UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-K
ANNUAL
REPORT
PURSUANT
TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark
One)
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R
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
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|
For
the fiscal year ended December 31, 2006
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|
|
OR
|
|
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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
|
Commission
File Number: 000-50327
_______________
iPass
Inc.
(Exact
name of Registrant as specified in its charter)
_______________
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Delaware
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93-1214598
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(State
or Other Jurisdiction
|
(I.R.S.
Employer
|
|
of
Incorporation or Organization)
|
Identification
No.)
|
3800
Bridge Parkway
Redwood
Shores, California 94065
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (650) 232-4100
_______________
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
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Name
of Each Exchange on Which Registered
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|
Common
Stock, $0.001 Per Share Par Value
|
NASDAQ
Global Market
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
£
No
R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
£
No
R
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 R
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. £
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. (Check
one):
Large
accelerated filer £
Accelerated filer R
Non-accelerated filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £
No
R
Aggregate
market value of the registrant’s common stock held by non-affiliates of the
registrant, based upon the closing price of a share of the registrant’s common
stock on June 30, 2006 as reported by the Nasdaq Global Market on that date:
$232,908,754. The determination of affiliate status for the purposes of this
calculation is not necessarily a conclusive determination for other purposes.
The calculation excludes approximately 23,346,871 shares held by directors,
officers and stockholders whose ownership exceeded five percent of the
registrant’s outstanding Common Stock as of June 30, 2006. Exclusion of these
shares should not be construed to indicate that such person controls, is
controlled by or is under common control with the registrant.
The
number of shares outstanding of the Registrant’s Common Stock, $0.001 par value,
as of February 28, 2007 was 63,935,220
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement in connection with our 2007
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than April 30, 2007, are incorporated by reference in
Part
III, Items 10-14 of this report on Form 10-K.
FORM
10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2006
TABLE
OF CONTENTS
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Page
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PART
I.
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PART
II.
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PART
III.
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PART
IV.
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Disclosure
Regarding Forward-Looking Statements
This
annual report on Form 10-K contains forward-looking statements regarding future
events and our future results that are based on current expectations, 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 and are
subject to risks, uncertainties, and assumptions that are difficult to predict.
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 “Risk Factors” and elsewhere herein, for
factors that may cause actual results to be different than those expressed
in
these forward-looking statements. Any forward-looking statement speaks only
as
of the date on which it is made, and except as required by law, we undertake
no
obligation to revise or update publicly any forward-looking statements for
any
reason.
PART
I
Overview
The
growth of remote and mobile work combined with the proliferation of mobile
devices and remote and mobile broadband networks has created increasing
complexity for enterprises which can lead to multiple risks including growth
in
total costs for supporting knowledge workers, lost workforce productivity from
technical complexity, and security and regulatory threats to the business.
To
address this growing enterprise pain point, we provide software-enabled
enterprise services that unify the management of remote and mobile connectivity
and devices on a global basis. First, we offer a portfolio of connectivity
services. Our flagship connectivity service, iPass Virtual Office, is designed
to enable enterprises to provide their employees with secure internet and
corporate network connectivity over any access network through a single
easy-to-use interface. iPass Virtual office unifies access across more than
150
fixed broadband networks in the U.S. and approximately 400 dial-up or mobile
broadband networks in over 160 countries that make up the iPass global virtual
network. The service also gives customers the option to use the service for
access over networks that are not yet part of the iPass global virtual network
such as on-campus wireless local area networks (LANs) as well as third-party
home broadband links, Wi-Fi hotspot networks, municipal Wi-Fi networks, 3G
mobile data networks and hotel Ethernet links.
In
addition, we provide device management services and software that enable better
control over and protection of an enterprises’ remote and mobile computer
systems. These products, which include systems management, patch management,
and
device authentication capabilities can be used in conjunction with iPass Mobile
Office or on a stand-alone basis. Fundamental to all iPass services is enabling
the IT Manager to maintain direct control of the determination and application
of policies as part of a self-service management process.
Software-Based
Platform for Service Delivery
As
opposed to traditional telecommunications companies that build, operate and
maintain network facilities, we have created a software-based platform that
delivers a virtual network over which our services operate. Our software
architecture gives our services the technology flexibility and cost-effective
scalability valued by enterprises. It comprises contractual relationships and
technical integrations with over 550 fixed and mobile telecommunications
carriers, Internet service providers and other network service providers around
the globe. This architecture has redundancy built in throughout, from the use
of
multiple network providers in most countries to fault-tolerance mechanisms
at
all points in the user login process. This allows us to deliver extremely high
service availability to our customers. In fact, since 2000, there has been
no
system down-time that impacted the platform and the services that it
provides.
In
addition, our architecture allows customers to gain better control of remote
and
mobile connectivity and simplify their back-end operations. Customers can
configure and enforce policies around network access based on financial and
security considerations. They also receive centralized delivery of detailed
billing, reporting and management information.
Revenue
Sources
We
derive
revenues from usage of our networks, from service fees and from enterprise
software licenses and maintenance fees. Our usage revenues are generated by
providing enterprise connectivity services to customers using narrowband access
technologies, such as modem dial-up, and from broadband access technologies,
including Ethernet and Wireless-Fidelity (Wi-Fi) and Mobile Data Services such
as 1xRTT and EV-DO. Revenues pertaining to usage represented 80% of our total
revenues in 2006. Additionally, we receive revenue from fees and other services,
including authentication services for channel partners, value-added reporting
services and endpoint systems management services. In 2006, we generated
approximately 20% of our revenues from fees and other services. We market and
sell our services directly, as well as indirectly through channel partners,
including network service providers, Internet service providers, systems
integrators and value-added resellers. We were incorporated in California in
July 1996 and reincorporated in Delaware in June 2000.
Our Strategy
Our
objective
is to use our software-enabled platform to become the leading provider of
enterprise mobility services worldwide. The key elements of our strategy to
achieve this objective include:
Expand
our Enterprise Customer Base.
We seek
to increase the number of enterprises that use our services by leveraging our
direct sales professionals and channel partners who focus on generating new
accounts. We also seek to expand our indirect sales capabilities by building
additional relationships with channel partners, such as systems integrators,
providers of security products (i.e. virtual private networks (VPN), personal
firewalls and intrusion detection) and providers of broadband access service
equipment. We also intend to build and maintain iPass brand awareness through
the promotion of our brand through marketing campaigns, our web presence, and
our large installed base of branded client software, and to increase our market
reach through integration of our back-end software and client software with
the
offerings through our channel partners.
Increase
User Penetration within our Existing Customer Base.
We seek
to accelerate the adoption of our services by increasing usage of our services
from the highly mobile business travelers who dominate our current user base
to
all customer employees who use laptop and handheld mobile devices at home,
while
traveling, or in the office over a wireless LAN. We intend to achieve this
through the sale of services related to non-iPass networks, such as enterprise
home broadband and on-campus wireless LANs as well as Wi-Fi hotspots, municipal
Wi-Fi networks, mobile data networks and hotel Ethernet links. Additionally,
we
will promote our device management services into our existing customer
base.
Within
customers who only have implemented our services in a single division, we
endeavor to broaden service adoption to all other operating units of the
enterprise. A key function of our sales force is to assist our customers with
the adoption and integration of our services with their organizations,
continually assess the customers evolving needs, offer new services for
adoption, and provide ongoing support.
Continue
to Expand our Wired and Wireless Broadband Coverage and Service
Offerings.
We
believe that the improved security, ease of use and management control that
our
services provide can address many of the challenges presented by the emerging
broadband markets, such as wireless security, lack of unified roaming standards
and increased complexity driven by provider fragmentation. As such, we seek
to
continually expand the broadband coverage of our virtual network to venues
attractive to business travelers, such as airports, hotels, convention centers,
cafes, restaurants, and other retail locations. We intend to continue increasing
the number of these venues by establishing relationships with network service
providers that provide access to these hotspots. We also plan to expand the
network coverage through mobile data services based on 2.5G and 3G networks,
that can help to keep these end users connected when a hotspot venue is not
convenient. We also seek to continue evolving our back-end authentication,
settlement and clearinghouse capabilities to support this expansion, developing
our client software to both enrich and simplify the user experience, and
improving our management capabilities to simplify management control for our
customers.
Continue
to Enhance our Virtual Network.
We
intend to continue to establish new relationships with network service providers
to increase the coverage and redundancy of our virtual network. We intend to
enhance the functionality and features of our software architecture and to
address changing customer requirements and technologies through internal
development, strategic partnerships and/or acquisitions. We also seek to expand
our service offerings by supporting and integrating new access methods, devices,
applications and operating systems, and by building additional relationships
with systems integrators and technology providers and develop services that
effectively leverage an enterprise’s existing infrastructure. We also intend to
explore additional managed services that enhance our competitive advantage
and
provide us with new growth opportunities. And
web-enabling the business at every possible point, such that our Software as
a
Service nature is increasingly clear will provide the best leverage across
the
business model.
Leverage
and Extend our Device Management Capabilities.
In order
to deepen the value we provide to customers, we intend to continue to improve
the device management capabilities of our services through both extension of
our
platform to new functions that serve to protect identities, endpoints, the
network, and user data as well as integrate with technology partners in the
enterprise security industry.
Our
Core Capabilities
Our
services are designed to enable enterprises to provide their employees with
secure access from approximately 160 countries to the internet and an
enterprise’s internal networks through a single easy-to-use interface. We
provide our services through a virtual network that is enabled by our
software-based network architecture and our contractual relationships with
over
550 network service providers around the globe.
Our
core
assets and capabilities include:
Global
Virtual Network for Mobile Use.
Our
virtual network aggregates over 104,000 access points in approximately 160
countries. As of December 31, 2006, over 27,000 of these access points were
dial-up connections and approximately 77,000 were broadband connections,
comprised of approximately 75,000 Wi-Fi hotspots and approximately 2,000 wired
hotspots as well as mobile data services in the United States, China, Japan,
and
Singapore. As a result, enterprises that use our services can provide their
remote and mobile workers with access from these countries, in most instances
with a local telephone or broadband connection.
Virtual
Fixed Broadband Network: In
North
America we have contractual relationships with over 150 fixed broadband network
providers, allowing us to provide the region’s most complete fixed broadband
coverage for enterprises looking for a single source through which to connect
home offices, branch offices, and retail locations.
High-Availability
and Scalable Authentication Architecture.
Our
relationships with over 550 network service providers enable us to provide
connectivity through multiple networks in approximately 120 out of the
approximately 160 countries on our virtual network. As a result, our virtual
network reduces the risk of service interruptions associated with depending
on
only one service provider. Furthermore, our geographically distributed
transaction centers act as a unified and fault-tolerant system that provides
scalable and highly-available user authentication and quality management
information collection. Each point in the authentication process is designed
with built-in redundancy and fail-over capabilities. There has been no system
down-time that impacted the platform and the services that it provides since
2000.
This
architecture also makes our virtual network scalable, allowing us to handle
many
connections and users without a proportionate increase in capital
expenditures.
Flexible
Enterprise Security Integration.
Our
software is designed to enable integration between an enterprise’s network
connectivity infrastructure and a wide variety of enterprise security
applications. Our services integrate a breadth of security software and systems,
including VPNs, personal firewall, anti-virus and authentication systems,
enabling enterprises to rapidly deploy our services while leveraging their
existing and future investments in security infrastructure.
Authentication
Security.
Unlike
many network service providers, we securely route all credentials relating
to
our end users with 128-bit Secure Socket Layer, or SSL, protocols, ensuring
the
confidentiality of sensitive user information as it traverses the Internet.
To
defend against identity theft, an additional layer of authentication using
131-bit ECC cryptography protects user credentials from the device over the
local access link into the iPass virtual network.
Policy-Based
Access Control.
Our
virtual network also offers policy management capabilities, enabling customers
to allow or deny access to their network based on specific user and session
characteristics. The characteristics may be based on the user’s location, the
user’s identity and role within the organization, the type of access network
being used, and the compliance of the user’s computer with enterprise security
policies.
Device
Management.
We have
software and services that allow for flexible and automated systems management
capabilities, with specific advantages with regard to endpoint systems used
by
remote and mobile workers. The capabilities can be used for device discovery,
asset management, device configuration, patch management and software
distribution. These capabilities can be hosted on servers at our customer’s
premises or in an iPass data center and are supported by agent software that
runs on the mobile worker’s device.
Centralized
Billing and Management Reporting.
We
integrate the networks of multiple service providers to create one global
virtual network, eliminating the need for enterprises to negotiate agreements
with multiple network service providers to provide network connectivity to
their
mobile workers. Our virtual network creates call detail records (CDRs) for
each
network session, including user, date, time, duration of usage and other
parameters. We are also able to provide detailed transaction-level billing
in a
single invoice for all services provided to enterprises and network service
providers and can tailor the invoice to provide the level of detail and the
format that our customers desire. We also offer the ability for information
technology managers to gain a comprehensive and near real-time view of their
employees’ network connectivity usage patterns, enabling faster identification
and resolution of user-related issues.
Our
technology enables us to deliver near real-time information of connection
success rates, client configurations, authentication times and other information
critical to diagnosing network health and troubleshooting user connection
problems. This patented capability is used internally to manage network provider
quality as well to provide in-depth reporting to customers for trouble-shooting
purposes.
Integration
of New Technologies.
We
actively evaluate and integrate support for new access methods, devices,
applications and operating systems into our service offering. For example,
we
support wired broadband, wireless broadband based on the current and emerging
Wi-Fi standards, as well as 3G mobile data services. End users can access our
virtual network using desktop and laptop computers, wireless handheld devices
and other Internet Protocol (IP) enabled electronic devices. Our network
integrates with our enterprise customers’ existing VPN and security
applications, and our software supports a wide range of computer operating
systems, including various versions of Microsoft’s Windows(R), Apple’s Mac OS,
as well as Symbian OS and Microsoft’s Windows Mobile versions for handheld
devices.
Services
iPass
Virtual Office
| · |
Increase
business productivity by giving workers seamless connectivity in
the
office, at home and on the road
|
| · |
Extend
ubiquitous broadband access to teleworkers across the U.S. and
Canada
|
| · |
Simplify
remote access management by reducing your number of providers and
leveraging the iPass Portal
|
Unified,
ubiquitous connectivity for teleworkers and mobile
employees
This
first-of-its-kind solution gives remote and mobile workers a standardized way
to
gain Internet access in the office, at home or in the field. Through secure,
unified access, these employees are able to stay connected to the people,
information and resources they need to remain productive.
Included
with the Virtual Office service is a pre-configured device that serves as both
a
Wi-Fi enabled gateway and hardware-based firewall. The device integrates an
employee's home into the corporate connectivity solution and makes it available
through the iPassConnect™ universal client.
Benefits
| · |
Enables
a seamless user experience.
Users always connect to the Internet through the award-winning
iPassConnect universal client.
|
| · |
Extends
ubiquitous broadband access.
Teleworkers enjoy the aggregated connectivity of more than 150 cable
and
DSL providers in the U.S. and Canada. Mobile employees gain worldwide
access through Wi-Fi, wired Ethernet, dial, GSM, ISDN, PHS and mobile
data
connections.
|
| · |
Simplifies
remote access management.
IT
staff benefit from aggregated connectivity, iPass-managed Wi-Fi gateways,
the iPass Portal and a single, consolidated bill for all remote and
mobile
access.
|
iPass
Mobile Office (formerly Corporate Access)
iPass
Mobile Office offers our customers the ability to provide global dial-up, wired
broadband and wireless access to their remote and mobile workers through the
iPassConnect universal client and centralized management and billing for the
IT
department. We generally bill customers based on usage of the iPass virtual
network, as well as additional monthly fees based on number of users for use
of
our client and management software over non-iPass networks. The process by
which
a mobile worker accesses their enterprise network through iPass virtual network
is illustrated in the following diagram and described through the following
steps:
1.
The
iPassConnect universal client software installed on a mobile worker’s laptop
computer or other electronic device enables the mobile worker to connect to
our
virtual network. For wired access the mobile worker launches the
iPassConnect(TM) universal client, selects the city in which he or she is
located, and then selects a local network access point (dial-up, ISDN, PHS,
or
wired high-speed internet). For wireless access, the client software
automatically detects and displays any available Wi-Fi hotspots or mobile data
services, whether it is a part of the iPass footprint or not. It will also
automatically choose the appropriate authentication protocol to initiate the
access request without user intervention. This is especially beneficial in
Wi-Fi
hotspots, corporate wireless LANs or home wireless LANs that require
802.1x-based security. The client software can also be used to connect via
the
user’s home broadband connection and home Wi-Fi LAN.
Security
checks can be built into the connection process. A feature called SecureConnect
allows the enterprise to set policies that detect whether the user’s personal
firewall or anti-virus software is active, auto-launch this software if it
is
not, and disallow the connection attempt if the proper software cannot be
launched. In addition, the user must enter his or her corporate credentials,
which will be authenticated by his or her enterprise database before the
connection is allowed.
2.
The
iPass NetServer software, installed in a network service provider’s network,
provides the interface between the network service provider and the iPass
network. The NetServer recognizes that the end user belongs to the iPass user
base and securely transmits the username and password to the nearest available
iPass Transaction Center using 128-bit SSL encryption. Our ten transaction
centers are located in California, New York, Georgia, Hong Kong, Australia,
the
United Kingdom, Germany, The Netherlands, Japan and Brazil. Any NetServer can
communicate with any Transaction Center, allowing for high availability in
the
rare event of a single Transaction Center failure.
3.
The
Transaction Center to which the authentication request is routed looks up the
enterprise to which the user belongs and securely transmits the user name and
password to the iPass RoamServer software residing on the enterprise’s
servers.
4.
The
RoamServer receives the request from the Transaction Center, converts it to
the
local authentication protocol used at the enterprise, and passes it to the
enterprise authentication database. Enterprises can manage their own user lists
and authentication databases and control users’ access to their internal network
through the authentication system of their choice.
5.
The
enterprise authentication database then grants or denies authorization. The
RoamServer securely sends a yes/no response back to the NetServer via a
Transaction Center.
6.
The
NetServer authorizes the network service provider to allow the user access
to
the Internet. At this point the iPassConnect universal client software can
be
configured to invoke the Device Management (formerly Endpoint Policy Management)
service to assess and remediate the mobile device for compliance with endpoint
security policies before providing access to the corporate network. Once
remediation is complete, iPassConnect can automatically launch the user’s VPN to
securely connect to the enterprise network.
7.
When
the mobile worker terminates the Internet session, the VPN connection is also
terminated and a record of the transaction is forwarded to the iPass
Clearinghouse. The enterprise receives detailed invoices either on a monthly
or
more frequent basis, as requested. For additional security, customers can use
the Auto-Teardown feature to set policies that terminate the internet session
if
the VPN, personal firewall, or anti-virus software is terminated during the
session.
Additional
Mobile Office features
iPass
Mobile Office includes the following features
iOQ
Advanced Reporting.
iOQ
allows our customers’ in-house or outsourced help desk personnel to quickly
identify issues and troubleshoot connection problems. With this feature
enterprises can generate records and reports regarding access locations, client
configuration, error codes, connection speeds, time to authenticate and other
critical information. We generally charge a monthly fee for our iOQ service.
We
periodically update the iOQ software in order to provide improved reporting
for
our internal support organization and our customers. These upgrades are
downloaded to the user’s computer or other electronic device when the user logs
in, at no additional cost to the customer.
Hosted
Authentication.
We offer
a hosted authentication option for iPass Mobile Office to enable enterprises
to
realize the benefits of our enterprise connectivity services while avoiding
the
cost of installing and managing additional authentication infrastructure. We
manage an enterprise’s authentication server in one of our secure data centers,
but the enterprise’s information technology manager retains full control. There
is an additional option in ExpressConnect that allows the individual charges
to
be directly charged to their corporate credit card.
On-Campus
Roaming.
This
feature allows enterprise IT departments to offer a single user experience
for
all remote and local wireless connections while extending centralized management
of security policies to these potentially vulnerable corporate wireless
networks.
Home
Office.
iPass
Home Office provides enterprise customers a method of outsourcing the broadband
network design, implementation and on-going support for their entire population
of home workers. This service provides customers a managed service with a single
point of contact and single consolidated bill while supporting broadband
connections on different technologies and carriers. iPass maintains
relationships with over 150 cable and DSL providers to provide near ubiquitous
coverage in the United States, Canada and United Kingdom. The Home Office
service comes with a secured, managed Wi-Fi enabled router to allow a user
the
freedom to work anywhere within the home.
Branch
Office.
This
service provides an organization with a managed wide-area network to connect
hundreds of small offices back to a corporate data center. It leverages iPass’
relationships with over 150 cable and DSL providers to provide ubiquitous
coverage throughout the United States and Canada. The connections are secured
using VPN platforms from Cisco, Juniper Networks and SonicWALL and the entire
service is managed by iPass. As part of the managed service, iPass provides
end-to-end proactive monitoring, reporting and troubleshooting of the health
of
the network, including availability, latency and packet loss. All of this
information is available on a real-time basis on the Universal Remote Control
section of the iPass portal.
