We are one of the leading providers of fleet management solutions to the truck transportation industry. Our innovative technologies and value-added services enable customers to optimize the utilization of their assets and enhance the productivity of fleet operations across the entire supply chain, resulting in decreased costs, improved compliance with U.S. Department of Transportation regulations, improved customer service and overall business productivity.
Founded in 1985, XATA has leveraged over 20 years of experience developing solutions for North America’s premier private fleets. That knowledge has resulted in a clear understanding of the features and functions that matter most to drivers and fleet operators.
We were the first company to provide completely paperless electronic logs, exception-based management reporting and learned standards for accurate business intelligence. Our products seamlessly combine enterprise software, onboard computing, real-time communications and global positioning systems (GPS) to provide an enterprise logistics management solution for private fleet operators.
Our first-generation products, introduced in the early 1990’s, included our revolutionary touch-screen Driver Computer and PC based Fleet Management System software. Valuable data was downloaded from Driver Computers to the Fleet Management System host software in batch mode via our patented Driver Key for compliance reporting and analysis.
In 1999 we introduced OpCenter, a Microsoft Windows-based customer-hosted system that can manage multiple operation centers and users over a wide area network. OpCenter continues to be a leading Fleet Management System for Fortune 1000 private trucking fleets.
In 2004, we introduced XATANET, our next-generation Web-based system. Over the past several years we have invested heavily in product development to bring the XATANET system to market, as well as to develop additional software applications for managing trucks and fleet operations. We believe that XATANET enables us to significantly broaden our penetration of the 3.6 million medium and heavy duty vehicle private fleet transportation market.
In 2000, we formed a strategic alliance with John Deere Special Technologies Group, Inc. (“JDSTG”), a subsidiary of Deere & Company, to enable us to accelerate our product development initiatives and more effectively distribute our new products to both new and existing markets. Deere now owns approximately 16.2 % of our outstanding common stock on a fully diluted basis.
In December 2003, Trident Capital invested approximately $4.1 million in the Company by acquiring 1,613,000 shares of Series B Convertible Preferred Stock. In September 2005, Trident Capital invested an additional $5.0 million by acquiring 1,269,000 shares of Series C Convertible Preferred Stock. On an as if-converted and fully diluted basis, Trident Capital now owns approximately 29.5% of our common stock. Trident Capital, a private equity firm with more than $1.5 billion under management, focuses on investments in the information services and enterprise software sectors. The additional capital has allowed us to continue expanding our product development, distribution and marketing efforts, and provided a strong endorsement of our plans for future growth.
Trucking Industry Background and Trends
Private fleets and for-hire carriers comprise the two major fleet categories within the commercial trucking industry. Private fleets (our current market focus) include manufacturers, wholesalers, retailers and other companies who transport their own goods using equipment they own or lease. For-hire carriers include truckload and less-than-truckload carriers whose primary business is the trucking and transportation of freight that belongs to others.
Commercial trucking fleets are characterized by considerable investment in equipment, high operating costs, significant annual mileage per vehicle and extensive federal and state compliance reporting requirements. Costs for equipment, drivers, fuel, insurance, maintenance, and support personnel make the
efficient operation of each vehicle an essential and complex part of fleet management. Accordingly, accurate and timely data collection and analysis enables managers of truck fleets to reduce operating costs. We believe there is, and will continue to be, significant demand in the trucking industry for onboard fleet management systems, principally because the use of this technology enables fleet operators to reduce expenses, respond to competitive pressures and improve customer service.
