SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002 Commission file number: 1-15087
I.D. SYSTEMS, INC.
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(Name of small business issuer in its charter)
Delaware 22-3270799
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One University Plaza, Hackensack, New Jersey 07601
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(Address of Principal Executive Offices) (Zip Code)
Issuer`s telephone number, including area code: (201) 996-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $0.01
Check whether the Issuer (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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer`s knowledge, in the definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. __
State issuer`s revenues for its most recent fiscal year = $5,544,000.
The aggregate market value of the Common Stock held by nonaffiliates of the
Issuer was approximately $25,820,000 based upon the last sales price of such
stock on March 21, 2003, as disclosed on The NASDAQ Small Cap Market (IDSY).
The number of shares of common stock, par value $0.01 per share, outstanding as
of March 21, 2003 was 6,810,461.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement to be filed in connection with the issuer`s 2003 annual
meeting of stockholders.
TABLE OF CONTENTS
PAGE
PART I. 1
Item 1. Description of Business..............................................................1
Item 2. Description of Properties............................................................9
Item 3. Legal Proceedings....................................................................9
Item 4. Submission of Matters to a Vote of Security Holders.................................10
PART II. ......................................................................................................11
Item 5. Market for Registrant`s Common Equity and Related Stockholder Matters...............11
Item 6. Management`s Discussion and Analysis of Financial Condition and Results of
Operations..........................................................................11
Item 7. Financial Statements................................................................17
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure..........................................................................18
PART III.......................................................................................................19
Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance With
Section 16(a) of the Exchange Act...................................................19
Item 10. Executive Compensation..............................................................19
Item 11. Security Ownership of Certain Beneficial Owners and Management......................19
Item 12. Certain Relationships and Related Transactions......................................19
Item 13. Exhibits, Lists and Reports on Form 8-K.............................................19
Item 14. Controls And Procedures.............................................................21
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
I.D. Systems, Inc. (the "Company"), a Delaware corporation incorporated in
1993, is a leading provider of advanced wireless solutions for tracking,
managing, and securing enterprise assets. The Company`s patented RF (radio
frequency) technology and proprietary software, The Wireless Asset Net(TM)
System, enables real-time, automated, cost-effective monitoring, control, and
analysis of a broad range of objects. The Company`s solutions can benefit users
by reducing operating costs, increasing security and revenues, improving safety,
enhancing service, and increasing profits. The Company`s customers include
Archer Daniels Midland, Avis Rent A Car System, Inc., DaimlerChrysler, Deere &
Co., Federal Aviation Administration, Ford Motor Company, Golub Corporation,
Hallmark Cards, Target Corporation, Toyota Motor Company, the U.S. Navy and the
U.S. Postal Service among others.
THE TECHNOLOGY
The primary hardware components of the Company`s system are wireless
programmable "Asset Communicators" installed on each asset and one or more
fixed-position "System Monitors" which form a coverage area. These devices
communicate with each other via low-power RF transmissions with no ongoing
communication costs.
Asset Communicators are miniature programmable computers that provide
significantly more functionality than conventional asset tracking "RFID tags".
For example, Asset Communicators can control access, detect asset
movement/location, monitor asset utilization, provide two-way text messaging,
and store a large amount of dynamic, configurable asset data. The firmware in
the devices can also be readily customized to meet specific customer needs.
The system does not require a central or controlling computer to make
decisions. Asset Communicators and System Monitors make decisions autonomously,
which significantly reduces the overall system cost and improves system
reliability. System Monitors incorporate a computer network connection as well
as a two-way RF transceiver, and are capable of linking to both the mobile
assets being monitored and to management software on the network.
The Company designs and implements software as well as hardware. Its
modular software systems are user-friendly, utilizing a robust database
platform, a Windows-style browser-based graphical user interface and options for
both client-server and web-based delivery.
CURRENT TARGET MARKETS
While there are diverse applications for its technology, the Company is
currently focused on companies that need to monitor, control and manage
industrial vehicles and rental fleet vehicles.
1
INDUSTRIAL VEHICLE APPLICATIONS. The Company`s WIRELESS ASSET NET(TM) fleet
management system is designed to address the safety, security and cost issues of
the material handling industry.
To improve fleet safety and security, the system provides:
o wireless vehicle access control to restrict access of equipment
to trained and authorized personnel, as required by the
Occupational Safety and Health Administration ("OSHA");
o electronic vehicle inspection checklists for paperless proof of
OSHA compliance;
o early detection of emerging vehicle safety issues; and
o impact sensing to assign responsibility for accidents.
The Company`s system is designed to prevent unauthorized personnel from
operating equipment, which we believe results in optimizing fleet health,
eliminating anonymous accidents and reducing damage-related costs. To
further reduce fleet maintenance costs, the Wireless Asset Net also automates
and enforces preventative maintenance scheduling by:
o wirelessly uploading true "drive-time" data from each individual
vehicle;
o automatically prioritizing maintenance events based on weighted
variables; and
o enabling remote lock-out of vehicles overdue for maintenance. The
system can also interface seamlessly with existing maintenance
databases.
To generate perhaps the most significant impact on fleet operating costs,
the Wireless Asset Net provides a set of tools to measure vehicle utilization
and justify fleet reductions. The system automatically records the actual
usage-time against idle-time of each individual vehicle/operator to benchmark
productivity, compare performance, and enable informed decisions about vehicle
allocation, disposal, and replacement. The system also visually monitors the
location of vehicles -- both in real time and historically -- to locate vehicles
that are idle or due for maintenance, to instantly track vehicle inventory, and
to monitor vehicle travel-paths in order to optimize labor efficiencies. In
addition, the system communicates work instructions to vehicle operators via
two-way text paging to improve productivity.
The Company believes its Wireless Asset Net technology can have a
significant impact on the security of airports and military bases. Aircraft
ground support equipment includes aircraft tow tractors, cargo loaders, baggage
tractors, fuel trucks, and catering trucks. The Company believes there are few
systems that effectively control and monitor the use of these vehicles. In the
absence of such controls, a perpetrator who gains access to the ramp area at
airports could access ground support equipment without restriction. The
Company`s wireless solution prevents unauthorized use of aircraft ground support
2
equipment by linking vehicle ignition to a personal identification system and/or
biometrics. The system requires an operator to present an access control ID
badge to the system`s intelligent vehicle-mounted hardware (and, optionally,
enter a PIN code) prior to operating a vehicle that services aircraft. A person
must be authorized and trained for a particular vehicle, in a particular area of
the airport, at a particular time of day, in order to use the vehicle. This
driver tracking and control technology not only prevents the unauthorized use of
equipment, but it also allows equipment to be instantly and remotely deactivated
via radio frequency in the event of an emergency.
The industrial vehicle market is the Company`s most developed application.
Customers that have piloted and/or deployed the Company`s Wireless Asset Net
system include Archer Daniels Midland, DaimlerChrysler, Deere & Co., Federal
Aviation Administration, Ford Motor Company, Golub Corporation, Hallmark Cards,
Target Corporation, Toyota Motor Company, the U.S. Navy and the U.S. Postal
Service among others.
RENTAL FLEET APPLICATIONS. The Company`s wireless rental car monitoring
system automatically uploads mileage and fuel data from rental vehicles, and is
designed to produce a significant impact on rental revenues and quality of
customer service to the Company`s customers.
