e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
000-50327
(Commission File Number)
iPass Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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93-1214598 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
3800 Bridge Parkway
Redwood Shores, California 94065
(Address of principal executive offices, including zip code)
(650) 232-4100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer.
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act).
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of the Registrants Common Stock, $0.001 par value, as of April
30, 2006 was 64,931,164.
iPASS INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
iPASS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
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March 31, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
15,627 |
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$ |
37,829 |
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Short-term investments |
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97,474 |
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146,727 |
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Accounts receivable, net of allowance for doubtful accounts of $2,760 and $2,040, respectively |
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31,371 |
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23,347 |
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Prepaid expenses and other current assets |
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5,168 |
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3,777 |
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Short-term deferred income tax assets |
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6,536 |
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4,555 |
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Total current assets |
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156,176 |
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216,235 |
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Property and equipment, net |
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10,569 |
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9,210 |
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Other assets |
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3,131 |
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1,561 |
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Long-term deferred income tax assets |
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9,196 |
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Acquired
intangible assets, net |
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16,855 |
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8,776 |
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Goodwill |
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80,162 |
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18,692 |
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Total assets |
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$ |
276,089 |
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$ |
254,474 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
14,528 |
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$ |
12,669 |
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Accrued liabilities |
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20,994 |
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12,523 |
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Deferred revenue short-term |
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4,075 |
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3,031 |
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Total current liabilities |
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39,597 |
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28,223 |
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Deferred revenue long-term |
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228 |
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Other long-term accrued liabilities |
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688 |
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Total liabilities |
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40,513 |
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28,223 |
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Stockholders equity: |
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Common stock |
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65 |
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64 |
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Additional paid-in capital |
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254,220 |
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245,456 |
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Deferred stock-based compensation |
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(593 |
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Accumulated other comprehensive loss |
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(275 |
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(307 |
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Accumulated deficit |
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(18,434 |
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(18,369 |
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Total stockholders equity |
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235,576 |
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226,251 |
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Total liabilities and stockholders equity |
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$ |
276,089 |
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$ |
254,474 |
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See Accompanying Notes to the Condensed Consolidated Financial Statements
3
iPASS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share amounts)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Revenues |
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$ |
44,270 |
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$ |
44,072 |
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Operating expenses (1) |
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Network access |
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12,532 |
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10,492 |
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Network operations |
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6,964 |
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5,378 |
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Research and development |
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5,531 |
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4,537 |
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Sales and marketing |
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14,815 |
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12,758 |
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General and administrative |
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5,862 |
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4,354 |
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Amortization of intangibles |
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821 |
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592 |
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Total operating expenses |
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46,525 |
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38,111 |
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Operating income (loss) |
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(2,255 |
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5,961 |
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Other income, net |
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1,127 |
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773 |
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Income (loss) before income taxes |
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(1,128 |
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6,734 |
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Provision for (benefit from) income taxes |
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(716 |
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2,645 |
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Net income
(loss) before cumulative effect of change in accounting
principle |
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(412 |
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4,089 |
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Cumulative effect of change in accounting principle, net of zero tax effect |
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347 |
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Net income (loss) |
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$ |
(65 |
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$ |
4,089 |
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Net income (loss) per share before cumulative effect of change in accounting principle: |
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Basic |
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$ |
(0.00 |
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$ |
0.07 |
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Diluted |
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$ |
(0.00 |
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$ |
0.06 |
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Per share effect of cumulative change in accounting principle: |
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Basic |
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$ |
(0.00 |
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$ |
0.00 |
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Diluted |
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$ |
(0.00 |
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$ |
0.00 |
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Net income (loss) per share: |
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Basic |
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$ |
(0.00 |
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$ |
0.07 |
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Diluted |
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$ |
(0.00 |
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$ |
0.06 |
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Number of shares used in per share calculations: |
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Basic |
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64,494,634 |
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62,316,794 |
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Diluted |
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64,494,634 |
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66,127,536 |
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(1) |
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Amortization of stock-based compensation included in the expense line items: |
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Network operations |
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$ |
207 |
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$ |
53 |
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Research and development |
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301 |
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57 |
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Sales and marketing |
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532 |
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85 |
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General and administrative |
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390 |
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165 |
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Total amortization of stock-based compensation |
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$ |
1,430 |
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$ |
360 |
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See Accompanying Notes to the Condensed Consolidated Financial Statements
4
iPASS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(65 |
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$ |
4,089 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Stock-based compensation expense |
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1,430 |
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360 |
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Tax benefits from employee stock option plans |
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294 |
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Amortization of acquired intangibles |
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821 |
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592 |
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Depreciation and amortization |
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1,248 |
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1,256 |
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Deferred income tax |
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(949 |
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2,307 |
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Provision for doubtful accounts |
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100 |
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200 |
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Realized loss on investments, net |
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31 |
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Cumulative effect of change in accounting principle |
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(347 |
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Changes in operating assets and liabilities, net of acquired assets and liabilities: |
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Accounts receivable |
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(968 |
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(2,804 |
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Prepaid expenses and other current assets |
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(758 |
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(98 |
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Other assets |
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(1,225 |
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(1 |
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Accounts payable |
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(339 |
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330 |
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Accrued liabilities |
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285 |
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137 |
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Other liabilities |
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228 |
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Net cash provided by (used in) operating activities |
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(539 |
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6,693 |
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Cash flows from investing activities: |
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Purchases of short-term investments |
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(56,667 |
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(16,217 |
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Maturities of short-term investments |
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111,739 |
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9,997 |
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Acquisition, net of cash acquired |
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(77,960 |
) |
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Purchases of property and equipment |
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(1,223 |
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(1,295 |
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Net cash used in investing activities |
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(24,111 |
) |
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(7,515 |
) |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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2,405 |
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591 |
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Tax benefit from employee stock option plans |
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43 |
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Net cash provided by financing activities |
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2,448 |
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591 |
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Net decrease in cash and cash equivalents |
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(22,202 |
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(231 |
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Cash and cash equivalents at beginning of period |
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37,829 |
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34,395 |
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$ |
15,627 |
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$ |
34,164 |
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See Accompanying Notes to the Condensed Consolidated Financial Statements
5
iPASS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business
iPass Inc. (the Company, iPass or we) provides software-enabled enterprise connectivity
services for remote and mobile workers. Our primary service offering, iPass Corporate Access, is
designed to enable enterprises to provide their employees with secure access from over 160
countries to the enterprises internal networks through an easy-to-use interface. As opposed to
telecommunications companies that own and operate physical networks, iPass provides its services
through a virtual network. iPass virtual network is enabled by its software, its scalable network
architecture and its relationships with over 300 telecommunications carriers, internet service
providers and other network service providers around the globe. In addition, we provide policy
management services that extend our secure offering to enable better protection of user identities,
the integrity of an enterprises remote and mobile computer systems, or endpoints, as well as an
enterprises network. These services can be used in conjunction with iPass Corporate Access or over
non-iPass network connections. The Companys software is designed to provide enterprises with a
high level of security, the ability to affect and control policy management, and to receive
centralized billing and detailed reporting. iPass was incorporated in California in July 1996 and
reincorporated in Delaware in June 2000.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial data as of March 31, 2006, and for the three months ended March 31, 2006
and 2005 has been prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and regulations. The December 31,
2005 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting principles. However, the
Company believes that the disclosures are adequate to make the information presented not
misleading.
On February 15, 2006 the Company acquired GoRemote Internet Communications, Inc. (GoRemote). The
effects of this transaction as well as the results of operations of GoRemote from February 15,
2006 through March 31, 2006 are included in our results of operations as of and for the three
months ended March 31, 2006.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments (which include normal recurring adjustments, except as disclosed
herein) necessary to present fairly the Companys financial position, results of operations, and
cash flows for the interim periods presented. The results of operations for the three months ended
March 31, 2006 are not necessarily indicative of the operating results for the full fiscal year or
any future periods.
Use of Estimates
The preparation of condensed consolidated 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 condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ materially from those estimates.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the financial statements of
iPass Inc. and its wholly owned subsidiaries after elimination of intercompany accounts and
transactions.
6
Foreign Currency Translation
Substantially all revenues and network access expenses are denominated in U.S. dollars. Therefore,
the Company considers the functional currency of its foreign subsidiaries to be the U.S. dollar.
Foreign currency transaction gains and losses are included in the accompanying condensed
consolidated statements of operation. Foreign currency transaction gains and losses were not
significant for the three months ended March 31, 2006 and 2005.
Comprehensive Income (Loss)
Comprehensive income (loss) is a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions with stockholders.
Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in
equity. Comprehensive income (loss) includes net income and unrealized losses on available-for-sale
securities.
Comprehensive income (loss) is comprised of the following (in thousands):
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Net income (loss) |
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$ |
(65 |
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$ |
4,089 |
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Net change
in accumulated unrealized gain (loss) on available-for-sale
securities, net of tax |
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32 |
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(237 |
) |
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Total comprehensive income (loss) |
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$ |
(33 |
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$ |
3,852 |
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Cash Equivalents and Short-term Investments
Cash equivalents consist of highly liquid investments, including corporate debt securities and
money market funds with maturities of 90 days or less from the date of purchase.
The Company has the ability to convert its short-term investments into cash or into securities with
a shorter remaining time to maturity without penalty and is not committed to holding the
investments until maturity. As such, all short-term investments in the Companys portfolio are
classified as available-for-sale and are stated at fair market value, with the unrealized gains
and losses reported as a component of accumulated comprehensive income (loss). The amortized cost
of debt securities is adjusted for amortization of premiums and accretion of unrealized discounts
to maturity. Such amortization and accretion is included in other income, net. The cost of
securities sold is based on the specific identification method.
Concentrations of Risk
Substantially
all of the Companys cash and cash equivalents are held by two
well established financial
institutions.
The Company provides credit to its customers in the normal course of business, performs ongoing
credit evaluations of its customers, and maintains an adequate allowance for doubtful accounts. As
of March 31, 2006 and December 31, 2005, no individual
customer represented 10% or more of revenue or accounts
receivable.
Fair Value of Financial Instruments
For the Companys financial instruments, including cash, cash equivalents, accounts receivable,
accounts payable, and accrued liabilities, carrying amounts approximate fair value due to the
relatively short maturities of the financial instruments.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is calculated using the straight-line method over the
estimated useful lives of the related assets as follows:
Equipment (Three years)
Furniture and fixtures (Five years)
7
Computer software and equipment (Three years)
Leasehold improvements (Shorter of useful life or lease term)
Impairment of Long-Lived Assets
The Company periodically evaluates the carrying amount of its property and equipment when events or
changes in business circumstances have occurred which indicate the carrying amount of such assets
may not be fully realizable. Determination of impairment is based on an estimate of undiscounted
future cash flows resulting from the use of the assets and their eventual disposition. If the
Company determines these assets have been impaired, the impairment charge is recorded based on a
comparison of the net book value of the fixed assets and their fair value determined by the
discounted future cash flows resulting from the use of the assets over their remaining useful
lives. There have been no such impairment charges during any of the periods presented.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized as income in the period that includes the
enactment date. A valuation allowance is recorded against deferred tax assets if it is more likely
than not that all or a portion of the deferred tax assets will not be realized.
Stock- Based Compensation
Description of the Companys Plans
In February 1997, the Company adopted the 1997 Stock Option Plan (1997 Plan). In June 1999, the
Company adopted two option plans, the 1999 Stock Option Plan (1999 Plan) and the 1999 Interim Stock
Option Plan (1999 Interim Plan). The 1997 Plan, the 1999 Plan, and the 1999 Interim Plan are
collectively referred to as the Plans. Under the Plans, as amended, the Company is authorized to
issue shares to employees, directors and consultants. As of
March 31, 2006, 19,139,734 shares were authorized for grant. The
Companys board of directors adopted the 2003 Equity Incentive
Plan and the 2003 Non-employee Directors Plan on January 15,
2003. The board of directors may grant incentive
and nonqualified stock options to employees, directors, and consultants of the Company. The
exercise price per share for nonstatutory stock options cannot be less than 85% of the fair market
value, as determined by the board of directors, on the date of grant. The exercise price per share
for incentive stock options cannot be less than the fair market value, as determined by the board
of directors on the date of grant. Options generally vest over a four-year period and generally
expire 10 years after the date of grant. Certain options can be exercised prior to vesting in
exchange for restricted stock. Should the option holder subsequently terminate employment prior to
vesting, the Company has the right to repurchase unvested shares at the lower of original exercise
price or fair value. At March 31, 2006, there were no shares of common stock subject to repurchase.
In January 2003, the Companys Board of Directors adopted the 2003 Employee Stock Purchase Plan
(ESPP). The ESPP became effective on July 23, 2003. At that time, 2,000,000 shares were reserved
for issuance under this plan. The number of shares reserved under this ESPP automatically
increases annually beginning January 1, 2004 by 1% of the total number of shares outstanding as of
the last day of the previous fiscal year. The ESPP permits participants to purchase common stock
through payroll deductions of up to 15% on an employees compensation, including commissions,
overtime, bonuses and other incentive compensation. The purchase price per share is equal to the
lower of 85% of the fair market value per share at the beginning of the offering period, or 85% of
the fair market value per share on the semi-annual purchase date.
Change in Accounting Principle
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors including employee stock options and employee stock purchases related to the ESPP based
on estimated fair values. SFAS 123(R) supersedes the Companys previous accounting under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107)
relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS
123(R). Using the modified prospective transition method of adopting SFAS 123(R), the Company began
recognizing compensation expense for stock-based awards granted or modified after December 31, 2005
and awards that were granted prior to the adoption of SFAS 123(R) but were still unvested at
December 31, 2005. Under this method of implementation, no restatement of prior periods has been
made.
