Task Force Issue No. 99-12, Determination of
the Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination ("EITF 99-12"). In accordance with EITF 99-12,
the Company established the first date on which the number of the Company's
shares and the amount of other consideration became fixed as of February 18,
2005. Accordingly, the Company valued the transaction using the average
closing price of the Company's common stock for the two-day period ending on
February 18, 2005, or $4.53 per share.
The shares of redeemable preferred stock issued in the acquisition
contain a provision whereby the redemption value may be increased based on the
future price of the Company's common stock (the "top-up" amount) and were
recorded at fair value as required by SFAS No. 141, Business Combinations
("SFAS 141") and Emerging Issues Task Force Issue No. 97-8, Accounting for
Contingent Consideration Issued in a Purchase Business Combination ("EITF
97-8"). The fair value of the redeemable preferred stock was determined to be
the aggregate of the redemption value of the preferred stock discounted at
6.5%, plus the estimated value of the embedded put and call options and the
estimated top-up, discounted at the Company's estimated cost of equity of
14.87%. See "Note 8--Derivative Financial Instrument Liabilities" and "Note
9--Redeemable Preferred Stock" for further discussion of the top-up.
The fair value of the stock options was determined using the
Black-Scholes option pricing model with the following assumptions: no dividend
yield, expected volatility of 96%, expected life of one year and a risk-free
interest rate of 3.09%.
The Vidus acquisition was accounted for under SFAS No. 141, and certain
specified provisions of SFAS 142. The results of operations of Vidus are
included in the Company's Condensed Consolidated Statement of Operations
beginning February 19, 2005.
The following table summarizes the estimated fair values of the tangible
assets acquired and the liabilities assumed at the date of acquisition (in
thousands):
Cash.................................................. $ 1,269
Accounts receivable................................... 1,669
Prepaid expenses and other............................ 412
Property and equipment................................ 1,022
Notes receivable from stockholder..................... 11
----------
Total tangible assets acquired........................ 4,383
----------
Accounts payable...................................... (540)
Accrued liabilities................................... (2,148)
Deferred revenue...................................... (4,270)
----------
Total tangible liabilities assumed.................... (6,958)
----------
Net tangible liabilities assumed...................... $ (2,575)
==========
Under the purchase method of accounting, the Company allocated the total
purchase price to the acquired net tangible and intangible assets based upon
their estimated fair market value as of the date of acquisition, February 18,
2005. The intangible assets recognized, apart from goodwill, represented
contractual or other legal rights of Vidus and those intangible assets of
Vidus that could be clearly identified. These intangible assets were
identified and valued through interviews and analysis of data provided by
Vidus concerning development projects, their stage of development, the time
and resources needed to complete them and, if applicable, their expected
income generating ability. There were no other contractual or other legal
rights of Vidus clearly identifiable by management, other than those
identified below.
8
The allocation of the purchase price to the tangible and identifiable
intangible assets acquired and liabilities assumed was as follows (in
thousands):
Fair value of net liabilities assumed..................... $ (2,575)
Intangible assets acquired:
Core developed technology............................... 18,410
Order backlog........................................... 5,500
Customer relationships.................................. 3,660
Trademarks.............................................. 3,250
Trade names............................................. 2,270
----------
33,090
In-process research and development....................... 5,640
Costs allocated to common stock issued.................... 478
Deferred tax liability, net............................... (3,693)
Goodwill.................................................. 13,341
----------
Purchase price............................................ $ 46,281
==========
Core Developed Technology
Core developed technology of approximately $18.4 million related to the
taskforce technology. At the date of acquisition, the developed technology was
complete and had reached technological feasibility. Any costs to be incurred
in the future will relate to the ongoing maintenance of the developed
technology and will be expensed as incurred. To estimate the fair value of the
developed technology, an income approach was used with a discount rate of 35%,
which included an analysis of future cash flows and the risks associated with
achieving such cash flows. The developed technology is being amortized over
its estimated useful life of ten years.
Order Backlog and Customer Relationships
The order backlog of approximately $5.5 million and the customer
relationships of approximately $3.7 million represented the fair value of the
PCS obligations and existing customer relationships. To estimate the fair
value of the order backlog and the customer relationships, an income approach
was used with a discount rate of 30%. The order backlog and customer
relationships are amortized over their estimated useful lives of three and ten
years, respectively.
Trademarks
The taskforce solution has strong name recognition in European field
service management, telecommunications, cable and utilities markets. To
estimate the fair value of the trademark an income approach was used with a
discount rate of 40%. The Company expects to continue to produce and market
the taskforce product. Therefore, an analysis of various economic factors
indicated there was no limit to the period of time the trademark would
contribute to future cash flows. Because cash flow is expected to continue
indefinitely, the trademark is not being amortized, but is tested for
impairment at least annually and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
Trade Names
The Vidus trade name had strong name recognition in European markets. At
the time of the acquisition, the Company expected to continue to utilize the
Vidus trade name in Europe. The fair value was determined using an income
approach with a discount rate of 40% and based on an analysis of various
economic factors the Company determined that the useful life of the trade name
was indefinite. During the fourth quarter of 2005, management determined that
the acquired Vidus trade name would no longer be utilized. As a result, the
Company recorded an impairment charge of $2.3 million.