We believe that there are many benefits offered by the Company`s solution
to car rental companies. However, two are most significant. First, by accurately
reporting fuel levels, without human intervention, rental car companies can
potentially increase revenues by accurately billing customers for fuel used.
Second, by utilizing the Company`s system, the average car return transaction,
including customer wait time, can be reduced as well. This time savings can
allow the rental company to reduce staff and/or devote more attention to vehicle
inspections, which may result in detecting damage that would otherwise go
unnoticed and uncharged.
The system also automates the car rental and car handling process. As a
customer approaches the exit gate, the system recognizes the identification of
the car and validates the rental for security purposes. In addition, the system
prints the rental agreement for the customer as he/she leaves the lot. This
functionality eliminates the need to pre-assign vehicles and pre-print rental
contracts. The system is also designed to optimize fleet usage by automating the
inventory process and monitoring the flow of vehicles.
In January 2003, the Company and Avis Rent A Car System, Inc., commenced a
pilot program to implement the Company`s Wireless Asset Net fleet management
technology on Avis` fleet of approximately 2,000 rental vehicles in Puerto Rico
by mid 2003. Puerto Rico was selected because it allows the use of the Company`s
system on a captive fleet which is intended to be representative of benefits
that can also be achieved as a result of broader based implementation.
3
FUTURE APPLICATIONS AND OTHER MARKETS
Deployment of the Company`s system infrastructure in customers` facilities
creates many new revenue opportunities. The Company`s system enables virtually
any asset owned, operated or maintained by a customer to be monitored. With
relatively simple customizations, the Company can create and deploy asset "tags"
to track pallets and containers, control the use of machinery, and manage other
assets. Once these tags are deployed, the customer can utilize one integrated
system for all of its asset tracking and monitoring needs. To date the Company
has also delivered effective systems that have demonstrated significant benefits
by providing companies with the ability to monitor, control and manage railcars,
as well as letters and packages.
RAILCAR INDUSTRY APPLICATIONS. The Company`s wireless tracking solution
has the potential to improve the rail industry`s customer service capabilities
and fundamentally change the way freight railroads operate in North America.
The Company believes that Class I railroads and their customers have a
vested interest in finding a cost-effective way to track the location and status
of railcars in real time. The Company`s real-time location system maps each
train`s location against its expected routes and schedules, averts delays by
rapidly identifying unplanned stops, and ensures that the correct railcars are
delivered to the correct locations in a timely manner. The Company believes that
this can translate directly into both customer satisfaction and increased
revenues for the railroads.
The Company`s solution for real-time railcar tracking is a unique hybrid of
its patented RF communications architecture, GPS location tracking, a cellular
or satellite link, and proprietary web-based graphical software. The Company`s
system can communicate data from an entire train of railcars with just one
cellular or satellite link. Compared to other systems that rely on satellite
transmitters on every railcar, the Company`s approach can save millions of
dollars in ongoing communications fees. Compared to systems that rely on
fixed-location reading devices, the system provides information from any
location at any time, eliminating "black holes" between readers. In addition,
the Company believes its approach provides the ability to generate and
communicate significantly more information than the railroads` existing tracking
system.
PACKAGE AND LETTER APPLICATIONS. The Company has been focused in this
market primarily on the U.S. Postal Service (USPS). During 2000, the Company`s
solution was deployed and began collecting data used to analyze the flow of
mail. In this application, the Company`s Asset Communicator is configured to fit
inside a standard business envelope and withstand the rigors of automated mail
processing machinery. The Company`s system allows the USPS, for the first time
in its history, to track test mail in real time and identify bottlenecks in the
mail delivery chain.
MANUFACTURING
The Company outsources its hardware manufacturing operations to leading
contract manufacturers including Flextronics International Ltd. and NuVisions
Manufacturing Inc. This strategy enables the Company to focus on its core
competency - designing hardware and software systems and delivering solutions to
customers - and to avoid investing in capital-intensive electronics
manufacturing infrastructure. Outsourcing also provides the Company with the
ability to ramp up deliveries to meet increases in demand without increasing
fixed expenses. The Company has not, however, entered into an agreement
providing for a long term commitment with its subcontractors to manufacture the
Company`s products.
4
SALES AND MARKETING
The Company`s sales and marketing objective is to achieve broad market
penetration through targeted sales activities. The Company currently markets its
system directly to large corporations and government agencies. In addition, the
Company is developing strategic relationships with key companies in target
markets, including original equipment manufacturers (OEMs), complementary
hardware and software vendors, and service providers.
The Company was awarded a United States General Services Administration
contract which enables any government agency to purchase the Company`s products
on an off-the-shelf basis, without further competitive bidding, until April
2004. The Company believes that this contract provides significant sales
opportunities with government agencies.
RESEARCH AND DEVELOPMENT
The Company completed the development of a "universal system" which allows
widespread use of the Company`s hardware and software. To maintain its
competitive advantage in the current target markets, and to penetrate additional
markets, the Company plans to continue its research and development efforts to
reduce the size and the cost of the Company`s system and to expand the
flexibility of the Company`s products.
COMPETITION
The market for wireless tracking and management of enterprise assets is
relatively new, constantly evolving, and competitive. Although the Company`s
current competitors do not provide the precise capabilities of the Company`s
systems, they do offer subsets of the Company`s system capabilities or alternate
approaches to the issues the Company`s products address. Those companies include
both emerging companies with limited operating histories, such as WhereNet
Corp., Remote Equipment Systems, Inc., Media Recovery, Inc., and companies with
longer operating histories, greater name recognition and/or significantly
greater financial, technical and marketing resources than the Company, such as
Savi Technology, Symbol Technologies, Inc., and Intermec Technologies Corp. The
Company expects that competition will intensify in the near future. However, the
Company believes there are significant barriers to entry for the Company`s
potential competitors.
INTELLECTUAL PROPERTY
The Company currently has one United States patent and pending patent
applications relating to the Company`s system architecture and technology. It
also has a corresponding patent and pending patent applications in selected
foreign countries. The patents and patent applications may not provide the
Company with any competitive advantage. Many of the Company`s current and
potential competitors dedicate substantially greater resources to protection and
enforcement of intellectual property rights.
The Company attempts to avoid infringing known proprietary rights of third
parties in its product development efforts. However, the Company has not
conducted and does not conduct comprehensive patent searches to determine
whether it infringes patents or other proprietary rights held by third parties.
In addition, it is difficult to proceed with certainty in a rapidly evolving
5
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies. If the Company were to discover that its products violate
third-party proprietary rights, the Company may not be able to:
o obtain licenses to continue offering such products without
substantial reengineering;
o reengineer the Company`s products successfully to avoid
infringement;
o obtain licenses on commercially reasonable terms, if at all; or
o litigate an alleged infringement successfully or settle without
substantial expense and damage awards.
Any claims against the Company relating to the infringement of third-party
proprietary rights, even if without merit, could result in the expenditure of
significant financial and managerial resources or in injunctions preventing us
from distributing certain products. Such claims could materially adversely
affect the Company`s business, financial condition and results of operations.
The Company`s software products are susceptible to unauthorized copying and
uses that may go undetected, and policing such unauthorized use is difficult. In
general, the Company`s efforts to protect its intellectual property rights
through patent, copyright, trademark and trade secret laws may not be effective
to prevent misappropriation of the technology, or to prevent the development and
design by others of products or technologies similar to or competitive with
those developed by the Company. The Company`s failure or inability to protect
its proprietary rights could materially adversely affect the Company`s business,
financial condition and results of operations.
