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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 March 31, 2005 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 
  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 March 31, 2005 and September 30, 2004
    
    
    3Statements of Operations for the Three and Six Months Ended March 31, 2005 and 2004
    
    
    5Statements of Cash Flows for the Six Months Ended March 31, 2005 and 2004
    
    
    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
    
    
    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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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements XATA Corporation 
 BALANCE SHEETS
  March 31,
    
    
    September 30,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    4,614,765
    
    
    $
    5,322,497Accounts receivable, less allowances for doubtful accounts
and sales returns of $299,000 and $293,000
    
    
    3,360,837
    
    
    
    5,500,832Inventories
    
    
    1,829,812
    
    
    
    1,067,034Deferred product costs
    
    
    1,558,752
    
    
    
    511,079Prepaid expenses
    
    
    208,143
    
    
    
    230,809Total current assets
    
    
    11,572,309
    
    
    
    12,632,251Equipment and Leasehold Improvements, at costEngineering and manufacturing equipment
    
    
    408,149
    
    
    
    388,424Office furniture and equipment
    
    
    1,481,287
    
    
    
    1,150,962Leasehold improvements
    
    
    41,344
    
    
    
    24,9481,930,780
    
    
    
    1,564,334Less: accumulated depreciation and amortization
    
    
    (1,229,176
    )
    
    
    (1,108,304
    )Total equipment and leasehold improvements
    
    
    701,604
    
    
    
    456,030Other AssetsDeferred product costs, net of current portion
    
    
    664,093
    
    
    
    303,481Total assets
    
    $
    12,938,006
    
    
    $
    13,391,762
 See Notes to Financial Statements 3




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March 31,
    
    
    September 30,2005
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesBank line of credit
    
    $
    
    
    
    $
    518,008Current maturities of long-term debt
    
    
    
    
    
    
    231,403Accounts payable
    
    
    1,478,100
    
    
    
    1,733,932Accrued expenses
    
    
    1,359,213
    
    
    
    1,592,808Deferred revenue
    
    
    4,494,100
    
    
    
    2,657,882Total current liabilities
    
    
    7,331,413
    
    
    
    6,734,033Long-Term Debt, net of current maturities
    
    
    
    
    
    
    19,969Deferred Revenue, net of current portion
    
    
    2,575,634
    
    
    
    1,501,799Total liabilities
    
    
    9,907,047
    
    
    
    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; 7,476,591 and 7,253,785 shares issued
    
    
    74,766
    
    
    
    72,538Additional paid-in capital
    
    
    19,433,982
    
    
    
    19,000,497Accumulated deficit
    
    
    (20,595,603
    )
    
    
    (17,859,606
    )Total shareholders equity
    
    
    3,030,959
    
    
    
    5,135,961Total liabilities and shareholders equity
    
    $
    12,938,006
    
    
    $
    13,391,762
 See Notes to Financial Statements 4




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XATA Corporation 
 STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    4,315,865
    
    
    $
    4,703,000
    
    
    $
    8,854,214
    
    
    $
    7,972,932Cost of goods sold
    
    
    3,179,073
    
    
    
    3,130,161
    
    
    
    6,240,827
    
    
    
    5,246,504Gross profit
    
    
    1,136,792
    
    
    
    1,572,839
    
    
    
    2,613,387
    
    
    
    2,726,428Operating expensesSelling, general and administrative
    
    
    1,589,071
    
    
    
    1,297,707
    
    
    
    3,079,566
    
    
    
    2,350,834Research and development
    
    
    1,136,996
    
    
    
    434,692
    
    
    
    2,133,400
    
    
    
    968,1382,726,067
    
    
    
    1,732,399
    
    
    
    5,212,966
    
    
    
    3,318,972Operating loss
    
    
    (1,589,275
    )
    
    
    (159,560
    )
    
    
    (2,599,579
    )
    
    
    (592,544
    )Non-operating income (expense)Interest income
    
    
    28,367
    
    
    
    6,462
    
    
    
    51,894
    
    
    
    7,175Interest expense
    
    
    (39
    )
    
    
    (16,462
    )
    
    
    (9,893
    )
    
    
    (39,954
    )Other
    
    
    11,114
    
    
    
    
    
    
    
    13,905
    
    
    
    1,17239,442
    
    
    
    (10,000
    )
    
    
    55,906
    
    
    
    (31,607
    )Net loss before income taxes
    
    
    (1,549,833
    )
    
    
    (169,560
    )
    
    
    (2,543,673
    )
    
    
    (624,151
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (1,549,833
    )
    
