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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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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, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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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 |
(State or Other Jurisdiction of |
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(I.R.S. Employer |
Incorporation or Organization) |
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Identification No.) |
3800 Bridge Parkway
Redwood Shores, California 94065
(Address, including zip code, of principal executive
offices)
(650) 232-4100
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 Par Value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
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 o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark 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
registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Act). Yes o No þ
Aggregate market value of the registrants common stock
held by non-affiliates of the registrant, based upon the closing
price of a share of the registrants common stock on
June 30, 2005 as reported by the Nasdaq National Market on
that date: $339,543,717. The determination of affiliate status
for the purposes of this calculation is not necessarily a
conclusive determination for other purposes. The calculation
excludes approximately 12,443,493 shares held by directors,
officers and stockholders whose ownership exceeded five percent
of the registrants outstanding Common Stock as of
June 30, 2005. 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 Registrants Common
Stock, $0.001 par value, as of February 28, 2006
was 64,567,835.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement in
connection with our 2006 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission not later than
April 30, 2006, are incorporated by reference in
Part III, Items 10-14 of this report on
Form 10-K.
iPASS INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
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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 Factors Affecting Operating
Results in Managements Discussion and Analysis
of Financial Condition and Results of Operations 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.
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PART I
Overview
We are a global provider of software-enabled enterprise
connectivity and endpoint management services for remote and
mobile workers. Our flagship service offering, iPass Corporate
Accesstm,
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 Corporate Access unifies access through over
300 networks in over 160 countries that make up the iPass
global virtual network. It 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 enterprise home
broadband and on-campus wireless local area networks (LANs) as
well as third-party
Wi-Fi hotspot,
municipal Wi-Fi networks and hotel Ethernet links.
In addition, we provide endpoint management services that enable
better protection of an enterprises remote and mobile
computer systems, or endpoints. These services, which include
device authentication, patch automation and systems management,
can be used in conjunction with iPass Corporate Access 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.
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Software-Based Platform for Service Delivery |
As opposed to traditional telecommunications companies that
build, operate and maintain network facilities, we have created
a virtual network as the platform for our services. Our virtual
network is based on a software architecture that gives it
technology flexibility and cost-effective scalability. It
comprises contractual relationships and technical integrations
with over 300 telecommunications carriers, Internet service
providers and other network service providers around the globe.
This architecture has redundancy built in throughout, from
multiple network providers in most countries to fault-tolerance
mechanisms at all points in the authentication process. This
allows it to deliver extremely high availability of service 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 while also simplifying
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.
We derive revenues from usage of our networks and from fees and
other services. 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 87% of our
total revenues in 2005. 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 2005 we generated approximately
13% 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 virtual network to
become the leading provider of secure enterprise connectivity
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
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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
of 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. This we
intend to achieve through the sale of services related to
non-iPass networks, such as enterprise home broadband and
on-campus wireless LANs as well as third party Wi-Fi hotspot,
municipal Wi-Fi networks and hotel Ethernet links. Additionally,
we will promote our endpoint 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 simplify the user experience, and
improving our management capabilities to unify 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 enterprises existing infrastructure. We also
intend to explore additional managed services that enhance our
competitive advantage and provide us with new growth
opportunities.
Leverage and Extend our Endpoint Management Capabilities.
In order to deepen the value we provide to customers, we intend
to continue to improve the endpoint management and policy
enforcement 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 enterprises 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 300 network service
providers around the globe.
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Our core assets and capabilities include:
Global Virtual Network. Our virtual network aggregates
over 70,000 access points in approximately 160 countries.
As of December 31, 2005, over 31,000 of these access points
were dial-up
connections and approximately 38,000 were broadband connections,
comprised of approximately 36,000 Wi-Fi hotspots and
approximately 2,000 wired hotspots as well as a North American
CDMA footprint. 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.
High-Availability and Scalable Authentication
Architecture. Our relationships with over 300 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 enterprises
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.
Network Access Policy Management. 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 users location, the users identity and role
within the organization, the type of access network being used,
and the compliance of the users computer with enterprise
security policies.
Endpoint Policy Management. We have software services
that allow for flexible and automated systems management
capabilities, with specific advantages with regards to endpoint
systems used by remote and mobile workers. The capabilities can
be used for device discovery, asset management, device
configuration, and software distribution. These capabilities can
be hosted on servers at our customers premises or in an
iPass data center and are supported by an agent software that
runs on the mobile workers 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 producing near real-time
information of connection success rates, client configurations,
authentication times and other information critical to
diagnosing network health and
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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 Microsofts
Windows®,
Apples Mac OS, and Microsofts Windows Mobile
versions for handheld devices.
Services
iPass Corporate Access is our primary service, offering 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:
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1. The iPassConnect universal client software installed on
a mobile workers laptop computer or other electronic
device enables the mobile worker to connect to our virtual
network. For wired access the mobile worker launches the
iPassConnecttm
universal client, selects the city in which he or she is
located, and then selects a local network access point
(dial-up, ISDN, 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
users home broadband connection and home Wi-Fi LAN. |
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Security checks can be built into the connection process. A
feature called SecureConnect allows the enterprise to set
policies that detect whether the users 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 checked against
his or her enterprise database before the connection is allowed. |
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2. The iPass NetServer software, installed in a network
service providers 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. |
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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 enterprises
servers. |
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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. |
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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. |
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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 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 users VPN to securely connect to
the enterprise network. |
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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. |
In addition to iPass Corporate Access, we currently offer the
following services:
iOQ. We have developed our iOQ service to allow our
customers in-house or outsourced help desk personnel to
quickly identify issues and troubleshoot connection problems.
With our iOQ service, 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
users computer or other electronic device when the user
logs in, at no additional cost to the customer.
ExpressConnect. Our ExpressConnect service is designed 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
enterprises authentication server in one of our secure
data centers, but the enterprises 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. We generally charge a
monthly fee for our ExpressConnect service.
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Wireless LAN Roaming. Our Wireless LAN Roaming service is
an add-on option to the iPass Corporate Access service that
extends its benefits to connections over on-campus Wi-Fi LANs.
This service 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. We
generally charge a monthly fee for our Wireless LAN Roaming
service.
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.
Endpoint Policy Management Online. This
iPass-hosted service links automated security assessment,
remediation and patch management capabilities into the iPass
Corporate Access service. When users attempt to use the
iPassConnect universal client to connect to the Internet and the
corporate VPN, the Endpoint Policy Management Online
service will check to see that the users 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.
Endpoint Policy Management Enterprise (formerly
Mobile Lifecycle Management Suite.) This service helps
enterprise customers to discover, secure, and manage their
laptops, desktops and handheld devices from any location via a
single management console. This service is driven by iPass
server software and resides on the enterprise network. It is
sold either on a per-seat fee-based model or through a perpetual
license model with annually occurring maintenance fees.
Endpoint Policy Management Enterprise includes the
following features:
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allows IT to discover all mobile assets by gathering detailed
hardware and software inventory on all mobile devices. |
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provides high-performance, policy-driven distribution of new
software and updates to remote and mobile devices, automatically
distributing software applications and system updates to all PCs
and handheld devices via LAN, wide-area networks (WAN) and
wireless networks. |
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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. |
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A Win32 management console of user configurations and inventory
information for rapid call resolution, all integrated with a
customers 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. |
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
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be a flexible and scalable network connectivity platform for
enterprises. The key features of iPassConnect include:
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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. |
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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 users computer or
other electronic device when the user logs in, at no additional
cost to the customer. |
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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. |
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Dynamic Phonebook. 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. |
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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. |
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Support for multiple operating systems and languages.
iPassConnect universal client supports a wide range of computer
operating systems, including Windows 95, 98, NT, 2000, Me, XP,
CE, Mac OS 8.x, 9.x, 10.x, Pocket PC2000, Pocket PC2002 and Palm
OS. Additionally, iPassConnect 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 customers 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 enterprises authentication database. Once the
enterprise authentication database has allowed or denied the end
users 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 Corporate
Access 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
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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, software 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:
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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 customers point of view. |
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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. |
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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. |
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 revenue accounted for approximately 45%, 41% and
39% of total revenues for the year ended December 31, 2005,
2004 and 2003, respectively. Revenues generated in the United
Kingdom accounted for 14% and 11% of total revenues for the year
ended December 31, 2005 and 2004, respectively. No
individual foreign country represented 10% or more of total
revenues for the years ended December 31, 2003.
International revenue is determined by the location of the
customers headquarters.
Substantially all of our long-lived assets are located in the
United States.
Agreements with Network Service Providers
We have relationships with over 300 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
10
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 2005, two network service providers, MCI
and Equant, accounted for approximately 9% and 6% 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 MCI 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, 2005, our sales organization was comprised of
95 individuals in North America, 22 individuals in Asia Pacific
and 42 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
partners 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 US and
BT Infonet and Equant 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.
11
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 Factors Affecting Operating
Results We face strong competition in our market,
which could make it difficult for us to succeed.
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, 2005,
our research and development organization consisted of 100
employees. Our research and development expenses were
$17.6 million, $13.8 million and $9.9 million in
2005, 2004, and 2003, 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®,
iOQ®
and the iPass logo are our U.S. registered trademarks.
iPassConnecttm,
ExpressConnecttm,
iPassNettm,
RoamServertm,
NetServertm,
iPass
Alliance®
and iPass Corporate
Accesstm
are designations that we use. We have 18 U.S. patent
applications pending relating to our service. On
January 21, 2003, we were issued a U.S. patent for a
method and a technology relating to our SQM technology. We also
obtained two U.S. patents in 2004 through the acquisition
of Safe3w and Mobile Automation. 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. The 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. 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, 2005, we had 406 employees, consisting
of 65 in network operations, 100 in research and development,
192 in sales and marketing and 49 in general and administrative.
We consider our relationship with our employees to be good.
Trademarks
iPass®,
iOQ®
and the iPass logo are our U.S. registered trademarks.
iPassConnecttm,
ExpressConnecttm,
iPassNettm,
RoamServertm,
NetServertm,
iPass Corporate
Accesstm,
DeviceIDtm,
EPMtm,
iSEELtm
and iPass
12
Alliancetm
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
SECs 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.
Set forth below and elsewhere in this report are risks and
uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking
statements contained in this report.
Risks Relating to Our Business
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If we are unable to meet the challenges posed by broadband
access, our ability to grow our business will be
impaired. |
We have generated substantially all of our usage revenues to
date from the sale of enterprise connectivity services using
narrowband technologies such as modem
dial-up. In particular,
in 2005, we derived $138.1 million, or 82% of our total
revenues from our traditional
dial-up business. In
some countries, including the United States, the use of
narrowband as a primary means of enterprise connectivity has
declined and is expected to continue to decline at an
accelerated rate over time as broadband access technologies,
such as cable modem, DSL, Wi-Fi and other wireless technologies,
including 3G, become more broadly used. In 2005, our revenue
derived from the use of narrowband connectivity decreased 8% as
compared to 2004. A substantial portion of the growth of our
business will depend in part upon our ability to expand the
broadband elements of our virtual network. Such an expansion may
not result in additional revenues to us. Key challenges in
expanding the broadband elements of our virtual network include:
The broadband access market is at an early stage of
development. Although we derive revenues from wired and
wireless broadband hotspots, such as particular
airports, hotels and convention centers, the broadband access
market, particularly for wireless access, is at an early stage
of development and demand at levels we anticipate may not
develop. In particular, the market for enterprise connectivity
services through broadband is characterized by evolving industry
standards and specifications and there is currently no uniform
standard for wireless access. We have developed and made
available Wi-Fi specifications that are directed at enabling
Wi-Fi access points to become ready for use by enterprise
customers. If this specification is not widely adopted, market
acceptance of our wireless broadband services may be
significantly reduced or delayed and our business could be
harmed. Furthermore, although the use of wireless frequencies
generally does not require a license in the United States and
abroad, if Wi-Fi frequencies become subject to licensing
requirements, or are otherwise restricted, this would
substantially impair the growth of wireless access. Some large
telecommunications providers and other stakeholders that pay
large sums of money to license other portions of the wireless
spectrum may seek to have the Wi-Fi spectrum become subject to
licensing restrictions. If the broadband wireless access market
does not develop, we will not be able to generate substantial
revenues from broadband wireless access.
The broadband service provider market is highly
fragmented. Due to the early stage of development of the
broadband access market, there are currently many wired and
wireless broadband service providers that provide coverage in
only one or a small number of hotspots. We have entered into
contractual relationships
13
with numerous broadband service providers. These contracts
generally have an initial term of two years or less. As this
process is in an early stage, we must continue to develop
relationships with many providers on terms commercially
acceptable to us in order to provide adequate coverage for our
customers mobile workers and to expand our broadband
coverage. We may also be required to develop additional
technologies in order to integrate new broadband services into
our service offering. If we are unable to develop these
relationships or technologies, our ability to grow our business
could be impaired. In addition, if broadband service providers
consolidate, our negotiating leverage with providers may
decrease, resulting in increased rates for access, which could
harm our operating results.
If demand for broadband access does not materially increase, or
if demand increases but we do not meet the challenges outlined
above, our ability to grow our business may suffer.
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Our customers require a high degree of reliability in our
services, and if we cannot meet their expectations, demand for
our services will decline. |
Any failure to provide reliable network access, uninterrupted
operation of our network and software infrastructure, or a
satisfactory experience for our customers and their mobile
workers, whether or not caused by our own failure, could reduce
demand for our services. In 2002, we experienced three outages
affecting our clearinghouse system, which handles invoicing to
our customers and network service providers, resulting in five
days of outages and eight days of work to confirm data integrity
in response to the outages. Although these problems did not
affect the ability of mobile workers to access our services or
impact our revenues, one of these outages caused a delay in our
invoicing of approximately one week. If additional outages
occur, or if we experience other hardware or software problems,
our business could be harmed.
We face strong competition
in our market, which could make it difficult for us to
succeed.
