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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-22718
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RACOTEK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE #41-1636021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7301 OHMS LANE, SUITE 200, MINNEAPOLIS, MINNESOTA, 55439
(Address of principal executive offices, including zip code)
(612) 832-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class September 30, 1997
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Common Stock, $.01 par value 24,964,396
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THIS REPORT CONSISTS OF 17 SEQUENTIALLY NUMBERED PAGES. THE EXHIBIT INDEX
APPEARS ON SEQUENTIALLY NUMBERED PAGE 13.
RACOTEK, INC.
INDEX
PART I -- Financial Information
Item 1. Financial Statements Page No.
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Statements of Operations
Three Months Ended September 30, 1997 and 1996 3
and Nine Months Ended September 30, 1997 and 1996
Balance Sheets
September 30, 1997 and December 31, 1996 4
Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II -- Other Information
Items
1-5. Not applicable 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RACOTEK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1997 1996 1997 1996
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NET REVENUES:
PRODUCTS $153 $548 $714 $1,240
SERVICES 883 1,326 3,503 3,891
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1,036 1,874 4,217 5,131
COST AND EXPENSES:
COST OF PRODUCTS 588 358 1,199 1,865
COST OF SERVICES 1,261 865 3,488 2,708
RESEARCH AND DEVELOPMENT 889 1,149 2,878 3,197
SALES AND MARKETING 942 1,253 3,616 4,795
GENERAL AND ADMINISTRATIVE 1,310 402 2,211 1,581
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LOSS FROM OPERATIONS (3,954) (2,153) (9,175) (9,015)
INTEREST INCOME 120 181 354 615
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NET LOSS ($3,834) ($1,972) ($8,821) ($8,400)
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NET LOSS PER SHARE ($0.15) ($0.08) ($0.35) ($0.35)
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NUMBER OF SHARES USED IN COMPUTATION 24,932 24,473 24,912 24,276
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The accompanying notes are an integral part of the financial statements.
3
RACOTEK, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
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(UNAUDITED)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $3,468 $2,956
SHORT-TERM INVESTMENTS 3,000 8,991
ACCOUNTS RECEIVABLE, NET 889 1,616
INVENTORIES - 374
PREPAID EXPENSES AND OTHER CURRENT ASSETS 95 294
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TOTAL CURRENT ASSETS 7,452 14,231
PROPERTY AND EQUIPMENT, NET 907 1,932
RESTRICTED CASH 355 470
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET - 121
OTHER LONG-TERM ASSETS 43 165
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TOTAL ASSETS $8,757 $16,919
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
ACCOUNTS PAYABLE $190 $656
ACCRUED EXPENSES 1,684 882
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TOTAL CURRENT LIABILITIES 1,874 1,538
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COMMITMENTS
STOCKHOLDERS' EQUITY :
COMMON STOCK, $0.01 PAR VALUE, 35,000 SHARES
AUTHORIZED, 24,964 AND 24,740 ISSUED AND
OUTSTANDING AT SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996, RESPECTIVELY 250 247
ADDITIONAL PAID-IN CAPITAL 71,198 70,878
ACCUMULATED DEFICIT (64,565) (55,744)
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TOTAL STOCKHOLDERS' EQUITY 6,883 15,381
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,757 $16,919
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The accompanying notes are an integral part of the financial statements.
4
RACOTEK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS) NINE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($8,821) ($8,400)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 899 678
WRITE-DOWN OF FIXED ASSETS 519 -
PROVISION FOR BAD DEBTS 90 237
WRITE-DOWN OF INVENTORIES 207 900
AMORTIZATION OF DISCOUNTS ON INVESTMENTS (9) (33)
STOCK ISSUED FOR CONSULTING SERVICES 80 -
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 637 (149)
INVENTORIES 167 110
PREPAID EXPENSES AND OTHER CURRENT ASSETS 199 308
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 336 (350)
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NET CASH USED IN OPERATING ACTIVITIES (5,696) (6,699)
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF INVESTMENTS (1,000) (15,746)
PROCEEDS FROM MATURITY OF INVESTMENTS 7,000 22,013
PURCHASE OF PROPERTY AND EQUIPMENT (102) (213)
OTHER (48) -
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NET CASH PROVIDED FROM INVESTING ACTIVITIES 5,850 6,054
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISES OF STOCK OPTIONS 243 134
CHANGES IN RESTRICTED CASH 115 115
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NET CASH PROVIDED FROM FINANCING ACTIVITIES 358 249
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NET CHANGE IN CASH AND CASH EQUIVALENTS 512 (396)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,956 4,397
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CASH AND CASH EQUIVALENTS, END OF PERIOD $3,468 $4,001
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The accompanying notes are an integral part of the financial statements.
