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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-QSB þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended December 31, 2004 or o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to Commission File Number:
    
    0-27166
 XATA Corporation 
  Minnesota
    
    41-1641815(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)
 151 E. Cliff Road, Suite 10, Burnsville, Minnesota
    
    55337(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone
number, including area code:      
(952) 707-5600    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o APPLICABLE ONLY TO CORPORATE ISSUERS:    1




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XATA CorporationIndex  
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets as of December 31, 2004 and September 30, 2004
    
    
    3Statements of Operations for the Three Months Ended December 31, 2004 and 2003
    
    
    5Statements of Cash Flows for the Three Months Ended December 31, 2004 and 2003
    
    
    6Notes to Financial Statements
    
    

    7Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    14Item 3. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults upon Senior Securities
    
    
    21Item 4.
Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    
    21SIGNATURESEXHIBITSEarnings Per Share ComputationCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements XATA CORPORATION 
 BALANCE SHEETS
DECEMBER 31, 2004 AND SEPTEMBER 30, 2004
(UNAUDITED)
 December 31,
    
    
    September 30,2004
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    6,081,715
    
    
    $
    5,322,497Accounts receivable, less allowances for doubtful accounts
and sales returns of $296,000 and $293,000
    
    
    3,491,655
    
    
    
    5,500,832Inventories
    
    
    968,176
    
    
    
    1,067,034Deferred product costs
    
    
    980,485
    
    
    
    511,079Prepaid expenses
    
    
    188,982
    
    
    
    230,809Total current assets
    
    
    11,711,013
    
    
    
    12,632,251Equipment and Leasehold Improvements, at costEngineering and manufacturing equipment
    
    
    398,749
    
    
    
    388,424Office furniture and equipment
    
    
    1,468,075
    
    
    
    1,150,962Leasehold improvements
    
    
    24,948
    
    
    
    24,9481,891,772
    
    
    
    1,564,334Less: accumulated depreciation and amortization
    
    
    (1,159,762
    )
    
    
    (1,108,304
    )Total equipment and leasehold improvements
    
    
    732,010
    
    
    
    456,030Other AssetsDeferred product costs, net of current portion
    
    
    489,646
    
    
    
    303,481Total assets
    
    $
    2,932,669
    
    
    $
    13,391,762
 See Notes to Financial Statements 3




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December 31,
    
    
    September 30,2004
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesBank line of credit
    
    $
    
    
    
    $
    518,008Current maturities of long-term debt
    
    
    
    
    
    
    231,403Accounts payable
    
    
    1,078,606
    
    
    
    1,733,932Accrued expenses
    
    
    1,107,057
    
    
    
    1,592,808Deferred revenue
    
    
    4,380,008
    
    
    
    2,657,882Total current liabilities
    
    
    6,565,671
    
    
    
    6,734,033Long-Term Debt, net of current maturities
    
    
    
    
    
    
    19,969Deferred Revenue, net of current portion
    
    
    2,009,393
    
    
    
    1,501,799Total liabilities
    
    
    8,575,064
    
    
    
    8,255,801Commitments
    
    
    
    
    
    
    Shareholders EquityPreferred stock, 4% convertible, 5,000,000 shares
authorized; 1,676,800 and 1,643,304 shares issued
    
    
    4,117,814
    
    
    
    3,922,532Common stock, par value $0.01 per share; 25,000,000 shares
authorized; 7,279,446 and 7,253,785 shares issued
    
    
    72,794
    
    
    
    72,538Additional paid-in capital
    
    
    19,171,014
    
    
    
    19,000,497Accumulated deficit
    
    
    (19,004,017
    )
    
    
    (17,859,606
    )Total shareholders equity
    
    
    4,357,605
    
    
    
    5,135,961Total liabilities and shareholders equity
    
    $
    12,932,669
    
    
    $
    13,391,762
 See Notes to Financial Statements 4




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XATA CORPORATION 
 STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
 December 31,
    
    
    December 31,2004
    
    
    2003Net sales
    
    $
    4,538,349
    
    
    $
    3,269,932Cost of goods sold
    
    
    3,061,754
    
    
    
    2,116,343Gross profit
    
    
    1,476,595
    
    
    
    1,153,589Operating expensesSelling, general and administrative
    
    
    1,490,495
    
    
    
    1,053,127Research and development
    
    
    996,404
    
    
    
    533,4462,486,899
    
    
    
    1,586,573Operating loss
    
    
    (1,010,304
    )
    
    
    (432,984
    )Non-operating income (expense)Interest income
    
    
    23,527
    
    
    
    713Interest expense
    
    
    (9,854
    )
    
    
    (23,492
    )Other
    
    
    2,791
    
    
    
    1,17216,464
    
    
    
    (21,607
    )Net loss before income taxes
    
    
    (993,840
    )
    
    
    (454,591
    )Income taxes
    
    
    
    
    
    
    Net loss
    
    
    (993,840
    )
    
    
    (454,591
    )Preferred stock dividends and deemed dividend
    
    
    (150,571
    )
    
    
    (639,907
    )Loss to common shareholders
    
    $
    (1,144,411
    )
    
