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Form 10-KSB
 U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended: September 30, 2005o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  toCommission file number: 0-27166
 XATA CORPORATION
  Minnesota
    
    41-1641815(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)151 East Cliff Road, Suite 10, Burnsville, Minnesota
    
    55337(Address of principal executive offices)
    
    (Zip Code)
    
  o
 þ o
 o
 o þ




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,
 ii




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##### 



TABLE OF CONTENTS
 PagePART IItem 1. Description of Business
    
    
    1Item 2. Description of Property
    
    
    15Item 3. Legal Proceedings
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15PART IIItem 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
    
    
    16Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    19Item 7. Financial Statements
    
    
    25Item 8. Changes In and Disagreement with Accountants on Accounting and
Financial Disclosure
    
    
    25Item 8A. Controls and Procedures
    
    
    25Item 8B. Other Information
    
    
    25PART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act
    
    
    26Item 10. Executive Compensation
    
    
    26Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    26Item 12. Certain Relationships and Related Transactions
    
    
    26Item 13. Exhibits and Reports on Form 8-K
    
    
    26Item 14. Principal Accountant Fees and Services
    
    
    30SIGNATURES
    
    
    31EXHIBIT
INDEX
    
    
    32Amended Loan and Security AgreementEarnings Per ShareConsent of Grant Thornton LLPCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  iii




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Forward Looking Statements
  
    
    We incurred operating losses in our most recent fiscal year, and such losses are likely
to continue in the next fiscal year.
    
    We may be unable to adapt to technological change quickly enough to grow or to retain
our customer base.
    
    We will continue to be dependent upon positioning systems and wireless communication
networks owned and controlled by others, and accordingly, their problems may adversely
impact us.
    
    For the foreseeable future, we are dependent upon the continued receipt and fulfillment
of new orders for our current products.
    
    Our growth and profitability depend on our timely introduction and market acceptance of
new products, our ability to continue to fund product development activities, and our
ability to establish and maintain strategic partner relationships.
 Trademark Notice
 ® ® ® ® ® ®
 
 PART I
 
 Item 1. Description of Business
 About XATA
    1




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Trucking Industry Background and Trends
    2




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
    
    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 become 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.
  Our Products and Services
   3




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
    
    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.
  XATANET Fleet Management System
      Onboard Hardware
  
 4




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Driver Displays
  Wireless Communications
  Application Service Packages
  OpCenter Fleet Management System
     5




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Target Markets
  Private Fleets
   For-Hire Carriers
  Other Markets
  Major Customers
   6




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Sales and Marketing
  Direct Sales Channel
   Indirect Sales Channel
    Competition
  7




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Key Alliances and Relationships
  Communication Providers
  Indirect Sales Channel Alliances
   Manufacturers
  8




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Patents, Trademarks, and Copyrights
  Research and Development
  
    
    Software.We intend to continue to develop our software applications by offering new
features while enhancing existing features. For example, in May 2005, we announced the
availability of XATANET 3.0. In addition to offering many of the core applications from
our OpCenter product line, XATANET 3.0 incorporated innovative new features that
dramatically increase driver productivity and customer service. One example is Smart
Routetm, a powerful tool for communicating and monitoring trip plans from the
initial dispatch to the ultimate delivery, all without paper.
    
    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.
  9




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Employees
  Executive Officers
 Craig S. Fawcett, Chairman of the Board & Chief Executive Officer
  Mark E. Ties, Chief Financial Officer & Treasurer
  Peter Thayer, Chief Technology Officer
  Thomas N. Flies, Vice President  Business Development
  10




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Investment Considerations and Risk Factors
 We do not have a long or stable history of profitable operations.
 We are dependent on key customers.
 Our sales cycle is long.
 We have competitors who are larger than we are.
 We have a limited number of products and those products are concentrated in one industry.
 11




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Our target market is highly cyclical.
 The effectiveness of our selling efforts depends on knowledgeable staff and effective marketing
alliances.
 We are dependent on proprietary technology.
 We depend on wireless communication networks owned and controlled by others.
 Our products may quickly become obsolete.
 12




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JDSTG and Trident Capital, who are represented on our Board of Directors, individually and together
own enough stock to exert significant influence over XATA.
 We are dependent on key personnel.
 We may need additional capital.
 We may issue additional stock without shareholder consent.
 13




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Our common stock could be delisted due to failure to satisfy a continued listing rule or standard.
 We may be unable to manage rapid growth.
 Our directors liability is limited under Minnesota law and under certain agreements.
 Anti-takeover provisions.
 We face burdens relating to the recent trend toward stricter corporate governance and financial
reporting standards.
 14




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Failure to achieve and maintain effective internal controls could have a material adverse effect on
our business, operating results and stock price.
 