9
In-Process Research and Development
Development projects that had reached technological feasibility were
classified as developed technology, and the value assigned to developed
technology was capitalized. In-process research and development of
approximately $5.6 million reflected research projects that had not reached
technological feasibility or had no alternative future use at the time of the
acquisition and was immediately expensed. In order to achieve technological
feasibility, the Company estimated the hours required to complete the projects
would cost approximately $5.7 million. The Company estimated the fair value
assigned to in-process research and development using the income approach,
which discounts to present value the cash flows attributable to the technology
once it had reached technological feasibility using a discount rate of 40%.
The stages of completion were determined by estimating the costs and time
incurred to date relative to the costs and time 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 fiscal 2005.
Expenditures to complete the acquired in-process research and development
approximated the original estimates.
Goodwill
Goodwill of approximately $13.3 million represents the excess of the
purchase price over the fair value of the net tangible and intangible assets
acquired. The acquisition allows the Company to integrate its technology with
Vidus' technology for dynamic scheduling, dispatching, routing and appointment
booking of mobile workers, cross-sell the companies' solutions and further
develop the combined technologies to provide customers with seamlessly
integrated solutions. The acquisition also creates the ability to expand the
Company's business to Europe and other international markets. These
opportunities, along with the ability to hire the Vidus workforce, were
significant contributing factors to the establishment of the purchase price,
resulting in the recognition of a significant amount of goodwill. The goodwill
and intangible assets were allocated to the licensed reporting segment. The
goodwill is not deductible for tax purposes.
The results of operations of Vidus are included in the Company's
Consolidated Statement of Operations from the date of the acquisition. If the
Company had acquired Vidus at the beginning of the periods presented, the
Company's unaudited pro forma revenue, net income (loss), net income (loss)
attributable to common stockholders and net income (loss) per share would have
been as follows (in thousands, except per share amount):
Year Ended
December 31,
------------------------------
2005 2004
------------------------------
Revenue................................................... $ 93,549 $ 82,089
Net income (loss)......................................... $ 25,226 $ (9,529)
Net income (loss) attributable to common stockholders..... $ 24,721 $ (10,192)
Net income (loss) per share (basic)....................... $ 0.41 $ (0.16)
Net income (loss) per share (diluted)..................... $ 0.40 $ (0.16)
Shares used in computing net income (loss)
per share (basic)....................................... 60,645 59,750
Shares used in computing net income (loss)
per share (diluted)..................................... 62,071 59,750
These results are not necessarily indicative of what the actual results of
operations would have been if the acquisition of Vidus had in fact occurred on
the dates or for the periods indicated, nor do they purport to project the
results of operations for any future periods or as of any date. These results
do not give effect to any cost savings, operating synergies, and revenue
enhancements which may result from the acquisition of Vidus or the costs of
achieving these cost savings, operating synergies, and revenue enhancements.
The in-process research and development charge of approximately $5.6 million
is included in the net income attributable to common stockholders for the year
ended December 31, 2005.
10
Intangible Assets
SFAS 142 requires purchased intangible assets other than goodwill to be
amortized over their expected useful lives unless these lives are determined
to be indefinite. Purchased intangible assets are carried at cost less
accumulated amortization. Amortization is computed over the estimated useful
lives of the respective assets, generally two to ten years.
Intangible assets were as follows (in thousands):
As of December 31, 2006 As of December 31, 2005
-------------------------------------------- ---------------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------------- -------------- ------------- -------------- ------------- -------------
Amortized intangible assets:
Core developed technology.... $ 23,462 $ (8,482) $ 14,980 $ 23,462 $ (6,641) $ 16,821
Order backlog................ 5,500 (3,416) 2,084 5,500 (1,582) 3,918
Customer relationships....... 3,660 (682) 2,978 3,660 (316) 3,344
------------- -------------- ------------- -------------- ------------- -------------
Total...................... 32,622 (12,580) 20,042 32,622 (8,539) 24,083
Unamortized intangible assets:
Trademarks................... 3,250 -- 3,250 3,250 -- 3,250
------------- -------------- ------------- -------------- ------------- -------------
Total intangible assets........ $ 35,872 $ (12,580) $ 23,292 $ 35,872 $ (8,539) $ 27,333
============= ============== ============= ============== ============= =============
During the fourth quarter of 2005, management determined that Vidus
Limited would officially change its name to @Road, Ltd. Therefore, the
acquired Vidus trade name will no longer be utilized. The name change is
intended to leverage the @Road brand equity and more closely reflect the
Company's objective of adding end-to-end MRM solutions offerings in Europe. As
a result, the Company reduced the carrying value to zero resulting in an
impairment charge of $2.3 million in 2005. The impairment charge is included
in Impairment of Intangible Assets in the Company's Statement of Operations.
For the years ended December 31, 2006, 2005 and 2004, amortization of
intangible assets was $4.0 million, $3.5 million and $28,000, respectively.
