UNITED STATES
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 March 31, 2002
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period from to
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Commission file number 0-26140
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@TRACK COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0352879
- ---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1155 Kas Drive, Suite 100, Richardson, Texas 75081
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 301-2000
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 registrant's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding as of
Title of each class May 10, 2002
- ---------------------------- ----------------------------------
Common Stock, $.01 par value 48,347,561
@TRACK COMMUNICATIONS, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
<Table>
<Caption>
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 2002
and December 31, 2001 3
Consolidated Statements of Operations for the
three months ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 2002 6
Notes to Consolidated Financial Statements 7-11
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
</Table>
2
PART I - FINANCIAL INFORMATION
@TRACK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<Table>
<Caption>
ASSETS
March 31, December 31,
2002 2001
------------ ------------
Current assets:
Cash and short-term investments $ 13,974 $ 14,889
Accounts receivable, net 8,011 11,470
Inventories, net 1,613 2,913
Deferred product costs - current portion 7,111 6,183
Notes receivable 12,000 --
Other current assets 2,311 592
------------ ------------
Total current assets 45,020 36,047
Network, equipment and software, net 6,943 8,583
Deferred product costs - non-current portion 2,998 4,516
License rights, net 37,189 37,848
Other assets, net 1,756 603
------------ ------------
Total assets $ 93,906 $ 87,597
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,926 $ 2,517
Telecommunications costs payable 2,374 3,584
Accrued interest payable 82 575
Deferred product revenues - current portion 8,879 7,588
Deferred service revenues - current portion 9,551 --
Other current liabilities 10,010 9,297
------------ ------------
Total current liabilities 32,822 23,561
Deferred product revenues - non-current portion 4,094 5,748
Deferred service revenues - non-current portion 2,225 --
Senior notes and other notes payable 14,260 14,109
------------ ------------
Total liabilities 53,401 43,418
------------ ------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common Stock 482 481
Common Stock - Class B -- --
Preferred Stock - Series E -- --
Additional paid-in capital 218,245 217,495
Accumulated deficit (177,660) (173,235)
Treasury stock (562) (562)
------------ ------------
Total stockholders' equity 40,505 44,179
------------ ------------
Total liabilities and stockholders' equity $ 93,906 $ 87,597
============ ============
</Table>
See accompanying notes to consolidated financial statements.
3
@TRACK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share)
<Table>
<Caption>
Three months ended
March 31,
------------------------------
2002 2001
------------ ------------
Revenues:
Product $ 1,448 $ 7,552
Ratable product 2,376 2,529
Service 11,158 12,355
------------ ------------
Total revenues 14,982 22,436
------------ ------------
Cost of revenues:
Product 1,075 6,084
Ratable product 1,914 2,092
Service 5,473 6,620
------------ ------------
Total cost of revenues 8,462 14,796
------------ ------------
Gross profit 6,520 7,640
------------ ------------
Expenses:
General and administrative 3,201 3,393
Customer service 1,271 2,001
Sales and marketing 3,266 1,159
Engineering 571 1,516
Network services center 373 409
Depreciation and amortization 1,829 1,585
------------ ------------
10,511 10,063
------------ ------------
Operating loss (3,991) (2,423)
Interest income 95 183
Interest expense (529) (3,342)
------------ ------------
Loss before income taxes (4,425) (5,582)
Income tax provision -- --
------------ ------------
Net loss $ (4,425) $ (5,582)
============ ============
Basic and diluted loss per share:
------------ ------------
Net loss per share $ (0.09) $ (0.22)
============ ============
Weighted average number of shares outstanding:
Basic and diluted 48,057 25,327
============ ============
</Table>
See accompanying notes to consolidated financial statements.
4
@TRACK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<Table>
<Caption>
Three months ended
March 31,
-----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (4,425) $ (5,582)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,170 1,585
Amortization of license rights 659 --
Amortization of discount on notes payable 15 99
Gain on sale of assets (12) --
Provision for bad debts 320 515
Non-cash compensation 532 --
Decrease in accounts receivable 3,139 2,796
Decrease in inventory 445 2,618
Decrease in deferred product costs 590 1,626
Decrease in accounts payable (591) (5,060)
Decrease in deferred product revenues (363) (1,930)
Decrease in deferred service revenues (472) --
Decrease in accrued expenses and other liabilities (2,311) (5,257)
Other (1,451) (150)
------------ ------------
Net cash used in operating activities (2,755) (8,740)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets and service contract 2,000 --
Additions to network, equipment and software (362) (728)
Increase in short-term investments (51) --
------------ ------------
Net cash provided by (used in) investing activities 1,587 (728)
------------ ------------
Cash flows from financing activities:
Payments on capital leases (17) --
Proceeds from exercise of stock options 219 --
------------ ------------
Net cash provided by financing activities 202 --
------------ ------------
Increase (decrease) in cash and cash equivalents (966) (9,468)
Cash and cash equivalents, beginning of period 10,755 20,641
------------ ------------
Cash and cash equivalents, end of period 9,789 11,173
Short-term investments 4,185 --
------------ ------------
Cash and short-term investments $ 13,974 $ 11,173
============ ============
Supplemental cash flow information:
Interest paid $ 990 $ 4,054
============ ============
Non-Cash Investing Activities:
Purchases of assets through capital leases $ 224 $ --
============ ============
Note receivable received as proceeds from sale of assets $ 12,000 $ --
============ ============
Receivable held in escrow received as proceeds from sale of assets $ 1,000 $ --
============ ============
</Table>
See accompanying notes to consolidated financial statements.
