1
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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from _______________ to ______________
Commission file number 0-26140
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HIGHWAYMASTER 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)
16479 Dallas Parkway, Suite 710, Dallas, Texas 75248
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 732-2500
--------------
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 August 7, 1998
- ---------------------------- -----------------------------------
Common Stock, $.01 par value 24,898,986
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HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
Form 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 1
Consolidated Statements of Operations for the
three months and six months ended June 30,
1998 and 1997 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 3
Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 1998 4
Notes to Consolidated Financial Statements 5-6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 10
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 2 Changes in Securities 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
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PART I - FINANCIAL INFORMATION
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
ASSETS
June 30, December 31,
1998 1997
---------- ------------
Current assets:
Cash and cash equivalents $ 18,751 $ 26,777
Temporary investments - current portion 11,332 19,709
Accounts receivable, net 16,011 13,963
Other short-term receivables 492 916
Inventory 2,033 3,145
Pledged securities - current portion 17,187 17,187
Prepaid expenses 213 279
---------- ----------
Total current assets 66,019 81,976
Network, equipment and software, net 18,810 15,482
Temporary investments - long-term portion 9,235 13,626
Pledged securities - long-term portion 23,297 30,216
Other assets, net 4,788 5,173
---------- ----------
Total assets $ 122,149 $ 146,473
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,165 $ 6,262
Telecommunications costs payable 4,141 2,192
Accrued interest payable 5,061 4,679
Other current liabilities 5,952 4,114
---------- ----------
Total current liabilities 18,319 17,247
Senior notes payable 121,216 120,956
---------- ----------
Total liabilities 139,535 138,203
---------- ----------
Stockholders' equity (deficit):
Preferred stock -- --
Common stock 252 252
Additional paid-in capital 149,481 149,481
Accumulated deficit (166,572) (140,916)
Treasury stock (547) (547)
---------- ----------
Total stockholders' equity (deficit) (17,386) 8,270
Commitments and contingencies
---------- ----------
Total liabilities and stockholders' equity (deficit) $ 122,149 $ 146,473
========== ==========
See accompanying notes to consolidated financial statements.
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HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Product $ 5,459 $ 8,417 $ 10,086 $ 14,249
Service 12,234 5,948 23,330 11,006
-------- -------- -------- --------
Total revenues 17,693 14,365 33,416 25,255
-------- -------- -------- --------
Cost of revenues:
Product 4,159 7,150 7,906 12,148
Service 8,555 5,064 17,270 8,671
-------- -------- -------- --------
Total cost of revenues 12,714 12,214 25,176 20,819
-------- -------- -------- --------
Gross profit 4,979 2,151 8,240 4,436
-------- -------- -------- --------
Expenses:
General and administrative 6,858 2,398 10,192 6,003
Customer service 3,061 2,769 6,425 5,000
Sales and marketing 2,328 1,963 4,507 4,055
Engineering 1,671 1,095 3,080 2,212
Network services center 438 254 835 538
Severance cost 445 -- 445 --
Depreciation and amortization 1,278 600 2,347 1,093
-------- -------- -------- --------
16,079 9,079 27,831 18,901
-------- -------- -------- --------
Operating loss (11,100) (6,928) (19,591) (14,465)
Interest income 1,485 285 2,827 448
Interest expense (4,452) -- (8,892) --
-------- -------- -------- --------
Loss before income taxes (14,067) (6,643) (25,656) (14,017)
Income tax provision -- -- -- --
-------- -------- -------- --------
Net loss ($14,067) ($ 6,643) ($25,656) ($14,017)
======== ======== ======== ========
Per share:
Basic and diluted net loss ($ 0.56) ($ 0.27) ($ 1.03) ($ 0.56)
======== ======== ======== ========
Weighted average number of shares outstanding 24,899 24,858 24,899 24,843
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six months ended
June 30,
----------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net loss ($25,656) ($14,017)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 2,347 1,093
Amortization of discount on notes payable 260 --
(Increase) in accounts receivable (2,048) (2,966)
Decrease in other receivables 472 790
Decrease in inventory 1,112 694
Increase (decrease) in accounts payable (3,097) 895
Increase in accrued expenses and other current liabilities 4,169 2,977
Other 213 (153)
-------- --------
Net cash used in operating activities (22,228) (10,687)
-------- --------
Cash flows from investing activities:
Additions to network and equipment (4,572) (1,191)
Additions to capitalized software (913) (2,062)
Decrease in pledged securities 6,919 --
Decrease in temporary investments 12,768 --
-------- --------
Net cash provided by (used in) investing activities 14,202 (3,253)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 202
-------- --------
Net cash provided by financing activities -- 202
-------- --------
(Decrease) in cash (8,026) (13,738)
Cash and cash equivalents, beginning of period 26,777 19,725
-------- --------
Cash and cash equivalents, end of period $ 18,751 $ 5,987
======== ========
Supplemental cash flow information:
Interest paid $ 8,212 $ --
======== ========
See accompanying notes to consolidated financial statements.
