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, 2003 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 = $7,959,000.
The aggregate market value of the Common Stock held by nonaffiliates of the
Issuer was approximately 42,257,000 based upon the last sales price of such
stock on March 17, 2004, as disclosed on The NASDAQ Small Cap Market (IDSY).
The number of shares of common stock, par value $0.01 per share, outstanding as
of March 17, 2004 was 7,227,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement to be filed in connection with the issuer's 2004 annual
meeting of stockholders.
TABLE OF CONTENTS
PAGE
PART I. ...............................................................................................................1
Item 1. Description of Business..............................................................1
Item 2. Description of Properties...........................................................11
Item 3. Legal Proceedings...................................................................11
Item 4. Submission of Matters to a Vote of Security Holders.................................11
PART II. .............................................................................................................12
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............12
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations..........................................................................12
Item 7. Financial Statements................................................................18
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure..........................................................................19
Item 8A. Controls and Procedures.............................................................19
PART III. ............................................................................................................20
Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance
With Section 16(a) of the Exchange Act..............................................20
Item 10. Executive Compensation..............................................................20
Item 11. Security Ownership of Certain Beneficial Owners and Management......................20
Item 12. Certain Relationships and Related Transactions......................................20
Item 13. Exhibits, Lists and Reports on Form 8-K.............................................20
Item 14. Principal Accountant and Fees.......................................................23
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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
American Axle, Archer Daniels Midland, Avis Rent A Car System, Inc., Daimler
Chrysler, Deere & Co., Ford Motor Company, Hallmark Cards, Target Corporation,
3M Company, Walgreen Co., the U.S. Navy, the U.S. Postal Service, and the U.S.
Transportation Security Administration, among others.
2003 HIGHLIGHTS
o We commenced a new program with Avis Rent A Car System, Inc. to
implement I.D. Systems' Wireless Asset Net technology on Avis'
fleet of approximately 2,000 rental vehicles in Puerto Rico. The
system is designed to automate various aspects of the car rental
and return process, in order to improve customer service and
increase the efficiency of rental fleet operations. We believe
this program represents a significant new market opportunity for
I.D. Systems' technology.
o Ford Motor Company expanded its deployment of I.D. Systems'
wireless Industrial Vehicle Electronic Control System (IVECS)
corporate-wide, which we believe reflects the wide array of
material benefits that the system is providing to Ford's
manufacturing operations.
o We obtained an additional automotive industry customer, American
Axle & Manufacturing Holdings, Inc., an automotive parts
producer with 14 locations in the United States and 2002 sales
of $3.5 billion.
o We entered into two additional contracts with the U.S. Postal
Service (USPS), which ordered I.D. System's Wireless Asset Net
system for fleets of industrial vehicles at the USPS Buffalo,
New York, Processing and Distribution Center and the USPS
Northern New Jersey Metro Processing and Distribution Center.
The Wireless Asset Net System is currently installed at eight
USPS facilities.
o We continued our teamwork with the U.S. Transportation Security
Administration and the Port Authority of New York and New
Jersey, under a grant initiated in 2002, to deploy Wireless
Asset Net technology on key vehicles at Newark Liberty
International Airport.
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o We entered into a new contract with the National Shipbuilding
Research Program (NSRP) to develop and implement a "Wireless
Equipment Monitoring and Control System" for select U.S.
shipyards. This project is one of only seven selected by the
NSRP to receive U.S. Navy co-funding and the Company is leading
a team that includes Northrop Grumman Corporation's Ship Systems
sector, the National Steel and Shipbuilding Company (NASSCO, a
subsidiary of General Dynamics Corporation), and the Portsmouth
Naval Shipyard.
o We added several significant new retail customers, including
Walgreen Co., WinCo Foods, Inc., and Price Chopper supermarkets.
o We commenced a new program with 3M Company.
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.
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 radio frequency 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.
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To improve fleet safety and security, the system provides:
o wireless vehicle access control to restrict access of equipment
to trained and authorized personnel, as required by the
Occupational Safety and Health Administration ("OSHA");
o electronic vehicle inspection checklists for paperless proof of
OSHA compliance;
o early detection of emerging vehicle safety issues; and
o impact sensing to assign responsibility for accidents.
The Company's system is designed to prevent unauthorized personnel from
operating equipment, which we believe results in optimizing fleet health,
eliminating anonymous accidents and reducing damage-related costs. To further
reduce fleet maintenance costs, the Wireless Asset Net also automates and
enforces preventative maintenance scheduling by:
o wirelessly uploading true "drive-time" data from each individual
vehicle;
o automatically prioritizing maintenance events based on weighted
variables; and
o enabling remote lock-out of vehicles overdue for maintenance.
The system can also interface seamlessly with existing
maintenance databases.
To generate perhaps the most significant impact on fleet operating
costs, the Wireless Asset Net provides a set of tools to measure vehicle 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,
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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, American Axle, Archer Daniels Midland, Daimler
Chrysler, Deere & Co., Ford Motor Company, Hallmark Cards, Target Corporation,
3M Company, Walgreen Co., the U.S. Navy, the U.S. Postal Service, and the U.S.
Transportation Security Administration, among others.
