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DRAFT 03/18/99
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[_] 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: 0-17995
CUSTOMTRACKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Texas 75-2216818
(State of Incorporation) (I.R.S. Employer
Identification Number)
One Galleria Tower
13355 Noel Road
Suite 1555
Dallas, Texas 75240-6604
(Address of Principal Executive Offices)
(972) 702-7055
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None Not Applicable
(Title of Class) (Name of Exchange on Which Registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
$0.01 Par Value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of February 26, 1999, there were 15,126,012 shares of CustomTracks
Corporation $0.01 par value common stock outstanding, 13,375,289 of which
having an aggregate market value of $107,002,312 were held by non-affiliates.
For purposes of the above statement, all directors and officers of the
Registrant are presumed to be affiliates.
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
Overview
At the beginning of 1998, CustomTracks Corporation, formerly Amtech
Corporation (the "Company"), was organized into two market-oriented groups.
The Electronic Security Group ("ESG"), which focused on products and services
for electronic access control applications, encompassed Cardkey European
Holdings Limited, Cardkey Systems, Inc., Cotag International ("Cotag") and
related entities. The Transportation Systems Group ("TSG"), which was
comprised of Amtech Systems Corporation, AMTC International S.A. (formerly
Amtech International S.A.) and Amtech World Corporation, developed and
provided high-frequency radio frequency identification solutions to the
transportation markets. These markets included electronic toll and traffic
management, rail, airport, parking and access control, intermodal and motor
freight.
On June 11, 1998, the Company sold the TSG to UNOVA, Inc. ("UNOVA"),
effective as of May 31, 1998, resulting in a pre-tax gain of $1,139,000. As
consideration for the sale, the Company received $22,350,000 in cash and
2,211,900 unregistered shares of the Company's common stock that were
previously purchased by UNOVA in late 1997. The shares were valued at
$10,921,000. Included in UNOVA's purchase were the Company's manufacturing and
technology facility in Albuquerque, New Mexico, the Company's radio frequency
identification technologies and other intellectual properties, the brand name
"Amtech" and all operations associated with the transportation business.
On July 7, 1998, the Company sold the net assets of Cotag to Metric Gruppen
AB ("Metric") of Solna, Sweden, effective as of June 30, 1998, resulting in a
pre-tax loss of $2,372,000, including a $2,800,000 write-off of intangible
assets. The Company received sales proceeds of $3,050,000 during 1998 and
$1,552,000 in February 1999. Depending on the level and mix of Cotag's
revenues achieved in 1999, the Company may receive up to an additional
$800,000. Included in Metric's purchase was the brand name and intellectual
property underlying Cotag's hands-free proximity technology, Cotag's
manufacturing facility in Cambridge, England and the ongoing business of the
unit.
On November 25, 1998, the Company sold the remaining portion of the ESG,
comprised of Cardkey European Holdings Limited, Cardkey Systems, Inc. and
related entities, to Johnson Controls, Inc., effective as of November 29,
1998, realizing cash proceeds of $44,715,000, including $3,752,000 received in
January 1999. The sale resulted in a pre-tax gain of $23,550,000 and included
all of the operations and net assets of the business.
As a result of these transactions, all of the Company's operations related
to this business segment were discontinued. See "New Business Initiatives" for
a description of the Company's new business initiatives.
The Company was incorporated in Texas in 1988. The Company's executive
offices are located at One Galleria Tower, 13355 Noel Road, Suite 1555,
Dallas, Texas 75240-6604 (telephone (972) 702-7055).
New Business Initiatives
Internet Transaction Payment System
The Company is exploring Internet related businesses, including a
transaction payment system for use by consumers when purchasing items over the
Internet. The system is expected to collect payments from consumers and
disburse the payments to participating vendors. The Company commenced
development of this system in 1999 using both internal and external resources,
and expects to introduce an operational payment system in the third quarter of
1999.
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The Company believes that the Internet payment system industry is immature,
fragmented and dynamic. No competitor has a dominant share of the market.
There are currently no significant barriers to entry. Many of the Company's
competitors and potential competitors in this arena are significantly larger
than the Company and have substantially more resources.
Customized Music
The Company also announced in February 1999 that its previously announced
plan to enter the customized compact disc business had been impacted by two
recent music industry developments. First, the Secure Digital Music
Initiative, an effort sponsored by the major music record companies to
establish standards for the digital distribution of protected music via the
Internet and other means, has delayed the Company's efforts to obtain music
content rights. Second, the availability of the handheld MP3 player will
likely impact customized compact disc pricing. The Company will evaluate its
customized compact disc strategy further as these developments evolve.
Other
In addition to developing the Internet transaction payment system, the
Company is also exploring additional Internet related businesses.
There is no assurance that the Company will be successful in the Internet
arena. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" below for a description of certain
management assumptions, risks and uncertainties relating to the Company's
operations.
Employees
The Company had 15 employees as of February 28, 1999.
Research and Development; Patents and Trademarks
The Company's continuing operations incurred no research and development
expenses in 1998, 1997 or 1996. Research and development expenses related to
the Company's discontinued operations amounted to $4,931,000, $11,332,000 and
$10,314,000 in 1998, 1997 and 1996, respectively.
The Company is a licensee of one patent covering concepts the Company may
employ in implementing its Internet businesses. In addition, the Company has
filed for trademarks and service marks, as applicable, for "CustomTracks" and
other marks.
Customers
The Company had no revenues from continuing operations in 1998. During 1998,
no customer accounted for 10% or more of revenues of the Company's
discontinued operations.
Sales Backlog
The Company's backlog, calculated as the aggregate of sales prices of orders
received from customers, less revenue recognized, was zero at February 28,
1999, as compared with approximately $60,500,000 at February 28, 1998, all of
which related to the Company's discontinued operations.
Geographic Information
The Company's continuing corporate operations are based in the United
States, and corporate assets at December 31, 1998 are primarily comprised of
cash investments and marketable securities invested in U.S. corporate debt
securities.
2
ITEM 2. PROPERTIES.
The Company leases approximately 6,910 square feet of space for its
corporate offices in Dallas, Texas, under a lease that expires in July 2003
and approximately 29,000 square feet of space for its proposed computing
center operations in Dallas, Texas, under a sublease which commences in May
1999 and expires in September 2004.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The Company's common stock trades on The Nasdaq Stock Market under the
symbol CUST. The following table shows the high and low sales prices by
quarter for 1998 and 1997. These prices do not include adjustments for retail
mark-ups, mark-downs or commissions.
1998 1997
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Quarter Ended High Low High Low
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March 31......................................... $ 4.87 $3.25 $8.38 $5.63
June 30.......................................... $ 5.62 $3.37 $6.13 $4.00
September 30..................................... $ 7.00 $4.56 $5.13 $4.25
December 31...................................... $12.31 $3.50 $5.63 $3.69
Effective November 3, 1997, UNOVA purchased 2,211,900 shares of the
Company's common stock for $10,000,000 in a private placement transaction. The
shares were issued in a transaction exempt from registration under the
Securities Act of 1933 by virtue of Section 4(2) thereof and Regulation D
thereunder. As partial consideration for the sale of the Company's TSG to
UNOVA in June 1998, these shares were returned to the Company. See "PART I,
ITEM 1. BUSINESS, Overview."
At February 26, 1999, there were 15,126,012 shares of common stock
outstanding held by 587 shareholders of record. On that date, the last
reported sales price of the common stock was $8.00.
