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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 September 30, 1998
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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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HIGHWAYMASTER COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 51-0352879
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1155 Kas Drive, Richardson, Texas 75081
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 301-2000
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16479 Dallas Parkway, Suite 710, Dallas, Texas 75248
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(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 November 6, 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 September 30, 1998
and December 31, 1997 1
Consolidated Statements of Operations for the
three months and nine months ended
September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 3
Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended
September 30, 1998 4
Notes to Consolidated Financial Statements 5-6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 11
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults Upon Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
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
September 30, December 31,
1998 1997
------------- -------------
Current assets:
Cash and cash equivalents $ 22,471 $ 26,777
Temporary investments - current portion 6,421 19,709
Accounts receivable, net 12,572 13,963
Other short-term receivables 507 916
Inventory 1,223 3,145
Pledged securities - current portion 17,187 17,187
Prepaid expenses 164 279
------------- -------------
Total current assets 60,545 81,976
Network, equipment and software, net 21,018 15,482
Temporary investments - long-term portion 5,244 13,626
Pledged securities - long-term portion 14,974 30,216
Other assets, net 4,614 5,173
------------- -------------
Total assets $ 106,395 $ 146,473
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,233 $ 6,262
Telecommunications costs payable 5,004 2,192
Accrued interest payable 764 4,679
Other current liabilities 11,918 4,114
------------- -------------
Total current liabilities 20,919 17,247
Senior notes payable 121,346 120,956
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Total liabilities 142,265 138,203
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Stockholders' equity (deficit):
Preferred stock -- --
Common stock 252 252
Additional paid-in capital 149,481 149,481
Accumulated deficit (185,056) (140,916)
Treasury stock (547) (547)
------------- -------------
Total stockholders' equity (deficit) (35,870) 8,270
Commitments and contingencies
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 106,395 $ 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 Nine months ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
Product $ 3,937 $ 8,905 $ 14,023 $ 23,154
Service 11,257 7,267 34,587 18,273
---------- ---------- ---------- ----------
Total revenues 15,194 16,172 48,610 41,427
---------- ---------- ---------- ----------
Cost of revenues:
Product 3,006 7,067 10,912 19,215
Service 7,824 5,789 25,094 14,460
---------- ---------- ---------- ----------
Total cost of revenues 10,830 12,856 36,006 33,675
---------- ---------- ---------- ----------
Gross profit 4,364 3,316 12,604 7,752
---------- ---------- ---------- ----------
Expenses:
General and administrative 7,361 2,644 17,553 8,647
Customer service 2,378 2,998 8,803 7,998
Sales and marketing 1,602 1,852 6,109 5,907
Engineering 1,507 1,155 4,587 3,367
Network services center 627 419 1,462 957
Severance and AutoLink termination costs 4,555 -- 5,000 --
Depreciation and amortization 1,599 662 3,946 1,755
---------- ---------- ---------- ----------
19,629 9,730 47,460 28,631
---------- ---------- ---------- ----------
Operating loss (15,265) (6,414) (34,856) (20,879)
Interest income 1,263 241 4,090 689
Interest expense (4,482) (418) (13,374) (418)
---------- ---------- ---------- ----------
Loss before income taxes (18,484) (6,591) (44,140) (20,608)
Income tax provision -- -- -- --
---------- ---------- ---------- ----------
Net loss $ (18,484) $ (6,591) $ (44,140) $ (20,608)
========== ========== ========== ==========
Per share:
Basic and diluted net loss $ (0.74) $ (0.27) $ (1.77) $ (0.83)
========== ========== ========== ==========
Weighted average number of shares outstanding 24,899 24,868 24,899 24,857
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
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HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine months ended
September 30,
------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net loss $ (44,140) $ (20,608)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 3,946 1,755
Amortization of discount on notes payable 390 --
(Increase) decrease in accounts receivable 1,391 (4,904)
Decrease in other receivables 481 575
Decrease in inventory 1,922 720
Increase (decrease) in accounts payable (3,029) 1,964
Increase in accrued expenses and other current liabilities 6,701 3,219
Other 256 (603)
---------- ----------
Net cash used in operating activities (32,082) (17,882)
---------- ----------
Cash flows from investing activities:
Additions to network and equipment (7,996) (2,221)
Additions to capitalized software (1,140) (2,132)
Purchase of pledged securities -- (46,588)
Decrease in pledged securities 15,242 --
Decrease in temporary investments 21,670 --
---------- ----------
Net cash provided by (used in) investing activities 27,776 (50,941)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of senior notes, net -- 120,937
Proceeds from exercise of stock options -- 295
---------- ----------
Net cash provided by financing activities -- 121,232
---------- ----------
Increase (decrease) in cash (4,306) 52,409
Cash and cash equivalents, beginning of period 26,777 19,725
---------- ----------
Cash and cash equivalents, end of period $ 22,471 $ 72,134
========== ==========
Supplemental cash flow information:
Interest paid $ 8,594 $ --
========== ==========
See accompanying notes to consolidated financial statements.
