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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER 0-22718
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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 June 30, 1998
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Common Stock, $0.01 par value 25,079,858
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THIS REPORT CONSISTS OF 14 SEQUENTIALLY NUMBERED PAGES.
RACOTEK, INC.
INDEX
PART I -- Financial Information
Page No.
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Item 1. Financial Statements
Statements of Operations for the
Three and Six Months Ended June 30, 1998, and 1997 3
Balance Sheets as of
June 30, 1998, and December 31, 1997 4
Statements of Cash Flows for the
Six Months Ended June 30, 1998, and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Not Applicable
PART II -- Other Information
Items
1-5. Not applicable 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RACOTEK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
NET REVENUES:
SERVICES $1,385 $1,070 $2,719 $2,620
PRODUCTS 25 372 95 561
------ ------ ------ ------
1,410 1,442 2,814 3,181
COST AND EXPENSES:
COST OF SERVICES 686 1,147 1,462 2,227
COST OF PRODUCTS 10 432 16 611
RESEARCH AND DEVELOPMENT 473 964 905 1,989
SALES AND MARKETING 535 1,145 1,057 2,674
GENERAL AND ADMINISTRATIVE 251 423 491 901
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LOSS FROM OPERATIONS (545) (2,669) (1,117) (5,221)
INTEREST INCOME 56 107 132 234
------ ------ ------ ------
NET LOSS ($489) ($2,562) ($985) ($4,987)
------ ------ ------ ------
------ ------ ------ ------
NET LOSS PER SHARE - BASIC AND DILUTED ($0.02) ($0.10) ($0.04) ($0.20)
------ ------ ------ ------
------ ------ ------ ------
WEIGHTED AVERAGE SHARES OUTSTANDING 25,048 24,923 25,025 24,894
------ ------ ------ ------
------ ------ ------ ------
The accompanying notes are an integral part of the financial statements.
3
RACOTEK, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
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(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 3,145 $ 3,103
SHORT-TERM INVESTMENTS 1,002 2,233
ACCOUNTS RECEIVABLE, NET 678 561
PREPAID EXPENSES AND OTHER CURRENT ASSETS 110 195
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TOTAL CURRENT ASSETS 4,935 6,092
PROPERTY AND EQUIPMENT, NET 578 786
RESTRICTED CASH 355 355
OTHER LONG-TERM ASSETS 27 4
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TOTAL ASSETS $ 5,895 $ 7,237
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
ACCOUNTS PAYABLE $ 81 $ 6
ACCRUED EXPENSES 387 651
DEFERRED REVENUE 1 303
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TOTAL CURRENT LIABILITIES 469 960
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COMMITMENTS
STOCKHOLDERS' EQUITY :
COMMON STOCK, $0.01 PAR VALUE, 35,000 SHARES
AUTHORIZED, 25,080 AND 24,999 SHARES ISSUED
AND OUTSTANDING AT JUNE 30, 1998, AND
DECEMBER 31, 1997, RESPECTIVELY 251 250
ADDITIONAL PAID-IN CAPITAL 71,398 71,265
ACCUMULATED DEFICIT (66,073) (65,088)
PROMISSORY NOTE RECEIVABLE FROM STOCKHOLDER (150) (150)
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TOTAL STOCKHOLDERS' EQUITY 5,426 6,277
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,895 $ 7,237
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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) SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($985) ($4,987)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 245 488
PROVISION FOR BAD DEBTS - 60
AMORTIZATION OF DISCOUNTS ON INVESTMENTS (7) (12)
STOCK ISSUED FOR CONSULTING SERVICES - 65
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (117) 614
INVENTORIES - 121
PREPAID EXPENSES AND OTHER CURRENT ASSETS 85 138
CURRENT LIABILITIES (491) (202)
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NET CASH USED IN OPERATING ACTIVITIES (1,270) (3,715)
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF INVESTMENTS (2,327) (1,000)
PROCEEDS FROM MATURITY OF INVESTMENTS 3,565 6,000
PURCHASE OF EQUIPMENT (37) (102)
OTHER (23) (25)
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NET CASH PROVIDED FROM INVESTING ACTIVITIES 1,178 4,873
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISES OF STOCK OPTIONS 134 230
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NET CASH PROVIDED FROM FINANCING ACTIVITIES 134 230
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NET CHANGE IN CASH AND CASH EQUIVALENTS 42 1,388
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,103 2,956
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CASH AND CASH EQUIVALENTS, END OF PERIOD $3,145 $4,344
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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 June 30, 1998, and for the three and six month periods ended
June 30, 1998, and 1997, reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly state the financial position as of June 30, 1998, 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, 1997, which were included in the Company's
1997 Annual Report to Shareholders on Form 10-K.
Effective January 1, 1998, the Company adopted Statement of Position (SOP)
97-2, "Software Revenue Recognition." The adoption of SOP 97-2 has had no
effect on the Company's revenue recognition practices or any impact on the
Company's financial position or results of operations.
