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SECURITIES AND EXCHANGE COMMISSION  Form 10-QSB x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 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

(State or Other Jurisdiction of Incorporation or Organization)
    
    41-1641815

(I.R.S. Employer Identification Number)
 151 E. Cliff Road, Suite 10, Burnsville, Minnesota 55337   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 x 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 June 30, 2004
and September 30, 2003
    
    
    3Statements of Operations for the Three and Nine
Months Ended June 30, 2004 and 2003
    
    
    5Statements of Cash Flows for the Nine Months
Ended June 30, 2004 and 2003
    
    
    6Notes to Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    13Item 3. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities
    
    
    20Item 3. Defaults upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits and Reports on Form 8-K
    
    
    20SIGNATURESEXHIBITSEarnings 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
JUNE 30, 2004 AND SEPTEMBER 30, 2003
(UNAUDITED)
 June 30,
    
    September 30,2004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    5,426,888
    
    
    $
    607,754Accounts receivable, less allowances for doubtful accounts
of $120,000 and $102,000
    
    
    3,408,066
    
    
    
    3,758,938Inventories
    
    
    849,191
    
    
    
    943,153Deferred product costs
    
    
    590,933
    
    
    
    305,411Prepaid expenses
    
    
    193,729
    
    
    
    123,023Total current assets
    
    
    10,468,807
    
    
    
    5,738,279Equipment and Leasehold Improvements, at costEngineering and manufacturing equipment
    
    
    359,424
    
    
    
    341,038Office furniture and equipment
    
    
    1,062,239
    
    
    
    979,313Leasehold improvements
    
    
    24,948
    
    
    
    24,9481,446,611
    
    
    
    1,345,299Less: accumulated depreciation and amortization
    
    
    (1,064,177
    )
    
    
    (925,873
    )Total equipment and lease hold improvements
    
    
    382,434
    
    
    
    419,426Other AssetsCapitalized software development costs, less accumulated
amortization of $6,858,223 and $5,950,426
    
    
    411,393
    
    
    
    1,319,190Total assets
    
    $
    11,262,634
    
    
    $
    7,476,895
 See Notes to Financial Statements 3




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June 30,
    
    September 30,2004
    
    2003LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesBank line of credit
    
    $
    386,345
    
    
    $
    792,184Current maturities of long-term debt
    
    
    227,949
    
    
    
    175,893Accounts payable
    
    
    585,557
    
    
    
    1,462,175Accrued expenses
    
    
    1,348,791
    
    
    
    1,014,967Deferred revenue
    
    
    2,515,144
    
    
    
    1,524,910Total current liabilities
    
    
    5,063,786
    
    
    
    4,970,129Long-Term Debt, net of current maturities
    
    
    79,061
    
    
    
    251,296Deferred Revenue, non-current
    
    
    741,242
    
    
    
    221,424Total liabilities
    
    
    5,884,089
    
    
    
    5,442,849Commitments
    
    
    
    
    
    
    Shareholders EquityPreferred stock, 4% convertible, 5,000,000 shares
authorized; 1,643,304 shares issued at June 30, 2004
    
    
    3,922,531
    
    
    
    Common stock, par value $0.01 per share; 25,000,000 and
12,000,000
shares authorized; 7,191,856 and 6,938,575 shares issued
    
    
    71,919
    
    
    
    69,386Additional paid-in capital
    
    
    18,761,730
    
    
    
    17,767,539Accumulated deficit
    
    
    (17,377,635
    )
    
    
    (15,802,879
    )Total shareholders equity
    
    
    5,378,545
    
    
    
    2,034,046Total liabilities and shareholders equity
    
    $
    11,262,634
    
    
    $
    7,476,895
 See Notes to Financial Statements 4




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XATA CORPORATION 
 STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    5,106,476
    
    
    $
    3,062,247
    
    
    $
    13,079,408
    
    
    $
    7,777,503Cost of goods sold
    
    
    3,420,957
    
    
    
    2,278,318
    
    
    