Retail
Office.
Retail
Office provides wide-area networking for distributed retail locations to connect
to a corporate data center. It is identical to the Branch Office product except
that the offering includes Payment Card Industry (PCI) Compliance as part of
the
solution. PCI is required for any network which transmits credit card data.
Retail Office solutions include VPN platforms from Cisco and Juniper Networks
and include all of the proactive management and reporting associated with Branch
Office as well as specific reporting for PCI Compliance.
Device
Management Services
DeviceID.
The
DeviceID service strengthens network security through device authentication.
This service creates a digital fingerprint for every device by gathering unique
identifying numbers from select hardware components and uses this information
when interrogating the device to provide access to the corporate LAN via a
VPN.
DeviceID helps protect against replay attacks, reverse engineering and spoofing
by checking different hardware attributes during each authentication request.
This service is designed to ensure that only corporate-issued or authorized
machines access the network as well as validate device identity as an additional
factor for VPN authentication.
iPass
Device Management services (formerly Endpoint Policy
Management).
This
service provides automated security assessment, remediation and patch management
capabilities. It can be purchased as standalone software or integrated into
the
iPass connectivity services. This service helps enterprise customers to
discover, secure, and manage their laptops, desktops and handheld devices from
any location via a single management console. When integrated with iPass
connectivity services, users attempt to use the iPassConnect universal client
to
connect to the Internet and the corporate VPN, the iPass Device Management
service will check to see that the user’s computer is running the proper
versions of Microsoft Windows OS patches and anti-virus definition file updates
for endpoint devices — prior to Internet access and the launching the VPN. This
helps mitigate the effects of viruses and worms and allows the IT manager to
remotely update laptops outside of the office.
These
services are sold
either on a per-seat fee-based model or through a perpetual license model with
annually recurring maintenance fees.
iPass
Device Management includes the following features:
• allows
IT
to discover all mobile assets by gathering detailed hardware and software
inventory on all mobile devices.
• provides
high-performance rules-based distribution of new software and updates to
devices, automatically distributing software applications and system updates
to
all PCs and handheld devices via LAN, wide-area networks (WAN) and wireless
networks. Includes special features to improve device management over remote
and
mobile connections.
• patch
automation features that speed the process of deploying Microsoft Windows OS
and
application patches across large populations of remote and mobile devices.
IT
staffs receive patches directly from Microsoft and apply them with no
intermediate handling during the process. This minimizes the risk of inadvertent
or intentional tampering with a patch, avoiding potential problems.
• A
Win32
management console of user configurations and inventory information for rapid
call resolution, all integrated with a customer’s existing Windows NT Domain,
NDS or Active Directory security system. There is also a Web-based console
with
a limited view of the same data set that can be accessed remotely.
Principal
Components of the iPass Platform
The
technology incorporated in our services is designed to provide our customers
with reliability, quality of service, network security, policy enforcement,
consolidated billing and scalability. Our technology consists of the following
four principal components, each
of
which was designed and developed internally: iPassConnect universal client;
distributed authentication system; iPass Clearinghouse; and Service Quality
Management.
iPassConnect
Universal Client.
The
iPassConnect universal client software is installed on mobile workers’ laptop
computers or other devices, and allows them to securely and reliably connect
to
the Internet using a variety of access methods including narrowband, integrated
services digital network, or ISDN, wired and wireless broadband, GSM and 3G.
The
iPassConnect universal client is designed to be easy-to-use and to be a flexible
and scalable network connectivity platform for enterprises. The key features
of
iPassConnect include:
• Intuitive
User Interface.
iPassConnect universal client was designed with over seven years of experience
and customer feedback, resulting in a user-friendly interface with many
features.
• Automatic
Updates.
iPassConnect universal client also provides enterprises with the ability to
schedule periodic software modifications or updates of iPassConnect to their
end
users without handling each end user device separately. These upgrades are
securely downloaded to the user’s computer or other electronic device when the
user logs in, at no additional cost to the customer.
• Central
Policy Control.
iPassConnect universal client enables an enterprise to define a set of criteria,
such as length of session or idle timeouts, once and apply those criteria to
manage its remote access policies across its entire workforce.
• Dynamic
Directory.
iPassConnect universal client enables enterprises to adjust the order of
narrowband access points that are displayed to the end user, based on service
quality. Customers also have the flexibility of integrating in-house access
numbers with iPass’ access points in cases where both networks are being
utilized.
• Third
Party Application Integration.
iPassConnect universal client can be configured to automatically launch a
variety of third party VPNs upon successful connection to the Internet.
iPassConnect can also monitor anti-virus software, personal firewalls and VPNs
and disconnect a user if there not running (based on the customer’s
policy).
• Support
for multiple operating systems and languages.
iPassConnect universal client supports a wide range of computer operating
systems, including Microsoft Windows 2000, XP, Mac OS X and above, and Windows
Mobile. Additionally, iPassConnect for Windows is localized in Brazilian
Portuguese, Portuguese, Simplified Chinese, Traditional Chinese, French, German,
Japanese, Korean and Spanish.
Distributed
and Redundant Authentication System.
Our
distributed authentication system, which is made up of iPass NetServer software,
iPass RoamServer software and iPass TransactionServer software, is designed
to
enable the reliable, scalable and secure initiation and termination of a remote
access session on our virtual network. NetServer is installed on the servers
of
our network service providers. RoamServer is installed on our enterprise
customer’s internal networks, typically located on their premises. Our ten
transaction centers, each of which is comprised of two or more transaction
servers, are located in third party co-location facilities.
The
software components of NetServer, RoamServer and the transaction server operate
on third party single- or multi-processor servers based on Unix, Linux, or
Windows. We send our enterprise customers updates to NetServer, RoamServer
and
the transaction server electronically on an as needed basis to support new
authentication and management needs.
iPass
NetServer software receives end user authentication requests for Internet
connectivity and securely forwards the request to a transaction server across
a
128-bit SSL connection. The iPass transaction server validates the request
and
securely forwards this request to a RoamServer located at the enterprise. The
RoamServer receives the authentication request for Internet connectivity and
forwards the request in a format compatible with the enterprise’s authentication
database. Once the enterprise authentication database has allowed or denied
the
end user’s request for access, this reply is returned along the same
route.
We
have
recently developed and are presently deploying an additional security
enhancement to our authentication system designed to further ensure the
confidentiality of sensitive user credentials.
iPass
Clearinghouse.
Our
iPass Clearinghouse software collects, filters, resolves, analyzes and
summarizes the accounting details necessary to bill for the iPass Mobile Office
and ExpressConnect services. Once an end user session is terminated, the
Clearinghouse retrieves accounting records for each customer from each
transaction server. Once received by the Clearinghouse, the records are filtered
to eliminate duplicate records and reviewed for completeness and integrity
of
the data. The Clearinghouse then determines the identities of both the customer
and the network service provider and generates two billing records to reflect
the revenues and network access expenses based on the details contained in
the
original accounting record. The Clearinghouse then summarizes the records of
each network service provider and generates and distributes customer call detail
records and invoices. The Clearinghouse software is run internally on servers
residing at a secure data center in Redwood City, California, with a fail-over
and disaster recovery in a separate location.
Service
Quality Management.
Our
iPass service quality management, or SQM, system consists of several
quality-of-service monitoring and management elements that we incorporated
into
our services. These tools and processes are comprised of the
following:
• Client-Side
SQM.
Client-side SQM captures detailed status and usage information from connection
attempts and uploads this information to a central iPass database when a
successful connection is made. SQM records and reports access points from which
connections are made, client configuration, error codes, connection speeds,
time
to authenticate and other information important in diagnosing network health.
Our SQM software is deployed on networks worldwide to gather data on local
access points and network conditions and allows us to monitor our virtual
network from a customer’s point of view.
• SQM
Reporting.
Our SQM
infrastructure enables our iOQ service and provides information such as detailed
access point performance, individual and corporate connection success rates,
and
other connection data to our customers and to us. With this data, our customer
support and development teams can monitor service quality and continue to
improve the reliability and performance of our service offering. Through our
iOQ
service, our customers benefit from this SQM technology because it enables
them
to diagnose problems their users are experiencing.
• Phonebook/Connection
Directory.
Based on
input from the SQM infrastructure, the phonebook tool within the iPassConnect
universal client places the highest quality access point at the top of the
directory in order to enhance the experience for our customers’ end
users.
Co-location
Facilities
Our
ten
Transaction Centers are located in third-party co-location facilities in
California, New York, Georgia, Hong Kong, Australia, the United Kingdom, The
Netherlands, Germany, Japan and Brazil. Three additional co-location facilities
are utilized to host our primary Clearinghouse and Finance systems, and
corporate web services, which are located in California. Three out of our ten
transaction centers also run the standby and disaster recovery Clearinghouse
environments, our ExpressConnect service and the phonebook distribution servers.
We maintain standard contractual agreements with the third parties that host
our
co-location facilities which generally provide for a term of between one and
three years. If our relationships with these providers terminate, we believe
that we will be able to secure relationships with alternative providers without
any significant disruption to our operations.
Customers
We
sell
our service offering directly to enterprise customers and indirectly though
channel partners.
International
revenues accounted for approximately 40%, 45% and 41% of total revenues for
the
year ended December 31, 2006, 2005 and 2004, respectively. Revenues generated
in
the United Kingdom accounted for 11%, 14% and 11% of total revenues for the
year
ended December 31, 2006, 2005 and 2004, respectively. International revenues
is
determined by the location of the customer’s headquarters.
Substantially
all of our long-lived assets are located in the United States.
Agreements
with Network Service Providers
We
have
relationships with over 550 telecommunications carriers, Internet service
providers and other network service providers that enable us to offer our
services in over 160 countries around the world. We pay network service
providers for access to their network access points on a usage basis, in some
cases, subject to minimum purchase commitments. Most of these contracts have
a
term of one year, after which either party can terminate the contract with
six
months notice. In 2006, two network service providers, Verizon Business Services
(formerly MCI) and Equant, accounted for approximately 4% and 3% of our network
access expenses, respectively. The contracts we have entered into with these
providers are non-exclusive and contain minimum commitments for the purchase
of
network access. Our contract with Equant expires in February 2007. The initial
term of our contract with Verizon Business
Services expired in November 2005. The contract with MCI is automatically
renewed for successive periods of one or 12 month periods unless terminated
by
either party. In countries in which we have contracted with multiple network
service providers, if one network service provider is no longer available,
we
can generally obtain alternative network access without significant disruption
to our business. We are also able to direct users to the network of particular
service providers to fulfill minimum purchase
commitments.
Sales
and Marketing
We
sell
our services directly through our sales force and indirectly through our channel
partners. Our sales organization is organized into regional account teams,
which
include sales directors, sales managers, account executives, account managers,
inside sales representatives, sales engineers and sales operations personnel.
We
maintain sales offices or personnel in a number of cities in the United States
as well as Australia, the United Kingdom, Hong Kong, Japan, Korea, Germany,
France, Singapore, Denmark, Sweden and The Netherlands. As of December 31,
2006,
our sales organization was comprised of 82 individuals in North America, 24
individuals in Asia Pacific and 46 individuals in Europe. We intend to increase
the size of our sales organization and establish additional sales offices as
needed.
Our
channel partners include network service providers, systems integrators and
value added resellers. A channel partner typically signs a one to two year
agreement with us through which we appoint the partner as a nonexclusive
reseller of our services. Channel partners are responsible for implementing
and
managing billing and promotional activities for their customers. Selling through
channel partners allows us to offer our services without incurring the cost
of
maintaining a direct sales force in each target market. Our channel partners
typically sell related networking products and bundle our services with their
core offerings. Once an enterprise has signed a contract for our services
through a channel partner, our post-sales team works with the channel partner
to
ensure successful implementation of our services. However, the enterprise
remains the channel partner’s customer and has no direct financial relationship
with us.
We
focus
our marketing efforts on creating awareness for our services and their
applications, educating potential customers and generating new sales
opportunities. We conduct a variety of marketing programs including advertising,
press relations, analyst relations, telemarketing, direct marketing, web and
e-mail marketing, collateral and sales tools creation, seminars, events and
trade shows.
Competition
We
compete primarily with large, facilities-based carriers and non-facilities-based
software-enabled network operators. We compete based on geographic coverage,
reliability, quality of service, ease of implementation, ease of use and cost.
We believe that we compete favorably in terms of geographical coverage,
reliability, quality of service, ease of implementation and ease of
use.
Facilities-based
carriers against whom we compete, such as AT&T globally, Verizon Business
(formerly MCI) in the U.S. and BT Infonet and Orange Business Services in
Europe, generally have substantially greater resources, larger customer bases,
longer operating histories, and greater name recognition than we have. Carriers
may have the ability to offer a broad range of services and may be willing
to
reduce the price for remote access that is bundled with their other services.
In
some cases, potential customers are also suppliers to these carriers, and may
be
more inclined to purchase enterprise connectivity services from these carriers
than from us. We believe that we compete favorably against facilities-based
carriers when the potential customer is not a supplier to the carrier, and
when
the customer requires global access rather than access only within a limited
geographic region.
To
a
lesser extent we also compete with other non-facilities-based software-enabled
network operators. In some cases, our service offerings may not be as
attractively priced as those offered by our competitors, which may put us at
a
competitive disadvantage. We believe we compete favorably against these
competitors in terms of the coverage, redundancy, security, quality and ease
of
use of our service offerings. Still, non- facilities-based network operators
that provide managed services such as VPNs and firewalls, may also provide,
as a
package, additional services such as local exchange and long distance services,
voicemail and DSL services. Although our channel partners may offer these
services in conjunction with our service, we do not offer these additional
services directly, which may put us at a competitive disadvantage when competing
for potential customers.
For
a
discussion of the possible effects that competition could have on our business,
see “Risk Factors” — We face strong competition in our market, which could make
it difficult for us to grow our business.”
Research
and Development
We
believe that to compete favorably we must continue to invest in the research
and
development of our services. Our research and development efforts are focused
on
improving and enhancing our existing service offerings as well as developing
new
proprietary products and services. As of December 31, 2006, our research and
development organization consisted of 168 employees. Our research and
development expenses were $22.6 million, $17.7 million and $14.2 million in
2006, 2005, and 2004, respectively.
Intellectual
Property
We
rely
on a combination of trademark, copyright, trade secret laws and disclosure
restrictions to protect our intellectual property rights. We also enter into
confidentiality and proprietary rights agreements with our employees,
consultants and other third parties and control access to software,
documentation and other proprietary information. iPass(R), iOQ(R) and the iPass
logo are our U.S. registered trademarks. iPassConnect(TM), ExpressConnect(TM),
iPassNet(TM), RoamServer(TM), NetServer(TM), iPass Alliance(R) and iPass Mobile
Office(TM) are designations that we use. iPass has a patent portfolio of six
US
patents, one Australian patent and one Israeli patent. We acquired two
patents from the acquisition of GoRemote Internet Communications, Inc. in 2006,
and we were granted an additional patent around our SQM technology. We
have twenty-four US patent applications pending, and thirty-five international
patent applications pending (in the same subject areas as the US patent
applications).The duration of a patent is 20 years from the date of issuance.
We
have also applied for or registered company trademarks in over 50 other
countries. If a claim is asserted that we have infringed the intellectual
property of a third party, we may be required to seek licenses to that
technology. In addition, we license third-party technologies that are
incorporated into our services, including our license for encryption granted
by
RSA Security. Licenses from third party technologies may not continue to be
available to us at a reasonable cost, or at all. Additionally, the steps we
have
taken to protect our intellectual property rights may not be adequate. Third
parties may infringe or misappropriate our proprietary rights. Competitors
may
also independently develop technologies that are substantially equivalent or
superior to the technologies we employ in our services. If we fail to protect
our proprietary rights adequately, our competitors could offer similar services,
potentially significantly harming our competitive position and decreasing our
revenues.
Employees
As
of
December 31, 2006, we had 575 employees, consisting of 148 in network
operations, 168 in research and development, 186 in sales and marketing and
73
in general and administrative. We consider our relationship with our employees
to be good.
Trademarks
iPass(R),
iOQ(R) and the iPass logo are our U.S. registered trademarks. iPassConnect(TM),
ExpressConnect(TM), iPassNet(TM), RoamServer(TM), NetServer(TM), iPass Mobile
Office(TM), DeviceID(TM), EPM(TM), iSEEL(TM) and iPass Alliance(TM) are
designations that we use. We have also applied for or registered company
trademarks in over 50 other countries.
Available
Information
Our
Internet address is www.ipass.com. We make available free of charge through
our
Internet website our annual report on Form 10-K, quarterly reports on Form
10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act, as
amended, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
Further,
a copy of this annual report is located at the SEC’s Public Reference Room at
450 Fifth Street, NW, Washington, D.C. 20549. Information on the operation
of
the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding our filings at
www.sec.gov.
Our
business is subject to a number of risks, many of which are described below.
If
any of the events described in these risks factors actually occur, our business,
financial condition or results of operations could be materially and adversely
affected, which would likely have a corresponding impact on the value of our
common stock. Further, the risk factors described below
could cause actual results to differ materially from the results contemplated
by
the forward-looking statements contained in this report.
These risk factors should be reviewed carefully.
Risks
Relating to Our Business
Our
business is in transition from a business reliant primarily on narrowband
connectivity to one reliant primarily on broadband connectivity and services,
and if we are unable to effectively manage this
transition
our business will be impaired.
Historically
we
have
generated the large majority of our revenues from
the
sale of enterprise connectivity services using narrowband technologies such
as
modem dial-up. For
example,
in 2005
we derived $138.1 million, or 82%, of our total revenues from our traditional
dial-up business. In the United States as well as many other countries, 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
response to this market shift we have added broadband and services elements
to
our business and, as a result, in 2006
our
revenue derived from the use of narrowband connectivity decreased to
$105.7
million or 57.9% of our revenue, and in the fourth quarter of 2006 had decreased
to less than 50% of our revenue.
Because
of the declining revenues associated with narrowband connectivity,
the
growth of our business will depend upon
our
ability to expand the broadband and
services elements of our business at a pace faster than our narrowband
connectivity business declines. In February 2006, we acquired GoRemote Internet
Communications, Inc. as part of our strategy to grow our broadband business,
and
are also developing additional broadband products and services internally.
To
grow our broadband business,
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
or
acquire additional
technologies in order to integrate new broadband and
security services
into our service offering. If we are unable to develop these relationships
or
develop
or acquire new technologies,
or
if
demand
for broadband access does not materially increase,
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
or no
access,
which
could harm our operating results.
We
face strong competition in our market, which could make it difficult for
us to
grow
our business.
We
compete primarily with facilities-based carriers as well as with
non-facilities-based software enabled network operators. Some of our competitors
have substantially greater resources, larger customer bases, longer operating
histories or greater name recognition than we have. Also, as
a
result
of our
provision
of policy
management services, we face 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 hotspot
or
telephone connections. As a result, they may offer 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 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
and
operating margins.
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.
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.
If
our security measures are breached and unauthorized access is obtained to
a customer’s
internal network, our virtual network may be perceived as not
being secure
and enterprises may curtail or stop using our
services.
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 cause
current and potential customers to obtain connectivity services from our
competitors, which would reduce demand for our services.
If
enterprise connectivity demand does not continue to
expand, our
revenues and operating results may be negatively impacted.
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, improve
our operating results
or meet
public market expectations. Increased usage of enterprise connectivity services
depends on numerous factors, including:
• the
willingness of enterprises to make additional information technology
expenditures;
• the
availability of security products necessary to ensure data privacy over the
public networks;
• the
quality, cost and functionality of these services and competing
services;
• the
increased adoption of wired and wireless broadband access methods;
and
• 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.
The
growth of our business depends
in part
upon our
ability of
our
policy management services to
achieve
and sustain expected levels of demand and market acceptance. If
enterprises do not perceive our policy management services
to have
significant benefits, then we will be unable to grow this aspect of our
business, or it will grow
more
slowly than we expect, either of which could significantly and adversely affect
our growth. 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
further
developing
our policy management services,
which
could delay or prevent the enhancement
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.
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. Once
a
customer contract is signed, there is typically an extended period before the
customer’s 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 26 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 24
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
in
each of the years
ended December 31, 2006,
2005
and 2004.
If we
lose access to Equant’s network and are unable to replace this access in some or
all of these countries, our ability
to market our services as being global would be impaired, which could cause
us
to lose customers. 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.
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. Service
providers have consolidated and may
continue
to
consolidate,
which
may
continue to
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 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.
Because
much of our business is international, we encounter additional
risks, which
may negatively
impact
our operating
results.
We
generate a substantial portion of our revenues from business conducted
internationally. Revenues from customers domiciled outside of the United
States
were 38%
of our
revenues in
2006, of
which approximately 26%
and
10%
were
generated in our EMEA (Europe, Middle East and Africa) 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:
• longer
payment cycles for foreign customers, including delays due to currency controls
and fluctuations;
• the
impact of changes in foreign currency exchange rates on the attractiveness
of
our pricing;
• high
taxes in some foreign jurisdictions;
• difficulty
in complying with Internet-related regulations in foreign
jurisdictions;
• difficulty
in staffing and managing foreign operations; and
• difficulty
in enforcing intellectual property rights and weaker laws protecting these
rights.