5
@TRACK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share information)
<Table>
<Caption>
Preferred Stock Common Stock Common Stock - Class B
----------------- -------------------- ----------------------
Shares Amount Shares Amount Shares Amount
------- ------ ---------- ------- -------- ----------
Stockholders' equity at December 31, 2001 1 $ -- 48,118,253 $ 481 -- $ --
Exercise of stock options 114,240 1
Acceleration of vesting on stock options
Net loss
------- ------ ---------- ------- -------- ----------
Stockholders' equity at March 31, 2002 1 $ -- 48,232,493 $ 482 -- $ --
======= ====== ========== ======= ======== ==========
<Caption>
Additional Treasury Stock
Paid-in ------------------ Accumulated
Capital Shares Amount Deficit Total
---------- ------- -------- ----------- ----------
Stockholders' equity at December 31, 2001 $ 217,495 75,799 $ (562) $ (173,235) $ 44,179
Exercise of stock options 218 219
Acceleration of vesting on stock options 532 532
Net loss (4,425) (4,425)
---------- ------- -------- ---------- ----------
Stockholders' equity at March 31, 2002 $ 218,245 75,799 $ (562) $ (177,660) $ 40,505
========== ======= ======== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
6
@TRACK COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
1. BUSINESS OVERVIEW
@Track Communications, Inc., a Delaware Corporation (the "Company" or
"@Track") develops and implements mobile communications solutions, including
integrated voice, data and position location services. The initial application
for the Company's wireless enhanced services has been developed for, and is
marketed and sold to, companies that operate in the long-haul trucking market.
The Company provides long-haul trucking companies with a comprehensive package
of mobile communications and management information services, thereby enabling
its trucking customers to effectively monitor the operations and improve the
performance of their fleets. The initial product application was customized and
has been sold to and installed in the service vehicle fleets of the member
companies of SBC Communications, Inc., pursuant to the service vehicle contract
(the "Service Vehicle Contract" or "Contract"). During the fourth quarter of
1999, the Company entered the mobile asset tracking market with the introduction
of its trailer-tracking product, TrackWare(R) . There were no significant
revenues from TrackWare(R) during periods ending March 31, 2001 or 2002. During
the first quarter of 2001, the Company began marketing and selling 20/20V, a
low-cost tracking product designed for small and medium sized fleets in the
transportation marketplace. There were no significant revenues from 20/20V
during the periods ending March 31, 2001 or 2002. During the third quarter of
2001, the Company commenced marketing the Vehicle Management
Information(TM)("VMI") product licensed from Minorplanet Limited into the
automatic vehicle location ("AVL") market in the United States.
On March 15, 2002, @Track completed the sale to Aether Systems, Inc.
("Aether") of certain assets and licenses related to @Track's long-haul trucking
and asset-tracking businesses pursuant to an Asset Purchase Agreement effective
as of March 15, 2002, by and between @Track and Aether (the "Sale"). Under the
terms of the Asset Purchase Agreement, @Track sold to Aether assets and related
license rights to its Platinum Service software solution, 20/20V(TM), and
TrackWare(R) asset and trailer-tracking products. In addition, @Track and Aether
agreed to form a strategic relationship with respect to @Track's long-haul
customer products, pursuant to which @Track will assign to Aether all service
revenues generated post-closing from its HighwayMaster Series 5000 ("HM5000")
customer base. Aether, in turn, has agreed to reimburse @Track for the network
and airtime service costs related to providing the HM5000 service. The two
companies have also agreed to work jointly in the adaptation of the VMI product
technology for the potential distribution of VMI by Aether to the
long-haul-trucking market (See Note 4).
2. BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein have
been prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all footnote disclosures
required by generally accepted accounting principles. These consolidated
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 2001. The accompanying
consolidated financial statements reflect all adjustments (all of which are of a
normal recurring nature), which are, in the opinion of management, necessary for
a fair presentation of the Company's financial position, results of operations
and cash flows for the interim periods. The results for any interim period are
not necessarily indicative of the results for the entire year.
3. REVENUE RECOGNITION
Currently, the Company resells cellular airtime to customers of its VMI
products. Therefore, in accordance with SAB 101, the Company defers product
revenues and recognizes this revenue ratably over the longer of the term of the
customer contract or the estimated life of the customer relationship. Such terms
range from three to five years.
7
4. SALE OF ASSETS
On March 15, 2002, @Track completed the Sale to Aether. As
consideration for the Sale, @Track received $3 million in cash, of which $1
million is included on the Company's balance sheet in other assets and will be
held in escrow and released to @Track over a 12-month period. @Track also
received a note for $12 million payable, at the option of Aether, in either cash
or convertible preferred stock in three equal installments of $4 million on
April 14, May 14, and June 14, 2002 (the "Note"). The preferred stock may then
be converted to common stock using a prescribed formula that compensates for
fluctuations in the stock price so that @Track will be able to convert and sell
in the open market Aether common stock equal to $12 million. The consideration
for the Sale was determined through arms length negotiation between @Track and
Aether.
