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, 2004 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 [_].
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 = $13,741,000.
The aggregate market value of the Common Stock held by nonaffiliates of the
Issuer was approximately $72,210,000 based upon the last sales price of such
stock on March 15, 2005, as disclosed on The NASDAQ National Market (IDSY).
The number of shares of common stock, par value $0.01 per share, outstanding as
of March 15, 2005 was 7,707,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement to be filed in 0connection with the issuer's 2005 annual meeting of
stockholders.
TABLE OF CONTENTS
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PAGE
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PART I. .....................................................................................1
Item 1. Description of Business...................................................1
Item 2. Description of Properties................................................16
Item 3. Legal Proceedings........................................................17
Item 4. Submission of Matters to a Vote of Security Holders......................17
PART II. ....................................................................................18
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................................18
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................18
Item 7. Financial Statements.....................................................25
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure......................................26
Item 8A. Controls and Procedures..................................................26
Item 8B. Other Information........................................................26
PART III.....................................................................................27
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act........................27
Item 10. Executive Compensation...................................................27
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...............................27
Item 12. Certain Relationships and Related Transactions...........................27
Item 13. Exhibits.................................................................27
Item 14. Principal Accountant Fees and Services...................................28
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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 3M
Company, American Axle, Archer Daniels Midland, Avis Rent A Car System, Inc.,
DaimlerChrysler, Deere & Co., Ford Motor Company, General Dynamics, Hallmark
Cards, Northrop Grumman, Target Corporation, Toyota Motor Manufacturing
Kentucky, Inc., Walgreen Co., the U.S. Navy, the U.S. Postal Service, and the
U.S. Transportation Security Administration, among others. During the year ended
December 31, 2004, Ford Motor Company, Target Corporation and the U.S.
Transportation Administration accounted for approximately 49%, 15% and 12%,
respectively, of the Company's revenue. During the year ended December 31, 2003,
Ford Motor Company accounted for approximately 58% of the Company's revenue and
no other customer accounted for more than 10% of the Company's revenue.
2004 HIGHLIGHTS
o Expansion of business with Ford Motor Company, including additional
orders for I.D. Systems' industrial vehicle electronic control
systems (IVECS) for Ford's North American manufacturing plants, and
a new contract to provide enterprise-wide support and maintenance
for IVECS. The IVECS system is designed to enhance safety, security,
and maintenance for forklifts and other industrial equipment. The
system is designed to improve safety and security by restricting
vehicle access to trained, authorized operators (as required by
OSHA) and by providing electronic safety inspection checklists. The
system can reduce maintenance expenses by automatically uploading
vehicle data, reporting problems identified on checklists in real
time, scheduling maintenance according to actual vehicle usage
rather than on a calendar basis, and helping management determine
the optimal economic time to replace equipment.
o Expansion of business with Target Corporation, which rolled out a
new version of I.D. Systems' Wireless Asset Net industrial fleet
management system on approximately 400 material handling vehicles in
Target distribution facilities throughout the United States. This
roll-out program followed a successful pilot initiative in which
I.D. Systems demonstrated the value of new system enhancements
designed specifically for warehouse/distribution environments.
o Continued work with the United States Postal Service (USPS), to
translate the previous success of Wireless Asset Net technology at
individual USPS mail processing facilities into an enterprise-wide
implementation of a wireless Powered Industrial Vehicle Management
System (PIVMS). These efforts culminated in a USPS contract award to
I.D. Systems, announced in January 2005, for a national PIVMS
deployment encompassing up to 460 USPS facilities over the next
three years. The PIVMS represents I.D. Systems' most technologically
advanced wireless solution to date, with state-of-the-art
functionality for controlling and tracking mobile equipment.
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o Continued development of homeland security applications with the
Transportation Security Administration (TSA), including the
successful completion of a series of key functional tests at Newark
Liberty International Airport, an increase in funding for the Newark
program, and the award of a new TSA contract to deploy a wireless
vehicle security system at a seaport in Jacksonville, Florida. This
vehicle security system, a version of I.D. Systems' Wireless Asset
Net, has advanced capabilities to deter potential threats at port
facilities, including alerts when vehicles enter prohibited areas,
emergency remote disabling of vehicles, and reports detailing
vehicle and operator activity.
o Expansion of business with WinCo Foods, which placed a follow-on
order for the Wireless Asset Net for its newest distribution center.
I.D. Systems' continued penetration into the food processing and
distribution industry resulted in the company being named to the "FL
100," a list of 100 prominent technology solution providers selected
by the food industry publication Food Logistics.
o Continued development of rental car fleet management applications
with Avis Rent A Car System, Inc., which has a version of the
Wireless Asset Net deployed on its 2,000-vehicle fleet in Puerto
Rico. This system is designed to automate various aspects of the car
rental and return process, helping improve customer service and
increasing the efficiency of fleet operations. For example, by
accurately detecting and automatically transmitting vehicle data,
the system can help renters get on their way more quickly at the end
of their rentals.
o Continued work with Northrop Grumman Ship Systems, General Dynamics'
National Steel and Shipbuilding Company, and the U.S. Navy's
Portsmouth Naval Shipyard to develop and implement an advanced
Wireless Equipment Monitoring and Control System (WEMACS) for
commercial and shipyard environments. This project, funded by the
National Shipbuilding Research Program, includes new product
development for monitoring complex machinery such as cranes.
o New business in the automotive industry, as Premier Manufacturing
Support Services ordered the Wireless Asset Net on behalf of one of
the world's largest automotive parts manufacturers. Premier provides
management and support services for more than 120 automotive plants
worldwide and could potentially develop into a strategic marketing
and system support partner for I.D. Systems.
o New business in the mass market retail distribution sector, as Wajax
Industries ordered the Wireless Asset Net on behalf of a major
Canadian retailer, as announced in January 2005. With a network of
31 branches across Canada, Wajax distributes mobile equipment and
provides related services for a wide range of industries - including
retail/wholesale distribution, manufacturing, mining, utilities,
construction, and forestry - and could potentially become a
foundation for I.D. Systems' dealer/ reseller program in Canada.
o New Wireless Asset Net system enhancements, including the launch of
a new generation of wireless vehicle monitoring hardware (the
Universal Vehicle Asset Communicator, or UVAC 02) and a series of
software upgrades. The UVAC 02 has expanded data management
capabilities, can be installed more quickly and easily than earlier
hardware generations, simplifies interactivity for equipment
operators, and allows for easier maintenance. The improved software
includes expanded server options for enterprise-wide deployments,
augmented database support, increased data throughput, new reporting
and auto-emailing tools, and enhanced remote diagnostic
capabilities.