RENTAL FLEET APPLICATIONS. The Company's wireless rental car monitoring
system automatically uploads mileage and fuel data from rental vehicles, and is
designed to produce a significant impact on rental revenues and quality of
customer service to the 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
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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.
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.
SALES AND MARKETING
The Company's sales and marketing objective is to achieve broad market
penetration through targeted sales activities. The Company currently markets its
system directly to large corporations and government agencies. In addition, the
Company is developing strategic relationships with key companies in target
markets, including original equipment manufacturers (OEMs), complementary
hardware and software vendors, and service providers.
The Company was awarded a United States General Services Administration
contract which enables any government agency to purchase the Company's products
on an off-the-shelf basis, without further competitive bidding, until April
2004. The Company believes that this contract provides significant sales
opportunities with government agencies.
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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.
COMPETITION
The market for wireless tracking and management of enterprise assets is
relatively new, constantly evolving, and competitive. Although the Company's
current competitors do not provide the precise capabilities of the Company's
systems, they do offer subsets of the Company's system capabilities or alternate
approaches to the issues the Company's products address. Those companies include
both emerging companies with limited operating histories, such as WhereNet
Corp., Media Recovery, Inc., and companies with longer operating histories,
greater name recognition and/or significantly greater financial, technical and
marketing resources than the Company, such as Savi Technology, Symbol
Technologies, Inc., and Intermec Technologies Corp. The Company expects that
competition will intensify in the near future. However, the Company believes
there are significant barriers to entry for the Company's potential competitors.
INTELLECTUAL PROPERTY
The Company currently has one United States patent and pending patent
applications relating to the Company's system architecture and 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
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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.
EMPLOYEES
The Company currently has thirty-seven full time employees, of which
nine are engaged in product development (which includes engineering), six in
operations, nine in customer satisfaction, six in sales and marketing, and seven
in finance and general administration.
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RISK FACTORS
THE MARKET FOR OUR TECHNOLOGY MIGHT NOT CONTINUE TO DEVELOP, CAUSING OUR
REVENUES TO DECREASE
Our success is highly dependent on the continued market acceptance of
our wireless monitoring and tracking system. The market for wireless monitoring
and tracking products and services is new and rapidly evolving. We are not
certain that our future target customers will purchase our wireless monitoring
and tracking system. Additionally, we cannot assure you that the market for
wireless monitoring and tracking technology will continue to emerge or become
sustainable. If the market for our products fails to grow, develops more slowly
than we expect or becomes saturated with competing products or services, then
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 2003, net sales to our largest customer, Ford Motor Company,
represented 58% of total revenue and 54% of our accounts receivable as of
December 31, 2003. Our revenue and our profitability would be adversely affected
if this customer 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
We have issued common stock, options and warrants to purchase our
common stock, and in the future we may issue additional shares of common stock,
options, warrants, preferred stock or other securities exercisable for or
convertible into our common stock. At March 17, 2004, there were warrants to
purchase 307,125 shares of common stock outstanding. Additionally, there were
options to employees and directors outstanding for the purchase of approximately
2,551,000 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.
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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. We could incur substantial costs to defend any
such litigation. Although we are not currently involved in any intellectual
property litigation, we may be a party to litigation in the future as a result
of an alleged infringement of another's intellectual property. If a claim of
infringement of intellectual property rights was decided against us, we could be
required to: cease selling, incorporating or using products or services that
incorporate the challenged intellectual property; obtain from the holder of the
infringed intellectual property right a license to sell or use the relevant
technology, which license may not be available on reasonable terms; or redesign
those products or services that incorporate such technology.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, WE MAY BE UNABLE TO
MEET THE NEEDS OF OUR CUSTOMERS
Our market is characterized by rapid technological change and frequent
new product announcements. Significant technological changes could render our
existing technology obsolete. If we are unable to successfully respond to these
developments or do not respond in a cost-effective way, we will be unable to
satisfactorily meet the needs of our customers. To be successful, we must adapt
to rapidly changing market conditions by continually improving the
responsiveness, services and features of our products and by developing new
features to meet customer needs. Our inability to meet customer needs would lead
to a loss of customers.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO RECRUIT ADDITIONAL PERSONNEL, OUR
BUSINESS MAY SUFFER
We are dependent on the continued employment and performance of our
executive officers and key employees, particularly Jeffrey M. Jagid, Chief
Executive Officer, Kenneth S. Ehrman, Chief Operating Officer, Ned Mavrommatis,
Chief Financial Officer, Michael Ehrman,
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Executive Vice President Engineering and Frederick Muntz, Executive Vice
President Sales and Marketing. We currently do not have employment agreements
with our key employees. Like other companies in our industry, we face intense
competition for qualified personnel. Many of our competitors for qualified
personnel have greater resources than we have. We cannot be certain that we will
be able to maintain salaries at market levels. Therefore, we cannot be certain
that we will be successful in attracting or retaining qualified personnel in the
future.