5
NOTES TO FINANCIAL STATEMENTS
Note A. Basis of Presentation:
The unaudited financial statements of Racotek, Inc. ("Racotek" or the "Company")
as of September 30, 1997 and for the periods ended September 30, 1997 and 1996,
reflect, in the opinion of management, all adjustments (which, except as noted
below, include only normal recurring adjustments) necessary to fairly state the
financial position at September 30, 1997, and the results of operations and cash
flows for the reported periods. The results of operations for any interim
period are not necessarily indicative of the results to be expected for any
other interim period or for the full year. The year-end balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. These financial
statements should be read in conjunction with the Company's audited financial
statements and related notes for the year ended December 31, 1996, which were
included in the Company's 1996 Annual Report and incorporated by reference in
its 1996 Annual Report on Form 10-K.
In March 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings per Share," which the Company will adopt effective for its 1997 year-
end reporting. The Company will be required to report basic net income (loss)
per share based on weighted average common shares outstanding, without
considering common equivalent shares, and diluted net income (loss) per share
based on weighted average common and, when dilutive, common equivalent shares
outstanding. Basic and diluted net income (loss) per share would be equivalent
to the Company's current reporting of net loss per share.
Note B. Selected Balance Sheet Information (in thousands):
September 30, 1997 December 31, 1996
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(Unaudited)
Accounts receivable, net:
Accounts receivable $1,129 $1,956
Less allowance for doubtful accounts (240) (340)
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$ 889 $1,616
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Property and equipment, net:
Computer equipment $1,460 $3,064
Furniture and equipment 679 816
Leasehold improvements 107 213
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2,246 4,093
Less accumulated depreciation and
amortization (1,339) (2,161)
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$907 $1,932
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During the third quarter of 1997, the Company wrote-off approximately $519,000
of fixed assets in connection with the reduction in the number of employees and
the consolidation and closing of facilities.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN
"FACTORS THAT MAY AFFECT FUTURE RESULTS" AS WELL AS THOSE IDENTIFIED IN THE
COMPANY'S OTHER SEC FILINGS.
OVERVIEW
Racotek provides solutions to customers that allow them to increase
the productivity and value of their mobile workers. To accomplish this,
Racotek provides consulting services, wireless networking software and
network management support. During the third quarter of 1997, the Company
reduced its workforce from approximately 95 employees to approximately 45
employees; consolidated and closed several facilities; and reduced the
carrying value of certain assets no longer expected to be used in operations.
As a result of these actions, the Company recorded one-time charges totaling
approximately $1,900,000 during the third quarter. The Company took these
actions because of slower than expected revenue growth. Although these
actions reduced the Company's operating expense level to under $2,000,000 per
quarter the Company expects to incur losses through the remainder of 1997 and
into 1998. The Company must increase its revenue in order to reach
profitability. The Company currently derives most of its revenue from systems
integration services including system planning and design, software
development, systems integration, training and installation management. In
the long-term, the Company believes that the recurring revenue from providing
monthly network support will constitute a substantial source of revenue.
RESULTS OF OPERATIONS
NET REVENUES
During 1996, the Company made the decision to discontinue the production,
purchase and distribution of SMR products. As a result of this decision, and
as a result of the Company's decision to promote the sale of its system
integration services rather than the sale of its software products, product
revenues for the nine months ended September 30, 1997, were $714,000, down
from $1,240,000 for the nine months ended September 30, 1996. Similarly,
product revenues decreased from $548,000 for the quarter ended September 30,
1996 to $153,000 for the quarter ended September 30, 1997. The Company
expects product revenues, which will consist primarily of wireless networking
software, to fluctuate based on the timing and size of client projects.