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o New RFID-based product developments, including the Battery Charger
Monitoring Point(TM) (Battery ChaMP(TM)), the AC Power Control
Module (ACPCM), and the Machine Asset Communicator(TM) (MAC).
o The Battery ChaMP provides remote management and real-time
visibility of batteries and chargers used to power fleets of
electric vehicles. I.D. Systems has already received an order
for this new product, as announced in January 2005 -
AeroVironment, Inc. purchased 500 ChaMP units for its
PosiCharge(TM) fast-charging system, which is being deployed
for a major automotive manufacturer.
o The ACPCM product, developed as part of I.D. Systems' program
with the National Shipbuilding Research Program, supports
Wireless Asset Net installations on complex machinery, such as
cranes. The ACPCM is designed to accommodate virtually any
power input and monitor multiple motor data points for
advanced maintenance management and asset utilization
analysis.
o The MAC product provides advanced wireless monitoring and
control of fixed machinery, including automatic quality
control checks, real-time alerts on out-of-specification
machine parameters, automatic machine shut-down based on
user-defined criteria, and electronic maintenance checklists.
The initial application of MAC technology is in the automotive
industry, where it is being used to enforce quality control on
adhesive-dispensing robots.
o A new cooperative relationship with Unisys Corporation, which, as a
subcontractor to I.D. Systems, will provide implementation services
and technical support for I.D. Systems' program with the U.S. Postal
Service. I.D. Systems is also working with Unisys in an informal
joint marketing capacity to explore other opportunities for Wireless
Asset Net system deployments within the U.S. Government.
o The transition of trading in I.D. Systems common stock from the
NASDAQ Small Cap Market to the NASDAQ National Market on November 8,
2004.
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 radio frequency 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.
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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.
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
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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 and operator
utilization and justify fleet and or personnel 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
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, 3M Company, American Axle, Archer Daniels Midland,
DaimlerChrysler, Deere & Co., Ford Motor Company, General Dynamics, Hallmark
Cards, Northrop Grumman, Target Corporation, Walgreen Co., the U.S. Navy, the
U.S. Postal Service, and the U.S. Transportation Security Administration, among
others.
To expand the scope and variation of its industrial equipment management
applications, the Company has developed several new products, including the
Battery Charger Monitoring Point(TM) (Battery ChaMP(TM)), the AC Power Control
Module (ACPCM), and the Machine Asset Communicator(TM) (MAC).
The Battery ChaMP provides remote management and real-time visibility of
batteries and fast-chargers used to power fleets of electric vehicles. This
wireless visibility ensures that fast-charge systems are properly administered
and maintained to maximize return on investment for the customer. The Company
has provided AeroVironment, Inc.'s PosiCharge(TM) business unit with Battery
ChaMP systems in support of a fast-charging system being deployed for a major
automotive manufacturer.
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The ACPCM product, developed as part of I.D. Systems' program with the
National Shipbuilding Research Program, supports Wireless Asset Net
installations on complex machinery, such as cranes. The ACPCM is designed to
accommodate virtually any power input and monitor multiple motor data points for
advanced maintenance management and asset utilization analysis.
The MAC product provides advanced wireless monitoring and control of fixed
machinery, including automatic quality control checks, real-time alerts on
out-of-specification machine parameters, automatic machine shut-down based on
user-defined criteria, and electronic maintenance checklists. The initial
application of MAC technology is in the automotive industry, where it is being
used to enforce quality control on adhesive-dispensing robots.
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 user's customers.
There are many benefits offered by the Company's solution to car rental
companies, with two such benefits being the 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 customer service or 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 processes. 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.
The Company and Avis Rent A Car System, Inc. commenced a program to
implement the Company's Wireless Asset Net fleet management technology on Avis'
fleet of approximately 2,000 rental vehicles in Puerto Rico. 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.
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, cranes 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 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.
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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's manufacturers are responsible for obtaining the necessary
components and supplies to manufacture the Company's products. While components
and supplies are generally available from a variety of sources, manufacturers
generally depend on a limited number of suppliers for several components,
certain subassemblies and products. In the past, unexpected demand for
communication products caused worldwide shortages of certain electronic parts
and allocation of such parts by suppliers that had an adverse impact on the
ability of manufacturers to deliver products as well as on the cost of producing
such products.
Due to the general availability of manufacturers for the Company's
products, the Company does not believe that the loss of either of its
manufacturers would have a long-term material adverse effect on its business,
although there could be a short-term adverse effect on the business.
The Company generally attempts to maintain sufficient inventory to meet
customer demand for products on short notice, as well as to meet anticipated
sales levels. If the Company's product mix changes in unanticipated ways, or if
sales for particular products do not materialize as anticipated, the Company may
have excess inventory or inventory that becomes obsolete. In such cases, the
Company's operating results could be negatively affected.
SALES AND MARKETING
The Company's sales and marketing objective is to achieve broad market
penetration through targeted sales activities, with an emphasis both on
expanding business opportunities and applications with existing customers and on
developing new customers and applications. The Company currently markets its
systems to large corporations and government agencies primarily through direct
sales. In addition, the Company has developed, and will continue to focus on,
strategic relationships with key companies in target markets, including
equipment dealers, complementary hardware and software vendors, original
equipment manufacturers (OEMs), and service providers.
The Company has a new United States General Services Administration
contract pending that will enable any government agency to purchase the
Company's products on an off-the-shelf basis, without further competitive
bidding. This contract will supersede a previous GSA contract that expired in
September 2004 and will incorporate numerous new products and services not
covered under the previous contract. The Company believes that the new GSA
contract will provide significant sales opportunities with government agencies.
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RESEARCH AND DEVELOPMENT
In the past, we focused our research and development efforts on the
development and deployment of a "universal system," which allows widespread use
of the Company's hardware and software on a broad and diverse base of industrial
equipment assets without requiring multiple or custom versions.
In addition, the Company customized its core fleet management technology
to meet the needs of several emerging markets, including the rental car market
and the airport ground service equipment market. As a result of the important
security implications of the Company's technology in the airport environment,
our internal research and development funding was partially offset by the
Transportation Security Administration.
We intend to continue our commitment to leading-edge technology
development. Current research and development efforts have transitioned to:
o further expanding the list of features and benefits to customers;
o meeting the requirements of new classes of assets;
o reducing the size and cost of the Company's core products; and
o simplifying product manufacturing and deployment.
Additionally, we believe that the Company's core digital, wireless and software
systems have and will continue to expand on cutting-edge technologies.
The Company expended $891,000 and $1,234,000 for research and development
during the years ended December 31, 2003 and 2004, respectively.
COMPETITION
The market for wireless tracking and management of enterprise assets is
relatively new, constantly evolving, and highly 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., Media Recovery, Inc., Access Control Group L.L.C. 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 competes principally on the basis of performance
and the quality of its products and services. 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.
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INTELLECTUAL PROPERTY
The Company currently has one United States patent which expires in
October of 2014, and pending patent applications relating to the Company's
system architecture, system functionality and rental car 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
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.
GOVERNMENT REGULATIONS
The use of radio emissions are subject to regulation in the United States
by various Federal agencies including the Federal Communications Commission
("FCC"), the OSHA and various State agencies have promulgated regulations which
concern the use of lasers and/or radio/electromagnetic emissions standards.
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Regulatory changes in the United States and other countries in which we
may operate in the future may require modifications to some of the Company's
products in order for it to continue to be able to manufacture and market these
products.
The Company's products intentionally transmit radio signals as part of
their normal operation. We have obtained certification from the FCC for our
products that require certification. Users of these products in the United
States do not require any license from the FCC to use or operate these products.
