TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization, Basis of Presentation and Business
HUGHES Telematics, Inc. (the Company) is developing an embedded, end-to-end telematics solution which is being marketed to automakers. The Companys technology allows for two-way communications with a vehicle which supports numerous applications including safety and security services, remote vehicle diagnostics, remote emissions monitoring and other location-based services. Following the acquisition of Networkcar, Inc., now known as Networkfleet, Inc. (Networkfleet), on August 1, 2006, the Company also provides an aftermarket wireless fleet management solution targeted to the local fleet market.
The Company was incorporated under the General Corporation Law of the State of Delaware on January 9, 2006. On July 21, 2006, the Company filed an Amended and Restated Certificate of Incorporation that increased its authorized shares to 1,100,000 shares, consisting of 1,000,000 shares of common stock, par value $0.01 per share, and 100,000 shares of preferred stock, par value $0.01 per share. On July 28, 2006, the Company filed an Amendment to the Amended and Restated Certificate of Incorporation that effected a 3,000 for one stock split of its common stock. All common stock share amounts in these consolidated financial statements reflect such stock
split. On July 19, 2007, the Company filed an Amendment to the Amended and Restated Certificate of Incorporation that increased its authorized shares to 1,600,000 shares, consisting of 1,500,000 shares of common stock, par value $0.01 per share, and 100,000 shares of preferred stock, par value $0.01 per share.
The Companys consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiary Networkfleet following the acquisition of Networkfleet. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current presentation.
During the years ended December 31, 2008 and 2007 and for the period from January 9, 2006 to December 31, 2006, the Company incurred a net loss of approximately $57.5 million, $32.3 million and $3.8 million, respectively, and used cash in operations of approximately $39.1 million, $23.6 million and $2.8 million, respectively. As of December 31, 2008, the Company had cash and cash equivalents of approximately $17.8 million and an accumulated deficit of approximately $93.6 million. Management believes that the cash on hand, the cash proceeds received in connection with the sale of the Companys Series B Convertible Preferred Stock (the New
Series B Preferred Stock) on March 12, 2009, and a combination of any of the cash to be received in connection with the merger with Polaris Acquisition Corp. (Polaris) (see Note 2); future potential financing from affiliates of Apollo Advisors V, L.P. (Apollo); and other financing transactions being pursued will allow the Company to continue operations beyond December 31, 2009. There is no assurance that the Company will be successful in obtaining additional financing to fund its operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
(2) Merger Agreement with Polaris Acquisition Corp.
On June 13, 2008, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which it agreed to merge (the Merger) with Polaris. The Merger Agreement was amended and restated on November 10, 2008 (the Amended Merger Agreement). At the closing of the Merger, all the outstanding shares of the Companys common stock shall be exchanged for the right to receive, in the aggregate, approximately 15,000,000 shares of Polaris common stock. In addition, holders of the Companys common stock shall be entitled to receive an aggregate of approximately 59,000,000 additional shares of
the Polaris common stock, in three tranches, which will be issued into escrow at the closing of the Merger and released to the Companys shareholders upon the achievement of certain share price targets over the five-year period following closing. Outstanding options exercisable for shares of the Companys common stock will be exchanged in the Merger for options to purchase shares of Polaris common stock. Pursuant to the Amended Merger Agreement, the Polaris founders agreed to deposit an aggregate of 1,250,000 shares of their Polaris common stock into escrow at closing. Such shares of Polaris common stock will be released upon the achievement of the first share price target between the first and fifth anniversary of closing.
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Merger Agreement with Polaris Acquisition Corp. (continued)
Upon consummation of the Merger and assuming no Polaris stockholders exercise their right to convert their common stock into a pro rata share of the Polaris trust account, then the Company will have access to approximately $140.0 million of the cash and cash equivalents currently held in the Polaris trust account. If the maximum number of Polaris stockholders exercise their conversion right, the Company will have access to approximately $95.0 million of the cash and cash equivalents currently held in the Polaris trust account. The number of shares of Polaris common stock received by the Companys stockholders at the closing of the Merger will be
subject to possible adjustments, including the issuance of additional shares of Polaris common stock for the value of equity raised by the Company prior to the closing of the Merger, if any, and for a shortfall in the net working capital of Polaris below $138.0 million at the closing of the Merger.
Pursuant to the Amended Merger Agreement, the Company and its stockholders, including Communications Investors LLC (Communications LLC), an affiliate of Apollo, agreed to reorganize the capital structure of the Company so that, immediately prior to the consummation of the Merger, the only outstanding equity securities of the Company, other than the warrants issued in connection with the Companys Credit Agreement (which will be exercised in connection with the Merger) and stock options, would be common stock.
The obligations of the Company and Polaris to complete the Merger are subject to the satisfaction or waiver by the other party, at or prior to the closing date, of various customary conditions, including (i) the receipt of all required regulatory approvals and consents, (ii) the approval of the Merger by Polaris stockholders, (iii) subject to certain exceptions and materiality thresholds, the accuracy of the representations and warranties of the other party and (iv) compliance of the other party with its covenants, subject to specified materiality thresholds.
(3) Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. The Company considers all debt securities with maturities of more than three months but less than one year as short-term investments and classifies investments in such short-term debt securities as held to maturity. The cost of these securities is adjusted for amortization of premiums and accretion of discounts to maturity over the contractual life of the security.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists primarily of trade receivables from customers and are generally due within 30 days of the invoice date. The Company estimates uncollectible accounts receivable based on specific troubled accounts or other currently available evidence. The specific allowances are re-evaluated and adjusted as additional information regarding collectability is received. After all reasonable attempts to collect the receivable have been exhausted, the account is written off against the allowance.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market. The Company periodically assesses the market value of its inventory, based on sales trends and forecasts and technological changes, and records a charge to current-period income when such factors indicate that a reduction in net realizable value has occurred.
Restricted Cash
To secure certain lease obligations, the Company must maintain letters of credit in an aggregate amount of approximately $3.8 million. The agreements governing the letters of credit require the Company to maintain restricted cash accounts which hold collateral equal to no less than the aggregate face amount of the outstanding letters of credit. As of December 31, 2008 and 2007, the Company had approximately $3.8 million and $1.0 million, respectively, in the restricted cash accounts.
F-22
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Summary of Significant Accounting Policies (continued)
Pursuant to a Credit Agreement (see Note 8), the Company is required to maintain an escrow account for the benefit of the lenders of the senior secured term indebtedness. Following the initial issuance of senior secured term indebtedness in March 2008, the Company was required to maintain a balance in the escrow account of no less than 25% of the outstanding principal balance of the senior secured term indebtedness. The 25% coverage was to be reduced on a pro rata basis over the next $67.5 million of debt or equity capital raised by the Company after March 2008. If a balance remains in the escrow account on March 31, 2009, the Company will be
required to make an offer to prepay outstanding term indebtedness with an aggregate principal amount equal to such remaining balance. As of December 31, 2008, the amount held in the escrow account was approximately $5.3 million. As the Company raises an additional $24.0 million of debt or equity financing, the remaining amount held in the escrow account will be released on a pro rata basis. As a result of the sale of New Series B Preferred Stock on March 12, 2009 (see Note 14), the remaining approximately $5.3 million was released from the escrow account.
Restricted cash balances which are expected to be restricted for more than one year have been classified as non-current assets on the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment are recorded at original acquisition cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Repair and maintenance costs are expensed as incurred.
Capitalized Software
Software development costs are capitalized in accordance with the AICPAs Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use
(SOP 98-1). SOP 98-1 requires companies to capitalize qualifying computer software costs that are incurred during the application development stage and amortize them over the softwares estimated useful life. Costs capitalized include direct labor, outside services, materials, software licenses and capitalized interest. For the years ended December 31, 2008 and 2007, the Company capitalized $13.3 million and $3.4 million, respectively, of
software development costs. Amortization will begin when the software is ready for its intended use and will be recognized over the expected useful life of the software, but not to exceed five years.
Goodwill and Intangibles
The Company records goodwill when consideration paid in a purchase acquisition exceeds the fair value of the net tangible assets and identifiable intangible assets acquired. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets
, goodwill and identified intangible assets with an indefinite life are not amortized but are tested for impairment at least annually or whenever changes in circumstances indicate that the carrying value may not be recoverable. The Company performs its annual goodwill impairment analysis as of December 31 of each year. The annual impairment
analysis as of December 31, 2008 indicated that there was no goodwill impairment for the year ended December 31, 2008. The Company amortizes the identified intangible assets with a finite life over their respective useful lives on a straight-line basis, which approximates the projected utility of such assets based on the available information.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net
F-23
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Summary of Significant Accounting Policies (continued)
undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.