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HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Nine months ended September 30, 1998
(UNAUDITED)
(in thousands, except share information)
Preferred Stock Common Stock Additional
------------------------ ----------------------- Paid-in
Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ----------
Stockholders' equity at December 31, 1997 1,000 $ -- 25,210,983 $ 252 $ 149,481
Net loss
---------- ---------- ---------- ---------- ----------
Stockholders' equity at September 30, 1998 1,000 $ -- 25,210,983 $ 252 $ 149,481
========== ========== ========== ========== ==========
Treasury Stock
---------------------- Accumulated
Shares Amount Deficit Total
---------- ---------- ------------ ----------
Stockholders' equity at December 31, 1997 311,997 $ (547) $ (140,916) $ 8,270
Net loss (44,140) (44,140)
--------- ---------- ---------- ----------
Stockholders' equity at September 30, 1998 311,997 $ (547) $ (185,056) $ (35,870)
========= ========== ========== ==========
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 its
commercial dispatch and tracking services in broader market segments.
The Company's revenues are derived primarily from the
long-haul trucking market from sales and installation of Mobile
Communication Units ("mobile units") and charges for its services.
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
September 30, December 31,
1998 1997
------------ -------------
Complete systems $ 457,000 $ 1,370,000
Component parts 756,000 1,775,000
------------ -------------
$ 1,223,000 $ 3,145,000
============ =============
4. SEVERANCE AND AUTOLINK TERMINATION COSTS
On August 31, 1998 the Company announced that it was halting
the development of its AutoLink service. As a consequence, the Company
recorded a charge of approximately $2,400,000 to recognize asset
impairments and record estimated amounts to be incurred to extinguish
contractual obligations associated with the AutoLink program. The
estimated cost of extinguishing these contractual obligations in the
amount of $1,600,000 is included in other current liabilities at
September 30, 1998.
On September 17, 1998 the Company announced a number of key
management and structural changes designed to more closely align the
Company's expenditures with its revenues. As a result of this
announcement and the AutoLink announcement, the Company reduced its
workforce by approximately 25% and recorded a charge of approximately
$2,200,000 for obligations under employment contracts and severance
payments to terminated employees. Of this amount,
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approximately $1,400,000 is included in other current liabilities at
September 30, 1998.
5. 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"). On September 16, 1998, Lucent transferred the patents at
issue in this lawsuit back to AT&T. 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. This evaluation and
analysis involved 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. 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 $1,800,000 during the nine months ended September 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 nine
months ended September 30, 1997, the majority of the installed base of mobile
units was served by the AT&T Complex. During the three and nine month periods
ended September 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 September 30, 1998 Compared to Three Months Ended
September 30, 1997
Total revenues decreased to $15.2 million in 1998 from $16.2 million in
1997. Product revenues declined to $3.9 million in 1998 million from $8.9
million in 1997 primarily as a result of a 61.3% decrease in mobile units sold.