On April 12, 2002, Aether delivered an Amended and Restated Convertible
Promissory Note (the "Amended Note") to the Company. Under the Amended Note,
Aether irrevocably agreed to pay cash in lieu of preferred stock for the first
$4 million installment originally due on April 14, 2002 and extended the
installment due date by twenty business days to May 10, 2002. Additionally,
under the Amended Note, Aether has the option to irrevocably elect to pay the
May 14 and June 14, 2002 installments in cash in lieu of preferred stock upon
five days prior written notice, and upon the making of such election, the
installment due date shall be extended by twenty business days.
On May 9, 2002, Aether notified the Company of its election to pay the
second $4 million installment under the Amended Note in cash. Thus, the second
$4 million installment under the Amended Note originally due on May 14, 2002 is
now due in cash on June 12, 2002. On May 10, 2002, the Company received the
initial $4 million installment under the Amended Note in cash from Aether.
Proceeds from the Sale to Aether totaled $15 million, of which $12.2
million was allocated to deferred service revenue and reflects the estimated
future gross revenues that the Company would have received from the HM5000
customer base net of cash reimbursements from Aether under the terms of the
agreement. The deferred service revenue will be recognized over the term of the
agreement with Aether that expires in September of 2003. The remaining proceeds
were allocated to consideration for assets sold, net of transaction costs, and
no gain or loss resulted from the sale.
5. FUTURE OPERATIONS
The Company has incurred significant operating losses since inception
and has limited financial resources to support it until such time that it is
able to generate positive cash flow from operations. Based on projected
operating results, the Company believes its existing capital resources will be
sufficient to fund its currently anticipated operating needs and capital
expenditure requirements for the next 18 months. Critical success factors to
achieving the Company's operating goals are 1) meeting the anticipated sales
goals pertaining to the recently acquired VMI technology and 2) converting
Aether common stock to cash proceeds (see Note 4).
6. OTHER ASSETS
The Company provides lease financing to certain customers of its VMI
products. All leases under these arrangements are classified as sales-type
leases. These leases typically have terms of three to five years and are
discounted at interest rates ranging from 14% to 18% depending on the customer's
credit risk.
The net present value of the lease payments is recognized as sales
revenue and deferred under the Company's revenue recognition policy. The net
investment in sales-type leases, contained within other assets on the Company's
balance sheet, is composed of total minimum lease payments net of unearned
interest income and allowance for uncollectible accounts.
7. COMMITMENTS AND CONTINGENCIES
During the first quarter of 2001, the outsource manufacturer (the
"vendor") that supplied substantially all of the Company's finished goods
inventory asserted a claim for reimbursement for excess and obsolete inventory
purchased in its capacity for use in the manufacture of the Company's products.
This claim was disputed by the Company. As a result of this dispute, beginning
in April 2001, the vendor ceased to perform on its contract to provide finished
goods inventory and certain other services to the Company. The claims and
counterclaims ultimately led to each of the parties filing litigation against
the other. The vendor and the Company executed a Compromise Settlement Agreement
on October 9, 2001. The
8
ultimate liability in connection with this settlement will not be known until
December 31, 2002. Based on information currently available, the Company
recorded a provision of $2.1 million during 2001 as its estimate of the cost to
be incurred to settle this litigation, of which $0.5 million had been utilized
as of March 31, 2002.
8. RELATED PARTY TRANSACTIONS
Minorplanet Systems PLC owns 62.5 percent of the Company's outstanding
common stock and thus controls the Company. As a result of this control,
Minorplanet Systems PLC is a related party. The Company has also agreed to pay
Minorplanet Limited, the operating subsidiary of Minorplanet Systems PLC, an
annual fee of $1,000,000 to aid in funding research and development of future
products covered by the license rights. Transactions with Minorplanet Systems
PLC and its operating subsidiaries are summarized below (in thousands).
<Table>
<Caption>
Three months ended March 31, 2002 2001
------------ ------------
Purchases $ 850 $ --
</Table>
<Table>
<Caption>
As of: March 31, December 31,
2002 2001
------------ ------------
Accounts receivable $ 70 $ 14
Accounts payable $ 1,375 $ 525
</Table>
During the three months ended March 31, 2001, SBC Wireless LLC was
considered a related party by virtue of the control provisions afforded by the
Amended & Restated Stockholders' Agreement dated September 27, 1996 between the
Company and certain stockholders (the "Stockholders' Agreement"). As a result of
the Stock Purchase and Exchange Agreement by and among the Company, Minorplanet
Systems PLC, and Mackay Shields LLC consummated on June 21, 2001, the
Stockholders' Agreement was terminated and such control provisions were
eliminated; thereafter, SBC Wireless LLC was no longer a related party. Certain
affiliates of SBC Wireless LLC, which is wholly owned by Cingular Wireless, LLC,
a joint venture in which SBC Communications, Inc. ("SBC") is a lead venturer,
serve as customers of and vendors to the Company. The Company sells mobile
communication units and provides services pursuant to the Service Vehicle
Contract. Additionally, one affiliated company serves as "administrative
carrier" and provides clearinghouse services, and other affiliated companies of
SBC are among the cellular carriers with whom the Company purchases wireless and
long distance airtime in connection with the Company's provision of its
services. Sales to these affiliated companies of SBC for the three months ended
March 31, 2001 are summarized below (in thousands).