Some of the Company's products transmit narrow band and spread spectrum radio
signals as part of their normal operation.
The Company has obtained certification from the FCC for the Company's
narrow band and spread spectrum radio products. Users of these products in the
United States do not require any license from the FCC to use or operate these
products.
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.
In addition, some of the Company's operations use substances regulated
under various federal, state and local laws governing the environment and worker
health and safety, including those governing the discharge of pollutants into
the ground, air and water, the management and disposal of hazardous substances
and wastes and the cleanup of contaminated sites. Certain of our products are
subject to various federal, state and local laws governing chemical substances
in electronic products.
EMPLOYEES
The Company currently has fifty-five full time employees, of which sixteen
are engaged in customer satisfaction, twelve in product development (which
includes engineering), nine in operations, nine in sales and marketing, and nine
in finance and general administration. None of the Company's employees are
represented by union or collective bargaining agreements. The Company believes
that it's relationships with its employees are good.
RISK FACTORS
WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND A SUBSTANTIAL ACCUMULATED
EARNINGS DEFICIT AND WE MAY NOT BE ABLE TO MAINTAIN OUR PROFITABILITY
Although we generated net income of approximately $400,000 for the year
ended December 31, 2004, we have incurred substantial net losses of
approximately $1.2 million and $1.4 million for the years ended December 31,
2003 and 2002, respectively. At December 31, 2004, we had an accumulated deficit
of approximately $11.4 million. If revenues do not continue to grow or if
operating expenses exceed our expectations or cannot be adjusted accordingly, we
may not be able to continue to maintain profitability and the value of our
common stock could decline significantly.
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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
our revenues will not increase and our financial condition may be materially
adversely affected.
OUR CONCENTRATION OF REVENUE TO ONE MAJOR CUSTOMER, FORD MOTOR COMPANY, MAY
ADVERSELY AFFECT OUR BUSINESS IF FORD DECIDES TO DISCONTINUE PURCHASING OUR
PRODUCTS.
During the year ended December 31, 2004, Ford Motor Company, Target
Corporation and the U.S. Transportation Administration accounted for
approximately 49%, 15% and 12%, respectively, of the Company's revenue. During
the year ended December 31, 2003, Ford Motor Company accounted for approximately
58% of the Company's revenue. Our revenue and our profitability would be
adversely affected if these customers ceased purchasing from us. We would have
no guarantee that we would be able to replace the loss of such revenue with
existing or new customers or in a timely manner to avoid an adverse financial
impact to our business.
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
In order to raise additional capital, we have issued common stock and
warrants to purchase our common stock, and in the future we may issue additional
shares of common stock, options, warrants, preferred stock, other securities
exercisable for or convertible into our common stock or debt. In addition at
March 15, 2005, there were options to employees and directors outstanding for
the purchase of approximately 2,776,000 shares of our common stock. We 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. If additional financing is
raised through debt financing, it may involve significant restrictive covenants
which could affect our ability to operate our business.
11
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
In recent years, there has been significant litigation in the United
States involving claims of alleged infringement of patents and other
intellectual property rights. Any such litigation could result in substantial
costs and diversion of management's attention and our resources. We may be a
party to litigation from time to time 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. We are active in the research and development of
new products and technologies and enhancing our current products. However,
research and development in our industry is complex and filled with uncertainty.
If we expend a significant amount of resources and our efforts do not lead to
the successful introduction of new or improved products, there could be a
material adverse effect on our revenues and market share. In addition, it is
common for research and development projects to encounter delays due to
unforeseen problems, resulting in low initial volume production, fewer product
features than originally considered desirable and higher production costs than
initially budgeted, which may result in lost market opportunities. In addition,
new products may not be commercially well received. There could be a material
adverse effect on our revenues, operating results and market share due to such
delays or deficiencies in the development, manufacturing and delivery of new
products. In addition, our inability to meet customer needs would lead to a loss
of customers and a decrease in our revenues.
12
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 have greater resources than we have to hire qualified personnel.
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. Our dependence on third-party
manufacturers subjects us to the risk of failure by these third parties to
provide us with our products in a timely manner and customer dissatisfaction
with the quality or performance of our products manufactured by these third
parties. Quality or performance failures by our third-party manufacturers or
changes in their financial or business condition could disrupt our ability to
supply quality products to our customers and thereby have a material adverse
effect on our business, revenues and financial condition. In addition, if we are
unable to fulfill orders from our customers, we could experience business
interruption, increased costs, damage to our reputation and loss of our
customers. Although we have several sources for production, the inability to
provide our products to our customers in a timely manner could result in the
loss of customers and our revenues could be materially delayed and/or reduced.
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. In addition, third-party manufacturers are
consolidating in the electronic component industry. The consolidation of
third-party manufacturers may give the remaining and larger third-party
manufacturers greater leverage to increase the prices that they charge and
thereby increase our manufacturing costs.
THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND COMPETITIVE
PRESSURES FROM EXISTING AND NEW COMPANIES MAY HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS, REVENUES, GROWTH RATES AND MARKET SHARE.
The industry in which we operate is a highly competitive industry that is
influenced by the following:
o advances in technology;
o New product introductions;
13
o evolving industry standards;
o product improvements;
o rapidly changing customer needs;
o intellectual property invention and protection;
o marketing and distribution capabilities;
o competition from highly capitalized companies;
o entrance of new competitors;
o ability of customers to invest in information technology; and
o price competition.
If we do not keep pace with product and technology advances, there could
be a material adverse effect on our competitive position, revenues and prospects
for growth. There is also likely to be continued pricing pressure as competitors
attempt to maintain or increase market share.
The products manufactured and marketed by us and our competitors are
becoming more complex. As the technological and functional capabilities of
future products increase, these products may begin to compete with products
being offered by traditional computer, network and communications industry
participants that have substantially greater financial, technical, marketing and
manufacturing resources than we do. We may not be able to compete successfully
against these new competitors, and competitive pressures may result in a
material adverse effect on our revenues and our operating results.
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,
as well as other Federal and State agencies.. Our ability to design, develop and
sell our products will continue to be subject to the rules and regulations of
the Federal Communication Commission, as well as other Federal and State
agencies 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
14
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, technical, operational and financial
resources and has caused our expenses to increase. 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, each of
which will result in increased expenses. 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,
increase our revenues and control our expenses.
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.
Although we maintain insurance, we cannot provide any assurance that:
o our insurance will provide adequate coverage against potential
liabilities if a product causes harm or fails to perform as
promised;
o adequate product liability insurance will continue to be available
in the future; or
o our insurance can be maintained on acceptable terms.
The obligation to pay any product liability claim in excess of whatever
insurance we are able to obtain would increase our expenses and could greatly
reduce our assets. In addition, any such claims could permanently injure our
reputation in our industry.
WHEN WE ARE REQUIRED TO TAKE A COMPENSATION EXPENSE FOR THE VALUE OF STOCK
OPTIONS OR OTHER COMPENSATORY AWARDS THAT WE ISSUE TO OUR EMPLOYEES, OUR RESULTS
OF OPERATIONS WILL BE NEGATIVELY IMPACTED.