The estimated future amortization expense of purchased intangible assets as of
December 31, 2006 is as follows (in thousands):
2007..................................... $ 4,040
2008..................................... 2,458
2009..................................... 2,207
2010..................................... 2,207
2011..................................... 2,207
Thereafter............................... 6,923
----------
Total.................................... $20,042
==========
Note 4. Short-Term Investments
Short-term investments included the following available-for-sale
securities at December 31, 2006 and 2005 (in thousands):
December 31, 2006
------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
------------ ----------- --------------- --------------
United States government debt securities......$ 17,334 $ -- $ (19) $ 17,315
Municipal debt securities..................... 33,307 -- -- 33,307
Corporate debt securities..................... 3,060 -- -- 3,060
------------ ----------- --------------- --------------
Total.........................................$ 53,701 $ -- $ (19) $ 53,682
============ =========== =============== ==============
11
December 31, 2005
------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
------------ ----------- --------------- --------------
United States government debt securities......$ 39,276 $ -- $ (72) $ 39,204
Municipal debt securities..................... 36,802 -- (6) 36,796
Corporate debt securities..................... 1,643 -- -- 1,643
------------ ----------- --------------- --------------
Total.........................................$ 77,721 $ -- $ (78) $ 77,643
============ =========== =============== ==============
In accordance with EITF 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, the following table
shows gross unrealized losses and fair value for those investments that were
in an unrealized loss position as of December 31, 2006 and 2005, aggregated by
investment category and the length of time that individual securities have
been in a continuous loss position (in thousands):
As of December 31, 2006
-------------------------------------------------------------------
Less than 12 Months 12 Months or Greater Total
---------------------- ------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value (Loss) Value (Loss) Value (Loss)
---------- ---------- --------- -------- ---------- -----------
United States government debt securities $ 17,315 $ (19) $ -- $ -- $ 17,315 $ (19)
Municipal debt securities................ 33,307 -- -- -- 33,307 --
Corporate debt securities................ 3,060 -- -- -- 3,060 --
---------- ---------- --------- -------- ---------- ---------
Total....................................$ 53,682 $ (19) $ -- $ -- $ 53,682 $ (19)
========== ========== ========= ======== ========== =========
As of December 31, 2005
-------------------------------------------------------------------
Less than 12 Months 12 Months or Greater Total
---------------------- ------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value (Loss) Value (Loss) Value (Loss)
---------- ---------- --------- -------- --------- ---------
United States government debt securities.$ 39,204 $ (72) $ -- $ -- $ 39,204 $ (72)
Municipal debt securities................ 36,796 (6) -- -- 36,796 (6)
Corporate debt securities................ 1,643 -- -- -- 1,643 --
---------- ---------- --------- -------- ---------- ---------
Total....................................$ 77,643 $ (78) $ -- $ -- $ 77,643 $ (78)
========== ========== ========= ======== ========== =========
The Company reviews investments in debt securities for other than
temporary impairment whenever the fair value of an investment is less than
amortized cost and evidence indicates that an investment's carrying amount is
not recoverable within a reasonable period of time. The decline in value of
these investments is primarily related to changes in interest rates and is
considered to be temporary in nature. When evaluating the investments, the
Company considers whether it has the ability and the intent to hold the
investment until a market price recovery and considers whether evidence
indicating the cost of the investment is recoverable outweighs evidence to the
contrary. Evidence considered in this assessment includes the reasons for the
impairment, compliance with the Company's investment policy, the severity and
duration of the impairment, changes in the value subsequent to year-end and
forecasted performance of the investee. The Company has reviewed those
securities with unrealized losses as of December 31, 2006 and 2005 for
other-than-temporary impairment, and has concluded that no
other-than-temporary impairment existed as of December 31, 2006 and 2005.
Note 5. Inventories
Inventories consist of (in thousands):
December 31,
----------------------
2006 2005
----------- ---------
Raw materials.........................$ 2,153 $ 1,796
Work in process....................... 7,649 2,013
Finished goods........................ 4,480 2,278
----------- ---------
$ 14,282 $ 6,087
=========== =========
Note 6. Property and Equipment
12
Property and equipment consist of (in thousands):
December 31,
-----------------------
2006 2005
----------- ----------
Computers and software........................$ 18,986 $ 14,424
Manufacturing and office equipment............ 830 663
Furniture and fixtures........................ 383 455
Leasehold improvements........................ 1,304 695
----------- ----------
Total....................................... 21,503 16,237
Accumulated depreciation and amortization..... (13,170) (10,042)
----------- ----------
Property and equipment, net...................$ 8,333 $ 6,195
=========== ==========
Depreciation expense for the year ended December 31, 2006, 2005 and 2004
was $3.3 million, $2.6 million, and $1.3 million, respectively.
As of December 31, 2006, the Company has office equipment and furniture
held under capital leases with a net book value of $209,000. The accumulated
amortization related to these underlying assets is $168,000 as of December 31,
2006.