 Item 2. Description of Property
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  15




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PART II
 
 Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
  Sale PriceLow
    
    
    HighFiscal Year 2004First Quarter
    
    $
    2.00
    
    
    $
    4.29Second Quarter
    
    
    3.30
    
    
    
    6.25Third Quarter
    
    
    5.00
    
    
    
    6.74Fourth Quarter
    
    
    5.00
    
    
    
    6.37
 Sale PriceLow
    
    
    HighFiscal Year 2005First Quarter
    
    $
    5.25
    
    
    $
    6.10Second Quarter
    
    
    4.00
    
    
    
    6.25Third Quarter
    
    
    3.80
    
    
    
    5.18Fourth Quarter
    
    
    2.62
    
    
    
    4.83
  Dividend Policy
   Sale of Unregistered Securities
 Preferred Stock
  16




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17




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Warrants
   Exemptions
  18




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Item 6. Managements Discussion and Analysis or Plan of Operation
  Critical Accounting Policies
  Revenue recognition. Software Revenue Recognition Software Revenue Recognition with Respect to Certain Transactions Revenue Recognition in Financial
Statements
   Allowance for doubtful accounts and sales returns.
 19




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Research and development costs. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed
 Income taxes
 20




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Results of Operations for the years ending September 30, 2005 and 2004
  Fiscal Year EndedSeptember 30,2005
    
    2004Net sales
    
    
    100
    %
    
    
    100
    %Gross profit
    
    
    22
    %
    
    
    33
    %Selling, general and administrative
    
    
    35
    %
    
    
    27
    %Research and development
    
    
    19
    %
    
    
    13
    %Operating loss
    
    
    -31
    %
    
    
    -6
    %Net loss
    
    
    -31
    %
    
    
    -6
    %
 Net Sales
  Cost of Goods Sold.
 Operating Expenses
 .
 21




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Non-operating Income (Expense).
 Income Taxes.
 Net Loss to Common Shareholders.
 Liquidity and Capital Resources
   22




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Subsequent Events
 .
 23




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Recently Issued Accounting Pronouncements
 Shared-Based Payment (Statement 123)
 Shared-Based Payment, Accounting for
Stock-Based Compensation. Accounting for Stock
Issued to Employees, Statement of Cash Flows.
 Accounting Changes and Error Corrections (Statement 154)
 Accounting Changes and Error Corrections  a
replacement of APB Opinion No. 20 and FASB Statement No. 3 Accounting Changes
  Exchange of Nonmonetary Assets (Statement 153)
 Exchange of Nonmonetary Assets
 24




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Item 7. Financial Statements
 Report of Independent Registered Public Accounting Firm
    
    
    F-1Balance Sheets
    
    
    F-2Statements of Operations
    
    
    F-3Statements of Changes in Shareholders Equity
    
    
    F-4Statements of Cash Flows
    
    
    F-5Notes to Financial Statements
    
    
    F-6 - F-20
 
 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
  
 Item 8A. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal controls.
 
 Item 8B. Other Information
  25




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-1




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XATA CORPORATION
BALANCE SHEETS
 September 30,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    6,472,993
    
    
    $
    1,332,695Short-term investments
    
    
    
    
    
    
    3,989,802Accounts receivable, less allowances for doubtful accounts
and sales returns of $315,000 and $293,000
    
    
    7,811,531
    
    
    
    5,500,832Inventories
    
    
    1,257,541
    
    
    
    1,067,034Deferred product costs
    
    
    4,671,386
    
    
    
    511,079Prepaid expenses
    
    
    203,596
    
    
    
    230,809Total current assets
    
    
    20,417,047
    
    
    
    12,632,251Equipment and leasehold improvements, net
    
    
    1,085,139
    
    
    
    456,030Deferred product costs, net of current portion
    
    
    1,001,481
    
    
    
    303,481Total assets
    
    $
    22,503,667
    
    
    $
    13,391,762LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesBank line of credit
    
    $
    1,800,000
    
    
    $
    518,008Current maturities of long-term debt
    
    
    
    
    
    
    231,403Accounts payable
    
    
    2,386,907
    
    
    
    1,733,932Accrued expenses
    
    
    2,170,764
    
    
    
    1,592,808Deferred revenue
    
    
    7,774,293
    
    
    
    2,657,882Total current liabilities
    
    
    14,131,964
    
    
    
    6,734,033Long-Term Debt, net of current maturities
    
    
    
    
    
    
    19,969Deferred Revenue, net of current portion
    
    
    3,335,383
    
    
    
    1,501,799Total liabilities
    
    
    17,467,347
    
    
    
    8,255,801Commitments
    
    
    
    
    
    
    Shareholders EquityPreferred stock, no par, 5,000,000 shares authorized:Series B, 4% convertible, 2,250,000 shares designated;
1,710,060 and 1,643,304 shares issued and outstanding
    
    
    4,259,835
    
    
    
    3,922,532Series C, convertible, 1,400,000 shares designated;
1,269,036 shares issued and outstanding
    