The Company has not paid any cash dividends on its common stock during the
last two years and does not anticipate doing so in the forseeable future.
3
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data regarding the
Company's results of operations and financial position for, and as of the end
of, each of the years in the five-year period ended December 31, 1998, which
are derived from the consolidated financial statements of the Company, which
have been audited. During 1998, the Company sold all of its operating
businesses and has reclassified their operating results as discontinued
operations. The consolidated financial statements and notes thereto as of
December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997
and 1996, and the report of Ernst & Young LLP thereon are included elsewhere
in this Form 10-K. The selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere herein.
Year Ended December 31,
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1998 1997 1996 1995 1994
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(In thousands, except per share data)
Statement of Operations Data
(1):
Corporate expenses (2).......... $(4,022) $ (2,931) $(3,012) $(2,246) $ (713)
Investment income, net.......... 1,956 1,068 2,793 2,127 2,104
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Income (loss) from continuing
operations before income
taxes.......................... (2,066) (1,863) (219) (119) 1,391
Income taxes.................... 576 (8) (77) 43 (428)
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Income (loss) from continuing
operations..................... (1,490) (1,871) (296) (76) 963
Discontinued operations (1)
Income (loss) from discontinued
operations, net of income
taxes (3) (4)................. 6,105 (12,089) (348) (4,011) 6,699
Gain (loss) on sale of
discontinued operations, net
of income taxes............... 21,651 (3,657) -- -- --
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27,756 (15,746) (348) (4,011) 6,699
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Net income (loss)............... $26,266 $(17,617) $ (644) $(4,087) $ 7,662
======= ======== ======= ======= =======
Basic and diluted earnings
(loss) per common share
Continuing operations.......... $ (0.09) $ (0.12) $ (0.02) $ (0.0l) $ 0.07
Discontinued operations........ 1.75 (1.05) (0.02) (0.27) 0.45
------- -------- ------- ------- -------
Net income (loss).............. $ 1.66 $ (1.17) $ (0.04) $ (0.28) $ 0.52
======= ======== ======= ======= =======
Shares used in computing
earnings (loss) per share
Basic.......................... 15,836 15,081 14,637 14,655 14,596
Diluted........................ 15,836 15,081 14,637 14,655 14,764
Cash dividends declared per
common share................... -- -- -- $ 0.02 $ 0.08
Balance Sheet Data:
Working capital................. $81,291 $ 63,648 $43,047 $49,349 $63,558
Total assets.................... 86,898 63,919 72,206 73,479 75,586
Total stockholders' equity...... 81,449 63,696 71,756 72,561 75,336
Stockholders' equity per share.. 5.40 3.76 4.87 4.97 5.16
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(1) In 1995, the Company acquired Cotag International Limited, Cardkey
Systems, Inc., Cardkey Systems Limited and WaveNet International, Inc.
WaveNet International, Inc. was sold in 1997, while the remainder of these
businesses and the Company's Transportation Systems Group ("TSG") were
sold in 1998. The operating results of these businesses have been
reclassified as discontinued operations for all periods presented. See
Note 2 to consolidated financial statements included herein.
(2) Corporate expenses for the years 1995 through 1998 represent the costs
associated with a holding company function established as a result of the
Company's 1995 acquisitions. In 1994, substantially all of the Company's
expenses were related to operating the TSG. However, the estimated direct
costs incurred by the TSG associated with being a publicly-held company
have been presented as corporate expenses.
(3) In 1997, loss from discontinued operations includes a $5.7 million pre-tax
contract loss provision related to a multi-year implementation of an
electronic toll collection system by the TSG.
(4) In 1997, income taxes related to discontinued operations includes $4.7
million representing the effect of establishing a valuation allowance for
U.S. deferred tax assets.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
Historically, the Company has operated in one industry segment, the
provision of systems and solutions for the intelligent transportation,
electronic security and other markets through the design, manufacturing,
installation and support of hardware and software products utilizing the
Company's wireless data and security technologies. The businesses comprising
this industry segment were sold during 1998 and 1997 and have been
reclassified as discontinued operations in the consolidated financial
statements. See Note 2 to the consolidated financial statements, "Discontinued
Operations," for additional discussion.
The Company is exploring Internet related businesses, including a
transaction payment system for use by consumers when purchasing items over the
Internet. The system is expected to collect payments from consumers and
disburse the payments to participating vendors. The Company commenced
development of this system in 1999 using both internal and external resources,
and expects to introduce an operational payment system in the third quarter of
1999.
Results of Operations
Continuing Operations
Corporate expenses
Corporate expenses decreased from $3,012,000 in 1996 to $2,931,000 in 1997
and increased to $4,022,000 in 1998. The change from 1997 to 1998 is primarily
attributable to an expense charge of approximately $1,000,000 incurred in
connection with the Company's former chairman, president and chief executive
officer's severance agreement and stock options. In 1996, corporate expenses
included $446,000 recognized by the Company relating to stock options granted
in December 1995 to certain of the Company's outside directors under a plan
that was approved by the shareholders on April 25, 1996.
Investment income, net
Investment income net of interest expense decreased from $2,793,000 in 1996
to $1,068,000 in 1997 and increased to $1,956,000 in 1998. The change from
1997 to 1998 is attributable to the increase in invested cash and marketable
securities resulting from the sale of the Company's businesses in 1998. The
decrease from 1996 to 1997 is primarily attributable to gains of $2,150,000
realized in 1996 from the sale of remaining U.S. corporate equity securities
in the Company's investment portfolio.
Income taxes
The income tax benefit on the loss from continuing operations in 1998 of
$576,000 is different from the U.S. statutory rate of 34%, primarily due to
unbenefitted U.S. losses and the nondeductible investment in a subsidiary. The
provision for income taxes on continuing operations in 1997 of $8,000 is
different from the U.S. statutory rate of 34%, primarily due to providing a
valuation allowance for all of the Company's U.S. deferred tax assets in light
of its continued operating losses. The provision for income taxes on
continuing operations in 1996 of $77,000 is different from the U.S. statutory
rate of 34%, primarily due to the effect of unbenefitted U.S. losses.
Loss from continuing operations
As a result of the foregoing, the Company experienced losses from continuing
operations of $296,000 in 1996, $1,871,000 in 1997 and $1,490,000 in 1998.
5
Discontinued Operations
The Company sold its operating businesses realizing net after-tax gains of
$21,651,000 in 1998 and an after-tax loss of $3,657,000 in 1997. Net operating
results from discontinued operations was a loss of $348,000 and $12,089,000 in
1996 and 1997, respectively, and income of $6,105,000 in 1998.
Liquidity and Capital Resources
At December 31, 1998, the Company's principal source of liquidity is its net
working capital position of $81,291,000, including cash and marketable
securities of $81,221,000. The Company's cash position increased significantly
during 1998, with cash proceeds of $62,503,000 being realized from the sales
of the Company's businesses. The Company plans to continue to invest its
excess cash in short-term, high-grade U.S. corporate debt securities or U.S.
government and agency securities. In June 1998, the Company's number of
outstanding common shares was reduced when 2,211,900 shares were returned to
the Company as partial consideration for the sale of the Transportation
Systems Group to UNOVA, Inc.