    $
    (1,094,498
    )Loss per common share  basic and diluted:Net loss
    
    $
    (0.15
    )
    
    $
    (0.07
    )Loss to common shareholders
    
    
    (0.16
    )
    
    
    (0.16
    )Weighted average common and
common share equivalentsBasic and Diluted
    
    
    7,130,558
    
    
    
    6,950,376
 See Notes to Financial Statements 5




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XATA CORPORATION 
 STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
 Three Months EndedDecember 31,2004
    
    
    2003Cash provided by operating activitiesNet loss
    
    $
    (993,840
    )
    
    $
    (454,591
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization of equipment and leasehold improvements
    
    
    51,458
    
    
    
    47,217Amortization of capitalized software development costs
    
    
    
    
    
    
    327,816Deferred compensation recognized
    
    
    50,268
    
    
    
    Issuance of warrants for services rendered
    
    
    25,000
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    2,009,177
    
    
    
    1,105,972Inventories
    
    
    98,858
    
    
    
    (235,755
    )Accounts payable
    
    
    (655,326
    )
    
    
    (623,301
    )Deferred revenue
    
    
    2,229,720
    
    
    
    15,502Accrued expenses
    
    
    (441,040
    )
    
    
    20,868Deferred product costs
    
    
    (655,571
    )
    
    
    46,044Prepaid expenses
    
    
    41,827
    
    
    
    40,265Net cash provided by operating activities
    
    
    1,760,531
    
    
    
    290,037Cash used in investing activitiesPurchase of equipment
    
    
    (327,438
    )
    
    
    (2,773
    )Net cash used in investing activities
    
    
    (327,438
    )
    
    
    (2,773
    )Cash provided by (used in) financing activitiesNet payments on bank line of credit
    
    
    (518,008
    )
    
    
    (518,320
    )Payments on long-term debt
    
    
    (251,372
    )
    
    
    (7,421
    )Net proceeds from issuance of preferred stock
    
    
    
    
    
    
    3,767,163Proceeds from options and warrants exercised
    
    
    95,505
    
    
    
    47,666Net cash provided by (used in) financing activities
    
    
    (673,875
    )
    
    
    3,289,088Increase in cash and cash equivalents
    
    
    759,218
    
    
    
    3,576,352Cash and cash equivalentsBeginning
    
    
    5,322,497
    
    
    
    607,754Ending
    
    $
    6,081,715
    
    
    $
    4,184,106Supplemental disclosures of cash flow informationCash payments for interest
    
    $
    9,854
    
    
    $
    23,492Supplemental schedule of noncash investing and financing activitiesPreferred stock dividends payable
    
    $
    13,918
    
    
    $
    10,925Preferred stock dividends paid
    
    $
    85,081
    
    
    $
    Preferred stock deemed dividends
    
    
    110,202
    
    
    
    628,982
 See Notes to Financial Statements 6




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NOTES TO FINANCIAL STATEMENTS Note 1. Management Statement Financial statements for the interim periods included herein are unaudited; however, in the opinion
of management of the Company, the accompanying unaudited financial statements contain all
adjustments (consisting of only normal, recurring accruals) necessary to present fairly the
financial position of the Company as of December 31, 2004, the results of operations and cash flows
for the three months ended December 31, 2004 and 2003. The results of operations for any interim
period are not necessarily indicative of the results for the fiscal year ending September 30, 2005.
These interim financial statements should be read in conjunction with the Companys annual
financial statements and related notes thereto included in the Companys Form 10-KSB and Annual
Report to shareholders for the fiscal year ended September 30, 2004. The balance sheet as of
September 30, 2004 included herein is derived from the audited balance sheet as of that date. Note 2. Significant Accounting Policies Revenue recognition:The Company derives its revenue from sales of hardware, software and related
services, and from application service contracts. The Company recognizes revenue in accordance
with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, and
Securities and Exchange Commission Staff Accounting Bulletin (SAB) 101, Revenue Recognition in
Financial Statements. Hardware and software revenue is recognized under SOP 97-2 and SAB 101 when (i) persuasive evidence
of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has
occurred, as evidenced by shipping documents and customer acceptance, (iii) the fee is fixed or
determinable and payable within twelve months, and (iv) collectibility is probable and supported by
credit checks or past payment history. Pursuant to certain contractual arrangements, revenues are
recognized for completed systems held at the Companys warehouse pending the receipt of delivery
instructions from the customer. As of December 31, 2004, the Company had approximately $25,000 of
systems on hand that had been billed to those customers awaiting specific delivery instructions. Many of the Companys customers purchase software maintenance agreements annually. Customers may
also purchase extended warranty and service support contracts. Revenue from maintenance
agreements, extended warranties and service support contracts are deferred and recognized ratably
over the contract period. Fees for professional services are recognized as they are performed. With regard to software arrangements involving multiple elements, the Company allocates revenue to
each element based on the relative fair value of each element. The Companys determination of fair
value of each element in multiple-element arrangements is based on vendor-specific objective
evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged
when the same element is sold separately. The Company has analyzed all of the elements included in
its multiple-element arrangements and has determined that it has sufficient VSOE to allocate
revenue to post-contract customer support (PCS) components of its license arrangements. VSOE for
PCS is determined based upon the customers annual renewal rates for these elements. Accordingly,
assuming all other revenue recognition criteria are met, revenue from perpetual licenses is
recognized upon delivery, and revenue from PCS is recognized ratably over the applicable term,
typically one year. 7