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HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Six months ended June 30, 1998
(UNAUDITED)
(in thousands, except share information)
Preferred Stock Common Stock Additional Treasury Stock
------------------- -------------------- Paid-in -------------------
Shares Amount Shares Amount Capital Shares Amount
------ -------- ---------- ------- -------- ------- --------
Stockholders' equity at December 31, 1997 1,000 $ -- 25,210,983 $252 $149,481 311,997 ($547)
------------------- ------------------- -------- -----------------
Net loss
Stockholders' equity at June 30, 1998 1,000 $ -- 25,210,983 $252 $149,481 311,997 ($547)
=================== =================== ======== =================
Accumulated
Deficit Total
----------- ---------
Stockholders' equity at December 31, 1997 ($140,916) $ 8,270
Net loss (25,656) (25,656)
--------- --------
Stockholders' equity at June 30, 1998 ($166,572) ($17,386)
========= ========
See accompanying notes to consolidated financial statements.
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HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(Unaudited)
1. BUSINESS OVERVIEW
The Company develops and implements mobile communications
solutions, including integrated voice, data and position location
services, to meet the needs of its customers. The initial application
for the Company's wireless enhanced services has been developed for,
and is marketed and sold to, companies which operate in the long-haul
trucking market. The Company provides long-haul trucking companies
with a comprehensive package of mobile communications and management
control services at a fixed rate per minute, thereby enabling its
trucking customers to effectively monitor the operations and improve
the performance of their fleets. The Company is currently developing
additional applications for its network to expand the range of trucking
companies that utilize its services and to address the needs of the
automotive and other markets.
Through 1997, the Company derived all of its revenues from the
long-haul trucking market from sales and installation of Mobile
Communication Units ("mobile units") and charges for its services. In
early 1998, the Company commenced marketing a mobile communication
solution applicable to broader segments of the trucking market.
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 consolidated financial
statements for the year ended December 31, 1997. 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. INVENTORIES
June 30, December 31,
1998 1997
----------- -----------
Complete systems $ 912,000 $ 1,370,000
Component parts 1,121,000 1,775,000
----------- -----------
$ 2,033,000 $ 3,145,000
=========== ===========
4. CONTINGENCIES
As previously reported, the Company is party to a lawsuit
filed in the U.S. District Court, Northern District of Texas, Dallas
Division against AT&T Corp. ("AT&T") and Lucent Technologies, Inc.
("Lucent"). Reference is made to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 for additional
information regarding this lawsuit.
In late 1997 the Company retained experts to analyze and
advise it with respect to various taxation issues. While this
evaluation and analysis is not yet complete, it involves the
identification of exemptions from taxation for certain types of
businesses or services, the confirmation of taxes currently being
passed through and the identification of sales tax issues needing
attention by the Company.