Any
of
these factors could negatively impact our business.
Acquisitions could
cause us to incur significant expenses or harm our operating
results,
and
could dilute the ownership of our
existing stockholders.
Part
of
our growth strategy is to consider and, if we believe it is advantageous to
our
company, to acquire new
businesses, technologies and
services.
For
example, we completed the acquisitions of Safe3w, Inc. in September 2004, Mobile
Automation, Inc. in October 2004 and GoRemote in February 2006. Integrating
any newly acquired
business, technology or service can
be
expensive and time-consuming.
If
we are
unable to integrate and
operate acquired businesses, technologies or services efficiently or otherwise
realize the benefits of an acquisition that we envisioned when making the
acquisition, the acquisition could have an unanticipated negative effect on
our
business and operating results. Acquisitions can
also
result in large and immediate write-offs or assumption of debt and contingent
liabilities, any
of which
could harm our operating results.
Further,
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.
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.
This
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:
• managing
our research and development efforts for new and evolving
technologies;
• expanding
the capacity and performance of our network and software
infrastructure;
• developing
our administrative, accounting and management information systems and controls;
and
• effectively
maintaining coordination among our various departments, particularly as we
expand internationally.
We
have
been,
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 2004, we announced that we would not meet
market expectations regarding our financial performance in the second quarter,
and our stock price declined. In
2005,
three purported class action complaints, which subsequently
were
consolidated, and two purported derivative actions, which also were consolidated,
were filed against iPass and certain of our executive officers
and
directors. Although we were successful in our defense of these lawsuits, we
may
be subject to similar lawsuits in the future if our stock price were to decline
substantially, and there is no guarantee that we would be successful in
defending any such future lawsuits. Any future
securities litigation could result in substantial costs and divert management’s
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.
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.
If
licenses to third party technologies
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.
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.
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.
There
are
no unresolved written SEC comments received at least 180 days prior to December
31, 2006.
We
lease
approximately 74,000 square feet of space in our headquarters in Redwood Shores,
California under a lease that expires in 2010. We also lease sales and support
offices in other parts of the Unites States and abroad. We believe that our
principal facility in Redwood Shores will be adequate for our needs for at
least
the next several years, and we might expect that additional facilities will
be
available in other jurisdictions to the extent we add new offices.
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”) alleged 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 Company’s
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 that motion was granted with prejudice on September 6,
2006. On September 7, 2006, final judgment was entered in
favor of the defendants. Plaintiffs failed to file a timely notice of
appeal.
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. On April 6, 2006, the
court granted the joint motion of all parties to have the case designated as
"complex litigation." 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 was filed on May 19, 2006. Defendants demurred to the
amended CDC and on September 1, 2006 the court sustained that
demurrer with leave to amend. On October 6, 2006, plaintiffs
filed a consolidated second amended complaint ("CSAC"). On October 24,
2006 defendants filed a demurrer as to the CSAC. On November 27, 2006,
plaintiffs voluntarily dismissed the action without prejudice.
We
may be
subject to various other claims and legal actions arising in the ordinary course
of business from time to time.
No
matters were submitted to a vote of our stockholders during the fiscal quarter
ended December 31, 2006.
PART
II
Price
Range of Common Stock
Our
common stock is traded on the Nasdaq Global Market under the symbol “IPAS”. The
following table sets forth the high and low sale price of our common stock,
based on the last daily sale, in each quarterly period within the two most
recent fiscal years, as reported on the Nasdaq Global Market:
|
Low
Sale Price
|
High
Sale Price
|
||||||
|
Fiscal
year ended December 31, 2006:
|
|||||||
|
First
Quarter
|
$
|
6.40
|
$
|
8.01
|
|||
|
Second
Quarter
|
5.11
|
8.52
|
|||||
|
Third
Quarter
|
4.16
|
5.75
|
|||||
|
Fourth
Quarter
|
4.25
|
5.92
|
|||||
|
Fiscal
year ended December 31, 2005:
|
|||||||
|
First
Quarter
|
$
|
5.87
|
$
|
7.08
|
|||
|
Second
Quarter
|
5.17
|
6.60
|
|||||
|
Third
Quarter
|
5.08
|
6.40
|
|||||
|
Fourth
Quarter
|
5.32
|
7.00
|
|||||
We
had
63,935,220 shares of our common stock outstanding held by 260 stockholders
of
record as of February 28, 2007.
Performance
Measurement
Comparison
The
following graph shows the total stockholder return of an investment of $100
in
cash as of July 24, 2003, the date of our initial public offering for
(i) our common stock, (ii) the NASDAQ Composite Index and
(iii) the Russell 2000 Index. All values assume reinvestment of the full
amount of all dividends and are calculated as of December 31:
|
7/24/03
|
9/30/03
|
12/31/03
|
3/31/04
|
6/30/04
|
9/30/04
|
12/31/04
|
3/31/05
|
6/30/05
|
9/30/05
|
12/31/05
|
3/31/06
|
6/30/06
|
9/30/06
|
12/31/06
|
||||||||||||||||||||||||||||||||
|
iPass
Inc.
|
100.00
|
125.87
|
85.75
|
58.54
|
56.72
|
32.08
|
39.64
|
32.78
|
32.46
|
28.82
|
35.14
|
42.90
|
29.99
|
25.07
|
31.49
|
|||||||||||||||||||||||||||||||
|
Russell
2000 Index
|
100.00
|
102.45
|
116.99
|
124.01
|
124.79
|
120.87
|
137.46
|
129.76
|
134.95
|
140.89
|
142.03
|
161.42
|
152.98
|
153.17
|
166.28
|
|||||||||||||||||||||||||||||||
|
Nasdaq
Market Index
|
100.00
|
103.26
|
115.67
|
115.43
|
118.83
|
110.28
|
126.78
|
116.78
|
120.85
|
126.26
|
129.82
|
137.70
|
128.54
|
133.67
|
143.27
|
|||||||||||||||||||||||||||||||
We
do not
believe that there are any published industry or line of business indices
that
are directly relevant to our line of business. In addition, we do not believe
that we can construct a peer group index as many of the services similar
to ours
comprise a small portion of the business of the companies providing the
services. Consequently, in addition to the NASDAQ Composite Index, we are
comparing our stock price performance to the Russell 2000 Index as it is
an
index of businesses with an average market capitalization similar to
ours.
Stock
Repurchases
On
May 9,
2006, we announced that our Board of Directors approved a two-year stock
repurchase program which authorizes us to repurchase up to $30.0 million of
our
outstanding common stock. A total of $6.2 million of stock was repurchased
in
the fourth quarter of 2006, leaving approximately $13.8 million that may be
used
for future repurchases, as set forth in the table below:
|
Total
Number of Shares
Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares
Purchased as Part
of Publicly Announced
Program
|
|
Approximate
Dollar Value
of Shares that May
Yet Be Purchased under
the Program
|
|||||||
|
October
1, 2006 to October 31, 2006
|
407,000
|
$
|
4.97
|
2,225,474
|
$
|
18,026
|
|||||||
|
November
1, 2006 to November 30, 2006
|
325,000
|
$
|
5.50
|
2,550,474
|
$
|
16,238
|
|||||||
|
December
1, 2006 to December 31, 2006
|
425,000
|
$
|
5.65
|
2,975,474
|
$
|
13,835
|
|||||||
|
Total
|
1,157,000
|
$
|
5.37
|
2,975,474
|
$
|
13,835
|
|||||||
Dividend
Policy
We
have
never paid any cash dividends on our common stock. Our board of directors
currently intends to retain future earnings to support operations and to finance
the growth and development of our business and does not intend to pay cash
dividends on our common stock in the foreseeable future. Any future
determination related to dividend policy will be made at the discretion of
our
board of directors.
Equity
Compensation Plan Information
Information
regarding our equity compensation plans will be presented under the caption
“Securities Authorized For Issuance Under Equity Compensation Plans” in our
definitive proxy statement in connection with our 2007 Annual Meeting of
Stockholders to be filed not later than April 30, 2007 (the “Proxy Statement”).
That information is incorporated into this report by reference.
Recent
Sales of Unregistered Securities
We
have
not made any sales of unregistered securities following the date of our initial
public offering.
The
following selected consolidated financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” following this section and our consolidated financial statements and
related notes included elsewhere in this report. The historical results are
not
necessarily indicative of results to be expected in any future
period.
|
|
Year
Ended December 31,
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||
|
Statement
of Operations Data
|
||||||||||||||||
|
Revenues
|
$
|
182,711
|
$
|
169,373
|
$
|
166,319
|
$
|
136,078
|
$
|
92,830
|
||||||
|
Total
operating expenses
|
202,001
|
151,474
|
137,353
|
113,721
|
86,178
|
|||||||||||
|
Operating
income (loss)
|
(19,290
|
)
|
17,899
|
28,966
|
22,357
|
6,652
|
||||||||||
|
Net
income (loss)
|
(8,089
|
)
|
12,895
|
19,068
|
13,902
|
29,759
|
(1)
|
|||||||||
|
Net
income (loss) per share:
|
||||||||||||||||
|
Basic
|
(0.13
|
)
|
0.20
|
0.31
|
0.26
|
2.34
|
||||||||||
|
Diluted
|
(0.13
|
)
|
0.19
|
0.29
|
0.23
|
0.57
|
||||||||||
__________
(1) Of
this
amount, $24.3 million was due to a tax benefit, resulting from the reversal
of
deferred tax valuation allowances.
|
|
As
of December 31,
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||
|
Total
assets
|
$
|
263,467
|
$
|
254,474
|
$
|
230,513
|
$
|
190,117
|
$
|
75,442
|
||||||
|
Line
of credit and loans payable
|
—
|
—
|
—
|
—
|
10,375
|
|||||||||||
|
Total
stockholders’ equity
|
223,307
|
226,251
|
207,222
|
171,722
|
49,600
|
|||||||||||
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 over 550 dial-up, wireless, and broadband
providers in over 160 countries.
Overview
of 2006
In
2006,
we continued to experience a decline in revenues derived from our traditional
dial-up business as dial-up revenue decreased 23% to $105.7 million in 2006
as
compared to $138.1 million in 2005. This decrease was offset in part by revenues
generated from fees and usage of our broadband service. However, we continued
to
add new customers during 2006, including 86 from the Forbes Global 2000,
bringing our total Forbes Global 2000 customers to 377 as of December 31,
2006.
As
we
continued to increase the number of broadband access points during the year,
increasing our global broadband footprint was a priority for us in 2006. We
ended 2006 with approximately 77,000 Wi-Fi and wired hotspots worldwide,
approximately 75,000 of which were Wi-Fi hotspots and approximately 2,000 of
which were wired hotspots. This enabled our customers to remotely access their
corporate networks from more locations, at higher speeds and contributed to
a
$30.9 million or 351% increase in broadband usage revenue in 2006 over
2005.
Going
forward, we will continue to focus on delivering innovative services and
solutions for our customers, increasing the number of end users of our services
for both dial-up and broadband access, as well as continue to increase fee
revenues from device management and other fee based services. In 2007, we expect
to see continued growth in our business. However, our success 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 “Risk Factors.”
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, which consists of dial-up
and broadband usage, represented 80%, 87% and 92% of our total revenues for
the
years ended December 31, 2006, 2005 and 2004, 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 22%, 5.2% and 1.4% of our total
revenues for the years ended December 31, 2006, 2005 and 2004,
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 Automation,
Inc. in October 2004, we also began generating license and maintenance revenue
through software licensing agreements. Revenues generated from license and
maintenance fees, together with revenues generated from deployment services
and
technical support, represented approximately 20%, 13% and 8% of our revenues
for
the years ended December 31, 2006, 2005 and 2004, respectively.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these 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, 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 and estimates are important
in understanding our consolidated financial statements.
Revenue
Recognition
Services
and Fees
We
derive
substantially all 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.
Revenues
are recognized 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.
License
and Maintenance
We
recognize revenue in accordance with Statement of Position (“SOP”)
No. 97-2, “Software
Revenue Recognition,”
as
amended by SOP No. 98-9, “Modification
of 97-2 Software Revenue Recognition, With Respect to Certain
Transactions,”
and
generally recognize revenue when all of the following criteria are met as
set
forth in paragraph 8 of SOP No. 97-2: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred, (3) the
fee is fixed or determinable and (4) collectibility is probable.
One
of
the critical judgments that we make is the assessment that “collectibility is
probable.” Our recognition of revenue is based on our assessment of the
probability of collecting the related accounts receivable balance on a
customer-by-customer basis. As a result, the timing or amount of revenue
recognition may have been different if different assessments of the probability
of collection had been made at the time the transactions were recorded in
revenue. If
we
determine that collectibility is not probable, revenue is recognized as cash
is
collected.
Another
critical judgment that we make involves the “fixed or determinable” criterion.
We consider payment terms where arrangement fees are due within three
months from delivery to be normal contractual terms. Payment terms beyond
three
months from delivery are considered extended and not fixed or determinable.
For
arrangements with extended payment terms, arrangement fee revenues are
recognized when fees become due, assuming all other revenue recognition criteria
have been met.
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 are deferred until services are performed.
Allowances for estimated future returns and discounts are provided for upon
recognition of revenue.
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 consolidated statements of income
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.
When
we
assess the likelihood that we will be able to recover our deferred tax assets,
we consider all available evidence, both positive and negative, including
historical levels of income, expectations and risks associated with estimates
of
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for a valuation allowance. If recovery is not likely,
we
would increase our provision for taxes by recording a valuation allowance
against the deferred tax assets that we estimate will not ultimately be
recoverable. The available positive evidence at December 31, 2006 included
cumulative taxable income during the last three years and a projection of future
income limited to three years. We continue to closely monitor available evidence
and may adjust our valuation allowance in future periods.
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 reassess
our
ability to realize our net operating losses. If we conclude it is more likely
than not that we would not realize the benefit of our net operating losses,
we
may have to re-establish all or a portion of the valuation allowance and
therefore record a significant charge to our results of operations.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted FAS 123R using the modified prospective method,
in which compensation cost was recognized based on the requirements of FAS
123R
for (a) all share-based payments granted or modified after the effective
date and (b) for all awards granted to employees prior to the effective
date of FAS 123R that remain unvested on the effective date. FAS 123R requires
the use of judgment and estimates in performing multiple calculations. We
have
estimated the expected volatility as an input into the Black-Scholes-Merton
valuation formula when assessing the fair value of options granted. Our estimate
of volatility was based upon the historical volatility experienced in our
stock
price and the volatility of peers in our industry. To the extent volatility
of
our stock price increases in the future, our estimates of the fair value
of
options granted in the future could increase, thereby increasing stock-based
compensation expense in future periods. In addition, we apply an expected
forfeiture rate when amortizing stock-based compensation expense. Our estimate
of the forfeiture rate was based primarily upon historical experience of
employee turnover. To the extent we revise this estimate in the future, our
stock-based compensation expense could be materially impacted in the quarter
of
revision, as well as in following quarters. Our estimate of expected term
of
options granted was derived from the average midpoint between vesting and
the
contractual term, as described in the SEC Staff Accounting Bulletin
No. 107, “Share-Based
Payment.”
In
the
future, as information regarding post vesting termination becomes more
accessible, we may change our method of deriving the expected term. This
change
could impact the fair value of our options granted in the
future.
We
have
elected the alternative transition method provided in the FASB Staff Position
for calculating the tax effects of equity-based compensation. The alternative
transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool (APIC pool) related to the tax effects
of
employee equity-based compensation, and to determine the subsequent impact
on
the APIC pool and Consolidated Statement of Cash Flows of the tax effects of
employee equity-based compensation awards that are outstanding upon the
implementation of SFAS 123(R). As of December 31, 2006, there was $8.7
million of unrecognized compensation cost, adjusted for estimated forfeitures,
related to non-vested stock-based payments granted to employees. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
Restructuring
Restructuring
charges are comprised primarily of costs for abandonment of excess facilities,
severance and associated employee termination costs related to redundancies
resulting from our acquisition of GoRemote in the first quarter of 2006. These
charges have been recorded in accordance with SFAS 146, Accounting
for Costs Associated with Exit or Disposal Activities,
which
requires that the recognition and measurement of termination costs be recorded
when the liability is incurred. Costs for the abandonment of excess facilities
has been reduced by estimated income from the sublease of the vacated
facilities. If we are unable to sublease the facilities within the timeframe
and
for the rates anticipated, we may need to revise our estimates and record
additional restructuring charges.
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 for 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 $3.3 million, $2.0 million and $2.1 million as of December 31,
2006,
2005 and 2004, respectively, for estimated losses resulting from the inability
of our customers to make their required payments. If the financial condition
of
our customers were to deteriorate, resulting in an impairment of their ability
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
|
|
December
31,
|
|
||||||||||||||||||||
|
|
|
|
|
Change
|
|
|
|
Change
|
|
|||||||||||||
|
|
2006
|
$
|
%
|
2005
|
|
$
|
|
%
|
2004
|
|||||||||||||
|
(In
thousands, except percentages)
|
||||||||||||||||||||||
|
Total
Revenue
|
$
|
182,711
|
$
|
13,338
|
7.9
|
%
|
$
|
169,373
|
$
|
3,054
|
1.8
|
%
|
$
|
166,319
|
||||||||
Total
revenue increased in 2006 as compared to 2005 due to offsetting factors.
Revenues generated from dial up usage decreased from $138.1 million in 2005
to
$105.7 million in 2006. This represents a decrease of $32.4 million or 23%.
This
was offset in part by increases in revenues generated from broadband usage
and
fees. Revenues generated from usage of our broadband services were $39.7 million
and $8.8 million dollars for the years ended December 31, 2006 and 2005
respectively. Fee revenue increased from $22.5 million in 2005 to $37.3 million
in 2006. We expect revenue from dial up usage to continue to decrease in
absolute dollars as well as a percentage of total revenue as the use of
narrowband as a primary means of enterprise connectivity is expected to continue
to decline, but we can not reasonably estimate if the decline will be consistent
with that seen from 2005 to 2006. No individual customer accounted for 10%
or
more of total revenues for the years ended December 31, 2006, 2005 or 2004.
Revenues from software and service fees represented approximately 20%, 13%
and
8% of our total revenue in 2006, 2005, and 2004, respectively.
International
revenues, which are revenues generated from customers domiciled outside the
United States, accounted for approximately 40%, 45% and 41% of total revenues
in
2006, 2005 and 2004, 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 26%, 29% and 24% of
total revenues in 2006, 2005 and 2004, respectively. The increase in EMEA as
a
percent of revenues has been driven by the expansion of our sales force in
the
region. Revenues in the Asia Pacific region represented 10%, 12% and 13% of
total revenues in 2006, 2005 and 2004, respectively. Revenues in the United
Kingdom accounted for 11%, 14% and 11% of total revenues in 2006, 2005 and
2004,
respectively. To date, substantially all of our revenues have been denominated
in U.S. dollars, although 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, which
we pay to our network service providers.
|
|
December
31,
|
|
||||||||||||||||||||
|
|
|
|
|
Change
|
|
|
|
Change
|
|
|
|
|||||||||||
|
|
|
2006
|
|
$
|
%
|
|
2005
|
$
|
%
|
2004
|
||||||||||||
|
(In
thousands, except percentages)
|
||||||||||||||||||||||
|
Network
access expenses
|
$
|
56,929
|
$
|
14,820
|
35.2
|
%
|
$
|
42,109
|
$
|
4,770
|
12.8
|
%
|
$
|
37,339
|
||||||||
|
As
a percent of revenue
|
31.2
|
%
|
—
|
6.3
|
%
|
24.9
|
%
|
—
|
2.4
|
%
|
22.5
|
%
|
||||||||||
The
growth in network access expenses in 2006 over 2005 was due primarily to
increased usage of our virtual network with respect to our broadband services.
For our dial-up access costs, we continued to purchase network access from
additional service providers at a lower cost and to renegotiate a number of
our
existing network service provider contracts in 2006. While network access costs
for broadband access are higher than those for dial-up, we believe that going
forward, we will have the ability to negotiate lower rates for access to
broadband networks. We expect network access expenses to continue to increase
in
absolute dollars and increase as a percentage of revenues as usage shifts from
higher margin dial to lower margin broadband.
The
growth in network access expenses in 2005 over 2004 was due primarily to
increased usage of our virtual network. In 2005, we continued to purchase
network access from additional service providers at a lower cost and to
renegotiate a number of our network service provider contracts, resulting in
lower network access costs for dial-up. This was offset in part by an increase
in network access expenses for broadband usage.