We compete primarily with facilities-based carriers as well as
with other non-facilities-based network operators. Some of our
competitors have substantially greater resources, larger
customer bases, longer operating histories or greater name
recognition than we have. Also, with the recent introduction of
our policy management services, we face additional competition
from companies that provide security and policy-based services
and software. In addition, we face the following challenges from
our competitors:
Many of our competitors can compete on price. Because
many of our facilities-based competitors own and operate
physical networks, there may be little incremental cost for them
to provide additional telephone or Internet connections. As a
result, they may offer
dial-up remote access
services at little additional cost, and may be willing to
discount or subsidize remote access services to capture other
sources of revenue. In contrast, we have traditionally purchased
network access from facilities-based network service providers
to enable our dial-up
remote access service. As a result, large carriers may sell
their remote access services at a lower price. In addition, new
non-facilities-based carriers may enter our market and compete
on price. In either case, we may lose business or be forced to
lower our prices to compete, which could reduce our revenues.
Many of our competitors offer additional services that we do
not, which enables them to compete favorably against us.
Some of our competitors provide services that we do not, such as
local exchange and long distance services, voicemail and digital
subscriber line, or DSL, services. Potential customers that
desire these services on a bundled basis may choose to obtain
remote access and policy management services from the competitor
that provides these additional services.
Our potential customers may have other business relationships
with our competitors and consider those relationships when
deciding between our services and those of our competitors.
Many of our competitors are large facilities-based carriers that
purchase substantial amounts of products and services, or
provide other services or goods unrelated to remote access
services. As a result, if a potential customer is also a
supplier to one of our large competitors, or purchases unrelated
services or goods from our competitor, the potential customer
may be motivated to purchase its remote access services from our
competitor in order to maintain or enhance its business
relationship with that competitor.
14
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The telecommunications industry has experienced a dramatic
decline, which may cause consolidation among network service
providers and impair our ability to provide reliable, redundant
service coverage and negotiate favorable network access
terms. |
The telecommunications industry has experienced dramatic
technological change and increased competition that have led to
significant declines in network access pricing. In addition, the
revenues of network service providers have declined as a result
of the general economic slowdown. As a result, network service
providers have experienced operating difficulties in the last
several years, resulting in poor operating results and a number
of these providers declaring bankruptcy. As these conditions
have continued, some of these service providers have
consolidated and are working to consolidate or otherwise cease
operations, which would reduce the number of network service
providers from which we are able to obtain network access. As
this occurs, while we expect that we will still be able to
maintain operations and provide enterprise connectivity services
with a small number of network service providers, we would
potentially not be able to provide sufficient redundant access
points in some geographic areas, which could diminish our
ability to provide broad, reliable, redundant coverage. Further,
our ability to negotiate favorable access rates from network
service providers could be impaired, which could increase our
network access expenses and harm our operating results.
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If our security measures are breached and unauthorized
access is obtained to a customers internal network, our
virtual network may be perceived as not being secure and
enterprises may curtail or stop using our services. |
It is imperative for our customers that access to their mission
critical data is secure. A key component of our ability to
attract and retain customers is the security measures that we
have engineered into our network for the authentication of the
end users credentials; on a going forward basis, we expect
an additional key component in this regard to be our policy
management services. These measures are designed to protect
against unauthorized access to our customers networks.
Because techniques used to obtain unauthorized access or to
sabotage networks change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate
preventative measures against unauthorized access or sabotage.
If an actual or perceived breach of network security occurs,
regardless of whether the breach is attributable to our
services, the market perception of the effectiveness of our
security measures could be harmed. To date, we have not
experienced any significant security breaches to our network.
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If enterprise connectivity demand does not continue to
expand, we may experience a shortfall in revenues or earnings or
otherwise fail to meet public market expectations. |
The growth of our business is dependent, in part, upon the
increased use of enterprise connectivity services and our
ability to capture a higher proportion of this market. If the
demand for enterprise connectivity services does not continue to
grow, then we may not be able to grow our business, maintain
profitability or meet public market expectations. Increased
usage of enterprise connectivity services depends on numerous
factors, including:
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the willingness of enterprises to make additional information
technology expenditures; |
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the availability of security products necessary to ensure data
privacy over the public networks; |
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the quality, cost and functionality of these services and
competing services; |
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the increased adoption of wired and wireless broadband access
methods; and |
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the proliferation of electronic devices and related applications. |
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If we are unable to meet the challenges related to the
market acceptance and provision of our policy management
services, our ability to grow the business may be harmed. |
We expect that the growth of our business may depend in part
upon whether our policy management services will achieve and
sustain expected levels of demand and market acceptance. If
enterprises do not
15
perceive the benefits of our policy management services, then
the market for these services may not develop at all, or it may
develop more slowly than we expect, either of which could
significantly and adversely affect our growth. In addition, if
demand for our policy management services does not materialize
as expected, our ability to recover our investment in Safe3w,
Inc. and Mobile Automation, Inc. may be impaired or delayed. In
addition, because of our limited operating history relating to
policy management services, we cannot predict our revenue and
operating results from the provision of these services. Key
challenges that we face related to our provision of these
services include the risk that we may encounter unexpected
technical and other difficulties in developing our policy
management services which could delay or prevent the development
of these services or certain features of these services; the
risk that the rate of adoption by enterprises of network
security software or integrated secure connectivity solutions
will not be as we anticipate, which if slow would reduce or
eliminate the purchase of these services; and the risk that
security breaches may occur, notwithstanding the use of our
policy management services, by hackers that develop new methods
of avoiding security software. If we do not adequately address
these challenges, our growth and operating results may be
negatively impacted.
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Our long sales and service deployment cycles require us to
incur substantial sales costs that may not result in related
revenues. |
Our business is characterized by a long sales cycle between the
time a potential customer is contacted and a customer contract
is signed. In addition, the downturn in the economy from early
2001 to 2003 and the resulting reduction in corporate spending
on Internet infrastructure further lengthened the average sales
cycle for our services. Furthermore, once a customer contract is
signed, there is typically an extended period before the
customers end users actually begin to use our services,
which is when we begin to realize revenues. As a result, we may
invest a significant amount of time and effort in attempting to
secure a customer which may not result in any revenues. Even if
we enter into a contract, we will have incurred substantial
sales-related expenses well before we recognize any related
revenues. If the expenses associated with sales increase, we are
not successful in our sales efforts, or we are unable to
generate associated offsetting revenues in a timely manner, our
operating results will be harmed.
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There are approximately 24 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 for the
years ended December 31, 2005, 2004 and 2003. If we lose
access to Equants network and are unable to replace this
access in some or all of these countries, our revenues would
decline. In addition, our ability to market our services as
being global would be impaired, which could cause us to lose
customers. Our agreement with Equant expires in February 2007,
but Equant may terminate the agreement earlier if we materially
breach the contract and fail to cure the breach, or if we become
insolvent. In addition, Equant has no obligation to continue to
provide us with access to its network after February 2007. If
Equant were to cease operations or terminate its arrangements
with us, we would be required to enter into arrangements with
other dial-up network
service providers, which may not be available. This process
could be costly and time consuming, and we may not be able to
enter into these arrangements on terms acceptable to us.
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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
16
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.
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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.
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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.
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Because much of our business is international, we
encounter additional risks, which may reduce our
profitability. |
We generate a substantial portion of our revenues from business
conducted internationally. Revenues from customers domiciled
outside of the United States were 45% of our revenues for 2005,
of which approximately 29% and 12% were generated in our EMEA
(Europe, Middle East and Africa) and Asia Pacific regions,
respectively. In 2004, revenues from customers domiciled outside
of the United States were 41% of our total revenues, of which
approximately 24% and 13% were generated in our EMEA and
Asia Pacific regions, respectively. Although we currently
bill for our services in U.S. dollars, our international
operations subject our business to specific risks. These risks
include:
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longer payment cycles for foreign customers, including delays
due to currency controls and fluctuations; |
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the impact of changes in foreign currency exchange rates on the
attractiveness of our pricing; |
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high taxes in some foreign jurisdictions; |
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difficulty in complying with Internet-related regulations in
foreign jurisdictions; |
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difficulty in staffing and managing foreign operations; and |
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difficulty in enforcing intellectual property rights and weaker
laws protecting these rights. |
Any of these factors could negatively impact our business.
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Completed or future acquisitions or investments could
dilute the ownership of our existing stockholders, cause us to
incur significant expenses or harm our operating results. |
Integrating any newly acquired businesses, technologies or
services may be expensive and time-consuming. For example, we
completed the acquisitions of Safe3w, Inc. in September 2004,
Mobile Automation, Inc. in October 2004 and
GoRemote Internet Communications, Inc. in February 2006. To
17
finance any acquisitions, it may be necessary for us to raise
additional funds through public or private financings.
Additional funds may not be available on terms that are
favorable to us and, in the case of equity financings, would
result in dilution to our stockholders. In the case of completed
or future acquisitions, we may be unable to operate any acquired
businesses profitably or otherwise implement our strategy
successfully. If we are unable to integrate any newly acquired
entities, such as GoRemote Internet Communications, Inc.,
or technologies effectively, our operating results could suffer.
Completed acquisitions by us, such as the aforementioned Safe3w,
Inc., Mobile Automation, Inc. and GoRemote Internet
Communications, Inc. transactions, or future acquisitions by us
could also result in large and immediate write-offs or
assumption of debt and contingent liabilities, either of which
could harm our operating results.
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If we are unable to effectively manage future expansion,
our business may be adversely impacted. |
We have experienced, and in the future may continue to
experience, rapid growth in operations which has placed and
could continue to place, a significant strain on our network
operations, development of services, internal controls and other
managerial, operating, and financial resources. If we do not
manage future expansion effectively, our business will be
harmed. To effectively manage any future expansion, we will need
to improve our operational and financial systems and managerial
controls and procedures, which include the following:
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managing our research and development efforts for new and
evolving technologies; |
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expanding the capacity and performance of our network and
software infrastructure; |
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developing our administrative, accounting and management
information systems and controls; and |
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effectively maintaining coordination among our various
departments, particularly as we expand internationally. |
|
|
|
We currently are, and in the future may be, subject to
securities class action lawsuits due to decreases in our stock
price. |
We are at risk of being subject to securities class action
lawsuits if our stock price declines substantially. Securities
class action litigation has often been brought against a company
following a decline in the market price of its securities. For
example, in June 2004, we announced that we would not meet
market expectations regarding our financial performance in the
second quarter, and our stock price declined. Beginning on
January 14, 2005, three purported class action complaints
were filed against the Company and certain of its executive
officers in United States District Court for the Northern
District of California, purportedly on behalf of a class of
investors who purchased iPass stock between April 22, 2004
and June 30, 2004. The complaint alleges claims under
Sections 10(b) and 20(a) of the Securities and Exchange Act
of 1934. 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 us are Kenneth D. Denman,
Donald C. McCauley, Anurag Lal and Jon M. Russo. The
Consolidated Amended Complaint alleges that the defendants
violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 during an alleged class period
from April 22, 2004 to June 30, 2004 by failing to
inform investors of certain operational issues that allegedly
led to declines in our revenue, earnings and growth prospects.
iPass and the individual defendants moved to dismiss the
complaint. The motion was heard on January 23, 2006, and
the motion was granted on February 27, 2006. The court
granted plaintiffs leave to file an amended complaint, which
shall be due by March 30, 2006. In addition, beginning on
March 25, 2005, a stockholder purporting to act on our
behalf filed a lawsuit entitled Narendar Gupta,
et al. v. Kenneth Denman, et al., Case
No. CIV445765 in the California Superior Court for the
County of San Mateo against our directors and certain
officers. iPass was also named as a nominal defendant solely in
a derivative capacity. On April 6, 2005, a similar lawsuit
entitled Eugene Danielson v. Kenneth D. Denman,
et al., No. CIV446034 was filed in that same
court. Both lawsuits were consolidated into a single action by
stipulation and order dated April 26, 2005. The derivative
action is based on the same factual allegations and
circumstances as the purported securities class actions and
alleges state law claims for insider trading, breach of
fiduciary duty, abuse of control, gross mismanagement, waste of
18
corporate assets, and unjust enrichment and seeks monetary
damages on behalf of iPass to be proven at trial. On May 5,
2005, the actions were consolidated as In re iPass, Inc.
Derivative Litigation, Case No. CIV445765. Plaintiffs
filed a consolidated complaint on February 21, 2006, and
the defendants have until March 28, 2006 within which to
respond to the complaint. If our stock price declines
substantially in the future, we may be the target of similar
litigation. The current, and any future, securities litigation
could result in substantial costs and divert managements
attention and resources, and could seriously harm our business.
|
|
|
Litigation arising from disputes involving third parties
could disrupt the conduct of our business. |
Because we rely on third parties to help us develop, market and
support our service offerings, from time to time we have been,
and we may continue to be, involved in disputes with these third
parties. If we are unable to resolve these disputes favorably,
our development, marketing or support of our services could be
delayed or limited, which could materially and adversely affect
our business.
|
|
|
If licenses to third party technologies, including our
license with RSA Security, do not continue to be available to us
at a reasonable cost, or at all, our business and operations may
be adversely affected. |
We license technologies from several software providers that are
incorporated in our services. We anticipate that we will
continue to license technology from third parties in the future.
In particular, we license encryption technology from RSA
Security. Our license agreement with RSA Security expired in
February 2006 and automatically renewed for an additional
three-year period. This license will continue to automatically
renew for additional three-year periods upon expiration, unless
terminated by us or by RSA Security. Licenses from third party
technologies, including our license with RSA Security, may not
continue to be available to us at a reasonable cost, or at all.
The loss of these technologies or other technologies that we
license could have an adverse effect on our services and
increase our costs or cause interruptions or delays in our
services until substitute technologies, if available, are
developed or identified, licensed and successfully integrated
into our services.
|
|
|
Litigation arising out of intellectual property
infringement could be expensive and disrupt our business. |
We cannot be certain that our products do not, or will not,
infringe upon patents, trademarks, copyrights or other
intellectual property rights held by third parties, or that
other parties will not assert infringement claims against us.
