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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER 0-22718
RACOTEK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE #41-1636021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7301 OHMS LANE, SUITE 200, MINNEAPOLIS, MINNESOTA, 55439
(Address of principal executive offices, including zip code)
(612) 832-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Outstanding at
Class June 30, 1996
----- -------------
Common Stock, $.01 par value 24,392,946
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RACOTEK, INC.
INDEX
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Statements of Operations
Three Months Ended June 30, 1996 and 1995
and Six Months Ended June 30, 1996 and 1995 3
Balance Sheets
June 30, 1996 and December 31, 1995 4
Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II -- OTHER INFORMATION
Items 1-5. Not applicable 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RACOTEK, INC.
STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net revenues:
Products $330 $784 $692 $1,694
Services 1,380 611 2,565 846
---------- ---------- ---------- ----------
1,710 1,395 3,257 2,540
Cost and expenses:
Cost of products 223 629 1,507 1,599
Cost of services 882 261 1,843 388
Research and development 1,010 860 2,048 1,752
Sales and marketing 1,638 2,391 3,542 4,520
General and administrative 454 533 1,179 1,070
---------- ---------- ---------- ----------
Loss from operations (2,497) (3,279) (6,862) (6,789)
Interest income 261 370 434 730
---------- ---------- ---------- ----------
Net loss ($2,236) ($2,909) ($6,428) ($6,059)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per share ($0.09) ($0.12) ($0.27) ($0.26)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares used in computation 24,240,471 23,732,322 24,174,465 23,656,753
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of the financial statements.
3
RACOTEK, INC.
BALANCE SHEETS
ASSETS
(In thousands, except number of shares and per share amount) June 30, December 31,
1996 1995
--------- ------------
Current assets:
Cash and cash equivalents $2,001 $4,397
Short-term investments 10,895 10,645
Accounts receivable, net 1,563 1,654
Inventories 409 1,305
Prepaid expenses and other current assets 227 518
--------- ---------
Total current assets 15,095 18,519
Long-term investments 2,017 5,052
Property and equipment, net 2,142 2,316
Restricted cash 585 585
Capitalized software development costs, net 181 241
Other long-term assets 364 403
--------- ---------
Total assets $20,384 $27,116
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $268 $638
Accrued expenses 1,080 1,100
--------- ---------
Total current liabilities 1,348 1,738
--------- ---------
Commitments
Stockholders' equity :
Common stock, $.01 par value, 35,000,000 shares
authorized, 24,392,946 and 24,043,446 issued and
outstanding at Jun. 30, 1996 and Dec. 31, 1995,
respectively 244 240
Additional paid-in capital 70,720 70,638
Accumulated deficit (51,928) (45,500)
--------- ---------
Total stockholders' equity 19,036 25,378
--------- ---------
Total liabilities and stockholders' equity $20,384 $27,116
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements.
4
RACOTEK, INC.
STATEMENTS OF CASH FLOWS
(In thousands) Six Months Ended
June 30,
--------------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net loss ($6,428) ($6,059)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 426 423
Provision for write-down of inventories 900
Provision for bad debts 257 55
Amortization of discounts on investments (8) (212)
Changes in operating assets and liabilities:
Accounts receivable (166) (79)
Inventories (4) 361
Prepaid expenses and other current assets 291 (98)
Accounts payable and accrued expenses (390) (198)
--------- ---------
Net cash used in operating activities (5,122) (5,807)
Cash flows from investing activities:
Purchase of investments (12,820) (10,623)
Proceeds from maturity of investments 15,613 17,966
Acquisition of assets (153) (368)
Other (30)
--------- ---------
Net cash provided from investing activities 2,640 6,945
Cash flows from financing activities:
Proceeds from exercises of options 86 365
Change in restricted cash 115
--------- ---------
Net cash provided from financing activities 86 480
--------- ---------
Net change in cash and cash equivalents (2,396) 1,618
Cash and cash equivalents, beginning of period 4,397 3,357
--------- ---------
Cash and cash equivalents, end of period $2,001 $4,975
--------- ---------
The accompanying notes are an integral part of the financial statements.
5
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE A. BASIS OF PRESENTATION:
The unaudited financial statements of Racotek, Inc. (the "Company") as of June
30, 1996 and for the periods ended June 30, 1996 and 1995 reflect, in the
opinion of management, all adjustments (which, except as noted below, include
only normal recurring adjustments) necessary to fairly state the financial
position at June 30, 1996 and the results of operations and cash flows for the
reported periods. The results of operations for any interim period are not
necessarily indicative of the results to be expected for any other interim
period or for the full year. The year-end condensed balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. These financial
statements should be read in conjunction with the Company's audited financial
statements and related notes for the year ended December 31, 1995, which were
included in the Company's 1995 Annual Report and incorporated by reference in
its 1995 Form 10-K. The preparation of these financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates. The most significant areas which require the
use of management estimates relate to allowances for inventory obsolescence and
doubtful accounts and the warranty accrual.