The Company's new business initiative to create Internet related businesses
is expected to require significant investment. The Company currently expects
to invest $20,000,000 to $30,000,000 during 1999 on its Internet transaction
payment system for software development, marketing, expanded lease facilities,
communications, computers and related equipment to establish a computing
center and related personnel and start-up operating costs. Management believes
the Company's existing cash position will be sufficient to meet near-term
anticipated needs. The Company has no existing borrowings or credit facilities
and acquisitions, if any, would be financed by the most attractive alternative
available, which could be the utilization of cash or the issuance of debt or
equity securities.
Non-Employee Stock Options Granted in 1999
Proposed Director Stock Option Plan
In January 1999, certain non-employee directors were granted options to
purchase, in the aggregate, approximately 150,000 shares of the Company's
common stock, subject to approval of a new directors' stock option plan by the
Company's stockholders. The options have an exercise price of $10.65 per
share, which was 120% of the closing price of the common stock on the date of
grant. The options vest upon the approval of a new plan and expire at the end
of ten years. If the stockholders approve the new plan, currently under
Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting for Stock
Issued to Employees," the excess, if any, of the closing price of the common
stock on the date of plan approval over the exercise price of $10.65 would be
charged to income for periods prior to the effective date of a new accounting
standard amending APB 25 as discussed below. The estimated fair value of these
options at the grant date using the Black-Scholes option valuation model is
approximately $965,000 or $6.43 per share.
New Business Initiatives
The Company entered into an agreement in February 1999 with Lante
Corporation ("Lante"), a third party software development firm, to assist the
Company with developing its new Internet transaction payment system. In
exchange for the services to be provided by Lante, the Company will pay cash
for work performed at discounted rates and will issue options to purchase
500,000 shares of the Company's common stock to Lante at an exercise price of
$7.62 per share, the closing price of the Company's common stock on the date
of the agreement. The options vest over three years and expire at the end of
ten years. The estimated fair value of these options at the grant date using
the Black-Scholes option valuation model is $2,865,000 or $5.73 per share.
Additionally, in February 1999, in exchange for a law firm's agreement to
assist the Company in marketing its Internet transaction payment system to
five major music companies, the Company agreed to issue the firm options to
purchase 20,000 shares of the Company's common stock at an exercise price of
$8.61 per share, representing the average closing price of the Company's
common stock for the twenty trading days centered around the date of the
agreement. The options will vest, if at all, on a pro rata basis when any or
all of the five
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targeted companies begin using the Company's Internet transaction payment
system. The options expire at the end of six years. The estimated fair value
of these options at the grant date using the Black-Scholes option valuation
model is $107,000 or $5.35 per share.
Accounting for Non-Employee Stock Options
The Financial Accounting Standards Board recently concluded its initial
deliberations on several practice issues under APB 25. The proposed effective
date of a new financial accounting standard setting forth these conclusions
would be its issuance date, which presently is expected to be in September
1999, but would apply to all stock option grants subsequent to December 15,
1998. A consequence of the application of the tentative conclusions would be
that outside directors that receive stock options would not be included under
the scope of APB 25 because they would no longer be considered employees.
Stock option grants to outside directors after December 15, 1998 would,
therefore, give rise to compensation expense, determined in accordance with
the following paragraph, and recognized over the vesting period for periods
subsequent to the effective date of the new accounting standard.
The accounting for equity instruments, such as the stock options discussed
in the paragraphs above, issued to non-employees for services rendered is
governed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" and Emerging Issues Task Force Issue No. 96-18
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." These
pronouncements require the fair value of equity instruments given as
consideration for services rendered be recognized as a non-cash charge to
income over the shorter of the vesting or service period. The equity
instruments must be revalued on each subsequent reporting date until
performance is complete with a cumulative catch up adjustment recognized for
any changes in their fair value. As a result, the Company's future results of
operations could be materially impacted by a change in valuation of the stock
options discussed above, or other equity instruments granted in the future to
non-employees, as a result of future increases or decreases in the price of
the Company's common stock. However, the required accounting treatment will
have no impact on the Company's cash flows or total stockholders' equity.
Impact of the Year 2000
The Year 2000 Issue is primarily the result of computer programs being
written using two digits rather than four to define the applicable year. There
are no material Year 2000 compliance requirements confronting the Company
since it has no existing operating businesses. The Company's current financial
and administrative systems are fully compliant. Accordingly, the Company has
no ongoing remediation plans with respect to its current systems.
Software systems developed for use in connection with the Company's new
Internet related businesses will be designed and tested for Year 2000
compliance. The Company continues to assess the impact, if any, the Year 2000
Issue will have on its key vendors and development partners before the
inception of a relationship. If the Company's assessments of the impact of the
Year 2000 Issue prove to be incorrect, the Company's new Internet related
businesses may be materially affected.
New Financial Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in years beginning
after June 15, 1999. Because the Company does not currently use derivatives,
management does not anticipate that the adoption of the new Statement will
have a significant effect on operating results or the financial position of
the Company.
7
Risks and Uncertainties
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Certain matters discussed in this Annual Report
on Form 10-K contain statements that constitute forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. The words "expect," "estimate," "anticipate," "predict," "believe,"
and similar expressions and variations thereof are intended to identify
forward-looking statements. Readers are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors.
These risks and uncertainties include, but are not limited to, the following:
Product Development and Market Acceptance. The Company's growth depends on
the timely development and market acceptance of new products. Successful
development of a development stage enterprise, particularly Internet related
businesses, can be difficult and costly; there are no assurances of ultimate
success and a start-up enterprise involves risks and uncertainties, including
the following:
. There are no assurances that the Company will be able to successfully and
timely develop new products for its targeted businesses, that it will be
able to compete effectively against similar or alternative businesses,
that it will gain market acceptance, that it will not be made obsolete by
further technological development, that it will be able to provide or
attract the necessary capital or that it will not encounter other, and
even unanticipated, risks.
. Use of the Internet by consumers, while growing, is still at an early
stage of development, and market acceptance of the Internet as a medium
for entertainment, commerce and information is still subject to a high
level of uncertainty.
. The Company may decide to exit the Internet transaction payment business
at any time.
Competition and Technological Change. The Company will be competing with
larger companies that have access to greater capital, research and
development, marketing, distribution and other resources than the Company. In
addition, the Internet market is characterized by extensive research efforts
and rapid product development and technological change that could render the
Company's products obsolete or noncompetitive.
Intellectual Property Rights. The Company relies in part on patents, trade
secrets and proprietary technology to remain competitive. It may be necessary
to defend these rights or to defend against claims that the Company is
infringing the rights of others. Intellectual property litigation and
controversies are disruptive and expensive.
Lack of Standards. There are currently no generally accepted standards for
Internet payment systems. There is no assurance that the Internet transaction
payment system the Company is developing will become a generally accepted
standard or that it will be compatible with any standards that become
generally accepted.
Sales of Businesses. The Company disposed of its operating businesses in
1998 and 1997. In connection with those dispositions, the Company agreed to
provide customary indemnifications to the purchasers of those businesses for
breaches of representations and warranties, covenants and other specified
matters. Although the Company believes that it has adequately provided for
future costs associated with these indemnification obligations, indemnifiable
claims could exceed the Company's estimates.
Other Uncertainties. Other operating, financial or legal risks or
uncertainties are discussed in this Form 10-K in specific contexts and in the
Company's other periodic SEC filings. The Company is, of course, also subject
to general economic risks, dependence on key personnel and other risks and
uncertainties.