    8,667,461
    
    
    
    5,909,135Gross profit
    
    
    1,685,519
    
    
    
    783,929
    
    
    
    4,411,947
    
    
    
    1,868,368Operating expensesSelling, general and administrative
    
    
    1,188,459
    
    
    
    1,333,080
    
    
    
    3,539,293
    
    
    
    3,628,703Research and development
    
    
    620,139
    
    
    
    468,908
    
    
    
    1,588,277
    
    
    
    1,444,3391,808,598
    
    
    
    1,801,988
    
    
    
    5,127,570
    
    
    
    5,073,042Operating loss
    
    
    (123,079
    )
    
    
    (1,018,059
    )
    
    
    (715,623
    )
    
    
    (3,204,674
    )Non-operating income (expense)Interest income
    
    
    6,276
    
    
    
    601
    
    
    
    13,451
    
    
    
    4,728Interest expense
    
    
    (22,653
    )
    
    
    (11,708
    )
    
    
    (62,607
    )
    
    
    (40,104
    )Other
    
    
    11,625
    
    
    
    
    
    
    
    12,797
    
    
    
    4,027(4,752
    )
    
    
    (11,107
    )
    
    
    (36,359
    )
    
    
    (31,349
    )Net loss before income taxes
    
    
    (127,831
    )
    
    
    (1,029,166
    )
    
    
    (751,982
    )
    
    
    (3,236,023
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (127,831
    )
    
    
    (1,029,166
    )
    
    
    (751,982
    )
    
    
    (3,236,023
    )Preferred stock dividends and deemed dividend
    
    
    (141,899
    )
    
    
    
    
    
    
    (822,774
    )
    
    
    Loss to common shareholders
    
    $
    (269,730
    )
    
    $
    (1,029,166
    )
    
    $
    (1,574,756
    )
    
    $
    (3,236,023
    )Loss per common share  basic and diluted:Net loss
    
    $
    (0.02
    )
    
    $
    (0.15
    )
    
    $
    (0.12
    )
    
    $
    (0.47
    )Loss to common shareholders
    
    
    (0.04
    )
    
    
    (0.15
    )
    
    
    (0.22
    )
    
    
    (0.47
    )Weighted average common and
common share equivalentsBasic and Diluted
    
    
    7,051,079
    
    
    
    6,933,825
    
    
    
    7,001,462
    
    
    
    6,933,146
 See Notes to Financial Statements 5




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XATA CORPORATION 
 STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
 Nine Months EndedJune 30,2004
    
    2003Cash provided by (used in) Operating ActivitiesNet loss
    
    $
    (751,982
    )
    
    $
    (3,236,023
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization of equipment and leasehold improvements
    
    
    138,304
    
    
    
    189,146Amortization of capitalized software development costs
    
    
    907,797
    
    
    
    1,080,570Deferred compensation
    
    
    59,964
    
    
    
    Provision for bad debts
    
    
    18,000
    
    
    
    (26,000
    )Write-off of software product
    
    
    
    
    
    
    48,594Changes in assets and liabilities:Accounts receivable
    
    
    332,872
    
    
    
    (163,723
    )Inventories
    
    
    93,962
    
    
    
    (251,266
    )Accounts payable
    
    
    (876,618
    )
    
    
    480,405Deferred revenue
    
    
    1,510,052
    
    
    
    335,673Accrued expenses
    
    
    318,183
    
    
    
    426,530Deferred product costs
    
    
    (285,522
    )
    
    
    (217,702
    )Prepaid expenses
    
    
    (70,706
    )
    
    
    7,601Net cash provided by (used in) operating activities
    
    
    1,394,306
    
    
    
    (1,326,195
    )Cash used in Investing ActivitiesPurchase of equipment
    
    
    (101,312
    )
    
    
    (96,017
    )Net cash used in investing activities
    
    
    (101,312
    )
    
    
    (96,017
    )Cash provided by Financing ActivitiesNet borrowings (payments) on bank line of credit
    
    
    (405,838
    )
    