EMPLOYEES
The Company currently has thirty-five full time employees, of which ten are
engaged in product development (which includes engineering), thirteen in
operations, six in sales and marketing and six in finance and general
administration.
RISK FACTORS
THE MARKET FOR OUR TECHNOLOGY MIGHT NOT CONTINUE TO DEVELOP, CAUSING OUR
REVENUES TO DECREASE
Our success is highly dependent on the continued market acceptance of
our wireless monitoring and tracking system. The market for wireless monitoring
and tracking products and services is new and rapidly evolving. We are not
certain that our future target customers will purchase our wireless monitoring
and tracking system. Additionally, we cannot assure you that the market for
wireless monitoring and tracking technology will continue to emerge or become
sustainable. If the market for our products fails to grow, develops more slowly
than we expect or becomes saturated with competing products or services, then
6
our revenues will not increase and our financial condition may be materially
adversely affected.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, LIMITING OUR ABILITY
TO DEVELOP AND EXPAND OPERATIONS
Based on our current estimates, we believe that we have sufficient cash
to continue operations for at least the next 12 months. Unplanned expenses or
development opportunities may require us to raise additional capital. We cannot
be certain that additional financing will be available when we require it and to
the extent that we require it. If additional funds are unavailable to us, or are
not available to us on acceptable terms, we may be unable to fund our expansion,
develop or enhance our products or respond to competitive pressures.
IF WE RAISE ADDITIONAL CAPITAL THROUGH THE SALE OF COMMON STOCK, PREFERRED
STOCK OR CONVERTIBLE DEBT SECURITIES, THE PERCENTAGE OWNERSHIP OF OUR THEN
EXISTING STOCKHOLDERS WILL BE DILUTED
We have issued common stock, options and warrants to purchase our
common stock, and in the future we may issue additional shares of common stock,
options, warrants, preferred stock or other securities exercisable for or
convertible into our common stock. At March 24, 2003, there were warrants to
purchase 307,125 shares of common stock outstanding. Additionally, we have
granted options to employees and directors for the purchase of approximately
2,400,000 shares of our common stock, and expect to continue to grant employees
stock options. Holders of our common stock do not have preemptive rights.
Therefore, issuances of additional securities will dilute the percentage
ownership of our stockholders.
OUR FAILURE TO PROTECT OUR PROPRIETARY TECHNOLOGY MAY IMPAIR OUR COMPETITIVE
POSITION
We believe that we have a competitive advantage due to our
intellectual property rights. Although we seek to protect our intellectual
property rights through patents, copyrights, trade secrets and other measures,
we cannot be certain that: we will be able to adequately protect our technology;
our patents will not be successfully challenged by one or more third parties,
which could result in our loss of the right to prevent others from exploiting
the technology described in the patent; competitors will not be able to develop
similar technology independently; and intellectual property laws will be
adequate to protect our intellectual property rights. Furthermore, policing the
unauthorized use of our products is difficult, and expensive litigation may be
necessary to enforce our intellectual property rights. Accordingly, we cannot be
certain that we will be able to protect our proprietary rights against
unauthorized third party copying or use. If we are unsuccessful in protecting
our intellectual property, we may lose the technological advantage we have over
competitors.
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM A
CLAIM OF INFRINGEMENT BY A THIRD PARTY
7
In recent years, there has been significant litigation in the United States
involving claims of alleged infringement of patents and other intellectual
property rights. We could incur substantial costs to defend any such litigation.
Although we are not currently involved in any intellectual property litigation,
we may be a party to litigation in the future as a result of an alleged
infringement of another`s intellectual property. If a claim of infringement of
intellectual property rights was decided against us, we could be required to:
cease selling, incorporating or using products or services that incorporate the
challenged intellectual property; obtain from the holder of the infringed
intellectual property right a license to sell or use the relevant technology,
which license may not be available on reasonable terms; or redesign those
products or services that incorporate such technology.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, WE MAY BE UNABLE TO
MEET THE NEEDS OF OUR CUSTOMERS
Our market is characterized by rapid technological change and frequent
new product announcements. Significant technological changes could render our
existing technology obsolete. If we are unable to successfully respond to these
developments or do not respond in a cost-effective way, we will be unable to
satisfactorily meet the needs of our customers. To be successful, we must adapt
to rapidly changing market conditions by continually improving the
responsiveness, services and features of our products and by developing new
features to meet customer needs. Our inability to meet customer needs would lead
to a loss of customers.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO RECRUIT ADDITIONAL PERSONNEL, OUR
BUSINESS MAY SUFFER
We are dependent on the continued employment and performance of our
executive officers and key employees, particularly Jeffrey M. Jagid, Chief
Executive Officer, Kenneth S. Ehrman, Chief Operating Officer, Ned Mavrommatis,
Chief Financial Officer, Michael Ehrman, Executive Vice President, Engineering,
and Frederick Muntz, Executive Vice President Sales and Marketing. We currently
do not have employment agreements with our key employees. Like other companies
in our industry, we face intense competition for qualified personnel. Many of
our competitors for qualified personnel have greater resources than we have. We
cannot be certain that we will be able to maintain salaries at market levels.
Therefore, we cannot be certain that we will be successful in attracting or
retaining qualified personnel in the future.
WE MIGHT NOT BE ABLE TO OBTAIN THE SERVICES OF QUALIFIED SUBCONTRACTORS TO
PRODUCE OUR PRODUCTS LEADING TO DISRUPTION IN PRODUCTION AND DISTRIBUTION OF OUR
PRODUCTS TO OUR CUSTOMERS
In order to meet our requirements under our contracts, we rely on the
efforts and skills of subcontractors for the manufacture of our products and the
delivery of our products to our customers. There is great competition for the
most qualified and competent subcontractors. If we are unable to afford or hire
qualified subcontractors the quality of our services and products could decline.
Such conditions would limit our ability to perform our contracts with customers.
8
THE FEDERAL GOVERNMENT MIGHT IMPLEMENT SIGNIFICANT REGULATIONS WHICH MIGHT
REQUIRE US TO INCUR SIGNIFICANT COMPLIANCE COSTS
Our products transmit radio frequency waves, the transmission of which
is governed by the rules and regulations of the Federal Communication
Commission. Our ability to design, develop and sell our products will continue
to be subject to the rules and regulations of the Federal Communication
Commission for the foreseeable future. The implementation of unfavorable
regulations, or unfavorable interpretations of existing regulations by courts or
regulatory bodies, could require us to incur significant compliance costs cause
the development of the affected markets to become impractical or otherwise
adversely affect our ability to produce or market our products.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH WE WILL BE UNABLE TO
SUCCESSFULLY OPERATE OUR BUSINESS IN THE FUTURE
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, technical, operational and financial
resources. To manage our expected growth, we will have to implement and improve
our operational and financial systems, and we will have to train and manage our
growing employee base. We will also need to maintain and expand our
relationships with customers, subcontractors and other third parties. If we are
unable to effectively manage our growth, our business may become inefficient and
we might not be able to effectively compete with competitors.