Note 7. Accrued Liabilities
Accrued liabilities consist of (in thousands):
December 31,
--------------------------
2006 2005
------------ ------------
Accrued compensation and related benefits.....$ 4,948 $ 3,629
Other accrued expenses........................ 6,481 5,122
------------ ------------
Total.......................................$ 11,429 $ 8,751
============ ============
Note 8. Derivative Financial Instrument Liabilities
In connection with the Vidus acquisition, the Company issued shares of its
Series B-1 and B-2 redeemable preferred stock with an embedded feature indexed
to the Company's common stock (the "top-up") that is payable to the holders of
the redeemable preferred stock upon redemption. See "Note 9 -Redeemable
Preferred Stock" for further discussion. In accordance with SFAS 133, the
top-up amount is considered a derivative instrument that should be bifurcated
from the preferred stock host and recognized as either an asset or liability,
depending on the rights and obligations under the contract, and should be
measured at fair value. The Company accounts for changes in the fair value of
the derivative instrument, which is not designated as a hedging instrument,
through the current period earnings.
Based on the highest ten consecutive trading days average closing price of
the Company's common stock of $5.73 per share through September 25, 2006, per
the terms of the acquisition, the final aggregate top-up amount payable upon
redemption of the related preferred stock is $7.1 million. The difference
between the fair value of the derivative liability of $7.0 million and the
final aggregate top-up amount of $7.1 million at December 31, 2006 represents
the fair value of a portion of the derivative to be recognized over the period
to the final preferred stock redemption date of February 18, 2007 for Series
B-2 redeemable preferred stock.
Prior to September 25, 2006 (the end of the top-up measurement period),
the Company used the Monte Carlo simulation of its stock price with the
movements in its stock price following a geometric Brownian motion to value
the derivative instrument that is recorded as a derivative liability. In
valuing the embedded derivative, the Company used the market price of its
common stock on the date of valuation, a historical volatility and the
expected remaining period to the expiration date of the top-up period. The
Company used the following valuation assumptions:
As of As of
December 31, February 18,
2005 2005
---------------- --------------
13
Historical volatility 54% 88%
Expected remaining period 9 months 15 months
Valuation date market price of common stock $ 5.23 $ 4.50
Risk-free interest rate 4.33% 3.07%
Discount rate 16.07% 14.87%
The fair value of this derivative instrument was $7.0 million at December
31, 2006 and $2.9 million at December 31, 2005 and $5.2 million at February
18, 2005. The change in the fair value of $(4.1) million and $2.3 million was
recorded in total other (expense) income, net in the consolidated statements
of operations for the years ended December 31, 2006 and 2005, respectively.
Note 9. Redeemable Preferred Stock
On February 18, 2005, the Board of Directors of the Company authorized
the creation of four series of preferred stock and designated approximately
44,000, 44,000, 5,000 and 5,000 shares as Series A-1, A-2, B-1 and B-2
preferred stock, respectively, of which approximately 23,000, 44,000, 5,000
and 5,000 shares of Series A-1, A-2, B-1 and B-2 preferred stock,
respectively, were issued and outstanding as of December 31, 2006 with an
aggregate redemption value of $8.7 million.
Dividends
The holders of the Series A-1, A-2, B-1 and B-2 preferred stock are
entitled to receive dividends at the rate of $6.50 per share annually. The
dividends accrue day to day, whether or not earned or declared, from February
18, 2005. The dividends are payable when and if declared by the Board of
Directors or when shares are redeemed. Any accumulation of unpaid dividends on
the preferred stock does not bear interest. Accrued dividends totaled $939,000
as of December 31, 2006.
Redemption
The holders of the Series A-1 and B-1 preferred stock may elect to redeem
all or a portion of the shares on or after February 18, 2006, and the holders
of the Series A-2 and B-2 preferred stock may elect to redeem all or a portion
of the shares on or after February 18, 2007.
Each share of Series A-1 and A-2 preferred stock is redeemable for an
amount equal to (i) $100 plus (ii) all declared or accumulated but unpaid
dividends. Each share of Series B-1 and B-2 preferred stock is redeemable for
an amount equal to (i) $100, plus (ii) all declared or accumulated but unpaid
dividends, plus (iii) the top-up amount of $731.
On or after February 18, 2009, the Company may redeem all or any portion
of the Series A-1, A-2, B-1, and B-2 preferred stock.
Conversion
None of the issued series of preferred stock is convertible.
Liquidation
Series A-1, A-2, B-1 and B-2 preferred stockholders are entitled to
receive, upon liquidation, an amount equal to their respective redemption
price. The holders of the Series A-1, A-2, B-1 and B-2 preferred stock rank on
a pari passu basis as to the receipt of such distributions and in preference
to the holders of common stock.
Voting
Each outstanding share of preferred stock is entitled to eleven (11) votes
on all matters, voting with the shares of common stock as a single class.