<Table>
<Caption>
Three months ended March 31, 2001
-----------
Revenues $ 10,405
</Table>
9. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes accounting standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company adopted
SFAS 131 beginning with the effective date of January 1, 1998. Prior to January
of 2002, the Company had only one reportable segment.
The Company's reportable segments offer different products and/or
services. The Company reports on these segments as management makes operating
decisions and assesses individual performances based on the performance of these
segments. Each segment also requires different technology and marketing
strategies. The Company's two reportable segments are VMI and NSC Systems.
During the third quarter of 2001, the Company commenced marketing the
VMI product licensed from Minorplanet Limited into the automatic vehicle
location ("AVL") marketplace in the United
9
States. VMI is designed to maximize the productivity of a mobile workforce as
well as reduce vehicle mileage and fuel related expenses. The VMI technology
consists of: (i) a data control unit ("DCU") that continually monitors and
records a vehicle's position, speed and distance traveled; (ii) a command and
control center ("CCC") which receives and stores in a database information
downloaded from the DCU's; and (iii) software used for communication, messaging
and detailed reporting. VMI uses GPS to acquire a vehicle location on a
minute-by-minute basis and a GSM based cellular network to transmit data between
the DCU's and the CCC. The VMI application is targeted to small and medium-sized
fleets in the metro marketplace which the Company believes represents a total
U.S. market of approximately 21 million vehicles.
Through its NSC Systems segment, the Company provides long-haul
trucking companies with a comprehensive package of mobile communications and
management information services, thereby enabling its trucking customers to
effectively monitor the operations and improve the performance of their fleets.
The initial product application was customized and has been sold to and
installed in the service vehicle fleets of the member companies of SBC
Communications, Inc., pursuant to the service vehicle contract. The Company also
provides mobile asset tracking solutions with its trailer-tracking products,
TrackWare(R) and 20/20V(TM). These products use the Company's Network Service
Center ("NSC") to relay voice and messages between the mobile units and the
customer's dispatchers.
On March 15, 2002, @Track completed the Sale to Aether of certain
assets and licenses related to @Track's long-haul trucking and asset-tracking
businesses pursuant to an Asset Purchase Agreement effective as of March 15,
2002, by and between @Track and Aether (see Note 4).
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Operating expenses are
allocated to each segment based on management's estimate of the utilization of
resources by each segment. The following table sets forth segment financial
information (in thousands).
<Table>
<Caption>
Three Months Ended March 31, 2002
NSC Systems VMI Consolidated
------------- ------------- -------------
Revenues $ 14,853 $ 129 $ 14,982
Operating income (loss) 2,051 (6,042) (3,991)
Interest expense (287) (242) (529)
Interest income 51 44 95
Depreciation and amortization 920 909 1,829
Net income (loss) 1,816 (6,241) (4,425)
Total assets 52,392 41,514 93,906
Capital expenditures 82 280 362
Other significant non-cash items:
Note receivable received as proceeds from sale of assets 12,000 -- 12,000
Receivable held in escrow received as proceeds from sale of assets 1,000 -- 1,000
Purchase of assets through capital leases 224 -- 224
</Table>
<Table>
<Caption>
Three Months Ended March 31, 2001
NSC Systems VMI Consolidated
------------- ------------- -------------
Revenues $ 22,436 $ -- $ 22,436
Operating loss (2,423) -- (2,423)
Interest expense (3,342) -- (3,342)
Interest income 183 -- 183
Depreciation and amortization 1,585 -- 1,585
Net loss (5,582) -- (5,582)
Total assets 63,314 -- 63,314
Capital expenditures 728 -- 728
</Table>
10. ACCELERATED VESTING ON STOCK OPTIONS
Effective March 15, 2002, two of the Company's executives resigned
their employment with the Company in connection with the Sale to Aether
consummated on March 15, 2002 (see Note 4). As part of their separation
agreements,
10
vesting was accelerated on a portion of previously unvested stock options
resulting in the recording of $.5 million in compensation expense which is
reflected in the Company's financial statements.
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the third quarter of 2001, the Company commenced marketing the
Vehicle Management Information ("VMI") product licensed from Minorplanet Limited
into the automatic vehicle location ("AVL") marketplace in the United States.
VMI is designed to maximize the productivity of a mobile workforce as well as
reduce vehicle mileage and fuel related expenses. The VMI technology consists
of: (i) a data control unit ("DCU") that continually monitors and records a
vehicle's position, speed and distance traveled; (ii) a command and control
center ("CCC") which receives and stores in a database information downloaded
from the DCU's; and (iii) software used for communication, messaging and
detailed reporting. VMI uses GPS to acquire a vehicle location on a
minute-by-minute basis and a GSM based cellular network to transmit data between
the DCU's and the CCC. The VMI application is targeted to small and medium sized
fleets in the metro marketplace which the Company believes represents a total
U.S. market of approximately 21 million vehicles.