    
    (169,560
    )
    
    
    (2,543,673
    )
    
    
    (624,151
    )Preferred stock dividends and deemed dividend
    
    
    (41,753
    )
    
    
    (40,968
    )
    
    
    (192,324
    )
    
    
    (680,875
    )Loss to common shareholders
    
    $
    (1,591,586
    )
    
    $
    (210,528
    )
    
    $
    (2,735,997
    )
    
    $
    (1,305,026
    )Loss per common share  basic and diluted:Net loss
    
    $
    (0.22
    )
    
    $
    (0.02
    )
    
    $
    (0.37
    )
    
    $
    (0.09
    )Loss to common shareholders
    
    
    (0.22
    )
    
    
    (0.03
    )
    
    
    (0.38
    )
    
    
    (0.19
    )Weighted average common and
common share equivalentsBasic and Diluted
    
    
    7,171,870
    
    
    
    7,006,293
    
    
    
    7,151,214
    
    
    
    6,976,654
 See Notes to Financial Statements 5




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XATA Corporation 
 STATEMENTS OF CASH FLOWS
  Six Months EndedMarch 31,2005
    
    
    2004Cash provided by (used in) operating activitiesNet loss
    
    $
    (2,543,673
    )
    
    $
    (624,151
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization of equipment and leasehold improvements
    
    
    120,872
    
    
    
    96,241Amortization of capitalized software development costs
    
    
    
    
    
    
    561,937Deferred compensation recognized
    
    
    195,128
    
    
    
    17,403Issuance of warrants for services rendered
    
    
    25,000
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    2,139,995
    
    
    
    (505,826
    )Inventories
    
    
    (762,778
    )
    
    
    278,425Accounts payable
    
    
    (255,832
    )
    
    
    (597,308
    )Deferred revenue
    
    
    2,910,053
    
    
    
    681,831Accrued expenses
    
    
    (230,637
    )
    
    
    146,828Deferred product costs
    
    
    (1,408,285
    )
    
    
    (37,023
    )Prepaid expenses
    
    
    22,666
    
    
    
    (24,283
    )Net cash provided by (used in) operating activities
    
    
    212,509
    
    
    
    (5,926
    )Cash used in investing activities
Purchase of equipment
    
    
    (366,446
    )
    
    
    (28,500
    )Net cash used in investing activities
    
    
    (366,446
    )
    
    
    (28,500
    )Cash (used in) provided by financing activitiesNet payments on bank line of credit
    
    
    (518,008
    )
    
    
    (267,379
    )Payments on long-term debt
    
    
    (251,372
    )
    
    
    (64,974
    )Net proceeds from issuance of preferred stock
    
    
    
    
    
    
    3,710,760Net proceeds from issuance of warrants
    
    
    
    
    
    
    56,403Proceeds from options and warrants exercised
    
    
    215,585
    
    
    
    201,097Net cash (used in) provided by financing activities
    
    
    (553,795
    )
    
    
    3,635,907(Decrease) increase in cash and cash equivalents
    
    
    (707,732
    )
    
    
    3,601,481Cash and cash equivalentsBeginning
    
    
    5,322,497
    
    
    
    607,754Ending
    
    $
    4,614,765
    
    
    $
    4,209,235Supplemental disclosures of cash flow informationCash payments for interest
    
    $
    9,893
    
    
    $
    39,954Supplemental schedule of noncash investing and financing activitiesPreferred stock dividends payable
    
    $
    55,671
    
    
    $
    51,892Preferred 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 March 31, 2005, the results of operations for the three and
six months ended March 31, 2005 and 2004 and cash flows for the six months ended March 31, 2005 and
2004. 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) 104, Revenue Recognition. Hardware and software revenue is recognized under SOP 97-2 and SAB 104 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 March 31, 2005, 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 comprised of raw materials and subassemblies and finished goods for
our OpCenter and XATANET products. Inventory is valued at the lower of cost or market. Cost is
determined on the standard cost method which approximates the first-in, first-out method, and
consists of the following: March 31
    
    
    September 302005
    
    
    2004Raw materials and subassemblies
    
    $
    1,004,963
    
    
    $
    552,108Finished goods
    
    
    824,849
    
    
    