OUR NEW PRODUCTS MAY CONTAIN TECHNOLOGICAL FLAWS AND WE MAY INCUR SUBSTANTIAL
LIABILITY DUE TO THESE FLAWS
Complex technological products like ours often contain undetected
errors or failures when first introduced or when new versions of the products
are introduced. Despite our every effort to eliminate these flaws, there still
may be flaws in our new products, even after the commencement of commercial
shipments. These flaws could result in a delay of, or failure to, achieve market
acceptance of our products, which, since our products are used in business
critical applications could lead to substantial product liability claims. Such
claims could not only adversely affect our immediate financial condition, but
could permanently injure our reputation in our industry.
ITEM 2. DESCRIPTION OF PROPERTIES
In November 1999, the Company entered into a lease that expires on March
31, 2010 for a facility in Hackensack, New Jersey, covering approximately 22,500
square feet, which the Company first occupied in March 2000. The rent is
currently $31,060 per month and will increase to $34,835 per month from the 61st
month until the end of the lease.
ITEM 3. LEGAL PROCEEDINGS
None.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II.
ITEM 5. MARKET FOR REGISTRANT`S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering on June 30, 1999. The
Company`s Common Stock is traded on The Nasdaq SmallCap Market under the symbol
IDSY. The following table sets forth, for the periods indicated, the high and
low sales price for the Company`s common stock as reported on such quotation
systems.
QUARTER ENDING: HIGH LOW
--------------- ---- ---
2001
----
March 31, 2001 $ 5.000 $2.000
June 30, 2001 $ 6.700 $3.375
September 30, 2001 $ 6.000 $3.700
December 31, 2001 $ 10.850 $4.450
2002
----
March 31, 2002 $ 11.650 $6.650
June 30, 2002 $ 8.300 $2.690
September 30, 2002 $ 6.000 $3.250
December 31, 2002 $ 4.590 $3.480
2003
----
January 1, 2003 - March 24, 2003 $ 5.190 $4.020
There were 28 registered holders and approximately 1,400 beneficial owners
of the Company`s Common Stock of record as of March 25, 2003. The Company has
not declared or paid dividends on its Common Stock to date and intends to retain
future earnings, if any, for use in its business for the foreseeable future.
ITEM 6. MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company`s financial condition
and results of operations should be read in conjunction with its financial
statements and notes thereto appearing elsewhere herein.
11
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of
operations are based on our financial statements that have been prepared under
accounting principles generally accepted in the United States of America. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could materially differ from those
estimates. We have disclosed all significant accounting policies in note B to
the financial statements included in this Form 10-KSB. The financial statements
and the related notes thereto should be read in conjunction with the following
discussion of our critical accounting policies. Our critical accounting policies
are:
REVENUE RECOGNITION
The Company`s revenues are derived from contracts with multiple element
arrangements, which include the Company`s system, training and technical
support. Revenues are recognized as each element is earned based on the relative
fair value of each element and when there are no undelivered elements that are
essential to the functionality of the delivered elements. The Company`s system
is typically implemented by the customer or a third party and, as a result,
revenue is recognized when title passes to the customer, which usually is upon
delivery of the system, provided all other revenue recognition criteria are met.
Training and technical support revenue are generally recognized at time of
performance.
The Company also enters into post-contract maintenance and support
agreements. Revenue is recognized over the service period and the cost of
providing these services is expensed as incurred.
During 2002 the Company began deriving revenues under leasing arrangements.
Such arrangements provide for monthly payments covering the system sale,
maintenance and interest. These arrangements meet the criteria to be accounted
for as sales-type leases pursuant to Statement of Financial Accounting Standards
No. 13, "Accounting for Leases". Accordingly, the system sale is recognized upon
delivery of the system, provided all other revenue recognition criteria are met.
Upon the recognition of revenue, an asset is established for the "investment in
sales-type leases". Maintenance revenue and interest income are recognized
monthly over the lease term. The Company recognized $784,000 of system sales
during the year ended December 31, 2002 pursuant to such arrangements. These
arrangements provide for sixty equal monthly payments and interest has been
imputed at 6%.
The Company recognized $1,536,000 of systems sales in 2002 in connection
with an installment sale. The arrangement provided for a $470,000 upfront
payment and equal monthly payments of approximately $26,000 through November
2007, which include principal, imputed interest at approximately 7% and
approximately $5,000 of maintenance, which is recognized as revenue monthly.
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$589,000 of the system sales is classified as accounts receivable and
$867,000 is classified as installment receivable - noncurrent portion at
December 31, 2002.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating information expressed as a percentage of revenue:
Year Ended
December 31,
2001 2002
Revenues 100.0% 100.0%
Cost of revenues 59.4 43.8
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Gross profit 40.6 56.2
Selling, general and administrative expenses 384.8 69.2
Research and development expenses 112.5 16.9
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Loss from operations (456.7) (29.9)
Net interest income 33.3 4.9
------------- --------------
Net loss (423.4) (25.0)
============= ==============
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
REVENUES. Revenues were $5,544,000 for the year ended December 31, 2002 compared
to $923,000 in the year ended December 31, 2001. The increase in revenues for
the year is attributable to increased sales of the Company`s Wireless Asset Net
system for tracking and managing fleets of industrial equipment. The Company`s
customer base now includes Archer Daniels Midland, DaimlerChrysler, Deere & Co.,
Federal Aviation Administration, Ford Motor Company, Golub Corporation, Hallmark
Cards, Target Corporation, Toyota Motor Company, the U.S. Navy and the U.S.
Postal Service among others.
COST OF REVENUES. Cost of revenues were $2,430,000 for the year ended December
31, 2002 compared to $548,000 in the year ended December 31, 2001. As a
percentage of revenues, cost of revenues decreased to 43.8% in the year ended
December 31, 2002 from 59.4% in the year ended December 31, 2001. This
percentage decrease was primarily attributable to the sale of certain higher
margin services during the year ended December 31, 2002 and lower product costs
due to continuing research and development efforts. Gross profit was $3,114,000
in the year ended December 31, 2002 compared to $375,000 in the year ended
December 31, 2001. As a percentage of revenues, gross profit increased to 56.2%
in the year ended December 31, 2002 from 40.6% in the year ended December 31,
2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $3,835,000 in the year ended December 31, 2002
compared to $3,552,000 in the year ended December 31, 2001. The increase was
13
primarily attributable to an increase in payroll expenses and an increase in
insurance premiums for the Company`s director and officer liability policy. As a
percentage of revenues, selling, general and administrative expenses decreased
to 69.2% in the year ended December 31, 2002 from 384.8% in the year ended
December 31, 2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$938,000 in the year ended December 31, 2002 compared to $1,038,000 in the year
ended December 31, 2001. This decrease was attributable to the completion of the
Company`s "universal system" of hardware and software for tracking and managing
fleets of industrial vehicles. The Company`s research and development efforts
during the year ended December 31, 2002 were devoted primarily to product
enhancements and manufacturing cost reductions. As a percentage of revenues,
research and development expenses decreased to 16.9% in the year ended December
31, 2002 from 112.5% in the year ended December 31, 2001.
NET INTEREST INCOME AND EXPENSE.
Interest income was $279,000 in the year ended December 31, 2002 as compared to
$310,000 in the year ended December 31, 2001. This decrease was attributable to
the reduction in interest rates. The Company invests in commercial paper and
corporate bonds which are classified as held to maturity. During the year ended
December 31, 2002 the Company earned interest income in connection with sales
type lease arrangements.
INTEREST EXPENSE
Interest expense was $4,000 in the year ended December 31, 2002 as compared to
$3,000 in the year ended December 31, 2001.