WE MIGHT NOT BE ABLE TO OBTAIN THE SERVICES OF QUALIFIED SUBCONTRACTORS TO
PRODUCE OUR PRODUCTS LEADING TO DISRUPTION IN PRODUCTION AND DISTRIBUTION OF OUR
PRODUCTS TO OUR CUSTOMERS
In order to meet our requirements under our contracts, we rely on the
efforts and skills of subcontractors for the manufacture of our products and the
delivery of our products to our customers. There is great competition for the
most qualified and competent subcontractors. If we are unable to afford or hire
qualified subcontractors the quality of our services and products could decline.
Such conditions would limit our ability to perform our contracts with customers.
THE FEDERAL GOVERNMENT MIGHT IMPLEMENT SIGNIFICANT REGULATIONS WHICH MIGHT
REQUIRE US TO INCUR SIGNIFICANT COMPLIANCE COSTS
Our products transmit radio frequency waves, the transmission of which
is governed by the rules and regulations of the Federal Communication
Commission. Our ability to design, develop and sell our products will continue
to be subject to the rules and regulations of the Federal Communication
Commission for the foreseeable future. The implementation of unfavorable
regulations, or unfavorable interpretations of existing regulations by courts or
regulatory bodies, could require us to incur significant compliance costs cause
the development of the affected markets to become impractical or otherwise
adversely affect our ability to produce or market our products.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH WE WILL BE UNABLE TO
SUCCESSFULLY OPERATE OUR BUSINESS IN THE FUTURE
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, technical, operational and financial
resources. To manage our expected growth, we will have to implement and improve
our operational and financial systems, and we will have to train and manage our
growing employee base. We will also need to maintain and expand our
relationships with customers, subcontractors and other third parties. If we are
unable to effectively manage our growth, our business may become inefficient and
we might not be able to effectively compete with competitors.
OUR NEW PRODUCTS MAY CONTAIN TECHNOLOGICAL FLAWS AND WE MAY INCUR SUBSTANTIAL
LIABILITY DUE TO THESE FLAWS
Complex technological products like ours often contain undetected
errors or failures when first introduced or when new versions of the products
are introduced. Despite our every effort to eliminate these flaws, there still
may be flaws in our new products, even after the commencement of commercial
shipments. These flaws could result in a delay of, or failure to,
10
achieve market acceptance of our products, which, since our products are used in
business critical applications could lead to substantial product liability
claims. Such claims could not only adversely affect our immediate financial
condition, but could permanently injure our reputation in our industry.
ITEM 2. DESCRIPTION OF PROPERTIES
In November 1999, the Company entered into a lease that expires on
March 31, 2010 for a facility in Hackensack, New Jersey, covering approximately
22,500 square feet, which the Company first occupied in March 2000. The rent is
currently $31,060 per month and will increase to $34,835 per month from the 61st
month until the end of the lease. 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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering on June 30, 1999. The
Company's Common Stock is traded on The Nasdaq SmallCap Market under the symbol
IDSY. The following table sets forth, for the periods indicated, the high and
low sales price for the Company's common stock as reported on such quotation
systems.
QUARTER ENDING: HIGH LOW
2002
March 31, 2002 $11.65 $6.65
June 30, 2002 $ 8.30 $2.69
September 30, 2002 $ 6.00 $3.25
December 31, 2002 $ 4.59 $3.48
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
January 1, 2004 - March 17, 2004 $ 8.50 $6.05
There were 26 registered holders and approximately 1,500 beneficial
owners of the Company's Common Stock of record as of March 17, 2004. 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.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of
operations are based on our financial statements that have been prepared under
accounting principles generally accepted in the United States of America. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could materially differ from those
estimates. We have disclosed all significant accounting policies in note B to
the financial statements included in this Form 10-KSB. The financial statements
and the related notes thereto should be read in conjunction with the following
discussion of our critical accounting policies. Our critical accounting policies
are:
REVENUE RECOGNITION
The Company's revenues are derived from contracts with multiple element
arrangements, which include the Company's system, training and technical
support. Revenues are recognized as each element is earned based on the relative
fair value of each element and when there are no undelivered elements that are
essential to the functionality of the delivered elements. The Company's system
is typically implemented by the customer or a third party and, as a result,
revenue is recognized when title passes to the customer, which usually is upon
delivery of the system, provided all other revenue recognition criteria are met.
Training and technical support revenue are generally recognized at time of
performance.
The Company also enters into post-contract maintenance and support
agreements. Revenue is recognized over the service period and the cost of
providing these services is expensed as incurred.
During 2002 the Company began deriving revenues under leasing
arrangements. Such arrangements provide for monthly payments covering the system
sale, maintenance and interest. These arrangements meet the criteria to be
accounted for as sales-type leases pursuant to Statement of Financial Accounting
Standards No. 13, "Accounting for Leases". Accordingly, the system sale is
recognized upon delivery of the system, provided all other revenue recognition
criteria are met. Upon the recognition of revenue, an asset is established for
the "investment in sales-type leases". Maintenance revenue and interest income
are recognized monthly over the lease term. The Company recognized $618,000 and
$784,000 of system sales during the years ended December 31, 2003 and 2002,
respectively, pursuant to such arrangements. These arrangements provide for
sixty equal monthly payments and interest has been imputed at 6% per annum. In
June 2003 the Company received approximately $1,231,000 in connection with the
assignment of certain sales type leases to a third-party leasing company.