14
The following table illustrates the activity for each series of preferred
stock through December 31, 2006 (in thousands):
Series A-1 Series A-2 Series B-1 Series B-2 Total
----------- ---------- ---------- ----------- -----------
Issued at fair value............... $ 2,352 $ 4,424 $ 3,205 $ 2,937 $ 12,918
Reclass of bifurcated derivative instrument,
at fair value at issuance........ -- -- (2,719) (2,451) (5,170)
Amounts accrued for dividends for the twelve
months ended December 31,
2005............................. 131 249 28 28 436
----------- ---------- ---------- ----------- -----------
Balance December 31, 2005.......... 2,483 4,673 514 514 8,184
Amounts accrued for dividends for the twelve
months ended December 31,
2006............................. 154 288 30 31 503
Redemption of preferred stock (75 shares of Series
A-1, 27 shares of Series B-1)................. (9) -- -- -- (9)
Reclassification of preferred stock redeemed but
not paid as of December 31, 2006 (23,172 shares
of Series A-1; 4,687 shares of Series B-1) (2,598) -- (527) -- (3,125)
----------- ---------- ---------- ----------- -----------
Balance December 31, 2006.......... $ 30 $ 4,961 $ 17 $ 545 $ 5,553
=========== ========== ========== =========== ===========
Note 10. Common Stock
At December 31, 2006, the Company had reserved approximately 18,534,000
shares of common stock available for future issuance under its stock option
plans, including approximately 10,118,000 shares related to outstanding stock
options. In addition, the Company had reserved approximately 1,779,000 shares
of common stock available for future issuance under the employee stock
purchase plan. The Company's Certificate of Incorporation, as amended,
authorizes it to issue 250,000,000 shares of common stock.
Note 11. Employee Benefit Plans
Adoption of SFAS 123R
The Company adopted the provisions of SFAS 123R, on January 1, 2006. Under
SFAS 123R, stock-based compensation cost is measured at the grant date, based
on the estimated fair value of the award at that date, and is recognized as
expense over the employee's requisite service period (generally over the
vesting period of the award) on a straight-line basis. The Company has no
awards with market conditions. The Company has one stock option grant with
performance and service conditions. These performance conditions were not met
during 2006 and therefore, the options fair value was amortized over the
vesting period five years after issuance on a straight-line basis.
The Company adopted the provisions of SFAS 123R using a
modified-prospective approach. Under the modified prospective approach, prior
periods are not revised for comparative purposes. The valuation provisions of
SFAS 123R apply to new awards and to awards that are outstanding on the
effective date and subsequently modified or cancelled. Estimated compensation
expense for awards outstanding at the effective date will be recognized on a
straight-line basis over the remaining service period using the compensation
cost calculated for pro forma disclosure purposes under SFAS 123 as adjusted
for estimated forfeitures. The Company has elected to follow the tax law
method of determining realization of excess tax benefits in accordance with
SFAS 123R.
The effect of recording stock-based compensation for the year ended
December 31, 2006 was as follows:
15
Year ended
December 31, 2006
---------------------
Stock-based compensation expense by type of
award:
Employee stock options $ 3,428
Employee stock purchase plan 929
Amounts capitalized as inventory (7)
---------------------
Total stock-based compensation $ 4,350
Tax effect of stock-based compensation $ 652
---------------------
Net effect on net (loss) income attributable to
common stockholders $ 3,698
=====================
Effect on (loss) income per share:
Basic $ 0.06
Diluted $ 0.06
The Company recorded $4.4 million of stock-based compensation expense in
its consolidated statement of operations for the year ended December 31, 2006.
A total of $3.3 million of this expense relates to prior year awards vesting
after January 1, 2006 and $1.1 million relates to options granted after the
adoption of SFAS 123R.
As of December 31, 2006, there was $4.8 million of total unrecognized
compensation cost related to non-vested stock-based employee compensation
arrangements. The cost is expected to be recognized over a weighted-average
period of 2.3 years. For the year ended December 31, 2006, stock-based
compensation totaling $7,000 was capitalized as inventory.
Valuation Assumptions
The weighted-average estimated fair value of employee stock options
granted during the years December 31, 2006, 2005 and 2004 was $2.91, $2.26 and
$3.79 per share, respectively. The Company calculated the fair value of each
option award on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions (annualized percentages):
Year Ended
December 31,
--------------------------------------------------
2006 2005 2004
--------------------------------------------------
Stock option plans:
Volatility 68% 84% 106%
Risk-free interest rate 4.8% 4.0% 3.4%
Dividend yield 0.0% 0.0% 0.0%
Expected life (in years) 5.0 3.2 5.0
Forfeiture rate 28% -- --
Year Ended
December 31,
--------------------------------------------------
2006 2005 2004
--------------------------------------------------
Employee stock purchase
plans:
Volatility 72% 73% 78%
Risk-free interest rate 4.2% 3.2% 1.3%
Dividend yield 0.0% 0.0% 0.0%
Expected life (in years) 1.2 0.5 0.5
Expected volatility is determined using a 50% weighting to both historical
volatility of the Company's common stock over a period of 4.5 to 5.0 years
following the Company's initial public offering and implied volatility based
on the Company's traded stock options. The risk-free interest rate is
calculated using zero coupon rates on treasury notes stripped principal for
each grant date given the expected life. The dividend yield of zero is based
on the fact that the Company expects to invest cash in operations and has
never paid cash dividends on common stock. The expected life is calculated for
the period from the Company's initial public offering using the interval
between the grant date and the exercise date weighted by the number of shares
exercised. The expected life is adjusted for the anticipated behavior in
relation to unexercised options.