From time to time we have been, and we may continue to be,
involved in disputes with these third parties. Any claim of
infringement of proprietary rights of others, even if ultimately
decided in our favor, could result in substantial costs and
diversion of our resources. Successful claims against us may
result in an injunction or substantial monetary liability, in
either case which could significantly impact our results of
operations or materially disrupt the conduct of our business. If
we are enjoined from using a technology, we will need to obtain
a license to use the technology, but licenses to third-party
technology may not be available to us at a reasonable cost, or
at all.
|
|
|
New accounting pronouncements may impact our future
financial position and results of operations. |
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123R, Accounting for
Stock-Based
Compensation Revised (SFAS 123R),
which requires the measurement and recognition of compensation
expense for all stock-based compensation based on estimated fair
values. As a result, our operating results for the first quarter
of 2006 and for future periods will contain a charge for
stock-based compensation related to employee stock options and
employee stock purchases. The application of SFAS 123R
requires the use of an option-pricing model to determine the
fair value of share-based payment awards. This determination of
fair value is affected by our stock price as well as assumptions
regarding a number of highly complex and subjective variables.
These variables include, but are not limited to, our expected
stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors.
Option-pricing models were developed for use in estimating the
value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because our employee
stock options have certain characteristics that are
significantly different from traded options, and because changes
in the subjective assumptions can materially affect the
estimated value, in managements opinion the existing
19
valuation models may not provide an accurate measure of the fair
value of our employee stock options. Although the fair value of
employee stock options is determined in accordance with
SFAS 123R and SAB 107 using an option-pricing model,
that value may not be indicative of the fair value observed in a
willing buyer/willing seller market transaction. We expect that
our adoption of SFAS 123R will have a material impact on
our financial statements and results of operations and this will
continue to be the case for future periods. We cannot predict
the effect that this adverse impact on our reported operating
results will have on the trading price of our common stock.
Risks Relating to Our Industry
|
|
|
Security concerns may delay the widespread adoption of the
Internet for enterprise communications, or limit usage of
Internet-based services, which would reduce demand for our
products and services. |
The secure transmission of confidential information over public
networks is a significant barrier to further adoption of the
Internet as a business medium. The Internet is a public network
and information is sent over this network from many sources.
Advances in computer capabilities, new discoveries in the field
of code breaking or other developments could result in
compromised security on our network or the networks of others.
Security and authentication concerns with respect to the
transmission over the Internet of confidential information, such
as corporate access passwords and the ability of hackers to
penetrate online security systems may reduce the demand for our
services. Further, new access methods, devices, applications and
operating systems have also introduced additional
vulnerabilities which have been actively exploited by hackers.
Internet-based worms and viruses, computer programs that are
created to slow Internet traffic or disrupt computer networks or
files by replicating through software or operating systems, are
examples of events or computer programs that can disrupt users
from using our Internet-based services and reduce demand for our
services, potentially affecting our business and financial
performance. In particular, certain Internet worms and viruses
affected some of our customers and their mobile users, which may
have negatively impacted our revenues. Furthermore, any
well-publicized compromises of confidential information may
reduce demand for Internet-based communications, including our
services.
|
|
|
Financial, political or economic conditions could
adversely affect our revenues. |
Our revenues and profitability depend on the overall demand for
enterprise connectivity services. The general weakening of the
global economy from early 2001 to 2003 led to decreased trade
and corporate spending on Internet infrastructure. In addition,
in the past, terrorist attacks, including the attacks on the
United States and internationally, have had a significant impact
on global economic conditions and our operations. If there are
further acts of terrorism, if hostilities involving the United
States and other countries continue or escalate, or if other
future financial, political, economic and other uncertainties or
natural disasters arise, this could lead to a reduction in
travel, including by business travelers who are substantial
users of our services, and continue to contribute to a climate
of economic and political uncertainty that could adversely
affect our revenue growth and financial results.
|
|
|
Government regulation of, and legal uncertainties
regarding, the Internet could harm our business. |
Internet-based communication services generally are not subject
to federal fees or taxes imposed to support programs such as
universal telephone service. Changes in the rules or regulations
of the U.S. Federal Communications Commission or in
applicable federal communications laws relating to the
imposition of these fees or taxes could result in significant
new operating expenses for us, and could negatively impact our
business. Any new law or regulation, U.S. or foreign,
pertaining to Internet-based communications services, or changes
to the application or interpretation of existing laws, could
decrease the demand for our services, increase our cost of doing
business or otherwise harm our business. There are an increasing
number of laws and regulations pertaining to the Internet. These
laws or regulations may relate to taxation and the quality of
products and services. Furthermore, the applicability to the
Internet of existing laws governing intellectual property
ownership and infringement, taxation, encryption, obscenity,
libel, employment, personal privacy, export or import matters
and other issues is uncertain and developing and we are not
certain how the possible application of these laws may affect
us. Some of these laws may not contemplate or address the unique
issues
20
of the Internet and related technologies. Changes in laws
intended to address these issues could create uncertainty in the
Internet market, which could reduce demand for our services,
increase our operating expenses or increase our litigation costs.
|
|
Item 1B. |
Unresolved Staff Comments |
There are no unresolved written SEC comments received at least
180 days prior to December 31, 2005.
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.
|
|
Item 3. |
Legal Proceedings |
Beginning on January 14, 2005, three purported class action
complaints were filed against us and certain of our executive
officers in 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 us are Kenneth D. Denman,
Donald C. McCauley, Anurag Lal and Jon M. Russo. The
Consolidated Amended Complaint alleges that the defendants
violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 during an alleged class period
from April 22, 2004 to June 30, 2004 by failing to
inform investors of certain operational issues that allegedly
led to declines in our revenue, earnings and growth prospects.
iPass and the individual defendants moved to dismiss the
complaint. The motion was heard on January 23, 2006, and
the motion was granted on February 27, 2006. The court
granted plaintiffs leave to file an amended complaint, which
shall be due by March 30, 2006. The case is at an early
stage and no trial date has been set. No discovery is expected
to take place unless and until plaintiffs file a complaint that
survives the individual defendants motion to dismiss.
iPass and the individual defendants intend to take all
appropriate actions to defend the suit. We cannot estimate any
possible loss at this time.
On March 25, 2005, a stockholder purporting to act on our
behalf filed a lawsuit entitled Narendar Gupta,
et al. v. Kenneth Denman, et al., Case No.
CIV445765 in the California Superior Court for the County of
San Mateo against our directors and certain officers. iPass
was also named as a nominal defendant solely in a derivative
capacity. On April 6, 2005, a similar lawsuit entitled
Eugene Danielson v. Kenneth D. Denman, et al.,
No. CIV446034 was filed in that same court. Both lawsuits
were consolidated into a single action by stipulation and order
dated April 26, 2005. The derivative action is based on the
same factual allegations and circumstances as the purported
securities class actions and alleges state law claims for
insider trading, breach of fiduciary duty, abuse of control,
gross mismanagement, waste of corporate assets, and unjust
enrichment and seeks monetary damages on behalf of iPass to be
proven at trial. On May 5, 2005, the actions were
consolidated as In re iPass, Inc. Derivative Litigation,
Case No. CIV445765. Plaintiffs filed a consolidated
complaint on February 21, 2006, and the defendants have
until March 28, 2006 within which to respond to the
complaint. The case is at an early stage, no discovery has
occurred and no trial date has been set. iPass and the
individual defendants intend to take all appropriate actions to
defend the suit. We cannot estimate any possible loss at this
time.
We may be subject to various other claims and legal actions
arising in the ordinary course of business from time to time.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of our stockholders during
the fiscal quarter ended December 31, 2005.
21
PART II
|
|
Item 5. |
Market For Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Price Range of Common Stock
Our common stock is traded on the Nasdaq National 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 National Market:
|
|
|
|
|
|
|
|
|
|
|
|
Low Sale Price | |
|
High Sale Price | |
|
|
| |
|
| |
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 |
|
Fiscal year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
10.70 |
|
|
$ |
16.25 |
|
|
Second Quarter
|
|
|
9.86 |
|
|
|
13.37 |
|
|
Third Quarter
|
|
|
4.78 |
|
|
|
6.91 |
|
|
Fourth Quarter
|
|
|
5.75 |
|
|
|
7.77 |
|
We had 64,567,835 shares of our common stock outstanding
held by 168 stockholders of record as of February 28, 2006.
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 2006 Annual Meeting of
Stockholders to be filed not later than April 30, 2006 (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.
22
|
|
Item 6. |
Selected Financial Data |
The following selected consolidated financial data should be
read in conjunction with Managements 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.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
169,373 |
|
|
$ |
166,319 |
|
|
$ |
136,078 |
|
|
$ |
92,830 |
|
|
$ |
53,164 |
|
Total operating expenses
|
|
|
151,474 |
|
|
|
137,353 |
|
|
|
113,721 |
|
|
|
86,178 |
|
|
|
80,898 |
|
Operating income (loss)
|
|
|
17,899 |
|
|
|
28,966 |
|
|
|
22,357 |
|
|
|
6,652 |
|
|
|
(27,734 |
) |
Net income (loss)
|
|
|
12,895 |
|
|
|
19,068 |
|
|
|
13,902 |
|
|
|
29,759 |
(1) |
|
|
(27,801 |
) |
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.20 |
|
|
|
0.31 |
|
|
|
0.26 |
|
|
|
2.34 |
|
|
|
(2.43 |
) |
|
Diluted
|
|
|
0.19 |
|
|
|
0.29 |
|
|
|
0.23 |
|
|
|
0.57 |
|
|
|
(2.43 |
) |
|
|
(1) |
Of this amount, $24.3 million was due to a tax benefit,
resulting from the reversal of deferred tax valuation allowances. |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
254,474 |
|
|
$ |
230,513 |
|
|
$ |
190,117 |
|
|
$ |
75,442 |
|
|
$ |
37,421 |
|
Line of credit and loans payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,375 |
|
|
|
8,932 |
|
Total stockholders equity
|
|
|
226,251 |
|
|
|
207,222 |
|
|
|
171,722 |
|
|
|
49,600 |
|
|
|
16,262 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Company Overview
We deliver simple, secure and manageable enterprise mobility
services, maximizing the productivity of workers as they move
between office, home and remote locations. Our policy management
services close the gaps in protecting computers, network assets,
user identities and data whenever users connect over the
Internet. Our connectivity services utilize the iPass global
virtual network, a unified network of hundreds of
dial-up, wireless, and
broadband providers in over 160 countries.
Overview of 2005
In 2005, we continued to experience a decline in revenues
derived from our traditional
dial-up business as
dial-up revenue
decreased 8% to $138.1 million in 2005 as compared to 2004.
This decrease was offset in part by revenues generated from fees
and from usage of our broadband service. We also continued to
add new customers during 2005, including 42 from the Forbes
Global 2000, bringing our total customers to 291 as of
December 31, 2005.
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 2005. We ended 2005 with
approximately 38,000 Wi-Fi and wired hotspots worldwide,
approximately 36,000 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
$6.5 million increase in broadband usage revenue in 2005
over 2004.
23
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
endpoint policy management and other fee based services. In
2006, 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
Factors Affecting Operating Results.
Sources of Revenues
We derive our revenues primarily from providing enterprise
connectivity services through our virtual network. We sell these
services directly, as well as indirectly through our channel
partners. We bill substantially all customers on a time basis
for usage based on negotiated rates. We bill the remaining
customers based on a fixed charge per active user per month with
additional charges for excess time. Substantially all enterprise
customers commit to a one to three year contract term. Most of
our contracts with enterprise customers contain minimum usage
levels. We bill customers for minimum commitments when actual
usage is less than their monthly minimum commitment amount. We
recognize the difference between the minimum commitment and
actual usage as fee revenue once the cash for such fee has been
collected. Our usage-based revenues represented 87%, 92% and 93%
of our revenues for the years ended December 31, 2005, 2004
and 2003, 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 5.2% and 1.4% of our total revenues for
the years ended December 31, 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 of 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 fees,
represented approximately 13% and 8% of our revenues for the
years ended December 31, 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.
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
24
levels can be based on an annual term, monthly term or over the
term of the arrangement. If actual usage in a given period is
less than the minimum commitment, we recognize the difference
between the actual usage and the minimum commitment as revenue
when cash is collected because we cannot reasonably estimate the
amount of the difference that will be collected. We cannot
reasonably estimate the amount of the difference to be collected
because we have from time to time renegotiated minimum
commitments in cases where customers have sought renegotiation
of their contract for reasons such as a significant downturn in
their business or where we have determined that it would be in
our best interest to do so. Customers are not contractually
entitled to use or otherwise receive benefit for unused service
in subsequent periods.
We typically provide our customers with deployment services,
technical support and additional optional services. Depending on
the service provided and the nature of the arrangement, we may
charge a one-time, annual or monthly fee. Revenues relating to
one-time fees are recognized on a straight-line basis over the
term of the initial contract, generally one to three years as we
can not reasonably estimate the period of performance. Revenues
relating to annual fees are recognized on a straight-line basis.
Revenues for monthly services are recognized during the month
that these services are provided.
License revenue consists of revenue earned under software
license agreements. License revenue is generally recognized when
a signed contract or other persuasive evidence of an arrangement
exists, the software has been shipped or electronically
delivered, the license fee is fixed or determinable, and
collection of the resulting receivable is probable as prescribed
by AICPA Statement of Portion (SOP)
97-2. We enter into
revenue arrangements in which a customer may purchase a
combination of software, upgrades and maintenance and support
(multiple-element arrangements). When vendor-specific objective
evidence (VSOE) of fair value exists for all
elements, we allocate revenue to each element based on the
relative fair value of each of the elements. VSOE of fair value
is established by the price charged when that element is sold
separately. When contracts contain multiple elements wherein
VSOE of fair value exists for all undelivered elements, we
account for the delivered elements in accordance with the
residual method prescribed by AICPA Statement of
Position (SOP) 98-9. Revenue from subscription
license agreements, which include software, rights to future
products on a
when-and-if available
basis and maintenance, is recognized ratably over the term of
the subscription period. Revenue on shipments to resellers,
which is generally subject to certain rights of return and price
protection, is recognized when the products are sold by the
resellers to the end-user customer.