$211,000 of the proceeds from these assignments related to maintenance that the
Company is obligated to perform and which is being recognized as revenue over
the remaining terms of the related maintenance agreements. At December 31, 2003
approximately $186,000 is included in deferred revenue.
13
The Company recognized $1,536,000 of system sales in 2002 in connection
with an installment sale. The arrangement provided for a $470,000 upfront
payment and equal monthly payments of approximately $26,000 through November
2007, which include principal, imputed interest at approximately 7% per annum
and approximately $5,000 of maintenance, which is recognized as revenue monthly.
In November 2003, the Company received approximately $1,070,000 in connection
with the assignment of the installment sale to a third party leasing company.
$196,000 of the proceeds from this assignment relates to maintenance that the
Company is obligated to perform and which is being recognized as revenue over
the remaining term of the related maintenance agreement. At December 31, 2003,
approximately $188,000 is included in deferred revenue.
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,
------------------------------
2002 2003
---------- ----------
Revenues 100.0% 100.0%
Cost of revenues 43.8 51.2
---------- ----------
Gross profit 56.2 48.8
Selling, general and administrative expenses 69.2 56.0
Research and development expenses 16.9 11.2
---------- ----------
Loss from operations (29.9) (18.4)
Net interest income 4.9 2.6
Other income -- 0.7
---------- ----------
Net loss (25.0) (15.1)
========== ==========
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
REVENUES. Revenues were $7,959,000 for the year ended December 31, 2003 compared
to $5,544,000 in the year ended December 31, 2002. The increase in revenues for
the year is attributable to increased sales of the Company's Wireless Asset Net
system for tracking and managing fleets of industrial equipment. The Company's
customer base now includes American Axle, Archer Daniels Midland, Daimler
Chrysler, Deere & Co., Ford Motor Company, Hallmark Cards, Target Corporation,
3M Company, Walgreen Co., the U.S. Navy, the U.S. Postal Service, and the U.S.
Transportation Security Administration, among others.
COST OF REVENUES. Cost of revenues were $4,075,000 for the year ended December
31, 2003 compared to $2,430,000 in the year ended December 31, 2002. As a
percentage of
14
revenues, cost of revenues increased to 51.2% in the year ended December 31,
2003 from 43.8% in the year ended December 31, 2002. This percentage increase
was primarily attributable to the sale of certain higher margin services during
the year ended December 31, 2002 and the write-off of approximately $150,000 of
obsolete components during the year ended December 31, 2003. Gross profit was
$3,884,000 in the year ended December 31, 2003 compared to $3,114,000 in the
year ended December 31, 2002. As a percentage of revenues, gross profit
decreased to 48.8% in the year ended December 31, 2003 from 56.2% in the year
ended December 31, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $4,456,000 in the year ended December 31, 2003
compared to $3,835,000 in the year ended December 31, 2002. The increase was
primarily attributable to an increase in payroll expenses and an increase in
insurance premiums for the Company's insurance policies. As a percentage of
revenues, selling, general and administrative expenses decreased to 56.0% in the
year ended December 31, 2003 from 69.2% in the year ended December 31, 2002.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$891,000 in the year ended December 31, 2003 compared to $938,000 in the year
ended December 31, 2002. This decrease was attributable to the completion of the
Company's "universal system" of hardware and software for tracking and managing
fleets of industrial vehicles. The Company's research and development efforts
during the year ended December 31, 2003 were devoted primarily to product
enhancements and manufacturing cost reductions. As a percentage of revenues,
research and development expenses decreased to 11.2% in the year ended December
31, 2003 from 16.9% in the year ended December 31, 2002.
INTEREST INCOME. Interest income was $269,000 in the year ended December 31,
2003 as compared to $279,000 in the year ended December 31, 2002. The Company
invests in commercial paper and corporate bonds which are classified as held to
maturity. During the year ended December 31, 2002 the Company began earning
interest income in connection with sales type lease arrangements. During 2003,
the majority of the sales type leases were assigned to a third party leasing
company.
INTEREST EXPENSE. Interest expense was $59,000 in the year ended December 31,
2003 as compared to $4,000 in the year ended December 31, 2002. This increase
was attributable to the Company's working capital line of credit and its five
year term loan.
OTHER INCOME. Other income of $54,000 in the year ended December 31, 2003
reflects rental income from a sublease arrangement.
NET LOSS. Net loss was $1,199,000 in the year ended December 31, 2003 as
compared to net loss of $1,384,000 in the year ended December 31, 2002. This
decrease was due primarily to the reasons described above.
15
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, the Company had cash, cash equivalents and
investments of $8,618,000 and working capital of $8,180,000 as compared to
$7,757,000 and $8,295,000, respectively, at December 31, 2002.
Net cash used in operating activities was $235,000 for the year ended
December 31, 2003 as compared to net cash used in operating activities of
$3,640,000 for the year ended December 31, 2002. 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 $150,000 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 $795,000, 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 used in operating activities in the year ended December 31, 2002 was
primarily due to a net loss of $1,384,000, an increase in accounts receivable of
$880,000, an increase in installment receivable of $867,000, an increase in
investment in sales type leases of $681,000, an increase in inventory of
$627,000 and a decrease in other liabilities of $100,000 partially offset by a
an increase in accounts payable and accrued expenses of $631,000 and
depreciation and amortization of $201,000.