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Based on preliminary estimates of possible exposure to sales taxes for current
and prior periods, the Company recorded a provision for taxes and other related
costs in the amount of $1,300,000 at June 30, 1998. This estimate may vary
materially from the amount of taxes that the Company may determine are payable.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARABILITY
During 1997, the Company's service revenues were generated from mobile
units served by either a switching complex operated by AT&T (the " AT&T
Complex") or by the Company's Network Services Center ("NSC"). During the three
and six month periods ended June 30, 1997, the majority of the installed base of
mobile units was served by the AT&T Complex. During the three and six month
periods ended June 30, 1998, the entire installed base of mobile units was
served by the NSC. Historically, the amount of service revenue and related
expense recognized by the Company varied significantly based upon whether a
particular customer received service through the AT&T Complex or the NSC. In the
case of customers served through the AT&T Complex, service charges were
collected by AT&T. The Company recognized as revenue the portion of service
charges received from AT&T, with the remainder of the service charges retained
by AT&T as compensation for its cost of providing services. In the case of
customers served by the NSC, the entire amount of the service charges to
customers is recognized by the Company as revenue and additional operating and
service expenses are borne by the Company. The operating expenses associated
with the NSC are reflected in the Company's financial statements as general and
administrative expenses (customer billing, credit, and collection activities),
network services center (other third party and internal operating expenses) and
depreciation. Because of the difference in the economic relationships described
above, as a greater proportion of customers have been served by the NSC, the
Company recognized increased service revenues, which are offset by additional
operating and service expenses.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended
June 30, 1997
Total revenues increased from $14.4 million in 1997 to $17.7 million in
1998. Product revenues decreased from $8.4 million in 1997 to $5.5 million in
1998 primarily as a result of a 43.0% decrease in mobile units sold. Product
shipments in 1998 were less than the Company's expectations as a result of a
general slowness in the trucking industry, the absence of any major new
contracts and the introduction of the Series 3000 mobile unit did not generate
any significant sales volumes. The Company is currently reevaluating its plans
and strategy for the Series 3000 product. Service revenues increased to $12.2
million in 1998 as compared to $5.9 million in 1997 due to the combined effect
of (i) the increase in the installed base of mobile units to 37,082 at June 30,
1998 from 25,233 at June 30, 1997 and (ii) increased service revenues per
mobile unit. Average monthly revenue per mobile unit in 1998 increased to
$109.31 from $82.62 in 1997 since the entire installed base of mobile units was
served through the NSC in 1998, as compared to the majority of the installed
base being served through the AT&T Complex in 1997. See discussion under
"Comparability," above.
Cost of revenues in 1998 was $12.7 million compared to $12.2 million in
1997 reflecting a decrease in cost of product revenues, as a result of the
decrease in the number of units sold, offset by an increase in cost of service
revenues as a result of the increase in the installed base of mobile units in
service.
Product gross profit margin was 23.8% in 1998 compared to 15.1% in
1997. The improvement in product gross profit margin is primarily attributable
to a lower provision for warranty costs, and lower installation costs as a
result of fewer installations in the 1998 period.
Service gross profit margin was 30.1% in 1998 compared to 14.9% in
1997. The Company incurs certain costs for airtime usage that are not billable
to customers under current billing practices. During the three months ended June
30, 1997, the Company recorded an adjustment to increase cellular airtime cost,
a component of cost of service revenue, based on new billing data received in
July, 1997. This new billing data indicated that the portion of airtime usage
not billable to customers was higher than previously believed by the Company and
used as the basis for recording accounting estimates. The increase in cost of
cellular airtime paid for by the Company in relation to airtime billable to
customers caused the decrease in service gross profit margin for the 1997
period. A portion of the adjustment made to cellular airtime costs related to
the three months ended March 31, 1997. Excluding the portion of the adjustment
attributable to the prior
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quarter, the Company's service gross profit margin for the quarter ended June
30, 1997 would have been approximately 20%. The improvement in service gross
profit margin to 30.1% in 1998 reflects the changed economic relationships
described under "Comparability," and the effect of technical adjustments and
modifications implemented since July, 1997 to improve service gross profit
margin. The Company continues to evaluate the components of its service gross
profit margin to attempt to identify additional technical adjustments and
modifications that may enable it to improve its service gross profit margin.
General and administrative expenses increased to $6.9 million in 1998
compared to $2.4 million in 1997. Of this $4.5 million increase, approximately
$1.5 million represents a provision for bad debts related to the Company's NSC
accounts receivable, and approximately $1.3 million represents a charge to
accrue an estimated liability for sales taxes and associated costs as described
in Note 4 to the accompanying consolidated financial statements. The $1.5
million provision for bad debts relates to personal calling accounts activated
in connection with a promotion designed to increase minutes of airtime usage. As
a result of the unfavorable experience in connection with these personal account
customers, the Company has discontinued the promotion and is changing the credit
process with respect to personal accounts in a attempt to reduce the Company's
credit risk. The remainder of the increase in general and administrative
expenses is represented primarily by (i) ordinary and customary costs associated
with billing, credit and collection activities for the NSC, (ii) growth in the
number of employees and salary increases, (iii) consulting fees in connection
with evaluation of the Company's information systems and efforts to improve
service gross profit margin, and (iv) professional fees, of which legal fees in
connection with the AT&T litigation are the most significant component.