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, costs of mobile data cards and certain allocated overhead
costs.
|
|
December
31,
|
|||||||||||||||||||||
|
|
|
Change
|
|
Change
|
|
|||||||||||||||||
|
|
|
2006
|
|
$
|
%
|
|
2005
|
$
|
%
|
2004
|
||||||||||||
|
(In
thousands, except percentages)
|
||||||||||||||||||||||
|
Network
operations expenses
|
$
|
32,013
|
$
|
11,067
|
52.8
|
%
|
$
|
20,946
|
$
|
1,570
|
8.1
|
%
|
$
|
19,376
|
||||||||
|
As
a percent of revenue
|
17.5
|
%
|
—
|
5.1
|
%
|
12.4
|
%
|
—
|
0.8
|
%
|
11.6
|
%
|
||||||||||
The
increase in network operations expenses from 2005 to 2006 in absolute dollars
was due primarily to $5.6 million in additional compensation and benefits
expense related to increased headcount from the acquisition of GoRemote Internet
Communications, Inc., $1.0 million related to the adoption of SFAS 123(R),
$1.2
million in mobile data card costs, $433,000 to write-down obsolete mobile data
cards and $1.4 million for external consulting and contractor support. To the
extent that we continue to expand our operations, we expect that our network
operations expenses will increase in absolute dollars, and increase slightly
as
a percentage of total revenue.
The
increase in network operations expenses in 2005 over 2004 in absolute dollars
was due primarily to $1.1 million in additional compensation and benefits
expense due to an increase in personnel, $497,000 additional depreciation
expense on network operations equipment in support and expansion of our virtual
network and $404,000 of additional transaction center fees and
communication
lines
expenses. This was offset in part by a $443,000 decrease in fees paid to
consultants. Network operations expenses increased slightly as a percentage
of
total revenue as we continued to increase both the capacity and redundancy
of
our virtual network.
Research
and Development
Research
and development expenses consist of compensation and benefits for our research
and development personnel, consulting, and certain allocated overhead
costs.
|
|
December
31,
|
|||||||||||||||||||||
|
|
|
Change
|
|
Change
|
|
|||||||||||||||||
|
|
2006
|
$
|
%
|
2005
|
$
|
%
|
2004
|
|||||||||||||||
|
(In
thousands, except percentages)
|
||||||||||||||||||||||
|
Research
and development expenses
|
$
|
22,557
|
$
|
4,811
|
27.1
|
%
|
$
|
17,746
|
$
|
3,590
|
25.4
|
%
|
$
|
14,156
|
||||||||
|
As
a percent of revenue
|
12.3
|
%
|
—
|
1.8
|
%
|
10.5
|
%
|
—
|
2.0
|
%
|
8.5
|
%
|
||||||||||
The
increase in research and development expenses from 2005 to 2006 was due
primarily to an additional $3.2 million of compensation costs related to
increased headcount due to the acquisition of GoRemote and $1.2 million related
to the adoption of SFAS 123(R) offset by a decrease of $931,000 in consulting
and contractor expenses. The remaining portion of the increase was due to
individually insignificant items. The increase as a percentage of revenues
as
well as absolute dollars was primarily due to the acquisition of GoRemote as
well as 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 were completed in 2004 and 2006. We
expect that our research and development expenses will remain relatively
constant in absolute dollars as we develop and enhance new and existing service
offerings, and to the extent revenues increase, will decrease slightly as a
percentage of revenues.
The
increase in research and development expenses from 2004 to 2005 was due
primarily to an additional $2.6 million of compensation and benefits expenses
related to an increase in headcount, $160,000 in fees paid to consultants to
further develop our service and $171,000 in technology association fees. The
increase as a percentage of revenues 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 our two acquisitions of Safe3w
and
Mobile Automation in third and fourth quarters of 2004, respectively, as well
as
the increase in research and development personnel as a result of those
acquisitions.
Sales
and Marketing
Sales
and
marketing expenses consist of compensation, benefits, advertising, promotion
expenses, and certain allocated overhead costs.
|
|
December
31,
|
|||||||||||||||||||||
|
|
|
Change
|
|
Change
|
|
|||||||||||||||||
|
|
2006
|
$
|
%
|
2005
|
$
|
%
|
2004
|
|||||||||||||||
|
(In
thousands, except percentages)
|
||||||||||||||||||||||
|
Sales
and marketing expenses
|
$
|
58,620
|
$
|
7,907
|
15.6
|
%
|
$
|
50,713
|
$
|
3,579
|
7.6
|
%
|
$
|
47,134
|
||||||||
|
As
a percent of revenue
|
31.9
|
%
|
—
|
2.0
|
%
|
29.9
|
%
|
—
|
1.6
|
%
|
28.3
|
%
|
||||||||||
The
increase in sales and marketing expenses in 2006 over 2005 in absolute dollars
was due primarily to approximately $4.8 million in additional compensation
and
benefits expenses due to additional sales personnel related to the acquisition
of GoRemote and expansion of the sales organization in the EMEA region, and
an
additional $2.2 million related to the adoption of SFAS 123(R). The remaining
portion of the increase was due to individually insignificant items. We expect
that sales and marketing expenses will remain relatively constant in absolute
dollars and, to the extent revenues increase, will decrease as a percentage
of
revenues.
The
increase in sales and marketing expenses in 2005 over 2004 in absolute dollars
was due primarily to an additional $2.6 million in compensation and benefits
expenses due to the additional sales personnel from the Mobile Automation
acquisition as well as the expansion of the sales organization in the EMEA
region. There was also an increase of $406,000 in marketing programs, including
trade shows and promotions. The increase also included $977,000 in compensation
and benefits expenses for existing marketing personnel. The remaining portion
of
the increase was due to individually insignificant items.
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.
|
|
December
31,
|
|||||||||||||||||||||
|
|
|
Change
|
|
Change
|
|
|||||||||||||||||
|
|
2006
|
$
|
%
|
2005
|
$
|
%
|
2004
|
|||||||||||||||
|
(In
thousands, except percentages)
|
||||||||||||||||||||||
|
General
and administrative expenses
|
$
|
23,178
|
$
|
5,585
|
31.7
|
%
|
$
|
17,593
|
$
|
(1,298
|
)
|
(6.9
|
)%
|
$
|
18,891
|
|||||||
|
As
a percent of revenue
|
12.7
|
%
|
—
|
2.3
|
%
|
10.4
|
%
|
—
|
(1.0
|
)%
|
11.4
|
%
|
||||||||||
General
and administrative expenses increased in absolute dollars and as a percentage
of
revenues from 2005 to 2006. The increase was driven primarily by approximately
$2.7 million in additional compensation and benefits expenses due to the
acquisition of GoRemote, an additional $1.7 million related to the adoption
of
SFAS 123(R). Additionally, bad debt expense increased by $893,000 and we began
matching employee contributions to the 401(k) plan resulting in an additional
expense of $792,000. The remaining increase is due to various individually
insignificant items. We expect that our general and administrative expenses
will
remain relatively constant in absolute dollars and, to the extent that revenues
increase, will decrease as a percentage of revenues.
A
significant part of the decrease in general and administrative expenses in
2005
was a $937,000 decrease in bad debt expense offset in part by $275,000 in
compensation and benefits expenses. The remaining portion of the change from
2004 to 2005 was due to a net decrease of various individually insignificant
accounts.
Amortization
of Acquired Tangibles
Amortization
of acquired intangibles was $4.0 million, $2.4 million and $457,000 for the
years ended December 31, 2006, 2005 and 2004, respectively. The increase from
2005 to 2006 was due to the impact of amortization of intangibles related to
the
GoRemote acquisition in February 2006. The increase from 2004 to 2005 was due
to
the full amortization impact of intangible assets related to the Safe3w and
Mobile Automation acquisitions during 2004 being amortized over the entire
year
in 2005 as they were acquired during 2004.
Non-Operating
Income and Expenses
Interest
Income
Interest
income includes interest income on cash, cash equivalents, and short-term
investment balances. Interest income and other was $3.7 million, $3.9 million
and $2.3 million for the years ended December 31, 2006, 2005 and 2004,
respectively. The decrease in interest and other income in 2006 was due to
the
net use of $72.2 million of cash, cash equivalents and short-term investment
balances for the acquisition of GoRemote in February 2006.
Provision
for Income Taxes
The
benefit from income taxes was $7.2 million in 2006, compared to a provision
of
$8.9 million in 2005. The change from provision to benefit is due to a loss
before income taxes of $15.6 million in 2006 as compared to income before taxes
of $21.8 million in 2005. The decrease in provision for income taxes in 2005
compared to 2004 was due to a decrease in income for taxes from $31.3 million
in
2004 to $21.8 million in 2005. The effective tax rate was (46)% for the year
ended December 31, 2006 and 41% and 39% for the years ended December 31, 2005
and 2004, 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 includes 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 line of credit.
Net
cash
provided by operating activities was $361,000 for the year ended December 31,
2006, compared to $32.1 million for the year ended December 31, 2005 and $38.1
million for the year ended December 31, 2004. The decrease in cash provided
by
operating activities in 2006 is due primarily to operating expenses increasing
by $50.5 million while our total revenues increased approximately $13.3 million,
as compared to 2005.
Net
cash
used in investing activities in 2006 was $16.0 million compared to $32.5 million
in 2005 and $60.2 million in 2004, respectively. Net cash used in investing
activities in 2006 was primarily from the acquisition of GoRemote, which net
of
cash acquired was $78.0 million offset by the net maturities of short term
investments of $67.2 million. In 2005, net cash used in investing activities
related to purchases of $170.4 million in short-term investments, offset by
the
maturities of short-term investments in the amount of $141.8 million as well
as
$3.9 million for the purchases of property and equipment. Net cash used in
investing activities in 2004 was from the purchases of $156.3 million in
short-term investments, $28.4 million for the acquisition of Safe3w and Mobile
Automation and $6.2 million for the purchases of property and equipment, offset
by the maturities of short-term investments in the amount of $130.7
million.
Net
cash
used in financing activities in 2006 was $6.7 million which was comprised of
$16.2 million of cash used for repurchases of common stock offset by $7.5
million of cash received for stock option exercises. Net cash provided by
financing activities in 2005 was $3.8 million, compared to $10.9 million in
2004, respectively. Cash provided by financing activities in 2005 was from
proceeds from the issuance of common stock for employee stock options and
through the employee stock purchase program. Cash provided by financing
activities in 2004 was the result of proceeds from the issuance of common stock
for employee stock options plus the receipt of payment of shareholder notes
receivable.
We
anticipate that our operating expenses, as well as planned capital expenditures,
will constitute a material use of our cash resources for the foreseeable future
in order to execute our business plan. In addition, we may utilize cash
resources to fund acquisitions of complementary businesses, technologies or
product lines. We believe that our cash and cash equivalents and short-term
investments on hand will be sufficient to meet our cash requirements for at
least the next 18 months, including working capital requirements and planned
capital expenditures.
As
of
December 31, 2006, our principal source of liquidity was $100.0 million of
cash,
cash equivalents and short-term investments.
Off-Balance
Sheet Arrangements
At
December 31, 2006 and 2005, we did not have any off-balance sheet arrangements
or relationships with unconsolidated entities or financial partnerships, such
as
entities often referred to as structured finance or special purpose entities,
which are typically established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.
Commitments
At
December 31, 2006, we had no material commitments for capital
expenditures.
We
have
signed contracts with some network service providers under which we have minimum
purchase commitments that expire on various dates through December 2007. Other
than in the approximately 24 countries in which our sole dial-up network service
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. In May 2005, we consolidated several term license
agreements that were set to expire into a single, long-term operating lease
with
a vendor. Future minimum purchase commitments under these agreements as of
December 31, 2006 are as follows (in thousands):
|
Year
ending December 31:
|
||||
|
2007
|
$
|
1,901
|
||
|
2008
|
1,066
|
|||
|
2009
|
266
|
|||
|
$
|
3,233
|
|||
We
lease
our facilities under non-cancelable operating leases that expire at various
dates through October 2016. Future minimum lease payments under these operating
leases as of December 31, 2006 are as follows (in thousands):
|
Year
ending December 31:
|
||||
|
2007
|
$
|
7,444
|
||
|
2008
|
6,113
|
|||
|
2009
|
5,718
|
|||
|
2010
|
2,755
|
|||
|
2011
and thereafter
|
3,456
|
|||
|
$
|
25,486
|
|||
Tabular
Disclosure of Contractual Obligations
|
|
Payments
Due by Period
|
|
||||||||||||||
|
Contractual
Obligations
|
|
Total
|
|
Less
Than 1
Yr
|
|
1-3
Years
|
|
3-5
Years
|
|
More
Than 5
Yrs
|
||||||
|
Operating
Lease Obligations
|
$
|
25,486
|
$
|
7,444
|
$
|
14,586
|
$
|
1,797
|
$
|
1,659
|
||||||
|
Purchase
Obligations
|
3,233
|
1,901
|
1,332
|
—
|
—
|
|||||||||||
|
Total
Contractual Obligations
|
$
|
28,719
|
$
|
9,345
|
$
|
15,918
|
$
|
1,797
|
$
|
1,659
|
||||||
Foreign
Currency
Although
we currently bill 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 substantially all 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.
Interest
Rate Sensitivity
As
of
December 31, 2006, we had cash, cash equivalents, and short-term investments
totaling $100.0 million. Our investment portfolio consists of auction rate
and
money market securities, asset backed securities, corporate securities, and
government securities, generally due within one to two years. All of our
instruments are classified as available for sale. 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.
As
of
December 31, 2005, we had cash and cash equivalents of $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 as of December 31, 2006 (in thousands):
|
Expected
Maturity Date for Par Value Amounts
for
the Year Ended
December 31,
|
As
of
Dec. 31, 2006
|
|||||||||||||||
|
2007
|
|
2008
|
|
2009
|
|
Total
Cost
Value
|
|
Total
Fair Value
|
||||||||
|
Government
agencies
|
$
|
32,205
|
$
|
23,990
|
$
|
1,770
|
$
|
58,818
|
$
|
58,656
|
||||||
|
Auction
rate and money market securities
|
25,100
|
—
|
—
|
25,051
|
25,052
|
|||||||||||
|
Total
|
$
|
57,305
|
$
|
23,990
|
$
|
1,770
|
$
|
83,869
|
$
|
83,708
|
||||||
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 cost of securities sold is based on the specific
identification method.
Financial
Statements
Our
financial statements required by this item are set forth as a separate section
of this report. See Item 15(a)(1) for a listing of financial statements provided
in the section titled “Financial Statements.”
Supplementary
Data
The
following tables set forth unaudited quarterly supplementary data for each
of
the years in the two-year period ended December 31, 2006 (in thousands, except
per share amounts):
|
|
Quarter
Ended
|
|
|||||||||||
|
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
||||
|
Year
Ended December 31, 2006
|
|||||||||||||
|
Revenues
|
$
|
44,270
|
$
|
47,384
|
$
|
45,900
|
$
|
45,157
|
|||||
|
Operating
income
|
(2,255
|
)
|
(5,142
|
)
|
(4,695
|
)
|
(7,198
|
)
|
|||||
|
Net
income
|
(65
|
)
|
(2,054
|
)
|
(2,209
|
)
|
(3,761
|
)
|
|||||
|
Basic
net income per share
|
$
|
(0.00
|
)
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
|
|
Diluted
net income per share
|
$
|
(0.00
|
)
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
|
|
|
Quarter
Ended
|
|
|||||||||||
|
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|||||
|
Year
Ended December 31, 2005
|
|||||||||||||
|
Revenues
|
$
|
44,072
|
$
|
43,125
|
$
|
41,881
|
$
|
40,295
|
|||||
|
Operating
income
|
5,961
|
4,536
|
4,683
|
2,719
|
|||||||||
|
Net
income
|
4,089
|
3,331
|
4,210
|
1,265
|
|||||||||
|
Basic
net income per share
|
$
|
0.07
|
$
|
0.05
|
$
|
0.07
|
$
|
0.02
|
|||||
|
Diluted
net income per share
|
$
|
0.06
|
$
|
0.05
|
$
|
0.06
|
$
|
0.02
|
|||||
None.
Controls
and Procedures
We
carried out an evaluation, under the supervision and with the participation
of
our Chief Executive Officer and Chief 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 Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and
procedures are effective.
Changes
in Internal Control Over Financial Reporting
In
addition, there have been no changes in our internal controls over financial
reporting during the quarter ended December 31, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal controls
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.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2006. In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in Internal
Control-Integrated Framework.
Our
management has concluded that, as of December 31, 2006, our internal control
over financial reporting is effective based on these criteria. Our independent
registered public accounting firm, KPMG LLP, have issued an audit report on
our
assessment of our internal control over financial reporting, which is included
herein.
We
have
excluded certain portions of GoRemote Internet Communications, Inc. (“GoRemote”)
from our assessment of internal control over financial reporting as of December
31, 2006 because it was acquired by the Company in a purchase business
combination during fiscal 2006 and the excluded portions had not yet been fully
integrated into the Company’s existing operations.
None.
PART
III
Information
relating to our executive officers and directors will be presented under the
captions “Proposal 1 — Election of Directors” and “Executive Officers and
Directors” in our definitive proxy statement in connection with our 2007 Annual
Meeting of stockholders to be filed with the Securities and Exchange Commission
not later than April 30, 2007 (the “Proxy Statement”). That information is
incorporated into this report by reference.
Information
concerning compliance with Section 16(a) of the Securities Exchange Act of
1934
will be presented under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement. That information is incorporated
into this report by reference.
Code
of Ethics
We
have
adopted a code of conduct and ethics that applies to all of our employees,
including the principal executive officer, principal financial officer and
principal accounting officer. This code of conduct and ethics is posted on
our
website. The Internet address for our website is http://www.ipass.com, and
the
code of conduct and ethics may be found as follows:
1. From
our
main Web page, first click on “Investors.”
2. Next,
click on “Corporate Governance.”
3. Then,
click on “Code of Conduct.”
4. Finally,
click on “Code of Conduct and Ethics.”
We
intend
to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding
an
amendment to, or waiver from, a provision of this code of conduct and ethics
by
posting such information on our website, at the address and location specified
above.
Information
relating to our audit committee and the audit committee financial expert
required by this Item 10 will be presented under the caption “Audit Committee”
in the Proxy Statement. That information is incorporated into this report by
reference.
Information
relating to director and executive compensation required by this Item 11 will
be
presented under the captions “Compensation of Directors,” “Compensation of
Executive Officers,”, “Compensation Committee Interlocks and Insider
Participation” and “Compensation Committee Report” in the Proxy Statement. That
information is incorporated into this report by reference.
Information
relating to the security ownership of our common stock by our management and
other beneficial owners will be presented under the caption “Security Ownership
of Certain Beneficial Owners and Management” in the Proxy Statement. That
information is incorporated into this report by reference.
Information
relating to securities authorized for issuance under equity compensation plans
will be presented under the caption “Securities Authorized for Issuance Under
Equity Compensation Plans” in the Proxy Statement. That information is
incorporated into this report by reference.
Information
relating to certain relationships of our directors and executive officers and
related transactions and the independence of our directors will be presented
under the caption “Certain Relationships and Related Transactions” and
“Independence of the Board of Directors” in the Proxy Statement. That
information is incorporated into this report by reference.
The
information required by this item will be included under the captions “Proposal
No. 2 — Ratification of Independent Auditors — Principal Accountant Fees and
Services” in the Proxy Statement. That information is incorporated into this
report by reference.
PART
IV
(a)
The
following financial statements are filed as part of this report:
1.
Financial Statements
|
|
Page
|
|
Consolidated
Financial Statements:
|
|
2.
Financial Statement Schedules
None.
All
schedules are omitted because they are not required or the required information
is shown in the financial statements or notes thereto.
3.
Exhibits
|
Exhibit
Number
|
Description
of Document
|
|
2.1
|
Agreement
and Plan of Merger dated October 26, 2004 by and among iPass Inc.,
Montage
Acquisition Corp., Mobile Automation, Inc. and David Strohm, as
Stockholders’ Agent.(1)
|
|
2.2
|
Agreement
of Merger among iPass Inc., Keystone Acquisition Sub, Inc. and GoRemote
Internet Communications, Inc. dated December 9,
2005.(2)
|
|
3.1
|
Amended
and Restated Certificate of Incorporation.(3)
|
|
3.2
|
Bylaws,
as amended.(3)
|
|
4.1
|
Reference
is made to Exhibits 3.1 and 3.2
|
|
4.2
|
Specimen
stock certificate.(3)
|
|
10.1*
|
2003
Equity Incentive Plan and form of related agreements, as
amended.(3)
|
|
10.1.1*
|
Form
of Stock Option Grant Notice under the 2003 Equity Incentive Plan
(containing additional vesting terms).(4)
|
|
10.2*
|
2003
Non-Employee Directors Plan, as amended.(5)
|
|
10.3*
|
1999
Stock Option Plan and form of related agreements.(3)
|
|
10.4*
|
1997
Stock Option Plan and form of related agreements.(3)
|
|
10.5*
|
Interim
1999 Stock Option Plan.(3)
|
|
10.6*
|
Restricted
Stock Purchase Agreement by and between the Registrant and Anurag
Lal
dated November 8, 1999.(3)
|
|
10.7*
|
2003
Employee Stock Purchase Plan and form of related agreements, as
amended.(3)
|
|
10.8
|
Lease
Agreement, dated October 26, 1999, between Registrant and Westport
Joint
Venture (as amended).(3)
|
|
10.9
|
Amended
and Restated Investor Rights Agreement, dated August 8, 2000, between
Registrant, founders and holders of the Registrant’s Preferred
Stock.(3)
|
|
10.10
|
Form
of Indemnity Agreement.(3)
|
|
10.11*
|
Employment
Agreement, dated November 13, 2001, between Registrant and Kenneth
D.