Stock-based compensation expense and the related income tax benefit recognized under SFAS 123(R) in
the condensed consolidated statements of operations for the three months ended March 31, 2006
related to stock options and ESPP were $1,430,000 and $43,000, respectively. The estimated fair
value of the Companys stock-based awards, less expected forfeitures, is amortized over the awards
vesting period on a straight-line basis. In addition, the Company has recorded a $(347,000)
cumulative effect of a change in accounting principle in the condensed consolidated statement of
operations for the three months ended March 31, 2006. The cumulative effect adjustment reversed
the impact of estimated forfeitures on prior period stock compensation to the extent the related
unvested options were outstanding as of January 1, 2006.
As a result of adopting SFAS 123(R), the Companys loss before income taxes and net loss for the
three months ended March 31, 2006 were increased by $1,430,000 and $1,040,000, respectively. The
implementation of SFAS 123(R) reduced basic and fully diluted earnings per share by $0.02 for the
three months ended March 31, 2006. The implementation of SFAS 123(R) did not have a significant
impact on cash flows from operations during the three months ended March 31, 2006.
8
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest
is recognized as expense over the requisite service periods in the Companys income statements.
Prior to January 1, 2006, the Company measured compensation expense for its employee stock-based
compensation plans using the intrinsic value method under APB 25 and related interpretations. In
accordance with APB 25, no stock-based compensation expense was recognized in the Companys income
statements for stock options granted to employees and directors that had an exercise price equal to
the deemed fair value of the underlying common stock on the date of grant.
Stock-based compensation expense recognized in the Companys statement of operations for the three
months ended March 31, 2006 included compensation expense for share-based payment awards granted
prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated
in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), as amended, and compensation expense for the
share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation
expense recognized in the consolidated income statements for the three months ended March 31, 2006
is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. In the Companys pro forma
information required under SFAS 123 for the periods prior to 2006, the Company accounted for
forfeitures as they occurred.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
No. FAS 123(R)-3 Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards. This FSP provides a practical transition election related to the accounting for the tax
effects of share-based payments awards to employees, as an alternative to the transition guidance
for the additional paid-in capital pool (APIC pool) in paragraph 81 of SFAS 123(R). The
alternative transition method includes simplified methods to establish the beginning balance of the
APIC pool related to the tax effects of employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of
employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R). The
guidance in this FSP is effective after November 10, 2005. The Company may take up to one year from
the later of adoption of SFAS 123(R) or the effective date of this FSP to evaluate its available
transition alternatives and make its one-time election. The Company is currently evaluating the
transition alternatives.
Stock Options
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table. Expected volatilities
are based the historical volatility of the Companys common stock, and other factors. The expected
term of options granted is derived from the average midpoint between vesting and the contractual
term, as described in SAB107. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2006 |
|
Risk-free rate |
|
|
4.5 |
% |
Expected dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
50 |
% |
Expected life |
|
6.1 years |
A summary of the changes in stock options outstanding under the Companys equity-based compensation
plan during the three months ended March 31, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Balance as of December 31, 2005 |
|
|
9,348,025 |
|
|
$ |
5.12 |
|
Granted |
|
|
787,748 |
|
|
$ |
7.53 |
|
Assumed |
|
|
1,915,009 |
|
|
$ |
23.63 |
|
Exercised |
|
|
(811,318 |
) |
|
$ |
3.87 |
|
Cancelled |
|
|
(367,562 |
) |
|
$ |
8.08 |
|
|
|
|
|
|
|
|
Balance as of March 31, 2006 |
|
|
10,871,902 |
|
|
$ |
7.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
|
|
(In thousands, except per share amounts) |
|
Options outstanding at March 31, 2006 |
|
|
10,871,902 |
|
|
|
7.42 |
|
|
|
7.43 |
|
|
$ |
31,079 |
|
Options vested and expected to vest at March 31,
2006 |
|
|
10,218,178 |
|
|
|
7.46 |
|
|
|
.49 |
|
|
$ |
29,939 |
|
Options exercisable at March 31, 2006 |
|
|
5,915,077 |
|
|
|
8.26 |
|
|
|
6.39 |
|
|
$ |
20,605 |
|
The weighted average grant date fair value of options granted during the three months ended
March 31, 2006 was $4.05. The total intrinsic value of options exercised during the three months
ended March 31, 2006 was $2.9 million. At March 31, 2006, the Company had $7.5 million of total
unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that
will be recognized over the weighted average period of 3.8 years. Cash received from stock option
exercises was $2.4 million during the three months ended March 31, 2006.
The following table summarizes significant ranges of outstanding and exercisable options as of
March 31, 2006 (in thousands, except years and per-share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of |
|
|
|
|
|
|
Exercise Prices |
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Remaining |
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Number |
|
|
Contractual |
|
|
Price per |
|
|
Number |
|
|
Price per |
|
|
|
Outstanding |
|
|
Life (in Years) |
|
|
Share |
|
|
Exercisable |
|
|
Share |
|
$ 0.10 - 0.85 |
|
|
1,215,313 |
|
|
|
5.87 |
|
|
$ |
0.63 |
|
|
|
1,153,064 |
|
|
$ |
0.62 |
|
0.95 - 4.00 |
|
|
1,168,559 |
|
|
|
6.55 |
|
|
|
2.46 |
|
|
|
879,730 |
|
|
|
2.42 |
|
4.17 - 5.05 |
|
|
1,887,035 |
|
|
|
6.29 |
|
|
|
4.89 |
|
|
|
1,174,944 |
|
|
|
4.79 |
|
5.26 - 5.35 |
|
|
1,765,124 |
|
|
|
8.33 |
|
|
|
5.35 |
|
|
|
688,343 |
|
|
|
5.35 |
|
5.38 - 5.87 |
|
|
1,310,809 |
|
|
|
9.02 |
|
|
|
5.70 |
|
|
|
415,241 |
|
|
|
5.61 |
|
5.91 - 7.38 |
|
|
1,191,163 |
|
|
|
8.79 |
|
|
|
6.59 |
|
|
|
307,159 |
|
|
|
6.40 |
|
7.40 - 8.50 |
|
|
1,134,198 |
|
|
|
7.55 |
|
|
|
7.89 |
|
|
|
538,449 |
|
|
|
8.23 |
|
8.80 - 47.78 |
|
|
1,089,741 |
|
|
|
7.45 |
|
|
|
15.43 |
|
|
|
648,187 |
|
|
|
16.56 |
|
53.33 - 160.00 |
|
|
101,910 |
|
|
|
3.97 |
|
|
|
149.35 |
|
|
|
101,910 |
|
|
|
149.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250.00 - 250.00 |
|
|
8,050 |
|
|
|
3.82 |
|
|
|
250.00 |
|
|
|
8,050 |
|
|
|
250.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,871,902 |
|
|
|
7.43 |
|
|
$ |
7.42 |
|
|
|
5,915,077 |
|
|
$ |
12.13 |
|
9
Employee Stock Purchase Plan
Compensation expense is calculated related to the ESPP using the fair value of the employees
purchase rights granted under the Black-Scholes model, assuming no expected dividends and the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Risk-free rate |
|
|
4.5 |
% |
|
|
3.2 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
50 |
% |
|
|
41 |
% |
Expected life |
|
|
0.5 to 1 year |
|
|
0.5 years |
The weighted-average fair value of the purchase rights granted under the ESPP during the three
months ended March 31, 2006 was $1.80.
Pro Forma Information under SFAS 123 for Periods Prior to 2006
Prior to January 1, 2006, the Company followed the disclosure-only provisions under SFAS 123, as
amended. The following table illustrates the effect on net income and earnings per share for the
three months ended March 31, 2005 if the Company had applied the fair value recognition provisions
of SFAS 123 to stock-based employee compensation (in thousands, except per share data):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2005 |
|
Net income as reported |
|
$ |
4,089 |
|
Add: Stock-based employee compensation expense included
in the reported net income, net of related tax effects |
|
|
220 |
|
Deduct: Stock-based employee compensation expense using
the fair value method, net of related tax effects |
|
|
(1,083 |
) |
|
|
|
|
Pro forma net income |
|
$ |
3,226 |
|
|
|
|
|
Basic net income per share: |
|
|
|
|
As reported |
|
$ |
0.07 |
|
Pro forma |
|
$ |
0.05 |
|
Diluted net income per share: |
|
|
|
|
As reported |
|
$ |
0.06 |
|
Pro forma |
|
$ |
0.05 |
|
Compensation expense for pro forma purposes is reflected over the vesting period, in accordance
with the method described in FASB Interpretation (FIN) 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans.
For pro forma purposes, the fair value of the Companys stock option awards was estimated using the
Black-Scholes option-pricing model, assuming no expected dividends and the following
weighted-average assumptions for the three months ended March 31, 2005:
|
|
|
|
|
|
|
2005 |
|
Risk-free rate |
|
|
3.5 |
% |
Expected dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
41 |
% |
Expected life |
|
3 years |
Prior to January 1, 2006, the expected life and expected volatility of the stock options were
based upon historical data and other relevant factors. Forfeitures of employee stock options were
accounted for on an as-incurred basis.
Based on the Black-Scholes option pricing model, the weighted average estimated fair value of
employee stock option grants was $2.05 for the three months ended March 31, 2005. The total
intrinsic value of options exercised during the three months ended
March 31, 2005 was $3.0 million.
No shares were issued under the ESPP during the three months ended March 31, 2006 and 2005.
Revenue Recognition
Services and Fees
We derive the large majority of our revenues from usage fees. We recognize revenues when persuasive
evidence of an arrangement exists, service has been provided to the customer, the price to the
customer is fixed or determinable, and collection is reasonably assured.
We recognize revenues during the period the services are rendered to end users based on usage at
negotiated rates. We typically require our customers to commit to minimum usage levels. Minimum
usage levels can be based on an annual term, monthly term or over the term of the arrangement. If
actual usage in a given period is less than the minimum commitment, we recognize the difference
between the actual usage and the minimum commitment as revenue when cash is collected because we
cannot reasonably estimate the amount of the difference that will be collected. We cannot
reasonably estimate the amount of the difference to be collected because we
have from time to time renegotiated minimum commitments in cases where customers have sought
renegotiation of their contract for reasons such as a significant downturn in their business or
where we have determined that it would be in our best interest to do so. Customers are not
contractually entitled to use or otherwise receive benefit for unused service in subsequent
periods.
10
We typically provide our customers with deployment services, technical support and additional
optional services. Depending on the service provided and the nature of the arrangement, we may
charge a one-time, annual or monthly fee. We recognize revenues relating to one-time fees on a
straight-line basis over the term of the initial contract, generally one to three years, as we can
not reasonably estimate the period of performance. We recognize revenues relating to annual fees on
a straight-line basis. We recognize revenues for monthly services during the month that these
services are provided.
License and Maintenance
License revenue consists of revenue earned under software license agreements. License revenue is
generally recognized when a signed contract or other persuasive evidence of an arrangement exists,
the software has been shipped or electronically delivered, the license fee is fixed or
determinable, and collection of the resulting receivable is probable as prescribed by AICPA
Statement of Portion (SOP) 97-2. We enter into revenue arrangements in which a customer may
purchase a combination of software, upgrades and maintenance and support (multiple-element
arrangements). When vendor-specific objective evidence (VSOE) of fair value exists for all
elements, we allocate revenue to each element based on the relative fair value of each of the
elements. VSOE of fair value is established by the price charged when that element is sold
separately. When contracts contain multiple elements wherein VSOE of fair value exists for all
undelivered elements, we account for the delivered elements in accordance with the residual
method prescribed by AICPA Statement of Position (SOP) 98-9. Revenue from subscription license
agreements, which include software, rights to future products on a when-and-if available basis and
maintenance, is recognized ratably over the term of the subscription period. Revenue on shipments
to resellers, which is generally subject to certain rights of return and price protection, is
recognized when the products are sold by the resellers to the end-user customer.
Maintenance revenue consists of fees for providing software updates on a when and if available
basis and technical support for software products (post-contract support or PCS). Maintenance
revenue is recognized ratably over the term of the agreement.
Payments received in advance of services performed are deferred. Allowances for estimated future
returns and discounts are provided for upon recognition of revenue.
Fixed Broadband
Through the acquisition of GoRemote Internet Communications, Inc., the Company provides services
over a heterogeneous virtual network, which was created by forming contractual relationships with
approximately 500 access providers, including Internet service providers, cable companies, DSL
companies and telecommunications companies. These companies may provide us their services under
either a reseller or an agency arrangement. In applying our revenue recognition policy we must make
judgments with regard to the specific facts and circumstances surrounding each provider
relationship to determine which portion of our revenues we provide under a reseller arrangement,
where we would record gross revenues and cost of revenues, and which portion of our revenues we
provide as an agent, where we would record revenues and cost of revenues combined on a net basis.
In exercising our judgment, we evaluate the contractual arrangements and de facto relationships
with each provider, together with various other assumptions believed to be applicable and
reasonable under the circumstances, to determine whether revenues are gross versus net. We have one
significant provider arrangement under which we account for revenues on a net basis. All other
provider arrangements are accounted for on a gross basis, with the related costs associated with
provisioning each endpoint being deferred initially and amortized over the estimated life of an
endpoint, typically 30 months. Our judgments may change as new events occur, as additional
information is obtained and as our operating environment changes, any of which could cause a
material impact on the revenues that we have reported. We record estimated allowances against
revenues for returns and cancellations in the same period the revenues are recorded. These
estimates are based upon historical analysis of our service level agreements, credit memo data and
other known factors for pricing and transaction volume disputes that arise in the normal course of
business. To date, allowances pertaining to our current business have not been significant.
The Company generally performs credit reviews to evaluate the customers ability to pay. If the
Company determines that it is not probable that the revenue is collectible, the revenue is
recognized as cash is collected.