Customer service expenses increased to $3.1 million in 1998 compared to
$2.8 million in 1997, attributable to the increasing emphasis on improving
response to customer needs, improvement in the technical operations of the
network and growth in the installed base of mobile units sold and in service.
Sales and marketing expenses increased to $2.3 million in 1998 compared
to $2.0 million in 1997 primarily as a result of increased advertising expense
related to AutoLink, the Series 3000 mobile unit and Platinum service.
Engineering expenses increased to $1.7 million in 1998 compared to $1.1
million in 1997. This increase is primarily attributable to increases in payroll
related costs as a result of an increase in the number of engineering personnel
devoted to continuation engineering and new product development, and other costs
specifically related to the development and release of the AutoLink service.
Severance costs of $0.4 million relate to the reduction in the number
of employees pursuant to a reorganization announced in June, 1998. The reduction
in the number of employees primarily reflects the elimination of redundancies
that had been necessary as a result of having customers served by both the AT&T
Complex and the NSC. All customers were served by the NSC as of December 31,
1997.
Depreciation and amortization expense increased to $1.3 million in 1998
compared to $0.6 million in 1997 reflecting the additional depreciation and
amortization as a result of additions to network, equipment and capitalized
software during 1997.
Interest income was $1.5 million in 1998 compared to $0.3 million in
1997. Interest expense was $4.5 million in 1998 compared to zero in 1997. The
change in these relationships reflects the higher average outstanding balances
during 1998 in cash and cash equivalents, temporary investments and notes
payable as a result of the issuance of the Senior Notes in September, 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended
June 30, 1997
Total revenues increased to $33.4 million in 1998 compared to $25.3
million in 1997. Product revenues decreased from $14.2 million in 1997 to $10.1
million in 1998 primarily as a result of a 36.0% decrease in mobile units sold.
Product shipments in 1998 were less than the Company's expectations as a result
of a general slowness in the trucking industry, the absence of any major new
contracts and the introduction of the Series 3000 mobile unit did not generate
any significant sales volumes. The Company is currently reevaluating its plans
and strategy for the Series 3000 product. Service revenues increased to $23.3
million in 1998 as compared to $11.0 million in 1997 due to the combined effect
of (i) the increased installed base of mobile units and (ii)
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increased service revenues per mobile unit. Average monthly revenue per mobile
unit in 1998 increased to $107.58 from $80.48 in 1997 since the entire installed
base of mobile units was served through the NSC in 1998, as compared to the
majority of the installed base being served through the AT&T Complex in 1997.
Cost of revenues in 1998 was $25.2 million compared to $20.8 million in
1997 reflecting a decrease in cost of product revenues, as a result of the
decrease in the number of units sold, offset by an increase in cost of service
revenues as a result of the increase in the installed base of mobile units in
service.
Product gross profit margin was 21.6% in 1998 compared to 14.7% in
1997. The improvement in product gross profit margin is primarily attributable
to a lower provision for warranty costs.
Service gross profit margin was 26.0% in 1998 compared to 21.2% in
1997. The Company incurs certain costs for airtime usage that are not billable
to customers under current billing practices. During the six months ended June
30, 1997, the Company recorded an adjustment to increase cellular airtime cost,
a component of cost of service revenue, based on new billing data received in
July, 1997. This new billing data indicated that the portion of airtime usage
not billable to customers was higher than previously believed by the Company and
used as the basis for recording accounting estimates. The increase in cost of
cellular airtime paid for by the Company in relation to airtime billable to
customers caused the decrease in service gross profit margin for the 1997
period. The improvement in service gross profit margin to 26.0% in 1998 reflects
the changed economic relationships described under "Comparability," above, and
the effect of technical adjustments and modifications implemented since July,
1997 to improve service gross profit margin. The Company continues to evaluate
the components of its service gross profit margin to attempt to identify
additional technical adjustments and modifications that may enable it to improve
its service gross profit margin.
General and administrative expenses increased to $10.2 million in 1998
compared to $6.0 million in 1997. Of this $4.2 million increase, approximately
$1.5 million represents a provision for bad debts related to the Company's NSC
accounts receivable, and approximately $1.3 million represents a charge to
accrue an estimated liability for sales taxes and associated costs
as described in Note 4 to the accompanying consolidated financial statements.