NOTE B. SELECTED BALANCE SHEET INFORMATION (IN THOUSANDS):
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $1,960 $1,851
Less allowance for doubtful accounts (397) (197)
------ ------
INVENTORIES: $1,563 $1,654
------ ------
------ ------
Components $105 $104
Finished Goods 304 1,201
------ ------
$409 $1,305
------ ------
------ ------
During the first quarter of 1996, the Company recorded a $900,000 charge to cost
of products to effect a write-down of its SMR-related inventories to their
estimated net realizable values. The decrease in the estimated net realizable
values of these inventories resulted from the Company's decision to discontinue
the production, purchase and distribution of these products.
PROPERTY AND EQUIPMENT, NET:
Computer equipment $2,876 $2,732
Furniture and equipment 844 835
Leasehold improvements 213 213
------ ------
$3,933 $3,780
Less accumulated depreciation and
amortization (1,791) (1,464)
------ ------
$2,142 $2,316
------ ------
------ ------
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was founded in March 1989. With the completion and initial
commercial shipments of its new KeyWare-TM- product in the second quarter of
1995, the Company emerged from its development stage. The Company expects to
continue to incur substantial losses into 1997 due to later-than-expected
customer implementations of wireless mobile data systems. The delays in
customer implementations have resulted from limited commercial availability and
geographic coverage of wireless networks such as cellular digital packet data
("CDPD") and low-earth orbit satellite ("LEO"), delays in completion of wireless
application software integration and significant capital costs required for
mobile computing devices. The Company believes that the commercial availability
and coverage of wireless networks are increasing and that capital costs are
beginning to decline. The Company also believes that it can accelerate
customers' decisions to implement mobile data by providing needed expertise
through the Company's consulting services. However, actual results could vary
materially from the foregoing forward-looking statements, due to decisions by
wireless network providers not to deploy or extend their networks, decisions by
manufacturers of mobile computing devices to modify or discontinue relevant
product lines, competitive conditions facing wireless network providers and
computing device manufactures, and other risks and uncertainties identified in
this Form 10-Q and in the Company's other SEC filings. There can be no
assurance that the Company's business will grow as anticipated or that the
Company will achieve or sustain profitability on a quarterly or annual basis in
the future.
Most prospective customers wish to test Racotek's products and services
during an evaluation period before implementing mobile data communications
throughout their user base. This reduces the amount of transmission service
and monthly support and license revenues the Company can expect to receive in
the near term. The Company continues to add new customers. However,
substantial growth in revenues requires a significant number of new customers
and a broader rollout of mobile data to work forces by a significant number of
existing customers. The Company believes that the recurring revenues from
providing monthly support, software maintenance and transmission services to
customers will constitute a substantial source of revenue in the long term.
An increasing proportion of the Company's net revenues have been derived
from professional services, including system planning, software development,
system integration, training and installation management. The Company believes
that its extensive experience in building, enabling and supporting mobile data
systems will continue to contribute to growth in professional service revenues,
and that customers who purchase Racotek's professional servcies may become
purchasers of Racotek's other products and services. Actual results could vary
materially from the foregoing forward-looking statements, however, due to
continuing reluctance on the part of prospective customers to implement mobile
data, the Company's inability to retain and recruit qualified personnel, the
success of the Company's competitors, and other risks and uncertainties
identified in this Form 10-Q and in the Company's other SEC filings.
RESULTS OF OPERATIONS
NET REVENUES
Product revenues decreased from $784,000 for the quarter ended June 30,
1995 to $330,000 for the quarter ended June 30, 1996. Product revenues
decreased from $1,694,000 for the six months ended June 30, 1995 to $692,000 for
the six months ended June 30, 1996. The decrease in product revenues resulted
from a decline in the product revenue per mobile user in 1996 as compared to
1995. The
7
product revenue per mobile user decreased with the introduction of KeyWare,
because KeyWare does not require proprietary Racotek hardware, which reduces
product revenue per mobile user. Product revenues will continue to fluctuate
based on product mix, initial customer shipments and the timing of customer
rollouts to their total user base.
Service revenues increased from $611,000 for the quarter ended June 30,
1995 to $1,380,000 for the quarter ended June 30, 1996. Service revenues
increased from $846,000 for the six months ended June 30, 1995 to $2,565,000 for
the six months ended June 30, 1996. These increases are primarily due to the
Company increasing its consulting service revenues, although transmission and
support services also increased due to the increase in the aggregrate number of
users in 1996 as compared to 1995. For the quarter ended June 30, 1996, the
Company earned $1,036,000 in revenues from consulting services as compared to
$376,000 for the quarter ended June 30, 1995. The Company anticipates that
service revenues will continue to increase as a percentage of total revenues in
future periods.