Debt Issuance Costs
Costs associated with the issuance of debt are deferred and amortized to interest expense, using the effective interest method, over the term of the respective debt.
Revenue Recognition
The Company earns revenue through the sale of Networkfleets products and services. Hardware sales consist principally of revenues from the sale of Networkfleets telematics device, primarily to resellers. Shipping and handling costs for hardware shipped to resellers are classified as cost of hardware sold. Networkfleets customers enter into a service contract which generally has a 12-month initial term which automatically renews for successive one-month periods thereafter. The Company has determined that the sale of Networkfleets hardware and its services constitutes a revenue arrangement with multiple deliverables in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Element Deliverables.
The Company accounts for the sale of hardware and the accompanying service as separate units of accounting. Revenue is recognized on sales of hardware when shipped to resellers or other customers and collection is considered probable. Consideration received for the monitoring and tracking services are recognized as service revenue when earned. Prepaid service fees are recorded as deferred revenue and are recognized as revenue when earned.
The Company has a long-term contract with each of two automakers pursuant to which the automakers have agreed to install telematics devices in their vehicles and permit the Company to exclusively provide telematics services to their new customers. Those contracts also require the Company to pay each automaker for certain non-recurring costs associated with the initiation of telematics services (see Note 12). In accordance with EITF Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)
, amounts paid under these agreements will be capitalized and recognized as a
reduction of revenue over the term of the respective agreement.
Research and Development
The Company incurs research and development costs in the course of developing its products and services. Such costs are expensed as incurred.
Share-Based Compensation
The Company records expense for share-based compensation awards based on the fair value recognition provisions contained in SFAS No. 123(R),
Share-Based Payment
(SFAS 123(R)). The fair value of stock option awards is determined using an option pricing model that is based on established principles of financial economic theory. Assumptions regarding volatility, expected term, dividend yield and risk-free rate are required for valuation of stock option awards (see Note 10).
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for 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 in income in the
period that includes the enactment date.
F-24
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Summary of Significant Accounting Policies (continued)
In assessing the need to record a valuation allowance against the Companys deferred tax assets, management considers, based upon all available evidence, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to the Companys early stage and its operating losses, there is uncertainty with respect to whether the Company will ultimately realize its deferred tax assets. Accordingly, as of December 31, 2008 and 2007, the Company recorded a full valuation allowance against its net deferred tax asset.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). The adoption of FIN 48 did not result in an increase or decrease to the Companys accrual for uncertain tax positions and no adjustment was recorded to retained earnings upon adoption.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources. The Companys comprehensive loss for years ended December 31, 2008 and 2007 and for the period from January 9, 2006 to December 31, 2006 equaled the Companys net loss.
Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution from the exercise or conversion of securities into common stock. The potential dilutive effect of outstanding stock options and warrants is calculated using the treasury stock method.
During all periods presented, the Company had potential common shares, including shares issuable upon the exercise of outstanding stock options and warrants, which could potentially dilute basic loss per share in the future, but were excluded in the computation of diluted loss per share in such periods, as their effect would have been antidilutive. Potential common shares issuable upon the exercise of outstanding stock options and warrants but excluded from the calculation of diluted loss per share were 685,909 shares, 582,570 shares and 206,900 shares for the years ended December 31, 2008 and 2007 and for the period from January 9, 2006 to December
31, 2006, respectively.
Use of Estimates
The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the use of management estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Companys financial instruments include cash, cash equivalents, accounts receivable, accounts payable, letters of credit, the Series A Redeemable Preferred Stock (the Series A Preferred Stock) and long-term debt. The Company discloses the estimated fair values for all financial instruments for which it is practicable to estimate fair value. As of December 31, 2008 and 2007, the fair value of these instruments, other than the Series A Preferred Stock and long-term debt, approximates book value due to their short-term duration.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and accounts receivable. Although the Company maintains cash balances at financial institutions that exceed federally insured limits, these balances are placed with various high credit quality financial institutions.
F-25
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Summary of Significant Accounting Policies (continued)
The Company generates revenues principally from customers located in the United States. For the years ended December 31, 2008 and 2007 and for the period from January 9, 2006 to December 31, 2006, one, one and two customers, respectively, individually accounted for more than 10% of the Companys revenues. Combined, these customers accounted for approximately $3.6 million and $2.1 million of total revenues for the years ended December 31, 2008 and 2007, respectively, and $1.7 million of total revenues for the period from January 9, 2006 to December 31, 2006.
The Companys significant customers, as measured by percentage of total revenues, were as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
January 9, 2006
(Inception) to
December 31,
2006
|
|
|
2008
|
|
2007
|
Customer A
|
|
|
11.8
|
%
|
|
|
10.3
|
%
|
|
|
|
|
Customer B
|
|
|
|
|
|
|
|
|
|
|
13.4
|
%
|
Customer C
|
|
|
|
|
|
|
|
|
|
|
11.7
|
%
|
As of December 31, 2008 and 2007, three and two customers, respectively, individually accounted for over 10% of the Companys total accounts receivable balance. Combined, these customers accounted for $3.0 million of the Companys total accounts receivable balance as of December 31, 2008 and $1.2 million of the Companys total accounts receivable balance as of December 31, 2007.
The Companys significant customers, as measured by percentage of total accounts receivable, were as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
Customer A
|
|
|
18.6
|
%
|
|
|
13.9
|
%
|
Customer D
|
|
|
16.8
|
%
|
|
|
12.0
|
%
|
Customer E
|
|
|
10.8
|
%
|
|
|
|
|
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements
(SFAS 157). This standard defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-2 (FSP 157-2) which delays the effective date of SFAS 157
by one year for all nonfinancial assets and nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. Those assets and liabilities measured at fair value under SFAS 157 in the year ended December 31, 2008 did not have a material impact on the Companys consolidated financial statements. In accordance with FSP 157-2, the Company will measure the remaining assets and liabilities no later than the three months ended March 31, 2009. The Company is evaluating the impact the adoption of FSP 157-2 may have on its financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Liabilities Including an Amendment of FASB Statement No. 115
(SFAS 159). Under this standard, entities will be permitted to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis. SFAS 159 was effective for the Company on January 1, 2008. The Company determined that the utilization of fair value reporting is not appropriate for the Companys financial instruments for which fair value measurement is not required. Consequently, the adoption of SFAS 159 did not have
a material impact on the Companys financial position and results of operations.
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TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Summary of Significant Accounting Policies (continued)
In November 2007, the EITF issued Issue No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1). EITF 07-1 states that income statement classification of payments between parties in an arrangement should be based on a consideration of (a) the nature and terms of the arrangement, (b) the nature of the entities operations and (c) whether the parties payments are within the scope of other existing generally accepted accounting principles. EITF 07-1 was effective for the Company on January 1, 2008. The adoption of EITF 07-1 did not have a material impact on the Companys financial position and results of
operations.
In June 2008, the EITF issued Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock
(EITF 07-5), which provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock. Under EITF 07-5, the Company first evaluates any contingent exercise provisions based on the guidance that was originally issued in EITF Issue No. 01-6, and second, evaluates the instruments settlement provisions. EITF 07-5 is effective for fiscal periods beginning after December 15, 2008. Based on a
preliminary evaluation of the impact of the adoption of EITF 07-5, the Company has determined that the warrants issued in connection with the issuance of the Series A Preferred Stock and the warrants issued in connection with the issuance of the senior secured term indebtedness may contain provisions which, in accordance with EITF 07-5, would indicate that the warrants are not indexed to the Companys stock. If the warrants are deemed not to be indexed to the Companys stock, then upon the adoption of EITF 07-5, the Company will reclassify the warrants from equity to a liability and will record a gain or loss each period, beginning in the first quarter of 2009 and continuing through the date the warrants are exercised, to recognize the change in fair market value of these instruments. The Company continues to evaluate the impact the adoption of EITF 07-5 may have on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)), which revised the guidance contained in SFAS No. 141,
Business Combinations.
Significant revisions include: (i) all transaction costs related to a business combination are to be expensed when incurred; (ii) certain contingent assets and liabilities purchased in a business combination are to be measured at fair value; (iii) contingent consideration (earn-out arrangements) paid in connection with a business combination are to be measured at fair value depending on the structure of the arrangements; and (iv) subsequent material adjustments
made to the purchase price allocation will be recorded back to the acquisition date, which will cause revision of previously issued financial statements when reporting comparative period financial information in subsequent financial statements. SFAS 141(R) will be prospectively applied for business combinations that have an acquisition date on or after January 1, 2009. As of December 31, 2008, the Company has incurred approximately $0.9 million in transaction costs related to the merger with Polaris. Such costs are included in other current assets in the accompanying consolidated balance sheets and will be retrospectively expensed by adjusting beginning retained earnings in the period the Company adopts SFAS 141(R).