As stock-based compensation expense recognized in the statements of
operations for 2006 is based on awards ultimately expected to vest, it is
reduced for estimated forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Pre-vesting
forfeitures were estimated to be approximately 28% as of December 31, 2006
based on weighted average historical forfeiture rates. Under the provisions of
SFAS 123R, the Company will record additional expense if the actual forfeiture
rate is lower than estimated, and will record a recovery of prior expense if
the actual forfeiture rate is higher than estimated. In the Company's pro
forma information required under SFAS 123 for the periods prior to fiscal
2006, the Company accounted for forfeitures as they occurred.
Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006
Prior to adopting the provisions of SFAS 123R, the Company provided the
disclosures required under SFAS 123 as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosures ("SFAS 148").
For purposes of pro forma disclosures under SFAS 123 for the year ended
December 31, 2005 and 2004, the estimated fair value of the stock options was
assumed to be amortized to expense over the stock options' vesting periods.
The pro forma effects of recognizing estimated compensation expense under the
fair value method on net income and net income per common share for the years
ended December 31, 2005 and 2004, were as follows:
Year Ended
December 31,
----------------------------
2005 2004
----------------------------
Net income as reported $ 27,911 $ 9,221
Add: stock-based employee compensation expense included in
reported net loss, net of tax effect -- 4
Less: stock-based employee compensation expense determined
under fair value based method, net of tax effect (4,692) (7,451)
----------------------------
Pro forma net income 23,219 1,774
Preferred stock dividends 436 --
----------------------------
Pro forma net income attributable to common stockholders $ 22,783 $ 1,774
----------------------------
Basic net income per share:
As reported $ 0.46 $ 0.17
----------------------------
Pro forma $ 0.38 $ 0.03
----------------------------
17
Diluted net income per share:
As reported $ 0.45 $ 0.16
----------------------------
Pro forma $ 0.37 $ 0.03
----------------------------
Equity Incentive Plans
The Company has equity incentive plans for directors, officers and
employees. Stock options granted under these plans generally vest 25% one year
from the date of grant and the remainder vest at a rate of 2.08% per month
thereafter. Grants to existing employees generally vest 25% per year on the
anniversary of the grant. Non-employee directors upon becoming a director
receive an initial grant of 40,000 shares vesting over 4 years and annual
grants of 10,000 shares vesting over one year. Options generally expire 10
years from the date of grant. Our equity incentive plans contain a provision
that automatically increases through 2010, on each January 1, the number of
shares reserved for issuance under these plans by the lesser of 2,500,000
shares or four percent of the total shares outstanding on the last day of the
preceding year.
The following table summarizes activity under our equity incentive plans
(shares in thousands):
Years Ended December 31,
-----------------------------------------------------------------------------
2006 2005 2004
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of period 9,571 $ 4.81 8,416 $ 5.23 7,415 $ 5.29
Granted................ 1,793 4.83 2,767 3.78 2,541 4.83
Assumed................ -- -- 146 0.95 -- --
Exercised.............. (461) 3.22 (315) 1.84 (641) 2.25
Canceled............... (786) 5.66 (1,443) 5.55 (899) 6.70
----------- ----------- -----------
Outstanding at end of
period............... 10,117 4.82 9,571 4.81 8,416 5.23
=========== =========== ===========
Options exercisable at end of period 6,398 $ 5.18 5,467 $ 5.50 3,790 $ 4.61
=========== =========== ===========
The following table summarizes number of shares, weighted average
remaining contractual life and average instrinsic value of options
outstanding, vested and expected to vest and exercisable at December 31, 2006
(shares and intrinsic value in thousands):
Year Ended December 31, 2006
--------------------------------------
Weighted
Average
Remaining Aggregate
Number of Contractual Intrinsic
Shares Life (Years) Value
--------------------------------------
Outstanding at end of period 10,117 6.8 $ 29,850
Vested and expected to vest. 8,907 6.5 $ 26,094
Options exercisable at end of period 6,398 5.6 $ 18,355
The aggregate intrinsic value is calculated as the difference between the
exercise price of the underlying awards and the quoted price of the Company's
common stock for the 8.6 million options that were in-the-money at December
31, 2006. As of December 31, 2006, the closing price of the Company's common
stock was $7.30 per share. In-the-money options are options with an exercise
price lower than the $7.30 closing price. Out-of-the-money options are options
with an exercise price greater than the $7.30 closing price. The total
intrinsic values of options exercised during the years ended December 31,
2006, 2005 and 2004 were $1.1 million, $729,000 and $4.0 million,
18
respectively. The intrinsic value is determined as of the date of option
exercise. The total cash received from employees as a result of employee stock
option exercises during the years ended December 31, 2006 and 2005 was
approximately $1.5 million and $578,000, respectively.