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Application service revenue, which is composed of monthly fees, is recognized ratably over the
minimum service contract period, which commences upon the activation of the mobile application
module. When system products are sold in conjunction with an application service contract, the
Company defers the product revenue and associated product costs (deferred product costs) at
shipment and recognizes both ratably over the expected contract term, which to date has been the
minimum service contract  generally a one to five year period. The Company accounts for the resale of certain satellite and other wireless communication services
in conjunction with its products based on the gross amount billed to customers. Cash and cash equivalents:The Company considers all highly liquid temporary investments with an
original maturity of 120 days or less to be cash equivalents. The Company maintains its cash in
bank deposit and money market accounts, which, at times, exceed federally, insured limits. The
Company invests excess cash in commercial paper and other liquid investments. The Company has not
experienced any losses in such accounts. Allowance for doubtful accounts and sales returns:The Company grants credit to customers in the
normal course of business. The majority of the Companys accounts receivable are due from
companies with fleet trucking operations in a variety of industries. Credit is extended based on
an evaluation of a customers financial condition and, generally, collateral is not required.
Accounts receivable are typically due from customers within 30 days and are stated at amounts due
from customers net of an allowance for doubtful accounts and sales returns. Accounts outstanding
longer than the contractual payment terms are considered past due. The Company determines its
allowance for doubtful accounts by considering a number of factors, including the length of time
trade receivables are past due, the Companys previous loss history, the customers current ability
to pay its obligation to the Company, and the condition of the general economy and the industry as
a whole. The Company reserves for these accounts receivable by increasing bad debt expense when
determined to be uncollectible. Payments subsequently received, or otherwise determined to be
collectible, are treated as recoveries that reduce bad debt expense. The Company determines its
allowance for sales returns by considering several factors, including history of prior sales
credits issued. The Company regularly assesses the allowance for sales returns and adjusts it as
needed. When the Company accepts a product return or issues a sales credit for which it had
specifically increased the allowance, it writes-off the associated accounts receivable and
decreases the allowance for sales returns. Inventories:Inventories are stated at the lower of cost or market. Cost is determined on the
standard cost method, which approximates the first-in, first-out method. Capitalized software development costs:Software development costs incurred after establishing
technological feasibility are capitalized. These costs are amortized to cost of goods sold
beginning when the product is first released for sale to the general public. The dollar amount
amortized is the greater of the amount computed using the ratio of current gross revenues for the
product to the total of current and anticipated future gross revenues or the straight-line method
over the estimated economic life of the product (two to five years). The Company reviews its
long-lived assets periodically to determine potential impairment by comparing the carrying value of
the long-lived assets with estimated future cash flows expected to result from the use of the
assets, including cash flows from disposition. If the sum of the expected future cash flows is
less than the carrying values, the Company will recognize an impairment loss. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds the fair value of the
long-lived assets. 8




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Research and development costs:Expenditures for research and development activities performed by
the Company are charged to operations as incurred. Equipment and Leasehold Improvements:Expenditures exceeding $1,000 with an expected useful
life greater than one year are capitalized. Net loss per share:Basic and diluted net loss of $0.15 per common share is computed by
dividing the net loss of $993,840, less preferred stock dividends of $40,370, by the weighted
average common shares outstanding for the quarter of 7,130,558. Common stock equivalent shares consist of convertible preferred stock (using the if-converted
method), stock options and warrants (using the treasury stock method), and the unvested portion of
issued restricted stock. Common stock equivalents as of December 31, 2004 and 2003 included
445,339 and 11,227 shares related to stock options and warrants. Additional common stock
equivalents as of December 31, 2004 and 2003 include 1,676,800 and 1,612,903 shares of convertible
preferred stock and 136,181 unvested shares of restricted stock as of December 31, 2004. There
were no common stock equivalents as of December 31, 2003 related to unvested restricted stock.
Because the Company incurred losses for the three months ended December 31, 2004 and 2003, the
inclusion of common stock equivalent shares in the calculation of diluted loss per common share
would have an antidilutive effect. Therefore, the basic and diluted loss per common share is the
same for the three-month periods ending December 31, 2004 and 2003. Stock-based compensation:The Company utilizes the intrinsic value method to account for its
stock-based employee compensation plan. Under this method, compensation expense is recognized for
the amount by which the market price of the common stock on the date of grant exceeds the exercise
price of an option. No compensation costs related to employee stock option grants have been
recognized in the consolidated Statements of Operations because all options have been issued with
an exercise price that was equal to the market price on the date of issuance. The following table
illustrates the effect on net loss if the Company had applied the fair value method. Three Months EndedDecember 31,2004
    
    
    2003Net loss, as reported
    
    $
    (993,840
    )
    
    $
    (454,591
    )Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards, net of
related tax effects
    