Denman.(3)
|
|
10.12*
|
Form
of Offer Letter to Executive Officers.(3)
|
|
10.13
|
OEM
Service Provider License Agreement, dated February 29, 2000, between
RSA
Security, Inc. and the Registrant, and amendments
thereto.(4)
|
|
10.14
|
Support
Agreement, dated February 29, 2000, by and between RSA Security,
Inc.(4)
|
|
10.15
|
Loan
and Security Agreement dated September 4, 2001 between Silicon Valley
Bank
and the Registrant, and modifications thereto.(3)
|
|
10.16*
|
2007
Annual Executive Management Bonus Plan.(6)
|
|
10.17*
|
Outside
Director Compensation Arrangement.(7)
|
|
10.18*
|
Executive
Officer Cash Compensation Arrangement.(8)
|
|
10.19*
|
Offer
Letter to Thomas Thimot dated December 9, 2005.(9)
|
|
10.20*
|
Transition
Agreement with John Thuma dated January 20, 2006.(10)
|
|
10.21*
|
Letter
Agreement pursuant to which Michael J. McConnell and Peter C. Clapman
were
elected to Registrant’s Board of Directors.(11)
|
|
24.1
|
Power
of Attorney (reference is made to the signature page of this Form
10-K).
|
__________
(1) Previously
filed as the like-numbered exhibit to our Annual Report on Form 10-K filed
with
the Securities and Exchange Commission on March 15, 2005, and incorporated
by
reference herein.
(2) Previously
filed as exhibit 10.22 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 12, 2005, and incorporated by
reference herein.
(3) Previously
filed as the like-numbered exhibit to our Registration Statement on Form S-1,
as
amended, originally filed with the Securities and Exchange Commission on January
24, 2003, as amended, and incorporated by reference herein.
(4) Previously
filed as the like-numbered exhibit to our Annual Report on form 10-K filed
with
the Securities and Exchange Commission on March 16, 2006, and incorporated
by
reference herein
(5) Previously
filed as exhibit 10.1 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 16, 2006, and incorporated by
reference herein.
(6) Previously
filed as Item 5.02 on our Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 13, 2007, and incorporated by reference
herein.
(7) Previously
disclosed under the caption “Compensation of Directors” in our Definitive Proxy
Statement on Schedule 14A filed with the Securities and Exchange Commission
on
April 26, 2004, and incorporated by reference herein.
(8) Previously
disclosed under the caption “Compensation of Executive Officers” in our
Definitive Proxy Statement on Schedule 14A filed with the Securities and
Exchange Commission on April 26, 2004, and incorporated by reference
herein.
(9) Previously
filed as exhibit 10.23 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 16, 2006, and incorporated by
reference herein.
(10) Previously
filed as exhibit 10.24 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 16, 2006, and incorporated by
reference herein.
(11) Previously
filed as exhibit 9.9.1 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 21, 2007.
* Indicates
a management contract or compensatory plan or arrangement.
The
Board
of Directors and Stockholders
iPass
Inc.:
We
have
audited the accompanying consolidated balance sheets of iPass
Inc. and subsidiaries (the Company)
as of
December 31, 2006 and December 31, 2005, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended
December 31, 2006. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 2006 and December 31, 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 2 to the Consolidated Financial Statements, effective January
1, 2006, the Company adopted the provision of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, based on the
criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and
our report dated March 28, 2007, expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG
LLP
Mountain
View, California
March
28,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
iPass
Inc.:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that iPass Inc. maintained
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal
Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management of iPass is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that iPass Inc. maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on criteria established in Internal
Control — Integrated Framework
issued
by COSO. Also, in our opinion, iPass Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal
Control — Integrated Framework
issued
by COSO.
iPass
Inc. acquired GoRemote Internet Communications, Inc. (“GoRemote”) during
2006, and management excluded from its assessment of the effectiveness of iPass
Inc.’s internal control over financial reporting as of December 31, 2006,
GoRemote’s internal control over financial reporting associated with total
assets of $4.8 million and total revenues of $30.8 million included in the
consolidated financial statements of iPass Inc. (and subsidiaries) as of and
for
the year ended December 31, 2006. Our audit of internal control over financial
reporting of iPass Inc. also excluded an evaluation of the internal control
over financial reporting of GoRemote.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of iPass Inc.
and subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended December
31,
2006, and our report dated March 28, 2007 expressed an unqualified opinion
on
those consolidated financial statements.
/s/
KPMG
LLP
Mountain
View, California
March
28,
2007
iPASS
INC. AND SUBSIDIARIES
(In
thousands, except share and per share amounts)
|
|
As
of December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
15,492
|
$
|
37,829
|
|||
|
Short-term
investments
|
83,708
|
145,473
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $3,282 and
$2,040,
respectively
|
28,579
|
23,347
|
|||||
|
Prepaid
expenses and other current assets
|
6,341
|
5,031
|
|||||
|
Deferred
tax assets
|
8,070
|
4,555
|
|||||
|
Total
current assets
|
142,190
|
216,235
|
|||||
|
Property
and equipment, net
|
10,519
|
9,210
|
|||||
|
Other
assets
|
3,344
|
1,561
|
|||||
|
Long-term
deferred tax assets
|
14,952
|
—
|
|||||
|
Acquired
intangibles, net
|
13,705
|
8,776
|
|||||
|
Goodwill
|
78,757
|
18,692
|
|||||
|
Total
assets
|
$
|
263,467
|
$
|
254,474
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
14,830
|
$
|
12,669
|
|||
|
Accrued
liabilities
|
16,482
|
12,523
|
|||||
|
Deferred
revenue—short term
|
5,411
|
3,031
|
|||||
|
Total
current liabilities
|
36,723
|
28,223
|
|||||
|
Deferred
revenue—long term
|
1,468
|
—
|
|||||
|
Other
long term liabilities
|
1,969
|
—
|
|||||
|
Total
liabilities
|
40,160
|
28,223
|
|||||
|
Commitments
(Note 13)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Common
stock, $.001 par value; authorized 250,000,000 shares; issued and
outstanding 63,467,796 and 64,202,765 shares, respectively
|
63
|
64
|
|||||
|
Additional
paid-in capital
|
249,800
|
245,456
|
|||||
|
Deferred
stock-based compensation
|
—
|
(593
|
)
|
||||
|
Accumulated
other comprehensive loss
|
(98
|
)
|
(307
|
)
|
|||
|
Accumulated
deficit
|
(26,458
|
)
|
(18,369
|
)
|
|||
|
Total
stockholders’ equity
|
223,307
|
226,251
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
263,467
|
$
|
254,474
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
iPASS
INC. AND SUBSIDIARIES
(In
thousands, except share and per share amounts)
|
|
For
the Year Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Revenues
|
$
|
182,711
|
$
|
169,373
|
$
|
166,319
|
||||
|
Operating
expenses (1):
|
||||||||||
|
Network
access
|
56,929
|
42,109
|
37,339
|
|||||||
|
Network
operations
|
32,013
|
20,946
|
19,376
|
|||||||
|
Research
and development
|
22,557
|
17,746
|
14,156
|
|||||||
|
Sales
and marketing
|
58,620
|
50,713
|
47,134
|
|||||||
|
General
and administrative
|
23,178
|
17,593
|
18,891
|
|||||||
|
Restructuring
charges
|
4,733
|
—
|
—
|
|||||||
|
Amortization
of acquired intangibles
|
3,971
|
2,367
|
457
|
|||||||
|
Total
operating expenses
|
202,001
|
151,474
|
137,353
|
|||||||
|
Operating
income (loss)
|
(19,290
|
)
|
17,899
|
28,966
|
||||||
|
Interest
income
|
3,659
|
3,899
|
2,298
|
|||||||
|
Income
(loss) before income taxes
|
(15,631
|
)
|
21,798
|
31,264
|
||||||
|
Provision
for (benefit from) income taxes
|
(7,195
|
)
|
8,903
|
12,196
|
||||||
|
Net
income (loss) before cumulative effect of change in accounting
principle
|
(8,436
|
)
|
12,895
|
19,068
|
||||||
|
Cumulative
effect of change in accounting principle, net of zero tax
effect
|
(347
|
) |
—
|
—
|
||||||
|
Net
income (loss)
|
$
|
(8,089
|
)
|
$
|
12,895
|
$
|
19,068
|
|||
|
Net
income (loss) per share before cumulative effect of change in accounting
principle:
|
||||||||||
|
Basic
|
$
|
(0.13
|
)
|
$
|
0.20
|
$
|
0.31
|
|||
|
Diluted
|
$
|
(0.13
|
)
|
$
|
0.19
|
$
|
0.29
|
|||
| Per share effect of cumulative change in accounting principle: | ||||||||||
|
Basic
|
$ | — | $ | — | $ | — | ||||
|
Diluted
|
$ | — | $ | — | $ | — | ||||
| Net income (loss) per share: | ||||||||||
|
Basic
|
$ | (0.13 | ) | $ | 0.20 | $ | 0.31 | |||
|
Diluted
|
$ | (0.13 | ) | $ | 0.19 | $ | 0.29 | |||
|
Number
of shares used in per share calculations:
|
||||||||||
|
Basic
|
64,572,603
|
63,353,779
|
60,770,680
|
|||||||
|
Diluted
|
64,572,603
|
66,277,342
|
65,645,757
|
|||||||
|
(1)
Stock-based compensation is included in the following expense line
items:
|
||||||||||
|
Network
operations
|
$
|
1,031
|
$
|
163
|
$
|
335
|
||||
|
Research
and development
|
1,235
|
175
|
352
|
|||||||
|
Sales
and marketing
|
2,206
|
265
|
554
|
|||||||
|
General
and administrative
|
1,706
|
534
|
1,101
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
iPASS
INC. AND SUBSIDIARIES
(In
thousands)
|
Common
Stock
|
Additional
Paid-In
Capital
|
Notes
Receivable
from
Stock-
holders
|
Deferred
Stock-Based
Compensation
|
Accumulated
Comprehensive
Income
(Loss)
|
Accumulated
Deficit
|
Total
Stock-
holders’
Equity
|
Comprehensive
Income
(loss)
|
|||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||
|
Balances,
December 31, 2003
|
60,483
|
$
|
60
|
$
|
229,026
|
$
|
(2,831
|
)
|
$
|
(4,326
|
)
|
$
|
125
|
$
|
(50,332
|
)
|
$
|
171,722
|
$
|
14,027
|
||||||||
|
Exercise
of stock options
|
1,886
|
2
|
5,239
|
—
|
—
|
—
|
—
|
5,241
|
—
|
|||||||||||||||||||
|
Employee
stock purchase plan — common stock issued
|
388
|
1
|
2,735
|
—
|
—
|
—
|
—
|
2,736
|
—
|
|||||||||||||||||||
|
Payment
of stockholder notes receivable
|
—
|
—
|
—
|
2,887
|
—
|
—
|
—
|
2,887
|
—
|
|||||||||||||||||||
|
Interest
earned on stockholder note receivable
|
—
|
—
|
—
|
(56
|
)
|
—
|
—
|
—
|
(56
|
)
|
—
|
|||||||||||||||||
|
Cancellation
of unvested stock options
|
—
|
—
|
(202
|
)
|
—
|
202
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Amortization
of stock-based compensation
|
—
|
—
|
—
|
—
|
2,342
|
—
|
—
|
2,342
|
—
|
|||||||||||||||||||
|
Tax
benefit from employee stock option plans
|
—
|
—
|
3,831
|
—
|
—
|
—
|
—
|
3,831
|
—
|
|||||||||||||||||||
|
Unrealized
loss on available-for-sale investments, net
|
—
|
—
|
—
|
—
|
—
|
(549
|
)
|
—
|
(549
|
)
|
(549
|
)
|
||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
19,068
|
19,068
|
19,068
|
|||||||||||||||||||
|
Balances,
December 31, 2004
|
62,757
|
$
|
63
|
$
|
240,629
|
—
|
$
|
(1,782
|
)
|
$
|
(424
|
)
|
$
|
(31,264
|
)
|
$
|
207,222
|
$
|
18,519
|
|||||||||
|
Exercise
of stock options
|
1,041
|
1
|
1,960
|
—
|
—
|
—
|
—
|
1,961
|
—
|
|||||||||||||||||||
|
Employee
stock purchase plan — common stock issued
|
405
|
—
|
1,840
|
—
|
—
|
—
|
—
|
1,840
|
—
|
|||||||||||||||||||
|
Cancellation
of unvested stock options
|
—
|
—
|
(52
|
)
|
—
|
52
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Amortization
of stock-based compensation
|
—
|
—
|
—
|
—
|
1,137
|
—
|
—
|
1,137
|
—
|
|||||||||||||||||||
|
Tax
benefit from employee stock option plans
|
—
|
—
|
1,079
|
—
|
—
|
—
|
—
|
1,079
|
—
|
|||||||||||||||||||
|
Unrealized
gain on available-for-sale investments, net
|
—
|
—
|
—
|
—
|
—
|
117
|
—
|
117
|
117
|
|||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
12,895
|
12,895
|
12,895
|
|||||||||||||||||||
|
Balances,
December 31, 2005
|
64,203
|
$
|
64
|
$
|
245,456
|
—
|
$
|
(593
|
)
|
$
|
(307
|
)
|
$
|
(18,369
|
)
|
$
|
226,251
|
$
|
13,012
|
|||||||||
|
Exercise
of stock options
|
1,831
|
2
|
5,622
|
—
|
—
|
—
|
—
|
5,624
|
—
|
|||||||||||||||||||
|
Employee
stock purchase plan — common stock issued
|
409
|
—
|
1,884
|
—
|
—
|
—
|
—
|
1,884
|
—
|
|||||||||||||||||||
|
Outstanding
common stock repurchased and retired
|
(2,975
|
)
|
(3
|
)
|
(16,188
|
)
|
—
|
—
|
—
|
—
|
(16,191
|
)
|
—
|
|||||||||||||||
|
Reversal
of unearned stock-based compensation upon adoption of SFAS No.
123(R)
|
—
|
—
|
(593
|
)
|
—
|
593
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Cumulative
effect of change in accounting principle
|
—
|
—
|
(347
|
)
|
—
|
—
|
—
|
—
|
(347
|
)
|
—
|
|||||||||||||||||
|
Fair
value of options assumed in acquisition of GoRemote
|
—
|
—
|
5,826
|
—
|
—
|
—
|
—
|
5,826
|
—
|
|||||||||||||||||||
|
Stock-based
compensation
|
—
|
—
|
6,178
|
—
|
—
|
—
|
6,178
|
—
|
||||||||||||||||||||
|
Excess
tax benefit from employee stock option plans
|
—
|
—
|
1,962
|
—
|
—
|
—
|
—
|
1,962
|
—
|
|||||||||||||||||||
|
Unrealized
gain on available-for-sale investments, net
|
—
|
—
|
—
|
—
|
—
|
209
|
—
|
209
|
209
|
|||||||||||||||||||
|
Net
income (loss)
|
—
|
—
|
—
|
—
|
—
|
—
|
(8,089
|
)
|
(8,089
|
)
|
(8,089
|
)
|
||||||||||||||||
|
Balances,
December 31, 2006
|
63,468
|
$
|
63
|
$
|
249,800
|
$
|
—
|
$
|
—
|
$
|
(98
|
)
|
$
|
(26,458
|
)
|
$
|
223,307
|
$
|
(7,880
|
)
|
||||||||
The accompanying notes are an integral part of these consolidated financial statements.
iPASS
INC. AND SUBSIDIARIES
(In
thousands)
|
|
For
the Year Ended December 31,
|
|
||||||||
|
|
|
2006
|
|
2005
|
|
2004
|
||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income (loss)
|
$
|
(8,089
|
)
|
$
|
12,895
|
$
|
19,068
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Amortization
of stock-based compensation for employees
|
6,178
|
1,137
|
2,342
|
|||||||
|
Amortization
of acquired intangibles
|
3,971
|
2,367
|
457
|
|||||||
|
Depreciation
and amortization
|
5,989
|
4,732
|
4,762
|
|||||||
|
Tax
benefit from employee stock option plans
|
—
|
1,079
|
3,831
|
|||||||
|
Excess
tax benefit from employee stock option plans
|
(1,962
|
)
|
—
|
—
|
||||||
|
Deferred
income taxes
|
(6,739
|
)
|
5,700
|
10,842
|
||||||
|
Interest
on shareholder notes receivable
|
—
|
—
|
(56
|
)
|
||||||
|
Provision
for doubtful accounts
|
1,056
|
163
|
1,100
|
|||||||
|
Cumulative
effect of change in accounting principle
|
(347
|
)
|
—
|
—
|
||||||
|
Realized
loss on investments, net
|
—
|
31
|
98
|
|||||||
|
Changes
in operating assets and liabilities, net of assets acquired and
liabilities assumed:
|
||||||||||
|
Accounts
receivable
|
868
|
374
|
(3,433
|
)
|
||||||
|
Prepaid
expenses and other current assets
|
(1,102
|
)
|
(616
|
)
|
250
|
|||||
|
Other
assets
|
(1,015
|
)
|
(337
|
)
|
30
|
|||||
|
Accounts
payable
|
(38
|
)
|
3,515
|
1,733
|
||||||
|
Accrued
liabilities
|
(4,226
|
)
|
1,011
|
(4,026
|
)
|
|||||
|
Deferred
revenue
|
3,848
|
47
|
1,132
|
|||||||
|
Other
liabilities
|
1,969
|
—
|
—
|
|||||||
|
Net
cash provided by operating activities
|
361
|
32,098
|
38,130
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchases
of short-term investments
|
(140,490
|
)
|
(170,422
|
)
|
(156,310
|
)
|
||||
|
Maturities
of short-term investments
|
207,695
|
141,839
|
130,696
|
|||||||
|
Purchases
of property and equipment
|
(5,222
|
)
|
(3,882
|
)
|
(6,186
|
)
|
||||
|
Acquisition
of GoRemote, net of cash acquired
|
(77,960
|
)
|
—
|
—
|
||||||
|
Acquisition
of Safe3w, net of cash acquired
|
—
|
—
|
(8,481
|
)
|
||||||
|
Acquisition
of Mobile Automation, net of cash acquired
|
—
|
—
|
(19,964
|
)
|
||||||
|
Net
cash used in investing activities
|
(15,977
|
)
|
(32,465
|
)
|
(60,245
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from issuance of common stock
|
7,508
|
3,801
|
7,977
|
|||||||
|
Cash
used in repurchase of common stock
|
(16,191
|
)
|
—
|
—
|
||||||
|
Tax
benefit from employee stock option plans
|
1,962
|
—
|
—
|
|||||||
|
Proceeds
from payment of stockholder notes receivable
|
—
|
—
|
2,887
|
|||||||
|
Net
cash provided by (used in) financing activities
|
(6,721
|
)
|
3,801
|
10,864
|
||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(22,337
|
)
|
3,434
|
(11,251
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
37,829
|
34,395
|
45,646
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
15,492
|
$
|
37,829
|
$
|
34,395
|
||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid for interest
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Assumption
of GoRemote options
|
$
|
5,826
|
$
|
—
|
$
|
—
|
||||
|
Cash
paid for taxes
|
$
|
1,471
|
$
|
1,094
|
$
|
1,485
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
iPASS
INC. AND SUBSIDIARIES
Note
1. Description of Business
iPass
Inc. (the “Company”, “iPass” or “we”) provides software-enabled enterprise
connectivity services for mobile workers. Its primary service offering, iPass
Corporate Access, is designed to enable enterprises to provide their employees
with secure access from approximately 160 countries to the enterprise’s 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 enterprise’s remote and mobile computer systems,
or endpoints, as well as an enterprise’s network. These services can be used in
conjunction with iPass Corporate Access or over non-iPass network connections.
The Company’s 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
Use
of Estimates
The
preparation of 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 consolidated financial statements and the reported amounts
of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles
of Consolidation
The
accompanying consolidated financial statements include the financial statements
of iPass Inc. and its wholly owned subsidiaries after elimination of
intercompany accounts and transactions.