The $1.5 million provision for bad debts relates to personal calling accounts
activated in connection with a promotion designed to increase minutes of airtime
usage. As a result of the unfavorable experience in connection with these
personal account customers, the Company has discontinued the promotion and is
changing the credit process with respect to personal accounts in a attempt to
reduce the Company's credit risk. The remainder of the increase in general and
administrative expenses is represented primarily by (i) ordinary and customary
costs associated with billing, credit and collection activities for the NSC ,
(ii) growth in the number of employees and salary increases, (iii) consulting
fees in connection with evaluation of the Company's information systems and
efforts to improve service gross profit margin, and (iv) professional fees, of
which legal fees in connection with the AT&T litigation are the most significant
component.
Customer service expenses increased to $6.4 million in 1998 compared to
$5.0 million in 1997, attributable to the increasing emphasis on improving
response to customer needs, improvement in the technical operations of the
network and growth in the number of mobile units shipped and in service.
Sales and marketing expenses increased to $4.5 million in 1998 compared
to $4.1 million in 1997 primarily as a result of increased advertising expense
related to AutoLink, the Series 3000 mobile unit and Platinum service.
Engineering expenses increased to $3.1 million in 1998 compared to $2.2
million in 1997. This increase is primarily attributable to increases in payroll
related costs as a result of an increase in the number of engineering personnel
devoted to continuation engineering and new product development, and other costs
specifically related to the development and release of the AutoLink service.
Severance costs of $0.4 million relate to the reduction in the number
of employees pursuant to a reorganization announced in June, 1998. The reduction
in the number of employees primarily reflects the elimination of redundancies
that had been necessary as a result of having customers served by both the AT&T
Complex and the NSC. All customers were served by the NSC as of December 31,
1997.
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Depreciation and amortization expense increased to $2.3 million in 1998
compared to $1.1 million in 1997 reflecting the additional depreciation and
amortization as a result of additions to network, equipment and capitalized
software during 1997.
Interest income was $2.8 million in 1998 compared to $0.4 million in
1997. Interest expense was $8.9 million in 1998 compared to zero in 1997. The
change in these relationships reflects the higher average outstanding balances
during 1998 in cash and cash equivalents, temporary investments and notes
payable as a result of the issuance of the Senior Notes in September,1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash consumed by operating activities during the six months ended
June 30, 1998 was $22.2 million due primarily to a $25.7 million loss from
operations. The Company's cash, cash equivalents and temporary investments
balance at June 30, 1998 was $39.3 million. Based on the Company's 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 approximately the next ten to twelve months.
However, the Company's future cash flow from operations and operating
requirements may vary depending on a number of factors, including the rate of
installation of mobile units, the level of competition, success of new products,
general economic conditions and other factors beyond the Company's control.
In September 1997, the Company issued $125,000,000 of senior notes (the
"Senior Notes") in a Rule 144A offering. The Company has placed in escrow funds
which are sufficient to pay interest on the Senior Notes through September 15,
2000. After such date, the Company will be required to pay interest on the
Senior Notes on a semi-annual basis as a rate of 13 3/4% per annum.
The Company's capital resources may be insufficient to fund its
operating needs, capital expenditures and debt service requirements in the
long-term. The Company believes that, in order to address its long-term capital
requirements, it will need to take steps to (i) improve the efficiency of its
operations so as to reduce or eliminate its operating losses, (ii) curtail or
eliminate one or more new applications under development by the Company so as
to reduce its operating costs or (iii) obtain additional sources of debt or
equity financing. The Company's ability to obtain additional debt financing is
materially restricted under the terms of the indenture governing the Senior
Notes. There can be no assurance that the Company would be able to obtain
additional debt and equity financing on terms that it would regard as
satisfactory, if at all.
In July 1998, the Company commenced a reassessment of all facets of
its business strategy, operations and organizational structure with the
objective of making more efficient use of its limited capital resources and
refocussing its operating and capital expenditure plans.
FORWARD LOOKING STATEMENTS
This report includes "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. All statements other than
statements of historical fact included in this report, including without
limitation, certain statements in this Item 2 under the captions "---Results of
Operations" and "---Liquidity and Capital Resources," may constitute forward
looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations ("cautionary statements") are disclosed in this report and the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 (under
the caption "Business --- Risk Factors" and elsewhere). All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings --
AT&T Litigation. As previously reported, the Company is party
to a lawsuit filed in the U.S. District Court, Northern
District of Texas, Dallas Division against AT&T Corp. ("AT&T")
and Lucent Technologies, Inc. ("Lucent"). Reference is made to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 for additional information regarding
this lawsuit.