    
    (40,000
    )
    
    
    (67,000
    )Pro forma net loss
    
    $
    (1,033,840
    )
    
    $
    (521,591
    )Basic and diluted net loss
per common shareAs reported
    
    $
    (0.14
    )
    
    $
    (0.07
    )Pro forma
    
    
    (0.14
    )
    
    
    (0.08
    )
 Restricted stock awards:The Company recently changed its long-term incentive compensation
practices by granting restricted shares of common stock rather than stock options. The Company did
not grant any
restricted shares of common stock to employees in the three months 9




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ended December 31, 2004. During
this three-month period, 3,339 shares of restricted stock were forfeited when an employee left the
Company. Each grant of restricted shares vests over three years and shares granted may not be sold
until three years after the date of grant. In the three months ended December 31, 2004, the
Company amortized $50,268 of deferred compensation related to restricted stock awards. Common stock warrants:The Company has, on occasion, issued warrants for the purchase of common
stock to directors and consultants. In the three-month period ended December 31, 2004, the Company
issued Williams Executive Search warrants to purchase 9,921 shares of common stock at an exercise
price of $5.74 per share in exchange for $25,000 in professional services. At December 31, 2004 and 2003, warrants were outstanding to purchase a total of 649,026 and 637,821
shares of common stock at a weighted-average exercise price of $3.14 and $3.04 per share, with a
weighted-average remaining life of approximately 3.90 years and 4.81 years. Note 3. Commitments Reseller Commitment On October 11, 2002, the Company entered into a U.S. Value Added Reseller Agreement with ORBCOMM
LLC. Pursuant to this agreement, the Company is authorized to resell certain satellite
communication services in conjunction with its products. In exchange for favorable pricing, the
Company has committed to certain volume minimums. On March 30, 2003, the Company and ORBCOMM
amended this agreement by revising certain commitment dates. Approximate future minimum purchases
in excess of units already activated under customer agreements are as follows: Fiscal Years ending September 30:2005
    
    $
    364,0002006
    
    
    917,000
 Note 4. Corporate Liquidity On December 6, 2003, the Company entered into a Common Stock Warrant and Series B Preferred Stock
Purchase Agreement with several entities associated with Trident Capital, Inc. (Trident), under
which Trident purchased 1,612,903 shares of Series B Preferred Stock for $4,096,774, or $2.54 per
share (see Note 6). On December 17, 2004 the Company established a new line of credit with Silicon Valley Bank.
Advances under the line of credit accrue interest at the prime rate, or 5.25% as of December 31,
2004. The line is subject to borrowing base requirements and is collateralized by substantially
all the assets of the Company. The agreement expires on December 16, 2005. The Company believes its current cash balance, line of credit and vendor terms will provide
adequate cash to fund operating needs for the foreseeable future. However, a protracted decline in
revenue, significant revenue growth or an increase in product development in the near term may
require the Company to obtain additional external funding. Moreover, it is possible that the
Companys cash needs may vary significantly from its predictions, due to failure to generate
anticipated cash flow or other reasons. No assurance can be given that the Companys predictions
regarding its cash needs will prove accurate, that the Company will not require additional
financing, that the Company will be able 10




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to secure any required additional
financing when needed, or that such financing, if obtained at all, will be on terms
favorable or acceptable
to the Company. If additional financing is required and the Company is unable to secure such
additional financing, the Company may need to implement measures to reduce operating costs,
including reductions to product development, marketing and other operating activities. Note 5. Transactions with Related Party The Company currently purchases a significant portion of the hardware components for its products
from Phoenix International Corporation (Phoenix), a wholly owned subsidiary of Deere & Company.
John Deere Special Technologies Group, Inc., our largest shareholder, is also a subsidiary of Deere
& Company. Payments by the Company to Phoenix totaled $1.62 and $1.01 million during the
three-month periods ended December 31, 2004 and 2003. All transactions between Phoenix and the
Company have been, and will continue to be, on terms negotiated at arms length. Note 6. Capital Stock The Company is authorized to issue up to 25,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock. The Board of Directors can issue 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. On December 6, 2003, the Company entered into a Common Stock Warrant and Series B Preferred Stock
Purchase Agreement (the Stock Purchase Agreement) with the following entities associated with
Trident Capital, Inc. (collectively Trident):  
    Trident Capital Fund-V, L.P.
    Trident Capital Fund-V Affiliates Fund, L.P.
    Trident Capital Fund-V Affiliates Fund (Q), L.P.
    Trident Capital Fund-V Principals Fund, L.P.
    Trident Capital Fund-V, C.V. Under the Stock Purchase Agreement, Trident purchased 1,612,903 shares of Series B Preferred Stock
for $4,096,774, or $2.54 per share. Each share of the Preferred Stock is convertible into one
share of the Companys Common Stock. The price per share of Preferred Stock and the conversion
price for the Common Stock are equal to the market value of the Common Stock (as defined in the
rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The
Preferred Stock pays an annual cumulative dividend of 4% of the original issue price (payable
semi-annually; payable in additional shares of Preferred Stock rather than cash, at the option of
the holders) and has a non-participating preferred liquidation right equal to the original issue
price, plus accrued unpaid dividends. In the three months ended December 31, 2004, the Company issued 33,496 shares of Series B Preferred
Stock to Trident for payment of accrued dividends. Based on the market value of the Companys
Common Stock on the date of the dividend payment, the payment of the dividend in additional shares
of Preferred Stock resulted in a non-cash deemed dividend of $110,202. The Preferred Stock is redeemable at the option of Trident at 100% of the original purchase price
plus accrued and unpaid dividends at any time after five years from date of issuance, or at any
time if there is a significant adverse judgment against the Company, the Company defaults 11