We believe the following trends continue to impact the private fleet trucking industry, resulting in increasing competitive pressures and demand for mobile information technology:
| • | New technologies: Historical barriers to purchase are diminishing with the affordability, simplicity and acceptance of new wireless communication and internet technologies. | ||
| • | Increased operating costs: Driver salaries, fuel, insurance, and other operating costs continue to increase. These trends encourage operators to utilize onboard information systems to control costs and more effectively manage their fleets. | ||
| • | Safety and security concerns: Since the terrorist attacks of September 11, 2001, public authorities and fleet operators have become more acutely interested in technology solutions to increase the safety and security of their drivers and cargo. This is especially true for companies transporting petroleum products and other hazardous loads. | ||
| • | E-commerce: As companies increasingly rely on just-in-time inventory management and seek to control and monitor inventories throughout their entire supply chain, they demand better service and increased capabilities from their trucking operators and vendors. In addition, as companies increasingly adopt Internet technologies to reduce communication costs, paperwork and processing times, trucking operators are adopting technology to comply with the operating processes and systems of their customers. This trend encourages integration of onboard computers with the host information systems of trucking fleet operators. | ||
| • | Government regulations: U.S. Department of Transportation (DOT) driver log requirements have become more stringent. The Federal Motor Carrier Safety Administration (FMCSA), an administration within the DOT, implemented new driver hours-of-service rules in January 2004, tightening driver work rules. These rules were challenged in federal court and the FMSCA issued revised rules effective October 1, 2005. The revised regulations became enforceable after a period of transitional compliance on January 1, 2006. The FMCSA is currently evaluating the benefit of Electronic Onboard Recorders (EOBR’s) to increase hours-of-service compliance, and in turn, highway safety. We believe computer generated driver logs may eventually be mandated by federal or state governments. |
The extensive hours-of-service regulations imposed by the FMCSA are compounded by additional regulation in each of the 50 states. In general, states require trucks to pay state fuel taxes based on the amount of fuel consumed in their state. To comply with these regulations, drivers must record state border crossing and fuel purchase information. Many long haul vehicles cross up to 25 state borders per week, resulting in significant paperwork for the driver, the clerical staff of the carrier and the processor of the carrier’s fuel tax returns. To complicate an already large paperwork requirement, these records must be maintained at the fleet home base as well as at the carrier’s headquarters. Records must also be readily available for federal regulators to review driver log compliance. Our systems are designed to automate compliance with each of these regulatory requirements.
Our Products and Services
XATA provides powerful, advanced, yet user-friendly computer systems used by manufacturing, distribution, petroleum and other operators of trucking fleets to reduce fuel costs, increase operational efficiencies, improve safety and enhance customer service.
Our product offerings consist of OpCenter, our comprehensive Windows-based fleet management system, and XATANET, our Web-based fleet management system. Our products perform the following functions to enable fleet operators to control costs and maximize vehicle and driver performance:
| • | Mobile two-way messaging and real-time vehicle location. | ||
| • | Automation of DOT driver log requirements and state fuel tax reporting. | ||
| • | Comprehensive vehicle and driver performance reporting. | ||
| • | Efficient routing, trip optimization and stop activity scheduling. | ||
| • | Diagnostic and accident data capture. |
These systems integrate data generated within the truck as well as data received via GPS (Global Positioning System) into either a Windows- or Web-based user interface, enabling fleet managers to measure fleet performance, resolve exception conditions, monitor ongoing operations and perform detailed analysis.
XATANET Fleet Management System
A flexible and expandable fleet management solution, XATANET enables fleet operators to lower operating costs, increase productivity, improve safety, and comply with regulatory requirements.
XATANET integrates onboard computers, driver displays and cost-effective communications with a suite of powerful, Web-based applications delivered on-demand via the Internet.
If organizations chose to have XATA host the service, we will manage the Web-based applications and maintain the customer databases associated with them. XATANET will provide asset tracking with real-time visibility of drivers, vehicles and deliveries. It delivers a low cost of entry and the freedom from customers having to monitor and manage software. All applications are securely accessible via the internet with a standard Web browser.
XATANET is ideal for organizations that seek to eliminate the startup costs and lengthy implementation times typically associated with fleet management solutions. XATANET allows fleets of all sizes to install, utilize and pay for only those applications that benefit their organization today, gaining immediate value at a lower cost of entry, while retaining the ability to expand their use as fleet operations evolve.
A XATANET solution is comprised of four primary components as described below:
Onboard Hardware
XATA Application Modules (XAM) — Rugged, mobile computing platforms including GPS and wireless communications hardware that collect, store and intelligently manage data communications. The XAM connects to the engine gathering vehicle and diagnostic information onboard. In conjunction with interactive driver displays, the XAM unifies communication between fleet management, vehicles, and drivers. Using our powerful onboard applications, all of the vehicle information can be delivered immediately to the driver display or reported back to fleet management, based on user defined preferences.
Our latest-generation, multi-mode XATA Application Module utilizes both the ORBCOMM satellite and Sprint digital cellular (CDMA 1xRTT) networks in a single unit to provide high-bandwidth, low latency, ubiquitous coverage. Our patent pending XATA MobileSync over-the-air application management instantly makes new features available and reduces the cost of updating software in the vehicle. Designed for use with both XATANET and OpCenter, the XAM serves as a migration path for OpCenter customers who want to leverage web-based software.