Note B. Selected Balance Sheet Information (in thousands):
June 30, 1998 December 31, 1997
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(Unaudited)
Accounts receivable, net:
Accounts receivable $ 900 $ 785
Less allowance for doubtful accounts (222) (224)
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$ 678 $ 561
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Property and equipment, net:
Computer equipment $ 1,482 $ 1,453
Furniture and equipment 679 679
Leasehold improvements 106 106
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2,267 2,238
Less accumulated depreciation and
Amortization (1,689) (1,452)
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$ 578 $ 786
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Note C. Net Loss per Share:
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," and has disclosed basic
and diluted net loss per share for the three and six month periods ended
June 30, 1998, and 1997 in accordance
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with this standard. The Company incurred net losses for these periods in
1998 and 1997, and excluded common equivalent shares from the diluted loss
per share computation, as their effect is anti-dilutive. If the Company
generates earnings in future periods the impact of common equivalent shares
may be dilutive. At June 30, 1998, the Company had 5,145,125 stock options
outstanding, which may be dilutive in future periods.
Note D. Subsequent Events:
On July 21, 1998, the Company signed a definitive agreement to acquire The
QuickSilver Group, Inc. (QuickSilver). Under the terms of the agreement, the
Company will pay approximately $500,000 in cash and issue $2,159,000 in
promissory notes payable, and 2,304,000 shares of its common stock in
exchange for all of the outstanding shares of QuickSilver capital stock. In
addition, the Company will grant approximately 903,000 stock options and a
stock purchase warrant to purchase approximately 457,000 shares of the
Company's common stock in exchange for outstanding QuickSilver stock options
and warrants, respectively. The acquisition, which is subject to QuickSilver
shareholder approval, will be accounted for as a purchase.
On August 7, 1998, the Company signed a non-binding letter of
intent to acquire Logical Information Systems, Inc. (LIS), a
provider of technology services focused on customer management
based in Dallas, Texas, for 885,581 shares of Company common stock
and $420,000 in promissory notes payable. The acquisition, which
is subject to due diligence and the execution of a definitive
agreement, may be terminated by either party without cause prior to
execution of the definitive agreement. The Company intends to
account for the acquisition of LIS as a purchase.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Racotek, Inc. ("Racotek" or the "Company") provides systems integration
solutions that enable its clients to deliver better service to their
customers and improve the productivity of their clients' workforce.
Historically focused on large companies with significant numbers of employees
engaged in field service, the Company is expanding its capabilities to
include all aspects of customer management systems integration. The Company's
services include business case evaluation, system planning and design,
software implementation, modification and development, training,
installation, change management, network management, and on-going support.
The Company is also developing a wireless data technology
that, in concept, will enable high-speed data transmission over
existing cellular infrastructures at rates not possible with
existing systems, without requiring dedicated frequencies or
diminishing the capacity or quality of voice transmissions. The
Company refers to this technology as "NextNet" and received a
United States patent registration for it in 1996. The Company has
since received several foreign patent registrations for the NextNet
technology. The Company is negotiating with third-party investors
to develop the NextNet technology in an entity that will be owned
jointly by Racotek and the third parties. In the planned
transaction, Racotek will contribute the intellectual property
underlying the NextNet technology to the entity and the independent
third parties will contribute funding to develop the technology.
It is currently contemplated that Racotek would not own a majority
of this entity following the investment by third parties. No
assurance can be given that the successful financing of this entity
will occur.
The origin of the Company was in selling proprietary hardware and
software that enabled data communication over wireless technology, such as
specialized mobile radio ("SMR") and cellular. During 1996, the Company
began a process to expand the services it could offer to its clients by
becoming a systems integrator focused on wireless data communication and
ceased production of its proprietary hardware.
In 1997, the Company completed its exit from its SMR hardware
operations, discontinued support for SMR technologies, except on a time and
materials basis, closed several facilities, disposed of assets no longer used
in operations, hired personnel with skills and experience in field service
and enterprise customer management (ECM), and eliminated personnel with
skills related to its previous operations. These actions reduced the
Company's workforce from approximately 95 employees to approximately 40
employees, and reduced the Company's operating costs significantly.