Net cash used in investing activities for the year ended December 31,
2003 was $1,945,000 as compared to net cash used in investing activities of
$1,467,000 for the year ended December 31, 2002. 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 used in
investing activities in the year ended December 31, 2002 was primarily from
purchases of investments of $4,603,000 and the purchases of fixed assets of
$340,000 partially offset by maturities of investments of $3,600,000.
Net cash provided by financing activities for the year ended December
31, 2003 was $1,601,000 as compared to net cash provided in financing activities
of $6,439,000 for the year ended December 31, 2002. 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.
Net cash provided by financing activities for the year ended December 31, 2002,
resulted primarily from $6,143,000 received in connection with the sale of
821,250 shares of common stock, $169,000 of proceeds received from exercise of
employee stock options, and $137,000 of borrowings under a line of credit.
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
16
swap contemporaneously with the closing of the loan and fixed the rate of
interest at 5.28% for the five year term.
The Company believes it has sufficient cash, cash equivalents and
investments for the next twelve months of operations.
The Company believes its operations have not been and, in the
foreseeable future, will not be materially adversely affected by inflation or
changing prices.
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.
17
ITEM 7. FINANCIAL STATEMENTS
CONTENTS PAGE
Independent auditors' report F-1
Balance sheet as of December 31, 2003 F-2
Statements of operations for the years ended December 31, 2002 and 2003 F-3
Statements of changes in stockholders' equity for the years ended
December 31, 2002 and 2003 F-4
Statements of cash flows for the years ended December 31, 2002 and 2003 F-5
Notes to financial statements F-6
18
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
I.D. Systems, Inc.
Hackensack, New Jersey
We have audited the accompanying balance sheet of I.D. Systems, Inc. as of
December 31, 2003 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 2002 and
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of I.D. Systems, Inc. as of December
31, 2003 and the results of its operations and its cash flows for the years
ended December 31, 2002 and 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Eisner LLP
--------------
New York, New York
February 20, 2004
F-1
I.D. SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 3,179,000
Investments 3,339,000
Accounts receivable, net 2,204,000
Inventory 676,000
Investment in sales type leases 37,000
Interest receivable 75,000
Officer loan 10,000
Prepaid expenses and other current assets 129,000
-------------
Total current assets 9,649,000
Investments - noncurrent 2,100,000
Fixed assets, net 845,000
Investment in sales type leases 73,000
Officer loan 31,000
Deferred contract costs 675,000
Other assets 97,000
-------------
$13,470,000
=============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 1,055,000
Long term debt - current portion 188,000
Line of credit 137,000
Deferred revenue 89,000
-------------
Total current liabilities 1,469,000
Long term debt 648,000
Deferred revenue 285,000
Deferred rent 89,000
-------------
2,491,000
-------------
Commitments (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
7,097,000 shares 71,000
Additional paid-in capital 22,804,000
Treasury stock; 40,000 shares at cost (113,000)
Accumulated deficit (11,783,000)
--------------
10,979,000
--------------
$ 13,470,000
==============
F-2
I.D. SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2003
------------- ------------
Revenue $5,544,000 $7,959,000
Cost of revenue 2,430,000 4,075,000
------------- ------------
Gross profit 3,114,000 3,884,000
------------- ------------
Operating expenses:
Selling, general and administrative expenses 3,835,000 4,456,000
Research and development expenses 938,000 891,000
------------- ------------
4,773,000 5,347,000
------------- ------------
Loss from operations (1,659,000) (1,463,000)
Interest income 279,000 269,000
Interest expense (4,000) (59,000)
Other income 54,000
------------- ------------
NET LOSS $(1,384,000) $(1,199,000)
============= ============
NET LOSS PER SHARE - BASIC AND DILUTED $(.21) $(.17)
============= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED LOSS PER SHARE 6,711,000 6,905,000
============= ============
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, 2002 5,866,000 $59,000 $15,739,000 $(9,200,000) $(113,000) $6,485,000
Shares issued pursuant to exercise
of stock options 112,000 1,000 168,000 169,000
Shares issued pursuant to
private placement 821,000 8,000 6,135,000 6,143,000
Net loss for the year ended
December 31, 2002 (1,384,000) (1,384,000)
--------- ------- ----------- ------------- ---------- -------------
BALANCE - DECEMBER 31, 2002 6,799,000 68,000 22,042,000 (10,584,000) (113,000) 11,413,000
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, 2002 7,097,000 $71,000 $22,804,000 $(11,783,000) $(113,000) $10,979,000
========= ======= =========== ============= ========== =============
F-4
I.D. SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2003
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,384,000) $(1,199,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 201,000 173,000
Deferred rent expense 24,000 23,000
Deferred revenue 26,000 348,000
Bad debt expense 20,000
Amortization of premium on investments 43,000 174,000
Changes in:
Accounts receivable (880,000) (1,110,000)
Inventory (627,000) 795,000
Prepaid expenses and other assets (26,000) 28,000
Investment in sales type leases (681,000) 571,000
Installment receivable - noncurrent portion (867,000) 867,000
Deferred contract costs (675,000)
Accounts payable and accrued expenses 631,000 (150,000)
Other liabilities (100,000) (100,000)
------------- ------------
Net cash used in operating activities (3,640,000) (235,000)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (340,000) (339,000)
Purchase of investments (4,603,000) (5,698,000)
Maturities and sales of investments 3,600,000 4,084,000
Increase in interest receivable (73,000) (2,000)
Officer loan, net of repayment (51,000)
Collection of officer loan 10,000
------------- ------------
Net cash used in investing activities (1,467,000) (1,945,000)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of lease obligations (10,000)
Proceeds from exercise of stock options 169,000 765,000
Proceeds from term loan 1,000,000
Repayment of term loan (164,000)
Proceeds from line of credit 137,000
Net proceeds from private placement 6,143,000
------------- ------------
Net cash provided by financing activities 6,439,000 1,601,000
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,332,000 (579,000)
Cash and cash equivalents - January 1 2,426,000 3,758,000
------------- ------------
CASH AND CASH EQUIVALENTS - DECEMBER 31 $3,758,000 $3,179,000
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $4,000 $59,000
F-5
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 was
incorporated in Delaware in 1993 and commenced operations in January 1994.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
[2] CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with
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.