VMI provides minute-by-minute visibility into the activities of a
mobile workforce via an extensive reporting system that provides real-time and
exception-based reporting. Real-time reports provide information regarding a
vehicle's location, idling, stop time, speed and distance traveled. With
real-time reporting, the user can view when an employee starts or finishes work,
job site arrival times and site visit locations. In addition, exception reports
allow the user to set various parameters within which vehicles must operate, and
the system will report exceptions including speeding, extended stops,
unscheduled stops, route deviations, visits to barred locations and excessive
idling.
Through its NSC Systems segment, the Company provides long-haul
trucking companies with a comprehensive package of mobile communications and
management information services, thereby enabling its trucking customers to
effectively monitor the operations and improve the performance of their fleets.
The initial product application was customized and has been sold to and
installed in the service vehicle fleets of the member companies of SBC
Communications, Inc., pursuant to the service vehicle contract (the "Service
Vehicle Contract" or "Contract"). The Company also provides mobile asset
tracking solutions with its trailer-tracking products, TrackWare(R) and
20/20V(TM).
On March 15, 2002, @Track completed the Sale to Aether of certain
assets and licenses related to @Track's long-haul trucking and asset-tracking
businesses pursuant to an Asset Purchase Agreement effective as of March 15,
2002, by and between @Track and Aether. Under the terms of the Asset Purchase
Agreement, @Track sold to Aether assets and related license rights to its
Platinum Service software solution, 20/20V(TM), and TrackWare(R) asset and
trailer-tracking products. In addition, @Track and Aether agreed to form a
strategic relationship with respect to @Track's long-haul customer products,
pursuant to which @Track will assign to Aether all service revenues generated
post-closing from its HighwayMaster Series 5000 (HM5000) customer base. Aether,
in turn, has agreed to reimburse @Track for the network and airtime service
costs related to providing the HM5000 service. Hereinafter, HM5000 units for
which the Company provides network services are referred to as network services
subscribers.
RESULTS OF OPERATIONS - CONSOLIDATED
Three Months Ended March 31, 2002, Compared to Three Months Ended March
31, 2001
Total revenues decreased 33.2% to $15.0 million in 2002, from $22.4
million in 2001. Product revenues decreased to $1.4 million in 2002, from $7.6
million in 2001 due to a reduction in sales related to the Service Vehicle
Contract. Service revenues were $11.2 million in 2002 compared to $12.4 million
in 2001. This 9.7% decrease in service revenues is primarily attributable to a
decrease in the average monthly revenue per mobile unit from $58.58 in 2001 to
$51.00 in 2002. Although the average number of installed units remained
relatively flat from 2001 to 2002, the proportion of service vehicles increased
resulting in a lower average revenue per mobile unit. Average revenue for
service vehicles is significantly less than that of long-haul trucking because
of different product functionality. The number of installed units and network
services subscribers increased to 69,193 at March, 31, 2002 from 68,415 at March
31, 2001.
Total gross profit margin increased from 34.1% in 2001 to 43.5% during
the first quarter of 2002. Service gross profit margin was 51.0% in 2002
compared to 46.4% in 2001. The increase in service gross profit margin is
primarily due to an improved margin from service repairs related to the Service
Vehicle Contract.
12
Total product gross profit margin, including ratable product margin,
was 21.8% in 2002 compared to 18.9% in 2001. During the first quarter of 2001,
the Company received significant quantities of TrackWare finished goods
inventory, the carrying amount of which was written down by approximately $0.6
million to estimated market value. Excluding the effect of the write-down from
cost to market, total product and ratable product gross profit margin would have
been 25.0% during the first quarter of 2001; the effective decrease in product
gross profit margin to 21.8% during the first quarter of 2002 is primarily
associated with additional general product warranty provisions.
Operating expenses increased 4.5% to $10.5 million in 2002 from $10.1
million in 2001. This increase is primarily due to sales and marketing
expenditures related to the VMI product launch partially offset by reductions in
engineering and customer service costs. Sales and marketing costs increased from
$1.2 million in 2001 to $3.3 million in 2002. Expenditures of approximately $.6
million were incurred on contracted sales, training and operational support
services associated with the VMI product launch during the first quarter of
2002. The remaining $1.5 million increase was primarily related to the hiring of
new sales personnel and the opening of two new VMI sales and operations offices
in Houston, Texas and Atlanta, Georgia.
The increase in sales and marketing expenses were offset by a $.9
million decrease in engineering costs and a $.7 million decrease in customer
service costs. These decreases were primarily associated with personnel
reductions made as a consequence of the cancellation of various technology
initiatives, as well as personnel reductions associated with the sale of assets
to Aether.
Operating loss for the first quarter of 2002 increased $1.5 million
from $2.4 million in 2001 to $3.9 million in 2002. This increase is the combined
effect of the $1.1 million decrease in gross profit and the $.4 increase in
operating expenses discussed above. The Company's ability to generate operating
income is significantly influenced by the gross margin related to product
revenues. The decrease in the Service Vehicle Contract unit sales during 2002
significantly reduced gross profit margin. During 2001, the Service Vehicle
Contract was responsible for the majority of product revenues. Product shipments
under that contract are expected to be significantly lower during 2002. The
Company's financial condition and results of operations are heavily dependent
upon the Company's ability to market and sell the VMI products.