Additional information regarding options outstanding as of December 31,
2006 is as follows (shares in thousands):
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Exercise Price Weighted Weighted
Average Weighted Exercisable
Remaining Average Average
Number Contractual Exercise Number Exercise
of Shares Life (Years) Price of Shares Price
- ------------------ ------------ ------------- ------------ ------------ ------------
$0.07 - 1.63................... 705 3.43 $ 1.19 705 $ 1.19
1.97 - 2.00.................... 820 4.65 2.00 820 2.00
2.07 - 3.40.................... 1,125 7.94 2.93 504 2.87
3.47 - 3.69.................... 1,183 6.55 3.57 707 3.61
3.85 - 4.18.................... 1,215 7.92 4.00 479 4.05
4.21 - 4.40.................... 1,024 9.52 4.39 141 4.36
4.48 - 5.04.................... 1,188 6.55 4.88 896 4.95
5.05 - 6.40.................... 1,257 7.67 5.74 560 5.96
6.44 - 10.93................... 1,212 4.97 9.37 1,198 9.40
11.05 - 14.58.................. 388 6.79 14.58 388 14.58
------------ ------------
10,117 6.76 $ 4.82 6,398 $ 5.18
============ ============
Options Exercisable Options Unexercisable Total Options
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ------------ ------------
In-the-money......... 4,875 $ 3.53 3,719 $ 4.21 8,594 $ 3.83
Out-of-the-money..... 1,523 10.44 -- -- 1,523 10.44
----------- ----------- ------------
Total options 6,398 $ 5.18 3,719 $ 4.21 10,117 $ 4.82
outstanding........ =========== =========== ============
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for all eligible
employees. Under the plan, shares of its common stock may be purchased over an
offering period with a maximum duration of two years at 85% of the lower of
the fair market value on the first day of the applicable offering period or on
the last day of the six-month purchase period. Employees may purchase up to
1,800 shares having a value not exceeding 20% of their gross compensation
during an offering period. During the years ended December 31, 2006, 2005 and
2004, employees purchased approximately 643,000, 580,000 and 464,000 shares at
average prices of $3.11, $2.89 and $4.60 per share, respectively. At December
31, 2006, approximately 1,779,000 shares of common stock were reserved for
future issuance. Our employee stock purchase plan contains a provision that
automatically increases, on each January 1, the number of shares reserved for
issuance under the employee stock purchase plan by the lesser of 900,000 or
two percent of the total shares outstanding on the last day of the preceding
year.
401(k) Saving and Retirement Plan
The Company sponsors a 401(k) Saving and Retirement Plan ("Plan") for all
employees who meet certain eligibility requirements. Participants may
contribute, on a pre-tax basis, between 1 percent and 15 percent of their
annual compensation, but not to exceed a maximum contribution amount pursuant
to Section 401(k) of the Internal Revenue Code. The Company was not required
to contribute to the Plan for any of the years presented; however, the Company
did contribute $30,000 to the Plan for 2006. There were no contributions in
2005 or 2004.
19
Note 12. Commitments and Contingencies
Lease Commitments
The following table represents the future minimum lease payments under
non-cancelable operating, capital and financing leases as of December 31,
2006.
Year Ending December 31:
2007.................................................$ 2,006
2008................................................. 1,798
2009................................................. 1,747
2010................................................. 1,044
2011................................................. 585
Thereafter:.......................................... 49
---------
---------
Total minimum lease payments.........................$ 7,229
=========
The Company recognizes rent expense on a straight-line basis over the
lease period and has accrued for rent expense incurred but not paid. Rent
expense was approximately $2.2 million, $2.5 million and $1.7 million (net of
sublease income of approximately $0, $37,000 and $43,000) for 2006, 2005 and
2004, respectively.
The Company has future minimum lease payments for capital and financing
leases for office equipment and furniture in the amount of $38,000 included in
the table above.
Purchase Commitments
At December 31, 2006 the Company had noncancelable inventory purchase
commitments totaling approximately $6.8 million.
Legal Proceedings
From time to time, the Company is subject to claims in legal proceedings
arising in the normal course of business. In accordance with SFAS 5, the
Company records a provision for a liability when management believes that it
is both probable that a liability has been incurred and the Company can
reasonably estimate the amount of the loss.
On January 18, 2007, Telematics Corporation filed a complaint against the
Company and seven other defendants in the United States District Court for the
Northern District of Georgia. The complaint alleges that the Company's mobile
resource management solutions infringe certain patents owned by the plaintiff.
As of April 30, 2007, this matter is still in the early stages and the Company
does not have sufficient information to (i) determine whether it is probable
that a liability has been incurred by the Company in connection with this
matter, or (ii) develop a reasonable estimate of the amount of any loss the
Company might incur as a result of any such liability.
Other Contingencies
The Company from time to time enters into certain types of agreements that
contingently require it to indemnify parties against third party claims. These
agreements primarily relate to: (i) certain agreements with the Company's
officers, directors and employees and third parties, under which the Company
may be required to indemnify such persons for liabilities arising out of their
duties to the Company and (ii) certain agreements under which the Company
indemnifies customers and other third parties for claims such as those arising
from intellectual property infringement, personal injury, or non-performance
under the agreement. Such indemnification provisions are accounted for in
accordance with SFAS No. 5, Accounting for Contingencies. To date, the Company
has not incurred any costs related to any claims under such indemnification
provisions.
The terms of such obligations vary. Because the amounts of the obligation
in these types of agreements often are not explicitly stated, the overall
maximum amount of the obligations cannot be reasonably estimated.
Historically, the Company has not been obligated to make any payments for
these obligations, and no liabilities have been recorded for these obligations
on the Company's balance sheet as of December 31, 2006
In general, the Company provides its customers a 12-month limited warranty
that the hardware furnished under the hosted agreements will be free from
defects in materials and workmanship and will substantially conform to the
20
specifications for such hardware. The Company's policy is to expense such
costs as incurred. To date, the Company has incurred minimal costs related to
this limited warranty obligation.