We believe that stock options are a key element in our ability to attract and
retain employees in the markets in which we operate. In December 2004, the
Financial Accounting Standards Board issued Share-Based Payment: an amendment of
FASB Statements No. 123 and 95, which requires a company to recognize, as an
expense, the fair value of stock option and other stock-based compensation to
employees beginning in 2005. We currently use the intrinsic value method to
measure compensation expense for stock-based awards to our employees. Under this
standard, we generally do not consider stock option grants issued under our
employee stock option plans to be compensation when the exercise price of the
stock option is equal to or greater than the fair market value on the date of
grant. For 2005 and thereafter, we will be required to take a compensation
charge as stock options or other stock-based compensation awards are issued or
as they vest, including the unvested portion of options that were granted prior
to 2005. This compensation charge will be based on a calculated value of the
option or other stock-based award using a complex methodology, and which may not
correlate to the current market price of our stock. The calculations required
under the new accounting rules are very complex. Recognizing this, the Financial
Accounting Standard Board has made such rules effective as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005.
For us, this will be our fiscal third quarter, which commences July 1, 2005.
However, under the new rules, we will be required to retroactively calculate and
recognize such expense as if the new rules had become effective January 1, 2005.
We believe that the effect of such compensation expense will be to materially
increase our operating expenses from historical levels, resulting in reduced
earnings and earnings per share.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A SIGNIFICANT PERCENTAGE OF OUR
OUTSTANDING COMMON STOCK AND HAVE THE ABILITY TO INFLUENCE SIGNIFICANTLY THE
OUTCOME OF CORPORATE TRANSACTIONS OR OTHER MATTERS SUBMITTED FOR STOCKHOLDER
APPROVAL.
Our executive officers and directors beneficially own, in the aggregate,
approximately 12% of our outstanding common stock, not including shares of
common stock that the officers and directors may acquire in the event that they
exercise any of the options granted to them or if they otherwise acquire
additional shares of common stock. As a result, our officers and directors have
the ability to influence significantly the outcome of all corporate actions
requiring stockholder approval, irrespective of how our other stockholders may
vote, including the following actions:
o the election of directors;
15
o adoption of stock option plans;
o the amendment of charter documents; or
o the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of our assets.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
Sales of a substantial number of shares of our common stock in the public
market could cause a decrease in the market price of our common stock. As of
December 31, 2004, we had 7,690,000 shares of common stock outstanding. Of the
7,690,000 shares of common stock outstanding, 6,744,000 shares are freely
tradable and 946,000 shares are restricted as a result of securities laws. In
addition, stock options to purchase 2,291,000 shares of our common stock were
outstanding at December 31, 2004, of which 1,100,000 were vested. The remainder
represents stock options that will vest over the next five years. The
weighted-average exercise prices of such stock options are substantially lower
than the current market price of our common stock. We may also issue additional
shares of stock in connection with our business and may grant additional stock
options to our employees, officers, directors and consultants under our stock
option plans or warrants to third parties. If a significant portion of these
shares were sold in the public market, the market value of our common stock
could be adversely affected. The terms on which we could obtain additional
capital during the life of our outstanding options and warrants may be adversely
affected, and it should be expected that the holders of these securities would
exercise or convert them at a time when we would be able to obtain equity
capital on terms more favorable than those provided for by such convertible
securities. As a result, any issuance of additional shares of common stock may
cause our current stockholders to suffer significant dilution which may
adversely affect the market price of our common stock.
SUPERVISION AND REGULATION -- SECURITIES AND EXCHANGE COMMISSION
The Company maintains a website at http://www.id-systems.com. The Company
makes available free of charge on our website all electronic filings with the
SEC (including proxy statements and reports on Forms 8-K, 10-KSB and 10-QSB and
any amendments to these reports) as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC. The Company has
also posted policies, codes and procedures that outline its corporate governance
principles, including the charters of the board's audit and nominating
committees, and the Company's Code of Ethics for senior financial officers, Code
of Ethics covering directors and all employees on the website. These materials
also are available free of charge in print to shareholders who request them in
writing. The information contained on the Company's website does not constitute
a part of this report.
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. During 2003, the Company entered into an
agreement to sublease 6,270 square feet through the end of the lease. The
sublease provides for monthly payments of $11,619 and also provides for
escalations relating to increases in real estate taxes and certain operating
expenses.
16
ITEM 3. LEGAL PROCEEDINGS
On September 1, 2004, I.D. Systems, Inc. filed a complaint against Access
Control Group L.L.C. ("Access") in the United States District Court in the
District of New Jersey asserting patent infringement (the "Action").
The Action seeks an injunction against continued infringement, treble
damages resulting from the infringement and the defendant's conduct, interest on
the damages, and such further relief as the Court deems just and appropriate.
The Action has been settled on a confidential basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Between June 30, 1999 and November 7, 2004, the Company's Common Stock had
been quoted on the Nasdaq SmallCap Market. Since November 8, 2004, the Company's
common stock has been quoted on The Nasdaq National 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
--------------- ---- ---
2003
----
March 31, 2003 $ 5.19 $ 4.02
June 30, 2003 $ 8.20 $ 4.54
September 30, 2003 $ 9.24 $ 7.08
December 31, 2003 $ 10.00 $ 5.77
2004
----
March 31, 2004 $ 8.50 $ 6.05
June 30, 2004 $ 16.18 $ 6.35
September 30, 2004 $ 16.54 $ 10.48
December 31, 2004 $ 19.96 $ 13.47
2005
----
January 1, 2005 - March 15, 2005 $ 18.50 $ 10.50
There were 21 registered holders and approximately 1,600 beneficial owners
of the Company's Common Stock of record as of March 15, 2005. 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.
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:
18
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 and risk of loss passes to the customer, which
usually is upon delivery of the system, pervasive evidence of an arrangement
exists, sales price is fixed and determinable, collectibility is reasonably
assured and contractual obligations have been satisfied. 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.
The Company also derives 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
as described above. 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.
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,
-------------------------------
2003 2004
------------- -------------
Revenues 100.0% 100.0%
Cost of revenues 51.2 47.4
------------- -------------
Gross profit 48.8 52.6
Selling, general and administrative expenses 56.0 42.8
Research and development expenses 11.2 9.0
------------- -------------
Income (loss) from operations (18.4) 0.8
Net interest income 2.6 1.0
Other income 0.7 1.1
------------- -------------
Net income (loss) (15.1)% 2.9%
============= =============
19
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
REVENUES. Revenues were $13,741,000 for the year ended December 31, 2004
compared to $7,959,000 in the year ended December 31, 2003, an increase of
$5,872,000, or 72.6%. The increase in revenues for the year was primarily
attributable to increased sales of the Company's Wireless Asset Net system for
tracking and managing fleets of industrial equipment. Included in revenues in
the year ended December 31, 2004 was $400,000 of revenues related to the cost
recovery method as described in Note B [9] of the financial statements included
herein. The revenue was offset by $400,000 of amortized capital costs included
in costs of revenues.