Driver Displays
Touch-screen driver displays are mounted in the cab of the truck capturing and communicating fleet performance information. With the ability to monitor fuel economy, estimated time of arrival (ETA), and regulatory compliance drivers can help ensure the fleet reaches optimum performance levels.
Wireless Communications
XATA systems use patented technologies that utilize lowest cost communication methods synchronizing trip and driver data with maximum efficiency. Our multi-mode systems combine CDMA 1xRTT, 802.11 WiFi, and satellite wireless networks to provide “No Gap” coverage and high speed data download.
Application Service Packages
XATANET’s applications are bundled into 4 Service Packages, conveniently designed to target the specific operational needs of fleet operations. This modular approach enables customers to expand services over time.
OpCenter Fleet Management System
Our OpCenter system enables managers to achieve measurable fleet performance and productivity improvements by integrating onboard technology into the fleet management process. The OpCenter system consists of a Driver Computer, Driver Key, Data Station and our OpCenter Fleet Management Software hosted and managed by the customer. Our XAM can also be used in various hardware configurations in replacement of a Driver Key.
The Driver Computer has a touch-sensitive, easy-to-read, user-friendly screen that provides instant feedback to the driver. Each driver has an electronic Driver Key that stores his identity, log, dispatch, and trip data and is a means of electronically transferring information to and from the Driver Computer and Data Station. Data Stations are located where drivers begin and end their trips, and provide dispatch data on a Driver Key at the beginning of each trip and offload actual trip data from the Driver Key at the end of each trip.
Our OpCenter Fleet Management Software operates in a multi-user, Microsoft Windows environment and is capable of managing multiple fleets over a wide area network. The system collects, validates and processes data recorded by a fleet’s network of Driver Computers and Data Stations. OpCenter provides a decision support tool for the entire distribution team. This system reduces operating costs, improves safety, streamlines compliance reporting and automates data collection for other systems. OpCenter helps users efficiently measure fleet performance, resolve exception conditions, monitor ongoing operations and perform detailed analysis.
When integrated with optional satellite, digital cellular or 802.11b Wi-Fi wireless communications via our XAM, OpCenter provides immediate access to critical onboard information. Its real-time notification is triggered by user-defined onboard conditions, ensuring that only critical information is reported to fleet management. Detecting and processing of exception conditions only improves operating efficiency while minimizing recurring communication charges.
Target Markets
There are approximately 8.1 million commercial trucks operating in the United States, of which 6.6 million are operated by private fleets and 1.5 million are operated by for-hire carriers. While most of our current customers fall into a portion of the private fleet category, we believe that our new fleet management products will enable us to enter other segments of the commercial trucking industry.
Private Fleets
Private fleets include the commercial trucks operated by manufacturers, wholesalers, retailers and other companies who transport their own goods using equipment they own or lease. Historically, the costs associated with purchasing an integrated hardware and software system for onboard computing, including our OpCenter system, required a minimum fleet size in order to recover the fixed costs of a host system implementation. As a result, we target our OpCenter system to private fleets that operate more than 30 heavy-duty trucks in select vertical markets.
We believe our historic target market segment has comprised approximately 300,000 vehicles. We believe our introduction of XATANET will allow us to significantly expand our addressable market to a much larger portion of the private fleet sector, including smaller fleets, large decentralized fleets and fleets in new vertical markets. Specifically, smaller fleets and decentralized fleets are able to purchase individual XATANET software application packages that target their specific information needs and use our Internet-based host system to collect, process and present their data. We believe these fleets represent a significant new market opportunity. We view the total 6.6 million commercial trucks in this segment as our target market going forward, with particular emphasis on fleets operating medium and heavy duty trucks, estimated at 3.6 million vehicles.
For-Hire Carriers
For-hire carriers include both truckload and less-than-truckload (LTL) carriers, whose primary business is the trucking and transportation of freight that belongs to others. There are approximately 1.3 million commercial trucks in the for-hire carrier market segment.
Other Markets
We believe our XATANET web-based system may ultimately be introduced into several other new markets because of its open system architecture and the many potential applications for web-based, GPS-enabled tools.
Major Customers
In fiscal 2006, we had sales with customers (hereinafter referred to as “Customer A” and “Customer B”) who each accounted for approximately 18% of fiscal 2006 revenue. No other customer accounted for 10% or more of revenue in fiscal 2006 or 2005.