Maintenance revenue consists of fees for providing software
updates on a when and if available basis and technical support
for software products (post-contract support or
PCS). Maintenance revenue is recognized ratably over
the term of the agreement.
Payments received in advance of services performed are deferred.
Allowances for estimated future returns and discounts are
provided for upon recognition of revenue.
The Company generally performs credit reviews to evaluate the
customers ability to pay. If the Company determines that
collectibility is not probable, revenue is recognized as cash is
collected.
|
|
|
Accounting for Income Taxes |
In preparing our consolidated financial statements, we assess
the likelihood that our deferred tax assets will be realized
from future taxable income. We establish a valuation allowance
if we determine that it is more likely than not that some
portion of the net deferred tax assets will not be realized.
Changes in the valuation allowance are included in our
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
25
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, 2005 included three years
of historical operating profits and a projection of future
income limited to three years which coincides with the period
over which we recorded historical operating profits. 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.
|
|
|
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 $2.0 million,
$2.1 million and $2.3 million as of December 31,
2005, 2004 and 2003, 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
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|
|
|
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|
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|
|
|
|
|
|
|
December 31, |
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|
|
|
|
|
|
Change |
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|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
|
% |
|
2004 |
|
$ |
|
% |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages) |
Total Revenue
|
|
$169,373 |
|
$3,054 |
|
1.8% |
|
$166,319 |
|
$30,241 |
|
22.2% |
|
$136,078 |
Total revenue increased slightly in 2005 as compared to 2004 due
to offsetting factors. Revenues generated from dial up usage
decreased from $150.5 million in 2004 to
$138.1 million in 2005. This represents a decrease of
$12.4 million or 9%. This was offset in part by increases
in revenues generated from broadband usage and fees. Revenues
generated from usage of our broadband services were
$8.8 million and $2.3 million dollars for the years
ended December 31, 2005 and 2004, respectively. Fee revenue
increased from $13.6 million in 2004 to $22.5 million
in 2005. We expect revenue from dial up usage to continue to
decrease in absolute dollars as well as a percentage of total
revenue, but we can not reasonably estimate if the decline will
be consistent with that seen from 2004 to 2005. No individual
customer accounted for 10% or more of total revenues for the
years ended December 31, 2005, 2004 or 2003. Revenues from
fees represented approximately 13%, 8% and 7% of our total
revenue in 2005, 2004, and 2003, respectively.
The growth in total revenue in 2004 over 2003 was due primarily
to an increase in the usage of our services resulting from an
increased number of end users of our services at new and
existing customers. Distinct end users of our service increased
to 518,000 in the month of December of 2004, compared to
447,000 for the same period in 2003.
International revenues, which are revenues generated from
customers domiciled outside the United States, accounted
for approximately 45%, 41% and 39% of total revenues in 2005,
2004 and 2003, respectively. Substantially all of our
international revenues are generated in the EMEA (Europe, Middle
East
26
and Africa) and Asia Pacific regions. Revenues in the EMEA
region represented 29%, 24% and 21% of total revenues in 2005,
2004 and 2003, 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
12%, 13% and 14% of total revenues in 2005, 2004 and 2003,
respectively. Revenues in the United Kingdom accounted for 14%
and 11% of total revenues in 2005 and 2004, respectively. No
individual foreign country accounted for 10% or more of total
revenues in 2003. 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 expenses consist of charges for access,
principally by the minute, that we pay to our network service
providers.
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|
|
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|
|
|
|
|
|
December 31, | |
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| |
|
|
|
|
Change | |
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|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2005 | |
|
$ | |
|
% | |
|
2004 | |
|
$ | |
|
% | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Network access expenses
|
|
$ |
42,109 |
|
|
$ |
4,770 |
|
|
|
12.8% |
|
|
$ |
37,339 |
|
|
$ |
7,218 |
|
|
|
24.0% |
|
|
$ |
30,121 |
|
As a percent of revenue
|
|
|
24.9 |
% |
|
|
|
|
|
|
2.4% |
|
|
|
22.5 |
% |
|
|
|
|
|
|
0.4% |
|
|
|
22.1 |
% |
The growth in network access expenses in 2005 over 2004 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 2005. 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 of our virtual
network increases.
The growth in network access expenses in 2004 over 2003 was due
primarily to increased usage of our virtual network. In 2004, 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 expenses consist of compensation and benefits
for our network engineering, customer support, network access
quality and information technology personnel, outside
consultants, transaction center fees, depreciation of our
network equipment, and certain allocated overhead costs.
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|
|
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|
|
|
December 31, | |
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|
| |
|
|
|
|
Change | |
|
|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2005 | |
|
$ | |
|
% | |
|
2004 | |
|
$ | |
|
% | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Network operations expenses
|
|
$ |
20,783 |
|
|
$ |
1,742 |
|
|
|
9.1% |
|
|
$ |
19,041 |
|
|
$ |
4,735 |
|
|
|
33.1% |
|
|
$ |
14,306 |
|
As a percent of revenue
|
|
|
12.3 |
% |
|
|
|
|
|
|
0.9% |
|
|
|
11.4 |
% |
|
|
|
|
|
|
0.9% |
|
|
|
10.5 |
% |
The increase in network operations expenses from 2004 to 2005 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. 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.
27
The increase in network operations expenses in 2004 over 2003 in
absolute dollars was due primarily to $1.8 million in
additional compensation and benefits expense due to an increase
in personnel, $840,000 of additional transaction center fees,
and $680,000 of additional depreciation expense on network
operations equipment in support and expansion of our virtual
network. There was also an additional $530,000 in license and
maintenance fees as well as $250,000 in additional consulting
fees. The remaining portion of the increase was due to
individually insignificant items. 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 expenses consist of compensation and
benefits for our research and development personnel, consulting,
and certain allocated overhead costs.
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|
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|
|
|
December 31, | |
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| |
|
|
|
|
Change | |
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|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2005 | |
|
$ | |
|
% | |
|
2004 | |
|
$ | |
|
% | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Research and development expenses
|
|
$ |
17,571 |
|
|
$ |
3,767 |
|
|
|
27.3% |
|
|
$ |
13,804 |
|
|
$ |
3,860 |
|
|
|
38.8% |
|
|
$ |
9,944 |
|
As a percent of revenue
|
|
|
10.4 |
% |
|
|
|
|
|
|
2.1% |
|
|
|
8.3 |
% |
|
|
|
|
|
|
1.0% |
|
|
|
7.3 |
% |
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. We
expect that our research and development expenses will continue
to increase slightly in absolute dollars as we develop and
enhance new and existing service offerings, but to remain
relatively constant as a percentage of revenues.
The increase in research and development expenses in 2004 over
2003 was due primarily to an additional $2.3 million of
compensation and benefits expenses related to an increase in
headcount, and approximately $1.2 million in fees paid to
consultants to further develop our service. The increase as a
percentage of revenues was due to the acceleration of our
development of new products as well as the increase in research
and development personnel as a result of the two acquisitions
that occurred in 2004.
Sales and marketing expenses consist of compensation, benefits,
advertising, promotion expenses, and certain allocated overhead
costs.
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|
|
|
December 31, | |
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|
| |
|
|
|
|
Change | |
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|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2005 | |
|
$ | |
|
% | |
|
2004 | |
|
$ | |
|
% | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Sales and marketing expenses
|
|
$ |
50,448 |
|
|
$ |
3,868 |
|
|
|
8.3% |
|
|
$ |
46,580 |
|
|
$ |
5,531 |
|
|
|
13.5 |
% |
|
$ |
41,049 |
|
As a percent of revenue
|
|
|
29.8 |
% |
|
|
|
|
|
|
1.8% |
|
|
|
28.0 |
% |
|
|
|
|
|
|
(2.2 |
)% |
|
|
30.2 |
% |
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. We
expect that sales and
28
marketing expenses will increase in absolute dollars to the
extent revenues increase and/or we expand our sales force and
increase marketing activities, but will remain relatively
constant as a percentage of revenues.
The increase in sales and marketing expenses in 2004 over 2003
in absolute dollars was due primarily to an additional
$2.3 million in compensation and benefits expenses
resulting from the expansion of the sales organization in the
EMEA and Asia Pacific regions, as well as the additional sales
personnel from the acquisition of Mobile Automation in the
fourth quarter of 2004. The increase also included
$1.2 million of additional advertising and public relations
expenses, as well as a $410,000 increase in compensation and
benefits expenses for additional 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.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
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|
| |
|
|
|
|
Change | |
|
|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2005 | |
|
$ | |
|
% | |
|
2004 | |
|
$ | |
|
% | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
General and administrative expenses
|
|
$ |
17,059 |
|
|
$ |
(731 |
) |
|
|
(4.1 |
)% |
|
$ |
17,790 |
|
|
$ |
3,558 |
|
|
|
25.0 |
% |
|
$ |
14,232 |
|
As a percent of revenue
|
|
|
10.1 |
% |
|
|
|
|
|
|
(0.6 |
)% |
|
|
10.7 |
% |
|
|
|
|
|
|
0.2 |
% |
|
|
10.5 |
% |
General and administrative expenses decreased slightly in
absolute dollars and remained relatively constant as a
percentage of revenues from 2004 to 2005. Part of the increase
in general and administrative expenses in 2005 was $275,000 in
compensation and benefits expenses offset in part by a $937,000
decrease in bad debt expense. The remaining portion of the
change from 2004 to 2005 was due to a net decrease of various
individually insignificant accounts. We expect that our general
and administrative expenses will increase in absolute dollars to
the extent that we expand our operations, but to remain
relatively constant as a percentage of revenues.
A significant part of the increase in general and administrative
expenses in 2004 over 2003 was $1.7 million in compensation
and benefits expenses for additional personnel and
$1.0 million for directors and officers insurance premiums.
There was also a $1.0 million increase in legal and
accounting fees. These increases were offset in part by
decreases in various individually insignificant accounts.
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|
|
Amortization of Stock-Based Compensation |
We record stock-based compensation charges in the amount by
which the option exercise price or the restricted stock purchase
price is less than the fair value of our common stock at the
date of grant. We amortize this compensation expense on an
accelerated basis over the vesting period of the applicable
agreements, generally four years. Amortization of stock-based
compensation expense relates to stock options granted to
employees prior to our initial public offering in July of 2003.
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|
|
|
|
|
|
|
|
|
December 31, | |
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|
| |
|
|
|
|
Change | |
|
|
|
Change | |
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2005 | |
|
$ | |
|
% | |
|
2004 | |
|
$ | |
|
% | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Amortization of stock-based compensation expense
|
|
$ |
1,137 |
|
|
$ |
(1,205 |
) |
|
|
(51.5 |
)% |
|
$ |
2,342 |
|
|
$ |
(1,727 |
) |
|
|
(42.4 |
)% |
|
$ |
4,069 |
|
As a percent of revenue
|
|
|
0.7 |
% |
|
|
|
|
|
|
(0.7 |
)% |
|
|
1.4 |
% |
|
|
|
|
|
|
(1.6 |
)% |
|
|
3.0 |
% |
We expect to incur amortization of stock-based compensation
expense of at least $498,000 in 2006 and $95,000 in 2007 and
thereafter. The amount of amortization of stock-based
compensation expense to be recognized in future periods could
decrease if stock options for which accrued but unvested
compensation
29
expense has been recorded are forfeited. Amortization of
stock-based
compensation may change upon the adaptation of SFAS
No. 123R in 2006.
|
|
|
Amortization of Acquired Tangibles |
Amortization of acquired intangibles was $2.4 million and
$457,000 for the years ended December 31, 2005 and 2004,
respectively. The increase from 2004 to 2005 was due to the
intangible assets being amortized over the entire year in 2005
as they were acquired during 2004.
Non-Operating Expenses
Other income net, consists of the net total of interest income
and interest expense for the period.
Interest income includes interest income on cash, cash
equivalents, and short-term investment balances. Interest income
and other was $3.9 million, $2.3 million and
$1.1 million for the years ended December 31, 2005,
2004 and 2003, respectively. The increase in interest and other
income in 2005 was due to an increase in the average cash, cash
equivalents and
short-term investment
balances for the period and an increase in the rate of return on
our investments as compared to the same period in 2004.
Interest expense consists of interest paid on our line of credit
and loans, as well as amortization of a loan discount associated
with the fair value of warrants issued in connection with our
financing activities prior to 2004. Interest expense was
$620,000 in 2003. There was no interest expense for the year
ended December 31, 2004 and 2005. The decrease in interest
expense is due to the paying off of our line of credit and all
outstanding loans payable in July and August 2003.
|
|
|
Provision for Income Taxes |
The provision for income taxes was $8.9 million in 2005,
compared to a provision of $12.2 million in 2004. The
decrease is due to a decrease in income before income taxes from
$31.3 million in 2004 to $21.8 million in 2005. The
increase in the provision for income taxes from
$9.0 million in 2003 was due to an increase in income
before income taxes in 2004 over 2003. The effective tax rate
was 41% for the year ended December 31, 2005 and 39% for
the years ended December 31, 2004 and 2003. The increase in
the 2005 effective tax rate was due to the recording of book to
tax return true-ups in
the fourth quarter of 2005.
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 $32.1 million
for the year ended December 31, 2005, compared to
$37.8 million for the year ended December 31, 2004 and
$23.7 million for the year ended December 31, 2003.