COST OF REVENUES
Cost of product revenues decreased from $629,000 for the quarter ended June
30, 1995 to $223,000 for the quarter ended June 30, 1996. Cost of product
revenues decreased from $1,599,000 for the six months ended June 30, 1995 to
$1,507,000 for the six months ended June 30, 1996. Gross margins for the second
quarter increased from 20% in 1995 to 32% in 1996, but fell from 6% for the six
month period ended June 30, 1995 to (118)% for the corresponding six month
period in 1996. Cost of products for the six months ended June 30, 1996
included a charge of approximately $900,000 resulting from the writedown of the
Company's remaining specialized mobile radio inventories to their net realizable
values. The decrease in the estimated net realizable values of these
inventories resulted from the Company's decision to discontinue the production,
purchase and distribution of these products. The Company believes product
margins will improve in the future with the change in the product mix to higher
margin software license sales and a reduction in hardware sales. However,
actual results could vary materially from the foregoing forward-looking
statements if the Company fails to achieve the volume of sales anticipated or
due to other risks and uncertainties identified in this Form 10-Q and in the
Company's other SEC filings.
Cost of services increased from $261,000 for the quarter ended June 30,
1995 to $882,000 for the quarter ended June 30, 1996. Cost of services
increased from $388,000 for the six months ended June 30, 1995 to $1,843,000 for
the six months ended June 30, 1996. The increase in the cost of services
resulted primarily from an increase in the volume of services performed and a
related increase in personnel. Service margins were 36% and 57% for the
quarters ended June 30, 1996 and 1995 respectively, and 28% and 54% for the six
month periods ended June 30, 1996 and 1995, respectively. The decrease in the
service margin percentage in 1996 resulted from the factors that increased the
cost of services and a change in service mix to include a greater proportion of
consulting services, which generates a lower margin than transmission services.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $860,000 for the quarter
ended June 30, 1995 to $1,010,000 for the quarter ended June 30, 1996. Research
and development expenses increased from $1,752,000 for the six months ended June
30, 1995 to $2,048,000 for the six months ended June 30, 1996. These increases
were primarily due to additional engineering personnel hired to assist with the
development of new versions of current software products and other product
features.
8
SALES AND MARKETING
Sales and marketing expenses decreased from $2,391,000 for the quarter
ended June 30, 1995 to $1,638,000 for the quarter ended June 30, 1996. Sales
and marketing expenses decreased from $4,520,000 for the six months ended June
30, 1995 to $3,542,000 for the six months ended June 30, 1996. The decrease in
these expenses was primarily the result of recharacterizing certain expenses as
the cost of services instead of sales and marketing expenses as the Company
increased its volume of billable customer services.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased from $533,000 for the quarter
ended June 30, 1995 to $454,000 for the quarter ended June 30, 1996. General
and administrative expenses increased from $1,070,000 for the six months ended
June 30, 1995 to $1,179,000 for the six months ended June 30, 1996.
INTEREST INCOME
Interest income decreased from $370,000 for the quarter ended June 30, 1995
to $261,000 for the quarter ended June 30, 1996. Interest income decreased from
$730,000 for the six months ended June 30, 1995 to $434,000 for the six months
ended June 30, 1996. These decreases are primarily a result of a decrease in
cash and investments in 1996 from 1995 levels.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had no significant capital spending or
purchase commitments and had cash and investments totaling $14,913,000 and
working capital of $13,747,000. For the six months ended June 30, 1996, the
Company used $5,122,000 of cash in its operating activities. The Company expects
to continue to incur substantial negative cash flows from operating activities
and therefore to have significant working capital needs through 1997. Net cash
of $2,640,000 generated from investing activities during the six months ended
June 30, 1996 resulted from the purchases and maturities of held-to-maturity
investments and the acquisition of property and equipment. The Company
generated $86,000 from financing activities for the six months ended June 30,
1996, from the exercise of stock options.
The Company believes that its existing capital resources will be sufficient
to meet the Company's cash requirements into 1997. However, actual results
could vary materially from the foregoing forward-looking statements due to many
factors, including the market acceptance of the Company's products, the levels
of promotion and marketing required to launch and sell its products and services
and to attain a competitive position in the marketplace, the extent to which the
Company invests in research and development with respect to existing and future
technology, including research and development with respect to additional
product features and product enhancements and other factors identified in this
Form 10-Q and in the Company's other SEC filings
FACTORS THAT MAY AFFECT FUTURE RESULTS
Delays in the commercial availability and geographic coverage of new
wireless networks may continue to impede or prevent substantial growth of the
Company's business. Prospective customers are reluctant to make company wide
implementation decisions until they have an opportunity to compare presently
available services to the services offered by new wireless networks, such as
CDPD and LEO
9
satellites. There can be no assurance that the new wireless networks will
attain commercial availability, or that they will be available in a significant
number of metropolitan areas, or that they will provide a scope of geographic
coverage that is attractive to customers in the metropolitan areas in which they
are available. The Company's inability to offer products and services to
customers on new wireless networks could have a material adverse effect on the
Company's business.