RESULTS OF OPERATIONS - VMI
Three Months Ended March 31, 2002
The Company began marketing the VMI product in the Dallas, Texas market
during the third quarter of 2001, the Houston market during the fourth quarter
of 2001, and the Atlanta market beginning in the first quarter of 2002. A total
of 925 units were sold during the first quarter of 2002. However, in accordance
with the Company's revenue recognition policies, revenue and the associated cost
of sales must be deferred under Staff Accounting Bulletin Number 101 ("SAB
101"), and recognized over the greater of the contract life or the life of the
estimated customer relationship. Therefore, VMI revenues and gross profit did
not contribute significantly to the Company's total revenue and gross profit
during the first quarter of 2002. Total VMI revenues during the first quarter
were $.1 million. The Company has recorded $2.1 million in deferred revenue
associated with VMI product sales reflected on the Company's balance sheet as of
March 31, 2002.
VMI operating losses were $6.0 million as the Company began dedicating
most of its sales and marketing resources and many of its operational resources
to the launching of the VMI product in several US markets including Dallas,
Houston, and Atlanta. Total sales and marketing personnel increased
significantly during the previous six months including the hiring of VMI sales
personnel in the Dallas, Houston and Atlanta offices as well as the hiring of
Dallas-based telesales personnel. As mentioned above, significant expenditures
were also incurred to open the new Houston and Atlanta offices as well as for
contracted sales, training and operational services associated with the VMI
product launch.
Also, included in the VMI first quarter operating loss is approximately
$.7 million in amortization of the VMI license rights and $.3 million in costs
associated with research and development of future products covered by the
license rights.
RESULTS OF OPERATIONS - NSC SYSTEMS
Three Months Ended March 31, 2002, Compared to Three Months Ended March
31, 2001
13
Total NSC Systems revenues decreased 33.5% from $22.4 million in 2001
to $14.9 million in 2002. Product revenues decreased $6.1 million due primarily
to a reduction in sales related to the Service Vehicle Contract. Service
revenues were $11.1 million in 2002 compared to $12.4 million in 2001. This
reduction in service revenues is primarily attributable to a decrease in the
average monthly revenue per mobile unit from $58.58 in 2001 to $51.00 in 2002
associated with an increased proportion of service vehicles.
Total gross profit margin increased from 34.1% in 2001 to 45.1% during
the first quarter of 2002. Service gross profit margin was 51.4% in 2002
compared to 46.4% in 2001. The increase in service gross profit margin is
primarily due to an improved margin from service repairs related to the Service
Vehicle Contract.
Product gross profit margin, including ratable product margin, was
26.1% in 2002 compared to 18.9% in 2001. During the first quarter of 2001, the
Company received significant quantities of TrackWare finished goods inventory,
the carrying amount of which was written down by approximately $0.6 million to
estimated market value. Excluding the effect of the write-down from cost to
market, product gross profit margin would have been 25.0% during the first
quarter of 2001.
Operating expenses within the NSC Systems segment decreased 54.5% from
$10.1 million during the first quarter of 2001 to $4.6 million in 2002 as the
Company re-directed most of its sales and marketing resources and many of its
operational resources from the NSC Systems segment to the new VMI segment to
focus on the VMI product launch. Also contributing to the reduction in NSC
Systems operating costs was a $.9 million decrease in engineering costs and a
$.7 million decrease in customer service costs. These decreases were primarily
associated with personnel reductions made as a consequence of the cancellation
of various technology initiatives, as well as personnel reductions associated
with the sale of assets to Aether.
Operating income for NSC Systems during the first quarter of 2002 was
$2.1 million versus an operating loss of $2.4 million in the first quarter of
2001. This increase in operating income represents the combined effect of the
$5.5 million reduction in operating expenses offset by a $1.0 million decrease
in gross profit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses since inception
and has limited financial resources to support itself until such time that it is
able to generate positive cash flow from operations. Based on projected
operating results, the Company believes its existing capital resources will be
sufficient to fund its currently anticipated operating needs and capital
expenditure requirements for the next 18 months. Critical success factors to
achieving the Company's operating goals are 1) meeting the anticipated sales
goals pertaining to the recently acquired VMI technology and 2) converting
Aether common stock to cash proceeds.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material exposure to market risk
associated with its cash and short-term investments. The Company's 13 3/4%
Senior Notes due 2005 are at a fixed rate and, thus, are not exposed to interest
rate risk.
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based upon
management's current beliefs and projections, as well as assumptions made by and
information currently available to management. When used in this Form 10-Q, the
words "anticipate," "believe," "estimate," "expect" and similar expressions are
intended to identify forward-looking statements. Any statement or conclusion
concerning future events is a forward-looking statement, and should not be
interpreted as a promise or conclusion that the event will occur. The Company's
actual operating results or the actual occurrence of any such event could differ
materially from those projected in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed in this
report, and the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
14
@TRACK COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See the Index to Exhibits.
(b) Reports on Form 8-K -
On March 27, 2002, the Company filed a current report on Form
8-K reporting under Item 2 the Company's disposition of
certain assets on March 15th, 2002 pursuant to that certain
Asset Purchase Agreement with Aether Systems, Inc.
15
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.
@TRACK COMMUNICATIONS, INC.