The decrease in cash provided by operating activities in 2005 is
due primarily to our total revenues increasing by approximately
$3.1 million, while operating expenses increased by
$14.1 million as compared to 2004.
Net cash used in investing activities in 2005 was
$32.5 million in 2005 compared to $59.9 million in
2004 and $99.2 million in 2003, respectively. Net cash used
in investing activities in 2005 was from the 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, offset by the maturities of
short-term investments in the amount of $131.1 million. Net
cash used in investing activities also included
30
$28.4 million for the acquisition of Safe3w and Mobile
Automation as well as $6.2 million for the purchases of
property and equipment.
Net cash provided by financing activities in 2005 was
$3.8 million, compared to $10.9 million and
$93.2 million in 2004 and 2003, 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. In comparison, cash
provided by financing activities in 2003 was primarily due to
net proceeds from our initial public offering, offset in part by
the payment of all outstanding balances on our line of credit
and loans payable.
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, 2005, our principal source of liquidity
was $184.6 million of cash, cash equivalents and short-term
investments.
|
|
|
Off-Balance Sheet Arrangements |
At December 31, 2004 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.
At December 31, 2005, 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 and operating lease
payments under these agreements as of December 31, 2005 are
as follows (in thousands):
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2006
|
|
$ |
1,387 |
|
|
2007
|
|
|
1,066 |
|
|
2008
|
|
|
1,066 |
|
|
2009
|
|
|
266 |
|
|
|
|
|
|
|
$ |
3,785 |
|
|
|
|
|
31
We lease our facilities under non-cancelable operating leases
that expire at various dates through February 2010. Future
minimum lease payments under these operating leases as of
December 31, 2005 are as follows (in thousands):
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2006
|
|
$ |
4,145 |
|
|
2007
|
|
|
4,279 |
|
|
2008
|
|
|
4,374 |
|
|
2009
|
|
|
4,311 |
|
|
2010
|
|
|
1,453 |
|
|
|
|
|
|
|
$ |
18,562 |
|
|
|
|
|
|
|
|
Tabular Disclosure of Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than | |
|
|
|
More Than |
Contractual Obligations |
|
Total | |
|
1 Yr | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Yrs |
|
|
| |
|
| |
|
| |
|
| |
|
|
Operating Lease Obligations
|
|
$ |
18,562 |
|
|
$ |
4,145 |
|
|
$ |
8,653 |
|
|
$ |
5,764 |
|
|
$ |
|
|
Purchase Obligations
|
|
|
3,785 |
|
|
|
1,387 |
|
|
|
2,132 |
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$ |
22,347 |
|
|
$ |
5,532 |
|
|
$ |
10,785 |
|
|
$ |
6,030 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
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, 2005, we had cash, cash equivalents, and
short-term investments totaling $184.6 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,
although there can be no assurance of this.
As of December 31, 2004, we had cash and cash equivalents
of $152.3 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.
32
The following is a chart of the principal amounts of short-term
investments by expected maturity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date | |
|
|
|
|
|
|
|
|
for Par Value Amounts | |
|
|
|
|
|
|
|
|
for the Year Ended | |
|
|
|
|
|
As of | |
|
|
December 31, | |
|
|
|
|
|
Dec. 31, 2005 | |
|
|
| |
|
|
|
Total Cost | |
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
Value | |
|
Total Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
U.S. Government agencies
|
|
$ |
85,405 |
|
|
$ |
11,900 |
|
|
$ |
20,490 |
|
|
$ |
119,981 |
|
|
$ |
119,508 |
|
Corporate notes
|
|
|
15,915 |
|
|
|
|
|
|
|
|
|
|
|
16,248 |
|
|
|
16,191 |
|
Auction rate and money market securities
|
|
|
11,000 |
|
|
|
|
|
|
|
|
|
|
|
11,000 |
|
|
|
11,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
112,320 |
|
|
$ |
11,900 |
|
|
$ |
20,490 |
|
|
$ |
147,229 |
|
|
$ |
146,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
Item 8. |
Financial Statements and Supplementary Data |
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, 2005 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
|
|
| |
|
| |
|
| |
|
| |
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
40,695 |
|
|
$ |
40,394 |
|
|
$ |
41,912 |
|
|
$ |
43,318 |
|
Operating income
|
|
|
7,140 |
|
|
|
7,194 |
|
|
|
7,950 |
|
|
|
6,682 |
|
Net income
|
|
|
4,697 |
|
|
|
4,489 |
|
|
|
5,206 |
|
|
|
4,676 |
|
Basic net income per share
|
|
$ |
0.08 |
|
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
Diluted net income per share
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.07 |
|
33
|
|
Item 9. |
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
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 to provide reasonable assurance that the
information required to be disclosed by us in our periodic SEC
reports are recorded, processed, summarized and reported within
the time periods specified in the in the SECs rules and
the SEC reports.
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, 2005 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.
Managements 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, 2005. 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, 2005, 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.
|
|
Item 9B. |
Other Information |
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
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 2006 Annual
Meeting of stockholders to be filed with the Securities and
Exchange Commission not later than April 30, 2006 (the
Proxy Statement). That information is incorporated
into this report by reference.
34
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.
|
|
Item 11. |
Executive Compensation |
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, and
Compensation Committee Interlocks and Insider
Participation in the Proxy Statement. That information is
incorporated into this report by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
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.
|
|
Item 13. |
Certain Relationships and Related Transactions |
Information relating to certain relationships of our directors
and executive officers and related transactions will be
presented under the caption Certain Relationships and
Related Transactions in the Proxy Statement. That
information is incorporated into this report by reference.
|
|
Item 14. |
Principal Accountant Fees and Services |
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.
35
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following financial statements are filed as
part of this report:
|
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
38 |
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
41 |
|
|
|
|
|
42 |
|
|
|
|
|
43 |
|
|
|
|
|
44 |
|
|
|
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.
|
|
|
|
|
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). |
|
10.2 |
|
|
2003 Non-Employee Directors Plan, as amended.(4) |
|
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 Registrants Preferred Stock.(3) |
|
10.10 |
|
|
Form of Indemnity Agreement.(3) |
36
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
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. |
|
10.14 |
|
|
Support Agreement, dated February 29, 2000, by and between
RSA Security, Inc. |
|
10.15 |
|
|
Loan and Security Agreement dated September 4, 2001 between
Silicon Valley Bank and the Registrant, and modifications
thereto.(3) |
|
10.16 |
|
|
2006 Annual Executive Management Bonus Plan. |
|
10.17 |
|
|
Outside Director Compensation Arrangement.(5) |
|
10.18 |
|
|
Executive Officer Cash Compensation Arrangement.(6) |
|
10.19 |
|
|
Offer Letter to Thomas Thimot dated December 9, 2005.(7) |
|
10.20 |
|
|
Transition Agreement with John Thuma dated January 20,
2006.(8) |
|
21.1 |
|
|
Subsidiaries of the Registrant. |
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
24.1 |
|
|
Power of Attorney (reference is made to the signature page of
this Form 10-K). |
|
31.1 |
|
|
Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
|
Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
|
Certification of the Chief Executive Officer pursuant to 18
U.S.C Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
|
Certification of the Chief Financial Officer pursuant to 18
U.S.C Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
(1) |
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 exhibit 10.1 on our Current Report on Form
8-K filed with the
Securities and Exchange Commission on March 13, 2006, and
incorporated by reference herein. |
|
(5) |
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. |
|
(6) |
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. |
|
(7) |
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. |
|
(8) |
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. |
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity and
comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 2005. These
consolidated financial statements are the responsibility of the
Companys 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 iPass Inc. and subsidiaries as of December 31,
2005 and 2004, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of iPass Inc.s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated March 15,
2006 expressed an unqualified opinion on managements
assessment of, and the effective operation of, internal control
over financial reporting.
Mountain View, California
March 15, 2006
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
iPass Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that iPass Inc. maintained effective
internal control over financial reporting as of
December 31, 2005, 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 managements assessment and an opinion on the
effectiveness of the Companys 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
managements 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 companys 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 companys
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
companys 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, managements assessment that iPass
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by COSO. Also,
in our opinion, iPass maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by COSO.
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, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2005, and our
report dated March 15, 2006 expressed an unqualified
opinion on those consolidated financial statements.
Mountain View, California
March 15, 2006
39
iPASS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
37,829 |
|
|
$ |
34,395 |
|
|
Short-term investments
|
|
|
146,727 |
|
|
|
117,940 |
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2,040 and $2,071, respectively
|
|
|
23,347 |
|
|
|
23,884 |
|
|
Prepaid expenses and other current assets
|
|
|
3,777 |
|
|
|
3,161 |
|
|
Deferred income tax assets
|
|
|
4,555 |
|
|
|
8,642 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
216,235 |
|
|
|
188,022 |
|
Property and equipment, net
|
|
|
9,210 |
|
|
|
10,111 |
|
Other assets
|
|
|
1,561 |
|
|
|
1,224 |
|
Acquired intangibles, net
|
|
|
8,776 |
|
|
|
11,143 |
|
Goodwill
|
|
|
18,692 |
|
|
|
20,013 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
254,474 |
|
|
$ |
230,513 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
12,669 |
|
|
$ |
9,154 |
|
|
Accrued liabilities
|
|
|
12,523 |
|
|
|
11,153 |
|
|
Deferred revenue
|
|
|
3,031 |
|
|
|
2,984 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,223 |
|
|
|
23,291 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
28,223 |
|
|
|
23,291 |
|
|
|
|
|
|
|
|
Commitments (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value; authorized
250,000,000 shares; issued and outstanding 64,202,765 and
62,756,718 shares, respectively
|
|
|
64 |
|
|
|
63 |
|
|
Additional paid-in capital
|
|
|
245,456 |
|
|
|
240,629 |
|
|
Deferred stock-based compensation
|
|
|
(593 |
) |
|
|
(1,782 |
) |
|
Accumulated other comprehensive loss
|
|
|
(307 |
) |
|
|
(424 |
) |
|
Accumulated deficit
|
|
|
(18,369 |
) |
|
|
(31,264 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
226,251 |
|
|
|
207,222 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
254,474 |
|
|
$ |
230,513 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
iPASS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
$ |
169,373 |
|
|
$ |
166,319 |
|
|
$ |
136,078 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network access
|
|
|
42,109 |
|
|
|
37,339 |
|
|
|
30,121 |
|
|
Network operations
|
|
|
20,783 |
|
|
|
19,041 |
|
|
|
14,306 |
|
|
Research and development
|
|
|
17,571 |
|
|
|
13,804 |
|
|
|
9,944 |
|
|
Sales and marketing
|
|
|
50,448 |
|
|
|
46,580 |
|
|
|
41,049 |
|
|
General and administrative
|
|
|
17,059 |
|
|
|
17,790 |
|
|
|
14,232 |
|
|
Amortization of stock-based compensation(1)
|
|
|
1,137 |
|
|
|
2,342 |
|
|
|
4,069 |
|
|
Amortization of acquired intangibles
|
|
|
2,367 |
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
151,474 |
|
|
|
137,353 |
|
|
|
113,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,899 |
|
|
|
28,966 |
|
|
|
22,357 |
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other
|
|
|
3,899 |
|
|
|
2,298 |
|
|
|
1,133 |
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
3,899 |
|
|
|
2,298 |
|
|
|
513 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
21,798 |
|
|
|
31,264 |
|
|
|
22,870 |
|
Provision for income taxes
|
|
|
8,903 |
|
|
|
12,196 |
|
|
|
8,968 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
12,895 |
|
|
$ |
19,068 |
|
|
$ |
13,902 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.20 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
Diluted
|
|
$ |
0.19 |
|
|
$ |
0.29 |
|
|
$ |
0.23 |
|
Number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
63,353,779 |
|
|
|
60,770,680 |
|
|
|
53,474,537 |
|
|
Diluted
|
|
|
66,277,342 |
|
|
|
65,645,757 |
|
|
|
60,622,040 |
|
(1) Amortization of stock-based compensation consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network operations
|
|
$ |
163 |
|
|
$ |
335 |
|
|
$ |
551 |
|
|
|
Research and development
|
|
|
175 |
|
|
|
352 |
|
|
|
468 |
|
|
|
Sales and marketing
|
|
|
265 |
|
|
|
554 |
|
|
|
984 |
|
|
|
General and administrative
|
|
|
534 |
|
|
|
1,101 |
|
|
|
2,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of stock-based compensation
|
|
$ |
1,137 |
|
|
$ |
2,342 |
|
|
$ |
4,069 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
iPASS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes | |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible | |
|
|
|
|
|
Receivable | |
|
|
|
Accumulated | |
|
|
|
Total | |
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
Additional | |
|
from | |
|
Deferred | |
|
Comprehensive | |
|
|
|
Stock- | |
|
|
|
|
| |
|
| |
|
Paid-In | |
|
Stock- | |
|
Stock-Based | |
|
Income | |
|
Accumulated | |
|
holders | |
|
Comprehensive | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Capital | |
|
holders | |
|
Compensation | |
|
(Loss) | |
|
Deficit | |
|
Equity | |
|
Income | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances, December 31, 2002
|
|
|
35,273 |
|
|
|
35 |
|
|
|
16,013 |
|
|
|
16 |
|
|
|
119,268 |
|
|
|
(2,644 |
) |
|
|
(2,841 |
) |
|
|
|
|
|
|
(64,234 |
) |
|
|
49,600 |
|
|
$ |
29,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in initial public offering, net of
issuance costs of $10,043
|
|
|
|
|
|
|
|
|
|
|
8,050 |
|
|
|
8 |
|
|
|
102,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,657 |
|
|
|
|
|
Conversion of convertible preferred stock into common stock
|
|
|
(35,273 |
) |
|
|
(35 |
) |
|
|
35,273 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
662 |
|
|
|
1 |
|
|
|
962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
963 |
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earned on stockholder note receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(187 |
) |
|
|
|
|
Cancellation of unvested stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(282 |
) |
|
|
|
|
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock- based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,836 |
|
|
|
|
|
|
|
(5,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,069 |
|
|
|
|
|
|
|
|
|
|
|
4,069 |
|
|
|
|
|
Fair value of options issued to non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392 |
|
|
|
|
|
Tax benefit from employee stock option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
|
|
Unrealized gain on available-for-sale investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
|
|
|
|
125 |
|
|
|
125 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,902 |
|
|
|
13,902 |
|
|
|
13,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
iPASS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
12,895 |
|
|
$ |
19,068 |
|
|
$ |
13,902 |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation for employees
|
|
|
1,137 |
|
|
|
2,342 |
|
|
|
4,069 |
|
|
Amortization of warrants issued
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
Amortization of acquired intangibles
|
|
|
2,367 |
|
|
|
457 |
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,783 |
|
|
|
4,386 |
|
|
|
3,810 |
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
392 |
|
|
Tax benefit from employee stock option plans
|
|
|
1,079 |
|
|
|
3,831 |
|
|
|
201 |
|
|
Deferred income taxes
|
|
|
5,700 |
|
|
|
10,842 |
|
|
|
6,958 |
|
|
Interest on shareholder notes receivable
|
|
|
|
|
|
|
(56 |
) |
|
|
(187 |
) |
|
Provision for doubtful accounts
|
|
|
163 |
|
|
|
1,100 |
|
|
|
1,176 |
|
|
Loss on disposals of property and equipment
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
Realized loss on investments, net
|
|
|
31 |
|
|
|
98 |
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
374 |
|
|
|
(3,433 |
) |
|
|
(7,607 |
) |
|
Prepaid expenses and other current assets
|
|
|
(616 |
) |
|
|
250 |
|
|
|
(1,991 |
) |
|
Other assets
|
|
|
(337 |
) |
|
|
30 |
|
|
|
(22 |
) |
|
Accounts payable
|
|
|
3,515 |
|
|
|
1,733 |
|
|
|
442 |
|
|
Accrued liabilities
|
|
|
1,058 |
|
|
|
(2,894 |
) |
|
|
2,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
32,149 |
|
|
|
37,754 |
|
|
|
23,682 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(170,422 |
) |
|
|
(156,310 |
) |
|
|
(98,854 |
) |
|
Maturities of short-term investments
|
|
|
141,788 |
|
|
|
131,072 |
|
|
|
5,340 |
|
|
Purchases of property and equipment
|
|
|
(3,882 |
) |
|
|
(6,186 |
) |
|
|
(5,683 |
) |
|
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
|
|
|
(32,516 |
) |
|
|
(59,869 |
) |
|
|
(99,197 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from initial public offering
|
|
|
|
|
|
|
|
|
|
|
102,657 |
|
|
Proceeds from loans payable
|
|
|
|
|
|
|
|
|
|
|
1,483 |
|
|
Payments on loans payable
|
|
|
|
|
|
|
|
|
|
|
(5,064 |
) |
|
Payments on line of credit, net
|
|
|
|
|
|
|
|
|
|
|
(6,794 |
) |
|
Proceeds from issuance of common stock
|
|
|
3,801 |
|
|
|
7,977 |
|
|
|
963 |
|
|
Proceeds from payment of stockholder notes receivable
|
|
|
|
|
|
|
2,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,801 |
|
|
|
10,864 |
|
|
|
93,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
3,434 |
|
|
|
(11,251 |
) |
|
|
17,730 |
|
Cash and cash equivalents at beginning of year
|
|
|
34,395 |
|
|
|
45,646 |
|
|
|
27,916 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
37,829 |
|
|
$ |
34,395 |
|
|
$ |
45,646 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
|
|
|
$ |
|
|
|
$ |
486 |
|
|
Cash paid for taxes
|
|
$ |
1,094 |
|
|
$ |
1,485 |
|
|
$ |
1,362 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
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 enterprises internal
networks through an
easy-to-use interface.
