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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-QSB
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended December 31, 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)
  
   
  þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:




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##### 



Index
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets as of December 31, 2005 and September 30, 2005
    
    
    4Statements of Operations for the Three Months Ended December 31, 2005 and 2004
    
    
    5Statements of Cash Flows for the Three Months Ended December 31, 2005 and 2004
    
    
    6Notes to Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    16Item 3. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURESEXHIBITSCertification 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
 3




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XATA CORPORATION
 
 BALANCE SHEETS
  December 31,
    
    
    September 30,2005
    
    
    2005ASSETSCurrent AssetsCash and cash equivalents
    
    $
    5,216,483
    
    
    $
    6,472,993Accounts receivable, less allowances for doubtful accounts
and sales returns of $345,000 and $315,000
    
    
    4,975,564
    
    
    
    7,811,531Inventories
    
    
    4,043,365
    
    
    
    1,257,541Deferred product costs
    
    
    4,093,738
    
    
    
    4,671,386Prepaid expenses
    
    
    225,459
    
    
    
    203,596Total current assets
    
    
    18,554,609
    
    
    
    20,417,047Equipment and leasehold improvements, net
    
    
    1,777,193
    
    
    
    1,085,139Deferred product costs, net of current portion
    
    
    1,139,124
    
    
    
    1,001,481Total assets
    
    $
    21,470,926
    
    
    $
    22,503,667LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesBank line of credit
    
    $
    2,000,000
    
    
    $
    1,800,000Capital lease obligations
    
    
    59,598
    
    
    
    Accounts payable
    
    
    1,494,221
    
    
    
    2,386,907Accrued expenses
    
    
    2,299,658
    
    
    
    2,170,764Deferred revenue
    
    
    7,252,122
    
    
    
    7,774,293Total current liabilities
    
    
    13,105,599
    
    
    
    14,131,964Capital Lease Obligations, net of current portion
    
    
    128,428
    
    
    
    Deferred Revenue, net of current portion
    
    
    3,672,029
    
    
    
    3,335,383Total liabilities
    
    
    16,906,056
    
    
    
    17,467,347Shareholders EquityPreferred stock, no par, 5,000,000 shares authorized:Series B, 4% convertible, 2,250,000 shares designated;
1,744,355 and 1,710,060 shares issued and outstanding
    
    
    4,398,385
    
    
    
    4,259,835Series C, convertible, 1,400,000 shares designated;
1,269,036 shares issued and outstanding
    
    
    4,845,173
    
    
    
    4,845,173Common stock, par value $0.01 per share; 25,000,000 shares
authorized; 7,583,247 and 7,549,180 shares issued and outstanding
    
    
    75,832
    
    
    
    75,491Additional paid-in capital
    
    
    21,559,318
    
    
    
    21,458,389Deferred stock based compensation
    
    
    (874,146
    )
    
    
    (1,007,197
    )Accumulated deficit
    
    
    (25,439,692
    )
    
    
    (24,595,371
    )Total shareholders equity
    
    
    4,564,870
    
    
    
    5,036,320Total liabilities and shareholders equity
    
    $
    21,470,926
    
    
    $
    22,503,667
  4




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XATA Corporation
 
 STATEMENTS OF OPERATIONS
  Three Months EndedDecember 31,2005
    
    
    2004Net sales
    
    $
    6,423,182
    
    
    $
    4,538,349Costs and expensesCost of goods sold
    
    
    4,612,495
    
    
    
    3,061,754Selling, general and administrative
    
    
    1,840,782
    
    
    
    1,490,495Research and development
    
    
    726,669
    
    
    
    996,4047,179,946
    
    
    
    5,548,653Operating loss
    
    
    (756,764
    )
    
    
    (1,010,304
    )Non-operating income (expense)Interest income (expense)
    
    
    7,650
    
    
    
    13,673Other
    
    
    
    
    
    
    2,7917,650
    
    
    
    16,464Net loss before income tax expense
    
    
    (749,114
    )
    
    
    (993,840
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    
    (749,114
    )
    
    
    (993,840
    )Preferred stock dividends
    
    
    (43,765
    )
    
    
    (40,369
    )Preferred stock deemed dividend
    
    
    (51,442
    )
    
    
    (110,202
    )Loss to common shareholders
    
    $
    (844,321
    )
    
    $
    (1,144,411
    )Loss per common share  basic and diluted:Loss to common shareholders
    
    $
    (0.12
    )
    
    $
    (0.16
    )Weighted average common and
common share equivalentsBasic and Diluted
    
    
    7,301,442
    
    
    