    
    4,845,173
    
    
    
    Common stock, par value $0.01 per share; 25,000,000 shares
authorized; 7,549,180 and 7,253,785 shares issued and outstanding
    
    
    75,491
    
    
    
    72,538Additional paid-in capital
    
    
    21,458,389
    
    
    
    19,498,960Deferred stock based compensation
    
    
    (1,007,197
    )
    
    
    (498,463
    )Accumulated deficit
    
    
    (24,595,371
    )
    
    
    (17,859,606
    )Total shareholders equity
    
    
    5,036,320
    
    
    
    5,135,961Total liabilities and shareholders equity
    
    $
    22,503,667
    
    
    $
    13,391,762
  F-2




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XATA CORPORATION
STATEMENTS OF OPERATIONS
 Years Ended September 30,2005
    
    
    2004Net sales
    
    $
    19,302,489
    
    
    $
    18,931,579Cost of goods sold
    
    
    14,994,438
    
    
    
    12,599,328Gross profit
    
    
    4,308,051
    
    
    
    6,332,251Operating expensesSelling, general and administrative
    
    
    6,765,679
    
    
    
    5,060,261Research and development
    
    
    3,622,077
    
    
    
    2,428,06510,387,756
    
    
    
    7,488,326Operating loss
    
    
    (6,079,705
    )
    
    
    (1,156,075
    )Non-operating income (expense)Interest income
    
    
    95,594
    
    
    
    28,110Interest expense
    
    
    (31,688
    )
    
    
    (77,350
    )Other
    
    
    35,562
    
    
    
    14,35199,468
    
    
    
    (34,889
    )Net loss before income taxes
    
    
    (5,980,237
    )
    
    
    (1,190,964
    )Income taxes
    
    
    
    
    
    
    Net loss
    
    
    (5,980,237
    )
    
    
    (1,190,964
    )Preferred stock dividends
    
    
    (169,004
    )
    
    
    (135,851
    )Preferred stock deemed dividend
    
    
    (586,524
    )
    
    
    (729,912
    )Net loss to common shareholders
    
    $
    (6,735,765
    )
    
    $
    (2,056,727
    )Net loss per common share  basic and diluted:Net loss to common shareholders
    
    $
    (0.93
    )
    
    $
    (0.29
    )Weighted average common and
common share equivalents
Basic and Diluted
    
    
    7,211,866
    
    
    
    7,021,573
  F-3




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XATA CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
YEARS ENDED SEPTEMBER 30, 2005 AND 2004
 Series B
    
    Series C
    
    Additional
    
    DeferedCommon Stock
    
    Preferred Stock
    
    Preferred Stock
    
    Paid-In
    
    Stock-Based
    
    AccumulatedShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Deficit
    
    TotalBalance, September 30, 2003
    
    
    6,938,575
    
    
    $
    69,386
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    17,767,539
    
    
    $
    
    
    
    $
    (15,802,879
    )
    
    $
    2,034,046Common stock issued on exercise of options
    
    
    147,220
    
    
    
    1,472
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    418,329
    
    
    
    
    
    
    
    
    
    
    
    419,801Common stock issued on exercise of warrants
    
    
    28,470
    
    
    
    285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,512
    
    
    
    
    
    
    
    
    
    
    
    34,797Issuance of restricted shares of common stock
    
    
    139,520
    
    
    
    1,395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    601,815
    
    
    
    (603,210
    )
    
    
    
    
    
    
    Amortization of deferred stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,747
    
    
    
    
    
    
    
    104,747Issuance of common stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    25,000Issuance of preferred stock and warrants
    
    
    
    
    
    
    
    
    
    
    1,612,903
    
    
    
    3,115,398
    
    
    
    
    
    
    
    
    
    
    
    651,765
    
    
    
    
    
    
    
    
    
    
    
    3,767,163Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    30,401
    
    
    
    77,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135,851
    )
    
    
    (58,629
    )Preferred stock deemed dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    729,912
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (729,912
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,190,964
    )
    
    
    (1,190,964
    )Balance, September 30, 2004
    
    
    7,253,785
    
    
    $
    72,538
    
    
    
    1,643,304
    
    
    $
    3,922,532
    
    
    
    
    
    
    $
    
    
    
    $
    19,498,960
    
    
    $
    (498,463
    )
    
    $
    (17,859,606
    )
    
    $
    5,135,961Common stock issued on exercise of options
    
    
    117,884
    
    
    
    1,178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    403,720
    
    
    
    
    
    
    
    
    
    
    
    404,898Common stock issued on exercise of warrants
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of restricted shares of common stock
    
    
    197,100
    
    
    
    1,971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,016,263
    
    
    
    (1,018,234
    )
    
    
    
    
    
    
    Amortization of deferred stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    434,973
    
    
    
    
    
    
    
    434,973Elimination of deferred compensation related to
terminated employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74,527
    )
    