Service revenues for the nine months ended September 30, 1997, were
$3,503,000, down from $3,891,000 for the nine months ended September 30,
1996. Service revenues for the quarter ended September 30, 1997, were
$883,000, down from $1,326,000 for the quarter ended September 30, 1996.
These decreases were due to the shift away from the small, technical projects
the Company was engaged in during the prior period in order to create
capacity to handle large consulting and integration services projects. The
Company derives a substantial amount of its revenues from a small number of
customers. Accordingly, the timing and amount of integration services work
performed for these customers may cause the Company's service revenues to
fluctuate. The Company expects continued volatility in service revenues
throughout the remainder of 1997 and into 1998.
7
COST OF REVENUES
Cost of product revenues decreased from $1,865,000 for the nine months
ended September 30, 1996, to $1,199,000 for the nine months ended September
30, 1997. The decrease is primarily due to a $900,000 charge recorded in the
first quarter of 1996, resulting from the write-down of the Company's
remaining SMR inventories to their net realizable values at that time, as a
result of the Company's decision to discontinue the SMR products described
above. Cost of product revenues for the quarter ended September 30, 1997,
were $588,000, up from $358,000 for the quarter ended September 30, 1996. As
discussed above, the Company recorded several one-time charges in the third
quarter of 1997. These charges included approximately $425,000 of costs
incurred to complete the Company's exit from the SMR products business. The
Company expects the cost of product revenues to be significantly less during
the remainder of 1997 and into 1998.
Cost of service revenues increased from $865,000 and $2,708,000 for the
three and nine months ended September 30, 1996, respectively, to $1,261,000 and
$3,488,000 for the three and nine months ended September 30, 1997, respectively.
The previously discussed one-time charges recorded during the third quarter of
1997 included approximately $211,000 of severance and related costs associated
with reducing the size of the integration services workforce. The Company
expects the cost of services to fluctuate based on service revenues.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased from $1,149,000 and $3,197,000
for the three and nine months ended September 30, 1996, respectively, to
$889,000 and $2,878,000 for the three and nine months ended September 30, 1997,
respectively. As a result of the focus on systems integration services rather
than product sales, the research and development staff was reduced during the
third quarter of 1997. This resulted in a charge of approximately $209,000 for
severance and related costs during the third quarter. Despite this charge,
research and development expenses were lower than one year ago and are expected
to decline further during the remainder of 1997 and into 1998.
SALES AND MARKETING
Sales and marketing expenses were $3,616,000 for the nine months ended
September 30, 1997, down from $4,795,000 for the nine months ended September 30,
1996. For the three months ended September 30, 1997, sales and marketing
expenses were $942,000 compared to $1,253,000 for the same period in the prior
year. In connection with the Company's focus on systems integration services, a
charge of approximately $202,000 was recorded in the third quarter of 1997 for
severance and facility consolidation costs in the sales and marketing area. As
a result of re-focusing the Company's sales and marketing efforts, the Company
expects sales and marketing expenses during the remainder of 1997 and into 1998,
to be less than they were in the third quarter of 1997.
8
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $402,000 and $1,581,000
for the three and nine months ended September 30, 1996, respectively, to
$1,310,000 and $2,211,000 for the three and nine months ended September 30,
1997, respectively. The increase is primarily due to approximately $803,000 of
facility and relocation charges recorded in the third quarter of 1997. The
Company expects general and administrative expense levels during the remainder
of 1997 and into 1998 to be less than they were in the third quarter of 1997.
INTEREST INCOME
Interest income decreased from $181,000 for the quarter ended September
30, 1996, to $120,000 for the third quarter of 1997. Interest income for the
nine months ended September 30, 1997 was $354,000, down from $615,000 for the
nine months ended September 30, 1996. The decrease is principally the result
of a decrease in investments, which were used to fund operating activities
during 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had no significant capital spending
or purchase commitments and had cash and investments totaling $6,468,000 and
working capital of $5,578,000. For the nine months ended September 30, 1997,
the Company used $5,696,000 of cash in its operating activities, compared to
$6,699,000 of cash for the nine months ended September 30, 1996. The amount of
cash used in operating activities decreased as a result of cost-reduction
efforts and improved collection of accounts receivable. The Company expects the
amount of cash used in operating activities to continue to decrease as a result
of these cost-reduction efforts, but expects to continue to incur negative cash
flows from operating activities through the remainder of 1997 and into 1998.