8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that it faces material market risk with respect
to its cash investments and marketable securities, which totalled $81,221,000
and $13,593,000 at December 31, 1998 and 1997, respectively. These
investments, all of which mature within one year, consist of high-grade U.S.
corporate debt securities and certificates of deposits, and do not include
derivative financial instruments or derivative commodity instruments, as such
terms are defined by the Securities and Exchange Commission in applicable
regulations. The Company has not undertaken any additional actions to cover
interest rate market risk and is not a party to any interest rate market risk
management activities. A hypothetical ten percent change in market interest
rates over the next year would not materially impact the Company's operating
results or cash flows due to the short-term, high credit quality nature of the
Company's investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item begins on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference from the
section "MANAGEMENT--Directors and Executive Officers" in the Company's 1999
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from the
section "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS" in the Company's
1999 Proxy Statement. Information in the section and subsection titled "REPORT
OF BOARD OF DIRECTORS ON ANNUAL COMPENSATION" and "Performance Graph,"
respectively, is not incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference from the
section "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" in the Company's
1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from the
section "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS--Transactions with
Management and Related Parties" in the Company's 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
See Index to Consolidated Financial Statements on page F-1 hereof.
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(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the SEC have been omitted because of the absence of the
conditions under which they are required or because the information required
is included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
Exhibit No. Description
----------- -----------
2.1 --Purchase and Sale Agreement, dated June 11, 1998, by and among
UNOVA, Inc., Intermec Technologies Corporation, Intermec
Technologies S.A., Amtech Corporation and Amtech International
S.A. (excluding certain exhibits and the schedules). Filed under
exhibit number 2.1 to the Company's Current Report on Form 8-K,
dated June 19, 1998, and incorporated herein by reference. The
Registrant agrees to furnish supplementally to the Commission
upon request a copy of any of the schedules and exhibits referred
to but not included in the Purchase and Sale Agreement filed with
the Commission.
2.2 --Sale and Purchase Agreement, dated July 6, 1998, by and among
Amtech Europe Limited, Metric Security Limited, AMTC Corporation
(trading name of Amtech Corporation) and Metric Gruppen AB
(including the schedules). Filed under exhibit number 2.1 to the
Company's Current Report on Form 8-K, dated July 21, 1998, and
incorporated herein by reference.
2.3 --Stock Purchase Agreement, dated November 9, 1998, by and between
Johnson Controls, Inc. and CustomTracks Corporation (excluding
the exhibits and schedules). Filed under exhibit number 2.1 to
the Company's Current Report on Form 8-K, dated December 10,
1998, and incorporated herein by reference. The Registrant agrees
to furnish supplementally to the Commission upon request a copy
of any of the schedules and exhibits referred to but not included
in the Stock Purchase Agreement filed with the Commission.
3.1 --Articles of Incorporation of the Company, together with all
amendments thereto. Filed under exhibit number 3.1 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997, and incorporated herein by reference. Articles of
Amendment to Articles of Incorporation of Amtech Corporation
d/b/a AMTC Corporation, dated August 31, 1998. Filed under
exhibit number 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998, and
incorporated herein by reference.
3.2 --Restated Bylaws of the Company, dated August 31, 1998. Filed
under exhibit number 3.2 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998, and
incorporated herein by reference.
4.1 --Specimen certificate for common stock of the Company. Filed
under exhibit number 4.1 in the Company's Registration Statement
on Form S-1 (Commission No. 33-31209) and incorporated herein by
reference.
10.1* --1990 Stock Option Plan of the Company (amended and restated as
of November 1998).
10.2* --1992 Stock Option Plan of the Company (amended and restated as
of November 1998).
10.3 --401(k) Retirement Plan of the Company and related Adoption
Agreement. Filed under exhibit number 10.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996,
and incorporated herein by reference.
10.4* --1995 Long-Term Incentive Plan of the Company (amended and
restated as of November 1998).
10.5* --1996 Directors' Stock Option Plan of the Company (amended and
restated as of November 1998).
10.6 --1996 Employee Stock Purchase Plan of the Company. Filed under
Annex II in the Company's Proxy Statement for the Annual Meeting
of Shareholders held April 25, 1996, and incorporated herein by
reference.
10.7 --Director Retainer Plan. Filed under exhibit number 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1993, and incorporated herein by reference.
10.8 --AMTC Corporation Stock Option Agreement, effective as of April
29, 1998, between David P. Cook and Amtech Corporation d/b/a AMTC
Corporation. Filed under exhibit number 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998, and incorporated herein by reference.
10
Exhibit No. Description
----------- -----------
10.9 --Employment Agreement, effective as of April 29, 1998, between
David P. Cook and Amtech Corporation d/b/a AMTC Corporation.
Filed under exhibit number 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998, and
incorporated herein by reference.
10.10 --Stock Purchase Agreement, dated May 14, 1998, between Amtech
Corporation and David P. Cook. Filed under exhibit number 10.5 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998, and incorporated herein by
reference.
10.11 --Severance Agreement, dated November 4, 1996, between Amtech
Corporation and Steve M. York. Filed under exhibit number 10.28
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
10.12* --Severance Agreement, dated November 4, 1996, between Amtech
Corporation and Ronald A. Woessner.
10.13* --Sublease Agreement, dated February 12, 1999, between Fidelity
Corporate Real Estate, L.L.C. and CustomTracks Operating
Corporation.
23.1* --Consent of Independent Auditors.
24.1 --Power of Attorney (included on page 12 of this Annual Report on
Form 10-K).
27.1* --Financial Data Schedule.
- --------
* Filed herewith
(b) Reports on Form 8-K
The Registrant filed Form 8-K on December 10, 1998 to report the November
25, 1998 sale of its electronic security products business, including Cardkey
Systems, Inc., Cardkey European Holdings Limited and Cardkey Systems Pacific
Pty. Limited, to Johnson Controls, Inc. The report included a pro forma
condensed consolidated balance sheet as of September 30, 1998 and pro forma
condensed consolidated statements of operations for the year ended December
31, 1997 and the nine months ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Dallas, State of Texas, on March 30, 1999.
CustomTracks Corporation
/s/ Steve M. York
By: _________________________________
Steve M. York
Senior Vice President,
Chief Financial Officer and
Treasurer
11
POWER OF ATTORNEY
We, the undersigned directors and officers of CustomTracks Corporation (the
"Company"), do hereby severally constitute and appoint David P. Cook and Steve
M. York, and each or either of them, our true and lawful attorneys and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
and to file the same with all exhibits thereto, and all other documents in
connection therewith, with the SEC, granting unto said attorneys and agents,
and each or either of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys and agents, and each of them, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ David P. Cook Chairman, President, Chief March 30, 1999
______________________________________ Executive Officer and
(David P. Cook) Director (Principal
Executive Officer)
/s/ Steve M. York Senior Vice President, March 30, 1999
______________________________________ Chief Financial Officer
(Steve M. York) and Treasurer (Principal
Financial and Accounting
Officer)
/s/ Michael E. Keane Director March 30, 1999
______________________________________
(Michael E. Keane)
/s/ James S. Marston Director March 30, 1999
______________________________________
(James S. Marston)
/s/ Jack L. Martin Director March 30, 1999
______________________________________
(Jack L. Martin)
/s/ Antonio R. Sanchez, Jr. Director March 30, 1999
______________________________________
(Antonio R. Sanchez, Jr.)