Also, during the second half of 1997 and the first quarter of 1998, the
Company broadened its sales focus from providing systems integration services
for field service workers to providing such services for all aspects of its
clients' enterprises that affect
8
their customers. On July 21, 1998, the Company continued its growth into the
area of ECM systems integration by signing a definitive agreement to acquire
The QuickSilver Group, Inc. (QuickSilver), a Cupertino, California based
customer management systems integrator specializing in the implementation of
customer management software packages and Internet-based commerce. The
acquisition is subject to customary conditions to closing, including
QuickSilver shareholder approval, and is expected to close during the third
quarter. Due to the Company's broadened focus and the expected acquisition of
QuickSilver, the Company expects to derive an increasing percentage of its
revenues from integrating third party software and equipment for all aspects
of its clients' enterprises, including call centers, help desks and dispatch,
and from implementing Internet-based commerce solutions.
Although the Company has significantly reduced its operating costs and
cash flows used in operations, the Company expects to continue to incur
losses during 1998, as it attempts to grow its revenues by providing services
in the area of ECM systems integration. There can be no assurance that these
services will meet with market acceptance or that revenues from these
services will be sufficient for the Company to obtain or sustain
profitability. The Company does not expect to derive income or cash flows
from its NextNet technology during 1998 or 1999.
YEAR 2000 The Company has conducted a limited review of
its internal computer systems and legacy proprietary hardware and
software products that could be affected by the "Year 2000" issue.
Based on this limited review, technology changes for potential Year
2000 issues are not currently expected to have a material impact on
the Company's operations. The Company expects to complete the
review of its internal systems and products by the first quarter of
1999. By the close of fiscal 1998, the Company will institute a
program to contact material vendors and customers to determine the
impact of Year 2000 issues on their products and businesses,
respectively. However, if the Company's present and future efforts
to address the Year 2000 issue are not successful, or if vendors
and other third parties with which the Company conducts business do
not successfully address the Year 2000 issue, the Company's
business, financial condition and results of operations may be
adversely affected.
RESULTS OF OPERATIONS
NET REVENUES
Revenues for the quarter ended June 30, 1998, were $1,410,000, as compared
to $1,442,000 in the second quarter of 1997. Revenues for the six months ended
June 30, 1998, were $2,814,000, as compared to $3,181,000 for the comparable
period in 1997. The decreases in revenues in the three and six month periods are
directly related to the changes in the composition of the Company's revenues, as
the Company has not yet replaced the revenues obtained from providing
proprietary products and incidental services for those products with revenues
from systems integration services. Service revenues were $1,385,000 for the
quarter ended June 30, 1998, as compared to $1,070,000 for the second quarter of
1997. For the six months ended June 30, 1998, service revenues were $2,719,000,
as compared to $2,620,000 for the comparable period in 1997.
9
Product revenues were $25,000 and $372,000 for the quarters ended June
30, 1998, and 1997, respectively. For the six months ended June 30, 1998,
product revenues were $95,000, as compared to $561,000 for the comparable
period in 1997.
Since the Company is now focused on ECM systems integration, service
revenues are expected to be an increasing percentage of its total revenues,
and product revenues are expected to continue to decline. All of
QuickSilver's revenue is derived from services.
A substantial percentage of the Company's revenues are derived from a
small number of clients. The timing and amount of integration services
performed for these clients can fluctuate, causing the Company's service
revenues to vary. The Company anticipates that this volatility will continue
during the third quarter.
COST OF REVENUES
The Company's total cost of revenues for the quarter ended June 30, 1998,
was $696,000, compared to $1,579,000 in the second quarter of 1997. For the six
months ended June 30, 1998, cost of revenues was $1,478,000, compared to
$2,838,000 for the comparable period in 1997.
The cost of service revenues was $686,000 for the second quarter of
1998, compared to $1,147,000 for the second quarter of 1997. Service gross
margins for the quarter ended June 30, 1998, were $699,000 or 50%, compared
to ($77,000) or (7%) for the second quarter of 1997. For the six months
ended June 30, 1998, cost of service revenues were $1,462,000, as compared to
$2,227,000 for the comparable period in 1997. Service gross margins for the
six months ended June 30, 1998, were $1,257,000 or 46%, compared to $393,000
or 15% for the same period in 1997.
The increase in service gross margins during the three and six month
periods ended June 30, 1998, resulted primarily from cost reduction measures
taken in 1997. Excluding the potential impact of the QuickSilver
acquisition, if completed, the Company expects that gross margin percentages
for services for the remainder of 1998 will be similar to those realized in
the first and second quarters.