Item 2. Changes in Securities -- None.
Item 3. Defaults Upon Senior Securities -- None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Annual
Meeting") was held on May 26, 1998. At the Annual Meeting, the
stockholders of the Company (i) elected each of the persons
listed below to serve as a director of the Company until the
next Annual Meeting of Stockholders or until their respective
successors have been duly elected and qualified; and (ii)
ratified the selection of Price Waterhouse LLP as the
Company's independent accountants for the Company's fiscal
year ending December 31, 1998.
The Company had 24,898,986 shares of Common Stock outstanding
as of April 6, 1998, the record date for the Annual Meeting.
At the Annual Meeting, holders of a total of 19,975,389 shares
of Common Stock were present in person or represented by
proxy. The following sets forth information regarding the
results of the voting at the Annual Meeting:
Proposal 1: Election of Directors
Shares Voting Shares
Director In Favor Withheld
-------- ------------- --------
William C. Kennedy, Jr. 19,918,863 56,526
William C. Saunders 19,918,813 56,576
Stephen L. Greaves 19,920,413 54,976
Terry S. Parker 19,920,563 54,826
Gerry C. Quinn 19,918,113 57,276
Proposal 2: Ratification of Price Waterhouse as the Company's
Independent Accountants
Votes in favor: 19,965,776
Votes against: 5,080
Abstentions: 4,533
11
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Item 5. Other Information --
On June 24, 1998, the Company received notification from The
Nasdaq Stock Market, Inc. ("NASDAQ") that the Company was not
in compliance with the minimum bid price requirement for
listing on the Nasdaq National Market and that should
compliance not be demonstrated by September 24, 1998, that the
Company would be delisted at the opening of business on
September 28, 1998. At the present time, the Company is still
not in compliance with the minimum bid price requirement for
maintaining a Nasdaq National Market listing, which provides
that the bid price for the common stock must remain at or
above $5.00. In early August 1998, the Company's Board of
Directors authorized the Company, in the event that it is
unable to achieve compliance with the minimum bid price
requirement, to apply for the common stock to be admitted for
trading on the Nasdaq SmallCap Market. The Company has
commenced discussions with Nasdaq regarding the possible
reassignment of its common stock to the Nasdaq SmallCap
Market. There can be no assurance that the Company will be
able to achieve compliance with Nasdaq National Market
criteria or that the common stock will be admitted for trading
on the Nasdaq SmallCap Market.
As previously reported, the initial term of the contract
between the Company and GTE-TSI, pursuant to which GTE-TSI
provides certain functions that enable the Company to
instantly deliver calls nationwide, ended on March 14, 1998,
and the contract is continuing under its short term renewal
provisions. At the present time, the Company and GTE-TSI are
still engaged in negotiating the terms of a permanent contract
extension.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See the Index to Exhibits.
(b) Reports on Form 8-K -- None.
12
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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.
HIGHWAYMASTER COMMUNICATIONS, INC.