Reclassifications
Amortization
of deferred stock-based compensation expense in prior years has been has been
reclassified to conform to current year presentation. The reclassifications
are
as follows (in thousands):
|
Consolidated
Statements of Operations
|
|||||||||||||||||||||||||
|
Network
operations
|
Research
and development
|
Sales
and marketing
|
General
and administrative
|
||||||||||||||||||||||
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
||||||||||||||||||
|
As
previously reported
|
$
|
20,783
|
$
|
19,041
|
$
|
17,571
|
$
|
13,804
|
$
|
50,448
|
$
|
46,580
|
$
|
17,059
|
$
|
17,790
|
|||||||||
|
Reclassification
|
163
|
335
|
175
|
352
|
265
|
554
|
534
|
1,101
|
|||||||||||||||||
|
As
reported
|
20,946
|
19,376
|
17,746
|
14,156
|
50,713
|
47,134
|
17,593
|
18,891
|
|||||||||||||||||
Certain
cash flows related to the amortization of premium on available for sale
securities have been reclassified between Net cash provided by operating
activities and Net cash used in investing activities for the years ended
December 31, 2005 and 2004, respectively. Additionally, amounts related to
interest earned on short-term investments but not received have been
reclassified from short-term investments to prepaid expenses and other current
assets. The reclassifications are as follows (in thousands):
|
Consolidated
Statements of Cash Flows
|
Consolidated
Balance Sheet
|
||||||||||||||||||||||||||||||
|
Depreciation
and amortization
|
Net
cash provided by operating activities
|
Maturities
of short term investments
|
Net
cash used in investing activities
|
Short
term investments
|
Prepaid
expenses and other current assets
|
||||||||||||||||||||||||||
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
2005
|
2005
|
||||||||||||||||||||||
|
As
previously reported
|
$
|
4,783
|
$
|
4,386
|
$
|
32,149
|
$
|
37,754
|
$
|
141,788
|
$
|
131,072
|
$
|
(32,516
|
)
|
$
|
(59,869
|
)
|
$
|
146,727
|
$
|
3,777
|
|||||||||
|
Reclassification
|
(51
|
)
|
376
|
(51
|
)
|
376
|
51
|
|
(376
|
)
|
51
|
(376
|
)
|
(1,254
|
)
|
1,254
|
|||||||||||||||
|
As
reported
|
4,732
|
4,762
|
32,098
|
38,130
|
141,839
|
130,696
|
(32,465
|
)
|
(60,245
|
)
|
145,473
|
5,031
|
|||||||||||||||||||
Foreign
Currency Transactions
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 Consolidated Statements of Operations.
Foreign currency gains and losses were not significant for the years ended
December 31, 2006, 2005 and 2004.
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 is the total of net income
and all other non-owner changes in equity. Comprehensive income (loss) includes
net income and unrealized gains and losses on available-for-sale
securities.
Comprehensive
income (loss) is comprised of the following (in thousands):
|
|
Year
Ended December 31,
|
|
||||||||
|
|
|
2006
|
|
2005
|
|
2004
|
||||
|
Net
income (loss)
|
$
|
(8,089
|
)
|
$
|
12,895
|
$
|
19,068
|
|||
|
Comprehensive
income (loss):
|
||||||||||
|
Change
in accumulated unrealized gain (loss) on available-for-sale securities,
net of taxes
|
209
|
117
|
(549
|
)
|
||||||
|
Total
comprehensive income (loss)
|
$
|
(7,880
|
)
|
$
|
13,012
|
$
|
18,519
|
|||
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 Company’s 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
cost of securities sold is based on the specific identification
method.
Concentrations
of Risk
Substantially
all of the Company’s cash, cash equivalents and short-term investments are held
by two well-established financial institutions. The Company’s investment
portfolio consists of investment-grade securities diversified among security
types, industries, and issuers and are managed by recognized financial
institutions that follow the Company’s investment policy. Any concentration of
credit risk related to these investments is believed to be minimal.
The
Company provides credit to its customers in the normal course of business,
performs ongoing credit evaluations of its customers, and maintains an allowance
for doubtful accounts. The Company provides reserves based on the combination
of
the age of the receivables, historical writeoffs and reserves for specific
customer balances. As of December 31, 2006 and 2005, no individual customer
represented 10% or more of accounts receivable. For the years ended December
31,
2006, 2005 and 2004, no customer represented more than 10% of total
revenues.
For
the
three years ended December 31, 2006, 2005 and 2004, one supplier represented
4.2%, 9.4% and 16.8% of network access expenses. In addition, the Company has
entered into contracts with certain access providers that contain minimum
purchase commitments (see Note 13).
.
Fair
Value of Financial Instruments
For
the
Company’s 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 and amortization of
leasehold improvements 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)
Computer
software and equipment (Three years)
Leasehold
improvements (Shorter of useful life or lease term)
Goodwill
and Other Intangible Assets
In
accordance with SFAS 142, “Goodwill and Other Intangible Assets,” goodwill is
not amortized, but is instead reviewed for impairment at least annually, or
as
circumstances indicate its value may no longer be recoverable. The Company
performs an annual impairment review during the fourth quarter of the fiscal
year. As the Company operates in one reporting segment, goodwill is reviewed
for
impairment at the enterprise level. Goodwill impairment testing is a two-step
process. First, the fair value of the enterprise is compared to its carrying
value. If the fair value exceeds the carrying value, goodwill is not impaired
and no further testing is performed. If a possible impairment exists, the second
step of measuring such impairment is performed. Other purchased intangible
assets with definite useful lives are amortized on a straight-line basis over
their useful lives, and tested for impairment when an impairment indicator
exists. No impairment losses were incurred in the years presented.
Impairment
of Long-Lived Assets
The
Company periodically evaluates the carrying amount of its property and equipment
and 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
the
fair value of the assets. 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
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 Company’s 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.
Total
stock-based compensation expense, including stock options, ESPP and restricted
stock awards, recognized under SFAS 123(R) in the condensed consolidated
statements of operations for the year ended December 31, 2006 was $6.2 million.
The income related tax benefit totaled $220,000 for the same period. The
estimated fair value of the Company’s 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. Prior to adopting SFAS
123(R) the Company did not reduce stock-based compensation expense by estimated
forfeitures; rather the Company reduced stock-based compensation only upon
actual forfeiture. The cumulative effect adjustment is equal to the
difference between previously recorded stock-based compensation expense
associated with unvested options at January 1, 2006 and the amount that would
have been recognized had the Company estimated forfeitures.
As
a
result of adopting SFAS 123(R), the Company’s loss before income taxes and net
loss were increased by $5.7 million and $5.2 million, respectively, for the
year
ended December 31, 2006. The implementation of SFAS 123(R) reduced basic and
fully diluted earnings per share by $0.08 for the year ended December 31, 2006.
The implementation of SFAS 123(R) did not have a significant impact on cash
flows from operations for the ended December 31, 2006.
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 Company’s 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 Company’s 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 Company’s statement of operations for the
year ended December 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
statements of operations for the year ended December 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 Company’s pro forma information required under SFAS 123 for
the periods prior to 2006, the Company accounted for forfeitures as they
occurred.
Pursuant
to the income tax provisions included in SFAS 123(R), the Company has elected
to
adopt the alternative transition method provided in the FASB Staff Position
for
calculating the tax effects of equity-based compensation. The alternative
transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool (APIC pool) related to the tax effects
of
employee equity-based compensation, and to determine the subsequent impact
on
the APIC pool and Consolidated Statement of Cash Flows of the tax effects of
employee equity-based compensation awards that are outstanding upon the
implementation of SFAS 123(R). As of December 31, 2006, there was $8.7
million of unrecognized compensation cost, adjusted for estimated forfeitures,
related to non-vested stock-based payments granted to employees. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
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 years ended December 31, 2005 and 2004 if the Company
had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation (in thousands, except per share data):
|
|
For
the Year Ended December 31,
|
|
|||||
|
|
|
2005
|
|
2004
|
|||
|
Net
income — as reported
|
$
|
12,895
|
$
|
19,068
|
|||
|
Add:
Stock-based employee compensation expense included in the reported
net
income, net of related tax effects
|
671
|
1,429
|
|||||
|
Deduct:
Stock-based employee compensation expense using the fair value method,
net
of related tax effects
|
(3,570
|
)
|
(3,699
|
)
|
|||
|
Pro
forma net income
|
$
|
9,996
|
$
|
16,798
|
|||
|
Basic
net income per common share:
|
|||||||
|
As
reported
|
$
|
0.20
|
$
|
0.31
|
|||
|
Pro
forma
|
$
|
0.16
|
$
|
0.28
|
|||
|
Diluted
net income per common share:
|
|||||||
|
As
reported
|
$
|
0.19
|
$
|
0.29
|
|||
|
Pro
forma
|
$
|
0.15
|
$
|
0.26
|
|||
Based
on
the Black-Scholes option pricing model, the weighted average fair value of
options granted during fiscal 2005 and 2004 was $1.54 and $2.05, respectively.
The total intrinsic value of options exercised during fiscal 2005 and 2004
was
$4.2 million and $15.1 million, respectively.
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. Amortization
of deferred compensation expense for the years ended December 31, 2005 and
2004
was approximately $1,137,000 and $2,342,000, respectively. The fair value of
each option grant was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants for the twelve months ended December 31, 2005 and 2004:
|
|
Employee
Stock Options For
the Year Ended December 31,
|
|
Employee
Stock Purchase Plan For
the Year Ended December 31,
|
|
|||||||||
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|||||
|
Risk-free
rate
|
3.9
|
%
|
3.0
|
%
|
3.7
|
%
|
1.6
|
%
|
|||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
|||||
|
Expected
volatility
|
35-41
|
%
|
41-47
|
%
|
36-41
|
%
|
32-52
|
%
|
|||||
|
Expected
life
|
3
Years
|
3
Years
|
.5
Years
|
.5
Years
|
|||||||||
__________
* Note
that
the employee stock purchase plan commenced on July 23, 2003 with the first
purchase occurring on April 30, 2004.
Computation
of Net Income (Loss) per Share
Basic
net
income (loss) per share is computed by dividing net income by the weighted
daily
average number of shares of common stock outstanding during the period. Diluted
net income (loss) per share is computed using 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 and restricted stock using
the
treasury-stock method.
Revenue
Recognition
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.
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. 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.
Usage
Fees
We
derive
the large majority of our revenues from usage fees, which consists of dial-up
and broadband usage. 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.
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 550 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,
by
initially deferring the costs associated with deploying each endpoint and
amortizing the costs 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. These revenues related
to
fixed broadband are included in broadband usage fees.
License
and Maintenance
With
the
acquisition of Mobile Automation, Inc. in October 2004, we began generating
license and maintenance revenue through software licensing 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 Position (“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 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.
Services
The
Company typically provides its customers with deployment services, technical
support and additional optional services. Depending on the service provided
and
the nature of the arrangement, the Company may charge a one-time, annual or
monthly fee. The Company recognizes revenues relating to one-time fees on a
straight-line basis over the term of the initial contract, generally one to
three years. The Company recognizes revenues relating to annual fees on a
straight-line basis and revenues for monthly services during the month that
these services are provided.
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 contracts. Costs of minimum purchase contracts are recognized 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 regarding such costs through December 31, 2006.
Advertising
Advertising
and promotional costs are expensed as incurred. For the years ended December
31,
2006, 2005 and 2004 these costs totaled approximately $533,000, $435,000 and
$989,000, respectively.
Software
Development Costs
Costs
related to the research and development of new software and enhancements to
existing software are expensed as incurred until technological feasibility,
defined as the completion of a working model, has been established. To date,
the
Company’s software has been available for general release shortly after the
establishment of technological feasibility, and accordingly, no costs have
been
capitalized.
Costs
related to software purchased to be sold are capitalized at the lower of
unamortized cost or net realizable value. The Company has approximately $900,000
of capitalized purchase software included in property and equipment, net on
the
consolidated balance sheets as of December 31, 2006 and 2005. Capitalized costs
are amortized based on current and future revenue related to each product.
To
date, the Company has not sold any purchased software and therefore has not
amortized any of the capitalized costs.
The
Company capitalizes the costs of computer software developed or obtained for
internal use. During the year ended December 31, 2006, the Company had
approximately $300,000 of capitalized software development costs.
During the years ended December 31, 2005 and 2004, the Company had no
capitalized software development costs. Development costs are amortized
over the estimated useful life of the software developed.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes — an interpretation of FASB Statement No.
109;
(“FIN
48”). FIN 48 provides guidance on recognition and measurement of uncertainties
in income taxes recognized in financial statements by prescribing a recognition
threshold and measurement attribute of tax positions taken or expected to be
taken on a tax return. FIN 48 is applicable for fiscal years beginning after
December 15, 2006. The Company is currently assessing the impact that the
adoption of FIN 48 will have on its consolidated results of operations and
financial position.
In
June
2006, the FASB reached consensus on Emerging Issues Task Force (“EITF”) No.
06-3, How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
be Presented in the Income Statement
(“EITF
06-3”). The scope of EITF 06-3 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between
a
seller and a customer and may include, but is not limited to, sales, use, value
added, and excise taxes. The Task Force affirmed its conclusion that entities
should present these taxes in the income statement on either a gross or a net
basis, based on their accounting policy, which should be disclosed pursuant
to
Accounting Principles Board Opinion (“APB”) No. 22, Disclosure
of Accounting
Policies.
If such
taxes are significant, and are presented on a gross basis, the amounts of those
taxes should be disclosed. The consensus on EITF 06-3 will be effective for
interim and annual reporting periods beginning after December 15, 2006. The
Company currently records transaction-based taxes on a net basis, in its
condensed consolidated statements of operations. The Company is currently
evaluating the impact of the adoption of EITF 06-3 however should the Company
conclude that such amounts are more appropriately presented on a gross basis,
it
could have a material impact on total net revenues and cost of sales, although
income or loss from operations and net income or loss would not be
affected.
In
September 2006, the SEC released Staff Accounting Bulletin No. 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(“SAB 108”). SAB 108 provides guidance on the process of quantifying
materiality of financial statement misstatements. Under SAB 108 registrants
are
required to consider both a “rollover” method which focuses primarily on the
income statement impact of misstatements and the “iron curtain” method which
focuses primarily on the balance sheet impact of misstatements. The transition
provisions of SAB 108 permit a registrant to adjust retained earnings for the
cumulative effect of immaterial errors relating to prior periods. The Company’s
adoption of SAB 108 did not have a material impact in the current fiscal
year.
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework and
guidance regarding the methods for measuring fair value, and expands related
disclosures about those measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently assessing
the impact that SFAS 157 will have on its consolidated results of operations
and
financial position.
In
February, 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
159”). SFAS 159 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS
159
is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS 159 on its consolidated
financial position and results of operations.
Note
3. Business Combinations
GoRemote
On
February 15, 2006, the Company completed its acquisition of GoRemote, a
publicly-traded company headquartered in Milpitas, California that provides
secure managed virtual business network services. The Company plans to expand
its product offering to its customers by offering GoRemote’s managed broadband
services for branch offices and teleworkers. The Company acquired 100% of the
outstanding shares of GoRemote paying approximately $78.9 million in cash,
to
acquire approximately 43.3 million shares of common stock for $1.71 per share
and approximately 541,631 shares of Series A preferred stock for $3.37 per
share. The purchase price includes approximately $3.1 million in direct
transaction costs including legal and valuation fees. 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 1.7
million shares of iPass common stock.
The
results of operations of GoRemote are included in the Company’s 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
purchase price
|
$
|
84,729
|
Under
the
purchase method of accounting, the total purchase price as shown in the table
above is allocated to GoRemote’s net tangible and intangible assets based on
their estimated fair values as of February 15, 2006. Management has allocated
the purchase price based on various factors. The allocation of the purchase
price is as follows (in thousands):
|
Cash
acquired
|
$
|
6,706
|
||
|
Accounts
receivable
|
7,138
|
|||
|
Other
tangible assets acquired
|
2,550
|
|||
|
Deferred
tax assets, net
|
11,011
|
|||
|
Amortizable
intangible assets:
|
||||
|
Customer
relationships
|
7,600
|
|||
|
Supplier
contracts
|
950
|
|||
|
Internally
developed software
|
350
|
|||
|
Goodwill
|
60,578
|
|||
|
Deferred
revenues
|
(1,025
|
)
|
||
|
Restructuring
liabilities
|
(1,249
|
)
|
||
|
Other
liabilities assumed
|
(9,880
|
)
|
||
|
Total
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. The
Company believes that its purchase of GoRemote resulted in the allocation of
considerable amounts to goodwill because of significant synergistic and
strategic benefits that it expects to realize from the acquisition. The Company
believes that it, unlike other market participants, had unique opportunities
to
generate revenues and profits through (1) the Company’s ability to convert its
existing dial-up customer base to broadband services and (2) its ability to
sell
expanded services into GoRemote’s existing customer base. Further, the Company
acquired an R&D and sales force from GoRemote that was familiar with
broadband technologies, a much more significant growth segment than iPass’
current dial-up service. The value of the workforce-in-place was subsumed into
goodwill as required by SFAS 141, Business Combinations.
Restructuring
costs of $1.2 million relate primarily to costs for abandoned excess facilities.
Pursuant to Emerging Issues Task Force Issue No. 95-3, Recognition
of Liabilities in Connection with a Purchase Business
Combination,
all
restructuring charges related to the acquisition are recognized as part of
the
purchase price allocation. The Company completed the relocation of all employees
and vacated the facilities in the second quarter of 2006.
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
|
|
|||
|
2007
|
$
|
1,834
|
||
|
2008
|
1,834
|
|||
|
2009
|
1,834
|
|||
|
2010
|
685
|
|||
|
2011
|
521
|
|||
|
2012
|
521
|
|||
|
2013
|
66
|
|||
|
$
|
7,295
|
|||
The
following unaudited pro forma information represents the results of operations
for iPass and GoRemote for the years ended December 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):
|
|
Year
Ended December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Total
revenue
|
$
|
187,734
|
$
|
212,492
|
|||
|
Net
income (loss) before cumulative change in accounting
principle
|
$
|
(13,124
|
)
|
$
|
1,935
|
||
|
Net
income (loss)
|
$
|
(12,777
|
)
|
$
|
1,935
|
||
|
Net
income (loss) per share:
|
|||||||
|
Basic
|
$
|
(0.20
|
)
|
$
|
0.03
|
||
|
Diluted
|
$
|
(0.20
|
)
|
$
|
0.03
|
||
|
Number
of shares used in per share calculations:
|
|||||||
|
Basic
|
64,572,779
|
63,353,779
|
|||||
|
Diluted
|
64,572,779
|
66,277,342
|
|||||
Mobile
Automation
In
October 2004, the Company completed its acquisition of Mobile Automation, Inc.,
a privately-held Westlake Village, California company that has developed
solutions that help enterprise IT departments protect and manage their remote
and mobile devices such as computers and personal data assistants (PDAs). The
Company acquired 100% of the interest in Mobile Automation in a cash transaction
for approximately $20.0 million. The Company plans to enhance its product
offering to its customers who use remote and mobile devices. The total purchase
price includes $187,000 in direct transactions costs, including legal and
valuation fees.
The
results of operations of Mobile Automation are included in the Company’s
Consolidated Statement of Operations beginning October 29, 2004, 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
acquired
|
$
|
37
|
||
|
Accounts
receivable
|
893
|
|||
|
Other
tangible assets acquired
|
52
|
|||
|
Amortizable
intangible assets:
|
||||
|
Existing
technology
|
5,000
|
|||
|
Patent/core
technology
|
1,700
|
|||
|
Maintenance
agreements and certain relationships
|
400
|
|||
|
Customer
relationships
|
500
|
|||
|
Goodwill
|
14,228
|
|||
|
Total
assets acquired
|
22,810
|
|||
|
Deferred
tax liability, net
|
(1,297
|
)
|
||
|
Liabilities
assumed
|
(1,326
|
)
|
||
|
Transaction
costs
|
(187
|
)
|
||
|
Net
assets acquired
|
$
|
20,000
|
Identifiable
intangible assets, including existing technology, patents/core technology and
customer relationships are being amortized over their useful lives of four
years. Maintenance agreements and certain relationships are being amortized
over
their useful lives of six years.
Developed
technology was identified and valued through interviews, analysis of data
provided by Mobile Automation concerning development projects, their stage
of
development, the time and resources needed to complete them, if applicable,
and
their expected income generating ability and associated risks. All development
projects had reached technological feasibility and were classified as developed
technology with the value assigned to existing technology capitalized. The
income approach, which includes an analysis of the cash flows and risks
associated with achieving such cash flows, was the primary technique utilized
in
valuing acquired intangible assets. Key assumptions included a discount rate
of
21.2% and estimates of revenue growth, operating expenses and
taxes.
In
completing the pre-acquisition tax return of Mobile Automation, Inc. during
2005, additional tax basis in assets was identified and additional tax net
operating loss carryforward was also identified. The net increase to deferred
tax assets resulting from these
items,
after adjustment to valuation allowance, was credited against goodwill initially
recorded as a result of the acquisition in the amount of $359,000. In 2006,
Mobile Automation goodwill was further adjusted as a result of changes in
estimates of future utilization of deferred tax assets related to net operating
losses for which a valuation allowance was recorded upon acquisition in the
amount of $144,000.
Safe3w
In
September 2004, the Company completed its acquisition of Safe3w, Inc., a
privately-held Woodbury, New York company that has developed patented dynamic
device “fingerprinting” technology. The Company acquired 100% of the interest in
Safe3w in a cash transaction for approximately $8.5 million. The Company plans
to incorporate Safe3w’s technology into its existing products. The total
purchase price includes $300,000 in direct transactions costs, including legal
and valuation fees.