    
    74,527
    
    
    
    
    
    
    
    Forfeiture of restricted shares of common stock
    
    
    (19,644
    )
    
    
    (196
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    25,000Issuance of preferred stock and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,269,036
    
    
    
    4,426,391
    
    
    
    588,777
    
    
    
    
    
    
    
    
    
    
    
    5,015,168Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    66,756
    
    
    
    169,561
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (169,004
    )
    
    
    557Preferred stock deemed dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,742
    
    
    
    
    
    
    
    418,782
    
    
    
    
    
    
    
    
    
    
    
    (586,524
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,980,237
    )
    
    
    (5,980,237
    )Balance, September 30, 2005
    
    
    7,549,180
    
    
    $
    75,491
    
    
    
    1,710,060
    
    
    $
    4,259,835
    
    
    
    1,269,036
    
    
    $
    4,845,173
    
    
    $
    21,458,389
    
    
    $
    (1,007,197
    )
    
    $
    (24,595,371
    )
    
    $
    5,036,320
  F-4




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##### Table of Contents



XATA CORPORATION
STATEMENTS OF CASH FLOWS
 Years Ended September 30,2005
    
    
    2004Cash provided by (used in) operating activitiesNet loss
    
    $
    (5,980,237
    )
    
    $
    (1,190,964
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization of equipment and leasehold improvements
    
    
    265,988
    
    
    
    182,431Amortization of capitalized software development costs
    
    
    
    
    
    
    1,319,190Deferred compensation recognized
    
    
    434,973
    
    
    
    104,747Issuance of warrants for services rendered
    
    
    25,000
    
    
    
    25,000Changes in assets and liabilities:
    
    
    
    
    
    
    Accounts receivable, net
    
    
    2,310,699
    
    
    
    (1,961,894
    )Inventories
    
    
    190,507
    
    
    
    (123,881
    )Deferred product costs
    
    
    4,858,307
    
    
    
    (509,149
    )Prepaid expenses
    
    
    27,213
    
    
    
    (107,786)Accounts payable
    
    
    652,975
    
    
    
    271,757Accrued expenses
    
    
    578,513
    
    
    
    739,212Deferred revenue
    
    
    6,949,995
    
    
    
    2,413,347Net cash provided by (used in) operating activities
    
    
    4,405,093
    
    
    
    1,162,010Cash provided by (used in) investing activitiesPurchase of equipment
    
    
    610,366
    
    
    
    (219,035
    )Additions to software development costs
    
    
    284,731
    
    
    
    Purchases of short-term investments
    
    
    
    
    
    
    (3,989,802
    )Sales of short-term investments
    
    
    3,989,802
    
    
    
    Net cash provided by (used in) investing activities
    
    
    3,094,705
    
    
    
    4,208,837Cash provided by (used in) financing activitiesNet borrowings (payments) on bank line of credit
    
    
    1,281,992
    
    
    
    (274,176
    )Payments on long-term debt
    
    
    251,372
    
    
    
    (175,817
    )Net proceeds from issuance of preferred stock and warrants
    
    
    5,015,168
    
    
    
    3,767,163Proceeds from options and warrants exercised
    
    
    404,898
    
    
    
    454,598Net cash provided by financing activities
    
    
    6,450,686
    
    
    
    3,771,768Increase in cash and cash equivalents
    
    
    5,140,298
    
    
    
    724,941Cash and cash equivalentsBeginning
    
    
    1,332,695
    
    
    
    607,754Ending
    
    $
    6,472,993
    
    
    $
    1,332,695Supplemental disclosures of cash flow informationCash payments for interest
    
    $
    31,031
    
    
    $
    77,350Supplemental schedule of noncash investing and financing activitiesRestricted stock
    
    $
    1,018,234
    
    
    $
    603,210Preferred stock deemed dividends
    
    $
    586,524
    
    
    $
    729,912Deferred compensation for terminated employees
    
    $
    74,527
    
    
    $
    Forfeitures of restricted stock
    
    $
    196
    
    
    $
    
  F-5




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 1. Description of Business
  Note 2. Summary of Significant Accounting Policies
 Revenue Recognition
 Software Revenue Recognition Software Revenue Recognition with Respect to Certain Transactions Revenue Recognition in Financial
Statements
   F-6




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 2. Summary of Significant Accounting Policies, continued
   Segment Reporting
  Use of Estimates
  Cash Equivalents and Short-Term Investments
   Concentration of Credit Risk
  F-7




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 2. Summary of Significant Accounting Policies, continued
  Fair value of Financial Instruments
  Inventories
  Equipment and Leasehold Improvements
  F-8




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 2. Summary of Significant Accounting Policies, continued
  September 30,2005
    
    
    2004Office furniture and equipment
    
    $
    1,661,512
    
    
    $
    1,150,962Engineering and manufacturing equipment
    
    
    453,789
    
    
    