    7,130,558
  5




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XATA Corporation
 
 STATEMENTS OF CASH FLOWS
  Three Months EndedDecember 31,2005
    
    
    2004Cash provided by (used in) operating activitiesNet loss
    
    $
    (749,114
    )
    
    $
    (993,840
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization of equipment and leasehold improvements
    
    
    74,195
    
    
    
    51,458Issuance of warrants for services rendered
    
    
    
    
    
    
    25,000Deferred compensation recognized
    
    
    120,470
    
    
    
    50,268Changes in assets and liabilities:Accounts receivable, net
    
    
    2,835,967
    
    
    
    2,009,177Inventories
    
    
    (2,785,824
    )
    
    
    98,858Deferred product costs
    
    
    440,005
    
    
    
    (655,571
    )Prepaid expenses
    
    
    (21,863
    )
    
    
    41,827Accounts payable
    
    
    (892,686
    )
    
    
    (655,326
    )Accrued expenses
    
    
    172,237
    
    
    
    (441,040
    )Deferred revenue
    
    
    (185,525
    )
    
    
    2,229,720Net cash provided by (used in) operating activities
    
    
    (992,138
    )
    
    
    1,760,531Cash used in investing activitiesPurchase of equipment
    
    
    (217,139
    )
    
    
    (327,438
    )Additions to software development costs
    
    
    (343,796
    )
    
    
    Purchases of short-term investments
    
    
    
    
    
    
    (245,978
    )Net cash used in investing activities
    
    
    (560,935
    )
    
    
    (573,416
    )Cash (used in) provided by financing activitiesNet borrowings (payments) on bank line of credit
    
    
    200,000
    
    
    
    (518,008
    )Payments on long-term debt
    
    
    
    
    
    
    (251,372
    )Net borrowings (payments) on capital lease obligations
    
    
    (17,288
    )
    
    
    Proceeds from options and warrants exercised
    
    
    113,851
    
    
    
    95,505Net cash (used in) provided by financing activities
    
    
    296,563
    
    
    
    (673,875
    )(Decrease) increase in cash and cash equivalents
    
    
    (1,256,510
    )
    
    
    513,240Cash and cash equivalentsBeginning
    
    
    6,472,993
    
    
    
    1,332,695Ending
    
    $
    5,216,483
    
    
    $
    1,845,935Supplemental disclosures of cash flow informationCash payments for interest
    
    $
    40,193
    
    
    $
    9,854Supplemental schedule of noncash investing and financing activitiesIssuance of restricted stock
    
    $
    63,750
    
    
    $
    Preferred stock deemed dividends
    
    
    51,442
    
    
    
    110,202Deferred compensation for terminated employees
    
    
    76,331
    
    
    
    Preferred stock dividend payable
    
    
    43,343
    
    
    
    44,711Preferred stock dividend paid
    
    
    87,108
    
    
    
    85,080Equipment purchased under capital lease
    
    
    205,314
    
    
    
    
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NOTES TO FINANCIAL STATEMENTS
 Note 1. Significant Accounting Policies
 Presentation
   Revenue Recognition
 Software Revenue Recognition Software Revenue Recognition with Respect to Certain Transactions Revenue Recognition in Financial
Statements
   7




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Use of Estimates
  Cash Equivalents
  Concentration of Credit Risk
 
 Fair Value of Financial Instruments
  Inventories
  8




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December 31,
    
    
    September 30,2005
    
    
    2005Raw materials and subassemblies
    
    $
    2,229,153
    
    
    $
    686,443Finished goods
    
    
    1,814,213
    
    
    
    571,098Total inventories
    
    $
    4,043,365
    
    
    $
    1,257,541
 Equipment and Leasehold Improvements
   December 31,
    
    
    September 30,2005
    
    
    2005Office furniture and equipment
    
    $
    2,028,043
    
    
    $
    1,661,512Engineering and manufacturing equipment
    
    
    535,297
    
    
    
    453,789Capitalized software development costs
    
    
    628,527
    
    
    
    284,731Leasehold improvements
    
    
    33,813
    
    
    
    59,3993,225,680
    
    
    
    2,459,431Less: accumulated depreciation and amortization
    
    
    (1,448,487
    )
    
    
    (1,374,292
    )Equipment and leasehold improvements, net
    
    $
    1,777,193
    
    
    $
    1,085,139
   Long-Lived Assets
  Product Warranties
   9




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Shipping and Handling Costs
  Advertising Costs
  Research and Development Costs
 Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed
 Income taxes
 Accounting for
Income Taxes
 Stock-Based Compensation
 Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation
 10