Our systems have been installed in approximately 54,000 trucks at over 1,800 distribution centers. Our customers include Fortune 500 companies and other large organizations, including Allegiance Healthcare Corporation, Baxter Healthcare Corporation, Bi-Lo, LLC, The BOC Group plc, Core-Mark International, CVS Pharmacy, Eby-Brown Company, Foster Farms Dairy, Hannaford Trucking Co., The Kroger Co., McLane Company, Publix Super Markets, Inc., Penske Corporation, Perlman Rocque, Ryder System Inc., Safeway, Inc., Supervalu, Inc., Toys “R” Us, Inc., Unisource Worldwide, Inc., United Natural Foods, Inc., the United States Postal Service, Whirlpool Corporation and xpedx (a division of International Paper Company).
Sales and Marketing
We market our products to operators of trucking fleets through a multi-tiered sales strategy including a direct sales force and various strategic alliances in our indirect sales channel.
Direct Sales Channel
Our direct sales force sells our onboard fleet management systems primarily to private fleet truck operators and logistics providers through national, regional and inside sales account executives. The efforts of our sales executives are supported by our systems sales consultants, project management and customer service organizations, which have a strong working knowledge of the hardware and software configurations and experience integrating our systems into fleets. We believe the level of service we provide to our customers is unique in the industry and a key competitive advantage in securing new customers and retaining existing accounts.
We focus our direct sales and marketing efforts on companies operating fleets of all sizes within vertical markets that have experienced significant benefits from our systems. These vertical markets include food distribution, petroleum production and marketing, manufacturing and processing, retail/wholesale delivery, and government.
Indirect Sales Channel
Distribution relationships with leading truck leasing companies such as Penske Truck Leasing Co., L.P. (a partnership of Penske Corporation and GE Capital) and NationaLease Purchasing Corporation (an affiliate of National Truck Leasing System) are the basis of our indirect sales channel. In our arrangement with Penske, Penske integrates our XATANET web-based system into its full-service lease program through a private labeled offering named Fleet I.Q. NationaLease also offers XATANET to its large base of lease customers in a joint go-to-market strategy with us.
As we continue to evolve the XATANET system, we anticipate offering our product through other new indirect sales channels such as sales agents, wireless carries and third party installers that will drive substantial additional sales.
We also use a combination of integrated marketing activities, including advertising, trade shows, the Internet and direct mail, to gain exposure within our target markets. We exhibit our products at selected industry conferences to promote brand awareness. We actively pursue speaking opportunities at industry trade shows for our management staff, as well as for customers who have gained efficiencies in fleet operations using our technology.
Competition
Competition in the mobile resource management system industry continues to increase at a rapid pace as businesses and governments realize the number of benefits organizations can achieve. We face strong
competition for our solutions, and this competition is expected to continue to increase in the future. We compete primarily on the basis of functionality, ease of use, quality, price, service availability and corporate financial strength. As the demand by businesses for mobile resource management solutions increases, the quality, functionality and breadth of competing products and services will likely improve and new competitors will likely enter our market. In addition, the widespread adoption of industry standards may make it easier for new market entrants or existing competitors to improve their existing products and services, to offer some or all of the products and services we offer or may offer in the future, or to offer new products and services that we do not offer. We also do not know to what extent network infrastructure developers and wireless network operators will seek to provide integrated wireless communications, Global Positioning Systems, software applications, transaction processing, and Internet solutions, including access devices developed internally or through captive suppliers.
Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do. Additionally, many of these companies have greater name recognition and more established relationships with our target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can.
Key Alliances and Relationships
We continue to establish relationships with third parties with the intent to increase the deployment of our solutions. We believe that establishing these strategic relationships will facilitate our technological leadership and increase our access to new customers. Some of our existing relationships include:
Communication Providers
We have established relationships with Sprint/Nextel (Sprint) and Orbcomm LLC (Orbcomm) to provide wireless connectivity between our subscribers and our host system. We contract directly with Sprint and Orbcomm for the provision of wireless communications, which are bundled with our solutions. We are continuing to expand this category and look to add additional partners in the upcoming 12 — 18 months.
Indirect Sales Channel Alliances
We have an agreement with Penske Truck Leasing Co., L.P. in which we provide Penske a private labeled version of our XATANET web-based fleet management system, wireless communication services, managed hosting services and technical support. Penske has integrated our XATANET web-based system as an option for its full-service lease customers under the name Fleet I.Q. In total, Penske Truck Leasing has approximately 200,000 vehicles under management.