Product shipments in 1998 were less than the Company's expectations primarily as
a result of the absence of any contribution from major new contracts. The
Company signed one major new contract in the third quarter of 1998. However, the
1,079 units shipped and placed in service during the third quarter in connection
with this contract are not reflected in product revenues because the earning
process was not complete at September 30, 1998. Service revenues increased to
$11.3 million in 1998 as compared to $7.3 million in 1997 due to the combined
effect of (i) the increase in the installed base of mobile units to 39,673 at
September 30, 1998 from 29,933 at September 30, 1997 and (ii) increased service
revenues per mobile unit. Average monthly revenue per mobile unit in 1998
increased to $94.75 from $87.82 in 1997 since the entire installed base of
mobile units was served through the NSC in 1998, as compared to slightly more
than half of the installed base being served through the NSC in 1997. See
discussion under "Comparability," above.
Cost of revenues in 1998 was $10.8 million compared to $12.9 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 23.6% in 1998 compared to 20.6% in
1997. The improvement in product gross profit margin is primarily attributable
to a lower provision for warranty costs.
Service gross profit margin was 30.5% in 1998 compared to 20.3% in
1997. The Company incurs certain costs for airtime usage that are not billable
to customers under current billing practices. The improvement in service gross
profit margin to 30.5% in 1998 reflects the changed economic relationships
described under "Comparability," and the effect of technical adjustments and
modifications implemented to reduce the amount of airtime costs incurred that
are not billable to customers. 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.
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General and administrative expenses increased to $7.4 million in 1998
compared to $2.6 million in 1997. Of this $4.8 million increase, approximately
$2.7 million represents a provision for bad debts as a result of a major
customer's filing for Chapter 11 bankruptcy protection, and approximately $0.5
million represents a charge to accrue an estimated liability for sales taxes
and associated costs as described in Note 5 to the accompanying consolidated
financial statements. 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) legal and
professional fees.
Customer service expenses decreased to $2.4 million in 1998 compared to
$3.0 million in 1997, primarily as a result of a decrease in the number of
employees in connection with a reorganization occurring in June, 1998, and
because installation and repair services formally provided by Company personnel
are now being provided under an outsourcing arrangement.
Sales and marketing expenses decreased to $1.6 million in 1998 compared
to $1.9 million in 1997 primarily as a result of the curtailment of advertising
expenditures to reduce operating expenses.
Engineering expenses increased to $1.5 million in 1998 compared to $1.2
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 and AutoLink termination costs of $4.6 million relate to a
reduction in the number of employees pursuant to a reorganization and the
halting of AutoLink development both of which were announced during the third
quarter of 1998. See Note 4 to the accompanying consolidated financial
statements.
Depreciation and amortization expense increased to $1.6 million in 1998
compared to $0.7 million in 1997 reflecting the additional depreciation and
amortization as a result of additions to network, equipment and capitalized
software during 1997 and the nine months ended September 30, 1998.
Interest income was $1.3 million in 1998 compared to $0.2 million in
1997. Interest expense was $4.5 million in 1998 compared to $0.4 million 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.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Total revenues increased to $48.6 million in 1998 compared to $41.4
million in 1997. Product revenues declined to $14.0 million in 1998 from $23.2
million in 1997 primarily as a result of a 45.3% decrease in mobile units sold.
Product shipments in 1998 were less than the Company's expectations primarily as
a result of the absence of any contribution from major new contracts and the
introduction of the Series 3000 mobile unit not generating any significant sales
volumes. After a reassessment of the market, the Series 3000 product offering
was discontinued. Service revenues increased to $34.6 million in 1998 as
compared to $18.3 million in 1997 due to the combined effect of (i) the
increased installed base of mobile units and (ii) increased service revenues per
mobile unit. Average monthly revenue per mobile unit in 1998 increased to
$102.47 from $80.75 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 $36.0 million compared to $33.7 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.
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Product gross profit margin was 22.2% in 1998 compared to 17.0% in
1997. The improvement in product gross profit margin is primarily attributable
to a lower provision for warranty costs.