    514,926Total inventories
    
    $
    1,829,812
    
    
    $
    1,067,034
 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 8




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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. 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 $0.22 per common share is computed by
dividing the net loss of $1,549,833, less preferred stock dividends of $41,753, by the weighted
average common shares outstanding for the quarter of 7,171,870. 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 March 31, 2005 and 2004 included 385,709
and 358,387 shares related to stock options and warrants. Additional common stock equivalents as
of March 31, 2005 and 2004 include 1,676,800 and 1,612,903 shares of convertible preferred stock,
and 264,871 and 111,064 unvested shares of restricted stock. Because the Company incurred losses
for the three months ended March 31, 2005 and 2004, 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 six-month periods ending
March 31, 2005 and 2004. 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. 9




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March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (1,549,833
    )
    
    $
    (169,560
    )
    
    $
    (2,543,673
    )
    
    $
    (624,151
    )Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards, net of
related tax effects
    
    
    74,000
    
    
    
    105,000
    
    
    
    114,000
    
    
    
    172,000Pro forma net loss
    
    $
    (1,623,833
    )
    
    $
    (274,560
    )
    
    $
    (2,657,673
    )
    
    $
    (796,151
    )Basic and diluted net lossper common shareAs reported
    
    $
    (0.22
    )
    
    $
    (0.02
    )
    
    $
    (0.36
    )
    
    $
    (0.09
    )Pro forma
    
    
    (0.23
    )
    
    
    (0.04
    )
    
    
    (0.37
    )
    
    
    (0.11
    )
 Restricted stock awards:The Company recently changed its long-term incentive compensation
practices by granting restricted shares of common stock rather than stock options. For the six
months ended March 31, 2005 and 2004 the Company granted 164,600 and 111,064 restricted shares of
common stock to employees. For the six months ended March 31, 2005, 16,305 shares of restricted
stock was forfeited when an employee left the Company. Each grant of restricted shares vests over
three years and shares granted may be sold once vested. The Company also granted 12,500 restricted
shares of common stock to certain directors in the three months ended March 31, 2005. Each grant
of restricted shares vests immediately, but shares granted may not be sold until one year after the
date of grant. The Company recognizes deferred compensation expense ratably over the vesting period of the
restricted stock. In the three months ended March 31, 2005 the Company amortized $144,861 of
deferred compensation expense, compared to $17,403 for the same period in 2004. In the six months
ended March 31, 2005 the Company amortized $195,128 of deferred compensation expense, compared to
$17,403 for the same period in 2004. Common stock warrants:The Company has, on occasion, issued warrants for the purchase of common
stock to directors and consultants. In the six-month period ended March 31, 2005, 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 March 31, 2005 and 2004, warrants were outstanding to purchase a total of 649,026 and 629,490
shares of common stock at a weighted-average exercise price of $3.14 and $3.06 per share, with a
weighted-average remaining life of approximately 3.65 years and 4.62 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 10




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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
    
    $
    260,0002006
    
    
    821,000
 Note 4. Line of Credit On December 17, 2004 the Company established a $2.0 million line of credit with Silicon Valley
Bank. Advances under the line of credit accrue interest at the prime rate, which was 5.75% as of
March 31, 2005. 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. 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 million and $3.66 million during the
three and six-month periods ended March 31, 2005. 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
(the 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 11




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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 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 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. 12




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Accounting for Share-Based Payment In December 2004, the Financial Accounting Standards Board (FASB) issued its standard on accounting
for share-based payments, SFAS No. 123 (revised 2004), Share-Based Paymentrequiring companies to
recognize compensation cost relating to share-based payment transactions in the financial
statements. SFAS No. 123(R) requires the measurement of compensation cost to be based on the fair
value of the equity or liability instruments issued. Upon issuance, SFAS No. 123(R) required public
companies to apply SFAS No. 123(R) in the first interim or annual reporting period beginning after
June 15, 2005 (after December 15, 2005 for small business issuers). In April 2005, the Securities
and Exchange Commission (SEC) approved a new rule that delays the effective date, requiring public
companies to apply SFAS 123(R) in the first annual period beginning after June 15, 2005 (after
December 15, 2005 for small business issuers). Except for the deferral of the effective date, the
guidance in SFAS 123(R) is unchanged. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. SFAS No. 123(R) replaces SFAS
No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. 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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##### Table of Contents



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. 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 104, 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. 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. 14




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##### Table of Contents



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 that are 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
feasibility, such costs would be capitalized as software development costs, which would have the
effect of reducing research and development costs in the current period. 15




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##### Table of Contents



Results of Operations The following table sets forth certain Statements of Operations data as a percentage of net sales: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Gross profit
    