We also have a relationship with NationaLease Purchasing Corporation, whereby NationaLease offers XATANET to its truck leasing customers in a joint go-to-market strategy with us. NationaLease is a consortium of approximately 120 independent truck leasing companies with a total fleet of 65,000 vehicles.
Manufacturers
We have established a relationship with Winland Electronics, Inc. (Winland) for the manufacture and testing of our mobile hardware products pursuant to our detailed specifications and quality requirements. In fiscal 2005 our primary manufacturing vendor was Phoenix International Corporation, a subsidiary of Deere & Company. Deere & Company, through its subsidiary JDSTG, is a principal shareholder of the Company. In the first quarter of fiscal 2006, we changed our primary manufacturing vendor to Winland as a result of increased production capabilities.
We have relationships with other companies that manufacture components for our solutions as well. All of our suppliers have entered into confidentiality agreements with respect to our proprietary technology. We believe our current suppliers can provide production volumes to meet our anticipated increases in product demand and we are not aware of any difficulty experienced by our suppliers in obtaining raw materials for manufacture.
Patents, Trademarks, and Copyrights
XATA, XATANET, and OpCenter are trademarks registered with the United States Patent and Trademark office. All computer programs, report formats, and screen formats are protected under United States copyright laws. In addition, we possess a design patent issued by the United States Patent and Trademark Office that covers the design of our Driver Computer display, and have patent applications pending on other technologies. We also claim trademark and trade name protection for the following: XATA MobileSync, and SmartCom. We have trademark applications pending with the United States Patent and Trademark Office for XATA MobileSync. We have patents pending for XATA Data Conduit, Portable Storage Module, and Environmental Condition Monitoring of a Container. We protect and defend our intellectual property rights vigorously.
Research and Development
We concentrate our research and development activities on hardware and software solutions for our customers. Our U.S. research and development activities are supplemented by third party resources we contract in Belarus. To enhance our existing solutions and to introduce new solutions to our existing and potential customers, we focus on the following key areas:
| • | Software. We intend to continue to develop our software applications by offering new features while enhancing existing features. For example, in August 2006, we announced the availability of XATANET 3.2, the latest version of our on-demand fleet management system that offers a new automated dashboard for key performance metrics and point-and-click scheduled reporting for information distribution. | ||
| • | Hardware. We intend to continue to develop and release platform upgrades to add new features as well as to enhance existing features. For example, in November 2004, we announced the availability of our Multi-Mode communications platform. An integrated digital cellular (CDMA 1xRTT) and satellite communications platform that delivers both high-speed data download and ubiquitous coverage, eliminating the traditional bandwidth and gap limitations facing fleets trying to efficiently operate in real-time. |
Research and development expenses were $3.3 million for fiscal 2006 compared to $3.6 million for fiscal 2005. The decrease of $0.3 million was mainly due to the increase in capitalized software development costs. In addition, we invested approximately $0.3 million in both fiscal 2006 and 2005 on the enhancement of released products. In fiscal 2006 and 2005, we incurred total research and development costs of $4.2 million and $3.9 million, respectively; of which $0.9 million and $0.3 million of software development costs were capitalized in fiscal 2006 and 2005, respectively. These costs were capitalized after the establishment of technological feasibility occurred as required by FAS 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. These costs will be amortized to cost of goods sold over the anticipated useful life of the product which is determined based upon its anticipated future net revenues.
Employees
As of September 30, 2006, our staff included 101 employees and 21 independent contractors whose primary assignments are approximately as follows: 47 in research and development and information services; 16 in sales and marketing; 35 in customer support; 24 in administrative, finance, purchasing and warehousing.
Executive Officers
John J. Coughlan, Chairman of the Board & Chief Executive Officer
Mr. Coughlan, age 47, has been Chairman and Chief Executive Officer since joining XATA in October 2006. Prior to joining XATA, he was involved in a business consulting practice. He previously served as president and CEO of Lawson Software, Minnesota’s largest software company. Mr. Coughlan joined Lawson Software in 1987 and became CEO in February 2001 prior to the company’s initial public offering in December of 2001. In addition to his responsibilities at XATA, Mr. Coughlan is an active regional business advocate and serves on the board of directors for several local organizations, including Securian Financial Group, Inc. He replaced Craig Fawcett who resigned in September 2006.