NET LOSS. Net loss was $1,384,000 in the year ended December 31, 2002 as
compared to net loss of $3,908,000 in the year ended December 31, 2001. This
decrease was due primarily to the reasons described above.
14
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had cash, cash equivalents and
investments of $7,757,000 and working capital of $8,295,000 as compared to
$5,465,000 and $5,970,000, respectively, at December 31, 2001.
Net cash used in operating activities was $3,683,000 for the year ended
December 31, 2002 as compared to net cash used in operating activities of
$3,185,000 for the year ended December 31, 2001. Net cash used in operating
activities in the year ended December 31, 2002 was primarily due to a net loss
of $1,384,000, an increase in accounts receivable of $880,000, an increase in
installment receivable of $867,000, an increase in investment in sales type
leases of $681,000, an increase in inventory of $627,000 and a decrease in other
liabilities of $100,000 partially offset by a an increase in accounts payable
and accrued expenses of $631,000 and depreciation and amortization of $201,000.
Net cash used in operating activities in the year ended December 31, 2001 was
primarily due to a net loss of $3,908,000 and a decrease in accounts payable
and accrued expenses of $125,000 partially offset by a decrease in accounts and
unbilled receivables of $412,000, an increase in other liabilities of $200,000
and a decrease in income taxes receivable of $111,000.
Net cash used in investing activities for the year ended December 31, 2002
was $1,424,000 as compared to cash provided by investing activities for the year
ended December 31, 2001 of $2,478,000. Net cash used in investing activities in
the year ended December 31, 2002 was primarily from purchases of investments of
$4,603,000 and the purchases of fixed assets of $340,000 partially offset by
maturities of investments of $3,600,000. Net cash provided by investing
activities in the year ended December 31, 2001 was primarily from maturities of
short-term investments of $12,000,000 partially offset by the purchase of
investments of $9,242,000 and amortization of debt discount on investments of
$209,000.
Net cash provided by financing activities for the year ended December 31,
2002 was $6,439,000 as compared to net cash provided in financing activities of
$48,000 for the year ended December 31, 2001. Net cash provided by financing
activities for the year ended December 31, 2002, resulted primarily from
$6,143,000 received in connection with the sale of 821,250 shares of common
stock, $169,000 of proceeds received from exercise of employee stock options,
and $137,000 of borrowings under a line of credit. Net cash provided by
financing activities for the year ended December 31, 2001, resulted from $70,000
of proceeds received from exercise of employee stock options, offset by $22,000
paid for capital lease obligations.
In January 2003, the Company closed on a five-year term loan for $1,000,000
with a financial institution. Interest at the 30 day LIBOR plus 1.75% and
principal are payable monthly. To hedge the loan`s floating interest expense the
Company entered into an interest rate swap contemporaneously with the closing of
the loan and fixed the rate of interest at 5.28% for the five year term.
The Company believes it has sufficient cash, cash equivalents and
investments for the next twelve months of operations.
15
The Company believes its operations have not been and, in the foreseeable
future, will not be materially adversely affected by inflation or changing
prices.
16
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-KSB, under the sections
"Management Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere relate to future events and expectations
and as such constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements and to vary significantly from
reporting period to reporting period. These forward looking statements were
based on various factors and were derived utilizing numerous important
assumptions and other factors that could cause actual results to differ
materially from those in the forward looking statements, including, but not
limited to: uncertainty as to the Company`s future profitability and the
Company`s ability to develop and implement operational and financial systems to
manage rapidly growing operations, competition in the Company`s existing and
potential future lines of business, and other factors. Other factors and
assumptions not identified above were also involved in the derivation of these
forward looking statements, and the failure of such other assumptions to be
realized, as well as other factors, may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
these forward looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward looking
statements.
ITEM 7. FINANCIAL STATEMENTS
I.D. SYSTEMS, INC.
CONTENTS
ITEM 7 FINANCIAL STATEMENTS
Independent auditors` report F-2
Balance sheet as of December 31, 2002 F-3
Statements of operations for the years ended December 31, 2001 and 2002 F-4
Statements of changes in stockholders` equity for the years ended December 31, 2001 and 2002 F-5
Statements of cash flows for the years ended December 31, 2001 and 2002 F-6
Notes to financial statement F-7
17
INDEPENDENT AUDITORS` REPORT
Board of Directors and Stockholders
I.D. Systems, Inc.
Hackensack, New Jersey
We have audited the accompanying balance sheet of I.D. Systems, Inc. as of
December 31, 2002 and the related statements of operations, changes in
stockholders` equity and cash flows for the years ended December 31, 2001 and
2002. These financial statements are the responsibility of the Company`s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of I.D. Systems, Inc. as of December
31, 2002 and the results of its operations and its cash flows for the years
ended December 31, 2001 and 2002, in conformity with accounting principles
generally accepted in the United States of America.
Eisner LLP (formerly Richard A. Eisner & Company, LLP)
New York, New York
January 30, 2003
F-2
I.D. SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 2002
ASSETS
Current assets:
Cash and cash equivalents $ 3,758,000
Investments 3,031,000
Accounts receivable 1,114,000
Inventory 1,471,000
Investment in sales type leases 159,000
Interest receivable 73,000
Officer loan 10,000
Prepaid expenses and other current assets 147,000
---------------
Total current assets 9,763,000
Investments 968,000
Fixed assets, net 679,000
Investment in sales type leases 522,000
Installment receivable - noncurrent portion 867,000
Officer loan 41,000
Other assets 107,000
---------------
$ 12,947,000
===============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 1,205,000
Line of credit 137,000
Deferred revenue 26,000
Other current liabilities 100,000
---------------
Total current liabilities 1,468,000
Deferred rent 66,000
---------------
1,534,000
---------------
Commitments and other matters (Note I)
STOCKHOLDERS` EQUITY
Preferred stock; authorized 5,000,000 shares, $.01 par value; none issued
Common stock; authorized 15,000,000 shares, $.01 par value; issued and outstanding
6,799,000 shares 68,000
Additional paid-in capital 22,042,000
Treasury stock; 40,000 shares at cost (113,000)
Accumulated deficit (10,584,000)
---------------
11,413,000
---------------
$ 12,947,000
===============
See notes to financial statements F-3
I.D. SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2002
------------- -------------
Revenue $ 923,000 $ 5,544,000
Cost of revenue 548,000 2,430,000
------------- -------------
Gross profit 375,000 3,114,000
------------- -------------
Operating expenses:
Selling, general and administrative expenses 3,552,000 3,835,000
Research and development expenses 1,038,000 938,000
------------- -------------
4,590,000 4,773,000
------------- -------------
Loss from operations (4,215,000) (1,659,000)
Interest income 310,000 279,000
Interest expense (3,000) (4,000)
------------- -------------
NET LOSS $ (3,908,000) $ (1,384,000)
============= =============
NET LOSS PER SHARE - BASIC AND DILUTED $(.67) $(.21)
===== =====
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED LOSS PER SHARE 5,840,000 6,711,000
============= =============
See notes to financial statements F-4
I.D. SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS` EQUITY
COMMON STOCK
-------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED TREASURY STOCKHOLDERS`
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
------ ------ ------- ------- ----- ------
BALANCE - JANUARY 1, 2001 5,721,000 57,000 15,558,000 (5,292,000) 10,323,000
Shares issued pursuant to exercise
of stock options 145,000 2,000 181,000 183,000
Shares received as consideration