    388,424Capitalized software development costs
    
    
    284,731
    
    
    
    Leasehold improvements
    
    
    59,399
    
    
    
    24,9482,459,431
    
    
    
    1,564,334Less: accumulated depreciation and amortization
    
    
    (1,374,292
    )
    
    
    (1,108,304
    )Property and equipment, net
    
    $
    1,085,139
    
    
    $
    456,030
   Long-Lived Assets
  Product Warranties
   F-9




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 2. Summary of Significant Accounting Policies, continued
 Shipping and Handling Costs
  Advertising Costs
  Research and Development Costs
 Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
 Income taxes
 Accounting for
Income Taxes
 F-10




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 2. Summary of Significant Accounting Policies, continued
 Stock-Based Compensation
 Accounting for Stock Issued to
Employees Accounting for
Stock-Based Compensation
 2005
    
    
    2004Net loss to common shareholders, as reported
    
    $
    (6,735,765
    )
    
    $
    (2,056,727
    )Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards, net of
related tax effects
    
    
    (155,000
    )
    
    
    (269,000
    )Pro forma net loss
    
    $
    (6,890,765
    )
    
    $
    (2,325,727
    )Basic and diluted net loss
per common share
As reported
    
    $
    (0.93
    )
    
    $
    (0.29
    )Pro forma
    
    
    (0.96
    )
    
    
    (0.33
    )
 Reclassifications
  F-11




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 2. Summary of Significant Accounting Policies, continued
 Major Customers
  Year Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Percentage of Net Sales
    
    
    Balance of Ending ReceivableCustomer A
    
    
    *
    
    
    
    27.0
    %
    
    
    *
    
    
    $
    1,006,000
 
 *
    
    Customer total was less than 10 percent of net sales or ending receivable.  Recently Issued Accounting Standards
 Shared-Based Payment (Statement 123)
 Shared-Based Payment, Accounting for
Stock-Based Compensation. Accounting for Stock
Issued to Employees, Statement of Cash Flows.
 Accounting Changes and Error Corrections (Statement 154)
 Accounting Changes and Error Corrections  a
replacement of APB Opinion No. 20 and FASB Statement No. 3 Accounting Changes
 F-12




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 2. Summary of Significant Accounting Policies, continued
  Exchange of Nonmonetary Assets (Statement 153)
 Exchange of Nonmonetary Assets
 Note 3. Inventories
  September 30,2005
    
    
    2004Raw materials and subassemblies
    
    $
    686,443
    
    
    $
    552,108Finished goods
    
    
    571,098
    
    
    
    514,926Total inventories
    
    $
    1,257,541
    
    
    $
    1,067,034
 Note 4. Bank Line of Credit
  Note 5. Long-Term Debt
  F-13




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 6. Net Loss Per Share
   2005
    
    
    2004Net loss
    
    $
    (5,980,237
    )
    
    $
    (1,190,964
    )Less: preferred stock dividend
    
    
    (169,004
    )
    
    
    (135,851
    )Less: preferred stock deemed dividend
    
    
    (586,524
    )
    
    
    (729,912
    )Net loss to common shareholders
    
    
    (6,735,765
    )
    
    
    (2,056,727
    )Weighted average shares outstanding
    
    
    7,211,866
    
    
    
    7,021,573Basic and diluted loss per share
    
    $
    (0.93
    )
    
    $
    (0.29
    )
  Note 7. Income Taxes
  September 30,2005
    
    
    2004Current deferred tax assets:Inventory and warranty reserve
    
    $
    407,000
    
    
    $
    235,000Accrued expenses, deferred revenue and other
    
    
    171,000
    
    
    
    125,000Accounts receivable and sales reserve
    
    
    116,000
    
    
    
    109,000694,000
    
    
    
    469,000Non-current deferred tax assets:Software development costs
    
    
    (105,000
    )
    
    
    Depreciation
    
    
    (39,000
    )
    
    
    (40,000
    )Research and development credit
    
    
    1,166,000
    
    
    
    976,000Net operating loss carryforwards
    
    
    7,880,000
    
    
    
    5,790,0008,902,000
    
    
    
    6,726,000Total deferred tax asset
    
    
    9,596,000
    
    
    
    7,195,000Less: valuation allowance
    
    
    (9,596,000
    )
    
    
    (7,195,000
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 F-14




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 7.
Income Taxes, continued
   September 30,2005
    
    
    2004Statutory federal rate applied to loss before income taxes
    
    $
    (2,033,000
    )
    
    $
    (405,000
    )State income tax benefit
    
    
    (179,000
    )
    
    
    (36,000
    )Permanent differences
    
    
    4,000
    
    
    
    10,000Change in valuation allowance
    
    
    2,401,000
    
    
    
    591,000Research and development credit
    
    
    (190,000
    )
    
    
    (159,000
    )Other
    
    
    (3,000
    )
    