Network Access
Network access expenses represent the amounts paid to network access providers for the usage of
their networks. The Company has minimum purchase commitments with some network service providers
for access that it expects to utilize during the term of the
11
contracts. We recognize costs of
minimum purchase contracts as network access expenses at the greater of the minimum commitment or
actual usage.
If the Company estimates that the revenues derived from the purchase commitment will be less than
the purchase commitment, the Company recognizes a loss on that purchase commitment to the extent of
that difference. No such loss has been recognized for the three months ended
March 31, 2006.
Note 3. Net Income (Loss) Per share
In accordance with SFAS 128, Earnings Per Share, basic net income (loss) per share is computed by
dividing net income (loss) by the weighted daily average number of shares of common stock
outstanding during the period. The weighted daily average number of shares of common stock excludes
shares that have been exercised prior to vesting and are subject to repurchase by the company.
There were no shares subject to repurchase for the three months ended March 31, 2006. Basic net
income per share excludes 558,769 shares subject to repurchase for the three months ended March 31,
2005. These shares have been included in diluted net income per share to the extent that the
inclusion of such shares is dilutive. Diluted net income (loss) per share is based upon the
weighted daily average number of shares of common stock outstanding for the period plus dilutive
potential common shares from the issuance of stock options using the treasury-stock method.
The following table sets forth the computation of basic and diluted net income (loss) per share (in
thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(65 |
) |
|
$ |
4,089 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic net income per share
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
64,494,634 |
|
|
|
62,316,794 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
3,810,742 |
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share adjusted
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
64,494,634 |
|
|
|
66,127,536 |
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.00 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
Diluted net income per (loss)share |
|
$ |
(0.00 |
) |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
For the
three months ended March 31, 2006 and 2005, 10,871,902 and 1,655,439 options to purchase common stock have been
excluded from the computation of diluted net income per share because the effect of including these
shares would have been anti-dilutive:
The weighted-average exercise price of options to purchase common stock excluded from the
computation was
$7.42 and $10.94 for the three months ended March 31, 2006 and 2005.
12
Note 4. Legal Contingencies
Beginning on January 14, 2005, three purported class action complaints were filed against the
Company and certain of its executive officers in the United States District Court for the Northern
District of California. On March 2, 2005, these cases were consolidated as In re iPass Securities
Litigation, Case No. 3:05-cv-00228-MHP. On April 22, 2005, David Lutzke and Rhonda Lutzke were
named lead plaintiffs. On July 5, 2005, plaintiffs filed a Consolidated Amended Complaint. Named
as defendants together with the Company are officers Kenneth D. Denman, Donald C. McCauley, Anurag
Lal, and Jon M. Russo. The Consolidated Amended Complaint (CAC) alleges that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 during an alleged class
period from April 22, 2004 to June 30, 2004 by failing to inform investors of certain operational
issues that allegedly led to declines in the Companys revenue, earnings and growth prospects.
Defendants moved to dismiss the CAC, and on February 28, 2006, the court granted the motion with
leave to amend. On March 30, 2006, plaintiffs filed a Second Consolidated Amended Complaint,
(SCAC) which set forth, the same claims against the same defendants relating to the same alleged
class period. Defendants filed a motion to dismiss the SCAC on May 1, 2006, and pursuant to an
agreed-upon schedule, the motion is set to be heard on July 31, 2006. The case is at an early stage
and no trial date has been set. No discovery is expected to take place unless defendants motion
to dismiss is denied. No loss
has been accrued as a loss is not probable or estimable as of
March 31, 2006
Beginning on March 25, 2005, two stockholders filed separate derivative actions in California
Superior Court for the County of San Mateo, purporting to state claims on behalf of the Company
against Kenneth D. Denman, Donald C. McCauley, Anurag Lal, Jon M. Russo, Peter G. Bodine, Arthur C.
Patterson, John D. Beletic, A. Gary Ames, Cregg B. Baumbaugh and Allan R. Spies. The complaints
purport to arise out of the same alleged nondisclosures set forth in the Consolidated Amended
Complaint set forth in the shareholder class action, and purport to set forth claims for breach of
fiduciary duty, abuse of process, gross mismanagement, waste, unjust enrichment, and violation of
California Corporations Code 25402. On May 5, 2005, the actions were consolidated as In re iPass,
Inc. Derivative Litigation, Case No. CIV445765. By agreement of the parties, the time to file
plaintiffs consolidated complaint was extended several times, and a Consolidated Derivative
Complaint (CDC) was filed on February 21, 2006. On March 28, 2006, defendants filed a demurrer
to the CDC, in response to which plaintiffs stated that they intend to further amend the CDC. The
further amended complaint has not yet been filed. On April 6, 2006, the court granted the joint
motion of all parties to have the case designated as complex litigation. The case is at an early
stage, no discovery has occurred, and no trial date has been set. No loss
has been accrued as a loss is not probable or estimable as of
March 31, 2006
On December 15, 2005, Peter Helfrich filed a complaint in the Superior Court for Orange County
against GoRemote Internet Communications, Inc. (GoRemote) (a company acquired by the Company on
February 15, 2006), alleging claims, including wrongful termination in violation of public policy,
breach of contract, unpaid compensation, unfair business practices, breach of the implied covenant
of good faith and fair dealing, and intentional infliction of emotional distress (the Complaint).
GoRemote responded to that Complaint on January 17, 2006, with a general denial of the allegations
in the Complaint and raised certain affirmative defenses. The parties have agreed to schedule a
private mediation, and most discovery has been stayed pending the outcome of the mediation.
In July and August 2001, GoRemote and certain of its officers were named as defendants in five
purported securities class action lawsuits filed in the United States District Court, Southern
District of New York, captioned as In re GoRemote Internet Communications, Inc. Initial Public
Offering Securities Litigation, No. 01 Civ 6771 (SAS), and consolidated with more than three
hundred substantially identical proceedings as In re Initial Public Offering Securities Litigation,
Master File No. 21 MC 92 (SAS). The Consolidated Amended Class Action Complaint for Violation of
the Federal Securities Laws (Consolidated Complaint) was filed on or about April 19, 2002, and
alleged claims against certain of GoRemotes officers and against CIBC World Markets Corp.,
Prudential Securities Incorporated, DB Alex. Brown, as successor to Deutsche Bank, and U.S. Bancorp
Piper Jaffray Inc., underwriters of GoRemotes December 14, 1999 initial public offering
(underwriter defendants), under Sections 11 and 15 of the Securities Act of 1933, as amended, and
under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.
Citing several press articles, the Consolidated Complaint alleged that the underwriter defendants
used improper methods in allocating shares in initial public offerings, and claimed the underwriter
defendants entered into improper commission agreements regarding aftermarket trading in GoRemotes
common stock purportedly issued pursuant to the registration statement for the initial public
offering. The Consolidated Complaint also alleged market manipulation claims against the
underwriter defendants based on the activities of their respective analysts, who were allegedly
compromised by conflicts of interest. The plaintiffs in the Consolidated
13
Complaint sought damages
as measured under Section 11 and Section 10(b) of the Securities Act of 1933, pre-judgment and
post-judgment interest, and reasonable attorneys and expert witnesses fees and other costs; no
specific amount was claimed in the plaintiffs prayer in the Consolidated Complaint.
In October 2002, certain of GoRemotes officers and directors who had been named as defendants in
the Consolidated Complaint were dismissed without prejudice upon order of the presiding judge. In
February 2003, the presiding judge dismissed the Section 10(b) claims against GoRemote and its
named officers and directors with prejudice.
From September 2002 through June 2003, GoRemote participated in settlement negotiations with a
committee of issuers litigation counsel, plaintiffs executive committee and representatives of
various insurance companies (the Insurers). GoRemotes Insurers were actively involved in the
settlement negotiations, and strongly supported a settlement proposal presented to GoRemote for
consideration in early June 2003. The settlement proposed by the plaintiffs would be paid for by
the Insurers and would dispose of all remaining claims against GoRemote.
After careful consideration, GoRemote decided to approve the settlement proposal in July 2003.
Although GoRemote believed that plaintiffs claims were without merit, it decided to accept the
settlement proposal (which does not admit wrongdoing) to avoid the cost and distraction of
continued litigation. Because the settlement would be funded entirely by its Insurers, GoRemote did
not believe that the settlement would have any effect on GoRemotes financial condition, results of
operations or cash flows.
On February 15, 2005, the court issued a decision certifying a class for settlement purposes and
granting preliminary approval of the settlement subject to modification of certain orders
contemplated by the settlement. On August 31, 2005, the court reaffirmed class certification and
preliminary approval of the modified settlement in a comprehensive order, and directed that Notice
of the settlement be published and mailed to class members beginning November 15, 2005. On
February 24, 2006, the court dismissed litigation filed against certain underwriters in connection
with the claims to be assigned to the plaintiffs under the settlement. On April 24, 2006, the
Court held a final fairness hearing to determine whether to grant final approval of the settlement.
A decision is expected this summer. GoRemote is covered by a claims-made liability insurance
policy which the Company believes will satisfy any potential liability of the Company under this
settlement. No loss has been accrued as of March 31, 2006.
Note 5. Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information establishes
standards for the reporting by business enterprises of information about operating segments,
products and services, geographic areas, and major customers. The method for determining what
information is reported is based on the way that management organizes the operating segments within
the Company for making operational decisions and assessments of financial performance. The
Companys chief executive officer (CEO) is considered to be the Companys chief operating decision
maker. The CEO reviews financial information presented on a consolidated basis for purposes of
making operating decisions and assessing financial performance. The consolidated financial
information reviewed by the CEO is similar to the information presented in the accompanying
condensed consolidated financial statements. Therefore, the Company has determined that it operates
in a single reportable segment.
Note 6. Business Combinations
On February 15, 2006, iPass completed its acquisition of GoRemote, a publicly-traded company
headquartered in Milpitas, California that provides secure managed virtual business network
services. GoRemote became a wholly owned subsidiary of iPass in a transaction accounted for using
the purchase method. The Company acquired 100% of the outstanding shares of GoRemote in a cash
transaction for $1.71 per share of GoRemote common stock and $3.37 per share of GoRemote Series A
preferred stock for a total of approximately $75.8 million.
The Company plans to expand its product offering to its customers by offering GoRemotes managed
broadband services for branch offices and teleworkers. On February 13, 2006, the stockholders of
GoRemote adopted the merger agreement and on February 15, 2006, a certificate of merger was filed
and the merger was effective. The Company paid, in total, approximately $78.9 million in cash,
which includes ancillary expenses associated with the purchase, to acquire the approximately 43.3
million outstanding shares of GoRemote common stock and the approximately 541,631 shares of
GoRemote Series A preferred stock. In addition, iPass assumed outstanding options to acquire
approximately 8.3 million shares of GoRemote common stock, and converted those into options to
acquire approximately 1.9 million shares of iPass common stock.
14
The results of operations of GoRemote are included in the Companys Condensed Consolidated
Statement of Operations beginning February 15, 2006, the date of the transaction closing. The
following table summarizes the allocation of the purchase price based on the estimated fair values
of the tangible assets acquired and the liabilities assumed at the date of acquisition (in
thousands):
|
|
|
|
|
Cash consideration for common and preferred stockholders |
|
$ |
75,806 |
|
Estimated fair value of options assumed |
|
|
5,826 |
|
Direct transaction costs |
|
|
3,097 |
|
|
|
|
|
Total preliminary estimated purchase price |
|
$ |
84,729 |
|
|
|
|
|
Under the purchase method of accounting, the total estimated purchase price as shown in the
table above is allocated to GoRemotes net tangible and intangible assets based on their estimated
fair values as of February 15, 2006. Management has allocated the preliminary estimated purchase
price based on various factors. The allocation of the purchase price is preliminary pending the
completion of various analyses and the finalization of estimates. The allocation of the
preliminary estimated purchase price is as follows (in thousands):
|
|
|
|
|
Net tangible assets |
|
$ |
6,380 |
|
Deferred Revenues |
|
|
(1,025 |
) |
Restructuring liabilities |
|
|
(1,249 |
) |
Amortizable intangible assets: |
|
|
|
|
Customer relationships |
|
|
7,600 |
|
Supplier contracts |
|
|
950 |
|
Internally developed software |
|
|
350 |
|
Goodwill |
|
|
61,471 |
|
Deferred tax assets, net |
|
|
10,252 |
|
|
|
|
|
Total preliminary estimated purchase price |
|
$ |
84,729 |
|
|
|
|
|
Goodwill represents the excess of the purchase price over the fair value of tangible and
identifiable intangible assets. The unaudited condensed consolidated statements of operations do
not reflect the amortization of goodwill acquired in the proposed merger, consistent with the
guidance in the Financial Accounting Standards Board Statement No. 142, Goodwill and Other
Intangible Assets.
Amortization of other intangibles has been provided over the following estimated useful lives:
customer relationships (Mobile Office) 4 years, supplier contracts 4 years; customer
relationships (Fixed Broadband) 7 years; internally developed software 7 years.