COST OF REVENUES. Cost of revenues were $6,509,000 for the year ended December
31, 2004 compared to $4,075,000 in the year ended December 31, 2003, an increase
of $2,434,000, or 59.7% . As a percentage of revenues, cost of revenues
decreased to 47.4% in the year ended December 31, 2004 from 51.2% in the year
ended December 31, 2003. This percentage decrease was primarily attributable to
the sale of higher margin services during the year ended December 31, 2004, from
cost reductions to the hardware components of the Company's system, as well as
the write-off of approximately $150,000 of obsolete components during the year
ended December 31, 2003. Gross profit was $7,232,000 in the year ended December
31, 2004 compared to $3,884,000 in the year ended December 31, 2003. As a
percentage of revenues, gross profit increased to 52.6% in the year ended
December 31, 2004 from 48.8% in the year ended December 31, 2003. Included in
costs of revenues in the year ended December 31, 2004 is $400,000 of amortized
capitalized costs associated with the cost recovery method as described in Note
B [9] of the financial statements included herein. In accordance, with the cost
recovery method, the capitalized contract costs were reduced by the same amount
equal to the revenue recognized in the period. Excluding the amortization of the
deferred contract costs of $400,000 for the year ended December 31, 2004, gross
profit as a percentage of revenues was 54.2% in comparison to 48.8% in the year
ended December 31, 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $5,879,000 in the year ended December 31, 2004
compared to $4,456,000 in the year ended December 31, 2003, an increase of
$1,423,000, or 31.9%. The increase was primarily attributable to increased
payroll and related expenses as well as travel expenses due to the hiring of
additional personnel to support the continued growth in the business. As a
percentage of revenues, selling, general and administrative expenses decreased
to 42.8% in the year ended December 31, 2004 from 56.0% in the year ended
December 31, 2003.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1,234,000 in the year ended December 31, 2004 compared to $891,000 in the year
ended December 31, 2003, an increase of $343,000 or 38.5%. This increase was
attributable to furthering our efforts to reduce costs, increase flexibility and
enhance the functionality of the Company's system. As a percentage of revenues,
research and development expenses decreased to 9.0% in the year ended December
31, 2004 from 11.2% in the year ended December 31, 2003.
20
INTEREST INCOME AND EXPENSE.
Interest income was $195,000 in the year ended December 31, 2004 as compared to
$269,000 in the year ended December 31, 2003, a decrease of $74,000 or 27.5%.
This decrease was attributable to the assignment of certain sales type leases to
a third party leasing company. During the year ended December 31, 2003, the
Company earned interest income in connection with sales type lease arrangements.
The Company invests in investment grade commercial paper and corporate bonds
which are classified as held to maturity.
INTEREST EXPENSE. Interest expense was $63,000 in the year ended December 31,
2004 as compared to $59,000 in the year ended December 31, 2003.
OTHER INCOME. Other income was $147,000 in the year ended December 31, 2004 as
compared to $54,000 in the year ended December 31, 2003. Other income reflects
rental income from a sublease arrangement entered during 2003.
NET INCOME (LOSS). Net income was $398,000 or $0.05 per basic and diluted share,
in the year ended December 31, 2004 as compared to a net loss of $1,199,000, or
$(0.17) per basic and diluted share, in the year ended December 31, 2003. This
was due primarily to the reasons described above.
21
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, the Company had cash, cash equivalents and
investments of $11,635,000 and working capital of $12,697,000 as compared to
$8,618,000 and $8,180,000, respectively, at December 31, 2003.
Net cash provided by operating activities was $1,623,000 for the year
ended December 31, 2004 as compared to net cash used in operating activities of
$235,000 for the year ended December 31, 2003. Net cash provided by operating
activities in the year ended December 31, 2004 was primarily due to an increase
in accounts payable and accrued expenses of $1,485,000, a decrease in accounts
receivable of $779,000, net income of $398,000, depreciation and amortization of
$255,000 and amortization of deferred contract costs of $199,000 partially
offset by an increase in inventory of $1,063,000 and an increase in unbilled
receivables of $402,000. Net cash used in operating activities in the year ended
December 31, 2003 was primarily due to a net loss of $1,199,000, an increase in
accounts receivable of $1,110,000, an increase in deferred contract costs of
$675,000, a decrease in accounts payable and accrued expenses of $70,000 and a
decrease in other liabilities of $100,000 partially offset by a decrease in
installment receivable of $867,000, a decrease in inventory of $715,000, a
decrease in investment in sales type leases of $571,000, an increase in deferred
revenue of $348,000, amortization of premium on investments of $174,000 and
depreciation and amortization of $173,000.
Net cash provided by investing activities for the year ended December 31,
2004 was $1,767,000 as compared to net cash used in investing activities of
$1,945,000 for the year ended December 31, 2003. Net cash provided by investing
activities in the year ended December 31, 2004 was primarily from maturities of
investments of $3,385,000 partially offset by purchases of investments of
$1,235,000 and the purchases of fixed assets of $419,000. Net cash used in
investing activities in the year ended December 31, 2003 was primarily from
purchases of investments of $5,698,000 and the purchases of fixed assets of
$339,000 partially offset by maturities of investments of $4,084,000.
Net cash provided by financing activities for the year ended December 31,
2004 was $1,871,000 as compared to net cash provided in financing activities of
$1,601,000 for the year ended December 31, 2003. Net cash provided by financing
activities for the year ended December 31, 2004, resulted primarily from the
proceeds of $1,171,000 received in connection with the exercise of stock options
and $1,025,000 received in connection with the exercise of warrants, partially
offset by $188,000 of repayments made under the term loan and $137,000 of
repayments for the Company's line of credit. Net cash provided by financing
activities for the year ended December 31, 2003, resulted primarily from the
proceeds of $1,000,000 received in connection with obtaining a five year term
loan and $765,000 of proceeds received from exercise of employee stock options,
partially offset by $164,000 of repayments made under the term loan.
The Company has a working capital line of credit, with maximum borrowings
of $500,000. Interest at the 30 day LIBOR Market Index Rate plus 1.75% is
payable monthly. At December 31, 2004, the Company did not owe anything under
this line of credit.
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 loan is secured by all the assets of the Company and the Company is in
compliance with the covenants under the term loan. The fair value of the
interest rate swap is not material to the financial statements or results of
operations.
22
Maturities of long-term debt are as follows:
YEAR ENDING
DECEMBER 31,
2005 $ 199,000
2006 209,000
2007 221,000
2008 19,000
---- ---------
$ 648,000
=========
The Company believes it has sufficient cash, cash equivalents and
investments for the next twelve months of operations.
The Company believes its operations have not been and, in the foreseeable
future, will not be materially adversely affected by inflation or changing
prices.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS123(R)
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R, SHARE-BASED PAYMENT, which
is a revision of SFAS No. 123 and APB 25. Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. The new standard
will be effective for the Company beginning July 1, 2005. The Company has not
yet completed their evaluation but expects the adoption to have a material
effect on the financial statements.