for exercise of stock options $ (113,000) (113,000)
Net loss for the year ended
December 31, 2001 (3,908,000) (3,908,000)
---------- ---------- ------------- ------------ ------------ --------------
BALANCE - DECEMBER 31, 2001 5,866,000 59,000 15,739,000 (9,200,000) (113,000) 6,485,000
Shares issued pursuant to exercise
of stock options 112,000 1,000 168,000 169,000
Shares issued pursuant to
private placement 821,000 8,000 6,135,000 6,143,000
Net loss for the year ended
December 31, 2002 (1,384,000) (1,384,000)
---------- ---------- ------------- ------------ ------------ --------------
BALANCE - DECEMBER 31, 2002 6,799,000 $ 68,000 $ 22,042,000 (10,584,000) $ (113,000) $ 11,413,000
========== ========= ============= ============ ============ =============
See notes to financial statements F-5
I.D. SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,908,000) $ (1,384,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 163,000 201,000
Deferred rent expense 23,000 24,000
Deferred revenue 26,000
Changes in:
Accounts receivable 63,000 (880,000)
Unbilled receivables 349,000
Inventory (96,000) (627,000)
Income tax receivable 111,000
Prepaid expenses and other assets 43,000 (26,000)
Investment in sales type leases (681,000)
Installment receivable - noncurrent portion (867,000)
Accounts payable and accrued expenses (125,000) 631,000
Taxes payable (8,000)
Other liabilities 200,000 (100,000)
--------------- ---------------
Net cash used in operating activities (3,185,000) (3,683,000)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (71,000) (340,000)
Purchases of investments (9,242,000) (4,603,000)
Maturities and sales of investments 12,000,000 3,600,000
Increase in interest receivable (73,000)
Amortization of (discount) premium on investments (209,000) 43,000
Officer loan, net of repayment (51,000)
--------------- ---------------
Net cash provided by (used in) investing activities 2,478,000 (1,424,000)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of lease obligations (22,000) (10,000)
Proceeds from exercise of stock options 70,000 169,000
Proceeds from line of credit 137,000
Net proceeds from private placement 6,143,000
--------------- ---------------
Net cash provided by financing activities 48,000 6,439,000
--------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (659,000) 1,332,000
Cash and cash equivalents - January 1 3,085,000 2,426,000
--------------- ---------------
CASH AND CASH EQUIVALENTS - DECEMBER 31 $ 2,426,000 $ 3,758,000
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 3,000 $ 4,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING INFORMATION:
Treasury shares received as consideration for exercise of stock options $ 113,000
See notes to financial statements F-6
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE A - THE COMPANY
I.D. Systems, Inc. (the "Company") is a provider of wireless solutions. The
Company designs, develops and produces innovative wireless monitoring and
tracking products that utilize its patented radio-frequency-based system and
Internet-based data management systems. The Company`s products are designed to
enable users to improve operating efficiencies and reduce costs. The Company was
incorporated in Delaware in 1993 and commenced operations in January 1994.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
[2] CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
[3] INVENTORY:
Inventory, which consists of components for the Company`s products and
finished goods to be shipped to customers under existing orders, is
stated at cost using the first-in first-out method.
[4] FIXED ASSETS AND DEPRECIATION:
Fixed assets are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets which range from
three to ten years. Equipment under capital leases are amortized using
the straight-line method over the terms of the respective leases, or
their estimated useful lives, whichever is shorter.
[5] LONG-LIVED ASSETS:
The Company evaluates its long-lived assets in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"), pursuant to which an impairment loss is recognized if
the carrying amount of a long-lived asset is not recoverable and exceeds
its fair value.
[6] RESEARCH AND DEVELOPMENT:
Research and development costs are charged to expense as incurred.
F-7
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] PATENT COSTS:
Costs incurred in connection with acquiring patent rights are charged to
expense as incurred.
[8] REVENUE RECOGNITION:
The Company`s revenues are derived from contracts with multiple element
arrangements, which include the Company`s system, training and technical
support. Revenues are recognized as each element is earned based on the
relative fair value of each element and when there are no undelivered
elements that are essential to the functionality of the delivered
elements. The Company`s system is typically implemented by the customer
or a third party and, as a result, revenue is recognized when title
passes to the customer, which usually is upon delivery of the system,
provided all other revenue recognition criteria are met. Training and
technical support revenue are generally recognized at time of
performance.
The Company also enters into post-contract maintenance and support
agreements. Revenue is recognized over the service period and the cost of
providing these services is expensed as incurred.
During 2002 the Company began deriving revenues under leasing
arrangements. Such arrangements provide for monthly payments covering the
system sale, maintenance and interest. These arrangements meet the
criteria to be accounted for as sales-type leases pursuant to Statement
of Financial Accounting Standards No. 13, "Accounting for Leases".
Accordingly, the system sale is recognized upon delivery of the system,
provided all other revenue recognition criteria are met. Upon the
recognition of revenue, an asset is established for the "investment in
sales-type leases". Maintenance revenue and interest income are
recognized monthly over the lease term. The Company recognized $784,000
of system sales during the year ended December 31, 2002 pursuant to such
arrangements. These arrangements provide for sixty equal monthly payments
and interest has been imputed at 6%.
The Company recognized $1,536,000 of system sales in 2002 in connection
with an installment sale. The arrangement provided for a $470,000 upfront
payment and equal monthly payments of approximately $26,000 through
November 2007, which include principal, imputed interest at approximately
7% and approximately $5,000 of maintenance, which is recognized as
revenue monthly. $589,000 of the system sales is classified as accounts
receivable and $867,000 is classified as "installment receivable -
noncurrent portion" at December 31, 2002 in the accompanying financial
statements.
[9] BENEFIT PLAN:
The Company maintains a retirement plan under Section 401(k) of the
Internal Revenue Code, which covers all eligible employees. The Company
did not make any contributions to the plan during the years ended
December 31, 2001 and 2002.
[10] RENT EXPENSE:
Expense related to the Company`s facility lease is recorded on a
straight-line basis over the lease term. The difference between rent
expense incurred and the amount paid is recorded as deferred rent and is
amortized over the lease term.
F-8
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[11] STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. The Company has
adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure", which was released in December 2002 as an
amendment of SFAS No. 123. The following table illustrates the effect on
net income and earnings per share if the fair value based method had been
applied to all awards.
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2002
-------------- --------------
Reported net loss $ (3,908,000) $ (1,384,000)
Stock-based employee compensation expense included in
reported net loss, net of related tax effects 0 0
Stock-based employee compensation determined under the
fair value based method, net of related tax effects (596,000) (925,000)
-------------- --------------
Pro forma net loss $ (4,504,000) $ (2,309,000)
============== ==============
Loss per share (basic and diluted):
As reported $(0.67) $(0.21)
====== ======
Pro forma $(0.77) $(0.34)
====== ======
The fair value of each option grant on the date of grant is estimated
using the Black-Scholes option-pricing model reflecting the following:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2002
--------- ---------
Volatility 93% 65%
Expected life of options 5 years 5 YEARS
Risk free interest rate 5% 4%
Dividend yield 0% 0%
The weighted average fair value of options granted during the years ended
December 31, 2001 and 2002 was $3.40 and $3.52, respectively.