The following represents the estimated annual amortization of acquired intangibles (in
thousands):
|
|
|
|
|
Fiscal Year |
|
|
|
|
2006 |
|
$ |
1,605 |
|
2007 |
|
|
1,834 |
|
2008 |
|
|
1,834 |
|
2009 |
|
|
1,834 |
|
2010 |
|
|
685 |
|
2011 |
|
|
521 |
|
2012 |
|
|
521 |
|
2013 |
|
|
66 |
|
|
|
|
|
|
|
$ |
8,900 |
|
|
|
|
|
The following unaudited pro forma information represents the results of operations for iPass
and GoRemote for the three months ended March 31, 2006 and 2005 as if the acquisition had been
consummated as of January 1, 2006 and 2005, respectively. This pro forma information does not
purport to be indicative of what may occur in the future (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Total revenue |
|
$ |
49,293 |
|
|
$ |
56,274 |
|
Net income (loss) |
|
|
(4,753 |
) |
|
|
3,421 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.07 |
) |
|
$ |
0.05 |
|
Diluted |
|
$ |
(0.07 |
) |
|
$ |
0.05 |
|
Number of shares used in per share calculations: |
|
|
|
|
|
|
|
|
Basic |
|
|
64,494,634 |
|
|
|
62,316,794 |
|
Diluted |
|
|
64,494,634 |
|
|
|
66,127,536 |
|
Note 7. Goodwill and Intangibles
The following table represents a rollforward of goodwill and acquired intangible assets, net
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
Balance |
|
|
Acquisition |
|
|
Amortization |
|
|
Balance |
|
Goodwill |
|
$ |
18,691 |
|
|
$ |
61,471 |
|
|
$ |
|
|
|
$ |
80,162 |
|
Intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing technology |
|
|
5,973 |
|
|
|
|
|
|
|
(403 |
) |
|
|
5,570 |
|
Patent/Core technology |
|
|
2,127 |
|
|
|
|
|
|
|
(141 |
) |
|
|
1,986 |
|
Maintenance agreements and certain relationships |
|
|
322 |
|
|
|
|
|
|
|
(17 |
) |
|
|
305 |
|
Customer relationships |
|
|
354 |
|
|
|
7,600 |
|
|
|
(224 |
) |
|
|
7,730 |
|
Supplier contracts |
|
|
|
|
|
|
950 |
|
|
|
(30 |
) |
|
|
920 |
|
Internally developed software |
|
|
|
|
|
|
350 |
|
|
|
(6 |
) |
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,467 |
|
|
$ |
70,371 |
|
|
$ |
(821 |
) |
|
$ |
97,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense related to acquired intangible assets is set forth in the table
below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Intangibles: |
|
|
|
|
|
|
|
|
Existing technology |
|
$ |
(403 |
) |
|
$ |
(403 |
) |
Patent/Core technology |
|
|
(141 |
) |
|
|
(141 |
) |
Maintenance agreements and certain relationships |
|
|
(17 |
) |
|
|
(17 |
) |
Customer relationships |
|
|
(224 |
) |
|
|
(31 |
) |
Supplier contracts |
|
|
(30 |
) |
|
|
|
|
Internally developed software |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(821 |
) |
|
$ |
(592 |
) |
|
|
|
|
|
|
|
The following tables set forth the carrying amount of other intangible assets that will
continue to be amortized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Life |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing technology |
|
7 yrs |
|
$ |
7,900 |
|
|
$ |
(2,330 |
) |
|
$ |
5,570 |
|
Patent/Core technology |
|
7 yrs |
|
|
2,800 |
|
|
|
(814 |
) |
|
|
1,986 |
|
Maintenance agreements and certain relationships |
|
5 yrs |
|
|
400 |
|
|
|
(95 |
) |
|
|
305 |
|
Customer relationships |
|
3-7 yrs |
|
|
8,100 |
|
|
|
(370 |
) |
|
|
7,730 |
|
Supplier contracts |
|
4 yrs |
|
|
950 |
|
|
|
(30 |
) |
|
|
920 |
|
Internally developed software |
|
7 yrs |
|
|
350 |
|
|
|
(6 |
) |
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,500 |
|
|
$ |
(3,645 |
) |
|
$ |
16,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Life |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing technology |
|
6 yrs |
|
$ |
7,900 |
|
|
$ |
(1,927 |
) |
|
$ |
5,973 |
|
Patent/Core technology |
|
6 yrs |
|
|
2,800 |
|
|
|
(673 |
) |
|
|
2,127 |
|
Maintenance agreements and certain relationships |
|
6 yrs |
|
|
400 |
|
|
|
(78 |
) |
|
|
322 |
|
Customer relationships |
|
4 yrs |
|
|
500 |
|
|
|
(146 |
) |
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,600 |
|
|
$ |
(2,824 |
) |
|
$ |
8,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the estimated future amortization of intangible assets (in
thousands):
|
|
|
|
|
Fiscal Year |
|
|
|
|
2006 |
|
$ |
3,150 |
|
2007 |
|
|
4,201 |
|
2008 |
|
|
3,901 |
|
2009 |
|
|
2,401 |
|
2010 |
|
|
1,241 |
|
Thereafter |
|
|
1,961 |
|
|
|
|
|
|
|
$ |
16,855 |
|
|
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This quarterly report on Form 10-Q, including this Managements Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking statements regarding future
events and our future results that are based on current expectations,
15
estimates, forecasts, and
projections about the industries in which we operate and the beliefs and assumptions of our
management. Words such as expects, anticipates, targets, goals, projects, intends,
plans, believes, seeks, estimates, variations of such words, and similar expressions are
intended to identify such forward-looking statements. In addition, any statements which refer to
projections of our future financial performance, our anticipated growth and trends in our business,
and other characterizations of future events or circumstances, are forward-looking statements.
Readers are cautioned that these forward-looking statements are only predictions based upon
assumptions made that we believed to be reasonable at the time, and are subject to risks and
uncertainties. Therefore, actual results may differ materially and adversely from those expressed
in any forward-looking statements. Readers are directed to risks and uncertainties identified below
under Factors Affecting Operating Results and elsewhere in this quarterly report, for factors
that may cause actual results to be different than those expressed in these forward-looking
statements. Except as required by law, we undertake no obligation to revise or update publicly any
forward-looking statements.
Company Overview
We deliver simple, secure and manageable enterprise mobility services, maximizing the productivity
of workers as they move between office, home and remote locations. Our policy management services
close the gaps in protecting computers, network assets, user identities and data whenever users
connect over the Internet. Our connectivity services utilize the iPass global virtual network, a
unified network of hundreds of dial-up, wireless, and broadband providers in over 160 countries.
Overview of the three months ended March 31, 2006
Our overall revenues increased slightly for the three months ended March 31, 2006 as compared to
the same period in 2005. The increase was driven primarily by our acquisition of GoRemote, which
was completed on February 15, 2006. GoRemote contributed additional revenues of $4.2 million which
offset a $4.0 million decline in iPass revenue primarily related to a continued decline in dial-up
revenues.
We increased the number of broadband access points during the quarter, increasing our global
broadband footprint. We ended the quarter with approximately 43,000 Wi-Fi and wired hotspots
worldwide. This enabled our customers to remotely access their corporate networks from more
locations, at higher speeds driving the increases in broadband usage revenues in 2006 over 2005.
Going forward, we will continue to focus on delivering innovative services and solutions for our
customers, with the goal of increasing the number of end users of our services for both dial-up and
broadband access, as well as to increase fee revenues from endpoint policy management and other fee
based services. The Company also plans to expand its product offering to its customers by offering
GoRemotes managed broadband services for branch offices and teleworkers. During the rest of 2006,
we expect to see moderate growth in our business as we expect dial-up revenues to continue to
decrease through the remainder of the fiscal year. However, our
ability to achieve these goals could be limited by several
factors, including the timely release of new products, continued market acceptance of our products
and the introduction of new products by existing or new competitors. For a further discussion of
these and other risk factors, see the section below entitled Factors Affecting Operating Results.
Sources of Revenues
We derive our revenues primarily from providing enterprise connectivity services through our
virtual network. We sell these services directly, as well as indirectly through our channel
partners. We bill substantially all customers on a time basis for usage based on negotiated rates.
We bill the remaining customers based on a fixed charge per active user per month with additional
charges for excess time. Substantially all enterprise customers commit to a one to three year
contract term. Most of our contracts with enterprise customers contain minimum usage levels. We
bill customers for minimum commitments when actual usage is less than their monthly minimum
commitment amount. We recognize the difference between the minimum commitment and actual usage as
fee revenue once the cash for such fee has been collected. Our usage-based revenues represented 82%
and 88% of our revenues for the three months ended March 31, 2006 and 2005, respectively.
We have incurred expenses to expand our broadband coverage and are seeking to generate additional
revenues from our broadband wired and wireless coverage. Revenues from usage of our broadband
services were 13% and 3% of our total revenues for the three months ended March 31, 2006 and 2005,
respectively.
We also provide customers with deployment services and technical support throughout the term of the
contract. We typically charge fees for these services on a one-time or annual basis, depending on
the service provided and the nature of the relationship. In addition, we also offer customers
additional services for which we generally bill on a monthly basis. With the acquisition of Mobile
16
Automation, Inc. in October of 2004, we also began generating license and maintenance revenue
through software licensing agreements. Revenues generated from service fees represented
approximately 18% and 12% of our revenues for the three months ended March 31, 2006 and 2005,
respectively.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our
condensed consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these condensed consolidated
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue
recognition, income taxes, impairment of short-term investments, impairment of goodwill and
intangible assets and allowance for doubtful accounts. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable, the results of which
form the basis of making judgments about the carrying values of assets and liabilities.
We believe the following critical accounting policies are important in understanding our condensed
consolidated financial statements.
Revenue Recognition
Services and Fees
We derive the large majority of our revenues from usage fees. We recognize revenues when persuasive
evidence of an arrangement exists, service has been provided to the customer, the price to the
customer is fixed or determinable, and collectibility is reasonably assured.
We recognize revenues during the period the services are rendered to end users based on usage at
negotiated rates. We typically require our customers to commit to minimum usage levels. Minimum
usage levels can be based on an annual term, monthly term or over the term of the arrangement. If
actual usage in a given period is less than the minimum commitment, we recognize the difference
between the actual usage and the minimum commitment as revenue when cash is collected because we
cannot reasonably estimate the amount of the difference that will be collected. We cannot
reasonably estimate the amount of the difference to be collected because we have from time to time
renegotiated minimum commitments in cases where customers have sought renegotiation of their
contract for reasons such as a significant downturn in their business or where we have determined
that it would be in our best interest to do so. Customers are not contractually entitled to use or
otherwise receive benefit for unused service in subsequent periods.
We typically provide our customers with deployment services, technical support and additional
optional services. Depending on the service provided and the nature of the arrangement, we may
charge a one-time, annual or monthly fee. We recognize revenues relating to one-time fees on a
straight-line basis over the term of the initial contract, generally one to three years as we can
not reasonably estimate the period of performance. We recognize revenues relating to annual fees on
a straight-line basis. Revenues for monthly services are recognized during the month that these
services are provided.
License and Maintenance
License revenue consists of revenue earned under software license agreements. We recognize license
revenue generally when a signed contract or other persuasive evidence of an arrangement exists, the
software has been shipped or electronically delivered, the license fee is fixed or determinable,
and collection of the resulting receivable is probable as prescribed by AICPA Statement of Portion
(SOP) 97-2. We enter into revenue arrangements in which a customer may purchase a combination of
software, upgrades and maintenance and support (multiple-element arrangements). When
vendor-specific objective evidence (VSOE) of fair value exists for all elements, we allocate
revenue to each element based on the relative fair value of each of the elements. VSOE of fair
value is established by the price charged when that element is sold separately. When contracts
contain multiple elements wherein VSOE of fair value exists for all undelivered elements, we
account for the delivered elements in accordance with the residual method prescribed by AICPA
Statement of Position (SOP) 98-9. We recognize revenue from subscription license agreements,
which include software, rights to future products on a when-and-if available basis and maintenance,
is recognized ratably over the term of the subscription
period. We recognize revenue on shipments to resellers, which is generally subject to certain
rights of return and price protection, when the products are sold by the resellers to the end-user
customer.
17
Maintenance revenue consists of fees for providing software updates on a when and if available
basis and technical support for software products (post-contract support or PCS). We recognize
maintenance revenue over the term of the agreement.
We defer payments received in advance of services performed. We provide allowances for estimated
future returns and discounts upon recognition of revenue.
Fixed Broadband
Through the acquisition of GoRemote, the Company provides services over a heterogeneous virtual
network, which was created by forming contractual relationships with approximately 500 access
providers, including Internet service providers, cable companies, DSL companies and
telecommunications companies. These companies may provide us their services under either a reseller
or an agency arrangement. In applying our revenue recognition policy we must make judgments with
regard to the specific facts and circumstances surrounding each provider relationship to determine
which portion of our revenues we provide under a reseller arrangement, where we would record gross
revenues and cost of revenues, and which portion of our revenues we provide as an agent, where we
would record revenues and cost of revenues combined on a net basis. In exercising our judgment, we
evaluate the contractual arrangements and de facto relationships with each provider, together with
various other assumptions believed to be applicable and reasonable under the circumstances, to
determine whether revenues are gross versus net. We have one significant provider arrangement under
which we account for revenues on a net basis. All other provider arrangements are accounted for on
a gross basis, with the related costs associated with provisioning each endpoint being deferred
initially and amortized over the estimated life of an endpoint, typically 30 months. Our judgments
may change as new events occur, as additional information is obtained and as our operating
environment changes, any of which could cause a material impact on the revenues that we have
reported. We record estimated allowances against revenues for returns and cancellations in the same
period the revenues are recorded. These estimates are based upon historical analysis of our service
level agreements, credit memo data and other known factors for pricing and transaction volume
disputes that arise in the normal course of business. To date, allowances pertaining to our current
business have not been significant.
The Company generally performs credit reviews to evaluate the customers ability to pay. If the
Company determines that it is not probable that the revenue is collectible, the revenue is
recognized as cash is collected.
Accounting for Income Taxes
In preparing our consolidated financial statements, we assess the likelihood that our deferred tax
assets will be realized from future taxable income. We establish a valuation allowance if we
determine that it is more likely than not that some portion of the net deferred tax assets will not
be realized. Changes in the valuation allowance are included in our Condensed Consolidated
Statements of Operations as a provision for (benefit from) income taxes. We exercise significant
judgment in determining our provisions for income taxes, our deferred tax assets and liabilities
and our future taxable income for purposes of assessing our ability to utilize any future tax
benefit from our deferred tax assets.