Date: May 14, 2002
By: /s/ Jana Ahlfinger Bell
-------------------------------------
Jana Ahlfinger Bell
President and Chief Executive Officer
By: /s/ W. Michael Smith
-------------------------------------
W. Michael Smith
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
16
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 - Stock Purchase and Exchange Agreement by and between the
Company, Minorplanet Systems PLC and Mackay Shields LLC,
dated February 14, 2001.(29)
2.2 - Asset Purchase Agreement by and between the Company and
Aether Systems, Inc. dated March 15, 2002.(30)
3.1 - Restated Certificate of Incorporation of the
Company.(28)
3.2 - Second Amended and Restated By-Laws of the Company.(28)
4.1 - Specimen of certificate representing Common Stock, $.01
par value, of the Company.(1)
4.2 - Indenture dated September 23, 1997 by and among the
Company, HighwayMaster Corporation and Texas Commerce
Bank, National Association (the "Indenture").(12)
4.3 - First Supplemental Indenture, dated June 20, 2001, to
the Indenture.(28)
4.4 - Pledge Agreement dated September 23, 1997, by and among
the Company, Bear, Stearns & Co. Inc. and Smith Barney
Inc.(12)
4.5 - Registration Rights Agreement dated September 23, 1997,
by and among the Company, HighwayMaster Corporation,
Bear, Stearns & Co. Inc. and Smith Barney Inc.(12)
4.9 - Warrant Registration Rights Agreement dated September
23, 1997, by and among the Company, Bear, Stearns & Co.
Inc. and Smith Barney, Inc.(12)
10.1 - Registration Rights Agreement by and between the
Company, Minorplanet Systems PLC and Mackay Shields LLC,
dated as of June 21, 2001.(31)
10.2 - Exclusive License and Distribution Agreement by and
between Minorplanet Limited, (an @Track subsidiary) and
Mislex (302) Limited, dated June 21, 2001(28)
10.3 Amended and Restated 1994 Stock Option Plan of the
Company, dated February 4, 1994.(1)(5)(6)
10.4 - Amendment No. 1 to the Amended and Restated 1994 Stock
Option Plan .(32)
10.5 - Amendment No. 2 to the Amended and Restated 1994 Stock
Option Plan(33).
10.6 - Stock Option Agreement, dated June 22, 1998, by and
between the Company and John Stupka.(16)
10.7 - Product Development Agreement, dated December 21, 1995,
between HighwayMaster Corporation and IEX
Corporation.(3)(4)
10.8 - Software Transfer Agreement, dated April 25, 1997,
between HighwayMaster Corporation and Burlington Motor
Carriers, Inc.(9)(10)
10.9 - Lease Agreement, dated March 20, 1998, between
HighwayMaster Corporation and Cardinal Collins Tech
Center, Inc.(15)
10.10 - September 18, 1998 Amended and Restated Stock Option
Agreement of May 29, 1998 by and between the Company and
Jana Ahlfinger Bell.(16)
10.11 - Stock Option Agreement, dated August 12, 1998, by and
between the Company and Jana Ahlfinger Bell.(16)
10.12 - Stock Option Agreement, dated September 18, 1998, by and
between the Company and Jana Ahlfinger Bell.(16)
10.13 - September 18, 1998 Amended and Restated Stock Option
Agreement of April 25, 1997, by and between the Company
and Robert LaMere.(16)
10.14 - September 18, 1998 Amended and Restated Stock Option
Agreement of June 3, 1998, by and between the Company
and Todd A. Felker.(16)
10.15 - Stock Option Agreement dated November 24, 1998, by and
between the Company and Michael Smith.(16)
10.16 - Agreement No. 980427 between Southwestern Bell Telephone
Company, Pacific Bell, Nevada Bell, Southern New England
Telephone and HighwayMaster Corporation executed on
January 13, 1999.(17)(18)
10.17 - Administrative Carrier Agreement entered into between
HighwayMaster Corporation and Southwestern Bell Mobile
Systems, Inc. on March 30, 1999.(17)(18)
</Table>
17
<Table>
10.18 - Addendum to Agreement entered into between HighwayMaster
Corporation and International Telecommunications Data
Systems, Inc. on February 4, 1999.(17)(18)
10.19 - Second Addendum to Agreement entered into between
HighwayMaster Corporation and International
Telecommunications Data Systems, Inc. on February 4,
1999.(17)(18)
10.20 - Stock Option Agreement dated June 24, 1999, by and
between the Company and J. Raymond Bilbao.(19)
10.21 - Stock Option Agreement dated June 24, 1999, by and
between the Company and Marshall Lamm.(19)
10.22 - Fleet-on-Track Services Agreement entered into between
GTE Telecommunications Services Incorporated and
HighwayMaster Corporation on May 3, 1999.(19)(20)
10.23 - Stock Option Agreement dated September 3, 1999, by and
between the Company and J. Raymond Bilbao.(21)
10.24 - Stock Option Agreement dated September 3, 1999, by and
between the Company and Todd Felker.(21)
10.25 - Stock Option Agreement dated September 3, 1999, by and
between the Company and C. Marshall Lamm.(21)
10.26 - Stock Option Agreement dated September 3, 1999, by and
between the Company and W. Michael Smith.(21)
10.27 - Stock Option Agreement dated September 3, 1999, by and
between the Company and Robert W. LaMere.(21)
10.28 - Limited Liability Company Agreement of HighwayMaster of
Canada, LLC executed March 3, 2000.(22)
10.29 - Monitoring Services Agreement dated May 25, 2000, by and
between the Company and Criticom International
Corporation.(23)(24)
10.30 - Commercial Lease Agreement dated April 26, 2000 by and
between the Company and 10th Street Business Park,
Ltd.(24)
10.31 - Stock Option Agreement dated July 18, 2001, by and
between the Company and Jana A. Bell(27)
10.32 - Stock Option Agreement dated June 21, 2001, by and
between the Company and Jana A. Bell(27)