As opposed to telecommunications companies that own and operate
physical networks, iPass provides its services through a virtual
network. iPass virtual network is enabled by its software,
its scalable network architecture and its relationships with
over 300 telecommunications carriers, internet service providers
and other network service providers around the globe. In
addition, we provide policy management services that extend our
secure offering to enable better protection of user identities,
the integrity of an enterprises remote and mobile computer
systems, or endpoints, as well as an enterprises network.
These services can be used in conjunction with iPass Corporate
Access or over non-iPass network connections. The Companys
software is designed to provide enterprises with a high level of
security, the ability to affect and control policy management,
and to receive centralized billing and detailed reporting. iPass
was incorporated in California in July 1996 and reincorporated
in Delaware in June 2000.
In July 2003, the Company closed the sale of
8,050,000 shares of common stock, including the
underwriters exercise of an over-allotment option, at a
price of $14 per share in an initial public offering (IPO).
A total of $112.7 million in gross proceeds was raised from
these transactions. After deducting the underwriting discount of
approximately $7.9 million, and offering expenses of
approximately $2.1 million, net proceeds were
$102.7 million.
Upon the closing of the Companys IPO,
35,273,169 shares of the Companys convertible
preferred stock converted into common shares.
|
|
Note 2. |
Summary of Significant Accounting Policies |
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. Certain reclassifications have been made to prior
year amounts to reflect the current year presentation.
|
|
|
Foreign Currency Translation |
Substantially all revenues and network access expenses are
denominated in U.S. dollars. Therefore, the Company
considers the functional currency of its foreign subsidiaries to
be the U.S. dollar. Foreign currency transaction gains and
losses are included in the accompanying Consolidated Statements
of Operations. Foreign currency transaction gains and losses
were not significant for the years ended December 31, 2005,
2004 and 2003.
Comprehensive income 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
44
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the total of net income and all other non-owner changes in
equity. Comprehensive income includes net income and unrealized
gains and losses on available-for-sale securities.
Comprehensive income is comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income
|
|
$ |
12,895 |
|
|
$ |
19,068 |
|
|
$ |
13,902 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated unrealized gain (loss) on
available-for-sale securities
|
|
|
117 |
|
|
|
(549 |
) |
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$ |
13,012 |
|
|
$ |
18,519 |
|
|
$ |
14,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents and Short-term Investments |
Cash equivalents consist of highly liquid investments including
corporate debt securities and money market funds with maturities
of 90 days or less from the date of purchase.
The Company has the ability to convert its short-term
investments into cash or into securities with a shorter
remaining time to maturity without penalty and is not committed
to holding the investments until maturity. As such, all
short-term investments in the Companys portfolio are
classified as available-for-sale and are stated at
fair market value, with the unrealized gains and losses reported
as a component of accumulated comprehensive income. The cost of
securities sold is based on the specific identification method.
Substantially all of the Companys cash, cash equivalents
and short-term investments are held by two financial
institutions.
The Company provides credit to its customers in the normal
course of business, performs ongoing credit evaluations of its
customers, and maintains an adequate allowance for doubtful
accounts. As of December 31, 2005 and 2004, no individual
customer represented 10% or more of accounts receivable. For the
years ended December 31, 2005, 2004 and 2003, no customer
represented more than 10% of total revenues.
For the three years ended December 31, 2005, 2004 and 2003,
suppliers representing greater than 10% of network access
expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Access Provider: |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
A
|
|
|
5.5% |
|
|
|
6.8% |
|
|
|
14.2% |
|
B
|
|
|
9.4% |
|
|
|
16.8% |
|
|
|
21.3% |
|
In addition, certain contracts the Company has entered into with
these access providers contain minimum purchase commitments (see
Note 9).
|
|
|
Fair Value of Financial Instruments |
For the Companys financial instruments, including cash,
cash equivalents, accounts receivable, accounts payable, and
accrued liabilities, carrying amounts approximate fair value due
to the relatively short maturities of the financial instruments.
45
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 |
Goodwill and intangible assets are recorded from our corporate
acquisition transactions. In accordance with SFAS 142,
Goodwill and Other Intangible Assets, our goodwill
and intangible assets with indefinite useful lives are not
amortized, but are instead tested for impairment at least
annually, or as circumstances indicate their value may no longer
be recoverable. We generally perform our annual impairment test
at the end of the fiscal year. As we operate our business in one
reporting segment, our goodwill is tested for impairment at the
enterprise level. Goodwill impairment testing is a two-step
process. For the first step, we screen for impairment, and if
any possible impairment exists, we undertake a second step of
measuring such impairment. Other purchased intangible assets
with definite useful lives are amortized on a straight-line
basis over their useful lives, and tested annually for
impairment as well. 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, 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 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.
The Company accounts for stock-based awards to employees and
directors using the intrinsic value method of accounting in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25). Under the intrinsic value method,
when the exercise price of the Companys employee stock
options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized in the
Companys Consolidated Statements of Operations.
46
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is required under SFAS 123, to disclose pro
forma information regarding option grants made to its employees
based on specified valuation techniques that produce estimated
compensation charges. The pro forma information is as follows
(in thousands, except per-share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income as reported
|
|
$ |
12,895 |
|
|
$ |
19,068 |
|
|
$ |
13,902 |
|
Add: Stock-based employee compensation expense included in the
reported net income, net of related tax effects
|
|
|
671 |
|
|
|
1,429 |
|
|
|
2,523 |
|
Deduct: Stock-based employee compensation expense using the fair
value method, net of related tax effects
|
|
|
(3,570 |
) |
|
|
(3,699 |
) |
|
|
(3,029 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
9,996 |
|
|
$ |
16,798 |
|
|
$ |
13,396 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.20 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
Pro forma
|
|
$ |
0.16 |
|
|
$ |
0.28 |
|
|
$ |
0.25 |
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.19 |
|
|
$ |
0.29 |
|
|
$ |
0.23 |
|
|
Pro forma
|
|
$ |
0.15 |
|
|
$ |
0.26 |
|
|
$ |
0.22 |
|
The weighted average fair value of options granted during fiscal
2005, 2004 and 2003 was $1.54, $2.05 and $4.35, 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, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options | |
|
Employee Stock Purchase Plan | |
|
|
For the Year Ended December 31, | |
|
For the Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Risk-free rate
|
|
|
3.9 |
% |
|
|
3.0 |
% |
|
|
2.0 |
% |
|
|
3.7 |
% |
|
|
1.6 |
% |
|
|
|
|
Expected dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
Expected volatility
|
|
|
35-41 |
% |
|
|
41-47 |
% |
|
|
43 |
% |
|
|
36-41 |
% |
|
|
32-52 |
% |
|
|
|
|
Expected life
|
|
|
3 Years |
|
|
|
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 per Share |
Basic net income 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 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 using the
treasury-stock method.
47
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company derives substantially all of its revenues from usage
fees. The Company recognizes 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. The
Company typically requires its 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, the Company recognizes the difference between the
actual usage and the minimum commitment as revenue when cash is
collected because the Company cannot reasonably estimate the
amount of the difference that will be collected. The Company
cannot reasonably estimate the amount of the difference to be
collected because it has 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 the Company has determined that it would
be in its best interest to do so. Customers are not
contractually entitled to use or otherwise receive benefit for
unused service in subsequent periods.
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. Revenues relating to one-time fees are recognized
on a straight-line basis over the term of the initial contract,
generally one to three years as we can not reasonably estimate
the period of performance. Revenues relating to annual fees are
recognized on a straight-line basis. Revenues for monthly
services are recognized during the month that these services are
provided.
License revenue consists principally of revenue earned under
software license agreements. License revenue is generally
recognized when a signed contract or other persuasive evidence
of an arrangement exists, the software has been shipped or
electronically delivered, the license fee is fixed or
determinable, and collection of the resulting receivable is
probable as prescribed by AICPA Statement of 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 AICPA Statement of
Position (SOP) 98-9. Revenue from subscription
license agreements, which include software, rights to future
products on a
when-and-if available
basis and maintenance, is recognized ratably over the term of
the subscription period. Revenue on shipments to resellers,
which is generally subject to certain rights of return and price
protection, is recognized when the products are sold by the
resellers to the end-user customer.
Maintenance revenue consists of fees for providing unspecified
software updates on a when and if available basis and technical
support for software products (post-contract support or
PCS). Maintenance revenue is recognized ratably over
the term of the agreement.
Payments received in advance of services performed are deferred.
Allowances for estimated future returns and discounts are
provided for upon recognition of revenue.
48
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company generally performs credit reviews to evaluate the
customers ability to pay. If the Company determines that
collectibility is not probable, revenue is recognized as cash is
collected.
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, 2005.
Advertising and promotional costs are expensed as incurred. For
the years ended December 31, 2005, 2004 and 2003 were
approximately $435,000, $989,000 and $1.4 million,
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 has been established. To date,
the Companys software has been available for general
release concurrent with the establishment of technological
feasibility, and accordingly, no costs have been capitalized.
The Company capitalizes the costs of computer software developed
or obtained for internal use. During the years ended
December 31, 2005, 2004 and 2003, the Company had no
capitalized software development costs. Development costs are
amortized over the estimated useful life of the software
developed. As of December 31, 2005 and 2004, the Company
had no capitalized software development costs.
|
|
|
Recent Accounting Pronouncements |
In December of 2004, the Financial Accounting Standards Board
(FASB) issued a revised version of Statement
No. 123 Accounting for Stock-Based Compensation
(SFAS 123R), which supersedes
APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance.
SFAS 123R requires recognition of the cost of employee
services received in share-based payment transactions, thereby
reflecting the economic consequences of those transactions in
the financial statements. The accounting provisions for
SFAS 123 are effective beginning with the first annual
reporting period that begins after June 15, 2005, and we
will be required to implement SFAS 123R beginning
January 1, 2006. The pro forma disclosures previously
permitted under SFAS 123 will no longer be an alternative
to financial statement recognition. See Stock-Based
Compensation above for the pro forma net income and
net income per share amounts, for the years ended
December 31, 2005, 2004 and 2003, as if we had used a
fair-value-based method similar to the methods required under
SFAS 123R to measure compensation expense for employee
stock incentive awards. Although we have not yet determined
whether the adoption of SFAS 123R will result in amounts
that are similar to the current pro forma disclosures under
SFAS 123, we are evaluating the requirements under
SFAS 123R and expect the adoption of SFAS 123R to have
a significant adverse impact on our Consolidated Statements of
Operations and net income per share.