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Three Months EndedDecember 31,2005
    
    2004Net loss to common shareholders, as reported
    
    $
    (844,321
    )
    
    $
    (1,144,411
    )Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards, net of
related tax effects
    
    
    
    
    
    
    (40,000
    )Pro forma net loss
    
    $
    (844,321
    )
    
    $
    (1,184,411
    )Basic and diluted net loss to common shareholders
per common shareAs reported
    
    $
    (0.12
    )
    
    $
    (0.16
    )Pro forma
    
    
    (0.12
    )
    
    
    (0.17
    )
 Reclassifications
  Recently Issued Accounting Standards
 Share-Based Payment (Statement 123)
 Shared-Based Payment, Accounting
for Stock-Based Compensation . Accounting for Stock Issued to Employees, Statement of Cash Flows.
 Accounting Changes and Error Corrections (Statement 154)
 Accounting Changes and Error Corrections  a replacement
of APB Opinion No. 20 and SFAS No. 3 Accounting Changes
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Exchange of Nonmonetary Assets (Statement 153)
 Exchange of Nonmonetary Assets
 Note 2. Commitments
 Leases
   Reseller Commitment
  401(k) Plan
  Note 3. Bank Line of Credit
  Note 4. Net Loss Per Share
  12




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2005
    
    
    2004Net loss
    
    $
    (749,114
    )
    
    $
    (993,840
    )Less: preferred stock dividend
    
    
    (43,765
    )
    
    
    (40,369
    )Less: preferred stock deemed dividend
    
    
    (51,442
    )
    
    
    (110,202
    )Net loss to common shareholders
    
    
    (844,321
    )
    
    
    (1,144,411
    )Weighted average shares outstanding
    
    
    7,301,442
    
    
    
    7,130,558Basic and diluted loss per share
    
    $
    (0.12
    )
    
    $
    (0.16
    )
  Note 5. Shareholders Equity
 Common Stock
  Preferred Stock
  Series B
  13




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Series C
  14




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Restricted Stock Awards
   Common stock warrants
   Weighed-Average
    
    Weighted AverageDate
    
    Warrants Outstanding
    
    Exercise Price
    
    Remaining LifeDecember 31, 2005
    
    
    1,019,026
    
    
    $
    3.43
    
    
    3.58 yearsSeptember 30,  2005
    
    
    1,019,026
    
    
    $
    3.43
    
    
    3.83 years
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Item 2. Managements Discussion and Analysis or Plan of Operation
  Overview
    
    
    Mobile two-way messaging and real-time vehicle location.
    
    Automation of DOT driver log requirements and state fuel tax reporting.
    
    Comprehensive vehicle and driver performance reporting.
    
    Efficient routing, trip optimization and stop activity scheduling.
    
    Diagnostic and accident data capture.
  XATANET Fleet Management System
     16




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Onboard Hardware
  
 Driver Displays
  Wireless Communications
  Application Service Packages
  OpCenter Fleet Management System
    17




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Critical Accounting Policies
  Revenue recognition. Software Revenue Recognition Software Revenue Recognition with Respect to Certain Transactions Revenue Recognition in Financial
Statements
    18




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Allowance for doubtful accounts and sales returns.
  Research and development costs. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed
 Income taxes
 Results of Operations for the quarters ended December 31, 2005 and 2004
  19




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Three months endedDecember 31,2005
    
    2004Net sales
    
    
    100
    %
    
    
    100
    %Gross profit
    
    
    28
    %
    
    
    33
    %Selling, general and administrative
    
    
    29
    %
    
    
    33
    %Research and development
    
    
    11
    %
    
    
    22
    %Operating loss
    
    
    -12
    %
    
    
    -22
    %Net loss
    
    
    -12
    %
    
    
    -22
    %
 Net Sales
  Cost of Goods Sold.
 Operating Expenses
 .
  20




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Non-operating Income (Expense).
 Income Taxes.
 Net Loss to Common Shareholders.
 Liquidity and Capital Resources
       21




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Item 3. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting
   Related Party Transactions
  22




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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, 2005. We undertake no obligation to update our disclosures in this
regard.
 [Remainder of Page Intentionally Left Blank]
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities and Small Business Issuer Purchases of Equity
Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit31.1
    
    
    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
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SIGNATURES
  Dated: February 8, 2006
    
    XATA Corporation(Registrant)by:
    
    /s/ Mark E. TiesMark E. TiesChief Financial Officer(Signing as Principal Financial and Accounting
Officer, and as Authorized Signatory of Registrant)
 25