Mark E. Ties, Chief Financial Officer & Treasurer
Mr. Ties, age 41, joined XATA in April 2005 as Chief Financial Officer. He is responsible for the Company’s finance, human resources, purchasing, and distribution functions. Before joining XATA, Mr. Ties was the chief financial officer and treasurer at Velocity Express Corporation, where he served as a member of the Company’s executive leadership team and was responsible for the Company’s financial activities including; capital raising activities; SEC compliance; financial planning and analysis; mergers and acquisitions; cash management; back-office process integration; corporate governance practices; and investor relations. Prior to Velocity, he served as a Senior Manager for Ernst & Young LLP in its entrepreneurial services and mergers and acquisitions departments and as a senior financial executive at a number of companies in varied industries. He has extensive financial management experience in the areas of financing, mergers and acquisitions, business integration and financial processes.
Thomas L. Schlick, Chief Operating Officer
Mr. Schlick, age, 56 joined XATA in April 2006 as Chief Operating Officer. As COO, Schlick is responsible for the XATA’s service operations, project management, quality delivery, customer training, and implementation. Prior to joining XATA, Schlick was senior vice president, global service, solutions and sales operations, for DataCard Corporation. At DataCard, Schlick served as a member of the executive leadership team and was responsible for global services activities including; field operations, technical product and software support, sales and service training, program management, depot repair, and call center operations. Prior to DataCard, he served as a senior executive at Rosemount, Inc., a division of Emerson Electric. Schlick has a B.S. in Electrical Engineering and an MBA from the University of Minnesota. He is a Six Sigma Green Belt, a Board Member of Association of Service Management, International and a senior member of the Instrument Society of America.
Thomas N. Flies, Vice President — Business Development
Mr. Flies, age 37, is responsible for the company’s business development, marketing and product management efforts. Mr. Flies joined XATA in 1990 and has served in various roles in sales, marketing, and product development including Sr. Vice President of Product Development where he led the development and introduction of XATA’s OpCenter product line. He was named Vice President of Business Development in 2002 to focus on developing and marketing XATANET to truck leasing
companies. In his role, Mr. Flies is responsible for developing product and marketing strategies and programs that drive revenue growth and establish strong brand awareness. Mr. Flies is a member of the National Private Truck Council (NPTC), American Trucking Association (ATA), Truck Rental and Leasing Association (TRALA) and the Council of Supply Chain Management Professionals (CSCMP).
Investment Considerations and Risk Factors
We do not have a long or stable history of profitable operations. The Company’s net losses to common shareholders for the fiscal years 2006 and 2005 were $2.1 million and $6.7 million, respectively. The respective periods’ net losses were $1.8 million and $6.0 million. Additional amounts of $0.3 million and $0.7 million, resulting from beneficial conversion charges and preferred stock dividends increased such respective period losses to the aforementioned levels of net losses to common shareholders.
We are dependent on key customers. We sell large orders to individual fleets and may be dependent upon a few major customers each year whose volume of purchases is significantly greater than that of other customers. As we continue to grow our existing customer base this risk will lessen, but until such time we are still dependent on continued purchases by present customers who continue to equip and upgrade their fleets. Loss of any significant current customers or an inability to further expand our customer base would adversely affect us.
Our sales cycle is long. The period required to complete a sale of our systems has historically been up to a year or longer. The length of the sales cycle may result in quarter-to-quarter fluctuations in revenue. Our systems are technically complex, which means the customer has to make an advance budget decision. The availability of new and other technologies also complicates and delays buying decisions.
We have competitors who are larger than we are. Many of the companies who offer competitive products have greater financial and other resources than our company. These competitors offer products ranging in sophistication and cost from basic onboard recorders to advanced mobile satellite communication and information systems. Their products may offer better or more functions than ours or may be more effectively marketed. In addition, the nature and sources of competition in our industry are rapidly evolving and increasingly depend on the ability to deliver integration of multiple information systems. These systems must link trucking operations with other facets of the supply chain through a variety of sophisticated software and communications technologies. These changes reflect a trend toward integration of intra-company data with the larger external supply chain involving the flow of goods to markets. We must continue to adapt our existing products and develop new products that facilitate the collection, integration, communication and utilization of information throughout the entire supply chain. This may entail the development of new technologies and the adaptation of new and existing products to be compatible with products and services provided by others in the industry. These trends may require us to establish strategic alliances with other companies who may be competitors.