[4] FIXED ASSETS AND DEPRECIATION:
Fixed assets are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets
which range from three to ten years. Equipment under capital leases are
amortized using the straight-line method over the terms of the
respective leases, or their estimated useful lives, whichever is
shorter.
[5] LONG-LIVED ASSETS:
The Company evaluates its long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
pursuant to which an impairment loss is recognized if the carrying
amount of a long-lived asset is not recoverable and exceeds its fair
value.
F-6
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 passes to the customer, which usually is upon delivery of
the system, provided all other revenue recognition criteria are met.
Training and technical support revenue are generally recognized at time
of performance.
The Company also enters into post-contract maintenance and support
agreements. Revenue is recognized over the service period and the cost
of providing these services is expensed as incurred.
During 2002 the Company began deriving revenues under leasing
arrangements. Such arrangements provide for monthly payments covering
the system sale, maintenance and interest. These arrangements meet the
criteria to be accounted for as sales-type leases pursuant to Statement
of Financial Accounting Standards No. 13, "Accounting for Leases".
Accordingly, the system sale is recognized upon delivery of the system,
provided all other revenue recognition criteria are met. Upon the
recognition of revenue, an asset is established for the "investment in
sales-type leases". Maintenance revenue and interest income are
recognized monthly over the lease term. The Company recognized $618,000
and $784,000 of system sales during the years ended December 31, 2003
and 2002, respectively, pursuant to such arrangements. These
arrangements provide for sixty equal monthly payments and interest has
been imputed at 6% per annum. In June 2003 the Company received
approximately $1,231,000 in connection with the assignment of certain
sales type leases to a third-party leasing company. $211,000 of the
proceeds from these assignments relates to maintenance that the Company
is obligated to perform and which is being recognized as revenue over
the remaining terms of the related maintenance agreements. At December
31, 2003 approximately $186,000 is included in deferred revenue.
F-7
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[8] REVENUE RECOGNITION: (CONTINUED)
The Company recognized $1,536,000 of system sales in 2002 in connection
with an installment sale. The arrangement provided for a $470,000
upfront payment and equal monthly payments of approximately $26,000
through November 2007, which include principal, imputed interest at
approximately 7% per annum and approximately $5,000 of maintenance,
which is recognized as revenue monthly. In November 2003 the Company
received approximately $1,070,000 in connection with the assignment of
the installment sale to a third party leasing company. $196,000 of the
proceeds from this assignment relates to maintenance that the Company
is obligated to perform and which is being recognized as revenue over
the remaining term of the related maintenance agreement. At December
31, 2003, approximately $188,000 is included in deferred revenue.
[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 capitalized costs will be charged to cost of
revenue in accordance with the cost recovery method, pursuant to which
the capitalized contract costs will be reduced in each period by an
amount equal to the revenue recognized until all of the capitalized
costs are written off. During 2003, the Company capitalized $675,000 of
such contract costs and expects to incur additional costs until the
installation is complete. The Company will continue to evaluate the
carrying amount of the capitalized contract costs for potential
impairment.
[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, 2002 and 2003.
[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.
F-8
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 and earnings per share if
the fair value based method had been applied to all awards.