The Company's ability to provide communication services is dependent upon
contractual relationships with wireless network providers. There can be no
assurance that the Company will be able to enter into or maintain relationships
with wireless network providers, that any such relationships will be on
economically favorable terms or that wireless network providers may not choose
to compete against rather than cooperate with the Company. Furthermore, there
can be no assurance that wireless network providers will have the capacity,
ability and FCC authorization to provide high-quality airtime to the Company's
customers on a continuous basis. The Company's inability to obtain high-
quality, reliable, continuous airtime from or maintain cooperative relationships
with wireless network providers would adversely affect the Company's business.
The Company depends on application software developers to help create a
market for the Company's products by writing their application software programs
so that the programs implement mobile data transmission through KeyWare. There
can be no assurance that the applications software developers will choose to
make their computer programs compatible with KeyWare. Furthermore, there can be
no assurance that the application software developers who implement mobile data
transmission through KeyWare will be successful in developing and marketing
their Racotek-compatible products or will continue to use the Company's products
in their business. In addition, delays by these developers in completing their
wireless application software integration is impeding the Company's efforts to
persuade existing and prospective customers to implement the products across
their entire fleets. Continuing delays in wireless application software
integration could have a material adverse impact on the Company's business.
Many large companies retain system integrators to select and implement
communications systems for their mobile workforces. The Company's ability to
obtain large companies as customers depends in part on establishing and
maintaining cooperative relationships with system integrators so that the system
integrators will recommend and purchase Racotek products and services for their
clients. The Company's inability to persuade system integrators to recommend
and purchase Racotek products and services for their clients could prevent the
Company from securing such clients as customers, which could have a material
adverse effect on the Company's business. In addition, to the extent system
integrators develop application software programs, the Company depends on them
to write their application software programs so that the programs implement
mobile data transmission through KeyWare. Continuing delays in wireless
application software integration by system integrators, like such delays on the
part of application software developers, could have a material adverse impact on
the Company's business.
The Company depends on third-party hardware manufacturers to develop and
maintain computer hardware devices that are suitable for mobile data
applications, such as handheld and vehicle-mounted devices, and to make these
devices available to customers at attractive prices. The Company's ability to
sell its products would be diminished if hardware manufacturers cease developing
such devices. Unless dependable and fully-featured KeyWare-compatible mobile
devices are available at competitive prices, customers will be reluctant to
implement mobile data systems and become Racotek customers, which would
adversely affect the Company's business.
10
A substantial portion of the Company's revenues derived from providing
consulting services to mobile data users. Consulting services cannot be
standardized and mass-marketed as readily as software, and they may not provide
as consistent a source of recurring revenue as transmission services are
expected to provide. In order for the Company's revenues from consulting
services to continue to grow, the Company must continue to add more customers
and larger projects to build, enable and support data mobility systems. The
Comapny's inability to find customers for its large-scale consulting services,
and/or the Company's inability to use its consulting services to obtain
additional customers for its software licenses, support and transmission
services could adversely affect the growth of its business.
The Company derives a substantial part of its revenue from a small number
of customers who, after evaluating the Company's products, proceed to install
the Company's products throughout their entire fleet of vehicles. A decision by
any one of these customers to delay or abandon roll-out of the Company's
products across an entire fleet may have a material adverse effect on the
Company's business and results of operations.
Competition in the communication industry is intense. Major software
development companies, as well as computer, database and communications
companies, are possible sources of future direct competition for Racotek's
products and services. Many of the Company's current and possible direct
competitors have financial, technical, marketing, sales, manufacturing,
distribution and other resources substantially greater than those of the
Company. In addition to direct competitors, the Company presently faces
competition from providers of other mobile communication services that customers
might view as substitutes for wireless data transmission, such as cellular
telephone, paging and conventional two-way voice radio.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See attached Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RACOTEK, INC.
By: /s/ Michael Fabiaschi
-----------------------------
Michael Fabiaschi
President and Chief Executive Officer
By: /s/ James E. Flaherty
-----------------------------
James E. Flaherty
Chief Financial Officer and Secretary
Dated: August 12, 1996
13
EXHIBIT INDEX
EXHIBIT NUMBER TITLE SEQUENTIALLY
NUMBERED
PAGE
11.01 Detail Computation of Net Loss per Share.
14