We have a limited number of products and those products are concentrated in one industry. Although our systems have potential applications in a number of industries, to date we have targeted only the private fleet trucking segment of the transportation industry. If this market segment experiences a downturn that decreases our sales, the development of new applications and markets could take several months or longer, and could require substantial funding. In addition, our future success is dependent in part on developing and marketing new software applications. We cannot assure that new applications can be successfully developed or marketed in a timely manner.
Our target market is highly cyclical. The fleet trucking segment of the transportation industry is subject to fluctuations and business cycles. We cannot predict to what extent these business cycles may result in increases or decreases in capital purchases by fleet managers. A significant downturn in the prospects of the fleet trucking segment of the transportation industry could have a material, adverse affect on us.
The effectiveness of our selling efforts depends on knowledgeable staff and effective marketing alliances. Direct sales of our products are dependent in part upon the salesperson’s in-depth knowledge and understanding of our systems. This knowledge is attained through experience and training over a period of several months or longer. We must attract, train, and retain qualified personnel on a continuing basis. We may not be able to sustain or augment our sales and marketing efforts by retaining or adding personnel, and it is possible that increased sales and marketing efforts will not result in increased sales or profitability. We believe that marketing alliances with truck leasing companies, truck manufacturers and others in the truck supply chain will become increasingly important distribution channels for our products. We may not be able to establish or sustain effective alliances. Moreover, we may have limited control over the selling efforts of our alliance partners.
We are dependent on proprietary technology. Our success is heavily dependent upon proprietary technology. We have been issued a design patent by the United States Patent and Trademark Office that covers our Driver Computer and have recently applied for several software-related patents, but we have not yet been awarded patents on any of our software programs. We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures, and contractual provisions to protect our proprietary rights. These measures afford only limited protection. Our means of protecting our proprietary rights may prove inadequate, or our competitors may independently develop similar technology, either of which could adversely affect us. In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our systems or obtain and use information that we regard as proprietary.
We depend on wireless communication networks owned and controlled by others. If we are unable to deliver continued access to communication services with sufficient capacity, our revenues could decrease. Our ability to grow and achieve profitability depends on the ability of satellite and digital cellular wireless carriers to provide sufficient network capacity, reliability and security to our customers. Even where wireless carriers provide coverage to entire regions, there are occasional lapses in coverage, for example due to man-made or natural obstructions blocking the transmission of data. These effects could make our services less reliable and less useful, and customer satisfaction could suffer. Our financial condition could be seriously harmed if our wireless carriers were to increase the prices of their services, or to suffer operational or technical failures.
Our products may quickly become obsolete. Our systems utilize proprietary software and onboard touch-screen computers. Although we believe our proprietary software is more important in the capture and communication of operating data than the hardware on which the software operates, continued improvements in hardware may render our technology, including its software, obsolete. The field of software and hardware is constantly undergoing rapid technological change and we may not be able to react and adapt to changes in this field. Moreover, development by our competitors could make our systems and services less competitive or obsolete. We believe that advancements in hardware and communications technology provide opportunities for us to form alliances with companies offering products complementary to our systems and services, but we cannot assure that we can form alliances with such companies or that any such alliance will be successful. Our success depends, in large part, on our ability to anticipate changes in technology and industry standards, and develop and introduce new features and enhancements to our system on a timely basis. If we are unable to do so for technological or other reasons or if new features or enhancements do not achieve market acceptance, our business could be materially and adversely affected. We may encounter technical or other difficulties that could in the future delay the introduction of new systems or system features or enhancements.
JDSTG and Trident Capital, who are represented on our Board of Directors, individually and together own enough stock to exert significant influence over XATA. As of December 13, 2006, JDSTG owned approximately 16.2% and Trident Capital owned approximately 29.5% of our common stock on an as-converted basis, and Trident has the ability to increase its ownership significantly through exercising warrants. In addition, JDSTG is entitled to name up to three representatives to our Board of Directors and Trident is entitled to name up to two representatives. Trident is entitled to vote its Series B Preferred Stock and Series C Preferred Stock as if converted to common stock and to vote as a separate class (to the exclusion of the holders of common stock) on the election of its two director nominees. Both JDSTG and Trident benefit from certain restrictive covenants of XATA in connection with their equity investments in the Company. The combination of stock ownership and Board of Director representation enables these shareholders, individually and together, to a greater degree, to exercise significant influence over the Company.