The
results of operations of Safe3w are included in the Company’s Consolidated
Statement of Operations beginning September 16, 2004, 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
acquired
|
$
|
7
|
||
|
Other
tangible assets acquired
|
96
|
|||
|
Amortizable
intangible assets:
|
||||
|
Existing
technology
|
2,900
|
|||
|
Patent/core
technology
|
1,100
|
|||
|
Goodwill
|
5,785
|
|||
|
Total
assets acquired
|
9,888
|
|||
|
Deferred
tax liability, net
|
(953
|
)
|
||
|
Liabilities
assumed
|
(135
|
)
|
||
|
Transaction
costs
|
(300
|
)
|
||
|
Net
assets acquired
|
$
|
8,500
|
Identifiable
intangible assets, including existing technology and patents/core technology
are
being amortized over their useful lives of eight years.
Developed
technology was identified and valued through interviews, analysis of data
provided by Safe3w concerning development projects, their stage of development,
the time and resources needed to complete them, if applicable, and their
expected income generating ability and associated risks. All development
projects had reached technological feasibility and were classified as developed
technology with the value assigned to existing technology capitalized. The
income approach, which includes an analysis of the cash flows and risks
associated with achieving such cash flows, was the primary technique utilized
in
valuing acquired intangible assets. Key assumptions included a discount rate
of
21.0% and estimates of revenue growth, operating expenses and
taxes.
Uncertainties
about tax bases or about pre-acquisition tax returns are, when resolved
subsequent to the business combination, applied to reduce or increase goodwill
in accordance with FAS 109, paragraph 30. In completing the pre-acquisition
tax
return of Safe3W, Inc. during 2005, additional tax basis in assets was
identified and additional tax net operating loss carryforward was also
identified. The net increase to deferred tax assets resulting from these items,
after adjustment to valuation allowance, was credited against goodwill initially
recorded as a result of the acquisition in the amount of $491,000. Safe3W
goodwill was further adjusted as a result changes in the estimated future
utilization of deferred tax assets related to net operating losses for which
a
valuation allowance was recorded upon acquisition in the amount of
$369,000.
Note
4. Short-Term Investments
The
following tables summarize the Company’s short-term investments as of December
31, 2006 and 2005 (in thousands):
|
|
Short-Term
Investments
|
|
|||||||||||
|
December
31, 2006
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
|||||
|
Government
agencies
|
$
|
58,818
|
$
|
19
|
$
|
(181
|
)
|
$
|
58,656
|
||||
|
Auction
rate and money market securities
|
25,051
|
1
|
—
|
25,052
|
|||||||||
|
$
|
83,869
|
$
|
20
|
$
|
(181
|
)
|
$
|
83,708
|
|||||
|
Short-Term
Investments
|
|
||||||||||||
|
December
31, 2005
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
|||||
|
Government
agencies
|
$
|
119,012
|
$
|
—
|
$
|
(473
|
)
|
$
|
118,539
|
||||
|
Corporate
notes
|
15,991
|
—
|
(57
|
)
|
15,934
|
||||||||
|
Auction
rate and money market securities
|
10,972
|
28
|
—
|
11,000
|
|||||||||
|
$
|
145,975
|
$
|
28
|
$
|
(530
|
)
|
$
|
145,473
|
|||||
The
following table summarizes the principal amounts of the Company’s short-term
investments by expected maturity date (in thousands):
|
Expected
Maturity Date for Par Value Amounts
for
the Year Ended
December 31,
|
|
As
of
Dec. 31, 2006
|
|
|||||||||||||
|
|
|
2007
|
|
2008
|
|
2009
|
|
Total
Cost
Value
|
|
Total
Fair Value
|
||||||
|
Government
agencies
|
$
|
32,205
|
$
|
23,990
|
$
|
1,770
|
$
|
58,818
|
$
|
58,656
|
||||||
|
Auction
rate and money market securities
|
25,100
|
—
|
—
|
25,051
|
25,052
|
|||||||||||
|
Total
|
$
|
57,305
|
$
|
23,990
|
$
|
1,770
|
$
|
83,869
|
$
|
83,708
|
||||||
The
Company recognized gross realized losses of $10,000 and $6,000 gross realized
gains for the year ended December 31, 2006. We recognized gross realized gains
of $17,000 and gross realized losses of $115,000 for the year ended December
31,
2005. There were no recognized gains or losses on short-term investments for
the
year ended December 31, 2004. The Company recognized $3.7 million, $3.9 million
and $2.3 million in interest income for the years ended December 31, 2006,
2005
and 2004, respectively.
The
Company had unrealized losses related to its auction rate and government
securities at December 31, 2006. These securities are subject to interest rate
risk, which resulted in the unrealized losses. In accordance with FASB Staff
Position (“FSP”) FAS115-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments,
the
following table summarizes the fair value and gross unrealized losses related
to
available-for-sale securities, aggregated by investment category and length
of
time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2006 (in thousands):
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|||||||||||||||||
|
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross
Unrealized Losses
|
|||||||||||||
|
Government
agencies
|
$
|
4,511
|
$
|
(7
|
)
|
$
|
54,145
|
$
|
(174
|
)
|
$
|
58,656
|
$
|
(181
|
)
|
||||
|
Auction
rate and money market securities
|
25,052
|
-
|
-
|
-
|
25,052
|
-
|
|||||||||||||
|
Total
|
$
|
29,563
|
$
|
(7
|
)
|
$
|
54,145
|
$
|
(174
|
)
|
$
|
83,708
|
$
|
(181
|
)
|
||||
Market
values were determined for each individual security in the investment portfolio.
There were 278 securities in total which had market values less than amortized
cost. These securities were comprised primarily of state or municipal
bonds.
In
determining whether the decline in the value of these securities was temporary
the Company considered the following factors:
| - |
The
length of time and extent to which the market value has been less
than
cost
|
| - |
The
financial condition and near-term prospects of the
issuer
|
| - |
The
Company’s intent and ability to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in
market
value
|
The
Company’s analysis led to the following conclusions:
| - |
The
magnitude of the unrealized losses is such that they could be reversed
with a modest change in interest
rates
|
| - |
The
probability that any of the issuers of these securities would be
unable to
meet its obligations to meet principal or interest payments is
negligible
|
| - |
Based
on both the length of time and extent to which the market value has
been
less than cost and the financial condition and near-term prospects
of the
issuer, the Company concluded that none of the unrealized losses
at
December 31, 2006 constituted other-than-temporary
impairment.
|
Note
5. Allowance for Doubtful Accounts
Changes
in the Company’s allowance for doubtful accounts, including acquired amounts,
for the years ended December 31, 2006, 2005 and 2004 are as follows (in
thousands):
|
|
Beginning
Balance
|
|
Provisions
|
|
Charge
Offs
|
|
Ending
Balance
|
||||||
|
Year
ended December 31, 2004
|
$
|
2,348
|
$
|
1,100
|
$
|
(1,377
|
)
|
$
|
2,071
|
||||
|
Year
ended December 31, 2005
|
$
|
2,071
|
$
|
163
|
$
|
(194
|
)
|
$
|
2,040
|
||||
|
Year
ended December 31, 2006
|
$
|
2,040
|
$
|
1,860
|
$
|
(618
|
)
|
$
|
3,282
|
||||
Note
6. Property and Equipment
Property
and equipment consisted of (in thousands):
|
|
December
31, 2006
|
|
December
31, 2005
|
||||
|
Equipment
|
$
|
30,283
|
$
|
19,839
|
|||
|
Furniture
and fixtures
|
3,794
|
3,498
|
|||||
|
Computer
software and equipment
|
10,705
|
4,919
|
|||||
|
Leasehold
improvements
|
2,502
|
2,002
|
|||||
|
47,284
|
30,258
|
||||||
|
Less:
Accumulated depreciation and amortization
|
(36,765
|
)
|
(21,048
|
)
|
|||
|
Property
and equipment, net
|
$
|
10,519
|
$
|
9,210
|
|||
Depreciation
expense was $5.3 million, $4.9 million and $4.4 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Note
7. Goodwill and Acquired Intangibles
The
following table represents a rollforward of goodwill and acquired intangible
assets, net (in thousands):
|
|
December
31, 2005
|
|
Adjustment
|
|
Acquisition
|
|
Amortization
|
|
December
31, 2006
|
|||||||
|
Goodwill
|
$
|
18,692
|
$
|
(513
|
)
|
$
|
60,578
|
$
|
—
|
$
|
78,757
|
|||||
|
Intangibles:
|
||||||||||||||||
|
Existing
technology
|
5,973
|
—
|
—
|
(1,612
|
)
|
4,361
|
||||||||||
|
Patent/Core
technology
|
2,127
|
—
|
—
|
(563
|
)
|
1,564
|
||||||||||
|
Maintenance
agreements and certain relationships
|
322
|
—
|
—
|
(66
|
)
|
256
|
||||||||||
|
Customer
relationships
|
354
|
—
|
7,600
|
(1,478
|
)
|
6,476
|
||||||||||
|
Supplier
contracts
|
—
|
—
|
950
|
(208
|
)
|
742
|
||||||||||
|
Internally
developed software
|
—
|
—
|
350
|
(44
|
)
|
306
|
||||||||||
|
$
|
27,468
|
$
|
(513
|
)
|
$
|
69,478
|
$
|
(3,971
|
)
|
$
|
92,462
|
|||||
The
beginning balance of goodwill related the the Safe3w and Mobile Automation
acquisitions was adjusted for changes in estimates of future utilization of
deferred tax assets related to net operating losses for which a valuation
allowance was recorded upon acquisition in the amount of $369,000 and $144,000,
respectively.
Total
amortization expense related to acquired intangible assets is set forth in
the
table below (in thousands):
|
|
Twelve
Months Ended December 31,
|
|
||||||||
|
|
|
2006
|
|
2005
|
|
2004
|
||||
|
Intangibles:
|
||||||||||
|
Existing
technology
|
$
|
(1,612
|
)
|
$
|
(1,613
|
)
|
$
|
(314
|
)
|
|
|
Patent/Core
technology
|
(563
|
)
|
(563
|
)
|
(111
|
)
|
||||
|
Maintenance
agreements and certain relationships
|
(66
|
)
|
(67
|
)
|
(11
|
)
|
||||
|
Customer
relationships
|
(1,478
|
)
|
(125
|
)
|
(21
|
)
|
||||
|
Supplier
contracts
|
(208
|
)
|
—
|
—
|
||||||
|
Internally
developed software
|
(44
|
)
|
—
|
—
|
||||||
|
$
|
(3,971
|
)
|
$
|
(2,367
|
)
|
$
|
(457
|
)
|
||
The
following tables set forth the carrying amount of other intangible assets that
will continue to be amortized (in thousands):
|
|
December
31, 2006
|
|
|||||||||||
|
|
|
Amortization
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|||||
|
Intangibles:
|
|||||||||||||
|
Existing
technology
|
4-8
yrs
|
$
|
7,900
|
$
|
(3,539
|
)
|
$ |
4,361
|
|||||
|
Patent/Core
technology
|
4-8
yrs
|
2,800
|
(1,236
|
)
|
1,564
|
||||||||
|
Maintenance
agreements and certain relationships
|
5
yrs
|
400
|
(144
|
)
|
256
|
||||||||
|
Customer
relationships
|
4-7
yrs
|
8,100
|
(1,624
|
)
|
6,476
|
||||||||
|
Supplier
contracts
|
4
yrs
|
950
|
(208
|
)
|
742
|
||||||||
|
Internally
developed software
|
7
yrs
|
350
|
(44
|
)
|
306
|
||||||||
|
$
|
20,500
|
$
|
(6,795
|
)
|
$
|
13,705
|
|||||||
|
|
December
31, 2005
|
|
|||||||||||
|
|
|
Amortization
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|||||
|
Intangibles:
|
|||||||||||||
|
Existing
technology
|
4-8
yrs
|
$
|
7,900
|
$
|
(1,927
|
)
|
$
|
5,973
|
|||||
|
Patent/Core
technology
|
4-8
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
|
|
|||
|
2007
|
$
|
4,201
|
||
|
2008
|
3,901
|
|||
|
2009
|
2,401
|
|||
|
2010
|
1,241
|
|||
|
2011
|
1,021
|
|||
|
Thereafter
|
940
|
|||
|
$
|
13,705
|
|||
Prior
to
the acquisition of Safe3w and Mobile Automation in 2004, the Company had no
acquired intangibles balances or expenses relating to the amortization of
acquired intangibles.
Note
8. Accrued Liabilities
Accrued
liabilities consisted of (in thousands):
|
|
December
31, 2006
|
December
31, 2005
|
|||||
|
Accrued
commissions
|
$
|
3,899
|
$
|
3,067
|
|||
|
Accrued
liabilities
|
5,809
|
4,399
|
|||||
|
Deferred
rent
|
1,013
|
1,618
|
|||||
|
Paid
time off payable
|
1,960
|
1,715
|
|||||
|
Income
taxes payable
|
1,504
|
1,724
|
|||||
|
Accrued
restructuring liabilities
|
2,297
|
--
|
|||||
|
$
|
16,482
|
$
|
12,523
|
||||
Note
9. Accrued Restructuring
In
March
2006, the Company recorded a restructuring charge totaling approximately
$1.7
million related to the workforce reduction of 58 iPass employees, across
all
functions. In November 2006, the Company recorded an additional restructuring
charge of $3.0 million related to excess iPass facilities. The restructurings
were recorded pursuant to FASB No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.
The
following is a summary of restructuring activities for the year ended December
31, 2006 (in thousands):
|
|
Excess
Facility
Costs
|
Severance
Costs
|
Total
Restructuring Accrual
|
|||||||
|
Balance
as of December 31, 2005
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Restructuring
charges
|
3,028
|
1,705
|
4,733
|
|||||||
|
Reclassification
of deferred rent
|
461
|
—
|
461
|
|||||||
|
Payments
|
(444
|
)
|
(1,302
|
)
|
(1,746
|
)
|
||||
|
Balance
as of December 31, 2006
|
$
|
3,045
|
$
|
403
|
$
|
3,448
|
||||
In
February 2006, in connection with the acquisition of GoRemote, the Company
recorded an accrual of $1.2 million for the lease costs associated with
the
acquired GoRemote corporate facilities that were expected to be abandoned.
The
accrual was recognized as part of the purchase price allocation pursuant
to
Emerging Issues Task Force Issue No. 95-3, Recognition
of Liabilities in Connection with a Purchase Business
Combination.
The
Company completed the relocation of employees and vacated facilities by
April
2006. The accrued costs are expected to be fully utilized by the second
quarter
of 2008. The following is a summary of the acquisition-related restructuring
activities for the year ended December 31, 2006 (in thousands):
|
|
Excess
Facility
Costs
|
|||
|
Balance
as of December 31, 2005
|
$
|
—
|
||
|
Accrued
acquisition-related restructuring costs
|
1,249
|
|||
|
Payments
|
(432
|
)
|
||
|
Balance
as of December 31, 2006
|
$
|
817
|
||
As
of
December 31, 2006, the Company has classified $2.3 million of the restructuring
liability in accrued liabilities and remaining $2.0 million in long-term
liabilities based on the Company’s expectation that the remaining lease payments
will be paid over the remaining term of the related leases (net of expected
sublease income).
Note
10. Income Taxes
Income
(loss) before income taxes includes net income (loss) from foreign operations
of
approximately $750,000, $120,000 and $968,000 for the years ended December
31,
2006, 2005 and 2004, respectively.
The
provision for (benefit from) income taxes consisted of the following for the
years ended December 31, 2006, 2005 and 2004 (in thousands):
|
|
2006
|
|
2005
|
|
2004
|
|||||
|
Current
|
||||||||||
|
U.S.
federal
|
$
|
(600
|
)
|
$
|
1,972
|
$
|
584
|
|||
|
State
|
(364
|
)
|
828
|
583
|
||||||
|
Foreign
|
507
|
402
|
187
|
|||||||
|
(457
|
)
|
3,202
|
1,354
|
|||||||
|
Deferred
|
||||||||||
|
U.S.
federal
|
(5,966
|
)
|
5,182
|
9,371
|
||||||
|
State
|
(772
|
)
|
518
|
1,471
|
||||||
|
(6,738
|
)
|
5,700
|
10,842
|
|||||||
|
Total
provision for (benefit from) income taxes
|
$
|
(7,195
|
)
|
$
|
8,902
|
$
|
12,196
|
|||
Deferred
income taxes reflect the net tax effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes and net loss carryforwards. As of
December 31, 2006, the Company believes it is more likely than not that the
Company will be able to realize its net deferred tax assets. A partial
valuation allowance was placed on the deferred tax assets relating to the net
operating loss carryforwards obtained as a result of the acquisition of Safe3w
and Mobile Automation in 2004, a portion of which was subsequently released
in
2005. The components of deferred tax assets (liabilities) consisted of the
following as of December 31, 2006 and 2005 (in thousands):
|
|
2006
|
|
2005
|
||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carryforwards
|
$
|
41,641
|
$
|
5,777
|
|||
|
Reserves
and accruals
|
8,401
|
4,304
|
|||||
|
Research
and development credits
|
4,907
|
1,667
|
|||||
|
Fixed
assets
|
1,679
|
77
|
|||||
|
Total
deferred tax assets
|
56,628
|
11,825
|
|||||
|
Valuation
allowance
|
(28,289
|
)
|
(3,582
|
)
|
|||
|
Net
deferred tax assets
|
$
|
28,339
|
$
|
8,243
|
|||
|
Deferred
tax liabilities:
|
|||||||
|
Acquired
intangibles
|
$
|
(5,316
|
)
|
$
|
(3,689
|
)
|
|
|
Total
net deferred tax assets
|
$
|
23,023
|
$
|
4,555
|
|||
During
2006, the Company increased the valuation allowance by approximately $24.7
million related to net operating losses attributable to acquired entities.
As of December 31, 2006, approximately $28.3 million of the valuation allowance
for deferred tax assets relates to net operating loss carryforwards attributable
to acquired entities, the benefit from which will be allocated to goodwill
rather than current earnings when and if subsequently realized. These net
operating loss carryforwards are subject to an annual limitation under Internal
Revenue Code Section 382, but are expected to be fully realized.
For
the
years ended December 31, 2006, 2005 and 2004, the provision for (benefit
from)
income taxes differed from the amounts computed by applying the U.S. federal
income tax rate to pretax income (loss) before income taxes as a result of
the
following:
|
|
2006
|
|
2005
|
|
2004
|
|||||
|
Federal
statutory rate
|
(35
|
)%
|
35
|
%
|
34
|
%
|
||||
|
State
taxes, net of federal benefit
|
(4
|
)
|
5
|
6
|
||||||
|
Foreign
taxes
|
2
|
2
|
—
|
|||||||
|
Amortization
of stock-based compensation
|
2
|
1
|
(1
|
)
|
||||||
|
Research
and development benefit
|
(7
|
)
|
(4
|
)
|
(2
|
)
|
||||
|
Tax
exempt interest
|
(6
|
)
|
—
|
—
|
||||||
|
Other
|
2
|
2
|
2
|
|||||||
|
Provision
for (benefit from) income taxes
|
(46)
|
%
|
41
|
%
|
39
|
%
|
||||
As
of
December 31, 2006, the Company had gross cumulative net operating loss
carryforwards for federal and state tax reporting purposes of approximately
$102.2 million and $63.4 million, respectively, which expire in various periods
through 2026. Under current tax law, net operating loss carryforwards available
in any given year may be limited upon the occurrence of certain events,
including significant changes in ownership interest such as an IPO. In addition,
the Company has federal net operating losses of $5.2 million and state net
operating losses of $5.4 million related to the deduction of stock options
vested prior to the adoption of FAS 123(R).
The
Company also has research and development tax credit carryforwards of
approximately $4.4 million and $3.8 million for federal and state income tax
purposes, respectively. If not utilized, the federal carryforwards will expire
in various amounts through 2026. The state tax credits can be carried forward
indefinitely.
U.S.
income taxes were not provided for on a cumulative total of $4.4 million
of
undistributed earnings for certain foreign subsidiaries. The Company intends
to
reinvest these earnings indefinitely in its foreign subsidiaries. If these
earnings were distributed to the U.S. in the form of dividends or otherwise,
or
if the shares of the relevant foreign subsidiaries were sold or otherwise
transferred, the Company would be subject to additional U.S. income taxes
(subject to an adjustment for foreign tax credits). It is not practicable
to
estimate the amount of additional income tax that might be payable upon
distribution of the earnings.
Note
11. Common Stock
Stock
Option 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 Pre-IPO Plans. Under the Pre-IPO Plans, as amended, the Company is
authorized to issue shares to employees, directors and consultants. On January
15, 2003, the Company adopted the 2003 Equity Incentive Plan and the 2003
Non-employee Directors Plan which are collectively referred to as the 2003
Plans. Under the 2003 Plans, 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 25% on the first anniversary of the grant
date with the remainder vesting ratably over the following 36 months; options
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. As of December 31, 2006, 23,088,834 shares were authorized for
grant
under all plans, including those assumed in the acquisition of GoRemote and
there were no shares of common stock subject to repurchase.