    
    579,085Payments on long-term debt
    
    
    (120,179
    )
    
    
    (200,800
    )Net proceeds from issuance of preferred stock
    
    
    3,710,760
    
    
    
    Net proceeds from issuance of warrants
    
    
    56,403
    
    
    
    Proceeds from options and warrants exercised
    
    
    284,994
    
    
    
    5,782Net cash provided by financing activities
    
    
    3,526,140
    
    
    
    384,067Increase (decrease) in cash and cash equivalents
    
    
    4,819,134
    
    
    
    (1,038,145
    )Cash and Cash EquivalentsBeginning
    
    
    607,754
    
    
    
    1,058,119Ending
    
    $
    5,426,888
    
    
    $
    19,974Supplemental Disclosures of Cash Flow InformationCash payments for interest
    
    $
    62,607
    
    
    $
    40,105Supplemental Schedule of Noncash Investing and Financing ActivitiesPreferred stock dividends payable
    
    $
    15,639
    
    
    $
    
 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 June 30, 2004, the results of operations for the three and
nine months ended June 30, 2004 and 2003, and cash flows for the nine months
ended June 30, 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, 2004. 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, 2003. The balance sheet as of
September 30, 2003 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 June 30, 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 7




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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. 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. 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. In fiscal 2003, the Company recorded an impairment loss of
$49,000, included in cost of goods sold, to write off the net balance of
capitalized software development costs related to a product line for which
revenue was not expected to be realized in the foreseeable future. Research and development costs:Expenditures for research and development
activities performed by the Company are charged to operations as incurred. Basic and diluted net loss per share:Basic and diluted net loss per common
share is computed by dividing the net loss by the weighted average common
shares outstanding for the period. 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 June 30, 2004 and 2003 included 473,347 and 61,349 shares
related to stock options and warrants. Additional common stock equivalents as
of June 30, 2004 include 1,643,304 shares of convertible preferred stock and
125,292 unvested shares of restricted stock. There were no common stock
equivalents as of June 30, 2003 related to convertible preferred stock or
unvested restricted stock. Because the Company incurred losses for the three
and nine months ended June 30, 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 and nine month periods ending June 30, 2004 and
2003. Stock-based compensation:The Company applies Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, and related
Interpretations in accounting 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 stock option grants have
been recognized in the consolidated Statements 8




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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
recognition provisions of Financial Accounting Standards Board (FASB) Statement
123, Accounting for Stock-Based Compensation, to its stock-based employee plan. Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (127,831
    )
    
    $
    (1,029,166
    )
    
    $
    (751,982
    )
    
    $
    (3,236,023
    )Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards, net of
related tax effects
    
    
    (49,000
    )
    
    
    (97,000
    )
    
    
    (221,000
    )
    
    
    (325,000
    )Pro forma net loss
    
    $
    (176,831
    )
    
    $
    (1,126,166
    )
    
    $
    (972,982
    )
    
    $
    (3,561,023
    )Basic and diluted net loss
per common shareAs reported
    
    $
    (0.02
    )
    
    $
    (0.15
    )
    
    $
    (0.11
    )
    
    $
    (0.47
    )Pro forma
    
    
    (0.03
    )
    
    
    (0.16
    )
    
    
    (0.14
    )
    
    
    (0.51
    )
 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 granted a total of 14,228 and 125,292
restricted shares of common stock to various management employees in the three
and nine months ended June 30, 2004, respectively. 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 and nine months ended June 30,
2004, the Company amortized approximately $43,000 and $60,000 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 nine-month
period ended June 30, 2004, the Company issued various entities associated with
Trident Capital, Inc. (Trident) warrants to purchase 451,226 shares of common
stock at an exercise price of $3.17 per share for an aggregate purchase price
of $56,403. This issuance of warrants was in connection with Tridents
purchase of 1,612,903 shares of Series B Preferred Stock (see Note 6).
Additionally, the Company issued Cherry Tree Securities, LLC (CTS), who acted
as placement agent for the Trident transaction, warrants for an aggregate of
163,264 shares of common stock (130,612 shares at $2.54 per share and 32,652
shares at $3.17 per share). At June 30, 2004 and 2003, warrants were outstanding to purchase a total of
629,490 and 47,478 shares of common stock at a weighted-average exercise price
of $3.06 and $2.19 per share, with a weighted-average remaining life of
approximately 4.37 years and 1.21 years. 9