The Company also provides its European customers with the longer of the
European Union statutory warranty of 90 days or country specific warranty of
up to 365 days. If the warranty is invoked, the Company may be required to
correct errors in its software rather than refund any fees under the
arrangement. As of December 31, 2006 this warranty has not been invoked by any
of the Company's customers.
Note 13. Terminated Acquisition Costs
On April 12, 2004, the Company 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, the
Company expensed approximately $2.1 million of acquisition-related costs.
Note 14. Income Taxes
The provision (benefit) from income taxes consists of the following (in
thousands):
Year Ended December 31,
-----------------------------------------
2006 2005 2004
------------- ------------- -----------
Federal:Current................$ 101 $ 113 $ --
Deferred............... 84 (30,813) --
------------- ------------- -----------
Total federal.......... 185 (30,700) --
------------- ------------- -----------
State:Current................ 30 -- --
Deferred............... 126 (3,800) --
------------- ------------- -----------
Total state............ 156 (3,800) --
------------- ------------- -----------
Foreign:Current................ -- -- --
Deferred............... (2,595) (3,294) --
------------- ------------- -----------
Total foreign.......... (2,595) (3,294) --
------------- ------------- -----------
Total benefit from income taxes.......$ (2,254) $ (37,794) $ --
============= ============= ===========
The pre-tax loss related to the Company's foreign operations in 2006 and
2005 was $8.6 million and $16.7 million, respectively. Only minimum state
income and franchise taxes were provided for in 2004 due to the Company's
history of net operating losses. Such amounts were not significant and were
included in general and administrative expenses.
The Company's effective tax rate differs from the amount computed by
applying the statutory federal income tax rate to (loss) income before
provision for income taxes as follows:
Year Ended December 31,
------------------------------------
2006 2005 2004
----------- ----------- ----------
Federal statutory rate................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit...... (1.1) 1.3 0.7
Non-deductible stock compensation charges (4.4) 0.2 (1.5)
Research and development credits......... 0.0 0.0 (1.8)
Valuation allowance...................... 0.0 364.2 (32.1)
Derivative............................... (9.9) 8.0 --
Rate differential on foreign losses...... (3.8) (25.5) --
Other.................................... (0.2) (0.8) (0.3)
----------- ----------- ----------
Effective tax rate....................... 15.6% 382.4% --%
=========== =========== ==========
21
Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
December 31,
--------------------------
2006 2005
------------ ------------
Deferred Tax Assets
Net operating loss carry forwards............................ $ 34,259 $ 39,359
Credit carry forwards........................................ 3,137 3,297
Accruals and reserves recognized in different periods........ 12,014 4,808
------------ ------------
Total gross deferred tax assets before valuation allowance. 49,410 47,464
Valuation allowance........................................ (268) (303)
------------ ------------
Deferred tax assets...................................... 49,142 47,161
Deferred Tax Liabilities
Acquired intangibles......................................... (5,563) (6,193)
------------ ------------
Net deferred tax assets (liabilities) before unrealized losses 43,579 40,968
Unrealized losses (gains) on:
Securities available-for-sale.............................. 7 31
Valuation allowance........................................ (7) (31)
------------ ------------
Net unrealized losses (gains)............................ -- --
------------ ------------
Net deferred tax asset................................. $ 43,579 $ 40,968
============ ============
The valuation allowance for deferred tax assets decreased by $59,000 and
$42.9 million in 2006 and 2005, respectively. The Company has concluded, based
on the standards set forth in SFAS No. 109, Accounting for Income Taxes, that
it is more likely than not that it will realize the benefits from its related
deferred tax assets, based on the Company's evaluation of current evidence and
its affect on the Company's estimate of future taxable income. The Company
receives tax deductions from the gains realized by employees on the exercise
of certain non-qualified stock options and disqualifying dispositions of stock
options. Approximately $6.8 million of the reversal of the valuation allowance
related to excess tax benefits from these stock option deductions for which
the benefit was recognized as a component of stockholders' equity for the year
ended December 31, 2005. Approximately $7,000 and $31,000 of the valuation
allowance at December 31, 2006 and 2005, respectively, related to unrealized
losses on available-for-sale securities and was charged to other comprehensive
income.
At December 31, 2006, the Company had federal, state and foreign net
operating loss ("NOL") carryforwards of approximately $74.2 million, $29.8
million, and $21.0 million, respectively. If not used, the federal NOL
carryforwards will expire between 2018 and 2023 and the state NOL
carryforwards will expire between 2007 and 2023. The foreign NOL carryforwards
do not expire.
At December 31, 2006, the Company also had federal and state research
credits of approximately $2.0 million and $1.6 million, respectively. If not
used, the federal research credit carryforwards will expire between 2012 and
2023. The state research credit carryforwards do not expire.
Note 15. Related Party Transactions
The Company has entered into indemnification agreements with each of its
directors, executive officers and certain other officers. These agreements
require the Company to indemnify such individuals, to the fullest extent
permitted by Delaware law, for certain liabilities to which they may become
subject as a result of their affiliation with the Company.
22