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on its
debts or files for bankruptcy, or in the event of a change of control. However, the Company may decline to redeem any
or all of the Preferred Stock at its sole option and discretion, and in such case the annual
cumulative dividend on the Preferred Stock will increase from 4% to 10%. The Company may redeem
the Preferred Stock at its option after five years from the date of issuance if the market price of
its Common Stock is greater than three times the conversion price on each of the sixty consecutive
days prior to the redemption date. Additionally, the Company issued Trident 5-year warrants for 451,226 shares of its Common Stock at
an exercise price of $3.17 per share. The aggregate purchase price of the warrants was $56,403.
The warrants permit cashless exercise. In connection with this transaction, the Company recognized a one-time, non-cash deemed dividend of
$628,982 relating to the beneficial conversion portion of the preferred stock. The beneficial
conversion portion was determined by allocating the Trident proceeds on a fair value basis between
the preferred stock and the warrants. The amount of the deemed dividend was the difference
between the deemed fair value of the preferred stock and the purchase price on the date of the
transaction. The deemed dividend was recorded as an addition to preferred stock with a
corresponding increase to accumulated deficit. The addition was recognized at the date of issuance
of the preferred stock, the same date at which the shares were eligible for conversion. The placement agent for the Trident investment received as consideration a $320,000 cash fee and
7-year warrants for purchase of an aggregate of 163,265 shares of Common Stock (130,612 shares at
$2.54 per share and 32,653 shares at $3.17 per share). These warrants permit cashless exercise
and provide the holders with piggyback registration rights. Recently issued accounting pronouncements: Accounting for Inventory Costs
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, Inventory Costs
an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that . . . under some circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment
as current period charges. . . . This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of so abnormal. In
addition, this Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This statement is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this Statement will have any immediate material impact
on the Company. Accounting for Share-Based Payment
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123 (revised 2004),
Share-Based Payment. This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. This Statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. This Statement requires that the
compensation cost relating to share-based payment transactions be measured on the fair value of the
equity or liability instruments issued. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions.
This Statement is effective in the first interim or annual 12




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reporting period that begins after December 15, 2005. Management is currently assessing if the
adoption of this Statement will have a material impact on the Company. [Remainder of Page Intentionally Left Blank] 13




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Item 2. Managements Discussion and Analysis or Plan of Operation The following discussion and analysis provides information we believe is relevant to an assessment
and understanding of our results of operations and financial condition. This discussion should be
read in conjunction with the financial statements in Item 1 and our report on Form 10-KSB for the
year ended September 30, 2004. Overview XATA provides onboard fleet management systems to the private fleet trucking market. Our products
combine global positioning, wireless communications and fleet management software to provide an
enterprise fleet management system for many of North Americas largest trucking fleets. Our
systems provide mobile two-way messaging and real-time vehicle location. Additionally, our
products automate driver log requirements and state fuel tax reporting, as well as collect data for
vehicle diagnostics, driver performance and mileage. Our systems enable our customers 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. We continued fulfilling orders for our XATANET web-based fleet management system to multiple
customers, including Penske Truck Leasing Co., L.P. in which Penske offers the XATANET web-based
fleet management system to its lease customers throughout North America. We continued fulfilling
orders for our OpCenter enterprise fleet management system to multiple customers, and completed
shipment of orders related to the United States Postal Service 2004 cargo van purchase. Critical Accounting Policies Accounting policies, methods and estimates are an integral part of our financial statements and are
based upon managements current judgments. Certain accounting policies, methods and estimates are
particularly important because of their significance to the financial statements. Note 2 of the
Notes to Financial Statements includes a summary of the significant accounting policies and methods
we use. The following is a discussion of what we believe to be the most critical of these policies
and methods. Revenue recognition.We derive our revenue from sales of hardware, software and related services,
and from application service contracts. We recognize revenue for hardware and software revenue, in
accordance with Statement of Position 97-2 and Securities and Exchange Commission Staff Accounting
Bulletin 101, when (i) persuasive evidence of an arrangement exists (for example a signed agreement
or purchase order), (ii) delivery has occurred, as evidenced by shipping documents and customer
acceptance, (iii) the fee is fixed or determinable and payable within twelve months, and (iv)
collectibility is probable and supported by credit checks or past payment history. Pursuant to
certain contractual arrangements, we recognize revenue for completed systems held at our warehouse
pending the receipt of delivery instructions from the customer. We defer recognition of revenue on
products sold in conjunction with application service contracts, as discussed below. Many of our customers purchase software maintenance agreements annually. Customers may also
purchase extended warranty and service support contracts. Revenue from maintenance agreements,
extended warranties and service support contracts are deferred and recognized ratably over the
contract period. When invoiced in advance, fees for professional services are recognized as they
are performed. 14