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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, 2004, 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
    
    $
    918,0002006
    
    
    1,286,000$
    2,204,000
 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 23, 2003, the Company renewed its line of credit under terms
comparable to its previous credit line agreement. The new agreement expires on
December 23, 2004 and may be automatically renewed for successive thirty-day
periods unless otherwise terminated by either the Company or the lender. 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 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 $1.41 million and $3.13 million
during the three and nine-month periods ended June 30, 2004. All transactions
between Phoenix and the Company have been, and will continue to be, on terms
negotiated at arms length. 10




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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 June 30, 2004,
the Company issued 30,401 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 $100,931. 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 the date of issuance, or at any time if there is a significant
adverse judgment against the Company, the Company defaults 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 11




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recorded as an addition to preferred stock with a corresponding reduction of
retained earnings. The addition was recognized at the date of issuance of the
preferred stock, the same date at which the shares were eligible for
conversion. See also Exhibit 11 filed herewith. As required under the Stock Purchase Agreement, the Company filed a
Registration Statement on Form S-3 to register the resale, from time to time,
of the Common Stock to be issued pursuant to conversion of the Preferred Stock
and exercise of the warrants, and a reasonable estimate of any Common Stock to
be issued as dividends on the Preferred Stock. This Registration Statement was
declared effective on March 15, 2004 by the Securities and Exchange Commission. [Remainder of Page Intentionally Left Blank] 12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 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, 2003. 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 experienced a further increase in sales in the third quarter of fiscal 2004
when compared to both the second quarter of fiscal 2004 and the third quarter
of fiscal 2003. This is due to several factors favorably impacting our
business, including a large program with the United States Postal Service,
growth in new heavy-duty truck sales, increasing fleet operating costs and
greater funding by prospects and customers for technology initiatives targeted
at improving fleet operating efficiencies. 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. 13




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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 production 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. Capitalized software development costs.We capitalize software development
costs incurred after establishing technological feasibility. These costs are
later 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. We are currently amortizing previously capitalized software
development costs, which increased our reported net loss in the current period. 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 feasibility, such costs
would be capitalized, which would have the effect of reducing research and
development costs in the current period. Results of Operations The following table sets forth certain Statements of Operations data as a
percentage of net sales: Three Months Ended
    