In
January 2003, the Company 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 employee’s 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.
In
June
2006, the Company’s shareholders approved amendments to and restatement of the
2003 Non-Employee Directors Plan (“Directors Plan”). The changes reduced the
initial grant to each director from 120,000 to 30,000 stock options which vest
10,000 shares on the first anniversary of the date of grant and thereafter
in
equal month installments over 24 months. Annual grants to each director were
reduced from 30,000 to 15,000 stock options which vest 100% on the anniversary
of the grant date. In addition the Directors Plan now provides and initial
grant
of 10,000 shares of restricted stock which vests 1/3 on each anniversary of
the
date of grant and annual grants of 5,000 shares of restricted stock which vest
100% on the one-year anniversary of the date of grant.
Stock-Based
Compensation
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses the weighted average assumptions
noted in the following table. Expected volatilities are based on the historical
volatility of the Company’s common stock and the historical volatility of
comparable securities. 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.
|
|
For
The Year Ended December
31, 2006
|
|||
|
Risk-free
rate
|
4.86
|
%
|
||
|
Expected
dividend yield
|
0
|
%
|
||
|
Expected
volatility
|
50
|
%
|
||
|
Expected
life
|
6.1
years
|
|||
Stock
option activity under the Plans for the three years ended December 31, 2006
is
summarized below:
|
|
Shares
Available
for Grant
|
Options
Outstanding
|
Weighted
Average Exercise
Price
|
|||||||
|
Balance
as of December 31, 2003
|
8,467,166
|
7,887,573
|
$
|
3.46
|
||||||
|
Authorized
|
3,024,171
|
—
|
—
|
|||||||
|
Granted
|
(4,497,933
|
)
|
4,497,933
|
6.10
|
||||||
|
Exercised
|
—
|
(1,885,253
|
)
|
2.75
|
||||||
|
Cancelled
|
385,267
|
(385,267
|
)
|
3.11
|
||||||
|
Balance
as of December 31, 2004
|
7,378,671
|
10,114,986
|
$ |
4.78
|
||||||
|
Authorized
|
3,637,835
|
—
|
—
|
|||||||
|
Granted
|
(1,045,300
|
)
|
1,045,300
|
5.88
|
||||||
|
Exercised
|
—
|
(1,041,176
|
)
|
1.88
|
||||||
|
Cancelled
|
771,085
|
(771,085
|
)
|
6.09
|
||||||
|
Balance
as of December 31, 2005
|
10,742,291
|
9,348,025
|
$
|
5.12
|
||||||
|
Authorized
|
3,248,060
|
—
|
—
|
|||||||
|
Options
granted
|
(2,071,823
|
)
|
2,071,823
|
6.85
|
||||||
|
Awards
granted
|
(446,303
|
)
|
—
|
—
|
||||||
|
Assumed
in acquisition of GoRemote
|
—
|
1,710,353
|
18.58
|
|||||||
|
Exercised
|
—
|
(1,831,995
|
)
|
3.03
|
||||||
|
Cancelled
|
1,897,781
|
|
(1,897,781
|
) |
7.09
|
|||||
|
Balance
at December 31, 2006
|
13,370,006
|
9,400,425
|
$
|
7.96
|
||||||
|
Exercisable
as of December 31, 2004
|
4,055,123
|
$
|
3.83
|
|||||||
|
Exercisable
as of December 31, 2005
|
4,945,870
|
$
|
4.39
|
|||||||
|
Exercisable
as of December 31, 2006
|
5,703,614
|
$
|
8.85
|
|||||||
|
|
Shares
|
|
Weighted
Average
Exercise
Price
per Share
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
||||||
|
(In
thousands, except share and per share amounts)
|
|||||||||||||
|
Options
outstanding at December 31, 2006
|
9,400,425
|
$
|
7.96
|
$
|
7.11
|
$
|
9,161
|
||||||
|
Options
vested and expected to vest at December, 31, 2006
|
8,972,276
|
$
|
8.03
|
$
|
7.03
|
$
|
9,103
|
||||||
|
Options
exercisable at December 31, 2006
|
5,703,614
|
$
|
8.85
|
$
|
6.22
|
$
|
8,349
|
||||||
The
weighted average grant date fair value of options granted during the year ended
December 31, 2006 was $3.70. The following is a summary of the weighted average
exercise price on the date of grant for all options granted during the year
ended December 31, 2006:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
per Share
|
||||
|
Exercise
price less than fair value
|
6,786
|
$
|
7.03
|
||||
|
Exercise
price equal to fair value
|
2,065,037
|
$
|
6.85
|
||||
|
Exercise
price more than fair value
|
—
|
—
|
|||||
The
total
intrinsic value of options exercised during the year ended December 31, 2006
was
$6.1 million. At December 31, 2006, the Company had $7.4 million of total
unrecognized compensation expense, net of estimated forfeitures, related to
stock options, ESPP and options assumed in business combinations that will
be
recognized over the weighted average period of 1.11 years. Cash received from
stock option exercises was $5.6 million during the twelve months ended December
31, 2006. The Company issues new shares of common stock upon exercise of stock
options.
The
following table summarizes the options outstanding as of December 31,
2006:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of Exercise
Prices
|
Number
Outstanding
|
Weighted-
Average
Remaining
Contractual
Life
(in Years)
|
Weighted-Average
Exercise
Price
per Share
|
Number
Exercisable
|
Weighted-Average
Exercise
Price
per Share
|
|||||||||||
|
$
0.10 — 2.00
|
1,051,462
|
5.37
|
$
|
0.97
|
1,047,995
|
$
|
0.97
|
|||||||||
|
2.01
— 4.75
|
1,136,599
|
4.81
|
3.79
|
1,100,154
|
3.80
|
|||||||||||
|
4.86
— 5.30
|
809,330
|
7.60
|
5.07
|
406,677
|
5.05
|
|||||||||||
|
5.33
— 5.35
|
1,487,321
|
7.57
|
5.35
|
862,709
|
5.35
|
|||||||||||
|
5.38
— 5.87
|
1,064,995
|
8.30
|
5.71
|
624,921
|
5.69
|
|||||||||||
|
5.91
— 6.36
|
961,247
|
8.64
|
6.24
|
186,329
|
6.20
|
|||||||||||
|
6.44
— 7.38
|
1,097,323
|
8.76
|
6.71
|
234,764
|
6.63
|
|||||||||||
|
7.40
— 10.60
|
1,015,301
|
6.73
|
8.69
|
558,591
|
8.58
|
|||||||||||
|
10.93
— 160.00
|
768,797
|
6.04
|
35.39
|
673,464
|
37.95
|
|||||||||||
|
250.00
— 250.00
|
8,050
|
3.07
|
250.00
|
8,050
|
250.00
|
|||||||||||
|
Total
|
9,400,425
|
7.11
|
7.96
|
5,703,614
|
8.85
|
|||||||||||
Employee
Stock Awards
The
Company grants stock awards to employees under the 2003 Plans. These plans
provide for the granting of restricted stock and/or performance awards to
officers and employees. Restricted stock issued under these plans generally
vest
annually over two to three years but are considered outstanding at the time
of
grant, as the stockholders are entitled to dividends and voting
rights.
A
summary
of the changes in stock awards outstanding under the Company’s equity-based
compensation plan during the twelve months ended December 31, 2006 is presented
below:
|
Shares
|
Weighted
Average Grant Date Fair Value
|
||||||
|
Nonvested
at December 31, 2005
|
—
|
—
|
|||||
|
Granted
|
446,303
|
$
|
6.32
|
||||
|
Vested
|
—
|
—
|
|||||
|
Forfeited
|
(33,950
|
)
|
$
|
6.39
|
|||
|
Nonvested
at December 31, 2006
|
412,353
|
$
|
6.31
|
||||
The
fair
value of the Company’s stock awards was calculated based upon the fair market
value of the Company’s stock at the date of grant. As of December 31, 2006,
there was $1.2 million of total unrecognized compensation cost related to the
unvested restricted stock awards granted, which is expected to be recognized
over the remaining weighted average vesting period of 1.55 years.
Employee
Stock Purchase Plan
Compensation
expense related to the Company’s employee stock purchase plan (“ESPP”) is
calculated 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:
|
For
the year ended
December
31, 2006,
|
||||
|
Risk-free
rate
|
4.95
|
%
|
||
|
Expected
dividend yield
|
0
|
%
|
||
|
Expected
volatility
|
55
|
%
|
||
|
Expected
life
|
0.5
to 1 year
|
|||
The
weighted-average fair value of the purchase rights granted under the ESPP during
the year ended December 31, 2006 was $1.82. During the twelve months ended
December 31, 2006 and 2005, 408,510 and 404,871 shares, respectively, were
issued pursuant to the plan.
Note
12. Stock Repurchase Program
In
May
2006, the Company’s Board of Directors approved a two-year stock repurchase
program which authorizes the Company to repurchase up to $30.0 million of
outstanding common stock from time to time on the open market or through
privately negotiated transactions. The timing and amount of any repurchases
will
depend upon market conditions and other corporate considerations.
Through
December 31, 2006, the Company repurchased and retired approximately 2.2 million
shares of common stock for an aggregate purchase price of $12.0 million. In
November and December 2006, the Company made additional repurchases of
approximately 750,000 shares for an aggregate purchase price of $4.2 million
with the intent to retire the shares by the end of the first quarter of fiscal
2007.
Note
13. Commitments and Contingencies
We
lease
our facilities under non-cancelable operating leases that expire at various
dates through March 2016. Future minimum lease payments under these operating
leases, including payments on leases accounted for under our restructuring
plan,
as of December 31, 2006 are as follows (in thousands):
|
Year
ending December 31:
|
||||
|
2007
|
$
|
7,444
|
||
|
2008
|
6,113
|
|||
|
2009
|
5,718
|
|||
|
2010
|
2,755
|
|||
|
2011
and thereafter
|
3,456
|
|||
|
$
|
25,486
|
|||
Rent
expense under operating leases for the years ended December 31, 2006, 2005,
and
2004 was $6.8 million, $6.0 million and $5.7 million, respectively.
As
of
December 31, 2006, the Company had minimum purchase commitments with network
service providers and vendor operating leases that expire at various dates
through 2009. Future minimum purchase commitments and operating lease
payments under all agreements are as follows (in thousands):
|
Year
ending December 31:
|
||||
|
2007
|
$
|
1,901
|
||
|
2008
|
1,066
|
|||
|
2009
|
266
|
|||
|
$
|
3,233
|
|||
Legal
Actions
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”) alleged 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 Company’s
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 that motion was granted with prejudice on September 6,
2006. On September 7, 2006, final judgment was entered in
favor of the defendants. Plaintiffs failed to file a timely notice of
appeal. No loss has been accrued as of December 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. On April 6, 2006, the
court granted the joint motion of all parties to have the case designated as
"complex litigation." 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 was filed on May 19, 2006. Defendants demurred to the
amended CDC and on September 1, 2006 the court sustained that
demurrer with leave to amend. On October 6, 2006, plaintiffs
filed a consolidated second amended complaint ("CSAC"). On October 24,
2006 defendants filed a demurrer as to the CSAC. However, on November 27, 2006,
plaintiffs voluntarily dismissed the action without prejudice. No loss has
been accrued as of December 31, 2006.
We
may be
subject to various other claims and legal actions arising in the ordinary course
of business from time to time.
Note
14. Employee 401(k) Plan
Substantially
all of the Company’s employees are eligible to participate in the Company’s
401(k) plan, which provides for discretionary Company matching contributions.
There were no matching contributions for the years ended December 31, 2005
or
2004. Beginning January 1, 2006, the Company provided a 50% match to employee
contributions up to 6% of an employee’s total compensation. The Company’s
matching contributions to the plan totaled $792,000 for the year ended December
31, 2006. Beginning January 1, 2007, the Company will provide a 50% match to
employee contributions up to 6% of an employee’s salary.
Note
15. Net Income (Loss) Per Common 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. As
such, basic net income (loss) per share excludes 352,778 and 635,113 shares
subject to repurchase for the years ended December 31, 2005 and 2004,
respectively. There were no shares subject to repurchase for the year ended
December 31, 2006. These shares have been included in diluted net income (loss)
per share to the extent that the inclusion of such shares is not anti-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, including 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):
|
|
For
the Year Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Numerator:
|
||||||||||
|
Net
income (loss)
|
$
|
(8,089
|
)
|
$
|
12,895
|
$
|
19,068
|
|||
|
Denominator:
|
||||||||||
|
Denominator
for basic net income per common share
|
||||||||||
|
Weighted
average shares outstanding
|
64,572,603
|
63,353,779
|
60,770,680
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Stock
options
|
--
|
2,923,563
|
4,875,077
|
|||||||
|
Denominator
for diluted net income (loss) per common share — adjusted
|
64,572,603
|
66,277,342
|
65,645,757
|
|||||||
|
Basic
net income (loss) per common share
|
$
|
(0.13
|
)
|
$
|
0.20
|
$
|
0.31
|
|||
|
Diluted
net income (loss) per common share
|
$
|
(0.13
|
)
|
$
|
0.19
|
$
|
0.29
|
|||
The
following potential shares of common stock have been excluded from the
computation of diluted net income (loss) per share because the effect of
including these shares would have been anti-dilutive:
|
|
For
the Year Ended December 31,
|
|
||||||||
|
|
|
2006
|
|
2005
|
|
2004
|
||||
|
Options
to purchase common stock
|
9,400,425
|
1,904,406
|
804,250
|
|||||||
|
Unvested
restricted stock awards
|
323,303
|
--
|
--
|
|||||||
The
weighted-average exercise price of options to purchase common stock excluded
from the computation was $7.70, $10.00 and $14.56 for the years ended December
31, 2006, 2005 and 2004, respectively.
Note
16. 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
Company’s chief operating decision maker is considered to be the Company’s chief
executive officer (CEO). 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 consolidated
statements of operations. Therefore, the Company has determined that it operates
in a single reportable segment.
International
revenue is determined by the location of the customer’s headquarters.
International revenue accounted for approximately 40%, 45% and 41% of total
revenues for the years ended December 31, 2006, 2005 and 2004, respectively.
Revenues in the United Kingdom accounted for 11%, 14% and 11% of total revenues
for the years ended December 31, 2006, 2005 and 2004, respectively.
Substantially
all of the Company’s long-lived assets are located in the United States.
Revenues in the United States were $109.9 million for the year ended December
31, 2006.
Pursuant
to the requirements of Section 13 or 15(d) 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.
| /s/ Kenneth D. Denman | /s/ Frank E. Verdecanna | ||
|
|
|
||
| Kenneth
D.
Denman Chairman, President and Chief Executive Officer (Principal Executive Officer) |
Frank
E.
Verdecanna Vice President and Chief Financial Officer (Principal Financial Officer) |
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Frank E. Verdecanna and Bruce K. Posey, and each
or any one of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requiste and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any
of
them, or their or his substitutes or substitute, may lawfully do or cause to
be
done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/
Kenneth D. Denman
|
Chairman,
President, Chief Executive Officer and Director
|
March
28, 2007
|
|
Kenneth
D. Denman
|
||
|
/s/
Frank E. Verdecanna
|
Vice
President and Chief Financial Officer (Principal Financial
Officer)
|
March
28, 2007
|
|
Frank
E. Verdecanna
|
||
|
/s/
A. Gary Ames
|
Director
|
March
28, 2007
|
|
A.
Gary Ames
|
||
|
/s/
John D. Beletic
|
Director
|
March
28, 2007
|
|
John
D. Beletic
|
||
|
/s/
Peter G. Bodine
|
Director
|
March
28, 2007
|
|
Peter
G. Bodine
|
||
|
/s/
Peter C. Clapman
|
Director
|
March
28, 2007
|
|
Peter
C. Clapman
|
||
|
/s/
Michael J. McConnell
|
Director
|
March
28, 2007
|
|
Michael
J. McConnell
|
||
|
/s/
Arthur C. Patterson
|
Director
|
March
28, 2007
|
|
Arthur
C. Patterson
|
||
|
/s/
Olof Pripp
|
Director
|
March
28, 2007
|
|
Olof
Pripp
|
||
|
/s/
Allan R. Spies
|
Director
|
March
28, 2007
|
|
Allan
R. Spies
|
|
Exhibit
Number
|
Description
of Document
|
|
2.1
|
Agreement
and Plan of Merger dated October 26, 2004 by and among iPass Inc.,
Montage
Acquisition Corp., Mobile Automation, Inc. and David Strohm, as
Stockholders’ Agent.(1)
|
|
2.2
|
Agreement
of Merger among iPass Inc., Keystone Acquisition Sub, Inc. and GoRemote
Internet Communications, Inc. dated December 9,
2005.(2)
|
|
3.1
|
Amended
and Restated Certificate of Incorporation.(3)
|
|
3.2
|
Bylaws,
as amended.(3)
|
|
4.1
|
Reference
is made to Exhibits 3.1 and 3.2
|
|
4.2
|
Specimen
stock certificate.(3)
|
|
10.1*
|
2003
Equity Incentive Plan and form of related agreements, as
amended.(3)
|
|
10.1.1*
|
Form
of Stock Option Grant Notice under the 2003 Equity Incentive Plan
(containing additional vesting terms).(4)
|
|
10.2*
|
2003
Non-Employee Directors Plan, as amended.(5)
|
|
10.3*
|
1999
Stock Option Plan and form of related agreements.(3)
|
|
10.4*
|
1997
Stock Option Plan and form of related agreements.(3)
|
|
10.5*
|
Interim
1999 Stock Option Plan.(3)
|
|
10.6*
|
Restricted
Stock Purchase Agreement by and between the Registrant and Anurag
Lal
dated November 8, 1999.(3)
|
|
10.7*
|
2003
Employee Stock Purchase Plan and form of related agreements, as
amended.(3)
|
|
10.8
|
Lease
Agreement, dated October 26, 1999, between Registrant and Westport
Joint
Venture (as amended).(3)
|
|
10.9
|
Amended
and Restated Investor Rights Agreement, dated August 8, 2000, between
Registrant, founders and holders of the Registrant’s Preferred
Stock.(3)
|
|
10.10
|
Form
of Indemnity Agreement.(3)
|
|
10.11*
|
Employment
Agreement, dated November 13, 2001, between Registrant and Kenneth
D.
Denman.(3)
|
|
10.12*
|
Form
of Offer Letter to Executive Officers.(3)
|
|
10.13
|
OEM
Service Provider License Agreement, dated February 29, 2000, between
RSA
Security, Inc. and the Registrant, and amendments
thereto.(4)
|
|
10.14
|
Support
Agreement, dated February 29, 2000, by and between RSA Security,
Inc.(4)
|
|
10.15
|
Loan
and Security Agreement dated September 4, 2001 between Silicon Valley
Bank
and the Registrant, and modifications thereto.(3)
|
|
10.16*
|
2007
Annual Executive Management Bonus Plan.(6)
|
|
10.17*
|
Outside
Director Compensation Arrangement.(7)
|
|
10.18*
|
Executive
Officer Cash Compensation Arrangement.(8)
|
|
10.19*
|
Offer
Letter to Thomas Thimot dated December 9, 2005.(9)
|
|
10.20*
|
Transition
Agreement with John Thuma dated January 20, 2006.(10)
|
|
10.21*
|
Letter
Agreement pursuant to which Michael J. McConnell and Peter C. Clapman
were
elected to Registrant’s Board of Directors.(11)
|
|
24.1
|
Power
of Attorney (reference is made to the signature page of this Form
10-K).
|
__________
(1) Previously
filed as the like-numbered exhibit to our Annual Report on Form 10-K filed
with
the Securities and Exchange Commission on March 15, 2005, and incorporated
by
reference herein.
(2) Previously
filed as exhibit 10.22 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 12, 2005, and incorporated by
reference herein.
(3) Previously
filed as the like-numbered exhibit to our Registration Statement on Form S-1,
as
amended, originally filed with the Securities and Exchange Commission on January
24, 2003, as amended, and incorporated by reference herein.
(4) Previously
filed as the like-numbered exhibit to our Annual Report on form 10-K filed
with
the Securities and Exchange Commission on March 16, 2006, and incorporated
by
reference herein
(5) Previously
filed as exhibit 10.1 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 16, 2006, and incorporated by
reference herein.
(6) Previously
filed as Item 5.02 on our Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 13, 2007, and incorporated by reference
herein.
(7) Previously
disclosed under the caption “Compensation of Directors” in our Definitive Proxy
Statement on Schedule 14A filed with the Securities and Exchange Commission
on
April 26, 2004, and incorporated by reference herein.
(8) Previously
disclosed under the caption “Compensation of Executive Officers” in our
Definitive Proxy Statement on Schedule 14A filed with the Securities and
Exchange Commission on April 26, 2004, and incorporated by reference
herein.
(9) Previously
filed as exhibit 10.23 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 16, 2006, and incorporated by
reference herein.
(10) Previously
filed as exhibit 10.24 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 16, 2006, and incorporated by
reference herein.
(11) Previously
filed as exhibit 9.9.1 on our Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 21, 2007.
* Indicates
a management contract or compensatory plan or arrangement.