Although we believe it is more likely than not that we will realize our net deferred tax assets,
there is no guarantee this will be the case as our ability to use the net operating losses is
contingent upon our ability to generate sufficient taxable income in the carryforward period. At
each period end, we will be required to reassess our ability to realize the benefit of our net
operating losses. If we were to conclude it is not more likely than not that we would realize the
benefit of our net operating losses, we may have to re-establish the valuation allowance and
therefore record a significant charge to our results of operations.
Share-Based Compensation Employee Stock-Based Awards
On January 1, 2006, we adopted SFAS 123(R) which requires the measurement and recognition of
compensation expense for all stock-based awards made to employees and directors including employee
stock options and employee stock purchases under the ESPP based on estimated fair values. SFAS
123(R) supersedes our previous accounting under APB 25 for periods beginning in fiscal year 2006.
In March 2005, the SEC issued SAB 107 providing supplemental implementation guidance for SFAS
123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).
SFAS 123(R) requires companies to estimate the fair value of stock-based awards on the date of
grant using an option pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in
our Condensed Consolidated Statements of Operations. We adopted SFAS 123(R) using the modified
prospective transition method which requires the application of the accounting standard starting
from January 1, 2006, the first day of our fiscal year 2006. Our Condensed Consolidated Financial
Statements, as of and for the three months ended March 31, 2006, reflect the impact of SFAS
18
123(R).
Stock-based compensation expense for the three months ended March 31, 2006, was $1.4 million, which
consisted of stock-based compensation expense related to employee stock options and our employee
stock purchase plan recognized under SFAS 123(R).
Prior to the adoption of SFAS 123(R), we accounted for stock-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 as allowed under SFAS 123
Accounting for Stock-Based Compensation. Under the intrinsic value method, no stock-based
compensation expense for employee stock options had been recognized in our Consolidated Statements
of Operations, because the exercise price of our stock options granted to employees and directors
equalled the fair market value of the underlying stock at the date of grant. In accordance with the
modified prospective transition method we used in adopting SFAS 123(R), our results of operations
prior to fiscal year 2006 have not been restated to reflect, and do not include, the possible
impact of SFAS 123(R).
Stock-based compensation expense recognized during a period is based on the value of the portion of
stock-based awards that is ultimately expected to vest during the period. Stock-based compensation
expense recognized in the three months ended March 31, 2006, included compensation expense for
stock-based awards granted prior to, but not yet vested as of December 31, 2005, based on the fair
value on the grant date estimated in accordance with the pro forma provisions of SFAS 123, and
compensation expense for the stock-based awards granted subsequent to December 31, 2005, based on
the fair value on the grant date estimated in accordance with the provisions of SFAS 123(R). As
stock-based compensation expense recognized in our results for the first quarter of fiscal year
2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Prior to fiscal year 2006, we
accounted for forfeitures as they occurred for the purposes of pro forma information under SFAS
123, as disclosed in our Notes to Condensed Consolidated Financial Statements for the related
periods.
Upon adoption of SFAS 123(R), we selected the Black-Scholes option pricing model as the most
appropriate method for determining the estimated fair value for stock-based awards. The
Black-Scholes model requires the use of highly subjective and complex assumptions which determine
the fair value of stock-based awards, including the options expected term and the price volatility
of the underlying stock.
Also see Note 2 to the Condensed Consolidated Financial Statements on Share-Based Compensation.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is based on a detailed assessment of accounts receivable for
specific, as well as anticipated, uncollectible accounts receivable. Our estimate in determining
the allowance for doubtful accounts is based on credit profiles of our customers, current economic
trends, contractual terms and conditions, and historical payment experience. We have an allowance
for doubtful accounts of $2.8 million and $2.0 million as of March 31, 2006 and December 31, 2005,
respectively, for estimated losses resulting from the inability of our customers to make their
required payments to us. If the financial condition of our customers were to deteriorate, resulting
in their inability to make payments, or if we underestimated the allowances required, additional
allowances may be required, which would result in an increased general and administrative expense
in the period such determination was made.
RESULTS OF OPERATIONS
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except percentages) |
|
Total revenue |
|
$ |
44,270 |
|
|
$ |
44,072 |
|
|
$ |
198 |
|
|
|
0.4 |
% |
Total revenue increased slightly in the three months ended March 31, 2006, as compared to the same
period in 2005 due to offsetting factors. Revenues were impacted by a continued decline in dial-up
revenues for the period as customers continue to migrate from dial-up to broadband as the preferred
method of connecting to their corporate networks. Dial-up revenues decreased $7.0 million in the
first quarter of 2006 as compared to 2005 and were partially offset by a $4.3 million increase in
revenues related to our broadband services. Revenues generated from broadband usage, dial-up usage
and fees include $4.2 million of revenue from our acquisition of GoRemote whose revenues for the
period from February 15, 2006 through March 31, 2006 are included in our total revenues. No
individual customer accounted for 10% or more of total revenues for the three months ended March
31, 2006 and 2005. Revenues
from minimum commitments, license and maintenance fees and additional services represented
approximately 18% and 12% of our revenues for the three months ended March 31, 2006 and 2005,
respectively.
19
International revenues accounted for approximately 44% and 43% of total revenues for the three
months ended March 31, 2006 and 2005, respectively. Substantially all of our international revenues
are generated in the EMEA (Europe, Middle East and Africa) and Asia Pacific regions. Revenues in
the EMEA region represented 29% and 27% of total revenues for the three months ended March 31, 2006
and 2005, respectively. The increase in the EMEA region as a percentage of total revenues is due to
the efforts of our expanded sales force in EMEA. Revenues in the Asia Pacific region represented
11% of total revenues for the three months ended March 31, 2006 and 2005. The only individual
foreign country to account for 10% or more of total revenues for the periods presented was the
United Kingdom, which represented approximately 14% and 13% of total revenues for the three months
ended March 31, 2006 and 2005, respectively. Substantially all of our revenues to date have been
denominated in U.S. dollars. In the future, some portion of revenues may be denominated in foreign
currencies.
Operating Expenses
Network Access
Network access expenses consist of charges for access, principally by the minute or time-based,
that we pay to our network service providers.
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|
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|
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March 31, |
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|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except percentages) |
|
Network access expenses |
|
$ |
12,532 |
|
|
$ |
10,492 |
|
|
$ |
2,040 |
|
|
|
19.4 |
% |
As a percent of revenue |
|
|
28.3 |
% |
|
|
23.8 |
% |
|
|
|
|
|
|
|
|
The growth in network access expenses in the three months ended March 31, 2006 as compared to the
same period in 2005 was due, in part, to increased usage of our virtual network as well as the
reflection of the higher costs of broadband access as it continues to comprise an increased portion
of our total network access usage. We expect network access expenses to continue to increase in
absolute dollars as usage of our virtual network increases, and to increase as a percentage of
revenues.
Network Operations
Network operations expenses consist of compensation and benefits for our network engineering,
customer support, network access quality and information technology personnel, outside consultants,
transaction center fees, depreciation of our network equipment, and certain allocated overhead
costs.
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|
|
March 31, |
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except percentages) |
|
Network operations expenses |
|
$ |
6,964 |
|
|
$ |
5,325 |
|
|
$ |
1,639 |
|
|
|
30.8 |
% |
As a percent of revenue |
|
|
15.7 |
% |
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
The growth in network operations expenses in the three months ended March 31, 2006 as compared to
the first quarter of 2005 was due primarily to approximately $830,000 in additional compensation
and benefits expense due to an increase in headcount, approximately $210,000 related to the
adoption of SFAS 123(R), and an increase in licensing fees of approximately $270,000, offset, in
part, by approximately $160,000 of decreased communication line costs. The remainder of the
increase was attributable to various expenses which individually, are insignificant items. The
increase as a percentage of revenues from the first quarter of 2005 to the first quarter of 2006
was due primarily to the expansion and support of our virtual network and increased headcount due
to the acquisition of GoRemote. As we expand our operations, we expect that our network operations
expenses will continue to increase in absolute dollars and as a percentage of revenues.
Research and Development
Research and development expenses consist of compensation and benefits for our research and
development personnel, consulting, and certain allocated overhead costs.
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March 31, |
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except percentages) |
|
Research and development expenses |
|
$ |
5,531 |
|
|
$ |
4,480 |
|
|
$ |
1,051 |
|
|
|
23.5 |
% |
As a percent of revenue |
|
|
12.5 |
% |
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
20
The increase in research and development expenses for the three months ended March 31, 2006 as
compared to the three months ended March 31, 2005 was due primarily to an additional $1.7 million
of compensation costs related to increased headcount and the inclusion of stock-based compensation
expense. The increase was partially offset by various expenses which, individually are
insignificant items. The increase as a percentage of revenues as well as absolute dollars was due
to the continued acceleration of our development of new products, the integration of technology
acquired into existing products and services as a result of the business acquisitions that occurred
in 2004 and 2005. We expect that our research and development expenses will continue to increase in
absolute dollars and remain relatively constant as a percentage of revenue as we increase the
number of our personnel and consultants to develop and enhance new and existing service offerings.
Sales and Marketing
Sales and marketing expenses consist of compensation, benefits, advertising, promotion expenses,
and certain allocated overhead costs.
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|
|
March 31, |
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except percentages) |
|
Sales and marketing expenses |
|
$ |
14,815 |
|
|
$ |
12,673 |
|
|
$ |
2,142 |
|
|
|
16.9 |
% |
As a percent of revenue |
|
|
33.5 |
% |
|
|
28.8 |
% |
|
|
|
|
|
|
|
|
The increase in sales and marketing expenses in absolute dollars in the three months ended March
31, 2006 as compared to the first quarter of 2005 was due primarily to an approximately $640,000
additional compensation and benefits expenses due to additional sales personnel related to the
expansion of the sales organization in the EMEA region, and an additional $530,000 related to the
adoption of SFAS 123(R). There was also an increase of approximately $350,000 in marketing
programs, including trade shows and promotions. The remaining portion of the increase was due to
individually insignificant items. We expect that sales and marketing expenses will remain constant
in absolute dollars and also decrease slightly as a percentage of revenues.
General and Administrative
General and administrative expenses consist of compensation and benefits of general and
administrative personnel, legal and accounting expenses, bad debt expense, and certain allocated
overhead costs.
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|
|
March 31, |
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except percentages) |
|
General and administrative expenses |
|
$ |
5,862 |
|
|
$ |
4,189 |
|
|
$ |
1,673 |
|
|
|
39.9 |
% |
As a percent of revenue |
|
|
13.2 |
% |
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
General and administrative expenses increased for the three months ended March 31, 2006 as compared
to the three months ended March 31, 2005. The increase was primarily driven by increased legal and
consulting fees of $400,000, increased benefits and expenses of $770,000 as a result of increased
headcount and stock-based compensation expense, and approximately $670,000 related to increased
facility costs. The increase were partially offset by various individually insignificant items.
We expect that in future periods our general and administrative expenses will remain constant in
absolute dollars and also decrease slightly as a percentage of revenues.
Amortization of Acquired Intangibles
Amortization of acquired intangibles was approximately $821,000 and $592,000 for the three months
ended March 31, 2006 and 2005, respectively. The increase from 2005 to 2006 was driven by the
amortization of intangible assets acquired in 2006 as a result of the acquisition of GoRemote.
21
Non-Operating Expenses
Other Income, Net
Other income, net consists of the net total of interest and other income and interest expense for
the period.
Interest and other income includes interest income on cash, cash equivalents, and short-term
investment balances and foreign exchange gains or losses. Interest income and other was $1.1
million and $773,000 for the three months ended March 31, 2006 and 2005, respectively. The increase
in interest and other income was due primarily to an increase in the rate of return on our
investments as compared to the same period in 2005.
There was no interest expense for the three months ended March 31, 2006 and 2005.
Provision for (Benefit from) Income Taxes
The benefit from income taxes was $716,000 for the three months ended March 31, 2006, compared to a
provision of $2.6 million for the three months ended March 31, 2005, respectively. The decrease in
income taxes is due to a decrease in income before income taxes for the three months ended March
31, 2006 as compared to the same period in 2005.
The effective tax rate was 63% and 39% for the three months ended March 31, 2006 and 2005,
respectively.
Liquidity and Capital Resources
From our inception in July 1996 through our initial public offering of our common stock in July
2003, we funded our operations primarily through issuances of preferred stock, which provided us
with aggregate net proceeds of approximately $86.5 million. In July 2003, we completed the sale of
8,050,000 shares of common stock in an initial public offering, which included the underwriters
exercise of an over-allotment option, and realized net proceeds of $102.7 million. We used $10.9
million of the net proceeds to pay off all outstanding balances on loans payable and the line of
credit.
Net cash
used by operating activities was $539,000 for the three months ended March 31, 2006,
compared to net cash provided by operating activities of $6.7 million for the three months ended
March 31, 2005. This change primarily was the result of a net loss incurred in the first three
months of 2006 of $65,000 as compared with net income of $4.1 million for the first three months
of 2005. as well as a increase in deferred income tax assets and an increase in other assets, as
compared to the first three months of 2005.
Net cash used in investing activities was $24.1 million for the three months ended March 31, 2006
which primarily represented the purchase of GoRemote, which net of cash acquired was $78.0 million,
also net maturities of short-term investments were $55.1 million, and purchases of property and
equipment was $1.2 million. The cash used for investing activities of $7.5 million, for the three
months ended March 31, 2005 was comprised of net purchases of short-term investments of $6.2
million and purchases of property and equipment of $1.3 million.