(4) Acquisition of Networkfleet
On August 1, 2006, the Company purchased all of the outstanding common stock of Networkfleet, a provider of hardware and services for remotely monitoring the performance and location of fleet vehicles, and certain intellectual property related to the provision of telematics services for approximately $24.7 million of cash, including approximately $0.3 million of legal and advisory fees incurred in connection with the transaction. The Company will pay up to an additional $3.2 million of cash if certain sales targets are achieved from 2009 to 2010. The acquisition of Networkfleet gave the Company immediate access to the growing fleet telematics market
and provided the Company an intellectual property portfolio which consists of patents covering certain of the Companys planned service offerings. The results of Networkfleets operations are included in the Companys results of operations for the period beginning August 1, 2006.
F-27
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Acquisition of Networkfleet (continued)
The acquisition of Networkfleet has been accounted for in accordance with SFAS No. 141,
Business Combinations.
The $24.7 million purchase price has been allocated to the acquired assets and liabilities based on their fair value. If the certain sales targets are achieved from 2009 to 2010 and the Company pays additional consideration, such amount will be recorded as an increase in goodwill. The following table presents the initial purchase price allocation:
|
|
|
|
|
August 1, 2006
|
|
|
(In Thousands)
|
Cash
|
|
$
|
1,699
|
|
Accounts receivable
|
|
|
1,882
|
|
Inventories
|
|
|
967
|
|
Other current assets
|
|
|
358
|
|
Property and equipment
|
|
|
447
|
|
Intangible assets:
|
|
|
|
|
Intellectual property
|
|
|
11,400
|
|
Existing technology
|
|
|
6,700
|
|
Trade name
|
|
|
1,100
|
|
Distributor relationships
|
|
|
1,000
|
|
Goodwill
|
|
|
5,169
|
|
Total assets acquired
|
|
|
30,722
|
|
Accounts payable and accrued liabilities
|
|
|
671
|
|
Technology upgrade program
|
|
|
2,658
|
|
Deferred income taxes
|
|
|
2,682
|
|
Total liabilities acquired
|
|
|
6,011
|
|
Net assets acquired
|
|
$
|
24,711
|
|
The following unaudited pro forma information is presented as if the Company had completed the acquisition of Networkfleet as of January 9, 2006. The pro forma information is not necessarily indicative of what the results of operations would have been had the acquisitions taken place at those dates or of the future results of operations.
|
|
|
|
|
January 9, 2006
(Inception) to
December 31, 2006
|
|
|
(In Thousands,
Except per Share Data)
|
Revenues
|
|
$
|
12,774
|
|
Net loss
|
|
$
|
(7,470
|
)
|
Loss per share basic and diluted
|
|
$
|
(22.52
|
)
|
F-28
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Supplemental Balance Sheet Information
Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Raw material components
|
|
$
|
1,202
|
|
|
$
|
1,357
|
|
Finished goods
|
|
|
812
|
|
|
|
1,401
|
|
Total
|
|
$
|
2,014
|
|
|
$
|
2,758
|
|
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and consisted of the following:
|
|
|
|
|
|
|
|
|
Estimated
Useful Lives
(Years)
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
|
|
(In Thousands)
|
Computer equipment and software
|
|
|
3 to 5
|
|
|
$
|
5,734
|
|
|
$
|
3,705
|
|
Machinery and equipment
|
|
|
2 to 5
|
|
|
|
4,845
|
|
|
|
1,268
|
|
Furniture and fixtures
|
|
|
5 to 7
|
|
|
|
217
|
|
|
|
50
|
|
Leasehold improvements
|
|
|
1 to 2
|
|
|
|
149
|
|
|
|
4
|
|
Construction in process
|
|
|
|
|
|
|
14,036
|
|
|
|
|
|
|
|
|
|
|
|
|
24,981
|
|
|
|
5,027
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(3,640
|
)
|
|
|
(1,143
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
21,341
|
|
|
$
|
3,884
|
|
Construction in process consists primarily of software and systems infrastructure that is being developed to support the Companys business and operations, but which is not yet ready for use.
Depreciation expense was approximately $2.5 million, $1.0 million and $0.1 million for the years ended December 31, 2008 and 2007 and the period from January 9, 2006 to December 31, 2006, respectively.
Accrued Liabilities
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Accrued non-inventory purchases
|
|
$
|
2,921
|
|
|
$
|
|
|
Accrued compensation and benefits
|
|
|
1,760
|
|
|
|
1,903
|
|
Technology upgrade program (see Note 12)
|
|
|
|
|
|
|
816
|
|
Accrued inventory purchases
|
|
|
236
|
|
|
|
713
|
|
Accrued professional and consulting fees
|
|
|
180
|
|
|
|
150
|
|
Accrued cost of service
|
|
|
157
|
|
|
|
|
|
Accrued marketing and promotion expenses
|
|
|
151
|
|
|
|
|
|
Other accrued expenses
|
|
|
832
|
|
|
|
609
|
|
|
|
$
|
6,237
|
|
|
$
|
4,191
|
|
F-29
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Goodwill and Acquired Intangible Assets
On August 1, 2006, the Company acquired Networkfleet and recorded goodwill of approximately $5.2 million resulting from the allocation of the purchase price.
Intangible assets and the related accumulated amortization were as follows:
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Lives
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
|
|
(In Thousands)
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
|
5 to 15
|
|
|
$
|
15,869
|
|
|
$
|
(3,997
|
)
|
|
$
|
11,872
|
|
Existing technology
|
|
|
5
|
|
|
|
6,700
|
|
|
|
(3,238
|
)
|
|
|
3,462
|
|
Trade name
|
|
|
5
|
|
|
|
1,100
|
|
|
|
(532
|
)
|
|
|
568
|
|
Distributor relationships
|
|
|
5
|
|
|
|
1,000
|
|
|
|
(483
|
)
|
|
|
517
|
|
Total
|
|
|
|
|
|
$
|
24,669
|
|
|
$
|
(8,250
|
)
|
|
$
|
16,419
|
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
|
5 to 15
|
|
|
$
|
15,869
|
|
|
$
|
(2,343
|
)
|
|
$
|
13,526
|
|
Existing technology
|
|
|
5
|
|
|
|
6,700
|
|
|
|
(1,898
|
)
|
|
|
4,802
|
|
Trade name
|
|
|
5
|
|
|
|
1,100
|
|
|
|
(312
|
)
|
|
|
788
|
|
Distributor relationships
|
|
|
5
|
|
|
|
1,000
|
|
|
|
(283
|
)
|
|
|
717
|
|
Total
|
|
|
|
|
|
$
|
24,669
|
|
|
$
|
(4,836
|
)
|
|
$
|
19,833
|
|
Intellectual property consists of the patent portfolio acquired in connection with the purchase of Networkfleet (see Note 4) and know-how acquired in connection with the issuance of common stock to the shareholders of SecureTnet International, LLC (see Note 10). The existing technology, trade name and distributor relationships intangible assets were acquired in connection with the purchase of Networkfleet. Amortization of existing technology is included in the cost of hardware sold in the accompanying consolidated statements of operations. For the years ended December 31, 2008 and 2007 and the period from January 9, 2006 to December 31,
2006, amortization expense was approximately $3.4 million, $3.4 million and $1.4 million, respectively.
The estimated future amortization of intangible assets as of December 31, 2008 is as follows (in thousands):
|
|
|
Year Ending December 31:
|
|
|
|
|
2009
|
|
$
|
3,414
|
|
2010
|
|
|
3,414
|
|
2011
|
|
|
2,308
|
|
2012
|
|
|
760
|
|
2013
|
|
|
760
|
|
Thereafter
|
|
|
5,763
|
|
Total
|
|
$
|
16,419
|
|
(7) Income Taxes
The Company and its eligible subsidiaries file a consolidated Federal income tax return. For Federal income tax purposes, the Company has unused net operating loss (NOL) carryforwards of approximately $51.8 million expiring in 2021 through 2028 and unused tax credits of approximately $2.5 million expiring in 2021 through 2027. Due to the Companys acquisition of Networkfleet, approximately $2.0 million of the NOL carryforwards are subject to an annual limitation in accordance with Internal Revenue Code Section 382.
F-30
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes (continued)
After 2010, all of Networkfleets NOL carryforwards and unused tax credits will be available to offset future taxable income of the Company and its subsidiaries unless subject to other limitation. The Company and Networkfleet also have NOL carryforwards available to offset future taxable income in certain states where income tax returns are filed. The amounts available vary by state due to apportionment of losses to each state, and the expiration of the state NOL carryforwards vary in accordance with applicable state laws.