Cost of product revenues were $10,000 and $432,000 for the quarters
ended June 30, 1998, and 1997, respectively. For the six months ended June
30, 1998, cost of product revenues were $16,000, as compared to $611,000 for
the comparable period in 1997. The decrease in costs of product revenues
from 1997 to 1998 is primarily due to ending the production and distribution
of SMR hardware in the third quarter of 1997, and increasing the emphasis on
sales of ECM systems integration services rather than the Company's software
products. Cost of product revenues will continue to be significantly lower
during 1998 as compared to 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses were $473,000 and $964,000 for the
quarters ended June 30, 1998, and 1997, respectively. For the six months ended
June 30, 1998,
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research and development expenses were $905,000, compared to $1,989,000 for
the six months ended June 30, 1997. The Company is now focused on ECM
systems integration services instead of product sales, and the reduction in
research and development expenses in the first and second quarters is due to
the reduction of research and development activities related to such
products, subsequent to the third quarter of 1997. Research and development
costs associated with NextNet were $399,000 during the second quarter of 1998
and $740,000 for the six months ended June 30, 1998. Research and
development costs associated with NextNet were not significant in the first
or second quarters of 1997. During the third quarter of 1998, research and
development expenses are expected to show similar declines on a year-to-year
basis. The Company's research and development expenses will significantly
decrease if the NextNet technology and related development activities are
transferred to an independent entity that will be jointly owned by Racotek
and third parties. The acquisition of QuickSilver, if completed, should not
materially affect the Company's spending for research and development.
SALES AND MARKETING
Sales and marketing expenses were $535,000 and $1,145,000 for the
quarters ended June 30, 1998, and 1997, respectively. For the six months
ended June 30, 1998, sales and marketing expenses were $1,057,000, compared
to $2,674,000 for the comparable period in 1997. The decreases in these
costs resulted primarily from the cost reduction measures taken in the third
and fourth quarters of 1997. The Company expects sales and marketing expenses
to increase during the third quarter, due to the expected acquisition of
QuickSilver and the increased emphasis on marketing ECM systems integration
and Internet-based commerce services.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $251,000 and $423,000 for the
quarters ended June 30, 1998, and 1997, respectively. For the six months ended
June 30, 1998, general and administrative expenses were $491,000, compared to
$901,000 for the comparable period in 1997. The decreases in these costs
resulted primarily from the cost reduction measures implemented by the Company
in 1997. General and administrative expenses are expected to increase
subsequent to the expected acquisition of QuickSilver.
INTEREST INCOME
Interest income was $56,000 and $107,000 for the quarters ended June 30,
1998, and 1997, respectively. For the six months ended June 30, 1998, interest
income was $132,000, compared to $234,000 for the comparable period in 1997.
The decrease in interest income is primarily the result of a decrease in the
amount of the Company's holdings of cash and cash equivalents and short-term
investments.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had no significant capital spending or
purchase commitments, with the exception of the previously mentioned expected
acquisitions of QuickSilver and LIS. As of June 30, 1998, the Company had
cash, cash equivalents, and investments totaling $4,147,000 and working
capital of $4,466,000. The Company
11
believes it has sufficient capital resources to fund its ECM systems
integration operations into 1999, and is seeking strategic partners to help
fund the development of its NextNet technology. For the six months ended
June 30, 1998, the Company used $1,270,000 of cash in its operating
activities, compared to $3,715,000 of cash used in operations for the six
months ended June 30, 1997. The amount of cash used in operating activities
decreased primarily due to cost reduction measures implemented in 1997. The
impact of the 1997 cost reduction measures on the Company's use of cash are
expected to continue throughout 1998. During the six months ended June 30,
1998, the Company had $1,178,000 of cash provided from investing activities,
primarily from the maturity of investments, net of purchases of investments
during the quarter. No significant financing activities occurred during the
six months ended June 30, 1998.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "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. Forward-looking statements represent the Company's expectations or
beliefs concerning future events, including the following: any statements
regarding future sales and profit percentages, any statements regarding the
continuation of historical trends, and any statements regarding the
sufficiency of the Company's cash balances and cash generated from operating
and financing activities for the Company's future liquidity and capital
resource needs. The Company cautions that any forward-looking statements
made by the Company in this Form 10-Q or in any other announcements made by
the Company are further qualified by important factors that could cause
actual results to differ materially from the forward-looking statements,
including, without limitation, the risk that the acquisition of QuickSilver
does not close, the ability of the Company to successfully integrate the two
companies, the ability of the Company to obtain large-scale consulting
services contracts, the Company's ability to use these consulting services to
obtain additional support services revenues, the ability of the Company to
hire and retain qualified personnel, the levels of promotion and marketing
required to promote the Company's services, the ability of the Company to
develop and market NextNet, its developmental technology for high speed
wireless data communication, the ability of the Company to successfully
obtain a partner to fund the development of NextNet, and other factors
identified in this Form 10-Q and the Company's other filings with the
Securities and Exchange Commission.
12
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) None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1998.
13
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 A. Fabiaschi
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Michael A. Fabiaschi
President, Chief Executive Officer
and Acting Chief Financial Officer
Dated: August 14, 1998
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