Service gross profit margin was 27.4% in 1998 compared to 20.9% in
1997. The Company incurs certain costs for airtime usage that are not billable
to customers under current billing practices. The improvement in service gross
profit margin to 27.4% in 1998 reflects the changed economic relationships
described under "Comparability," above, and the effect of technical adjustments
and modifications implemented to reduce the amount of airtime costs incurred
that are not billable to customers. 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 $17.6 million in 1998
compared to $8.6 million in 1997. Of this $9.0 million increase, approximately
$4.2 million represents a provision for bad debts related to the Company's
accounts receivable, and approximately $1.8 million represents a charge to
accrue an estimated liability for sales taxes and associated costs as described
in Note 5 to the accompanying consolidated financial statements. Of the $4.2
million provision for bad debts, $1.5 million 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, during the second quarter of 1998 the Company
discontinued the promotion and changed the credit process with respect to
personal accounts in an attempt to reduce the Company's credit risk. The
additional $2.7 million provision is as a result of a major customer's filing
for Chapter 11 bankruptcy protection. 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) legal and
professional fees.
Customer service expenses increased to $8.8 million in 1998 compared to
$8.0 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 $6.1 million in 1998 compared
to $5.9 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 $4.6 million in 1998 compared to $3.4
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 and AutoLink termination costs of $5.0 million relate
primarily to a reduction in the number of employees pursuant to a reorganization
and the halting of AutoLink development both of which were announced during the
third quarter of 1998. See Note 4 to the accompanying consolidated financial
statements.
Depreciation and amortization expense increased to $3.9 million in 1998
compared to $1.8 million in 1997 reflecting the additional depreciation and
amortization as a result of additions to network, equipment and capitalized
software during 1997 and the nine months ended September 30, 1998.
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Interest income was $4.1 million in 1998 compared to $0.7 million in
1997. Interest expense was $13.4 million in 1998 compared to $0.4 million 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 nine months ended
September 30, 1998 was $32.1 million due primarily to a $44.1 million loss from
operations. The Company's cash, cash equivalents and temporary investments
balance at September 30, 1998 was $34.1 million. During the third quarter, the
Company halted the development of the AutoLink program and made a number of key
management and structural changes designed to more closely align the Company's
expenditures with its revenues. Based on the Company's projected operating
results, after considering these changes, the Company believes its existing
capital resources will be sufficient to fund its currently anticipated operating
needs and capital expenditure requirements for at least the next 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.
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) increase the installed base of
mobile units in service and improve the efficiency of its operations, so as to
reduce or eliminate its operating losses, or (ii) 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 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 at a rate of 13 3/4% per annum. Subsequent
to September 30, 1998, the Company purchased $21,395,000 of its Senior Notes on
the open market at a substantial discount from face value. The Company expects
that a portion of the purchase price for the retired senior notes will be funded
through the release of the allocable portion of the escrowed funds held for the
payment of interest thereon. The Company may continue to make purchases on the
open market in the event conditions remain favorable.
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YEAR 2000
The Company has undertaken certain internal testing procedures with
respect to its products and services to determine if any Year 2000 transition
problems exist. In order to provide greater assurance of year 2000 compliance,
the Company has also engaged an independent Year 2000 consultant to assist in
identifying any Year 2000 issues with its internal information technology
systems. It is anticipated that an independent enterprise-wide Year 2000
assessment will be completed about the end of 1998. Upon completion of the
independent Year 2000 assessment, remediation efforts will be addressed based
on any material problems identified. The Company is also in the process of
obtaining Year 2000 disclosures from third party vendors which provide products
and services to the Company's customers that interface with the products and
services provided by the Company. Until the independent enterprise-wide
assessment has been completed, the Company will be unable to estimate the cost
of Year 2000 remediation efforts.