[12] INCOME TAXES:
The Company uses the asset and liability method of accounting for
deferred income taxes. Deferred income taxes are measured by applying
enacted statutory rates to net operating loss carryforwards and to the
differences between the financial reporting and tax bases of assets and
liabilities. Deferred tax assets are reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be
realized.
F-9
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[13] NET INCOME (LOSS) PER SHARE:
The Company calculates net income (loss) per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a
dual presentation of "basic" and "diluted" income (loss) per share on the
face of the statements of operations. Basic income (loss) per share is
computed by dividing the net income (loss) by the weighted average number
of shares of common stock outstanding during each period. Diluted income
(loss) per share includes the effect, if any, from the potential exercise
or conversion of securities, such as stock options and warrants, which
would result in the issuance of incremental shares of common stock. For
the years ended December 31, 2001 and 2002 the basic and diluted weighted
average shares outstanding are the same since the effect from the
potential exercise of outstanding stock options and warrants would have
been anti-dilutive (see Note G).
[14] FINANCIAL INSTRUMENTS:
The carrying amounts of cash equivalents, investments and other
liabilities approximate their fair values due to the short period to
maturity of these instruments. The carrying amount of investment in
sales-type leases and "installment receivable - noncurrent portion"
approximate their fair values due to the market rate of interest charged
to customers.
NOTE C - INVESTMENTS
The Company`s investments at December 31, 2002 consist principally of corporate
bonds and are classified as held to maturity. Accordingly, investments are
carried at amortized cost.
NOTE D - FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and amortization,
and at December 31, 2002, are summarized as follows:
Equipment $ 418,000
Computer software 138,000
Computer hardware 189,000
Furniture and fixtures 250,000
Leasehold improvements 275,000
------------
1,270,000
Accumulated depreciation and amortization 591,000
------------
$ 679,000
============
During 2002 various capital leases expired and the Company purchased the related
equipment for nominal consideration. The original cost of the equipment was
$51,000.
F-10
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE E - OFFICER LOAN
In June 2002, the Company loaned $56,000 to an officer. The loan is payable
together with interest of 4% in semi-monthly installments of $500 through August
2007. At December 31, 2002, $51,000 is due to the Company, $10,000 of which is
due in 2003. The loan is fully payable upon demand and is due if the employee is
terminated from the Company for any reason. This loan was made prior to the
release of the Sarbanes-Oxley Act of 2002. The Company is prohibited from making
any loans to officers in the future.
NOTE F - LINE OF CREDIT
During 2002, the Company secured a working capital line of credit, with maximum
borrowings of $500,000. Interest at the 30 day LIBOR Market Index Rate (1.4% at
December 31, 2002) plus 1.75% is payable monthly. At December 31, 2002, the
Company owed $137,000 under this line of credit. Outstanding principal amounts
are payable by May 1, 2003.
NOTE G - STOCKHOLDERS` EQUITY
[1] COMMON STOCK:
In June 1999, the Company sold 2,300,000 shares of its common stock in an
initial public offering. In connection therewith, the Company received
net proceeds of $13,921,000.
In January 2002, the Company sold 821,000 shares of its common stock in a
private placement. In connection therewith, the Company received net
proceeds of $6,143,000.
[2] PREFERRED STOCK:
The Company has 5,000,000 shares of $.01 par value preferred stock
authorized. The Company`s Board of Directors has the authority to issue
shares of preferred stock and to determine the price and terms of those
shares.
[3] STOCK OPTIONS:
The Company has adopted the 1995 Stock Option Plan, pursuant to which the
Company may grant options to purchase up to an aggregate of 1,250,000
shares of common stock. The Company has also adopted the 1999 Stock
Option Plan and the 1999 Director Option Plan, pursuant to which the
Company may grant options to purchase up to 1,813,000 (which was
increased during 2001 from 813,000) and 300,000 shares of common stock,
respectively. The Plans are administered by the Board of Directors, which
has the authority to determine the term during which an option may be
exercised (not more than 10 years), the exercise price of an option and
the rate at which options may be exercised.
F-11
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE G - STOCKHOLDERS` EQUITY (CONTINUED)
[3] STOCK OPTIONS: (CONTINUED)
A summary of the status of the Company`s stock option plans as of
December 31, 2001 and 2002 and changes during the years ended on those
dates, is presented below:
2001 2002
------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ -------------- ------------ --------------
Outstanding at beginning of year 1,975,000 $2.76 2,222,000 $3.32
Granted 664,000 4.64 122,000 6.05
Exercised (145,000) 1.26 (112,000) 1.51
Forfeited (272,000) 3.59 (32,000) 5.66
------------ ------------
Outstanding at end of year 2,222,000 3.32 2,200,000 3.53
============ ============
Exercisable at end of year 970,000 1.80 1,240,000 2.47
============ ============
As of December 31, 2002 there were 900,000 options available for grant
under the Company`s stock option plans.
The following table summarizes information about stock options at
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
--------------- --------------- --------------- --------------- ---------------- ----------------
$0.80 213,000 3 years $0.80 213,000 $0.80
1.20 708,000 5 years 1.20 637,000 1.20
2.31 - 3.81 362,000 8 years 2.95 89,000 3.09
4.07 - 6.70 603,000 8 years 5.36 176,000 5.04
7.38 - 10.25 314,000 7 years 7.75 125,000 7.67
--------------- ----------------
2,200,000 6 years 3.53 1,240,000 2.47
=============== ================
[4] WARRANTS:
In connection with the Company`s initial public offering in June 1999,
warrants to purchase 200,000 shares of common stock were issued to the
underwriter for nominal consideration. The warrants are exercisable for a
period of four years, commencing in June 2000, at a price of $11.55 per
share.
In connection with the Company`s private placement in January 2002,
warrants to purchase 107,125 shares of common stock were issued to the
placement agent and a finder. The warrants are exercisable for a period
of five years, commencing in January 2002 at a price of $9.58 per share.
F-12
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE H - INCOME TAXES
The Company has a deferred tax asset of approximately $4,171,000 at December 31,
2002. The Company has a net operating loss carryforward of approximately
$10,481,000 for federal income tax purposes, substantially all of which expires
from 2020 through 2022 and, certain state and local net operating loss
carryforwards. There were no significant timing differences between financial
and tax reporting. $741,000 of the net operating loss carryforwards relates to
stock options for which there were no compensation charges for financial
reporting. Accordingly, any future benefit would be credited to additional
paid-in capital. Future stock issuances may subject the Company to annual
limitations on the utilization of its net operating loss carryforward. The
Company has provided a valuation allowance, which increased during 2001 and 2002
by $1,481,000 and $838,000, respectively, against the full amount of its
deferred tax asset, since the likelihood of realization cannot be determined.
The difference between income taxes at the statutory federal income tax rate and
income taxes reported in the statements of operations are attributable to the
following:
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2002
-------------- ------------
Income tax benefit at the federal statutory rate $ (1,329,000) $ (471,000)
State and local income taxes, net of effect on federal taxes (193,000) (69,000)
Increase in valuation allowance 1,481,000 838,000
Stock options (292,000)
Other 41,000 (6,000)
-------------- ------------
$ 0 $ 0
============== ============
NOTE I - COMMITMENTS AND OTHER MATTERS
[1] OPERATING LEASES:
The Company is obligated under operating leases for its facility, which
it occupied in March 2000. The Company`s operating leases provide for
minimum annual rental payments as follows:
YEAR ENDING
DECEMBER 31,
---------------
2003 $ 373,000
2004 373,000
2005 410,000
2006 410,000
2007 410,000
Thereafter 1,025,000
-------------
$ 3,001,000
=============
The office lease, which expires in 2010, also provides for escalations
relating to increases in real estate taxes and certain operating
expenses. Expenses relating to operating leases aggregated approximately
$580,000 and $499,000 for the years ended December 31, 2001 and 2002,
respectively.