SFAS151
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151. "Inventory Costs,
an amendment of ARB No. 43, Chapter 4." SFAS 151 amends ARB No. 43, Chapter 4,
to clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) should be recognized as current period
charges. In addition. SFAS 151 requires that allocation of fixed production
overhead to the cost of conversion be based on the normal capacity of the
production facilities. The provision of SFAS 151 shall be effective for the
Company beginning on September 1, 2005. The Company is currently evaluating
whether this statement will have a material effect on its financial statements.
23
SFAS153
EXCHANGES OF NONMONETATY ASSETS - AN AMENDMENT OF APE OPINION NO. 29 - SFAS NO.
153
SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets.
It eliminates the exception from fair value accounting for nonmonetary exchanges
of similar productive assets and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of an entity are
expected to change significantly as a result of the exchange. This statement is
effective beginning in October 1, 2006 and is not expected to have a significant
impact on our financial statements.
EITF04-8
In September 2004, the ElTF reached a consensus on Issue No. 04-8, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share." ElTF
04-8 requires that all issued securities that have embedded conversion features
that are contingently exercisable upon the occurrence of a market-price
condition should be in the calculation of diluted earnings per share, regardless
of whether the market price trigger has been met ElTF 04-8 is effective for
reporting periods ending after December 15. 2004 The adoption of EITF 04-8 will
not materially effect the diluted EPS calculation.
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.
24
ITEM 7. FINANCIAL STATEMENTS
CONTENTS PAGE
-------- ----
Report of independent registered public accounting firm F-1
Balance sheet as of December 31, 2004 F-2
Statements of operations for the years ended December 31, 2003 and 2004 F-3
Statements of changes in stockholders' equity for the years ended
December 31, 2003 and 2004 F-4
Statements of cash flows for the years ended December 31, 2003 and 2004 F-5
Notes to financial statements F-6
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
I.D. Systems, Inc.
We have audited the accompanying balance sheet of I.D. Systems, Inc. as of
December 31, 2004 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 2003 and
2004. 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 the standards of the Public
Accounting Oversight Board (United States). 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, 2004 and the results of its operations and its cash flows for the years
ended December 31, 2003 and 2004, in conformity with United States generally
accepted accounting principles.
New York, New York
February 11, 2005
F-1
I.D. SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 8,440,000
Short-term investments 3,195,000
Accounts receivable, net 1,432,000
Unbilled receivables 402,000
Inventory 1,739,000
Investment in sales type leases 39,000
Interest receivable 50,000
Officer loan 10,000
Prepaid expenses and other current assets 225,000
------------
Total current assets 15,532,000
Fixed assets, net 1,009,000
Investment in sales type leases 34,000
Officer loan 20,000
Deferred contract costs 476,000
Other assets 88,000
------------
$ 17,159,000
============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 2,541,000
Long term debt - current portion 199,000
Deferred revenue 95,000
------------
Total current liabilities 2,835,000
Long term debt 449,000
Deferred revenue 191,000
Deferred rent 112,000
------------
3,587,000
------------
Commitments and Contingencies (Note J)
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
7,690,000 shares 77,000
Additional paid-in capital 24,994,000
Treasury stock; 40,000 shares at cost (113,000)
Accumulated deficit (11,386,000)
------------
13,572,000
------------
$ 17,159,000
============
See notes to accompanying financial statements.
F-2
I.D. SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------
2003 2004
------------ ------------
Revenue $ 7,959,000 $ 13,741,000
Cost of revenue 4,075,000 6,509,000
------------ ------------
Gross profit 3,884,000 7,232,000
------------ ------------
Operating expenses:
Selling, general and administrative expenses 4,456,000 5,879,000
Research and development expenses 891,000 1,234,000
------------ ------------
5,347,000 7,113,000
------------ ------------
Income (loss) from operations (1,463,000) 119,000
Interest income 269,000 195,000
Interest expense (59,000) (63,000)
Other income 54,000 147,000
------------ ------------
NET INCOME (LOSS) $ (1,199,000) $ 398,000
============ ============
NET INCOME (LOSS) PER SHARE - BASIC $ (.17) $ 0.05
============ ============
NET INCOME (LOSS) PER SHARE - DILUTED $ (.17) $ 0.05
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- BASIC 6,905,000 7,455,000
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- DILUTED 6,905,000 8,783,000
============ ============
See notes to accompanying financial statements.
F-3
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, 2003 6,799,000 $ 68,000 $ 22,042,000 $ (10,585,000) $ (113,000) $ 11,412,000
Shares issued pursuant to exercise
of stock options 298,000 3,000 762,000 765,000
Net loss for the year ended
December 31, 2003 (1,199,000) (1,199,000)
------------- ------------- ------------- ------------- ------------- -------------
BALANCE - DECEMBER 31, 2003 7,097,000 71,000 22,804,000 (11,784,000) (113,000) 10,978,000
Shares issued pursuant to exercise
of stock options 444,000 4,000 1,167,000 1,171,000
Shares issued pursuant to exercise
of warrants 149,000 2,000 1,023,000 1,025,000
Net income for the year ended
December 31, 2004 398,000 398,000
------------- ------------- ------------- ------------- ------------- -------------
BALANCE - DECEMBER 31, 2004 7,690,000 $ 77,000 $ 24,994,000 $ (11,386,000) $ (113,000) $ 13,572,000
============= ============= ============= ============= ============= =============
See notes to accompanying financial statements.
F-4
I.D. SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2003 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,199,000) $ 398,000
Adjustments to reconcile net income (loss) to cash (used in)
provided by operating activities:
Depreciation and amortization 173,000 255,000
Deferred rent expense 23,000 23,000
Deferred revenue 348,000 (88,000)
Bad debt expense 20,000 (7,000)
Deferred contract costs (675,000) 199,000
Amortization of premium on investments 174,000 94,000
Changes in:
Accounts receivable (1,110,000) 779,000
Unbilled receivables -- (402,000)
Inventory 715,000 (1,063,000)
Prepaid expenses and other assets 28,000 (87,000)
Investment in sales type leases 571,000 37,000
Installment receivable 867,000 --
Other liabilities (100,000) --
Accounts payable and accrued expenses (70,000) 1,485,000
----------- -----------
Net cash (used in) provided by operating activities (235,000) 1,623,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (339,000) (419,000)
Purchase of investments (5,698,000) (1,235,000)
Maturities of investments 4,084,000 3,385,000
Increase (decrease) in interest receivable (2,000) 25,000
Collection of officer loan 10,000 11,000
----------- -----------
Net cash (used in) provided by investing activities (1,945,000) 1,767,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term loan 1,000,000 --
Repayment of term loan (164,000) (188,000)
Repayment of line of credit -- (137,000)
Proceeds from exercise of stock options 765,000 1,171,000
Proceeds from exercise of warrants -- 1,025,000
----------- -----------
Net cash provided by financing activities 1,601,000 1,871,000
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (579,000) 5,261,000
Cash and cash equivalents - beginning of period 3,758,000 3,179,000
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,179,000 $ 8,440,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 59,000 $ 63,000
See notes to accompanying financial statements.