The Company cannot ensure or predict whether customers will experience
Year 2000 problems arising from non-compliant third party products or
non-compliant third party services provided in connection with the Company's
products and services including but not limited to cellular carriers and their
networks, long distance carriers and their networks, the public switched
telephone network, computer systems upon which any of the Company's software
resides and/or third party software programs which interface and exchange date
with the Company's products.
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"). On September 16,
1998, Lucent transferred the patents at issue in this lawsuit
back to AT&T. 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 -- None
Item 5. Other Information --
As previously reported, The Nasdaq Stock Market, Inc.
("Nasdaq") notified the Company that it was not in compliance
with the minimum bid price requirement of $5.00 per share for
listing on the Nasdaq National Market and that the Company's
securities would be delisted on September 28, 1998 unless it
achieved compliance by September 24, 1998. That delisting has
been stayed pending the outcome of a hearing before a Nasdaq
Listing Qualifications Panel scheduled for November 19, 1998.
At the hearing the Company will continue to discuss the
possibility of moving to the Nasdaq Small Cap Market, among
other options for achieving compliance. Additionally, on
November 6, 1998, the Company received notification from
Nasdaq that it was not in compliance with the minimum market
value of public float of $15 million and that the Company's
securities would be delisted on February 4, 1999 unless it
achieved compliance with this requirement by February 3, 1999.
There can be no assurance that the Company will be able to
achieve compliance with the Nasdaq National Market criteria or
that the Company will be admitted for trading on the Nasdaq
SmallCap Market.
As previously reported, the Company was negotiating a
permanent contract extension with GTE-TSI whereby GTE-TSI
provides certain functions that enable the Company to
instantly deliver calls nationwide. At the present time, the
Company and GTE-TSI are still engaged in negotiating the
terms of a permanent contract extension.
As disclosed in the Current Report on Form 8-K filed by the
Company on September 17, 1998, several key management and
structural changes were undertaken in order to sharpen the
Company's focus on its core products and to achieve increased
operating efficiency. Jana A. Bell, who joined the Company in
June 1998 as Executive Vice President and Chief Financial
Officer, assumed the role of President and Chief Executive
Officer. William C. Saunders, former President and Chief
Executive Officer, accepted the position of Chairman of the
Board of Directors. William C. Kennedy, Jr. resigned from his
role as Chairman of the Board of Directors of the Company, but
retained a board seat and will serve as Vice Chairman of the
Board. The Company also flattened its organizational structure
to facilitate necessary changes. Concurrently with management
changes, the company downsized its workforce by approximately
one-fourth. In two previous announcements, HighwayMaster
indicated that it is sharpening its focus on the commercial
dispatch and tracking business. On August 31, 1998, the
Company announced that it was halting the development of its
AutoLink service. On the same day, the Company announced a
major contract with three subsidiaries of SBC Communications,
Inc. to install HighwayMaster units in 11,500 fleet vehicles.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See the Index to Exhibits.
(b) Reports on Form 8-K
On September 1, 1998, the Company filed a Current report on
Form 8-K related to its halting the development and launch of
AutoLink previously projected for late 1998.
On September 17, 1998, the Company filed a Current report on
Form 8-K related to key management and structural changes.
12
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.
HIGHWAYMASTER COMMUNICATIONS, INC.
Date: November 13, 1998
By: /s/ Jana A. Bell
---------------------------------------
Jana A. Bell
President and Chief Executive Officer
and Acting Chief Financial Officer
(Principal Financial Officer)
13
16
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 - Agreement and General Release, dated September 30, 1998, by and
between HighwayMaster Corporation and William C. Kennedy, Jr.(15)
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 Ahlfinger Bell.(14)
10.23 - Lease Agreement, dated March 20, 1998, between the Company and
Cardinal Collins Tech Center, Inc.(15)
27 - Financial Data Schedule.(15)
- ---------
(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.
18
(12) Filed in connection with the Company's Registration Statement on Form S-4,
as amended (No. 333-38361).
(13) Filed in connection with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(14) Filed in connection with the Company's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 1998.
(15) Filed herewith.