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3
(FAS 154). FAS 154 provides guidance on
the accounting for, and reporting of, a change in accounting
principle, in the absence of explicit transition requirements
specific to a newly adopted accounting principle. Previously,
most voluntary changes in
49
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accounting principles were required to be recognized by way of a
cumulative effect adjustment within net income during the period
of the change. FAS 154 requires retrospective application
to prior periods financial statements, unless it is
impracticable to determine either the period-specific effects or
the cumulative effect of the change. FAS 154 is effective
for accounting changes made in fiscal years beginning after
December 15, 2005. If required, the application of
FAS 154 may have a material effect on our financial
position on our results of operations.
|
|
Note 3. |
Short-Term Investments |
The following tables summarize the Companys short-term
investments as of December 31, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments | |
|
|
| |
|
|
|
|
Unrealized | |
|
Unrealized | |
|
Fair | |
December 31, 2005 |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
U.S. Government agencies
|
|
$ |
119,981 |
|
|
$ |
|
|
|
$ |
(473 |
) |
|
$ |
119,508 |
|
Corporate notes
|
|
|
16,248 |
|
|
|
|
|
|
|
(57 |
) |
|
|
16,191 |
|
Auction rate and money market securities
|
|
|
11,000 |
|
|
|
28 |
|
|
|
|
|
|
|
11,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147,229 |
|
|
$ |
28 |
|
|
$ |
(530 |
) |
|
$ |
146,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments | |
|
|
| |
|
|
|
|
Unrealized |
|
Unrealized | |
|
Fair | |
December 31, 2004 |
|
Cost | |
|
Gains |
|
Losses | |
|
Value | |
|
|
| |
|
|
|
| |
|
| |
U.S. Government agencies
|
|
$ |
103,357 |
|
|
$ |
|
|
|
$ |
(368 |
) |
|
$ |
102,989 |
|
Corporate notes
|
|
|
15,007 |
|
|
|
|
|
|
|
(56 |
) |
|
|
14,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
118,364 |
|
|
$ |
|
|
|
$ |
(424 |
) |
|
$ |
117,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the principal amounts of the
Companys short-term investments by expected maturity date
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity | |
|
|
|
|
|
|
|
|
|
|
Date | |
|
|
|
|
|
|
|
|
|
|
for Par Value | |
|
|
|
|
|
|
|
|
|
|
Amounts | |
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
|
|
|
As of | |
|
|
|
|
December 31, | |
|
|
|
|
|
Dec. 31, 2005 | |
|
|
|
|
| |
|
|
|
Total Cost | |
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
Value | |
|
Total Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
U.S. Government agencies
|
|
$ |
85,405 |
|
|
$ |
11,900 |
|
|
$ |
20,490 |
|
|
$ |
119,981 |
|
|
$ |
119,508 |
|
Corporate notes
|
|
|
15,915 |
|
|
|
|
|
|
|
|
|
|
|
16,248 |
|
|
|
16,191 |
|
Auction rate and money market securities
|
|
|
11,000 |
|
|
|
|
|
|
|
|
|
|
|
11,000 |
|
|
|
11,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
112,320 |
|
|
$ |
11,900 |
|
|
$ |
20,490 |
|
|
$ |
147,229 |
|
|
$ |
146,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized gross realized losses of $31,000 and no
gross realized gains for the year ended December 31, 2005.
We recognized gross realized gains of $17,000 and gross realized
losses of $115,000 for the year ended December 31, 2004.
There were no recognized gains or losses on short-term
investments for the year ended December 31, 2003. The
Company has not recorded any impairment loss relating to an
other-than-temporary impairment in the fair value of its
short-term investments as the Company has the ability to hold
the security until maturity.
The Company had unrealized losses related to its corporate and
government securities at December 31, 2005. These
securities are subject to interest rate risk, which resulted in
the unrealized losses. There are no
50
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securely impaired investments or investments that have been
impaired for an extended duration as we typically purchase
securities with maturities that are due within one to two years.
|
|
Note 4. |
Allowance for Doubtful Accounts |
Changes in the Companys allowance for doubtful accounts
for the years ended December 31, 2003, 2004 and 2005 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning | |
|
|
|
|
|
Ending | |
|
|
Balance | |
|
Provisions | |
|
Charge Offs | |
|
Balance | |
|
|
| |
|
| |
|
| |
|
| |
Year ended December 31, 2003
|
|
$ |
1,500 |
|
|
$ |
1,176 |
|
|
$ |
(328 |
) |
|
$ |
2,348 |
|
Year ended December 31, 2004
|
|
$ |
2,348 |
|
|
$ |
1,100 |
|
|
$ |
(1,377 |
) |
|
$ |
2,071 |
|
Year ended December 31, 2005
|
|
$ |
2,071 |
|
|
$ |
163 |
|
|
$ |
(194 |
) |
|
$ |
2,040 |
|
|
|
Note 5. |
Property and Equipment |
Property and equipment consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Equipment
|
|
$ |
19,839 |
|
|
$ |
17,906 |
|
Furniture and fixtures
|
|
|
3,498 |
|
|
|
2,538 |
|
Computer software and equipment
|
|
|
4,919 |
|
|
|
4,312 |
|
Leasehold improvements
|
|
|
2,002 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
|
|
|
30,258 |
|
|
|
26,376 |
|
Less: Accumulated depreciation and amortization
|
|
|
(21,048 |
) |
|
|
(16,265 |
) |
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
9,210 |
|
|
$ |
10,111 |
|
|
|
|
|
|
|
|
Depreciation expense was $4,917,000, $4,386,000 and $3,711,000
for the years ended December 31, 2005, 2004 and 2003,
respectively.
|
|
Note 6. |
Accrued Liabilities |
Accrued liabilities consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Accrued commissions
|
|
$ |
3,067 |
|
|
$ |
2,928 |
|
Accrued liabilities
|
|
|
3,961 |
|
|
|
3,946 |
|
Deferred rent
|
|
|
1,618 |
|
|
|
1,630 |
|
Paid time off payable
|
|
|
1,715 |
|
|
|
1,631 |
|
Income taxes payable
|
|
|
1,724 |
|
|
|
553 |
|
Other accrued liabilities
|
|
|
438 |
|
|
|
465 |
|
|
|
|
|
|
|
|
|
|
$ |
12,523 |
|
|
$ |
11,153 |
|
|
|
|
|
|
|
|
51
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7. |
Business Combinations |
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 Safe3ws 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
Companys 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 preacquisition 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 preacquisition 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. Acquisition goodwill was further
adjusted as a result of the utilization of acquired company tax
net operating losses for which a valuation allowance was
recorded upon acquisition in the amount of $104,000.
52
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Companys 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 preacquisition 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. Acquisition
goodwill was further adjusted as a result of the utilization of
acquired company tax net operating losses for which a valuation
allowance was recorded upon acquisition in the amount of
$367,000.
53
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
GoRemote Internet Communications |
On December 9, 2005, the Company announced the acquisition
of GoRemote Internet Communications, Inc.
(GoRemote), a publicly-traded company headquartered
in Milpitas, California that provides enterprises managed
broadband and connectivity services. The Company acquired 100%
of the outstanding shares of GoRemote in a cash transaction for
$1.71 per share of GoRemote common stock and $3.37 per
share of GoRemote Series A preferred stock for a total
transaction value of approximately $75.8 million. The
Company plans to expand its product offering to its customers by
offering GoRemotes managed broadband services for branch
offices and teleworkers. On February 13, 2006, the
stockholders of GoRemote approved the merger and on
February 15, 2006, the certificate of merger was filed and
the merger was effective. The Company paid approximately
$75.8 million in cash to acquire the approximately
43.3 million outstanding shares of GoRemote common stock
and the approximately 541,631 shares of GoRemote
Series A preferred stock. Although we plan to complete the
purchase accounting for the transaction in the quarter ended
March 31, 2006, we have disclosed the information required
per SFAS No. 141 to the extent it was practicable.
|
|
Note 8. |
Acquired Intangibles, net |
Acquired intangibles with finite lives as of December 31,
2005 and 2004 are classified as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 | |
|
|
| |
|
|
Gross | |
|
|
|
Net | |
|
Weighted | |
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Average | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Useful Life | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Existing technology
|
|
$ |
7,900 |
|
|
$ |
(1,927 |
) |
|
$ |
5,973 |
|
|
|
5.5 Years |
|
Patent/ Core technology
|
|
|
2,800 |
|
|
|
(673 |
) |
|
|
2,127 |
|
|
|
5.6 Years |
|
Maintenance agreements and certain relationships
|
|
|
400 |
|
|
|
(78 |
) |
|
|
322 |
|
|
|
6.0 Years |
|
Customer relationships
|
|
|
500 |
|
|
|
(146 |
) |
|
|
354 |
|
|
|
4.0 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangibles
|
|
$ |
11,600 |
|
|
$ |
(2,824 |
) |
|
$ |
8,776 |
|
|
|
5.3 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004 | |
|
|
| |
|
|
Gross | |
|
|
|
Net | |
|
Weighted | |
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Average | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Useful Life | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Existing technology
|
|
$ |
7,900 |
|
|
$ |
(314 |
) |
|
$ |
7,586 |
|
|
|
5.5 Years |
|
Patent/ Core technology
|
|
|
2,800 |
|
|
|
(111 |
) |
|
|
2,689 |
|
|
|
5.6 Years |
|
Maintenance agreements and certain relationships
|
|
|
400 |
|
|
|
(11 |
) |
|
|
389 |
|
|
|
6.0 Years |
|
Customer relationships
|
|
|
500 |
|
|
|
(21 |
) |
|
|
479 |
|
|
|
4.0 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangibles
|
|
$ |
11,600 |
|
|
$ |
(457 |
) |
|
$ |
11,143 |
|
|
|
5.3 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
Aggregate amortization expense for the fiscal years (in
thousands):
|
|
|
|
|
|
2004
|
|
$ |
457 |
|
|
2005
|
|
$ |
2,367 |
|
Estimated amortization expense for the fiscal years (in
thousands):
|
|
|
|
|
|
2006
|
|
$ |
2,367 |
|
|
2007
|
|
|
2,367 |
|
|
2008
|
|
|
2,067 |
|
|
2009
|
|
|
567 |
|
|
2010
|
|
|
556 |
|
|
Thereafter
|
|
|
852 |
|
|
|
|
|
Total estimated amortization expense
|
|
$ |
8,776 |
|
|
|
|
|
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 9. |
Commitments and Contingencies |
We lease our facilities under non-cancelable operating leases
that expire at various dates through February 2010. Future
minimum lease payments under these operating leases as of
December 31, 2005 are as follows (in thousands):
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2006
|
|
$ |
4,145 |
|
|
2007
|
|
|
4,279 |
|
|
2008
|
|
|
4,374 |
|
|
2009
|
|
|
4,311 |
|
|
2010
|
|
|
1,453 |
|
|
|
|
|
|
|
$ |
18,562 |
|
|
|
|
|
Rent expense under operating leases for the years ended
December 31, 2005, 2004, and 2003 was $6.0 million,
$5.7 million and $4.3 million, respectively (net of
sublease income of $111,000 in 2003).
As of December 31, 2005, the Company had minimum purchase
commitments with network service providers 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:
|
|
|
|
|
|
2006
|
|
$ |
1,387 |
|
|
2007
|
|
|
1,066 |
|
|
2008
|
|
|
1,066 |
|
|
2009
|
|
|
266 |
|
|
|
|
|
|
|
$ |
3,785 |
|
|
|
|
|
Beginning on January 14, 2005, three purported class action
complaints were filed against us and certain of our executive
officers in United States District Court for the Northern
District of California. On March 2,
55
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 us are Kenneth D. Denman, Donald C. McCauley, Anurag Lal
and Jon M. Russo. The Consolidated Amended Complaint alleges
that the defendants violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 during an alleged
class period from April 22, 2004 to
June 30, 2004 by failing to inform investors of certain
operational issues that allegedly led to declines in our
revenue, earnings and growth prospects. iPass and the individual
defendants moved to dismiss the complaint. The motion was heard
on January 23, 2006, and the motion was granted on
February 27, 2006. The court granted plaintiffs leave to
file an amended complaint, which shall be due by March 30,
2006. The case is at an early stage and no trial date has been
set. No discovery is expected to take place unless and until
plaintiffs file a complaint that survives the individual
defendants motion to dismiss. iPass and the individual
defendants intend to take all appropriate actions to defend the
suit. We cannot estimate any possible loss at this time.
On March 25, 2005, a stockholder purporting to act on our
behalf filed a lawsuit entitled Narendar Gupta,
et al. v. Kenneth Denman, et al., Case No.
CIV445765 in the California Superior Court for the County of
San Mateo against our directors and certain officers. iPass
was also named as a nominal defendant solely in a derivative
capacity. On April 6, 2005, a similar lawsuit entitled
Eugene Danielson v. Kenneth D. Denman, et al.,
No. CIV446034 was filed in that same court. Both lawsuits
were consolidated into a single action by stipulation and order
dated April 26, 2005. The derivative action is based on the
same factual allegations and circumstances as the purported
securities class actions and alleges state law claims for
insider trading, breach of fiduciary duty, abuse of control,
gross mismanagement, waste of corporate assets, and unjust
enrichment and seeks monetary damages on behalf of iPass to be
proven at trial. On May 5, 2005, the actions were
consolidated as In re iPass, Inc. Derivative Litigation,
Case No. CIV445765. Plaintiffs filed a consolidated
complaint on February 21, 2006, and the defendants have
until March 28, 2006 within which to respond to the
complaint. The case is at an early stage, no discovery has
occurred and no trial date has been set. iPass and the
individual defendants intend to take all appropriate actions to
defend the suit. We cannot estimate any possible loss at this
time.