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Application service revenue, which is composed of monthly fees, is recognized ratably over the
minimum service contract period, which commences upon the activation of the mobile application
module. When system products are sold in conjunction with an application service contract, we
defer the product revenue and associated product costs, and recognize both ratably over the minimum
service contract term (generally one to five years) rather than upon shipment of the product. Our
application service revenue relates to sales of our XATANET fleet management system, a new product
with which we have limited market experience. Once we gain additional experience with this
product, it is possible we will conclude it is appropriate to recognize product revenue and
associated product costs over a term that is longer than the minimum service contract term.
Because we expect the proportion of sales treated under this policy, including sales of XATANET, to
increase relative to sales of other products, we expect deferred revenue to increase over time.
This will have the effect of delaying revenue recognition of XATANET system sales to future
periods, and thus will lower the amount of revenue recognized in earlier periods. Allowance for doubtful accounts and sales returns.We grant credit to customers in the normal
course of business. The majority of our accounts receivables are due from companies with fleet
trucking operations in a variety of industries. Credit is extended based on an evaluation of a
customers financial condition and, generally, collateral is not required. Accounts receivable are
typically due from customers within 30 days and are stated at amounts due from customers net of an
allowance for doubtful accounts and sales returns. Accounts outstanding longer than the
contractual payment terms are considered past due. We determine the allowance for doubtful
accounts by considering a number of factors, including the length of time trade receivables are
past due, our previous loss history, the customers current ability to pay its obligation, and the
condition of the general economy and the industry as a whole. We reserve for these accounts
receivable by increasing bad debt expense when they are determined to be uncollectible. Payments
subsequently received, or otherwise determined to be collectible, are treated as recoveries that
reduce bad debt expense. We determine our allowance for sales returns by considering several
factors, including history of prior sales credits issued. We regularly assess the allowance for
sales returns and increase it as needed. When we accept a product return or issue a sales credit
for which we had specifically increased the allowance, we write-off the associated accounts
receivable and decrease the allowance for sales returns. Capitalized software development costs.We capitalize software development costs incurred after
establishing technological feasibility. These costs are amortized to cost of goods sold beginning
when the product is first released for sale to the general public. Amortization is at the greater
of the amount computed using the ratio of current gross revenues for the product to the total of
current and anticipated future gross revenues or the straight-line method over the estimated
economic life of the product. Capitalization of software development costs has the effect of
reducing operating costs and increasing reported profitability in the period in which such costs
occur. Amortization of these costs increases cost of goods sold in the periods over which such
amortization takes place, thus decreasing reported profitability in those periods. All previously
capitalized software development costs were full amortized as of September 30, 2004. We review our long-lived assets periodically to determine potential impairment by comparing the
carrying value of the long-lived assets with estimated future cash flows expected to result from
the use of the assets, including cash flows from disposition. If the sum of the expected future
cash flows is less than the carrying value, we will recognize an impairment loss equal to the
amount by which the carrying value exceeds the fair value of the long-lived assets. Research and development costs.We charge expenditures for research and development activities to
operations as incurred. If we expend funds on the development of software, including software
development salaries, for projects or products that we deem to have achieved technological 15




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feasibility, such costs would be capitalized, which would have the effect of reducing research and development costs
in the current period. Results of Operations for the quarters ended December 31, 2004 and 2003 The following table sets forth certain Statements of Operations data as a percentage of net sales: Three Months EndedDecember 31,2004
    
    
    2003Net sales
    
    
    100
    %
    
    
    100
    %Gross profit
    
    
    33
    %
    
    
    35
    %Selling, general and administrative
    
    
    33
    %
    
    
    32
    %Research and development
    
    
    22
    %
    
    
    16
    %Operating loss
    
    
    -22
    %
    
    
    -13
    %Net loss
    
    
    -22
    %
    
    
    -13
    %
 Net Sales.Our net sales for the three months ended December 31, 2004 were $4.54 million,
versus net sales of $3.27 million for the three months ended December 31, 2003. For the three
months ended December 31, 2004, net sales derived from OpCenter hardware and software were $3.16
million, OpCenter services totaling $928,000, and $445,000 of recognized revenue from sales of
XATANET. We completed shipment of the USPS 2004 cargo van order with shipments totaling $1.56
million in the three months ended December 31, 2004. Deferred revenue increased to $6.4 million in the first quarter of fiscal 2005 compared to $4.2
million in the fourth quarter of fiscal 2004. The higher deferred revenue at the end of the first
quarter is a result of increasing XATANET sales. Because XATANET is a subscriber-based product,
revenue associated with it is recognized over the initial term of each subscription rather than
fully at the time of delivery. Accordingly, we expect reported revenue from this product will
increase gradually as the subscriber base grows. Cost of Goods Sold.Cost of goods sold includes the direct product costs associated with
fulfilling customer orders as well as certain fixed expenses. Fixed expenses include costs related
to our system implementation and support staff, and expenses associated with the enhancement of
released products. For the three months ended December 31, 2003 $328,000 of non-cash amortization
of capitalized software development costs were included in the cost of goods sold. No amortization
costs were included in the three month period ended December 31, 2004 because all capitalized
software development costs were fully amortized as of September 30, 2004. Product sales mix, order
discounts and other variable and fixed expenses impact cost of goods sold. Cost of goods sold in
the three months ended December 31, 2004 was $3.06 million, versus $2.12 million for the comparable
prior year period. Cost of sales as a percent of net sales increased in the current fiscal year
period compared to the same prior year period primarily because of higher expenses associated new
product sales. Operating Expenses.Operating expenses include research and development expenses, as well as
selling, general and administrative expenses. Total operating expenses were $2.49 million for the
three months ended December 31, 2004 compared to $1.59 million for the comparable prior year
period. Selling, general and administrative expenses were $1.49 million for the three months ended December
31, 2004, compared to $1.05 million for the comparable prior year period. This increase in the
current quarter resulted from higher current year selling expenses and
administrative support to bring
XATANET to market. 16