YEAR ENDED DECEMBER 31,
------------------------------
2002 2003
------------ ------------
Reported net loss $(1,384,000) $(1,199,000)
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 (925,000) (862,000)
------------ ------------
Pro forma net loss $(2,309,000) $(2,061,000)
============ ============
Loss per share (basic and diluted):
As reported $(0.21) $(0.17)
============ ============
Pro forma $(0.34) $(0.30)
============ ============
F-9
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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,
--------------------------
2002 2003
--------- ---------
Volatility 65% 44%
Expected life of options 5 years 5 years
Risk free interest rate 4% 3%
Dividend yield 0% 0%
The weighted average fair value of options granted during the years
ended December 31, 2002 and 2003 were $3.52 and $2.19, 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 carryforwards and to the
differences between the financial reporting and tax bases of assets and
liabilities. Deferred tax assets are reduced, if necessary, by a
valuation allowance 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:
The Company calculates net income (loss) per share in accordance with
the provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128
requires a dual presentation of "basic" and "diluted" income (loss) per
share on the face of the statements of operations. Basic income (loss)
per share is computed by dividing the net income (loss) by the weighted
average number of shares of common stock outstanding during each
period. Diluted income (loss) per share includes the effect, if any,
from the potential exercise or conversion of securities, such as stock
options and warrants, which would result in the issuance of incremental
shares of common stock. For the years ended December 31, 2002 and 2003,
the basic and diluted net loss per share are the same since the effect
from the potential exercise of 2,507,000 and 2,436,000 outstanding
stock options and warrants as of December 31, 2002 and 2003,
respectively, would have been anti-dilutive (see Note H).
F-10
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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.
NOTE C - INVESTMENTS
The Company's investments at December 31, 2003 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, 2003, are summarized as follows:
Equipment $441,000
Computer software 186,000
Computer hardware 285,000
Furniture and fixtures 250,000
Leasehold improvements 447,000
-----------
1,609,000
Accumulated depreciation and amortization 764,000
-----------
$845,000
===========
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, 2003, $41,000 is due to the Company, $10,000 of which is
due in 2004. The loan is fully payable upon demand and is due if the employee is
terminated from the Company for any reason. This loan was made prior to the
release of the Sarbanes-Oxley Act of 2002. The Company is prohibited from making
any loans to officers in the future.
F-11
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 (1.2% at December 31,
2003) plus 1.75% is payable monthly. At December 31, 2003, the Company owed
$137,000 under this line of credit. Outstanding principal amounts are payable by
May 1, 2004.
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.
Maturities of long-term debt are as follows:
YEAR ENDING
DECEMBER 31,
2004 $188,000
2005 199,000
2006 209,000
2007 221,000
2008 19,000
--------
$836,000
========
NOTE H - STOCKHOLDERS' EQUITY
[1] COMMON STOCK:
In January 2002, the Company sold 821,000 shares of its common stock in
a private placement. In connection therewith, the Company received net
proceeds of $6,143,000.
[2] PREFERRED STOCK:
The Company has 5,000,000 shares of $.01 par value preferred stock
authorized. The Company's Board of Directors has the authority to issue
shares of preferred stock and to determine the price and terms of those
shares.
F-12
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
[3] STOCK OPTIONS:
The Company has adopted the 1995 Stock Option Plan, pursuant to which
the Company may grant options to purchase up to an aggregate of
1,250,000 shares of common stock. The Company has also adopted the 1999
Stock Option Plan and the 1999 Director Option Plan, pursuant to which
the Company may grant options to purchase up to 1,813,000 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, 2002 and 2003 and changes during the years ended on those
dates, is presented below:
2002 2003
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- --------------
Outstanding at beginning of year 2,222,000 $3.32 2,200,000 $3.53
Granted 122,000 6.05 485,000 4.81
Exercised (112,000) 1.51 (298,000) 2.57
Forfeited (32,000) 5.66 (258,000) 5.35
---------- ----------
Outstanding at end of year 2,200,000 3.53 2,129,000 3.74
========== ==========
Exercisable at end of year 1,240,000 2.47 1,258,000 2.89
========== ==========
As of December 31, 2003 there were 672,000 options available for grant
under the Company's stock option plans.
F-13
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE H - STOCKHOLDERS' EQUITY
[3] STOCK OPTIONS: (CONTINUED)
The following table summarizes information about stock options at
December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
------------- ----------- ----------- -------- ----------- --------
$0.80 133,000 2 years $0.80 133,000 $0.80
1.20 652,000 4 years 1.20 652,000 1.20
2.31 - 3.81 203,000 7 years 2.89 59,000 2.97
4.07 - 6.70 787,000 8 years 4.76 229,000 5.06
7.38 - 10.25 354,000 7 years 7.71 185,000 7.65
--------- ---------
2,129,000 6 years 3.74 1,258,000 2.89
========= =========
[4] WARRANTS:
In connection with the Company's initial public offering in June 1999,
warrants to purchase 200,000 shares of common stock were issued to the
underwriter for nominal consideration. The warrants are exercisable for
a period of four years, commencing in June 2000, at a price of $11.55
per share.
In connection with the Company's private placement in January 2002,
warrants to purchase 107,000 shares of common stock were issued to the
placement agent and a finder. The warrants are exercisable for a period
of five years, commencing in January 2002 at a price of $9.58 per
share.
NOTE I - INCOME TAXES
The Company has a deferred tax asset of approximately $4,960,000 at December 31,
2003 primarily relating to net operating loss carryforward. The Company has a
net operating loss carryforward of approximately $12,508,000 for federal income
tax purposes, substantially all of which expires from 2020 through 2023 and,
certain state and local net operating loss carryforwards. There were no
significant timing differences between financial and tax reporting.