    
    (1,000
    )$
    
    
    
    $
    Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    $
    
    
    
    $
    
   Note 8. Commitments
 Leases
   Years ending September 30:2006
    
    $
    180,0002007
    
    
    54,000
  F-15




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 8.
Commitments, continued
 Reseller Commitment
  401(k) Plan
  Note 9. Shareholders Equity
 Common Stock
  Preferred Stock
  Series B
   F-16




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 9. Shareholders Equity, continued
       Series C
  F-17




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 9. Shareholders Equity, continued
  
    Stock Option Plans
  F-18




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 9. Shareholders Equity, continued
  2005
    
    
    2004Weighted-Average
    
    
    
    
    
    
    Weighted-AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOptions outstanding at beginning of year
    
    
    689,788
    
    
    $
    3.76
    
    
    
    828,115
    
    
    $
    3.56Options granted
    
    
    25,000
    
    
    
    5.23
    
    
    
    28,000
    
    
    
    3.96Options exercised
    
    
    (117,884
    )
    
    
    3.43
    
    
    
    (147,220
    )
    
    
    2.85Options canceled
    
    
    (39,351
    )
    
    
    4.48
    
    
    
    (19,107
    )
    
    
    2.62Options outstanding at end of year
    
    
    557,553
    
    
    $
    3.84
    
    
    
    689,788
    
    
    $
    3.76
 Options Outstanding
    
    
    
    
    
    
    Options ExercisableWeighted-AverageNumber Outstanding
    
    
    Remaining
    
    
    
    
    
    
    Number Exercisableat September 30,
    
    
    Contractual Life
    
    
    Weighted Average
    
    
    at September 30,
    
    
    Weighted AverageRange of exercise price
    
    2005
    
    
    (Years)
    
    
    Exercise Price
    
    
    2005
    
    
    Exercise Price$2.38  $3.25
    
    
    128,350
    
    
    
    0.69
    
    
    $
    3.02
    
    
    
    128,350
    
    
    $
    3.02$3.30  $4.00
    
    
    221,097
    
    
    
    1.65
    
    
    
    3.73
    
    
    
    188,698
    
    
    
    3.72$4.13  $5.23
    
    
    208,106
    
    
    
    1.81
    
    
    
    4.46
    
    
    
    201,237
    
    
    
    4.47557,553
    
    
    
    1.49
    
    
    $
    3.84
    
    
    
    518,285
    
    
    $
    3.84
  Restricted Stock Awards
   F-19




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##### Table of Contents



XATA CORPORATION
NOTES TO FNANCIAL STATEMENTS
 Note 9. Shareholders Equity, continued
 Common stock warrants
   Weighed-Average
    
    Weighted AverageDate
    
    Warrants Outstanding
    
    Exercise Price
    
    Remaining LifeSeptember 30, 2005
September 30, 2004
    
    1,019,026
639,105
    
    $3.43
$3.10
    
    3.83 years
4.13 years
 Note 10. Related Party Transactions
  Note 11. Subsequent Events (unaudited)
 .
 F-20




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##### Table of Contents



PART III
 
 Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section
16(a) of the Exchange Act
   
 Item 10. Executive Compensation
  Equity Compensation Plan Information
   
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  
 Item 12. Certain Relationships and Related Transactions
  
 Item 13. Exhibits and Reports on Form 8-K
 Reports on Form 8-K
  26




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##### Table of Contents



Exhibits
 ExhibitNo.
    
    Description of Exhibits3.1
    
    Restated Articles of Incorporation, as amended (1)3.2
    
    Bylaws (1)3.3
    
    Amended and Restated Bylaws, effective February 26, 2002 (12)4.1
    
    Form of certificate representing the Common Stock (1)4.2
    
    Certificate of Designation of Preferences of Series B Preferred Stock (17)4.3
    
    Form of Trident Warrants (17)4.4
    
    Form of Cherry Tree Warrants (17)4.5
    
    Certificate of Designation (21)4.6
    
    Form of Trident Warrants (21) The Company issued 5 warrants which
are identical except as to holder and number of shares. The holders and their
respective share amounts are as follows:
 Holder
    
    Number of Warrant SharesTrident Capital Fund-V, L.P.
    
    
    335,939Trident Capital Fund-V Affiliates Fund, L.P.
    
    
    1,953Trident Capital Fund-V Affiliates Fund (Q), L.P.
    
    
    1,863Trident Capital Fund-V Principals Fund, L.P.
    
    
    9,723Trident Capital Parallel Fund-V, C.V.
    