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Research and development expenses during the three months ended December 31, 2004 were $996,000,
versus $533,000 in the comparable fiscal 2004 period. Costs associated with research and
development activities are expensed in the period they are incurred. We capitalize software
development expenditures after we establish technological feasibility of new products, and later
amortize these capitalized amounts to cost of goods sold based on the anticipated useful life of
the product. We determine the useful life of each product based upon its anticipated future net
revenues. In the three months ended December 31, 2004, we did not capitalize any software
development costs because the expenditures were primarily on products that have not attained
technological feasibility. Overall product development expenses totaled $1.11 million in the three months ended December 31,
2004. These include $996,000 of research and development expense associated with the development
of new products, combined with $113,000 expended on the enhancement of released products (included
as a component of cost of goods sold). Product development expenses have increased as we continue
to strategically invest in our products to satisfy demand for higher value applications and
increase our market position. Non-operating Income and Expense.Interest expense for the three months ended December 31, 2004
was $10,000 compared to $23,000 in the same prior year period. Interest expense decreased in the
current year period because we paid off both the long-term note payable to Deere & Company, as well
as our bank credit line. Interest income for the three months ended December 31, 2004 was $24,000,
versus $1,000 in the comparable prior year period. The increase in the current year was due to a
higher cash balance in our investment account as a result of the proceeds received from the Trident
investment. Income Taxes.No income tax benefit or expense was recorded for the three-month periods ended
December 31, 2004 or 2003. We periodically review the valuation allowance we have established for
our deferred tax assets. Realization of deferred tax assets is dependent upon sufficient future
taxable income during periods when deductible temporary differences and carryforwards are expected
to be available to reduce taxable income. The amount of the net deferred tax asset considered
realizable could be increased in the future if we return to profitability and actual future taxable
income is higher than currently estimated. Net Loss.Net loss for the three months ended December 31, 2004 was $994,000, compared to $455,000
for the three months ended December 31, 2003. The increased net loss in the current year periods
resulted primarily from a $463,000 increase in research and development expense. Outlook.At the end of fiscal 2004, Penske had sold more than 1,000 XATANET systems to its lease
customers. In fiscal 2005 we expect continued growth under our program with Penske. In addition,
we expect to continue to add other XATANET customers like Coremark International and Valley
Proteins to our growing list of over 100 XATANET customers. Liquidity and Capital Resources At December 31, 2004, our working capital totaled $5.15 million compared to working capital of
$5.90 million at September 30, 2004. The increase in working capital was due to a combination of
cash generated from operations, less repayment of all long-term debt. 17