    
    26
    %
    
    
    33
    %
    
    
    30
    %
    
    
    34
    %Selling, general and administrative
    
    
    37
    %
    
    
    28
    %
    
    
    35
    %
    
    
    29
    %Research and development
    
    
    26
    %
    
    
    9
    %
    
    
    24
    %
    
    
    12
    %Operating loss
    
    
    -37
    %
    
    
    -3
    %
    
    
    -29
    %
    
    
    -7
    %Net loss
    
    
    -36
    %
    
    
    -4
    %
    
    
    -29
    %
    
    
    -8
    %
 Net Sales.Our net sales for the three and six months ended March 31, 2005 were $4.3 and $8.9
million, versus net sales of $4.7 and $8.0 million for the three and six months ended March 31,
2004. For the three and six months ended March 31, 2005, net sales derived from OpCenter hardware
and software were $2.4 and $5.6 million, compared to $3.7 and $5.7 million for the three and six
months ended March 31, 2004. OpCenter services for the three and six months ended March 31, 2005,
totaled $0.9 and $1.9 million, compared to $0.8 and $1.9 million for the same prior year periods.
XATANET recognized revenue for the three and six months ended March 31, 2005, totaled $1.0 and $1.4
million, compared to $0.2 and $0.4 million for the three and six months ended March 31, 2004. In addition, deferred revenue increased a 196 percent on a year over year basis, to $7.1 million at
the end of the second quarter of fiscal 2005 compared to $2.4 million at the end of the second
quarter of fiscal 2004. The higher deferred revenue is primarily a result of increasing XATANET
sales. Revenue associated with XATANET is recognized over the initial term of each subscription
rather than fully at the time of delivery. XATANET subscription terms are a minimum of twelve
months. Given this information total sales have remained relatively flat on a year over year basis
although XATANET subscriptions have grown 117 percent since fiscal 2004. Cost of Goods Sold.Cost of goods sold includes the direct product costs associated with
fulfilling customer orders, customer upgrade costs related to previously sold systems, as well as
certain fixed expenses. These fixed expenses include costs related to our system implementation
and support staff, expenses associated with the enhancement of released products, and other
miscellaneous variable and fixed expenses. Cost of goods sold in the three and six months
ended March 31, 2005 were $3.2 and $6.2 million, versus $3.1 and $5.3 million for the comparable
prior year periods. Cost of goods sold as a percent of net sales increased in the current fiscal
year period compared to the same prior year period primarily because of an increase in system
component costs and customer upgrade costs. Customer upgrade costs amounted to $0.4 and $0.8
million in the three and six months ended March 31, 2005. Exclusive of these costs, margins on new
system sales were approximately 35 and 38 percent for the three and six months ended March 31,
2005. Operating Expenses.Operating expenses include research and development expenses, as well as
selling, general and administrative expenses. Total operating expenses were $2.7 and $5.2 million
for the three and six months ended March 31, 2005 compared to $1.7 and $3.3 million for the
comparable prior year periods. Selling, general and administrative expenses were $1.6 and $3.1 million for the three months ended
March 31, 2005, compared to $1.3 and $2.4 million for the
comparable prior year periods. The
increase in these costs in fiscal 2005 versus 2004 were associated with the expansion of our sales
and marketing efforts to support the XATANET product market and non-cash
compensation expense associated with the issuances
of restricted stock. 16




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Research and development expenses during the three and six months ended March 31, 2005 were $1.1
and $2.1 million, versus $0.4 and $1.0 in the comparable fiscal
2004 periods. 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 six months ended March 31, 2005, 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 $1.2 and $2.3 million in the three and six months
ended March 31, 2005. These include $1.1 and $2.1 million of research and development expense
associated with the development of new products, combined with $0.1 and $0.2 million 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 the expansion of our
OpCenter and XATANET products to satisfy demand for higher value applications and increase our
market position. Non-operating Income and Expense.Interest expense for the three and six months ended March 31,
2005 was $0 and $10,000 compared to $16,000 and $40,000 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 and six months
ended March 31, 2005 was $28,000 and $52,000, versus $6,000 and $7,000 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. Net Loss.Net loss for the three and six months ended March 31, 2005 was $1.5 and $2.5 million,
compared to $0.2 and $0.6 million for the three and six months ended March 31, 2004. The increased
net loss in the current year periods resulted primarily due to our commitment to research and
development expense and customer upgrade costs associated with the continued expansion of our
existing products. Liquidity and Capital Resources Cash provided by operating activities during the six months ended March 31, 2005 totaled $0.2
million compared to cash used in operating activities of $6,000 for the same period last year.
Cash provided by operating activities for the six months ended March 31, 2005 resulted primarily
from a $2.9 million increase in deferred revenue, non-cash depreciation expenses totaling $0.1
million, a $2.2 million decrease in accounts receivable, and $0.2 million in non-cash compensation
expense. Our operating loss of $2.5 million, a $0.3 million decrease in accounts payable, a $1.4
million increase in deferred product costs, an inventory increase of $0.8 million and a decrease in
accrued expenses of $0.2 million offset these increases. We expect deferred revenue and deferred
product costs to increase in future periods due to our 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 $3.3 million at March 31, 2005 decreased
from $5.5 million at September 30, 2004 because of the timeliness of customer payments. Total
deferred revenue of $7.1 million at March 31, 2005 was greater than
balances in all prior quarters primarily because of
increased sales of XATANET. 17