F-14
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE I - INCOME TAXES (CONTINUED)
$1,741,000 of the net operating loss carryforwards relates to stock options for
which there were no compensation charges for financial reporting. Accordingly,
any future benefit would be credited to additional paid-in capital. Future stock
issuances may subject the Company to annual limitations on the utilization of
its net operating loss carryforwards. The Company has provided a valuation
allowance, which increased during 2002 and 2003 by $838,000 and $789,000,
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,
2002 2003
Income tax benefit at the federal statutory rate $(471,000) $(408,000)
State and local income taxes, net of effect on federal taxes (69,000) (59,000)
Increase in valuation allowance 838,000 789,000
Stock options (292,000) (302,000)
Other (6,000) (20,000)
---------- ----------
$0 $0
========== ==========
F-15
I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE J - COMMITMENTS AND OTHER MATTERS
[1] OPERATING LEASES:
The Company is obligated under operating leases for its facility, which
it occupied in March 2000. The Company's operating leases provide for
minimum annual rental payments as follows:
YEAR ENDING
DECEMBER 31,
--------------
2004 $373,000
2005 410,000
2006 410,000
2007 410,000
2008 410,000
Thereafter 615,000
----------
$2,628,000
==========
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 $499,000 and $396,000 for the years ended December 31,
2002 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 $54,000 for the year ended
December 31, 2003 reflects rent received by the Company under the
sublease.
[2] CONCENTRATION OF CUSTOMERS:
Four customers accounted for 28%, 20%, 13% and 12%, respectively, of
the Company's revenue during the year ended December 31, 2002.
One customer, which is one of the largest automobile manufacturers in
the United States, 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.
F-16
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. 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 or in other
factors that could have significantly affected those controls subsequent to the
date of the Company's most recent evaluation.
19
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 2004
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 2004
Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the Company's definitive Proxy Statement to be filed for its 2004
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 2004
Annual Meeting of Stockholders.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
A) EXHIBITS
The following exhibits are filed herewith or are incorporated herein by
reference, as indicated.
Number Description
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to the Company's Form SB-2
filed with the Commission on June 30, 1999).
3.2 Amended and Restated By-Laws of the Company (incorporated herein
by Reference to the Company's Form SB-2 filed with the Commission
on June 30, 1999).
4.1 Specimen Certificate of the Company's Common Stock (incorporated
herein by reference to the Company's Form SB-2 filed with the
Commission on June 30, 1999).
20
4.2 Form of Underwriter's Warrant Agreement, including Form of
Warrant Certificate (incorporated herein by reference to the
Company's Form SB-2 filed with the Commission on June 30, 1999).
10.1 Agreement between the Registrant and the United States Postal
Service: Offer and Award Standard dated August 22, 1997, as
modified on May 12, 1998, September 8, 1998, and March 5, 1999
(incorporated herein by reference to the Company's Form SB-2
filed with the Commission on June 30, 1999).
10.2 Federal Supply Service Information Technology schedule Award
effective April 16, 1999 through April 15, 2004 (incorporated
herein by reference to the Company's Form SB-2 filed with the
Commission on June 30, 1999).
10.3 Form of Employment Agreement between the Company and its
executive officers (incorporated herein by reference to the
Company's Form SB-2 filed with the Commission on June 30, 1999).
10.4 1995 Non-Qualified Stock Option Plan (incorporated herein by
reference to the Company's Form SB-2 filed with the Commission on
June 30, 1999).
10.5 1999 Stock Option Plan (incorporated herein by reference to the
Company's Form SB-2 filed with the Commission on June 30, 1999).
10.6 Form of Indemnification Agreement (incorporated herein by
reference to the Company's Form SB-2 filed with the Commission on
June 30, 1999).
10.7 1999 Director Option Plan (incorporated herein by reference to
the Company's Form SB-2 filed with the Commission on June 30,
1999).
10.8 Office Lease dated November 4, 1999 between the Company and
Venture Hackensack Holding, Inc.(incorporated herein by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1999 filed with the Commission on March 29,
2000)
23.1 Consent of Eisner LLP
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
21
B) REPORTS ON FORM 8-K
On November 10, 2003, we filed a report on Form 8-K, under Items 7 and
12 to disclose the issuance of a press release announcing our results of
operations and financial condition for the three and nine months ended September
30, 2003, and attached the press release as an exhibit.
ITEM 14. PRINCIPAL ACCOUNTANT AND FEES
The information required by this Item is incorporated herein by
reference to the Company's definitive Proxy Statement to be filed for its 2004
Annual Meeting of Stockholders.
22
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 17, 2004
I.D. SYSTEMS, INC.
By: /s/ Jeffrey M. Jagid
--------------------
Jeffrey M. Jagid
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Ned Mavrommatis
-------------------
Ned Mavrommatis
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1934, this Annual
Report on Form 10-KSB is signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jeffrey M. Jagid Chief Executive Officer March 17, 2004
-------------------------- and Director
Jeffrey M. Jagid
/s/ Kenneth S. Ehrman Chief Operating Officer March 17, 2004
-------------------------- and Director
Kenneth S. Ehrman
/s/ Lawrence Burstein Director March 17, 2004
--------------------------
Lawrence Burstein
/s/ Michael Monaco Director March 17, 2004
--------------------------
Michael Monaco
/s/ Beatrice Yormark Director March 17, 2004
--------------------------
Beatrice Yormark