/s/ Dr. Ben G. Streetman Director March 30, 1999
______________________________________
(Dr. Ben G. Streetman)
/s/ Mark Tebbe Director March 30, 1999
______________________________________
(Mark Tebbe)
12
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................. F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996...................................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Net
Income (Loss) for the years ended December 31, 1998, 1997 and 1996....... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CustomTracks Corporation
We have audited the accompanying consolidated balance sheets of CustomTracks
Corporation, formerly Amtech Corporation, as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity
and comprehensive net income (loss) and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CustomTracks
Corporation at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Dallas, Texas
March 29, 1999
F-2
CUSTOMTRACKS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 54,292,000 $ 12,583,000
Marketable securities............................ 26,929,000 1,010,000
Due from sale of discontinued operations......... 5,304,000 --
Net assets related to discontinued operations.... -- 50,271,000
Other current assets............................. 215,000 7,000
------------ ------------
Total current assets........................... 86,740,000 63,871,000
Property and equipment, net........................ 158,000 48,000
------------ ------------
$ 86,898,000 $ 63,919,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............ $ 499,000 $ 196,000
Income taxes..................................... 1,075,000 27,000
Liabilities related to discontinued operations... 3,875,000 --
------------ ------------
Total current liabilities...................... 5,449,000 223,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, 10,000,000 shares
authorized; none outstanding.................... -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized; 17,384,437 issued, 15,092,537
outstanding in 1998 and 17,024,563 issued,
16,944,563 outstanding in 1997.................. 174,000 170,000
Additional capital............................... 88,449,000 86,045,000
Treasury stock, at cost; 2,291,900 shares in 1998
and 80,000 shares in 1997....................... (11,314,000) (393,000)
Retained earnings (accumulated deficit).......... 4,140,000 (22,126,000)
------------ ------------
Total stockholders' equity..................... 81,449,000 63,696,000
------------ ------------
$ 86,898,000 $ 63,919,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CUSTOMTRACKS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------------
1998 1997 1996
----------- ------------ -----------
Corporate expenses..................... $(4,022,000) $ (2,931,000) $(3,012,000)
Investment income, net................. 1,956,000 1,068,000 2,793,000
----------- ------------ -----------
Loss from continuing operations before
income taxes.......................... (2,066,000) (1,863,000) (219,000)
Income taxes........................... 576,000 (8,000) (77,000)
----------- ------------ -----------
Loss from continuing operations...... (1,490,000) (1,871,000) (296,000)
Discontinued operations:
Income (loss) from discontinued
operations, net of income taxes..... 6,105,000 (12,089,000) (348,000)
Gain (loss) on sale of discontinued
operations, net of income taxes..... 21,651,000 (3,657,000) --
----------- ------------ -----------
27,756,000 (15,746,000) (348,000)
----------- ------------ -----------
Net income (loss)...................... $26,266,000 $(17,617,000) $ (644,000)
=========== ============ ===========
Basic and diluted earnings (loss) per
common share:
Continuing operations................ $ (0.09) $ (0.12) $ (0.02)
Discontinued operations.............. 1.75 (1.05) (0.02)
----------- ------------ -----------
Net income (loss).................... $ 1.66 $ (1.17) $ (0.04)
=========== ============ ===========
Weighted average shares outstanding.... 15,835,654 15,080,669 14,636,605
=========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CUSTOMTRACKS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE NET INCOME (LOSS)
Accumulated Retained
Common Stock other earnings Total
------------------- Additional comprehensive Treasury (accumulated stockholders'
Shares Amount capital income stock deficit) equity
---------- -------- ----------- ------------- ------------ ------------ -------------
Balance, December 31,
1995................... 14,685,036 $147,000 $75,349,000 $ 1,323,000 $ (393,000) $ (3,865,000) $ 72,561,000
Exercise of stock
options for cash...... 117,627 1,000 112,000 -- -- -- 113,000
Tax benefit from
exercise of stock
options............... -- -- 35,000 -- -- -- 35,000
Stock option
compensation.......... -- -- 446,000 -- -- -- 446,000
Other.................. -- -- 568,000 -- -- -- 568,000
Comprehensive net loss:
Net loss............... -- -- -- -- -- (644,000) (644,000)
Reclassification
adjustment for gains
on sales of marketable
securities included in
net loss (net of tax
effect of $681,000)... -- -- -- (1,323,000) -- -- (1,323,000)
------------
Comprehensive net
loss.................. -- -- -- -- -- -- (1,967,000)
---------- -------- ----------- ----------- ------------ ------------ ------------
Balance, December 31,
1996................... 14,802,663 148,000 76,510,000 -- (393,000) (4,509,000) 71,756,000
Stock option
compensation.......... 10,000 -- 92,000 -- -- -- 92,000
Sale of common stock,
net of expenses....... 2,211,900 22,000 9,945,000 -- -- -- 9,967,000
Other.................. -- -- (502,000) -- -- -- (502,000)
Net loss and
comprehensive net
loss.................. -- -- -- -- -- (17,617,000) (17,617,000)
---------- -------- ----------- ----------- ------------ ------------ ------------
Balance, December 31,
1997................... 17,024,563 170,000 86,045,000 -- (393,000) (22,126,000) 63,696,000
Exercise of stock
options for cash...... 227,928 2,000 1,504,000 -- -- -- 1,506,000
Tax benefit from
exercise of stock
options............... -- -- 196,000 -- -- -- 196,000
Stock option
compensation.......... 131,946 2,000 715,000 -- -- -- 717,000
Treasury stock received
in sale of business
(2,211,900 shares).... -- -- -- -- (10,921,000) -- (10,921,000)
Other.................. -- -- (11,000) -- -- -- (11,000)
Net income and
comprehensive net
income................ -- -- -- -- -- 26,266,000 26,266,000
---------- -------- ----------- ----------- ------------ ------------ ------------
Balance, December 31,
1998................... 17,384,437 $174,000 $88,449,000 $ -- $(11,314,000) $ 4,140,000 $ 81,449,000
========== ======== =========== =========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CUSTOMTRACKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------------
1998 1997 1996
------------ ----------- ------------
Cash flows from operating activities:
Loss from continuing operations...... $ (1,490,000) $(1,871,000) $ (296,000)
Adjustments to reconcile loss from
continuing operations to net cash
provided (used) by operating
activities:
Depreciation and amortization........ 13,000 20,000 15,000
Deferred income taxes................ -- 380,000 --
Realized gain on sale of marketable
securities.......................... -- -- (2,150,000)
Stock option compensation............ 404,000 -- 446,000
Tax benefit from exercise of stock
options............................. -- -- 35,000
Changes in assets and liabilities,
excluding divestiture of
businesses:
Other current assets................ (208,000) 80,000 169,000
Current liabilities................. 1,351,000 (227,000) 52,000
------------ ----------- ------------
Net cash provided (used) by
continuing operations............... 70,000 (1,618,000) (1,729,000)
Net cash provided (used) by
discontinued operations............. 6,286,000 (4,339,000) (894,000)
------------ ----------- ------------
Net cash provided (used) by
operating activities.............. 6,356,000 (5,957,000) (2,623,000)
Cash flows from investing activities:
Purchases of property and equipment,
net................................. (110,000) (68,000) (52,000)
Purchases of marketable securities... (36,867,000) (4,916,000) (14,729,000)
Sales and maturities of marketable
securities.......................... 10,948,000 15,758,000 13,191,000
Investing activities of discontinued
operations:
Proceeds from sales of businesses,
net of cash sold.................... 62,503,000 1,225,000 --
Purchase of Cardkey Systems, net of
cash acquired....................... -- (1,868,000) (952,000)
Purchases of property and equipment,
net and other....................... (2,616,000) (3,780,000) (6,615,000)
------------ ----------- ------------
Net cash provided (used) by
investing activities.............. 33,858,000 6,351,000 (9,157,000)
Cash flows from financing activities:
Proceeds from exercise of stock
options............................. 1,506,000 -- 113,000
Proceeds from sale of common stock,
net of expenses..................... -- 9,967,000 --
------------ ----------- ------------
Net cash provided by financing
activities........................ 1,506,000 9,967,000 113,000
Effect of exchange rate changes on
cash and cash equivalents............ (11,000) 106,000 121,000
------------ ----------- ------------
Increase (decrease) in cash and cash
equivalents.......................... 41,709,000 10,467,000 (11,546,000)
Cash and cash equivalents, beginning
of year.............................. 12,583,000 2,116,000 13,662,000
------------ ----------- ------------
Cash and cash equivalents, end of
year................................. $ 54,292,000 $12,583,000 $ 2,116,000
============ =========== ============
Supplemental cash flow information:
Income taxes paid (net of refunds)... $ (391,000) $ (681,000) $ 765,000
Interest paid........................ $ -- $ 405,000 $ 113,000
Treasury stock received in sale of
business............................ $ 10,921,000 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation--The accompanying consolidated financial statements of
CustomTracks Corporation (formerly Amtech Corporation) include the accounts of
the Company and its majority-owned subsidiaries. Intercompany balances and
transactions have been eliminated. Investees in which the Company owns 50% or
less of the outstanding securities are accounted for using the equity method
of accounting.