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##### Table of Contents



Cash used in investing activities was $0.4 million for purchases of equipment and software in the
six months ended March 31, 2005. During the same period last year, $29,000 was invested in
equipment. Cash used in financing activities was $0.6 million in the six months ended March 31, 2005 compared
to cash provided of $3.6 million during the same period a year ago. Cash used in financing
activities in the current six month period resulted from the $0.5 million payoff of our bank line
of credit and the payment of $0.3 million on the Deere & Company note, offset by proceeds from
exercised options totaling $0.2 million. 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 $2.0 million line of credit with Silicon Valley Bank.
Advances under the line of credit accrue interest at the prime rate, which was 5.75% as of March
31, 2005. 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. 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. In the six months ended
March 31, 2005, 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 and six months ended March 31, 2005 totaled $1.62 million and
$3.66 million, respectively. These amounts may increase over time to the extent sales of 18




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##### Table of Contents



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 The Companys management carried out an evaluation, under the supervision and with the
participation of the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Companys President and Chief Executive Officer along with the
Companys Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information relating to the Company
required to be included in the Companys periodic filings under the Exchange Act. There was no change in our
internal controls over financial reporting that occurred during the
last fiscal quarter that has materially effected, or is reasonably
likely to materially effect, 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;
    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] 19




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##### Table of Contents



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 March 31, 2005 the Company issued a 5 year warrant for the purchase
of 9,921 shares of its common stock at $5.74 per share to an executive search firm in exchange for
services. No underwriter was involved. The issuance was made without registration under the
Securities Act in reliance upon Section 4(2) of the Act. 
 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 The annual meeting of shareholders of the Company was held on February 17, 2005. As of
the record date, January 5, 2005, there were 7,282,785 shares of common stock and 1,643,304
shares of Series B Preferred Stock of the Company entitled to vote at the meeting. There
were in attendance at the meeting in person or by proxy holders of 8,702,486 shares of the
8,926,089 eligible voting shares, which is equivalent to approximately 97.5% of the total
number of eligible voting shares of the Company issued and outstanding. Matters voted upon and the results thereof are as follows:  1.
    The number of directors was set at seven (7), and seven (7) directors (including
Christopher P. Marshall, who was elected by the holders of the Series B Preferred Stock,
voting separately by ballot as a class) were elected to serve for a one-year term
expiring when their successors are elected and qualified at the annual meeting in 2006. For
    
    
    WithheldStephen A. Lawrence
    
    
    7,978,435
    
    
    
    724,051Richard L. Bogen
    
    
    7,969,625
    
    
    
    732,861Craig S. Fawcett
    
    
    7,903,595
    
    
    
    798,891Carl M. Fredericks
    
    
    7,958,769
    
    
    
    743,717Roger W. Kleppe
    
    
    7,969,625
    
    
    
    732,861Charles R. Stamp, Jr.
    
    
    7,901,195
    
    
    
    801,291Christopher P. Marshall
    
    
    1,643,304
    
    
    
    -0
  2.
    Approval of the acquisition of additional Series B Preferred Stock of the Company
by Trident Capital by election to receive dividends in the form of Series B Preferred
Stock. For      6,063,710
    Against      103,779
    Abstain      27,446
    Broker Non-Vote      2,507,551
  3.
    Approval of an amendment to the Bylaws of the Company to permit uncertificated
 shares. 20




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##### Table of Contents



For      6,083,425
    Against      99,060
    Abstain      12,450
    Broker Non-Vote      2,507,551
 
 Item 5. Other Information None 
 Item 6. Exhibits Exhibit 11
    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 
 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: May 13, 2005
    
    XATA Corporation(Registrant)by:
    
    /s/ Mark E. TiesMark E. TiesChief Financial Officer(Signing as Principal Financial and AccountingOfficer, and as Authorized Signatory of Registrant)
 21