    Nine Months EndedJune 30,
    
    Jun e 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Gross profit
    
    
    33
    %
    
    
    26
    %
    
    
    34
    %
    
    
    24
    %Selling, general and administrative
    
    
    23
    %
    
    
    44
    %
    
    
    27
    %
    
    
    47
    %Research and development
    
    
    12
    %
    
    
    15
    %
    
    
    12
    %
    
    
    19
    %Operating loss
    
    
    -2
    %
    
    
    -33
    %
    
    
    -5
    %
    
    
    -41
    %Net loss
    
    
    -3
    %
    
    
    -34
    %
    
    
    -6
    %
    
    
    -42
    %
 14




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Net Sales.Our net sales for the three months ended June 30, 2004 were $5.11
million, versus net sales of $3.06 million for the three months ended June 30,
2003. Net sales for the nine months ended June 30, 2004 were $13.08 million,
versus net sales of $7.78 million for the nine months ended June 30, 2003. For
the three and nine months ended June 30, 2004, net sales derived from OpCenter
hardware and software were $4.08 million and $9.86 million, net sales from
software maintenance support and services sales were $757,000 and $2.58
million, and recognized sales of XATANET equipment and services totaled
$269,000 and $640,000. Net sales increased in the current quarter due to strong sales of our OpCenter
enterprise fleet management system, led by sales to the United States Postal
Service (USPS). In December 2003, we were awarded orders totaling
approximately $8.0 million from two truck manufacturers as part of the USPS
2004 cargo van purchase. USPS specified our OpCenter system as a component for
each of the 1,800 trucks it will purchase from these truck manufacturers. We
generally recognize revenue for the hardware and software components of these
orders at the time of delivery. We defer revenue for software maintenance,
extended warranties and service support contracts, and recognize such revenue
ratably over the contract period. In the three months ended June 30, 2004, net
sales derived from the USPS 2004 cargo van orders totaled $2.56 million. We
expect to complete delivery of the hardware and software components of these
orders by December 31, 2004. 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, expenses associated with the enhancement of released products, and
non-cash amortization of capitalized software development costs. 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 June 30, 2004 was $3.42
million, versus $2.28 million for the comparable prior year period. In the
nine months ended June 30, 2004 cost of goods sold was $8.67 million, versus
$5.91 million for the comparable prior year period. Cost of sales as a percent
of net sales decreased in the current fiscal year periods compared to the same
prior year periods primarily because of higher net sales that offset the fixed
expense items included in cost of goods sold. Operating Expenses.Operating expenses include research and development
expenses, as well as selling, general and administrative expenses. Total
operating expenses were $1.81 million for the three months ended June 30, 2004
compared to $1.80 million for the comparable prior year period. For the nine
months ended June 30, 2004, total operating expenses were $5.13 million, versus
$5.07 million for the nine months ended June 30, 2003. Selling, general and administrative expenses were $1.19 million for the three
months ended June 30, 2004, compared to $1.33 million for the comparable prior
year period. These expenses decreased in the current year quarter primarily
due to lower current year selling expenses and a prior year severance expense
accrual. For the nine months ended June 30, 2004, selling, general and
administrative expenses were $3.54 million compared to $3.63 million for the
comparable prior year period. Research and development expenses during the three months ended June 30, 2004
were $620,000, versus $469,000 in the comparable fiscal 2003 period. For the
nine months ended June 30, 2004, research and development expenses were $1.59
million, versus $1.44 million in the comparable fiscal 2003 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 15




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the three and nine months ended June 30, 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 $771,000 in the three months ended
June 30, 2004. These include $620,000 of research and development expense
associated with the development of new products, combined with $151,000
expended on the enhancement of released products (included as a component of
cost of goods sold). For the nine months ended June 30, 2004, overall product
development expenses totaled $1.96 million, including $1.59 million of research
and development expense associated with the development of new products and
$372,000 spent on the enhancement of released products. Non-operating Income and Expense.Interest expense for the three months ended
June 30, 2004 was $23,000 compared to $12,000 in the same prior year period.
For the nine months ended June 30, 2004, interest expense was $63,000 compared
to $40,000 in the same prior year period. Interest expense increased in the
current year periods because of a greater use of our bank line of credit and
higher average interest rate. Interest income for the three months ended June
30, 2004 was $6,000, versus $1,000 in the comparable prior year period. For
the nine months ended June 30, 2004, interest income was $13,000, versus $5,000
in the comparable prior year period. The increase in the current year was due
to a higher cash balance in our investment account. Income Taxes.No income tax benefit or expense was recorded for the three or
nine-month periods ended June 30, 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 June 30, 2004 was $128,000,
compared to $1.03 million for the three months ended June 30, 2003. For the
nine months ended June 30, 2004, net loss was $752,000, compared to $3.24
million for the nine months ended June 30, 2003. The decreased net loss in the
current year periods primarily resulted from our higher net sales. Outlook.We expect the orders received in December, 2003 totaling $8.0 million
associated with the USPS 2004 cargo van purchase will significantly contribute
to our total fiscal 2004 revenue. Additionally, in April 2004, we began
shipping product under our program with Penske Truck Leasing Co., L.P. under
which we provide Penske a private labeled version of our XATANET web-based
fleet management system. In this arrangement, Penske pays us for the system
hardware and associated service fees for the initial service term for each
subscriber unit in the month following the delivery of each unit. Consistent
with other XATANET sales, revenue associated with systems sold to Penske is
recognized over the initial term of each subscription rather than at the time
of delivery. Because of this, we expect that reported revenue from this
arrangement will occur gradually as the subscription volume grows. Liquidity and Capital Resources At June 30, 2004, our working capital totaled $5.41 million compared to working
capital of $768,000 at September 30, 2003. The increase in working capital was
due to a combination of the Trident investment in our Series B Preferred Stock
(see Note 6 in Notes to Financial Statements) and cash generated from
operations. 16