During 1998, the Company sold all of its operating businesses and,
accordingly, the assets and liabilities, operating results and cash flows of
these businesses have been reclassified as discontinued operations in the
accompanying financial statements. The results of the discontinued operations
do not include any interest expense or allocation of corporate expenses.
The Company is exploring Internet related businesses and in 1999 began
developing a transaction payment system for use by consumers when purchasing
items over the Internet. The system is expected to collect payments from
consumers and disburse the payments to participating vendors. Successful
development of a development stage enterprise, particularly Internet related
businesses, is costly and highly competitive. The Company's internal growth
depends on the timely development and market acceptance of new products. A
start-up enterprise involves risks and uncertainties and there are no
assurances that the Company will be successful in its efforts. See Note 9 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Cash investments and marketable securities--Cash investments with maturities
of three months or less when purchased are considered cash equivalents.
Marketable securities, which are available-for-sale and have stated maturities
of less than one year, are as follows:
1998 1997
----------- ----------
U.S. corporate debt securities....................... $26,929,000 $ --
Bank certificate of deposit.......................... -- 1,010,000
----------- ----------
$26,929,000 $1,010,000
=========== ==========
Marketable securities are carried at amortized cost, which approximates fair
market value. The Company purchases cash investments and marketable securities
that are of high credit quality and limits the amount invested in any one
institution.
Property and equipment--Property and equipment are recorded at cost and
depreciated using the straight-line method over their estimated useful lives
ranging from three to five years.
Stock-based employee compensation--As permitted by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation expense for employee stock options, if any, is
measured as the excess of the quoted market price of the Company's stock at
the date of grant over the amount an employee must pay to acquire the stock.
Earnings per share--Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," became effective in the fourth quarter of 1997 and
requires two presentations of earnings per share - "basic" and "diluted."
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding (the
denominator) for the period. The computation of diluted earnings per share is
similar to basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
F-7
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts presented for basic and diluted loss per share from continuing
operations in the accompanying statements of operations have been computed by
dividing loss from continuing operations by the weighted-average number of
common shares outstanding. The two presentations are equal in amounts because
the assumed exercise of outstanding stock options would be antidilutive for
all periods presented. See Notes 4 and 9 for information regarding potentially
dilutive stock options.
Comprehensive income (loss)--In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for
the reporting and display of comprehensive income (loss) and its components.
The Company adopted SFAS 130 in 1998. In 1996, other comprehensive income or
loss consists of a reclassification adjustment for gains on sales of
marketable securities which were included in the net loss. There are no
components of other comprehensive income for the years ended December 31, 1998
and 1997.
Use of estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
reviews its estimates on an ongoing basis, including those related to
discontinued operations and revises such estimates based upon currently
available facts and circumstances.
Significant accounting policies related to the Company's discontinued
operations are as follows:
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market.
Intangible assets--Intangible assets, primarily goodwill, are amortized
using the straight-line method over their estimated useful lives ranging from
seven to fifteen years.
Capitalized software--At December 31, 1997, net assets related to
discontinued operations include approximately $3,200,000 for the costs to
acquire specialized software for use in new products. This asset began
amortizing over five years in 1998.
Revenue recognition--Generally, sales are recorded when products are shipped
or services are rendered. Sales under long-term contracts are recorded as
costs are incurred and include estimated profits calculated on the basis of
the relationship between costs incurred and total estimated costs (cost-to-
cost type of percentage-of-completion method of accounting). Revenues
recognized in excess of amounts billed to customers are included in accounts
receivable and amounted to approximately $6,260,000 at December 31, 1997. In
the period in which it is determined it is probable that a loss will result
from the performance of a contract, the entire amount of the estimated
ultimate loss is charged against income. In late 1997, the Company recorded a
pre-tax contract loss provision of $5,700,000 related to the Transportation
Systems Group's multi-year contract with a state agency to design, install and
maintain an electronic toll collection system.
2. DISCONTINUED OPERATIONS
Historically, the Company operated in one industry segment, the provision of
systems and solutions for the intelligent transportation, electronic security
and other markets through the design, manufacturing, installation and support
of hardware and software products utilizing the Company's wireless data and
security technologies. The businesses comprising this industry segment were
sold during 1998 and 1997 in four separate transactions as described below.
These businesses are presented as Discontinued Operations in the accompanying
financial statements.
F-8
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Transportation Systems Group
In June 1998, the Company sold its Transportation Systems Group to UNOVA,
Inc. ("UNOVA"), effective as of May 31, 1998, resulting in a pre-tax gain of
$1,139,000. As consideration for the sale, the Company received $22,350,000 in
cash and 2,211,900 unregistered shares of the Company's common stock that were
previously purchased by UNOVA in late 1997. The shares were valued at
$10,921,000. Included in UNOVA's purchase were the Company's manufacturing and
technology facility in Albuquerque, New Mexico, the Company's radio frequency
identification technologies and other intellectual properties, the brand name
Amtech, and all operations associated with the transportation business.
Cotag International
In July 1998, the Company sold the net assets of Cotag International
("Cotag") to Metric Gruppen AB ("Metric") of Solna, Sweden, effective as of
June 30, 1998, resulting in a pre-tax loss of $2,372,000, including a
$2,800,000 write-off of intangible assets. The Company received sales proceeds
of $3,050,000 during 1998 and $1,552,000 in February 1999. Depending on the
level and mix of Cotag's revenues achieved in 1999, the Company may receive up
to an additional $800,000, none of which has been reflected in the financial
statements as of December 31, 1998. Included in Metric's purchase was the
brand name and intellectual property underlying Cotag's hands-free proximity
technology, Cotag's manufacturing facility in Cambridge, England, and the
ongoing business of the unit.