Net cash
provided by financing activities for the three months ended March 31, 2006 was $2.4
million, compared to $591,000 million for the three months ended March 31, 2005. Net cash provided
by financing activities for the first three months of 2006 was due to stock option exercises. Net
cash provided by financing activities in the first three months of 2005 was primarily due primarily
to stock option exercises.
As of March 31, 2006, our principal source of liquidity was $113.1 million of cash, cash
equivalents and short-term investments.
Commitments
At March 31, 2006, we had no material commitments for capital expenditures.
Other than in the approximately 22 countries in which our sole network provider is Equant, we have
contracted with multiple network service providers to provide alternative access points in a given
geographic area. In those geographic areas where we provide access through multiple providers, we
are able to direct users to the network of particular service providers. Consequently, we believe
we have the ability to fulfill our minimum purchase commitments in these geographic areas. Future
minimum purchase commitments under all agreements as of March 31, 2006 are as follows (in
thousands):
|
|
|
|
|
Year ending December 31: |
|
|
|
|
2006 |
|
$ |
2,085 |
|
2007 |
|
|
1,901 |
|
2008 |
|
|
1,066 |
|
2009 |
|
|
266 |
|
|
|
|
|
|
|
$ |
5,318 |
|
|
|
|
|
22
We lease our facilities under non-cancelable operating leases that expire at various dates through
February 2010. Future minimum lease payments under these operating leases as of March 31, 2006 are
as follows (in thousands):
|
|
|
|
|
Year ending December 31: |
|
|
|
|
2006 |
|
$ |
3,131 |
|
2007 |
|
|
4,279 |
|
2008 |
|
|
4,374 |
|
2009 |
|
|
4,311 |
|
2010 and thereafter |
|
|
1,453 |
|
|
|
|
|
|
|
$ |
17,548 |
|
|
|
|
|
Liquidity and Capital Resource Requirements
Based on past performance and current expectations, we believe that our cash and cash equivalents,
short-term investments, and cash generated from operations will satisfy our working capital needs,
capital expenditures, investment requirements, commitments, and other liquidity requirements
associated with our existing operations through at least the next 18 months. In addition to our
historical working capital needs, we may utilize cash resources to fund acquisitions of
complementary businesses, technologies or product lines. However, there are no current or planned
transactions, arrangements, and other relationships with unconsolidated entities or other persons
that are reasonably likely to materially affect liquidity or the availability of our requirements
for capital resources.
FACTORS AFFECTING OPERATING RESULTS
Set forth below and elsewhere in this report are risks and uncertainties that could cause actual
results to differ materially from the results contemplated by the forward-looking statements
contained in this report.
Risks Relating to Our Business
If we are unable to meet the challenges posed by broadband access, our ability to grow our
business will be impaired.
We have generated the large majority of our usage revenues to date from the sale of enterprise
connectivity services using narrowband technologies such as modem dial-up. In particular, in 2005
we derived $138.1 million, or 82%, of our total revenues from our traditional dial-up business. In
some countries, including the United States, the use of narrowband as a primary means of enterprise
connectivity has declined and is expected to continue to decline at an accelerated rate over time
as broadband access technologies, such as cable modem, DSL, Wi-Fi and other wireless technologies,
including 3G, become more broadly used. In 2005, our revenue derived from the use of narrowband
connectivity decreased 8% as compared to 2004. A substantial portion of the growth of our business
will depend in part upon our ability to expand the broadband elements of our virtual network. Such
an expansion may not result in additional revenues to us. Key challenges in expanding the broadband
elements of our virtual network include:
The broadband access market is at an early stage of development. Although we derive revenues
from wired and wireless broadband hotspots, such as particular airports, hotels and convention
centers, the broadband access market, particularly for wireless access, is at an early stage of
development and demand at levels we anticipate may not develop. In particular, the market for
enterprise connectivity services through broadband is characterized by evolving industry standards
and specifications and there is currently no uniform standard for wireless access. We have
developed and made available Wi-Fi specifications that are directed at enabling Wi-Fi access points
to become ready for use by enterprise customers. If this specification is not widely adopted,
market acceptance of our wireless broadband services may be significantly reduced or delayed and
our business could be harmed. Furthermore, although the use of wireless frequencies generally does
not require a license in the United States and abroad, if Wi-Fi frequencies become subject to
licensing requirements, or are otherwise restricted, this would substantially impair the growth of
wireless access. Some large telecommunications providers and other stakeholders that pay large sums
of money to license other portions of the wireless spectrum
may seek to have the Wi-Fi spectrum become subject to licensing restrictions. If the broadband
wireless access market does not develop, we will not be able to generate substantial revenues from
broadband wireless access.
23
The broadband service provider market is highly fragmented. Due to the early stage of
development of the broadband access market, there are currently many wired and wireless broadband
service providers that provide coverage in only one or a small number of hotspots. We have entered
into contractual relationships with numerous broadband service providers. These contracts generally
have an initial term of two years or less. As this process is in an early stage, we must continue
to develop relationships with many providers on terms commercially acceptable to us in order to
provide adequate coverage for our customers mobile workers and to expand our broadband coverage.
We may also be required to develop additional technologies in order to integrate new broadband
services into our service offering. If we are unable to develop these relationships or
technologies, our ability to grow our business could be impaired. In addition, if broadband service
providers consolidate, our negotiating leverage with providers may decrease, resulting in increased
rates for access, which could harm our operating results.
If demand for broadband access does not materially increase, or if demand increases but we do
not meet the challenges outlined above, our ability to grow our business may suffer.
Our customers require a high degree of reliability in our services, and if we cannot meet their
expectations, demand for our services will decline.
Any failure to provide reliable network access, uninterrupted operation of our network and
software infrastructure, or a satisfactory experience for our customers and their mobile workers,
whether or not caused by our own failure, could reduce demand for our services. In 2002, we
experienced three outages affecting our clearinghouse system, which handles invoicing to our
customers and network service providers, resulting in five days of outages and eight days of work
to confirm data integrity in response to the outages. Although these problems did not affect the
ability of mobile workers to access our services or impact our revenues, one of these outages
caused a delay in our invoicing of approximately one week. If additional outages occur, or if we
experience other hardware or software problems, our business could be harmed.
We face strong competition in our market, which could make it difficult for us to succeed.
We compete primarily with facilities-based carriers as well as with other non-facilities-based
network operators. Some of our competitors have substantially greater resources, larger customer
bases, longer operating histories or greater name recognition than we have. Also, with the recent
introduction of our policy management services, we face additional competition from companies that
provide security and policy-based services and software. In addition, we face the following
challenges from our competitors:
Many of our competitors can compete on price. Because many of our facilities-based
competitors own and operate physical networks, there may be little incremental cost for them to
provide additional telephone or Internet connections. As a result, they may offer dial-up remote
access services at little additional cost, and may be willing to discount or subsidize remote
access services to capture other sources of revenue. In contrast, we have traditionally purchased
network access from facilities-based network service providers to enable our dial-up remote access
service. As a result, large carriers may sell their remote access services at a lower price. In
addition, new non-facilities-based carriers may enter our market and compete on price. In either
case, we may lose business or be forced to lower our prices to compete, which could reduce our
revenues.
Many of our competitors offer additional services that we do not, which enables them to
compete favorably against us. Some of our competitors provide services that we do not, such as
local exchange and long distance services, voicemail and digital subscriber line, or DSL, services.
Potential customers that desire these services on a bundled basis may choose to obtain remote
access and policy management services from the competitor that provides these additional services.
Our potential customers may have other business relationships with our competitors and
consider those relationships when deciding between our services and those of our competitors. Many
of our competitors are large facilities-based carriers that purchase substantial amounts of
products and services, or provide other services or goods unrelated to remote access services. As a
result, if a potential customer is also a supplier to one of our large competitors, or purchases
unrelated services or goods from our competitor, the potential customer may be motivated to
purchase its remote access services from our competitor in order to maintain or enhance its
business relationship with that competitor.
The telecommunications industry has experienced a dramatic decline, which may cause consolidation
among network service providers and impair our ability to provide reliable, redundant service
coverage and negotiate favorable network access terms.
The telecommunications industry has experienced dramatic technological change and increased
competition that have led to significant declines in network access pricing. In addition, the
revenues of network service providers have declined as a result of the
24
general economic slowdown.
As a result, network service providers have experienced operating difficulties in the last several
years, resulting in poor operating results and a number of these providers declaring bankruptcy. As
these conditions have continued, some of these service providers have consolidated and are working
to consolidate or otherwise cease operations, which would reduce the number of network service
providers from which we are able to obtain network access. As this occurs, while we expect that we
will still be able to maintain operations and provide enterprise connectivity services with a small
number of network service providers, we would potentially not be able to provide sufficient
redundant access points in some geographic areas, which could diminish our ability to provide
broad, reliable, redundant coverage. Further, our ability to negotiate favorable access rates from
network service providers could be impaired, which could increase our network access expenses and
harm our operating results.
If our security measures are breached and unauthorized access is obtained to a customers internal
network, our virtual network may be perceived as not being secure and enterprises may curtail or
stop using our services.
It is imperative for our customers that access to their mission critical data is secure. A key
component of our ability to attract and retain customers is the security measures that we have
engineered into our network for the authentication of the end users credentials; on a going
forward basis, we expect an additional key component in this regard to be our policy management
services. These measures are designed to protect against unauthorized access to our customers
networks. Because techniques used to obtain unauthorized access or to sabotage networks change
frequently and generally are not recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventative measures against unauthorized
access or sabotage. If an actual or perceived breach of network security occurs, regardless of
whether the breach is attributable to our services, the market perception of the effectiveness of
our security measures could be harmed. To date, we have not experienced any significant security
breaches to our network.
If enterprise connectivity demand does not continue to expand, we may experience a shortfall in
revenues or earnings or otherwise fail to meet public market expectations.
The growth of our business is dependent, in part, upon the increased use of enterprise
connectivity services and our ability to capture a higher proportion of this market. If the demand
for enterprise connectivity services does not continue to grow, then we may not be able to grow our
business, maintain profitability or meet public market expectations. Increased usage of enterprise
connectivity services depends on numerous factors, including:
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the willingness of enterprises to make additional information technology expenditures; |
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the availability of security products necessary to ensure data privacy over the public networks; |
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the quality, cost and functionality of these services and competing services; |
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the increased adoption of wired and wireless broadband access methods; and |
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the proliferation of electronic devices and related applications. |
If we are unable to meet the challenges related to the market acceptance and provision of our
policy management services, our ability to grow the business may be harmed.
We expect that the growth of our business may depend in part upon whether our policy
management services will achieve and sustain expected levels of demand and market acceptance. If
enterprises do not perceive the benefits of our policy management services, then the market for
these services may not develop at all, or it may develop more slowly than we expect, either of
which could significantly and adversely affect our growth. In addition, if demand for our policy
management services does not materialize as expected, our ability to recover our investment in
Safe3w, Inc. and Mobile Automation, Inc. may be impaired or delayed. In addition, because of our
limited operating history relating to policy management services, we cannot predict our revenue and
operating results from the provision of these services. Key challenges that we face related to our
provision of these services include the risk that we may encounter unexpected technical and other
difficulties in developing our policy management services which could delay or prevent the
development of these services or certain features of these services; the risk that the rate of
adoption by enterprises of network security software or integrated secure connectivity solutions
will not be as we anticipate, which if slow would reduce or eliminate the
purchase of these services; and the risk that security breaches may occur, notwithstanding the
use of our policy management services, by hackers that develop new methods of avoiding security
software. If we do not adequately address these challenges, our growth and operating results may be
negatively impacted.
25
Our long sales and service deployment cycles require us to incur substantial sales costs that may
not result in related revenues.
Our business is characterized by a long sales cycle between the time a potential customer is
contacted and a customer contract is signed. In addition, the downturn in the economy from early
2001 to 2003 and the resulting reduction in corporate spending on Internet infrastructure further
lengthened the average sales cycle for our services. Furthermore, once a customer contract is
signed, there is typically an extended period before the customers end users actually begin to use
our services, which is when we begin to realize revenues. As a result, we may invest a significant
amount of time and effort in attempting to secure a customer which may not result in any revenues.
Even if we enter into a contract, we will have incurred substantial sales-related expenses well
before we recognize any related revenues. If the expenses associated with sales increase, we are
not successful in our sales efforts, or we are unable to generate associated offsetting revenues in
a timely manner, our operating results will be harmed.
There are approximately 22 countries in which we provide dial-up access only through Equant. The
loss of Equant as a dial-up network service provider would substantially diminish our ability to
deliver global network access.
In approximately 22 countries, our sole dial-up network service provider is Equant. Network
usage from access within these countries accounted for less than 2% of our revenues for the quarter
ended March 31, 2006 and years ended December 31, 2005, 2004 and 2003. If we lose access to
Equants network and are unable to replace this access in some or all of these countries, our
revenues would decline. In addition, our ability to market our services as being global would be
impaired, which could cause us to lose customers. Our agreement with Equant expires in February
2007, but Equant may terminate the agreement earlier if we materially breach the contract and fail
to cure the breach, or if we become insolvent. In addition, Equant has no obligation to continue to
provide us with access to its network after February 2007. If Equant were to cease operations or
terminate its arrangements with us, we would be required to enter into arrangements with other
dial-up network service providers, which may not be available. This process could be costly and
time consuming, and we may not be able to enter into these arrangements on terms acceptable to us.
If our channel partners do not successfully market our services to their customers or corporate end
users, then our revenues and business may be adversely affected.
We sell our services directly through our sales force and indirectly through our channel
partners, which include network service providers, systems integrators and value added resellers.
Our business depends on the efforts and the success of these channel partners in marketing our
services to their customers. Our own ability to promote our services directly to their customers is
often limited. Many of our channel partners may offer services to their customers that may be
similar to, or competitive with, our services. Therefore, these channel partners may be reluctant
to promote our services. If our channel partners fail to market our services effectively, our
ability to grow our revenue would be reduced and our business will be impaired.