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Cash provided by operating activities during the three months ended December 31, 2004 totaled $1.76
million compared to cash provided by operating activities of $290,000 for the same period last
year. Cash provided by operating activities for the three months ended December 31, 2004 resulted
primarily from a $2.23 million increase in deferred revenue, non-cash depreciation expenses
totaling $51,000, a $2.01 million decrease in accounts receivable, $75,000 in non-cash compensation
expense, an inventory reduction of $99,000 and a $42,000 decrease in prepaid expense. Our
operating loss of $994,000, a $655,000 decrease in accounts payable, a $656,000 increase in
deferred product costs and a decrease in accrued expenses of $441,000 offset these increases. We
expect deferred revenue and deferred product costs to increase in future periods due to anticipated
growth in application service revenue related to our XATANET system. Deferred product costs
relate to the manufacturing costs of the system products for which revenue has been deferred. Our accounts receivable balance of $3.49 million at December 31, 2004 decreased from $5.50 million
at September 30, 2004 because of the timeliness of customer payments. Total deferred revenue of
$6.39 million at December 31, 2004 was greater than balances in all prior quarters because of
increased sales of XATANET. Cash used in investing activities was $327,000 for purchases of equipment and software in the three
months ended December 31, 2004. During the same period last year, $3,000 was invested in
equipment. Cash used by financing activities was $674,000 in the three months ended December 31, 2004 compared
to cash provided of $3.29 million during the same period a year ago. Cash used by financing
activities in the current three-month period resulted from the $518,000 payoff of our bank line of
credit and the payment of $251,000 on the Deere & Company note, offset by proceeds from exercised
options totaling $95,000. On November 30, 2004, we pre-paid the remaining principal balance of $214,000 on its Promissory
Note with Deere & Company. The Promissory Note was created on April 20, 2000 in the original
principal amount of $1,000,000. On December 17, 2004 we established a new line of credit with Silicon Valley Bank. Advances under
the line of credit accrue interest at the prime rate, or 5.25% as of December 31, 2004. The line
is subject to borrowing base requirements and is collateralized by substantially all the assets of
the Company. The agreement expires on December 16, 2005. We believe our current cash balance, line of credit and vendor terms will provide adequate cash to
fund operating needs for the foreseeable future. However, a protracted decline in revenue,
significant revenue growth or an increase in product development in the near term may require us to
obtain external funding. Moreover, it is possible that our cash needs may vary significantly from
its predictions, due to failure to generate anticipated cash flow or other reasons. No assurance
can be given that our predictions regarding our cash needs will prove accurate, that we will not
require additional financing, that we will be able to secure any required additional financing when
needed, or that such financing, if obtained at all, will be on terms favorable or acceptable to us.
If additional financing is required and we are unable to secure such additional financing, we may
need to implement measures to reduce operating costs, including reductions to product development,
marketing and other operating activities. Our Series B Preferred Stock prohibits payment of dividends to the holders of any other capital
stock unless and until we have paid dividends accrued on the Series B Preferred Stock, which pays
an annual cumulative dividend of 4% of the original issue price. At the option of the Series B
Preferred Stock holders, such dividends are payable in additional shares of Preferred Stock rather
than cash, subject to certain 18




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limitations of The Nasdaq Stock Market. In the three months ended December 31, 2004, we issued 33,496 shares
of Series B Preferred Stock for payment of accrued dividends. We are further restricted from
dividend payments by our primary lender. Transactions with Related Party We purchase our XATA Application Module (XAM) mobile computing and communication devices from
Phoenix International Corporation, a wholly owned subsidiary of Deere & Company. Deere is our
largest shareholder and is currently represented by one individual serving on our Board of
Directors. Deere has the right to name two additional directors at its sole discretion. Phoenix
International fabricates the XAM units to our detailed design specifications. We retain full
ownership of the intellectual property rights to the XAM design. Our terms with Phoenix
International are comparable to those we have with non-affiliated vendors. Payments to Phoenix
International in the three-month period ended December 31, 2004 totaled $1.62 million. These
amounts may increase over time to the extent sales of our XAM units and related products increase.
We have no dependence on this vendor and are able to purchase the fabrication of this product from
other vendors if necessary or desirable. 
 Item 3. Controls and Procedures Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting On December 31, 2004, our Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in our periodic filings with
the Securities and Exchange Commission. There were no significant changes in our internal controls over financial reporting that occurred
during our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. Forward-looking Statements This document includes forward-looking statements based on current expectations. Actual results
may differ materially. These forward-looking statements involve a number of risks and
uncertainties about us, our business, our customers, the economy and the business environment in
general. Risks and uncertainties about us include, but are not limited to, the following:  
    although we expect to incur operating losses in the current fiscal year, these losses
may continue beyond the expected timeframe or in excess of the expected magnitude, and we
may be dependent upon external investment to support our operations during periods in which
we incur operating losses;
    we may be unable to adapt to technological change quickly enough to grow or to retain
our customer base; 19




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
    we will continue to be dependent upon positioning systems and 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 research and development activities, and our
ability to establish and maintain strategic partner relationships. You are encouraged to read more about the specific risks and uncertainties of our business. We
have described those that we currently consider most important in our report on Form 10-KSB for our
fiscal year ended September 30, 2004. We undertake no obligation to update our disclosures in this
regard. [Remainder of Page Intentionally Left Blank] 20




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings None 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In the three months ended December 31, 2004, the Company issued 33,496 shares of Series B
Preferred Stock as a dividend on its outstanding Series B Preferred Stock (all of which is
held by Trident) and five-year warrants for purchase of 9,921 shares of common stock
exercisable at $5.74 per share to an executive search firm. No underwriter or placement
agent was involved and there were no cash proceeds from the issuances. The Company relied on
the exemption from registration provided by Section 4(2) of the Securities Act for these
issuances. 
 Item 3. Defaults upon Senior Securities and Small Business Issuer Purchases of Equity
Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K Exhibit11
    
    Earnings per share computation31.1
    
    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
 Reports on Form 8-K  1.
    Report on Form 8-K dated November 30, 2004 concerning the press release for
financial results for the fiscal year ended September 30, 2004. 21




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2.
    Report on Form 8-K dated December 22, 2004 concerning the press release for the
resignation of John G. Lewis as Chief Financial Officer and Chief Operating Officer 
 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 11, 2005
    
    XATA Corporation
(Registrant)by:
    
    /s/ Craig S. FawcettCraig S. FawcettChief Executive Officer(Signing as Principal Executive Officer,
Principal Financial and Accounting Officer, and as
Authorized Signatory of Registrant)
 22