10.33 - Stock Option Agreement dated July 18, 2001, by and
between the Company and J. Raymond Bilbao(27)
10.34 - Stock Option Agreement dated June 21, 2001, by and
between the Company and J. Raymond Bilbao(27)
10.35 - Stock Option Agreement dated July 18, 2001, by and
between the Company and Todd A. Felker(27)
10.36 - Stock Option Agreement dated June 21, 2001, by and
between the Company and Todd A. Felker(27)
10.37 - Stock Option Agreement dated July 18, 2001, by and
between the Company and Robert W. LaMere(27)
10.38 - Stock Option Agreement dated June 21, 2001, by and
between the Company and Robert W. LaMere(27)
10.39 - Stock Option Agreement dated July 18, 2001, by and
between the Company and Marshall Lamm(27)
10.40 - Stock Option Agreement dated June 21, 2001, by and
between the Company and Marshall Lamm(27)
10.41 - Stock Option Agreement dated July 18, 2001, by and
between the Company and W. Michael Smith(27)
10.42 - Stock Option Agreement dated June 21, 2001, by and
between the Company and W. Michael Smith(27)
10.43 - Employment Agreement, dated June 21, 2001, between Jana
A. Bell and the Company(28)
10.44 - Employment Agreement, dated June 21, 2001, between J.
Raymond Bilbao and the Company(28)
</Table>
18
<Table>
10.45 - Employment Agreement, dated June 21, 2001, between W.
Michael Smith and the Company(28)
10.46 - Employment Agreement, dated June 21, 2001, between Todd
A. Felker and the Company(28)
10.47 - Agreement No. 980427-03, dated January 31, 2002 between
SBC Ameritech, SBC Pacific Bell, SBC Southern New
England Telephone, SBC Southwestern Bell Telephone, L.P.
and the Company(35)(36)
11 - Statement Regarding Computation of Per Share
Earnings(35)
99.0 - Receipt of representation from Arthur Andersen, LLP(34)
</Table>
- -------
(1) Filed in connection with the Company's Registration Statement on Form
S-1, as amended (No. 33-91486), effective June 22, 1995.
(2) [Footnote intentionally omitted]
(3) Filed in connection with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(4) Certain confidential portions deleted pursuant to Application for
Confidential Treatment filed in connection with the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(5) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)(4).
(6) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 1996.
(7) [Footnote intentionally omitted.]
(8) [Footnote intentionally omitted.]
(9) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended March 31, 1997.
(10) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued in connection with the
Company's Form 10-Q Quarterly Report for the quarterly period ended
March 31, 1997.
(11) [Footnote intentionally omitted.]
(12) Filed in connection with the Company's Registration Statement on Form
S-4, as amended (No. 333-38361).
(13) [Footnote intentionally omitted.]
(14) [Footnote intentionally omitted.]
(15) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended September 30, 1998.
(16) Filed in connection with the Company's Form 10-K fiscal year ended
December 31, 1998.
(17) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended March 31, 1999.
(18) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued June 22, 1999 in
connection with the Company's Form 10 -Q Quarterly Report for the
quarterly period ended March 31, 1999.
(19) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 1999.
(20) Certain confidential portions deleted pursuant to letter granting
application for confidential treatment issued October 10, 1999 in
connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 1999.
(21) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended September 30, 1999.
(22) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended March 31, 2000.
19
(23) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued December 5, 2000 in
connection with the Company's Form 10 -Q Quarterly Report for the
quarterly period ended June 30, 2000.
(24) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 2000.
(25) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued June 20, 2001 in
connection with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
(26) Filed in connection with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.
(27) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended September 30, 2001.
(28) Filed in connection with the Company's Current Report on Form 8-K filed
with the SEC on June 29, 2001.
(29) Filed as Appendix A to the Company's Definitive Proxy Statement on
Schedule 14A filed with the SEC on May 11, 2001.
(30) Filed in connection with the Company's Current Report on Form 8-K filed
with the SEC on March 27, 2002. Certain confidential portions deleted
pursuant to Order Granting Application for Confidential Treatment
issued in connection with the Company's Current Report on Form 8-K
filed with the SEC on March 27, 2002.
(31) Filed in connection with the Company's Form S-3 Registration Statement
filed with the SEC on October 10, 2001 (File No. 333-71340).
(32) Incorporated by reference to Exhibit A to the proxy statement contained
in the Company's Definitive Schedule 14A filed with the SEC on April
25, 2000.
(33) Incorporated by reference to Exhibit F to the proxy statement contained
in the Company's Definitive Schedule 14A filed with the SEC on May 11,
2001.
(34) Filed in connection with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.
(35) Filed herewith.
(36) Certain confidential portions deleted pursuant to Application for
Confidential Treatment filed on even date herewith.
20