If we fail to address evolving standards and technological changes in the enterprise connectivity
and policy management services industry, our business could be harmed.
The market for enterprise connectivity and policy management services is characterized by
evolving industry standards and specifications and rapid technological change, including new access
methods, devices, applications and operating systems. In developing and introducing our services,
we have made, and will continue to make, assumptions with respect to which features, security
standards, performance criteria, access methods, devices, applications and operating systems will
be required or desired by enterprises and their mobile workers. If we implement technological
changes or specifications that are different from those required or desired, or if we are unable to
successfully integrate required or desired technological changes or specifications into our wired
or wireless services, market acceptance of our services may be significantly reduced or delayed and
our business could be harmed.
Our software is complex and may contain errors that could damage our reputation and decrease usage
of our services.
Our software may contain errors that interrupt network access or have other unintended
consequences. If network access is disrupted due to a software error, or if any other unintended
negative results occur, such as the loss of billing information, a security breach or unauthorized
access to our virtual network, our reputation could be harmed and our business may suffer. Although
we generally attempt by contract to limit our exposure to incidental and consequential damages, if
these contract provisions are not enforced or enforceable for any reason, or if liabilities arise
that are not effectively limited, our operating results could be harmed.
26
Because much of our business is international, we encounter additional risks, which may reduce our
profitability.
We generate a substantial portion of our revenues from business conducted internationally.
Revenues from customers domiciled outside of the United States were 44% of our revenues for the
first quarter of 2006, of which approximately 29% and 12% were generated in our EMEA (Europe,
Middle East and Africa) and Asia Pacific regions. In 2005, revenues from customers domiciled
outside of the United States were 45% of our total revenues, of which approximately 29% and 12%
were generated in our EMEA and Asia Pacific regions, respectively. In 2004, revenues from customers
domiciled outside of the United States were 41% of our total revenues, of which approximately 24%
and 13% were generated in our EMEA and Asia Pacific regions, respectively. Although we currently
bill for our services in U.S. dollars, our international operations subject our business to
specific risks. These risks include:
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longer payment cycles for foreign customers, including delays due to currency controls and fluctuations; |
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the impact of changes in foreign currency exchange rates on the attractiveness of our pricing; |
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high taxes in some foreign jurisdictions; |
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difficulty in complying with Internet-related regulations in foreign jurisdictions; |
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difficulty in staffing and managing foreign operations; and |
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difficulty in enforcing intellectual property rights and weaker laws protecting these rights. |
Any of these factors could negatively impact our business.
Completed or future acquisitions or investments could dilute the ownership of our existing
stockholders, cause us to incur significant expenses or harm our operating results.
Integrating any newly acquired businesses, technologies or services may be expensive and
time-consuming. For example, we completed the acquisitions of Safe3w, Inc. in September 2004,
Mobile Automation, Inc. in October 2004 and GoRemote Internet Communications, Inc. in February
2006. To finance any acquisitions, it may be necessary for us to raise additional funds through
public or private financings. Additional funds may not be available on terms that are favorable to
us and, in the case of equity financings, would result in dilution to our stockholders. In the case
of completed or future acquisitions, we may be unable to operate any acquired businesses profitably
or otherwise implement our strategy successfully. If we are unable to integrate any newly acquired
entities, such as GoRemote Internet Communications, Inc., or technologies effectively, our
operating results could suffer. Completed acquisitions by us, such as the aforementioned Safe3w,
Inc., Mobile Automation, Inc. and GoRemote Internet Communications, Inc. transactions, or future
acquisitions by us could also result in large and immediate write-offs or assumption of debt and
contingent liabilities, either of which could harm our operating results.
If we are unable to effectively manage future expansion, our business may be adversely impacted.
We have experienced, and in the future may continue to experience, rapid growth in operations
which has placed and could continue to place, a significant strain on our network operations,
development of services, internal controls and other managerial, operating, and financial
resources. If we do not manage future expansion effectively, our business will be harmed. To
effectively manage any future expansion, we will need to improve our operational and financial
systems and managerial controls and procedures, which include the following:
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managing our research and development efforts for new and evolving technologies; |
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expanding the capacity and performance of our network and software infrastructure; |
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developing our administrative, accounting and management information systems and controls; and |
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effectively maintaining coordination among our various departments, particularly as we expand internationally. |
We currently are, and in the future may be, subject to securities class action lawsuits due to
decreases in our stock price.
We are at risk of being subject to securities class action lawsuits if our stock price
declines substantially. Securities class action litigation has often been brought against a company
following a decline in the market price of its securities. For example, in June
27
2004, we announced
that we would not meet market expectations regarding our financial performance in the second
quarter, and our stock price declined. Beginning on January 14, 2005, three purported class action
complaints, which were subsequently consolidated, were filed against iPass and certain of our
executive officers, purportedly on behalf of a class of investors who purchased iPass stock between
April 22, 2004 and June 30, 2004. The complaints allege claims under Sections 10(b) and 20(a) of
the Securities and Exchange Act of 1934. In addition, in March and April of 2005, two stockholders
purporting to act on our behalf filed lawsuits against our directors and certain officers. iPass
was also named as a nominal defendant solely in a derivative capacity. The derivative action, which
has been consolidated, is based on the same factual allegations and circumstances as the purported
securities class actions and alleges state law claims as well. This actions are described in Part
II, Item 1 of this Quarterly Report on Form 10-Q. If our stock price declines substantially in the
future, we may be the target of similar litigation. The current, and any future, securities
litigation could result in substantial costs and divert managements attention and resources, and
could seriously harm our business.
Litigation arising from disputes involving third parties could disrupt the conduct of our
business.
Because we rely on third parties to help us develop, market and support our service offerings,
from time to time we have been, and we may continue to be, involved in disputes with these third
parties. If we are unable to resolve these disputes favorably, our development, marketing or
support of our services could be delayed or limited, which could materially and adversely affect
our business.
If licenses to third party technologies, including our license with RSA Security, do not continue
to be available to us at a reasonable cost, or at all, our business and operations may be
adversely affected.
We license technologies from several software providers that are incorporated in our services.
We anticipate that we will continue to license technology from third parties in the future. In
particular, we license encryption technology from RSA Security. Our license agreement with RSA
Security expired in February 2006 and automatically renewed for an additional three-year period.
This license will continue to automatically renew for additional three-year periods upon
expiration, unless terminated by us or by RSA Security. Licenses from third party technologies,
including our license with RSA Security, may not continue to be available to us at a reasonable
cost, or at all. The loss of these technologies or other technologies that we license could have an
adverse effect on our services and increase our costs or cause interruptions or delays in our
services until substitute technologies, if available, are developed or identified, licensed and
successfully integrated into our services.
Litigation arising out of intellectual property infringement could be expensive and disrupt our
business.
We cannot be certain that our products do not, or will not, infringe upon patents, trademarks,
copyrights or other intellectual property rights held by third parties, or that other parties will
not assert infringement claims against us. From time to time we have been, and we may continue to
be, involved in disputes with these third parties. Any claim of infringement of proprietary rights
of others, even if ultimately decided in our favor, could result in substantial costs and diversion
of our resources. Successful claims against us may result in an injunction or substantial monetary
liability, in either case which could significantly impact our results of operations or materially
disrupt the conduct of our business. If we are enjoined from using a technology, we will need to
obtain a license to use the technology, but licenses to third-party technology may not be available
to us at a reasonable cost, or at all.
New accounting pronouncements may impact our future financial position and results of operations.
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R),
Accounting for Stock-Based Compensation Revised (SFAS 123(R)), which requires the measurement
and recognition of compensation expense for all stock-based compensation based on estimated fair
values. As a result, our operating results for the first quarter of 2006 contains, and for future
periods will contain, a charge for stock-based compensation related to employee stock options and
employee stock purchases. The application of SFAS 123(R) requires the use of an option-pricing
model to determine the fair value of share-based payment awards. This determination of fair value
is affected by our stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to, our expected stock price
volatility over the term of the awards, and actual and projected employee stock option exercise
behaviors. Option-pricing models were developed for use in estimating the value of traded options
that have no vesting or hedging restrictions and are fully transferable. Because our employee stock
options have certain characteristics that are significantly different from traded options, and
because changes in the subjective assumptions can materially affect the estimated value, in
managements opinion the existing valuation models may not provide an
accurate measure of the fair value of our employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123(R) and SAB 107 using an
option-pricing model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction. Our adoption of SFAS 123(R) had a material impact on our
financial statements
28
and results of operations in the first quarter of fiscal 2006, causing us to
report a loss, rather than net income, for that quarter. SFAS 123(R) will continue to have a
material impact on our financial statements and results of operations in future periods. We cannot
predict the effect that this adverse impact on our reported operating results will have on the
trading price of our common stock.
Risks Relating to Our Industry
Security concerns may delay the widespread adoption of the Internet for enterprise communications,
or limit usage of Internet-based services, which would reduce demand for our products and
services.
The secure transmission of confidential information over public networks is a significant barrier
to further adoption of the Internet as a business medium. The Internet is a public network and
information is sent over this network from many sources. Advances in computer capabilities, new
discoveries in the field of code breaking or other developments could result in compromised
security on our network or the networks of others. Security and authentication concerns with
respect to the transmission over the Internet of confidential information, such as corporate access
passwords and the ability of hackers to penetrate online security systems may reduce the demand for
our services. Further, new access methods, devices, applications and operating systems have also
introduced additional vulnerabilities which have been actively exploited by hackers. Internet-based
worms and viruses, computer programs that are created to slow Internet traffic or disrupt computer
networks or files by replicating through software or operating systems, are examples of events or
computer programs that can disrupt users from using our Internet-based services and reduce demand
for our services, potentially affecting our business and financial performance. In particular,
certain Internet worms and viruses affected some of our customers and their mobile users, which may
have negatively impacted our revenues. Furthermore, any well-publicized compromises of confidential
information may reduce demand for Internet-based communications, including our services.
Financial, political or economic conditions could adversely affect our revenues.
Our revenues and profitability depend on the overall demand for enterprise connectivity
services. The general weakening of the global economy from early 2001 to 2003 led to decreased
trade and corporate spending on Internet infrastructure. In addition, in the past, terrorist
attacks, including the attacks on the United States and internationally, have had a significant
impact on global economic conditions and our operations. If there are further acts of terrorism, if
hostilities involving the United States and other countries continue or escalate, or if other
future financial, political, economic and other uncertainties or natural disasters arise, this
could lead to a reduction in travel, including by business travelers who are substantial users of
our services, and continue to contribute to a climate of economic and political uncertainty that
could adversely affect our revenue growth and financial results.
Government regulation of, and legal uncertainties regarding, the Internet could harm our business.
Internet-based communication services generally are not subject to federal fees or taxes imposed to
support programs such as universal telephone service. Changes in the rules or regulations of the
U.S. Federal Communications Commission or in applicable federal communications laws relating to the
imposition of these fees or taxes could result in significant new operating expenses for us, and
could negatively impact our business. Any new law or regulation, U.S. or foreign, pertaining to
Internet-based communications services, or changes to the application or interpretation of existing
laws, could decrease the demand for our services, increase our cost of doing business or otherwise
harm our business. There are an increasing number of laws and regulations pertaining to the
Internet. These laws or regulations may relate to taxation and the quality of products and
services. Furthermore, the applicability to the Internet of existing laws governing intellectual
property ownership and infringement, taxation, encryption, obscenity, libel, employment, personal
privacy, export or import matters and other issues is uncertain and developing and we are not
certain how the possible application of these laws may affect us. Some of these laws may not
contemplate or address the unique issues of the Internet and related technologies. Changes in laws
intended to address these issues could create uncertainty in the Internet market, which could
reduce demand for our services, increase our operating expenses or increase our litigation costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
Although we currently bill substantially all of our services in U.S. dollars, our financial results
could be affected by factors such as changes in foreign currency rates or weak economic conditions
in foreign markets. A strengthening of the dollar could make our
services less competitive in foreign markets and therefore could reduce our revenues. We are billed
by and pay the majority of our network service providers in U.S. dollars. In the future, some
portion of our revenues and costs may be denominated in foreign currencies. To date, exchange rate
fluctuations have had little impact on our operating results.
29
Interest Rate Sensitivity
As of March 31, 2006, we had cash, cash equivalents, and short-term investments totaling $113.1
million, as compared to $184.6 million as of December 31, 2005 which decreased, primarily due to
cash outlays to acquire GoRemote. Our investment portfolio consists of money market funds and
securities, asset backed securities, corporate securities, and government securities, generally due
within one to two years. All of our instruments are held other than for trading purposes. We place
investments with high quality issuers and limit the amount of credit exposure to any one issuer.
These securities are subject to interest rate risks. Based on our portfolio content and our ability
to hold investments to maturity, we believe that, a hypothetical 10% increase or decrease in
current interest rates would not materially affect our interest income, although there can be no
assurance of this.
As of December 31, 2005, we had cash, cash equivalents and short-term investments totaling $184.6
million, which consisted of cash and highly liquid short-term investments with original maturities
of three months or less at the date of purchase, which we held solely for non-trading purposes. A
hypothetical increase or decrease in market interest rates by 10% from the market interest rates
would have caused the interest generated by, and the fair value of, these short-term investments to
change by an immaterial amount.