For the years ended December 31, 2008 and 2007 and for the period from January 9, 2006 to December 31, 2006, the Companys loss before income taxes was approximately $57.5 million, $34.5 million and $6.1 million, respectively. The income tax benefit consists of the following:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
January 9, 2006
(Inception) to
December 31,
2006
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Current benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
1,726
|
|
|
|
1,832
|
|
State
|
|
|
|
|
|
|
476
|
|
|
|
436
|
|
Total deferred benefit
|
|
|
|
|
|
|
2,202
|
|
|
|
2,268
|
|
Total income tax benefit
|
|
$
|
|
|
|
$
|
2,202
|
|
|
$
|
2,268
|
|
The income tax benefit differs from the amount computed by applying the Federal statutory rate of 35% to the Companys loss before income taxes as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
January 9, 2006
(Inception) to
December 31,
2006
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Income tax benefit at Federal statutory rate
|
|
$
|
20,114
|
|
|
$
|
12,087
|
|
|
$
|
2,136
|
|
State taxes, net of Federal benefit
|
|
|
2,725
|
|
|
|
1,630
|
|
|
|
284
|
|
Change in valuation allowance
|
|
|
(23,103
|
)
|
|
|
(11,784
|
)
|
|
|
|
|
Research tax credits
|
|
|
1,302
|
|
|
|
944
|
|
|
|
|
|
Interest expense on Series A Preferred Stock
|
|
|
(989
|
)
|
|
|
(634
|
)
|
|
|
(143
|
)
|
Permanent differences and other
|
|
|
(49
|
)
|
|
|
(41
|
)
|
|
|
(9
|
)
|
Total income tax benefit
|
|
$
|
|
|
|
$
|
2,202
|
|
|
$
|
2,268
|
|
F-31
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes (continued)
The tax effect of temporary differences that give rise to significant portions of the net deferred tax liability are as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
$
|
23,115
|
|
|
$
|
9,243
|
|
Capitalized software
|
|
|
14,120
|
|
|
|
6,294
|
|
Accrued expenses
|
|
|
589
|
|
|
|
818
|
|
Allowance for bad debt
|
|
|
276
|
|
|
|
279
|
|
Inventory reserves and capitalization
|
|
|
227
|
|
|
|
227
|
|
Fixed assets
|
|
|
405
|
|
|
|
112
|
|
Other
|
|
|
303
|
|
|
|
132
|
|
Total gross deferred tax assets
|
|
|
39,035
|
|
|
|
17,105
|
|
Less: valuation allowance
|
|
|
(34,887
|
)
|
|
|
(11,784
|
)
|
Total deferred tax assets
|
|
|
4,148
|
|
|
|
5,321
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
4,148
|
|
|
|
5,321
|
|
Total deferred tax liabilities
|
|
|
4,148
|
|
|
|
5,321
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
In assessing the need to record a valuation allowance against the Companys deferred tax assets, management considers, based upon all available evidence, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to the Companys early stage and its operating losses, there is uncertainty with respect to whether the Company will ultimately realize its deferred tax assets. Accordingly, as of December 31, 2008 and 2007, the Company recorded a full valuation allowance against its net deferred tax asset.
The adoption of FIN 48 did not result in an accrual for the year ended December 31, 2008 or 2007 for uncertain tax positions taken in current or prior years, settlements with the taxing authorities or a lapse of the applicable statute of limitations. There are no uncertain tax positions as of December 31, 2008 or 2007 that, if recognized, would significantly affect the effective tax rate, and there are no uncertain tax positions for which it is reasonably possible that the total amounts of the unrecognized tax benefits will significantly change in the next twelve months. The Company may be subject to examination by the U.S. federal and various state
tax jurisdictions for the 2005, 2006, 2007 and 2008 tax years. Under the terms of the purchase agreement between the Company and the former parent company of Networkfleet, the former parent company agreed to indemnify the Company for any taxes imposed on Networkfleet for periods prior to August 1, 2006. The Company will include interest and penalties related to its tax contingencies in income tax expense. No interest or penalties have been recognized during the year ended December 31, 2008 or 2007.
F-32
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt
The components of long-term debt were as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Senior secured term indebtedness
|
|
$
|
53,572
|
|
|
$
|
|
|
Senior subordinated unsecured promissory note
|
|
|
13,024
|
|
|
|
|
|
Total long-term debt
|
|
$
|
66,596
|
|
|
$
|
|
|
Senior Secured Term Indebtedness
On March 31, 2008, the Company entered into a Credit Agreement pursuant to which it issued, for aggregate consideration of $20.0 million, senior secured term indebtedness with a principal amount of $20.0 million and warrants to purchase 25,870 shares of common stock at an exercise price of $0.01 per share. The Company deposited $5.0 million of the proceeds into an escrow account which will be released to the Company on a pro rata basis over the next $67.5 million of debt or equity capital raised by the Company. If a balance remains in the escrow account on March 31, 2009, the Company will be required to make an offer to prepay outstanding senior
secured term indebtedness with an aggregate principal amount equal to such remaining balance.
As additional consideration for services provided by Morgan Stanley Senior Funding, Inc. (the Lead Arranger) in connection with the issuance and syndication of the term indebtedness, the Company (i) issued a warrant to an affiliate of the Lead Arranger to purchase 9,689 shares of common stock at an exercise price of $0.01 per share and (ii) agreed to issue the Lead Arranger or its designated affiliate additional warrants to purchase up to 9,689 shares of common stock at an exercise price of $0.01 per share on a pro rata basis in connection with the issuance of up to $40.0 million of incremental senior secured term indebtedness under the
Credit Agreement.
On April 9, 2008, the Company entered into an Amended and Restated Credit Agreement pursuant to which it issued, for aggregate consideration of $20.0 million, additional senior secured term indebtedness with a principal amount of $20.0 million and warrants to purchase 26,447 shares of common stock at an exercise price of $0.01 per share. The Company deposited approximately $2.0 million of the proceeds into the escrow account, bringing the total amount held in the escrow account for the benefit of all senior secured note holders to approximately $7.0 million. Pursuant to the agreement with the Lead Arranger, the Company issued an additional warrant to
purchase 4,845 shares of common stock at an exercise price of $0.01 per share.
On July 8, 2008, the Company entered into an Incremental Loan Commitment Agreement pursuant to which it issued, for aggregate consideration of $15.0 million, additional senior secured term indebtedness with a principal amount of $15.0 million and warrants to purchase 19,833 shares of common stock at an exercise price of $0.01 per share. As a result of this transaction, approximately $0.4 million was released from the escrow account, reducing the total amount held in the escrow account for the benefit of all senior secured note holders to approximately $6.6 million. Pursuant to the agreement with the Lead Arranger, the Company issued an additional
warrant to purchase 3,633 shares of common stock at an exercise price of $0.01 per share.
On December 12, 2008, the Company entered into an Incremental Loan Commitment Agreement with Apollo Investment Fund V (PLASE), LP (AIF V PLASE), an affiliate of Apollo, pursuant to which it issued, for aggregate consideration of $5.0 million, additional senior secured term indebtedness with a principal amount of $5.0 million and warrants to purchase 6,611 shares of common stock at an exercise price of $0.01 per share. As a result of this transaction and the issuance of a senior subordinated unsecured promissory note on the same date, approximately $1.3 million was released from the escrow account, reducing the total amount held in the
escrow account for the benefit of all senior secured note holders to approximately
F-33
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt (continued)
$5.3 million. Pursuant to the agreement with the Lead Arranger, the Company issued an additional warrant to purchase 1,211 shares of common stock at an exercise price of $0.01 per share.
The senior secured term indebtedness is guaranteed by all of the Companys existing and future domestic subsidiaries and is secured by all of its tangible and intangible assets. At the election of the Company, the term indebtedness bears interest at (i) the Prime Lending Rate plus 10.00% or (ii) for Eurocurrency borrowings, 11.00% plus the greater of the London Interbank Offered Rate (LIBOR) or 3.00%. In accordance with an agreement between the Company and one of the senior secured note holders, the interest rate on term indebtedness with a principal amount of $5.0 million will have a fixed interest rate of 14.00% for the term of the
debt. With respect to Eurocurrency borrowings, the Company may elect interest periods of one, two, three, or six months (or nine or twelve months if approved by each senior secured note holder), and interest is payable in arrears at the end of each interest period but, in any event, at least every three months. With respect to any interest period ending on or prior to March 31, 2010 and unless the Company elects at least three days prior to the beginning of any such interest period, the interest accrued on the term indebtedness will be paid in kind in arrears with such accrued interest being added to the outstanding principal balance of the term indebtedness. With respect to all interest periods ending after March 31, 2010, the accrued interest will be paid in cash in arrears. As of December 31, 2008, the Company had elected to convert all outstanding amounts of the term indebtedness to Prime Lending Rate borrowings which resulted in the term indebtedness bearing an interest rate of
13.25%.