F-5
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - THE COMPANY
I.D. Systems, Inc. (the "Company") is a provider of wireless solutions for
corporate asset management. The Company designs, develops and produces
innovative wireless monitoring and tracking products that utilize its patented
radio-frequency-based system. The Company's products are designed to enable
users to improve operating efficiencies and reduce costs. The Company outsources
its hardware manufacturing operations to contract manufacturers. 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. These estimates include
collectibility of accounts receivable, sales returns, recoverability of
inventory, realization of deferred tax assets, useful lives and impairment
of tangible and intangible assets.
[2] CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with an
original 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 the lower of cost or market using the first-in first-out method. At
December 31, 2004 the Company's inventory consisted of components of
approximately $499,000 and finished goods of approximately $1,240,000.
[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 and leasehold
improvements 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 Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets,". In the evaluation, the
Company compares values of such assets to the estimated undiscounted
future cash flows expected from the use of the assets and their eventual
disposition. When the estimated undiscounted future cash flows are less
than the carrying amount an impairment loss is recognized equal to the
difference between the assets fair value and their carrying value. At
December 31, 2004, the Company had not incurred an impairment charge.
F-6
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
[6] RESEARCH AND DEVELOPMENT:
Research and development costs are charged to expense as incurred.
[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 and risk
of loss passes to the customer, which usually is upon delivery of the
system, pervasive evidence of an arrangement exists, sales price is fixed
and determinable, collectibility is reasonably assured and contractual
obligations have been satisfied. 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.
The Company also derives 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 as described above. 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.
[9] DEFERRED CONTRACT COSTS:
During 2003, the Company entered into a contract with a customer pursuant
to which the Company's system will be implemented on a portion of the
customer's fleet of vehicles. The Company will be entitled to issue sixty
monthly invoices of up to $40,000 per month, each of which is contingent
upon certain conditions being met. Costs directly attributable to this
contract, consisting principally of engineering and manufacturing costs,
are being deferred until implementation of the system is completed. The
deferred costs will be charged to cost of revenue in accordance with the
cost recovery method, pursuant to which the deferred contract costs will
be reduced in each period by an amount equal to the revenue recognized
until all of the deferred costs are written off at which time the Company
will recognize a gross profit, if any. As of December 31, 2004, the
Company deferred $876,000 of such contract costs and amortized $400,000 of
such costs during the year then ended. The implementation of the system is
substantially completed and additional contract costs are not anticipated
to be significant. The Company will continue to evaluate the carrying
amount of the deferred contract costs for potential impairment.
F-7
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
[10] 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, 2003 and 2004.
[11] 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.
[12] 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 SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." The following table illustrates
the effect on net income (loss) and earnings (loss) per share if the fair
value based method had been applied to all awards.
YEAR ENDED DECEMBER 31,
--------------------------
2003 2004
----------- -----------
Reported net income (loss) $(1,199,000) $ 398,000
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 (862,000) (1,187,000)
----------- -----------
Pro forma net loss $(2,061,000) $ (789,000)
=========== ===========
Net income (loss) per share (basic and diluted):
As reported $ (0.17) $ 0.05
=========== ===========
Pro forma $ (0.30) $ (0.11)
=========== ===========
F-8
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
[12] STOCK-BASED COMPENSATION: (CONTINUED)
The fair value of each option grant on the date of grant is estimated
using the Black-Scholes option-pricing model reflecting the following
weighted average assumptions:
YEAR ENDED
DECEMBER 31,
-------------------------
2003 2004
------- -------
Volatility 44% 52%
Expected life of options 5 years 5 years
Risk free interest rate 3% 3%
Dividend yield 0% 0%
The weighted average fair value of options granted during the years ended
December 31, 2003 and 2004 were $3.52 and $3.74 respectively.
[13] 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 carry forwards 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 if it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
[14] NET INCOME (LOSS) PER SHARE:
YEAR ENDED DECEMBER 31,
--------------------------
2003 2004
----------- -----------
BASIC EARNINGS (LOSS) PER SHARE
-------------------------------
Net income (loss) $(1,199,000) $ 398,000
----------- -----------
Weighted average shares outstanding 6,905,000 7,455,000
----------- -----------
Basic earnings (loss) per share $ (0.17) $ 0.05
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
---------------------------------
Net income (loss) $(1,199,000) $ 398,000
----------- -----------
Weighted average shares outstanding 6,905,000 7,455,000
----------- -----------
Dilutive effect of stock options 0 1,328,000
----------- -----------
Weighted average shares outstanding,
diluted 6,905,000 8,783,000
----------- -----------
Diluted earnings (loss) per share $ (0.17) $ 0.05
=========== ===========
Basic income (loss) per share is based on the weighted average number of
common shares outstanding during each period. Diluted income (loss) per
share reflects the potential dilution assuming common shares were issued
upon the exercise of outstanding options and warrants and the proceeds
thereof were used to purchase outstanding common shares. For the year
ended December 31, 2003, the basic and diluted weighted average shares
outstanding are the same since the effect from the potential exercise of
outstanding stock options and warrants of 2,436,000 would have been
anti-dilutive.
F-9
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
[15] FINANCIAL INSTRUMENTS:
The carrying amounts of cash equivalents, accounts receivable, investments
and other liabilities approximate their fair values due to the short
period to maturity of these instruments. The carrying amounts of
investment in sales-type leases and "installment receivable - noncurrent
portion" approximate their fair value due to the market rate of interest
charged to customers.
[16] RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
[17] RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
SFAS123(R)
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R, SHARE-BASED PAYMENT, which
is a revision of SFAS No. 123 and APB 25. Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. The new standard
will be effective for the Company beginning July 1, 2005. The Company has not
yet completed their evaluation but expects the adoption to have a material
effect on the financial statements.
SFAS151
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151. "Inventory Costs,
an amendment of ARB No. 43, Chapter 4." SFAS 151 amends ARB No. 43, Chapter 4,
to clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) should be recognized as current period
charges. In addition. SFAS 151 requires that allocation of fixed production
overhead to the cost of conversion be based on the normal capacity of the
production facilities. The provision of SFAS 151 shall be effective for the
Company beginning on September 1, 2005. The Company is currently evaluating
whether this statement will have a material effect on its financial statements.
SFAS153
EXCHANGES OF NONMONETATY ASSETS - AN AMENDMENT OF APE OPINION NO. 29 - SFAS NO.
153
SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets.
It eliminates the exception from fair value accounting for nonmonetary exchanges
of similar productive assets and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of an entity are
expected to change significantly as a result of the exchange. This statement is
effective beginning in October 1, 2006 and is not expected to have a significant
impact on our financial statements.
EITF04-8
In September 2004, the ElTF reached a consensus on Issue No. 04-8, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share." ElTF
04-8 requires that all issued securities that have embedded conversion features
that are contingently exercisable upon the occurrence of a market-price
condition should be in the calculation of diluted earnings per share, regardless
of whether the market price trigger has been met ElTF 04-8 is effective for
reporting periods ending after December 15. 2004 The adoption of EITF 04-8 will
not materially effect the diluted EPS calculation.