Date: August 12, 1998
By: /s/ William C. Saunders
-----------------------------------------
William C. Saunders
President and Chief Executive Officer
By: /s/ Jana Bell
-----------------------------------------
Jana Bell
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
13
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INDEX TO EXHIBITS
EXHIBIT
NUMBER TITLE
- ------ -----
3.1 - Certificate of Incorporation of the Company, as amended.(1)(9)
3.2 - Amended and Restated By-Laws of the Company.(13)
4.1 - Specimen of certificate representing Common Stock, $.01 par value, of
the Company.(1)
4.2 - Warrant Certificate, dated September 27, 1996, issued to SBW.(7)
4.3 - Recapitalization Agreement, dated September 27, 1996, by and among the
Company, the Erin Mills Stockholders, the Carlyle Stockholders and the
other persons named therein.(7)
4.4 - Amended and Restated Stockholders' Agreement, dated September
27, 1996, by and among the Company, SBW, the Erin Mills
Stockholders, the Carlyle Stockholders, the By-Word Stockholders
and the other persons named therein.(7)
4.5 - Indenture dated September 23, 1997 by and among the Company,
HighwayMaster Corporation and Texas Commerce Bank, National
Association.(12)
4.6 - Pledge Agreement dated September 23, 1997 by and among the Company,
Bear, Stearns & Co. Inc. and Smith Barney Inc.(12)
4.7 - Registration Rights Agreement dated September 23, 1997 by and among
the Company, HighwayMaster Corporation, Bear, Stearns & Co. Inc. and
Smith Barney Inc.(12)
4.8 - Warrant Agreement dated September 23, 1997 by and among the
Company, 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 - License Agreement, dated April 23, 1992, by and between Voice
Control Systems and the Company (as successor to By-Word
Technologies, Inc.)(1)
10.2 - Agency Agreement, dated February 1, 1993, between the Company
and Saunders, Lubinski & White, Inc.(1)
10.3 - Employment Agreement, dated February 4, 1994, by and between
HighwayMaster Corporation and William C. Kennedy, Jr., as
amended.(1)(5)
10.4 - Employment Agreement, dated February 4, 1994, by and between
HighwayMaster Corporation and William C. Saunders, as amended.(1)(5)
10.5 - Employment Agreement, dated November 23, 1994, by and between
HighwayMaster Corporation and Gordon D. Quick.(1)(5)
10.6 - Amended and Restated 1994 Stock Option Plan of the Company,
dated February 4, 1994, as amended.(1)(5)(6)
10.7 - Purchase Agreement, dated September 27, 1996, between the
Company and SBW.(7)
10.8 - Mobile Communications (Voice and Data) Services Agreement, dated
as of July 15, 1993, between the Company and EDS Personal
Communications Corporation.(1)(2)
10.9 - Services Agreement, dated March 14, 1995, between the Company
and GTE Telecommunications Services Incorporated.(1)(2)
10.10 - Services Agreement, dated March 20, 1996, between the Company
and GTE-Mobile Communications Service Corporation.(3)(4)
10.11 - Agreement, dated June 8, 1994, between the Company and
Truckstops of America, Inc.(1)
17
10.12 - Amendment dated November 16, 1995 to that certain Mobile
Communications (Voice and Data) Services Agreement, dated as of
July 15, 1993, between the Company and EDS Personal
Communications Corporation.(3)(4)
10.13 - Letter Agreement, dated April 5, 1995, between the Company and
IEX Corporation.(1)
10.14 - Product Development Agreement, dated December 21, 1995, between
the Company and IEX Corporation.(3)(4)
10.15 - Technical Services Agreement, dated September 27, 1996, between
the HM Corporation and SBW.(7)
10.16 - Letter Agreement, dated February 19, 1996, between the Company
and IEX Corporation.(3)
10.17 - Form of Adoption Agreement, Regional Prototype Cash or Deferred
Profit-Sharing Plan and Trust Sponsored by McKay Hochman Co., Inc.,
relating to the HighwayMaster Corporation 401(k) Plan.(1)
10.18 - Agreement, dated December 3, 1996, between the Company and
Pickett Racing.(8)
10.19 - Software Transfer Agreement, dated April 25, 1997 between the
Company and Burlington Motor Carriers, Inc.(9)(10)
10.20 - Purchase Agreement dated September 18, 1997 by and among the
Company, HighwayMaster Corporation, Bear, Stearns & Co. Inc. and
Smith Barney Inc.(12)
10.21 - Employment Agreement, dated December 12, 1995, by and between
HighwayMaster Corporation and William McCausland.(13)
10.22 - Employment Agreement, dated May 29, 1998, by and between HighwayMaster
Corporation and Jana Alfinger Bell. (14)
27 - Financial Data Schedule.(14)
- ---------
(1) Filed in connection with the Company's Registration
Statement on Form S-1, as amended (No. 33-91486) effective
June 22, 1995.
(2) Certain confidential portions deleted pursuant to Order
Granting Application for Confidential Treatment issued in
connection with Registration Statement on Form S-1 (No.
33-91486) effective June 22, 1995.
(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) Filed in connection with the Company's Current Report on
Form 8-K filed on October 7, 1996.
(8) Filed in connection with the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
(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) Filed in connection with the Company's Form 10-Q Quarterly
Report for the quarterly period ended June 30, 1997.
(12) Filed in connection with the Company's Registration
Statement on Form S-4, as amended (No. 333-38361).
18
(13) Filed in connection with the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
(14) Filed herewith.