    
    25,522
 9.0
    
    Voting Agreement (17)9.1
    
    Amended and Restated Voting Agreement (21)10.1
    
    Lease (for Office and Manufacturing Facilities), dated September 11, 1986,
Letter Agreement and Amendment No. 1 to lease dated July 10, 1992, and
Amendment No. 2 to Lease (1)10.2
    
    Agreements with Dennis R. Johnson regarding employment (1)10.3
    
    Agreements with William P. Flies regarding employment (1)10.4
    
    1991 Long-Term Incentive and Stock Option Plan, as amended by the Board of
Directors in May 1997 subject to ratification by the shareholders10.5
    
    Purchase Agreement with Ryder Dedicated Logistics, Inc. dated December 31,
1994, with supplemental agreement dated September 1, 1995 (2)10.7
    
    Lease dated December 26, 1996 with Hoyt Properties, Inc. for new corporate
headquarters (3)10.8
    
    Letter of Agreement with William Callahan regarding compensation (4)10.9
    
    Credit Agreement with Norwest Business Credit, Inc., dated October 23, 1998 and
Amendments dated November 30, 1998 and January 8, 1999 (5)10.10
    
    Master Security Agreement and Promissory Note with GE Capital Corporation
Commercial Asset Funding, dated August 6, 1998 (5)10.11
    
    Separation Agreement with Dennis R. Johnson (6)10.12
    
    Separation Agreement with William Callahan (6)10.13
    
    Amendment to Credit Agreement with Norwest Bank dated December 1, 1999 (6)10.14
    
    Sublease Agreement with Kavoras, Inc. dated September 1, 1999 (6)10.15
    
    Stock Purchase Agreement with JDSTG, dated August 30, 2000 (7)10.16
    
    Registration Rights Agreement with JDSTG dated August 30, 2000 (7)10.17
    
    Amendment No. 1, dated October 31, 2000, to Stock Purchase Agreement with
JDSTG (9)10.18
    
    Side Agreement with JDSTG dated December 28, 2000 (8)10.19
    
    Employment Agreement dated October 1, 2000 with William P. Flies, Chief
Executive Officer (10)10.20
    
    Employment Agreement dated January 15, 2001 with John G. Lewis, Chief Financial Officer (10)
 27




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##### Table of Contents



Holder
    
    Number of Warrant Shares10.21
    
    Employment Agreement dated October 1, 2000 with Thomas N. Flies, Senior Vice
President of Product Development (10)10.22
    
    Employment Agreement dated October 1, 2000 with Joel G. Jorgenson, Senior Vice
President of Sales (10)10.23
    
    Employment Agreement dated February 5, 2001 with J. Perry McGahan, Vice
President of Software Engineering (11)10.24
    
    Employment Agreement dated February 20, 2002 with Craig S. Fawcett, Chief
Executive Officer (12)10.25
    
    Financing Agreement and Revolving Note with Itasca Business Credit, Inc. dated
December 23, 2002 (13)10.26
    
    Form of Warrant issued to directors as equity compensation (13),
(14)10.27
    
    Employment Agreement dated October 1, 2002 with William P. Flies, Chief
Technical Officer (15)10.28
    
    First Lease Amendment dated May 5, 2003 which amends Lease dated December 27,
1996 with Hoyt Properties for Burnsville, Minnesota corporate headquarters
(15)10.29
    
    Separation Agreement and Release dated June 11, 2003 with William P. Flies,
Chief Technical Officer (16)10.30
    
    Trident Investor Indemnification Agreement (17)10.31
    
    Trident Director Indemnification Agreement (17)10.32
    
    Common Stock Warrant and Series B Preferred Stock Purchase Agreement (17)10.33
    
    First Amendment to Financing Agreement and Restated Revolving Note with Itasca
Business Credit, Inc.10.34
    
    Amended Restricted Stock Award Agreement (18)10.35
    
    Loan and Security Agreement with Silicon Valley Bank10.36
    
    Form of Directors Restricted Stock Award Agreement (19)
An award in this form was granted to each director of the company.10.37
    
    Ties restricted stock award (20)10.38
    
    Ties change of control agreement (20)10.39
    
    Common stock warrant & Series C Preferred Stock Purchase Agreement (21)The Schedule of Exceptions to Representations, Warranties, and Covenants of
the Company has been omitted, but will be provided to the Commissioner upon
request.10.40
    
    First Amendment to Loan and
Security Agreement dated December 16, 2005 with Silicon Valley
Bank*11
    
    Computation of Earnings Per Share*14
    
    Amended Code Of Ethics For Principal Executive Officer And Senior Financial
Officers (22)23
    
    Consent of Grant Thornton LLP, independent registered public accounting firm*31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 *32.2
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 *99.1
    
    Fiscal Year 2005 Definitive Proxy Materials (portions of which are incorporated
herein by reference) (23)
 
 *
    
    Filed herewith(1)
    
    Incorporated by reference to exhibit filed as a part of Registration Statement on Form S-2
(Commission File No. 33-98932). 28




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##### Table of Contents



(2)
    
    Incorporated by reference to exhibit filed as a part of Report on Form 10-QSB for the fiscal
quarter ended March 31, 1995. Certain segments have been granted confidential treatment.(3)
    