The Amended and Restated Credit Agreement governing the term indebtedness requires the Company to comply with certain negative covenants which include limitations on the Companys ability to incur additional debt; create liens; pay dividends or make other distributions; make loans and investments; sell assets; redeem or repurchase capital stock or subordinated debt; engage in specified transactions with affiliates; consolidate or merge with or into, or sell substantially all of its assets to, another person; and enter into new lines of business. The Company may incur indebtedness beyond the specific limits allowed under the Amended and Restated
Credit Agreement, provided it maintains a leverage ratio of no greater than 5.0 to 1.0. Noncompliance with any of the covenants without cure or waiver would constitute an event of default. An event of default resulting from a breach of a covenant may result, at the option of the note holders, in an acceleration of the principal and interest outstanding. The Amended and Restated Credit Agreement also contains other events of default (subject to specified grace periods), including defaults based on the termination of the Companys contract with an automaker, events of bankruptcy and insolvency, and nonpayment of principal, interest or fees when due.
The warrants issued in connection with the issuance of the term indebtedness are exercisable upon the earlier to occur of (i) the repayment of the term indebtedness, (ii) a change of control as defined in the warrant agreement, (iii) a transaction or event causing or allowing the holders to sell the shares of common stock issuable upon exercise of the warrants pursuant to the Co-Sale Agreement, dated March 31, 2008, as amended, by and among the Company, Communications LLC and the holders of the warrants. If not exercised prior to the earlier of (i) the date on which the Company becomes subject to the requirement to file reports under Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934, as amended, or (ii) March 31, 2013, the warrants will be automatically exercised on such date with no action required on the part of the holders (except the payment of the aggregate exercise price). In the event that the term indebtedness is prepaid in full prior to March 31, 2010, the number of shares for which each warrant is exercisable shall be reduced by 18.75%. As additional consideration for services provided by the Lead Arranger in connection with the issuance and syndication of the term indebtedness, the Company agreed to issue the Lead Arranger or its designated affiliate additional warrants to purchase a number of shares of common stock equal to the reduction in the number of shares of common stock issuable under the warrants held by Morgan Stanley Senior Funding, Inc. or its affiliates in the event the term indebtedness is prepaid in full by March 31, 2010. The number of shares for which each warrant is exercisable is
subject to additional adjustment under certain anti-dilution and other provisions as set forth in the warrant agreement.
F-34
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt (continued)
In accordance with Accounting Principles Board Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,
as of each issuance date, the Company ascribed value to the senior secured term indebtedness and the related warrants based on their relative fair values. As such, $16.7 million, $16.7 million, $10.5 million and $2.9 million was allocated to the senior secured term indebtedness and $3.3 million, $3.3 million, $4.5 million and $1.0 million was allocated to the warrants on the March 31, 2008, April 9, 2008, July 8, 2008 and December 12, 2008 issuance dates, respectively. The resulting discount from the face
value of the senior secured term indebtedness resulting from the ascribed value to the warrants will be amortized as additional interest expense over the term of the senior secured term indebtedness using the effective interest rate method.
In connection with the issuance of the senior secured term indebtedness to AIF V PLASE on December 12, 2008, the Company recorded a deemed capital contribution from Apollo of approximately $1.0 million related to the difference between (i) the fair value of the note using an estimated interest rate the Company would have paid an unrelated third party on a similar note and (ii) the fair value of the note using the stated interest rate. The Company determined the estimated fair value amount by using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the fair value estimates presented herein is not necessarily indicative of the amount that the Company or holders of the instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value. The discount from the face value of the senior secured term indebtedness resulting from the deemed capital contribution will be amortized as additional interest expense over the term of the senior secured term indebtedness using the effective interest rate method.
Senior Subordinated Unsecured Promissory Notes
On March 31, 2008, the Company issued to Communications LLC a senior subordinated unsecured promissory note with a principal amount of $12.5 million and a maturity date of October 1, 2013. The note bears interest at a rate of 15.00% per annum which is compounded and added to the principal amount annually and is payable at maturity. In connection with the issuance of the note, the Company recorded a deemed capital contribution from Apollo of approximately $2.4 million related to the difference between (i) the fair value of the note using an estimated interest rate the Company would have paid an unrelated third party on a similar note and (ii) the fair
value of the note using the 15.00% stated interest rate. The discount from the face value of the note resulting from the deemed capital contribution will be amortized as additional interest expense over the term of the note using the effective interest rate method.
On December 12, 2008, the Company issued to AIF V PLASE an additional senior subordinated unsecured promissory note with a principal amount of $3.5 million and a maturity date of October 1, 2013. The note bears interest at 15.00% per annum which is compounded and added to the principal amount annually and is payable at maturity. In connection with the issuance of the note, the Company recorded an additional deemed capital contribution of approximately $2.4 million from Apollo related to the difference between (i) the fair value of the note using an estimated interest rate the Company would have paid an unrelated third party on a similar note and (ii)
the fair value of the note using the 15.00% stated interest rate. The discount from the face value of the note resulting from the deemed capital contribution will be amortized as additional interest expense over the term of the note using the effective interest rate method.
At the time of issuance of each promissory note, the Company determined the estimated fair value amount by using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimates presented herein is not necessarily indicative of the amount that the Company or holders of the instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
F-35
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Capital Lease Obligations
The Company leases certain equipment under capital lease arrangements expiring at various times through 2011. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The interest rates pertaining to these capital leases range from 7.25% to 11.00% (average interest rate is 8.18%). One of the lease arrangements is between the Company and Hughes Network Systems, LLC (HNS), a related party (see Note 11).
Minimum future lease payments under these capital leases are:
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Total future minimum lease payments
|
|
$
|
7,819
|
|
|
$
|
|
|
Less: amounts representing interest
|
|
|
(488
|
)
|
|
|
|
|
Net minimum lease payments
|
|
|
7,331
|
|
|
|
|
|
Current portion
|
|
|
(1,738
|
)
|
|
|
|
|
Long-term portion
|
|
$
|
5,593
|
|
|
$
|
|
|
(10) Stockholders Equity
Common Stock
On July 21, 2006, the Company sold an aggregate of 12,000 shares of its common stock for nominal consideration to two individuals who later became the Chief Executive Officer of the Company and the President of the Company to whom it had previously agreed to sell such equity.
On July 31, 2006, the Company issued 60,680 shares of its common stock to the shareholders of SecureTnet International, LLC as consideration for the contribution of intellectual property, including technical know-how related to the development of an end-to-end telematics solution.
Series A Redeemable Preferred Stock
On July 28, 2006, the Company issued and sold to Communications LLC, for an aggregate purchase price of $40.0 million, 4,000 shares of the Companys Series A Preferred Stock and a warrant to purchase 200,000 shares of common stock at an exercise price of $50.00 per share. On June 19, 2007, the Company issued and sold to Communications LLC, for an aggregate purchase price of $15.0 million, an additional 1,500 shares of Series A Preferred Stock and a warrant to purchase 150,000 shares of common stock at an exercise price of $100.00 per share. On November 29, 2007, the Company issued and sold to Communications LLC, for an aggregate purchase price
of $20.0 million, an additional 2,000 shares of Series A Preferred Stock and a warrant to purchase 200,000 shares of common stock at an exercise price of $150.00 per share. The Series A Preferred Stock is non-voting, has a liquidation preference of $10,000 per share and is senior in priority to the Companys common stock. As of December 31, 2008 and 2007, there were 7,500 shares of Series A Preferred Stock outstanding, and the aggregate liquidation preference of the Series A Preferred Stock was $75.0 million. On October 1, 2013, the Company will be required to redeem the Series A Preferred Stock at a redemption price equal to $10,000 per share. In the event of a change of control, as defined, at the option of the holders of the majority of the then outstanding shares of the Series A Preferred Stock, the Company is required to redeem all or any number of such holders shares of Series A Preferred Stock. The holders of at least a majority of the Series A Preferred Stock,
generally voting together as a single class, must consent in order for the Company to take certain defined actions. Significant actions subject to protective provisions include the payment of dividends on capital stock of the Company and the redemption, repurchase or retirement of any capital stock of the Company.
F-36
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Stockholders Equity (continued)
The warrants are currently exercisable and expire ten years after the date of issuance. The holder of each warrant has the option to pay the exercise price of the warrant in cash, surrendering Company common stock or Series A Preferred Stock previously acquired, or instructing the Company to withhold a number of Company shares with an aggregate fair value equal to the aggregate exercise price. The exercise price and the number of shares for which each warrant is exercisable for is subject to adjustment under certain anti-dilution and other provisions as set forth in the warrant agreement.