Net cash of $5,850,000 provided by investing activities during the nine months
ended September 30, 1997 resulted primarily from investments that matured during
the period, net of investment purchases. The Company generated $243,000 of cash
from financing activities for the nine months ended September 30, 1997, from the
exercise of stock options.
With the implementation of the cost-reduction measures, the Company
believes its existing capital resources will be sufficient to meet its cash
requirements through 1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS:
There can be no assurance that the Company's business will grow as
anticipated or that the Company will achieve or sustain profitability on a
quarterly or annual basis in the future. The Company derives a substantial part
of its revenues from a small number of clients whom, after evaluating the
Company's capabilities, proceed to engage the Company to design, implement and
deploy their mobile computing systems. A decision by any one of these clients
to delay a mobile computing project may have a material adverse effect on the
Company's business and results of operations.
9
The Company has decided to focus its efforts in the near term on selling
its system integration services to customers in a small number of vertical
markets, such as field service. Although the Company believes that such
specialization will increase its effectiveness, it also means that the Company's
failure in any one of these areas will have a significant adverse impact on
overall Company performance.
The Company's consulting and integration services cannot be standardized
and mass-marketed as readily as software and they may not provide as
consistent a source of recurring revenues as monthly network support is
expected to provide. The Company must institute methodologies to re-use
software components in order to improve gross margin rates.
In order for the Company's revenues from consulting and integration
services to continue to grow, the Company must continue to add more customers
and larger projects to plan, design and implement mobile computing systems.
The Company's inability to identify customers for its large-scale consulting
and integration services and/or the Company's inability to use its consulting
and integration services to obtain additional customers for its software
licenses and network support services would materially and adversely affect
the growth of its business.
The Company depends on third-party hardware manufacturers to develop and
maintain computer hardware devices that are suitable for mobile data
applications, such as handheld and vehicle-mounted devices, and to make these
devices available to customers at attractive prices. The prices for these
hardware devices have declined and are expected to continue to decline. The
Company's ability to sell its products and services is affected by the price of
these hardware devices. Unless dependable, fully featured hardware devices are
available at attractive prices, customers will be reluctant to implement mobile
data systems and become Racotek customers, which would materially and adversely
affect the Company's business.
Competition in the communication industry is intense. Major software
development companies, as well as computer, database and communication companies
are possible sources of future direct competition for the Company's products and
services. Many of the Company's current and possible direct competitors have
financial, technical, marketing, sales, manufacturing, distribution and other
resources substantially greater than those of the Company. In addition to
direct competitors, the Company presently faces competition from providers of
other mobile communication services that customers might view as substitutes for
wireless data transmission, such as cellular telephone, paging and conventional
two-way voice radio.
In addition to the factors listed above, actual results could vary
materially from the foregoing forward-looking statements due to the Company's
inability to hire and retain qualified personnel, the risk that the Company
may need to enhance products and services beyond what is currently planned,
the levels of promotion and marketing required to promote the Company's
products and services so as to attain a competitive position in the
marketplace, or other risks and uncertainties identified in this Form 10-Q
and the Company's other filings with the SEC.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RACOTEK, INC.
By: Michael Fabiaschi
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Michael Fabiaschi
President and Chief Executive Officer
By: David J. Maenke
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David J. Maenke
Chief Financial Officer and Secretary
Dated: October 28, 1997
12
EXHIBIT INDEX
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EXHIBIT NUMBER TITLE SEQUENTIALLY NUMBERED PAGE
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10.01** Letter agreement by and between Registrant and Norm
Smith dated September 29, 1997. 14
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10.02** Letter agreement by and between Registrant and Vladi Kelman
dated September 25, 1997. 15
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10.03** Letter agreement by and between Registrant and Dave Maenke
dated September 25, 1997. 16
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10.04** Letter agreement by and between Registrant and Paul Edelhertz
dated September 25, 1997 17
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**Management contract or compensation plan.
13