We are dependent on key personnel. Our staff is small and our future success depends to a significant extent on the efforts of key management, technical and sales personnel. The loss of one of our key employees could adversely affect our ability to provide leading edge technology to the transportation industry.
We may need additional capital. Although we believe cash flow from operations and our $5 million line of credit will be sufficient to meet capital requirements for the foreseeable future, our cash needs may vary significantly from predictions. For example, if we do not generate anticipated cash flow, or if we grow at a rate faster than we anticipate, our predictions regarding cash needs may prove inaccurate and we may require additional financing. Our inability to obtain needed financing could have a material adverse effect on operating results. We cannot assure that we will be able to secure additional financing when needed or that financing, if obtained, will be on terms favorable or acceptable to us. Moreover, future financing may result in dilution to holders of our common stock.
We may issue additional stock without shareholder consent. We have authorized 25,000,000 shares of common stock, of which 8,452,000 shares were issued and outstanding as of December 13, 2006. The Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares. Additional shares may be issued in connection with future financing, acquisitions, employee stock plans, or otherwise. Any such issuance will dilute the percentage ownership of existing shareholders. We are also currently authorized to issue up to 5,000,000 shares of preferred stock. As of December 13, 2006, 1,815,000 shares of Series B Convertible Preferred Stock and 1,269,000 Series C Convertible Preferred Stock were issued and outstanding. The Board of Directors can issue additional preferred stock in one or more series and fix the terms of such stock without shareholder approval. Preferred stock may include the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. The issuance of preferred stock could adversely affect the rights of the holders of common stock and reduce the value of the common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party.
Our common stock could be delisted due to failure to satisfy a continued listing rule or standard. On August 26, 2005, the Company received a letter from The Nasdaq Listing Qualification Staff (“Nasdaq”), notifying the Company that it was not in compliance with Marketplace Rule 4310(c)(2)(B) (the “Rule”). This Rule requires the Company to have a minimum $35 million in market value of listed securities, $2.5 million in shareholders’ equity, or $500,000 in net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. Nasdaq informed
the Company that it had 30 calendar days, or until September 26, 2005, to regain compliance with the Rule. By virtue of the Trident Capital investment in September 2005, we regained compliance with the Nasdaq Marketplace listing requirements. However, Nasdaq has advised us that it will continue to monitor our compliance with the listing standards. If we fail to show compliance, we may be subject to delisting.
We may be unable to manage rapid growth. The Company’s continued growth will place an increasing strain on our resources, and we could experience difficulties relating to a variety of operational matters, including hiring, training and managing an increasing number of employees, obtaining sufficient quantities of product from vendors, obtaining sufficient materials and contract manufacturers to produce our products, expanding our distribution capabilities and enhancing our customer service, financial, and operating systems. There can be no assurance that the Company will be able to manage growth effectively. Any failure to manage growth could have a material adverse effect on the Company’s business, financial condition and results of operations.
Our directors’ liability is limited under Minnesota law and under certain agreements. Our Articles of Incorporation, as amended and restated, state that our directors are not liable for monetary damages for breach of fiduciary duty, except for a breach of the duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Minnesota law or for any transaction in which the director derived an improper personal benefit. In addition, our bylaws provide that we shall indemnify our officers and directors to the fullest extent permitted by Minnesota law for all expenses incurred in the settlement of any actions against them in connection with their service as officers or directors of the Company. In addition, we have entered into indemnification agreements with the Trident investors, and its representatives who serve as directors on our Board, which may supplement the indemnification provisions available to them under Minnesota law.
Anti-takeover provisions. Minnesota law provides Minnesota corporations with anti-takeover protections. These protective provisions could delay or prevent a change in control of our company by requiring shareholder approval of significant acquisitions of our voting stock. These provisions operate even when many shareholders may think a takeover would be in their best interests.
We face burdens relating to the recent trend toward stricter corporate governance and financial reporting standards. New legislation or regulations that follow the trend of imposing stricter corporate governance and financial reporting standards, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, continues to increase our costs of compliance. A failure to comply with these new laws and regulations may impact market perception of our financial condition and could materially harm our business. Additionally, it is unclear what additional laws or regulations may develop, and we cannot predict the ultimate impact of any future changes.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, operating results and stock price. We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act which will become effective for the Company beginning in fiscal 2008, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our Independent Auditors in fiscal 2009 addressing these assessments. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.