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Cash provided by operating activities during the nine months ended June 30,
2004 totaled $1.39 million compared to cash used in operating activities of
$1.33 million for the same period last year. Cash provided by operating
activities for the nine months ended June 30, 2004 resulted primarily from a
$1.51 increase in deferred revenue, non-cash amortization and depreciation
expenses totaling $1.05 million, a $333,000 decrease in accounts receivable, a
$318,000 increase in accrued expenses and a $94,000 decrease in inventories,
offset by an $877,000 decrease in accounts payable, a $286,000 increase in
deferred product costs and our $752,000 net loss. 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. We expect non-cash amortization expense to
cease after this fiscal year as we complete the amortization of previously
capitalized software development costs in our fiscal fourth quarter. Our accounts receivable balance of $3.41 million at June 30, 2004 decreased
from the balance at both March 31, 2004 and September 30, 2003 because of
improved timeliness of customer payments. Total deferred revenue of $3.26
million at June 30, 2004 was higher than balances on both March 31, 2004 and
September 30, 2003 because of higher XATANET sales and the billing of deferred
revenue items associated with the USPS orders. Cash used in investing activities was $101,000 for purchases of equipment in
the nine months ended June 30, 2004. During the same period last year, $96,000
was invested in equipment. Cash provided by financing activities was $3.53 million in the nine months
ended June 30, 2004 compared to $384,000 during the same period a year ago.
Cash provided by financing activities in the current nine-month period resulted
from the $3.77 million net proceeds from the Trident investment and from
$285,000 of net proceeds from the exercise of stock options and warrants,
offset by $526,000 of principal payments on our bank credit line and long-term
debt. On December 23, 2003, we renewed our line of credit under terms comparable to
our previous credit line agreement. Advances under the line of credit accrue
interest at prime rate plus 2.90%. The terms of the credit agreement include a
provision for minimum monthly interest payments. The line is subject to
borrowing base requirements, based on eligible accounts receivable, and is
secured by substantially all Company assets. On June 30, 2004, the maximum
borrowing availability on the line was approximately $1.66 million. The new
agreement expires on December 23, 2004 and may be automatically renewed for
successive thirty-day periods unless otherwise terminated by either the lender
or us. We have a note payable to Deere & Company that includes monthly principal and
interest payments to Deere. The note, which originated April 20, 2000 in the
principal amount of $1,000,000 and was amended on June 10, 2003 to temporarily
defer principal payments, had a principal balance of $307,000 on June 30, 2004.
We resumed making principal payments on the note in January 2004. The note
matures on October 1, 2005 and is secured by substantially all Company assets. 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 17




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##### Table of Contents



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 limitations of The Nasdaq Stock Market. In the three
months ended June 30, 2004, we issued 30,401 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 nine-month period ended June 30, 2004 totaled $3.13 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 On June 30, 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 18




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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;  
    
    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,
2003. We undertake no obligation to update our disclosures in this regard. [Remainder of Page Intentionally Left Blank] 19




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings None 
 Item 2. Changes in Securities None 
 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 April 28, 2004 concerning the press
release for financial results for the fiscal quarter ending March 31,
2004. 20




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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:  August 4, 2004
    XATA Corporation
(Registrant)by:
    /s/  John G. LewisJohn G. LewisChief Financial Officer
(Signing as Principal Financial and Accounting
Officer and as Authorized Signatory of Registrant) 21