    Incorporated by reference to exhibit filed as a part of Report on Form 10-QSB for the fiscal
quarter ended March 31, 1997.(4)
    
    Incorporated by reference to exhibit filed as a part of Report on Form 10-KSB for fiscal year
ended September 30, 1997.(5)
    
    Incorporated by reference to exhibit filed as a part of Report on Form 10-KSB for fiscal year
ended September 30, 1998.(6)
    
    Incorporated by reference to exhibit filed as a part of Report on Form 10-KSB for fiscal year
ended September 30, 1999.(7)
    
    Incorporated by reference to exhibit filed as a part of Report on Form 8-K on September 7,
2000.(8)
    
    Incorporated by reference to exhibit filed as a part of Report on Form 10-KSB for the fiscal
year ended September 30, 2000.(9)
    
    Incorporated by reference to exhibit filed as a part of Report on Form 8-K on November 2,
2000.(10)
    
    Incorporated by reference to exhibit filed as part of Report on Form 10-QSB for the fiscal
quarter ended December 31, 2000.(11)
    
    Incorporated by reference to exhibit filed as part of Report on Form 10-QSB for the fiscal
quarter ended March 31, 2001.(12)
    
    Incorporated by reference to exhibit filed as part of Report on Form 10-QSB for the fiscal
quarter ended March 31, 2002.(13)
    
    Incorporated by reference to exhibit filed as part of Report on Form 10-KSB for the fiscal
year ended September 30, 2002.(14)
    
    Warrants substantially identical to the warrant filed as Exhibit 10.26 have been issued and
are outstanding as follows: Holder
    
    Date of Issuance
    
    Exercise Price
    
    Number of SharesRichard Bogen
    
    5/14/00
    
    
    4.50
    
    
    
    5,000Stephen Lawrence
    
    9/17/01
    
    
    3.69
    
    
    
    10,000
 (15)
    
    Incorporated by reference to exhibit filed as part of Report on Form 10-QSB for the fiscal
quarter ended March 31, 2003.(16)
    
    Incorporated by reference to exhibit filed as part of Report on Form 10-QSB for the fiscal
quarter ended June 30, 2003.(17)
    
    Incorporated by reference to exhibit filed as part of Report on Form 8-K on December 9, 2003.(18)
    
    Form of Amended Restricted Stock Award Agreement for awards granted to Craig S. Fawcett, John
G. Lewis, Peter A. Thayer, Mark W. Engel and Thomas N. Flies. The award agreements are
identical for each individual except for name, dates and number of shares. Incorporated by
reference to exhibit file as part of Report on Form 10-KSB for the fiscal year ended September
30, 2004.(19)
    
    Incorporated by reference to exhibit filed as part of Report on Form 8-K on February 18,
2005.(20)
    
    Incorporated by reference to exhibit filed as part of Report on Form 8-K on April 12, 2005.(21)
    
    Incorporated by reference to exhibit filed as part of Report on Form 8-K on September 22,
2005. 29




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##### Table of Contents



(22)
    
    Incorporated by reference to exhibit filed as part of Report on Form 10-KSB for the fiscal
year ended September 30, 2004(23)
    
    To be filed in definitive form not later than January 14, 2006 
 Item 14. Principal Accountant Fees and Services
  30




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##### Table of Contents



SIGNATURES
  XATA CORPORATIONDated:  December 22, 2005
    By:
    /s/     Craig S. FawcettCraig S. Fawcett, Chairman and Chief Executive Officer   (Principal executive officer)  Dated:  December 22, 2005
    By:
    /s/     Richard L. BogenRichard L. Bogen, DirectorDated:  December 22, 2005
    By:
    /s/     Craig S. FawcettCraig S. Fawcett, Chairman and Chief Executive OfficerDated:  December 22, 2005
    By:
    /s/     Carl M. FredericksCarl M. Fredericks, DirectorDated:  December 22, 2005
    By:
    /s/     Roger W. KleppeRoger W. Kleppe, DirectorDated:  December 22, 2005
    By:
    /s/     Stephen A. LawrenceStephen A. Lawrence, DirectorDated:  December 22, 2005
    By:
    /s/     Mark E. TiesMark E. Ties, Chief Financial Officer (Principalaccounting and financial officer)Dated:  December 22, 2005
    By:
    /s/     Christopher P. MarshallChristopher P. Marshall, DirectorDated:  December 22, 2005
    By:
    /s/     Charles R. Stamp, Jr.Charles R. Stamp, Jr., Director 31




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##### Table of Contents



INDEX TO EXHIBITS
 IndexNumber
    
    Description10.40
    
    First Amendment to Loan and
Security Agreement dated December 16, 2005 with Silicon Valley Bank11
    
    Earnings per share23
    
    Consent of Grant Thornton LLP, independent registered public accounting firm*31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 32