F-10
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C - SHORT-TERM INVESTMENTS
The Company's investments at December 31, 2004 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, 2004, are summarized as follows:
Equipment $ 451,000
Computer software 277,000
Computer hardware 335,000
Furniture and fixtures 237,000
Leasehold improvements 447,000
-----------
1,747,000
Accumulated depreciation and amortization 738,000
-----------
$ 1,009,000
===========
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, 2004, $30,000 is due to the Company, $10,000 of which is
due in 2005. 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
enactment 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
The Company has a working capital line of credit, with maximum borrowings of
$500,000. Interest at the 30 day LIBOR Market Index Rate plus 1.75% is payable
monthly. At December 31, 2004, the Company did not owe anything under this line
of credit.
NOTE G - LONG-TERM DEBT
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 loan is
secured by all the assets of the Company and the Company is in compliance with
the covenants under the term loan. The fair value of the interest rate swap is
not material to the financial statements or results of operations.
F-11
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Maturities of long-term debt are as follows:
YEAR ENDING
DECEMBER 31,
2005 $ 199,000
2006 209,000
2007 221,000
2008 19,000
---- ---------
$ 648,000
=========
NOTE H - STOCKHOLDERS' EQUITY
[1] PREFERRED STOCK:
The Company is authorized to issue 5,000,000 shares of $.01 par value
preferred stock. 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.
[2] 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 2,813,000 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 vesting provisions.
A summary of the status of the Company's stock option plans as of December
31, 2003 and 2004 and changes during the years ended on those dates, is
presented below:
F-12
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
2003 2004
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------- -------------- -------------- --------------
Outstanding at beginning of year 2,200,000 $ 3.53 2,129,000 $ 3.74
Granted 485,000 4.81 713,000 7.85
Exercised (298,000) 2.57 (444,000) 2.63
Forfeited (258,000) 5.35 (107,000) 7.96
-------------- --------------
Outstanding at end of year 2,129,000 $ 3.74 2,291,000 $ 5.04
============== ==============
Exercisable at end of year 1,258,000 $ 2.89 1,100,000 $ 3.61
============== ==============
As of December 31, 2004 there were 1,366,000 options available for grant
under the Company's stock option plans.
The following table summarizes information about stock options at December
31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------- ----------- ----------- ----------- ----------- -----------
1.20 542,000 3 years 1.20 542,000 1.20
2.31 - 3.81 151,000 6 years 2.93 80,000 3.02
4.07 - 7.05 1,198,000 8 years 5.71 258,000 5.32
7.56 - 18.90 400,000 6 years 9.02 220,000 7.77
----------- -----------
2,291,000 5 years 5.04 1,100,000 3.61
=========== ===========
[3] 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 were exercisable for a
period of four years, commencing in June 2000, at a price of $11.55 per
share. The warrants were exercised during 2004 on a cashless basis in
accordance with their original terms. In connection with the exercise the
Company issued 42,000 shares.
In connection with the Company's private placement in January 2002,
warrants to purchase 107,000 shares of common stock were issued to the
placement agent and a finder. The warrants were exercisable for a period
of five years, commencing in January 2002 at a price of $9.58 per share.
The warrants were exercised during 2004. In connection with the exercise
the Company received proceeds of $1,025,000.
F-13
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - INCOME TAXES
The Company has a deferred tax asset of approximately $6,313,000 at December 31,
2004 primarily relating to net operating loss carryforward. The Company has a
net operating loss carryforward of approximately $15,921,000 for federal income
tax purposes, substantially all of which expires from 2020 through 2024 and,
certain state and local net operating loss carryforwards. There were no
significant timing differences between financial and tax reporting.
$4,775,000 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 carryforwards. The Company has provided a valuation
allowance, which increased during 2003 and 2004 by $789,000 and $1,045,000,
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,
2003 2004
----------- -----------
Income tax benefit at the federal statutory rate $ (408,000) $ 135,000
State and local income taxes, net of effect on federal taxes (59,000) (129,000)
Increase in valuation allowance 789,000 1,045,000
Stock options (302,000) (1,031,000)
Other (20,000) (20,000)
----------- -----------
$ 0 $ 0
=========== ===========
NOTE J - COMMITMENTS, CONTINGENCIES 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:
F-14
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDING
DECEMBER 31,
------------
2005 $410,000
2006 410,000
2007 410,000
2008 410,000
2009 410,000
Thereafter 205,000
----------
$2,255,000
==========
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 $409,000
and $499,000 for the years ended December 31, 2004 and 2003, respectively.
During 2003, the Company entered into an agreement to sublease a portion
of its space through the end of the lease. The sublease provides for
monthly payments of approximately $12,000 and also provides for
escalations relating to increases in real estate taxes and certain
operating expenses. Other income of $147,000 and $54,000 for the year
ended December 31, 2004 and 2003, respectively reflects rent received by
the Company under the sublease.
[2] CONCENTRATION OF CUSTOMERS:
Three customers accounted for 49%, 15%, and 12%, respectively, of the
Company's revenue during the year ended December 31, 2004. Two of those
customers accounted for 31% and 21% of the Company's account and unbilled
receivables at December 31, 2004.
One customer, accounted for 58% of the Company's revenue during the year
ended December 31, 2003 and 54% of the Company's accounts receivable as of
December 31, 2003.
[3] LEGAL PROCEEDINGS:
On September 1, 2004, I.D. Systems, Inc. filed a complaint against Access
Control Group L.L.C. ("Access") in the United States District Court in the
District of New Jersey asserting patent infringement (the "Action").
The Action seeks an injunction against continued infringement, treble
damages resulting from the infringement and the defendant's conduct,
interest on the damages, and such further relief as the Court deems just
and appropriate. The Action has been settled on a confidential basis.
F-15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. 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. As of the end of the period covered by 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 ( as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934). 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.
There were no changes in the Company's internal controls over financial
reporting that occurred during the last fiscal quarter to which this report
relates that have materially effected or is reasonably likely to materially
effect, the Company's internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
NONE
26
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 2005 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 2005 Annual
Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement to be filed for its 2005 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 2005 Annual
Meeting of Stockholders.
ITEM 13. EXHIBITS
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).
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).
27
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
31.1 Written Certification of Chief Executive Officer Pursuant to Section
302 of The Sarbanes-Oxley Act of 2002
31.2 Written Certification of Chief Financial Officer Pursuant to Section
302 of The Sarbanes-Oxley Act of 2002
32 Written Certification of Chief Executive Officer Pursuant to Section
906 of The Sarbanes-Oxley Act of 2002
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement to be filed for its 2005 Annual
Meeting of Stockholders. a.
28
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 22, 2005
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 Accounting and 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 22, 2005
----------------------
Jeffrey M. Jagid and Director
/s/ Kenneth S. Ehrman Chief Operating Officer March 22, 2005
----------------------
Kenneth S. Ehrman and Director
/s/ Lawrence Burstein Director March 22, 2005
----------------------
Lawrence Burstein
/s/ Michael Monaco Director March 22, 2005
----------------------
Michael Monaco
/s/ Beatrice Yormark Director March 22, 2005
----------------------
Beatrice Yormark