As of each sale date, the Company ascribed value to the Series A Preferred Stock and the warrant based on their relative fair values. As such, $34.9 million, $8.2 million and $11.7 million was allocated to Series A Preferred Stock and $5.1 million, $6.8 million and $8.3 million was allocated to the warrants on the July 28, 2006, June 19, 2007 and November 29, 2007 sale dates, respectively. The Series A Preferred Stock is accounted for in accordance with SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
(SFAS 150), with the accretion of the book value of the Series A
Preferred Stock up to the $75.0 million redemption amount being recorded as interest expense on the accompanying consolidated statements of operations.
In connection with the issuance of the term indebtedness, on March 31, 2008, Communications LLC agreed to extend the mandatory redemption date of the Series A Preferred Stock to October 1, 2013. In accordance with EITF Issue No. 96-19,
Debtors Accounting for a Modification or Exchange of Debt Instruments
, this extension was deemed to be an extinguishment and reissuance of the Series A Preferred Stock, and accordingly, the Company recorded approximately $2.2 million as a decrease to additional paid in capital for the difference between the fair value of the Series A Preferred Stock following the extension and the book value prior to the
extension.
Retired Series B Redeemable Preferred Stock
On September 29, 2006, the Company issued and sold to a strategic partner 1,000 shares of the Companys Series B Redeemable Preferred Stock (the Retired Series B Preferred Stock) for a purchase price of $5.0 million. The Retired Series B Preferred Stock was non-voting, had a liquidation preference of $5,000 per share and was senior in priority to each of the Companys Series A Preferred Stock and the Companys common stock. There were no shares of Retired Series B Preferred Stock outstanding as of December 31, 2008. As of December 31, 2007, there were 1,000 shares of Retired Series B Preferred Stock outstanding with a
liquidation preference of $5.0 million. The sale of the Retired Series B Preferred Stock was in connection with a strategic relationship entered into by and between the Company and the strategic partner in September 2006 that the parties agreed to further document in a detailed commercial agreement. Since the commercial agreement was not executed by March 31, 2007, the Retired Series B Preferred Stock became redeemable by its terms at the option of either party for $5.0 million. Accordingly, the Retired Series B Preferred Stock has been reflected on the accompanying consolidated balance sheets as a liability in accordance with SFAS 150. The Company redeemed the outstanding shares of Retired Series B Preferred Stock on March 26, 2008 for $5.0 million.
Share-Based Compensation
The Companys 2006 Stock Incentive Plan (Plan) provides for share-based compensation awards, including incentive stock options, non-qualified stock options and share awards, to the Companys officers, employees, non-employee directors and non-employee consultants. There are 50,000 shares of common stock authorized for issuance under the Plan. The Plan is administered by the Companys Board of Directors which determines eligibility, amount, and other terms and conditions of awards. Options awarded under the Plan generally have a term of ten years and an exercise price equal to or greater than the fair value of the underlying
shares of common stock on the date of grant. Generally, half of each award vests in equal parts over a period of three years of continued employment or service to the Company. The remaining half of each award vests upon the achievement of certain pre-established performance goals set by the Companys Board of Directors. In the event an option holders service to the Company is terminated for either (i) other than good
F-37
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Stockholders Equity (continued)
reason, as defined in the Plan, before the fifth anniversary of the holders service to the Company or (ii) cause, the Company may repurchase any stock obtained through the exercise of a stock option within 180 days of such holders termination date at a price equal to the lesser of the fair market value of the stock on the date of termination or the exercise price of the stock option. In the event an option holders service to the Company is terminated for any of (i) good reason, as defined in the Plan, (ii) other than cause or (iii) following the fifth anniversary of such holders service to the Company, the Company may
repurchase any stock obtained through the exercise of a stock option within 180 days of such holders termination date at a price equal to the fair market value of the stock on the date of termination.
Since January 1, 2007, the Company granted stock options with exercise prices as follows:
|
|
|
|
|
|
|
|
|
Month
|
|
Number
of Shares
|
|
Exercise
Price
|
|
Fair Value
per Share
|
|
Intrinsic Value
per Share
|
January 2007
|
|
|
3,360
|
|
|
$
|
100.00
|
|
|
$
|
42.44
|
|
|
$
|
|
|
March 2007
|
|
|
1,200
|
|
|
$
|
100.00
|
|
|
$
|
42.44
|
|
|
$
|
|
|
April 2007
|
|
|
1,200
|
|
|
$
|
100.00
|
|
|
$
|
42.44
|
|
|
$
|
|
|
October 2007
|
|
|
6,270
|
|
|
$
|
100.00
|
|
|
$
|
94.12
|
|
|
$
|
|
|
November 2007
|
|
|
17,700
|
|
|
$
|
150.00
|
|
|
$
|
99.83
|
|
|
$
|
|
|
January 2008
|
|
|
5,470
|
|
|
$
|
150.00
|
|
|
$
|
99.83
|
|
|
$
|
|
|
May 2008
|
|
|
2,710
|
|
|
$
|
150.00
|
|
|
$
|
146.29
|
|
|
$
|
|
|
The fair value of the common stock was determined contemporaneously with the grants.
In accordance with SFAS 123(R), the Company records compensation expense for all share-based awards issued. For the years ended December 31, 2008 and 2007 and for the period from January 9, 2006 to December 31, 2006, the Company recorded approximately $0.4 million, $0.1 million and $1,000 of compensation expense, respectively, related to stock option grants. Such compensation expense is included in research and development, sales and marketing and general and administrative expense in the accompanying consolidated statements of operations. For awards outstanding as of December 31, 2008, the Company expects to recognize approximately $1.2 million of
additional expense related to stock option awards on a straight-line basis over the remaining average service period of approximately 2.9 years.
The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model. For the years ended December 31, 2008, 2007 and 2006, the weighted average grant-date fair value of options awarded was $80.68, $59.68 and $27.60 per share, respectively, and was based on the following assumptions:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
January 9, 2006
(Inception) to
December 31,
2006
|
|
|
2008
|
|
2007
|
Risk free rate
|
|
|
3.8 3.9%
|
|
|
|
4.0 4.7%
|
|
|
|
4.4%
|
|
Expected term (years)
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Expected volatility
|
|
|
62.2 63.7%
|
|
|
|
62.2% 64.0%
|
|
|
|
66.5%
|
|
Dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
0.0%
|
|
The risk-free interest rate assumption is based upon the grant date closing rate for United States treasury notes that have a life which approximates the expected term of the option. The expected term is based upon the contractual term of each employee stock option grant as the repurchase feature of the Plan encourages a longer holding period and the Company does not have sufficient operating history to estimate a term shorter than the contractual term. The expected volatility is based on the average historical volatility of comparable guideline companies. The dividend yield assumption is based on the Companys expectation that it will not
F-38
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Stockholders Equity (continued)
pay dividends for the foreseeable future. Due to the Companys limited operating history, forfeitures are estimated based on actual terminations.
The following table reflects stock option activity:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2007
|
|
|
32,570
|
|
|
$
|
127.17
|
|
|
|
|
|
Granted
|
|
|
8,180
|
|
|
$
|
150.00
|
|
|
|
|
|
Forfeited
|
|
|
(2,980
|
)
|
|
$
|
111.74
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
37,770
|
|
|
$
|
133.33
|
|
|
$
|
5,224
|
|
Exercisable at December 31, 2008
|
|
|
9,405
|
|
|
|
|
|
|
$
|
1,360
|
|
The following table provides information about stock options that are outstanding and exercisable as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Stock Options Exercisable
|
Exercise Price
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life (Yrs)
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life (Yrs)
|
$100.00
|
|
|
12,590
|
|
|
|
$100.00
|
|
|
|
8.3
|
|
|
|
4,318
|
|
|
|
$100.00
|
|
|
|
8.2
|
|
$150.00
|
|
|
25,180
|
|
|
|
$150.00
|
|
|
|
9.0
|
|
|
|
5,087
|
|
|
|
$150.00
|
|
|
|
9.0
|
|
(11) Related Party Transactions
Apollo
Communications LLC and AIF V PLASE are investment funds affiliated with Apollo. As of December 31, 2008, Apollo, through Communications LLC and AIF V PLASE, owned approximately 81% of Companys outstanding common stock on a fully diluted basis.