F-13
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE I - COMMITMENTS AND OTHER MATTERS (CONTINUED)
[2] CONCENTRATION OF CUSTOMERS:
One customer accounted for 15% of the Company`s revenue and sales to a
vendor of components from inventory accounted for 11% of the Company`s
revenue during the year ended December 31, 2001. One customer
accounted for 59% of the Company`s accounts receivable at December 31,
2001.
Four customers accounted for 28%, 20%, 13% and 12%, respectively, of the
Company`s revenue during the year ended December 31, 2002. One of these
customers accounted for 44% of the Company`s accounts receivable as of
December 31, 2002.
[3] OTHER LIABILITIES:
In December 2001, the Company settled a claim in connection with a
contract and recorded a charge of $250,000, which is included in general
and administrative expenses in the accompanying financial statements.
Pursuant to the terms of the settlement agreement, the Company paid
$50,000 in December 2001 and is obligated to pay $50,000 every six months
from June 2002 through December 2003. Accordingly, $100,000 is reflected
as other current liabilities in the accompanying financial statements.
[4] OTHER:
In September 2002, the Company was notified by a non-core supplier that
they had been undercharging the Company and they requested reimbursement
in the amount of approximately $386,000. The matter was settled for
$250,000, which was paid by the Company in December 2002.
NOTE J - SUBSEQUENT EVENT:
In January 2003, the Company closed on a five-year term loan for $1,000,000 with
a financial institution. Interest at the 30 day LIBOR plus 1.75% and principal
are payable monthly. To hedge the loan`s floating interest expense the Company
entered into an interest rate swap contemporaneously with the closing of the
loan and fixed the rate of interest at 5.28% for the five year term.
F-14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated herein by reference
to the Company`s definitive Proxy Statement to be filed for its 2003 Annual
Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the Company`s definitive Proxy Statement to be filed for its 2003 Annual
Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the Company`s definitive Proxy Statement to be filed for its 2003 Annual
Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the Company`s definitive Proxy Statement to be filed for its 2003 Annual
Meeting of Stockholders.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
A) EXHIBITS
The following exhibits are filed herewith or are incorporated herein by
reference, as indicated.
Number Description
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to the Company`s Form SB-2
filed with the Commission on June 30, 1999).
3.2 Amended and Restated By-Laws of the Company (incorporated herein
by Reference to the Company`s Form SB-2 filed with the Commission
on June 30, 1999).
4.1 Specimen Certificate of the Company`s Common Stock (incorporated
herein by reference to the Company`s Form SB-2 filed with the
Commission on June 30, 1999).
19
4.2 Form of Underwriter`s Warrant Agreement, including Form of
Warrant Certificate (incorporated herein by reference to the
Company`s Form SB-2 filed with the Commission on June 30, 1999).
10.1 Agreement between the Registrant and the United States Postal
Service: Offer and Award Standard dated August 22, 1997, as
modified on May 12, 1998, September 8, 1998, and March 5, 1999
(incorporated herein by reference to the Company`s Form SB-2
filed with the Commission on June 30, 1999).
10.2 Federal Supply Service Information Technology schedule Award
effective April 16, 1999 through April 15, 2004 (incorporated
herein by reference to the Company`s Form SB-2 filed with the
Commission on June 30, 1999).
10.3 Form of Employment Agreement between the Company and its
executive officers (incorporated herein by reference to the
Company`s Form SB-2 filed with the Commission on June 30, 1999).
10.4 1995 Non-Qualified Stock Option Plan (incorporated herein by
reference to the Company`s Form SB-2 filed with the Commission on
June 30, 1999).
10.5 1999 Stock Option Plan (incorporated herein by reference to the
Company`s Form SB-2 filed with the Commission on June 30, 1999).
10.6 Form of Indemnification Agreement (incorporated herein by
reference to the Company`s Form SB-2 filed with the Commission on
June 30, 1999).
10.7 1999 Director Option Plan (incorporated herein by reference to
the Company`s Form SB-2 filed with the Commission on June 30,
1999).
10.8 Office Lease dated November 4, 1999 between the Company and
Venture Hackensack Holding, Inc.(incorporated herein by reference
to the Company`s Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1999 filed with the Commission on March 29,
2000)
23.1 Consent of Eisner LLP (formerly Richard A. Eisner & Company, LLP)
99 Written Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002
B) REPORTS ON FORM 8-K
None.
20
ITEM 14. CONTROLS AND PROCEDURES
a. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC`s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Within the 90 days prior to the filing of this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Company`s management, including 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. Based
upon and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company`s disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
b. CHANGES IN INTERNAL CONTROLS:
There were no changes in the Company`s internal controls or in other
factors that could have significantly affected those controls subsequent to the
date of the Company`s most recent evaluation.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: March 24, 2003
I.D. SYSTEMS, INC.
By: /s/ Jeffrey M. Jagid
-------------------------------
Jeffrey M. Jagid
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Ned Mavrommatis
-------------------------------
Ned Mavrommatis
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1934, this Annual
Report on Form 10-KSB is signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Jeffrey M. Jagid Chief Executive Officer March 24, 2003
-------------------------------------
Jeffrey M. Jagid and Director
/s/ Kenneth S. Ehrman Chief Operating Officer March 24, 2003
----------------------------------
Kenneth S. Ehrman and Director
/s/ Beatrice Yormark Director March 24, 2003
-----------------------------------
Beatrice Yormark
/s/ Martin G. Rosansky Director March 24, 2003
-----------------------------------
Martin G. Rosansky
/s/ Lawrence Burstein Director March 24, 2003
-----------------------------------
Lawrence Burstein
/s/ Michael Monaco Director March 24, 2003
----------------------------------
Michael Monaco
22
CERTIFICATIONS
I, Jeffrey M. Jagid, as Chief Executive Officer (Principal Executive Officer),
certify that:
1. I have reviewed this annual report on Form 10-KSB of I.D. Systems;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant`s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant`s disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant`s other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant`s auditors and the audit committee of
registrant`s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant`s ability to record,
process, summarize and report financial data and have identified for the
registrant`s auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant`s internal
controls; and
6. The registrant`s other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
23
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2003 /s/ Jeffrey M. Jagid
-------------- --------------------------------------
Name: Jeffrey M. Jagid
Title: Chief Executive Officer
(Principal Executive Officer)
24
CERTIFICATIONS
I, Ned Mavrommatis, as Chief Financial Officer (Principal Financial Officer),
certify that:
1. I have reviewed this annual report on Form 10-KSB of I.D. Systems;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant`s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant`s disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant`s other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant`s auditors and the audit committee of
registrant`s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant`s ability to record,
process, summarize and report financial data and have identified for the
registrant`s auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant`s internal
controls; and
6. The registrant`s other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
25
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2003 /s/ Ned Mavrommatis
---------------- --------------------------------------------
Name: Ned Mavrommatis
Title: Chief Financial Officer
(Principal Financial Officer)
26