We may be subject to various other claims and legal actions
arising in the ordinary course of business from time to time.
Note 10. 401(k) Plan
Substantially all of the Companys employees are eligible
to participate in the Companys 401(k) plan, which provides
for discretionary Company matching contributions. There were no
matching contributions for the years ended December 31,
2005, 2004 or 2003. Beginning January 1, 2006, the Company
will provide a 50% match to employee contributions up to 6% of
an employees total compensation.
Income before income taxes includes net income from foreign
operations of approximately $120,000, $968,000 and $736,000 for
the years ended December 31, 2005, 2004 and 2003,
respectively.
56
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes consisted of the following for
the years ended December 31, 2005, 2004 and 2003 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$ |
1,972 |
|
|
$ |
584 |
|
|
$ |
518 |
|
|
State
|
|
|
828 |
|
|
|
583 |
|
|
|
1,285 |
|
|
Foreign
|
|
|
402 |
|
|
|
187 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,203 |
|
|
|
1,354 |
|
|
|
2,010 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
5,182 |
|
|
|
9,371 |
|
|
|
7,451 |
|
|
State
|
|
|
518 |
|
|
|
1,471 |
|
|
|
(493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,700 |
|
|
|
10,842 |
|
|
|
6,958 |
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$ |
8,903 |
|
|
$ |
12,196 |
|
|
$ |
8,968 |
|
|
|
|
|
|
|
|
|
|
|
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. 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 were subsequently released in 2005. The components of
deferred tax assets (liabilities) consisted of the
following as of December 31, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Acquired intangibles
|
|
$ |
(3,689 |
) |
|
$ |
(4,520 |
) |
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
5,777 |
|
|
|
11,461 |
|
|
Reserves and accruals
|
|
|
4,304 |
|
|
|
3,293 |
|
|
Other
|
|
|
1,745 |
|
|
|
1,624 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
11,826 |
|
|
|
16,378 |
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(3,582 |
) |
|
|
(3,216 |
) |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
8,244 |
|
|
|
13,162 |
|
|
|
|
|
|
|
|
Total net deferred income tax assets
|
|
$ |
4,555 |
|
|
$ |
8,642 |
|
|
|
|
|
|
|
|
57
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2005, 2004 and 2003, the
provision for income taxes differed from the amounts computed by
applying the U.S. federal income tax rate to pretax income
before income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal statutory rate
|
|
|
35 |
% |
|
|
34 |
% |
|
|
34 |
% |
State taxes, net of federal benefit
|
|
|
5 |
|
|
|
6 |
|
|
|
2 |
|
Foreign taxes
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
1 |
|
|
|
(1 |
) |
|
|
6 |
|
Research and development benefit
|
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
Other
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
41 |
% |
|
|
39 |
% |
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, the Company had gross cumulative
net operating loss carryforwards for federal and state tax
reporting purposes of approximately $15.0 million and
$16.0 million, respectively, which expire in various
periods through 2021. 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.
The Company also has research and development tax credit
carryforwards of approximately $1.9 million and
$1.6 million for federal and state income tax purposes,
respectively. If not utilized, the federal carryforwards will
expire in various amounts through 2025. The state tax credits
can be carried forward indefinitely.
In 2005, a portion of the valuation allowance placed on acquired
company net operating losses in the amount of $471,000 was
reversed as a result of the utilization of those net operating
losses, with the offset going against goodwill.
In February 1997, the Company adopted the 1997 Stock Option Plan
(1997 Plan). In June 1999, the Company adopted two option plans,
the 1999 Stock Option Plan (1999 Plan) and the 1999 Interim
Stock Option Plan (1999 Interim Plan). The 1997 Plan, the 1999
Plan, and the 1999 Interim Plan are collectively referred to as
the Plans. Under the Plans, as amended, the Company is
authorized to issue shares to employees, directors and
consultants. The board of directors may grant incentive and
nonqualified stock options to employees, directors, and
consultants of the Company. The exercise price per share for
nonstatutory stock options cannot be less than 85% of the fair
market value, as determined by the board of directors, on the
date of grant. The exercise price per share for incentive stock
options cannot be less than the fair market value, as determined
by the board of directors on the date of grant. Options
generally vest over a four-year period and generally expire
10 years after the date of grant. Certain options can be
exercised prior to vesting in exchange for restricted stock.
Should the option holder subsequently terminate employment prior
to vesting, the Company has the right to repurchase unvested
shares at the lower of original exercise price or fair value. At
December 31, 2005, there were no shares of common stock
subject to repurchase.
58
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock option activity under the Plans for the three years ended
December 31, 2005 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares | |
|
|
|
|
|
|
Available for | |
|
Number of | |
|
Weighted Average | |
|
|
Grant | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
Balance as of December 31, 2002
|
|
|
1,148,945 |
|
|
|
7,008,318 |
|
|
$ |
2.60 |
|
|
Authorized
|
|
|
8,859,026 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,792,200 |
) |
|
|
1,792,200 |
|
|
|
6.00 |
|
|
Exercised
|
|
|
|
|
|
|
(661,550 |
) |
|
|
4.55 |
|
|
Cancelled
|
|
|
251,395 |
|
|
|
(251,395 |
) |
|
|
2.79 |
|
|
|
|
|
|
|
|
|
|
|
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 at December 31, 2005
|
|
|
10,742,291 |
|
|
|
9,348,025 |
|
|
$ |
5.12 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2003
|
|
|
|
|
|
|
3,891,821 |
|
|
$ |
3.45 |
|
Exercisable as of December 31, 2004
|
|
|
|
|
|
|
4,055,123 |
|
|
$ |
3.83 |
|
Exercisable as of December 31, 2005
|
|
|
|
|
|
|
4,945,870 |
|
|
$ |
4.39 |
|
The following table summarizes the options outstanding as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
Weighted | |
|
|
|
Options Exercisable | |
|
|
|
|
Average | |
|
|
|
| |
|
|
|
|
Remaining | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Contractual | |
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Life | |
|
Exercise | |
|
Number of | |
|
Exercise | |
Exercise Prices |
|
Options | |
|
(Years) | |
|
Price | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.14-2.10
|
|
|
2,278,661 |
|
|
|
6.34 |
|
|
$ |
1.07 |
|
|
|
1,923,927 |
|
|
$ |
0.99 |
|
$2.50-5.05
|
|
|
2,392,966 |
|
|
|
6.59 |
|
|
$ |
4.69 |
|
|
|
1,422,786 |
|
|
$ |
4.57 |
|
$5.26-5.58
|
|
|
1,955,800 |
|
|
|
8.60 |
|
|
$ |
5.35 |
|
|
|
659,797 |
|
|
$ |
5.35 |
|
$5.75-20.02
|
|
|
2,720,598 |
|
|
|
8.14 |
|
|
$ |
8.73 |
|
|
|
939,360 |
|
|
$ |
10.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,348,025 |
|
|
|
7.40 |
|
|
$ |
5.12 |
|
|
|
4,945,870 |
|
|
$ |
4.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys board of directors adopted the 2003 Employee
Stock Purchase Plan, the 2003 Equity Incentive Plan and the 2003
Non-employee Directors Plan on January 15, 2003.
The Company records stock-based compensation charges in the
amount, if any, by which the option exercise price or the
restricted stock purchase price is less than the deemed fair
value of common stock at the date of grant. Prior to the
Companys IPO, the Companys board of directors
determined the fair value of our
59
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common stock based upon several factors, including operating
performance, issuances of convertible preferred stock,
liquidation preferences of preferred stockholders, and
valuations of other publicly-traded companies. The Company
recorded deferred stock-based compensation totaling
approximately $8,136,000 prior to July of 2003 that is being
amortized on an accelerated basis over the corresponding vesting
period, using the method outlined in FASB Interpretation
No. 28. There was no deferred stock-based compensation
recorded for the years ended December 31, 2005 or 2004.
Deferred stock-based compensation was decreased by approximately
$52,000, $202,000 and $282,000 for the years ended
December 31, 2005, 2004 and 2003, due to forfeiture of
accrued but unvested deferred stock-based compensation arising
from the termination of employees. Amortization of deferred
compensation expense for the years ended December 31, 2005,
2004 and 2003, was approximately $1,137,000, $2,342,000 and
$4,069,000, respectively. Non-employee equity transactions were
accounted for at fair value at each grant date pursuant to
SFAS No. 123. The amount of deferred stock-based
compensation expense to be recorded in future periods could
decrease if options for which accrued but unvested compensation
has been recorded are forfeited.
|
|
Note 13. |
Segment Information |
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for the reporting by business enterprises of information about
operating segments, products and services, geographic areas, and
major customers. The method for determining what information is
reported is based on the way that management organizes the
operating segments within the Company for making operational
decisions and assessments of financial performance. The
Companys chief operating decision maker is considered to
be the Companys 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
customers headquarters. International revenue accounted
for approximately 45%, 41% and 39% of total revenues for the
years ended December 31, 2005, 2004 and 2003, respectively.
Revenues in the United Kingdom accounted for 14% and 11% of
total revenues for the years ended December 31, 2005 and
2004, respectively. No individual foreign country accounted for
10% or more of total revenues in 2003.
Substantially all of the Companys long-lived assets are
located in the United States. Revenues in the United States were
$93.2 million for the year ended December 31, 2005.
|
|
Note 14. |
Net Income Per Common Share |
In accordance with SFAS 128, Earnings Per
Share, basic net income per share is computed by dividing
net income 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 per share
excludes 352,778, 635,113 and 1,467,190 shares subject to
repurchase for the years ended December 31, 2005, 2004 and
2003, respectively. These shares have been included in diluted
net income per share to the extent that the inclusion of such
shares is not anti-dilutive. Diluted net income 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.
60
iPASS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted net income per share (in thousands, except share and per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
12,895 |
|
|
$ |
19,068 |
|
|
$ |
13,902 |
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
63,353,779 |
|
|
|
60,770,680 |
|
|
|
53,474,537 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,923,563 |
|
|
|
4,875,077 |
|
|
|
7,147,503 |
|
|
Denominator for diluted net income per common share
adjusted
|
|
|
66,277,342 |
|
|
|
65,645,757 |
|
|
|
60,622,040 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$ |
0.20 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$ |
0.19 |
|
|
$ |
0.29 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
The following potential shares of common stock have been
excluded from the computation of diluted net income per share
because the effect of including these shares would have been
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Options to purchase common stock
|
|
|
1,904,406 |
|
|
|
804,250 |
|
|
|
351,200 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average exercise price of options to purchase
common stock excluded from the computation was $10.00, $14.56
and $18.12 for the years ended December 31, 2005, 2004 and
2003, respectively.
|
|
Note 15. |
Related Party Transactions |
During 2002, the Company entered into two full recourse notes
receivable for $1,484,675 with two executive officers for the
exercise of stock options. The notes as well as any accrued
interest were paid in full during 2004.
61
SIGNATURES
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.
|
|
|
iPass Inc. |
|
|
By: /s/ Frank E. Verdecanna |
|
|
|
Frank E. Verdecanna |
|
Vice President and Chief Financial Officer |
|
(duly authorized officer and principal financial officer) |
Date: March 15, 2006
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 requisite 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
Kenneth D. Denman |
|
Chairman, President, Chief Executive Officer and Director |
|
March 15, 2006 |
|
/s/ FRANK E. VERDECANNA
Frank E. Verdecanna |
|
Vice President
and Chief Financial Officer
(Principal Financial Officer) |
|
March 15, 2006 |
|
/s/ A. Gary Ames
A. Gary Ames |
|
Director |
|
March 15, 2006 |
|
/s/ Cregg B. Baumbaugh
Cregg B. Baumbaugh |
|
Director |
|
March 15, 2006 |
|
/s/ John D. Beletic
John D. Beletic |
|
Director |
|
March 15, 2006 |
|
/s/ Peter G. Bodine
Peter G. Bodine |
|
Director |
|
March 15, 2006 |
|
/s/ Arthur C. Patterson
Arthur C. Patterson |
|
Director |
|
March 15, 2006 |
|
/s/ Allan R. Spies
Allan R. Spies |
|
Director |
|
March 15, 2006 |
62
INDEX TO 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). |
|
10.2 |
|
|
2003 Non-Employee Directors Plan, as amended.(4) |
|
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 Registrants 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. |
|
10.14 |
|
|
Support Agreement, dated February 29, 2000, by and between
RSA Security, Inc. |
|
10.15 |
|
|
Loan and Security Agreement dated September 4, 2001 between
Silicon Valley Bank and the Registrant, and modifications
thereto.(3) |
|
10.16 |
|
|
2006 Annual Executive Management Bonus Plan. |
|
10.17 |
|
|
Outside Director Compensation Arrangement.(5) |
|
10.18 |
|
|
Executive Officer Cash Compensation Arrangement.(6) |
|
10.19 |
|
|
Offer Letter to Thomas Thimot dated December 9, 2005.(7) |
|
10.20 |
|
|
Transition Agreement with John Thuma dated January 20,
2006.(8) |
|
21.1 |
|
|
Subsidiaries of the Registrant. |
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
24.1 |
|
|
Power of Attorney (reference is made to the signature page of
this Form 10-K). |
|
31.1 |
|
|
Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
63
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
31.2 |
|
|
Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
|
Certification of the Chief Executive Officer pursuant to 18
U.S.C Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
|
Certification of the Chief Financial Officer pursuant to 18
U.S.C Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
(1) |
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 exhibit 10.1 on our Current Report on Form
8-K filed with the
Securities and Exchange Commission on March 13, 2006, and
incorporated by reference herein. |
|
(5) |
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. |
|
(6) |
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. |
|
(7) |
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. |
|
(8) |
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. |
64