On March 31, 2008, the Company issued to Communications LLC a senior subordinated unsecured promissory note with a principal amount of $12.5 million and a maturity date of October 1, 2013 (see Note 8). The note bears interest at a rate of 15.00% per annum which is compounded and added to the principal amount annually and is payable at maturity. In connection with the issuance of the note, the Company recorded a deemed capital contribution from Apollo of approximately $2.4 million related to the difference between (i) the fair value of the note using an estimated interest rate the Company would have paid an unrelated third party on a similar note and
(ii) the fair value of the note using the 15.00% stated interest rate.
On December 12, 2008, the Company issued AIF V PLASE, for aggregate consideration of $5.0 million, additional senior secured term indebtedness with a principal amount of $5.0 million and warrants to purchase 6,611 shares of common stock at an exercise price of $0.01 per share (see Note 8). In connection with the issuance of the note, the Company recorded a deemed capital contribution from Apollo of approximately $1.0 million related to the difference between (i) the fair value of the note using an estimated interest rate the Company would have paid an unrelated third party on a similar note and (ii) the fair value of the note using the 15.00% stated
interest rate.
On December 12, 2008, the Company issued to AIF V PLASE a senior subordinated unsecured promissory note with a principal amount of $3.5 million and a maturity date of October 1, 2013 (see Note 8). The note bears interest at a rate of 15.00% per annum which is compounded and added to the principal amount annually and is payable at maturity. In connection with the issuance of the note, the Company recorded a deemed capital contribution from Apollo of approximately $2.4 million related to the difference between
F-39
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Related Party Transactions (continued)
(i) the fair value of the note using an estimated interest rate the Company would have paid an unrelated third party on a similar note and (ii) the fair value of the note using the 15.00% stated interest rate.
On the date of each issuance, the Company determined the estimated fair value amount by using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimates presented herein is not necessarily indicative of the amount that the Company or holders of the instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
On March 12, 2009, the Company issued and sold 1,200,000 shares of New Series B Preferred Stock to AIF V PLASE for $12.0 million (see Note 14).
Polaris Acquisition Corp.
In September 2008, the Company entered into a services agreement with Trivergance Business Resources (TBR), an affiliate of certain officers and directors of Polaris, pursuant to which TBR provided a marketing assessment and other research for the Company to aid in creating a marketing and retention platform. The Company agreed to pay TBR a fee of approximately $0.2 million, reasonable and customary travel expenses and certain other expenses incurred in connection with the engagement. Additionally, in November 2008, the Company entered into a letter agreement with TBR pursuant to which the Company has engaged TBR to provide certain
marketing services in exchange for a $125,000 monthly draw against a per subscriber fee payable on certain subscribers acquired beginning in November 2008 and continuing through December 2010. A portion of the monthly draw has been deferred until the Company raises additional capital.
Hughes Network System
In July 2006, HNS, a wholly-owned subsidiary of Hughes Communications, Inc. (HCI) and an affiliate of Apollo, granted a limited license to the Company allowing the Company to use the HUGHES Telematics trademark. The license is limited in that the Company may use the HUGHES Telematics trademark only in connection with its business of automotive telematics and only in combination with the Telematics name. As partial consideration for the license, the agreement provides that HNS will be the Companys preferred engineering services provider. The license is royalty-free, except that the Company has agreed to commence paying a royalty to
HNS in the event the Company no longer has a commercial or affiliated relationship with HNS. As contemplated by the license terms and while the definitive agreement governing the relationship was being negotiated, HNS provided engineering development services to the Company pursuant to an Authorization to Proceed. In January 2008, the Company and HNS executed a definitive agreement pursuant to which HNS is continuing to provide the Company with engineering development and manufacturing services. For the years ended December 31, 2008 and 2007 and for the period from January 9, 2006 through December 31, 2006, HNS provided approximately $30.9 million, $21.6 million and $1.6 million of services, respectively, to the Company. As of December 31, 2008 and 2007, the Company had an outstanding balance, not including the equipment financing discussed below, of approximately $8.9 million and $4.9 million, respectively, payable to HNS. On March 12, 2009, the Company issued and sold 1,300,000
shares of New Series B Preferred Stock to HCI through the conversion of $13.0 million of trade accounts payable (see Note 14).
In June 2008, the Company and HNS entered into an arrangement pursuant to which HNS purchased, on behalf of the Company, certain production equipment for an aggregate amount of approximately $2.0 million. Starting in June 2009, the Company will pay HNS at a rate of $4.94 per telematics hardware device manufactured using the equipment; provided that (i) the Company will pay HNS a minimum of $0.2 million under this arrangement by December 31, 2009 and (ii) the Company shall have paid HNS the balance of the amount owed under this arrangement plus all accrued interest by December 31, 2010. Interest will accrue on the outstanding balance at a rate of
11.00% per annum. The Company may pay the balance of the amount owed plus accrued interest in full at any time, and at the time the balance is paid in full, the Company will have the
F-40
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Related Party Transactions (continued)
option to purchase the production test equipment from HNS for $1.00. As of December 31, 2008, the Company had an outstanding balance related to the equipment financing of approximately $2.1 million which is reflected in capital lease obligations on the accompanying consolidated balance sheets.
Two members of the Companys board of directors, the Chief Executive Officer and another board member who is affiliated with Apollo, are both members of the Board of Managers of HNS and the Board of Directors of HCI.
SkyTerra Communications
On August 1, 2006, the Company entered into an agreement with SkyTerra Communications, Inc. (SkyTerra), a former affiliate of Apollo, pursuant to which the Company received consulting services from three personnel of SkyTerra. The agreement allowed for such personnel to provide the Company up to an aggregate of 200 hours of service per month for a monthly fee of $25,000. The agreement was amended effective December 18, 2006 when the Companys Chief Executive Officer and Vice President Finance, two of the SkyTerra personnel providing services to the Company, became employees of the Company. The amended agreement provided that the
Company would pay $8,000 per month to SkyTerra for the services of the remaining employee of SkyTerra who had been providing services to the Company. This amended agreement was terminated effective February 1, 2007 when that remaining SkyTerra employee, SkyTerras General Counsel and Secretary, became a part-time employee and General Counsel of the Company, while continuing to serve part-time with SkyTerra. Also effective December 18, 2006, the Company and SkyTerra executed a second agreement pursuant to which the Companys Vice President Finance was to provide services to SkyTerra in exchange for SkyTerra paying the Company $5,000 per month. This agreement terminated on March 31, 2007. During the years ended December 31, 2008 and 2007 and for the period from January 9, 2006 through December 31, 2006, the Company incurred approximately $0, $0, and $0.2 million, of net expense, respectively, under these consulting agreements.
The Companys Chief Executive Officer of the Company is the former Chief Executive Officer and President of SkyTerra and a former member of SkyTerras board of directors. Another member of the Companys board of directors who is affiliated with Apollo is also a former member of SkyTerras board of directors.
(12) Contingencies and Commitments
Leases
The Company has non-cancelable operating leases. Future minimum payments, by year and in the aggregate, under operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 2008 (in thousands):
|
|
|
Year Ending December 31:
|
|
|
|
|
2009
|
|
$
|
764
|
|
2010
|
|
|
609
|
|
2011
|
|
|
630
|
|
2012
|
|
|
652
|
|
2013
|
|
|
675
|
|
Thereafter
|
|
|
878
|
|
Total minimum lease payments
|
|
$
|
4,208
|
|
For the years ended December 31, 2008 and 2007, and for the period from January 9, 2006 to December 31, 2006, total expense under operating leases was approximately $0.7 million, $0.6 million and $0.2 million, respectively.
F-41
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Contingencies and Commitments (continued)
Technology Upgrade Program
Prior to its acquisition by the Company, Networkfleet sold products which utilized a wireless network which the network operator informed the Company would be decommissioned and used for other purposes. Consequently, Networkfleet initiated an upgrade program through which customers may exchange certain of these products which were purchased between April 2002 and July 2006 for the current version of Networkfleets hardware which operates on a different wireless network. During 2007, the network operator informed the Company that they had decided not to decommission the network. However, due to inconsistent coverage within the network coverage
area, the Company continued with the upgrade program. Networkfleet completed the program in December 2008. The estimated cost of the upgrade program was approximately $2.7 million and was recorded as a liability in the Companys purchase price allocation for the Networkfleet acquisition. The remaining liability as of December 31, 2008 and 2007 was $0 and approximately $0.8 million, respectively, and is included in accrued expenses in the accompanying consolidated balance sheets. During the years ended December 31 2008 and 2007, the Company reassessed the estimated remaining cost of the upgrade program and, as a result, reduced the liability by approximately $0.4 million and $0.4 million, respectively. This reduction was recorded as a decrease in cost of hardware sold. In connection with the completion of the technology upgrade program, Networkfleet evaluated its inventory on hand and recorded an approximately $0.4 million charge related to excess or obsolete inventories which were
being used primarily in the exchange provided under the program.