Cardkey Systems
In November 1998, the Company sold Cardkey Systems and related entities to
Johnson Controls, Inc., effective as of November 29, 1998, realizing cash
proceeds of $44,715,000, including $3,752,000 received in January 1999. The
sale resulted in a pre-tax gain of $23,550,000 and included all of the
operations and net assets of the business.
Interactive Data Group
The Company withdrew from the wireless LAN terminal market and sold its
Interactive Data Group in late 1997 for $1,225,000 in cash, resulting in a
pre-tax loss of $3,725,000.
The gain or loss on the sale of discontinued operations is summarized as
follows:
1998 1997
----------- -----------
Gain (loss) on sale before income taxes........... $22,317,000 $(3,725,000)
Income taxes...................................... (666,000) 68,000
----------- -----------
Gain (loss) on sale of discontinued operations.... $21,651,000 $(3,657,000)
=========== ===========
Summary operating results of the discontinued operations are as follows:
1998 1997 1996
----------- ------------ ------------
Revenues.......................... $87,224,000 $117,706,000 $116,508,000
Costs and expenses................ 80,396,000 126,848,000 116,644,000
----------- ------------ ------------
Income (loss) before income
taxes............................ 6,828,000 (9,142,000) (136,000)
Income taxes...................... (723,000) (2,947,000) (212,000)
----------- ------------ ------------
Income (loss) from discontinued
operations....................... $ 6,105,000 $(12,089,000) $ (348,000)
=========== ============ ============
F-9
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Liabilities related to discontinued operations of $3,875,000 at December 31,
1998 consist primarily of accrued compensation paid in 1999 to certain
employees of the discontinued businesses and estimated future costs for
various indemnification issues associated with the disposal of these
businesses.
The net assets related to discontinued operations in the December 31, 1997
balance sheet include:
Cash........................................................ $ 2,580,000
Accounts receivable......................................... 31,056,000
Inventories................................................. 11,759,000
Other current assets........................................ 794,000
Property and equipment...................................... 12,695,000
Intangible assets........................................... 6,746,000
Other assets................................................ 5,742,000
Current liabilities......................................... (21,101,000)
------------
Net assets related to discontinued operations............... $ 50,271,000
============
3. PROPERTY AND EQUIPMENT
1998 1997
-------- --------
Computer equipment and software.......................... $ 83,000 $ 37,000
Office equipment, furniture and fixtures................. 88,000 46,000
-------- --------
171,000 83,000
Less accumulated depreciation............................ (13,000) (35,000)
-------- --------
$158,000 $ 48,000
======== ========
4. STOCKHOLDERS' EQUITY
Sale and Reacquisition of Stock
In November 1997, UNOVA purchased 2,211,900 shares of the Company's common
stock for $10,000,000 in a private placement transaction. As partial
consideration for the sale of the Company's Transportation Systems Group to
UNOVA in June 1998 (Note 2), these shares were returned to the Company.
Stock Options
The Company has non-qualified stock options outstanding to employees and
directors under various shareholder approved stock option plans. Options
granted under these plans are generally not less than the fair market value at
the date of grant, and subject to termination of employment generally expire
ten years from the date of grant. Employee options are generally exercisable
in annual installments over three to five years or are exercisable at rates of
45% in three years and the remaining 55% in five and one-half years, unless
accelerated due to the Company's common stock trading at appreciated price
targets. Grants to certain directors are exercisable within six months from
the date of the grant. At December 31, 1998, 870,495 shares were available for
future grants under the Company's stock option plans, excluding 15,000 shares
reserved for possible issuance as restricted stock in tandem with the exercise
of certain stock options outstanding. In 1998 and 1997, 58,000 and 5,000
shares of restricted stock, respectively, were issued pursuant to the plans.
In February 1998, Mr. David P. Cook replaced the chairman, president and
chief executive officer of the Company. The provisions of the former
executive's severance agreement and various stock options resulted in a
F-10
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
charge to income in 1998 of approximately $1,000,000, including a cash payment
of approximately $650,000, which is included in corporate expenses. The
Company and Mr. Cook have entered into an employment arrangement providing for
a three year term, beginning April 29, 1998. Mr. Cook will receive no salary;
however, as consideration for entering into the employment arrangement, Mr.
Cook received an option to acquire 4,254,627 shares of the Company's common
stock. The option exercise price is $7.00 per share, which was twice the
closing price of the Company's common stock on April 28, 1998. The options
have a five year term, vest quarterly over two years, and are subject to
accelerated vesting upon the occurrence of specified events.
The following is a summary of stock option transactions for 1998, 1997 and
1996:
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at December 31, 1995......................... 1,277,348 $7.69
Granted at market price................................ 330,750 $6.29
Cancelled.............................................. (128,650) $7.36
Exercised.............................................. (69,927) $4.98
---------
Outstanding at December 31, 1996......................... 1,409,521 $7.53
Granted at market price................................ 515,767 $4.48
Cancelled.............................................. (276,594) $7.09
Exercised.............................................. (5,000) $5.75
---------
Outstanding at December 31, 1997......................... 1,643,694 $6.65
Granted at market price................................ 178,625 $4.50
Granted at price exceeding market...................... 4,334,627 $7.01
Cancelled.............................................. (847,875) $6.46
Exercised.............................................. (301,874) $4.66
---------
Outstanding at December 31, 1998......................... 5,007,197 $6.98
=========
Summarized information about stock options outstanding at December 31, 1998
is as follows:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
$ 3.56-
$ 6.88 476,320 4.8 $ 5.07 315,017 $ 5.18
$ 7.00-
$10.75 4,502,127 4.1 $ 7.11 1,215,339 $ 7.30
$16.50-
$25.40 28,750 4.6 $18.77 28,750 $18.77
--------- ---------
5,007,197 1,559,106
========= =========
At December 31, 1997, 602,652 options were exercisable.
In December 1995, stock options were granted to certain of the Company's
outside directors under a plan that was approved by the shareholders on April
25, 1996. The Company recognized compensation expense of $446,000, which is
included in corporate expenses, based on the excess of the fair market value
of the Company's common stock on the date of plan approval, which was $9.00,
over the exercise price of the options of $5.13, which was fair market value
of the Company's common stock on the date of grant.