The following is a chart of the principal amounts of short-term investments by expected maturity
(in thousands):
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Expected Maturity |
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Date |
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for Par Value |
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Amounts |
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For the Year Ended |
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As of |
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December 31, |
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Total Cost |
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Mar. 31, 2006 |
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2006 |
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2007 |
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2008 |
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Value |
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Total Fair Value |
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U.S. Government agencies |
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$ |
41,900 |
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$ |
11,900 |
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$ |
21,490 |
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$ |
77,058 |
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$ |
76,550 |
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Auction rate and money
market securities |
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14,500 |
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14,500 |
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14,554 |
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Corporate notes |
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6,215 |
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6,390 |
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6,370 |
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Total |
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$ |
62,615 |
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$ |
11,900 |
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$ |
21,490 |
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$ |
97,948 |
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$ |
97,474 |
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Our general policy is to limit the risk of principal loss and ensure the safety of invested
funds by limiting market and credit risk. We consider all investments to be short-term investments,
which are classified in the balance sheet as current assets, because (1) the investments can be
readily converted at any time into cash or into securities with a shorter remaining time to
maturity and (2) the investments are selected for yield management purposes only and we are not
committed to holding the investments until maturity. We determine the appropriate classification of
our investments at the time of purchase and re-evaluate such designations as of each balance sheet
date. All short-term investments and cash equivalents in our portfolio are classified as
available-for-sale and are stated at fair market value, with the unrealized gains and losses
reported as a component of accumulated other comprehensive income (loss). The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of unrealized discounts to
maturity. Such amortization and accretion is included in interest income and other, net. The cost
of securities sold is based on the specific identification method.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)
and 15d-15(e)), as of the end of the period covered by this report. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our disclosure controls
and procedures are effective to provide reasonable assurance that the information required to be
disclosed by us in our periodic SEC reports are recorded, processed, summarized and reported within
the time periods specified in the SECs rules and the SEC reports.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter
ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
30
Limitations of Disclosure Controls and Procedures and Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect
that our disclosure controls and procedures or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within iPass have been detected.
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Beginning on January 14, 2005, three purported class action complaints were filed against the
Company and certain of its executive officers in the United States District Court for the Northern
District of California. On March 2, 2005, these cases were consolidated as In re iPass Securities
Litigation, Case No. 3:05-cv-00228-MHP. On April 22, 2005, David Lutzke and Rhonda Lutzke were
named lead plaintiffs. On July 5, 2005, plaintiffs filed a Consolidated Amended Complaint. Named
as defendants together with the Company are officers Kenneth D. Denman, Donald C. McCauley, Anurag
Lal, and Jon M. Russo. The Consolidated Amended Complaint (CAC) alleges that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 during an alleged class
period from April 22, 2004 to June 30, 2004 by failing to inform investors of certain operational
issues that allegedly led to declines in the Companys revenue, earnings and growth prospects.
Defendants moved to dismiss the CAC, and on February 28, 2006, the court granted the motion with
leave to amend. On March 30, 2006, plaintiffs filed a Second Consolidated Amended Complaint,
(SCAC) which set forth, the same claims against the same defendants relating to the same alleged
class period. On May 1, 2006, the Defendants filed a motion to dismiss the SCAC, and pursuant to
an agreed-upon schedule, the motion is set to be heard on July 31, 2006. The case is at an early
stage and no trial date has been set. No discovery is expected to take place unless defendants
motion to dismiss is denied.
Beginning on March 25, 2005, two stockholders filed separate derivative actions in California
Superior Court for the County of San Mateo, purporting to state claims on behalf of the Company
against Kenneth D. Denman, Donald C. McCauley, Anurag Lal, Jon M. Russo, Peter G. Bodine, Arthur C.
Patterson, John D. Beletic, A. Gary Ames, Cregg B. Baumbaugh and Allan R. Spies. The complaints
purport to arise out of the same alleged nondisclosures set forth in the Consolidated Amended
Complaint set forth in the shareholder class action, and purport to set forth claims for breach of
fiduciary duty, abuse of process, gross mismanagement, waste, unjust enrichment, and violation of
California Corporations Code 25402. On May 5, 2005, the actions were consolidated as In re iPass,
Inc. Derivative Litigation, Case No. CIV445765. By agreement of the parties, the time to file
plaintiffs consolidated complaint was extended several times, and a Consolidated Derivative
Complaint (CDC) was filed on February 21, 2006. On March 28, 2006, defendants filed a demurrer
to the CDC, in response to which plaintiffs stated that they intend to further amend the CDC. The
further amended complaint has not yet been filed. On April 6, 2006, the court granted the joint
motion of all parties to have the case designated as complex litigation. The case is at an early
stage, no discovery has occurred, and no trial date has been set.
The Companys wholly-owned subsidiary, Go Remote Internet Communications, Inc., which was acquired
by the Company as of February 15, 2006, is subject to various legal proceedings and claims arising
in the ordinary course of business. The Companys management does not expect that the results in
any of these legal proceedings will have a material adverse effect on the Companys financial
condition, results of operations, or cash flows.
In July and August 2001, GoRemote and certain of its officers were named as defendants in five
purported securities class action lawsuits filed in the United States District Court, Southern
District of New York, captioned as In re GoRemote Internet Communications, Inc. Initial Public
Offering Securities Litigation, No. 01 Civ 6771 (SAS), and consolidated with more than three
hundred substantially identical proceedings as In re Initial Public Offering Securities Litigation,
Master File No. 21 MC 92 (SAS). The Consolidated Amended Class Action Complaint for Violation of
the Federal Securities Laws (Consolidated Complaint) was filed on or about April 19, 2002, and
alleged claims against certain of GoRemotes officers and against CIBC World Markets Corp.,
Prudential Securities Incorporated, DB Alex. Brown, as successor to Deutsche Bank, and U.S. Bancorp
Piper Jaffray Inc., underwriters of GoRemotes December 14, 1999 initial public offering
(underwriter defendants), under Sections 11 and 15 of the Securities Act of 1933, as amended, and
under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.
Citing several press articles, the Consolidated Complaint alleged that the underwriter defendants
used improper methods in allocating shares in initial public offerings, and claimed the underwriter
defendants entered into improper commission agreements regarding aftermarket trading in GoRemotes
common stock purportedly issued pursuant to the registration statement for the initial public
offering. The Consolidated Complaint also alleged market manipulation claims against the
underwriter defendants based on the activities of their respective analysts, who were allegedly
compromised by conflicts of interest. The plaintiffs in the Consolidated Complaint sought damages
as measured under Section 11 and Section 10(b) of the Securities Act of 1933, pre-judgment and
post-judgment interest, and reasonable attorneys and expert witnesses fees and other costs; no
specific amount was claimed in the plaintiffs prayer in the Consolidated Complaint.
In October 2002, certain of GoRemotes officers and directors who had been named as defendants in
the Consolidated Complaint were dismissed without prejudice upon order of the presiding judge. In
February 2003, the presiding judge dismissed the Section 10(b) claims against GoRemote and its
named officers and directors with prejudice.
32
From September 2002 through June 2003, GoRemote participated in settlement negotiations with a
committee of issuers litigation counsel, plaintiffs executive committee and representatives of
various insurance companies (the Insurers). GoRemotes Insurers were actively involved in the
settlement negotiations, and strongly supported a settlement proposal presented to GoRemote for
consideration in early June 2003. The settlement proposed by the plaintiffs would be paid for by
the Insurers and would dispose of all remaining claims against GoRemote.
After careful consideration, GoRemote decided to approve the settlement proposal in July 2003.
Although GoRemote believed that plaintiffs claims were without merit, it decided to accept the
settlement proposal (which does not admit wrongdoing) to avoid the cost and distraction of
continued litigation. Because the settlement would be funded entirely by its Insurers, GoRemote did
not believe that the settlement would have any effect on GoRemotes financial condition, results of
operations or cash flows.
On December 15, 2005, Helfrich filed a complaint in the Superior Court for Orange County against
GoRemote Internet Communications, Inc. (GoRemote) (a company acquired by the Company on February
15, 2006), alleging claims, including wrongful termination in violation of public policy, breach of
contract, unpaid compensation, unfair business practices, breach of the implied covenant of good
faith and fair dealing, and intentional infliction of emotional distress (the Complaint).
GoRemote responded to that Complaint on January 17, 2006, with a general denial of the allegations
in the Complaint and raised certain affirmative defenses. The parties are scheduled for a private
mediation on May 5, 2006, and most discovery has been stayed pending the outcome of the mediation.
Item 1A. Risk Factors
We include in Part I, Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Risks Related to Our Operations a description of risk factors related to
our business in order to enable readers to assess, and be appropriately apprised of, many of the
risks and uncertainties applicable to the forward-looking statements made in this Quarterly Report
on Form 10-Q. We do not claim that the risks and uncertainties set forth in that section are all
of the risks and uncertainties facing our business, but do believe that they reflect the more
important ones.
The risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2005, as filed with the SEC on March 16, 2006, have not substantively changed, except
for the following risk factors, which have been restated as set forth in Part I, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations Risks
Related to Our Business of this Quarterly Report on Form 10-Q:
1. We have updated the risk factors If we are unable to meet the challenges posed by broadband
access, our ability to grow our business will be impaired, There are approximately 22 countries
in which we provide dial-up access only through Equant. The loss of Equant as a dial-up network
service provider would substantially diminish our ability to deliver global network access and
Because much of our business is international, we encounter additional risks, which may reduce our
profitability to include first quarter of 2006 financial information;
2. We abbreviated the risk factor We currently are, and in the future may be, subject to
securities class action lawsuits due to decreases in our stock price; and
3. We updated the risk factor New accounting pronouncements may impact our future financial
position and results of operations for the adoption of SFAS 123(R) as applied to our first quarter
of 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
33
Item 5. Other Information
Not applicable.
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Amended and Restated Certificate of Incorporation (1) |
|
|
|
3.2
|
|
Bylaws, as amended (2) |
|
|
|
4.1
|
|
Reference is made to Exhibits 3.1 and 3.2 |
|
|
|
4.2
|
|
Specimen stock certificate (2) |
|
|
|
10.1
|
|
2003 Non-Employee Director Plan, as amended (3) |
|
|
|
10.16
|
|
2006 Annual Executive Management Bonus Plan (4) |
|
|
|
10.17
|
|
Outside Director Compensation Arrangement (6) |
|
|
|
10.21
|
|
Forms of Restricted Stock Purchase Agreement under 2003 Equity Incentive Plan |
|
|
|
10.23
|
|
Offer Letter to Thomas Thimot, dated December 9, 2005 (5) |
|
|
|
10.24
|
|
Transition Agreement with John Thuma, dated January 20, 2006 (5) |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Filed as an exhibit to iPass Quarterly Report on Form 10-Q for the quarter ended September
30, 2003 (Commission No. 000- 50327), filed November 13, 2003, and incorporated herein by
reference. |
|
(2) |
|
Filed as an exhibit to iPass Registration Statement on Form S-1 (No. 333-102715) and
incorporated herein by reference. |
|
(3) |
|
Filed as an exhibit to iPass Current Report on Form 8-K (Commission No. 000-50327), filed
March 13, 2006, and incorporated herein by reference. |
|
(4) |
|
Filed as an exhibit to iPass Annual Report on Form 10-K for the year ended December 31, 2006
(Commission No. 000-50327), filed March 16, 2006, and incorporated herein by reference. |
|
(5) |
|
Filed as an exhibit to iPass Current Report on Form 8-K (Commission No. 000-50327), filed
February 16, 2006, and incorporated herein by reference. |
|
(6) |
|
Set forth under the heading Board Cash Compensation in Item 1.01 of iPass Current Report
on Form 8-K (Commission No. 000-50327), filed February 16, 2006, and incorporated herein by
reference. |
34
SIGNATURE
Pursuant to the requirements 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.
|
|
|
|
|
|
|
|
|
|
|
iPass Inc.
|
|
|
|
|
|
|
|
|
|
Date: May 10, 2006
|
|
By:
|
|
/s/ Frank E. Verdecanna |
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank E. Verdecanna |
|
|
|
|
|
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Vice President and Chief Financial Officer |
|
|
|
|
|
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(duly authorized officer and principal financial officer) |
|
|
35
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Amended and Restated Certificate of Incorporation (1) |
|
|
|
3.2
|
|
Bylaws, as amended (2) |
|
|
|
4.1
|
|
Reference is made to Exhibits 3.1 and 3.2 |
|
|
|
4.2
|
|
Specimen stock certificate (2) |
|
|
|
10.1
|
|
2003 Non-Employee Director Plan, as amended (3) |
|
|
|
10.16
|
|
2006 Annual Executive Management Bonus Plan (4) |
|
|
|
10.17
|
|
Outside Director Compensation Arrangement (6) |
|
|
|
10.21
|
|
Forms of Restricted Stock Purchase Agreement under 2003 Equity Incentive Plan |
|
|
|
10.23
|
|
Offer Letter to Thomas Thimot, dated December 9, 2005 (5) |
|
|
|
10.24
|
|
Transition Agreement with John Thuma, dated January 20, 2006 (5) |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Filed as an exhibit to iPass Quarterly Report on Form 10-Q for the quarter ended September
30, 2003 (Commission No. 000- 50327), filed November 13, 2003, and incorporated herein by
reference. |
|
(2) |
|
Filed as an exhibit to iPass Registration Statement on Form S-1 (No. 333-102715) and
incorporated herein by reference. |
|
(3) |
|
Filed as an exhibit to iPass Current Report on Form 8-K (Commission No. 000-50327), filed
March 13, 2006, and incorporated herein by reference. |
|
(4) |
|
Filed as an exhibit to iPass Annual Report on Form 10-K for the year ended December 31, 2006
(Commission No. 000-50327), filed March 16, 2006, and incorporated herein by reference. |
|
(5) |
|
Filed as an exhibit to iPass Current Report on Form 8-K (Commission No. 000-50327), filed
February 16, 2006, and incorporated herein by reference. |
|
(6) |
|
Set forth under the heading Board Cash Compensation in Item 1.01 of iPass Current Report
on Form 8-K (Commission No. 000-50327), filed February 16, 2006, and incorporated herein by
reference. |
36