Changes in the remaining liability related to the technology upgrade program were as follows:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Balance at beginning of period
|
|
$
|
816
|
|
|
$
|
2,178
|
|
Costs incurred
|
|
|
(384
|
)
|
|
|
(922
|
)
|
Reduction in the estimated cost to complete the program
|
|
|
(432
|
)
|
|
|
(440
|
)
|
Balance at end of period
|
|
$
|
|
|
|
$
|
816
|
|
Warranty Liability
The Company warrants its hardware to be free of defects in materials and workmanship and to substantially conform to the specifications for such hardware. The Company estimates its future warranty obligations by considering historical product return experience and related costs. As of December 31, 2008 and 2007, the Companys estimated warranty liability was approximately $0.1 million and $0.2 million, respectively.
Changes in accrued warranty liability costs were as follows:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Balance at beginning of period
|
|
$
|
156
|
|
|
$
|
21
|
|
Warranty cost accrual
|
|
|
659
|
|
|
|
733
|
|
Warranty costs incurred
|
|
|
(679
|
)
|
|
|
(598
|
)
|
Balance at end of period
|
|
$
|
136
|
|
|
$
|
156
|
|
Contractual Payment Obligations
The Company has a long-term contract with each of two automakers pursuant to which the automakers have agreed to install telematics devices in their vehicles and permit the Company to exclusively provide telematics services to their new customers. Those contracts also require the Company to pay each automaker
F-42
TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Contingencies and Commitments (continued)
for certain non-recurring costs associated with the initiation of telematics services, up to an aggregate of $29.0 million between the two companies. The Company committed to pay $4.0 million of this amount on the first business day following each of January 1, 2008, January 1, 2009 and January 1, 2010. The remaining balance will be paid as the automaker incurs certain actual costs and are expected to be paid in full by December 31, 2011. In accordance with EITF Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products),
amounts paid under these agreements will be
capitalized and recognized as a reduction of revenue over the term of the respective agreement. During the year ended December 31, 2008, the Company incurred $4.3 million under these agreements, which is included in other assets on the accompanying consolidated balance sheets.
In April 2008, the Company entered into a software license agreement pursuant to which it agreed to pay the software provider, in installments and upon certain conditions set forth below, an aggregate of $5.5 million in exchange for licenses to use its software in the Companys service offerings enabled by the factory installed hardware. Upon execution of the agreement, the Company paid the software provider $1.0 million for an initial amount of licenses. In addition, within three business days of the date on which the Company completes a financing resulting in net proceeds in excess of $15.0 million, the Company is required to pay the software
supplier an additional $2.5 million as prepaid royalties for additional licenses. Finally, within three business days of the date on which the Company completes an additional financing resulting in net proceeds in excess of an additional $15.0 million, the Company is required to pay the software provider an additional $2.0 million as prepaid royalties for additional licenses. In addition, the Company has the option to acquire additional licenses on terms and conditions set forth in the agreement. Pursuant to the license agreement, the software supplier also agreed not to license its software to certain automotive manufacturers, other than through the Company. During the year ended December 31, 2008, the Company paid the software provider an aggregate of $2.1 million for prepaid royalties for licenses. Such amount has been reflected in other noncurrent assets on the accompanying consolidated balance sheets.
In April 2008, the Company entered into an amended agreement with a supplier pursuant to which the Company committed to purchase services in an aggregate amount of no less than $6.0 million in the year ended December 31, 2009, and $9.0 million in the years ended December 31, 2010, 2011 and 2012. If it becomes probable that the anticipated services to be purchased under this agreement will be below the contractual minimums, the Company will record a liability for such anticipated shortfall. As of December 31, 2008, the Company expects to meet the contractual minimums and, accordingly, has not recorded a liability for an anticipated shortfall under
this agreement.
Litigation and Claims
From time to time, the Company is subject to litigation in the normal course of business. The Company is of the opinion that, based on information presently available, the resolution of any such legal matters will not have a material adverse effect on the Companys financial position, results of operations or its cash flows.
(13) Segment Information
The Company presents its segment information along the same lines that its chief executive officer reviews its operating results in assessing performance and allocating resources. Accordingly, the Companys operations have been classified into two business segments: (i) HUGHES Telematics and (ii) Networkfleet. The HUGHES Telematics segment is developing the factory installed, end-to-end telematics solution which is being marketed to automakers and includes our corporate expenses. The Networkfleet segment provides an aftermarket wireless fleet management solution targeted to the local fleet market. For each period presented, all reported revenues
were attributable to Networkfleet.
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TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Segment Information (continued)
The following table presents certain financial information on the Companys reportable segments:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
January 9, 2006
(Inception) to
December 31,
2006
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
HUGHES Telematics
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Networkfleet
|
|
|
30,260
|
|
|
|
20,352
|
|
|
|
6,913
|
|
Total
|
|
$
|
30,260
|
|
|
$
|
20,352
|
|
|
$
|
6,913
|
|
Loss from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
HUGHES Telematics
|
|
$
|
(47,556
|
)
|
|
$
|
(29,431
|
)
|
|
$
|
(4,487
|
)
|
Networkfleet
|
|
|
(102
|
)
|
|
|
(4,146
|
)
|
|
|
(1,649
|
)
|
Total
|
|
$
|
(47,658
|
)
|
|
$
|
(33,577
|
)
|
|
$
|
(6,136
|
)
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Total assets:
|
|
|
|
|
|
|
|
|
HUGHES Telematics
|
|
$
|
88,341
|
|
|
$
|
42,580
|
|
Networkfleet
|
|
|
20,641
|
|
|
|
20,352
|
|
Total
|
|
$
|
108,982
|
|
|
$
|
62,932
|
|
All of the Companys assets are located within the United States. As of each of December 31, 2008 and 2007, the Company included the $5.2 million of goodwill in the total assets of the Networkfleet segment.
(14) Subsequent Events
On March 12, 2009, the Company issued and sold 5,000,000 shares of New Series B Preferred Stock for an aggregate purchase price of $50.0 million. AIF V PLASE purchased 1,200,000 of such shares of New Series B Preferred Stock for $12.0 million of cash, and HCI, parent of HNS, purchased 1,300,000 of such shares of New Series B Preferred Stock through the conversion of $13.0 million of trade accounts payable transferred from HNS. The remaining 2,500,000 shares of New Series B Preferred Stock were purchased by unrelated institutional investors for $25.0 million of cash. As a result of sale of New Series B Preferred Stock, the remaining approximately $5.3
million was released from the escrow account held for the benefit of the senior secured note holders. For consulting and financial advisory services provided in connection with the sale of the New Series B Preferred Stock, the Company paid Trivergance, LLC (Trivergance), an affiliate of Polaris, approximately $1.3 million of cash and issued Trivergance a warrant to purchase 5,153 shares of common stock at an exercise price of $10.19 per share.
The New Series B Preferred Stock has an initial liquidation preference of $10.00 per share which will increase quarterly at a rate of 8.0% per annum and is senior in priority to each of the Companys Series A Preferred Stock and the Companys common stock. The New Series B Preferred Stock is convertible at any time at the option of the holder into such number of shares of common stock equal to the then current liquidation preference divided by the conversion price of $145.55 per share, subject to adjustment under certain anti-dilution and other provisions. The holders of the New Series B Preferred Stock are entitled to vote on an
as-converted basis on all matters which holders of the Companys common stock are entitled to vote. Beginning on October 1, 2013, the New Series B Preferred Stock is subject to redemption at the option of the holder at the then current liquidation preference plus any accrued and unpaid dividends.
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TABLE OF CONTENTS
HUGHES TELEMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Subsequent Events (continued)
In connection with the sale of the New Series B Preferred Stock, on March 12, 2009, the Company filed an Amendment to its Amended and Restated Certificate of Incorporation that increased its authorized shares to 7,600,000 shares, consisting of 2,500,000 shares of common stock, par value $0.01 per share, and 5,100,000 shares of preferred stock, par value $0.01 per share.
In connection with the sale of the New Series B Preferred Stock, on March 12, 2009, the Company also amended the Amended Merger Agreement with Polaris to, among other things, increase the number of shares of Polaris common stock issued to the Companys security holders at closing by approximately 5,000,000 shares to a total of approximately 20,000,000 shares. The aggregate number of additional shares issued to the Companys security holders which will be subject to the escrow subject to the achievement of certain share price targets agreement remained unchanged at approximately 59,000,000. At the closing of the Merger, the New Series B
Preferred Stock will convert into the right to receive an aggregate of 5,000,000 of the approximately 20,000,000 initial shares of Polaris common stock and 7,500,000 of the approximately 59,000,000 shares placed in escrow.
F-45