F-11
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its stock options. Accordingly, the Company does not record
compensation expenses for its employee stock option grants unless the market
price exceeds the exercise price on the date of grant. Effective January 1,
1996, Statement of Financial Accounting Standards No. 123 ("SFAS 123")
"Accounting for Stock-Based Compensation," encourages adoption of a fair-value
based method for valuing the cost of stock-based compensation; however, it
allows companies to continue to use the intrinsic value method under APB 25
and disclose pro forma results and earnings per share in accordance with SFAS
123. Under SFAS 123, compensation cost is measured at the grant date based
upon the value of the award and is recognized over the vesting period. As
required, the pro forma disclosures include only options granted since January
1, 1995. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions to the option valuation models can materially
affect their estimated fair value, in management's opinion, the existing
valuation methods do not necessarily provide a reliable single measure of the
fair value of its stock options. Had compensation cost for the Company's
stock-based compensation been determined consistent with SFAS 123, the
Company's net results and earnings per share would have been as follows:
1998 1997 1996
----------- ------------ -----------
Net income (loss):
As reported....................... $26,266,000 $(17,617,000) $ (644,000)
Pro forma......................... $25,019,000 $(17,923,000) $(1,112,000)
Basic and diluted earnings (loss)
per share:
As reported....................... $ 1.66 $ (1.17) $ (0.04)
Pro forma......................... $ 1.58 $ (1.19) $ (0.08)
The Company used the Black-Scholes option pricing model to determine the
fair value of grants made during 1998, 1997 and 1996. The following weighted
average assumptions were applied in determining the pro forma compensation
cost:
1998 1997 1996
----- ----- -----
Risk-free interest rate................. 5.59% 5.85% 6.05%
Expected option life.................... 3.1 years 3.4 years 3.7 years
Expected stock price volatility......... 52% 55% 51%
Expected dividend yield................. -- -- --
Fair value of options:
Granted at market price............... $1.45 $1.84 $2.74
Granted at prices exceeding market.... $0.70 -- --
5. INCOME TAXES
Components of income taxes related to continuing operations are as follows:
1998 1997 1996
-------- --------- --------
Federal income tax (provision) benefit:
Current..................................... $576,000 $ 372,000 $(77,000)
Deferred.................................... -- (380,000) --
-------- --------- --------
$576,000 $ (8,000) $(77,000)
======== ========= ========
F-12
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the expected U.S. tax benefit to income taxes related to
continuing operations is as follows:
1998 1997 1996
-------- --------- ---------
Expected tax benefit at U.S. statutory
rate..................................... $702,000 $ 633,000 $ 74,000
Unbenefitted U.S. losses, net............. (64,000) (24,000) (151,000)
Investment in subsidiary.................. (68,000) -- --
Increase in valuation allowance, net...... -- (380,000) --
Unbenefitted (benefitted) tax credits..... 6,000 (237,000) --
-------- --------- ---------
$576,000 $ (8,000) $ (77,000)
======== ========= =========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's deferred tax assets and liabilities as of December 31, 1998 and 1997
are as follows:
1998 1997
----------- ------------
Deferred tax assets:
Nondeductible reserves.......................... $ 895,000 $ 3,796,000
Losses of foreign subsidiaries.................. -- 7,271,000
U.S. net operating loss carryforwards........... 16,000 3,021,000
Tax credit carryforwards........................ 607,000 2,193,000
Stock option compensation....................... 207,000 180,000
Other, net...................................... -- 303,000
----------- ------------
Total deferred tax assets..................... 1,725,000 16,764,000
Valuation allowance for deferred tax assets....... (1,725,000) (15,680,000)
----------- ------------
-- 1,084,000
Deferred tax liabilities:
Amortization of intangibles..................... -- 1,084,000
----------- ------------
Net deferred tax assets......................... $ -- $ --
=========== ============
In 1997, in light of continued operating losses, future taxable income of
the Company was uncertain, and as a result, all of the Company's deferred tax
assets were fully reserved. During 1998, the Company sold all of its operating
businesses, resulting in the utilization or transfer of substantially all of
the Company's deferred tax assets. The Company continues to fully reserve its
deferred tax assets in 1998 due to the uncertainty of future taxable income
from the Company's new business initiatives. Tax credit carryforwards at
December 31, 1998 represent alternative minimum tax credits that do not
expire.
6. LEASE COMMITMENTS
The Company's continuing operations includes office rental expenses of
approximately $150,000 per year for 1998, 1997 and 1996. At December 31, 1998,
future minimum lease payments under noncancelable operating leases are
$185,000 annually through July 2003. In 1999, the Company entered into an
operating sublease for approximately 29,000 square feet of office space which
commences in May 1999. The sublease provides for minimum annual lease payments
of $466,000 through September 2004.
7. RELATED PARTY TRANSACTIONS
In June 1998, the Company sold its Transportation Systems Group to UNOVA. At
the time of the sale, UNOVA was a 13% shareholder of the Company and a member
of UNOVA's senior management was on the Company's Board of Directors. See Note
2.
F-13
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1998, the Company acquired Petabyte Corporation ("Petabyte"), a
digital data distribution start-up enterprise founded by Mr. Cook, the
Company's chairman, president and chief executive officer. In consideration of
the sale of Petabyte, the Company paid Mr. Cook $200,000 and agreed to pay Mr.
Cook four annual payments of $200,000 each. In March 1999, the Company
returned to Mr. Cook title to a Petabyte patent covering certain digital data
distribution concepts, while retaining a use license to the patent for a
nominal one-time payment. As part of the return of the title, the Company's
future payments to Mr. Cook, totaling $800,000 have been eliminated.
8. EMPLOYEE BENEFIT PLANS
The Company has a retirement savings plan structured under Section 401(k) of
the Internal Revenue Code. The plan covers substantially all U.S. employees
meeting minimum service requirements. Under the plan, contributions are
voluntarily made by employees and the Company may provide matching
contributions based on the employees' contributions. The Company's continuing
operations includes approximately $16,000 per year in 1998, 1997 and 1996, for
matching contributions to this plan.
The Company has an employee stock purchase plan for substantially all
employees that meet minimum service requirements. The plan provides for the
purchase of up to 300,000 previously issued shares of the Company's common
stock. The employee contributes 85% of the purchase price through payroll
deduction with the difference paid by the Company. Since inception of the plan
in 1996, a total of 151,834 shares have been purchased including 50,789 and
85,152 shares purchased in 1998 and 1997, respectively.
9. SUBSEQUENT EVENTS
Proposed Director Stock Option Plan
In January 1999, certain non-employee directors were granted options to
purchase, in the aggregate, approximately 150,000 shares of the Company's
common stock, subject to approval of a new directors' stock option plan by the
Company's stockholders. The options have an exercise price of $10.65 per
share, which was 120% of the closing price of the common stock on the date of
grant. The options vest upon the approval of a new plan and expire at the end
of ten years. If the stockholders approve the new plan, currently under
Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting for Stock
Issued to Employees," the excess, if any, of the closing price of the common
stock on the date of plan approval over the exercise price of $10.65 would be
charged to income for periods prior to the effective date of a new accounting
standard amending APB 25 as discussed below. The estimated fair value of these
options at the grant date using the Black-Scholes option valuation model is
approximately $965,000 or $6.43 per share.
New Business Initiatives
In January 1999, the Company's Board of Directors approved a significant
investment in a new Internet related business, a transaction payment system
for use by consumers when purchasing items over the Internet. The system is
expected to collect payments from consumers and disburse the payments to
participating vendors. The Company is developing this proprietary Internet
transaction payment system, using both internal and external resources. The
Company entered into an agreement in February 1999 with Lante Corporation
("Lante"), a third party software development firm, to assist in such
development effort. In exchange for the services to be provided by Lante, the
Company will pay cash for work performed at discounted rates and will issue
options to purchase 500,000 shares of the Company's common stock to Lante at
an exercise price of $7.62 per share, the closing price of the Company's
common stock on the date of the agreement. The options vest over three years
and expire at the end of ten years. The estimated fair value of these options
at the grant date using the Black-Scholes option valuation model is $2,865,000
or $5.73 per share.
F-14
CUSTOMTRACKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Company engaged the services of a law firm to assist in
obtaining exclusive or non-exclusive rights, or both, to certain music content
rights. In exchange for these services, a wholly-owned subsidiary of the
Company agreed to issue options to acquire approximately 5% of the
subsidiary's common stock, which was convertible into common stock of the
Company. Based upon the lack of near-term prospects to obtain the targeted
music rights, the parties terminated this option arrangement. The Company has
paid the law firm $50,000 in exchange for the cancellation of the options to
have been issued, a portion of which had vested. Subsequently, in February
1999, in exchange for the law firm's agreement to assist the Company in
marketing its Internet transaction payment system to five major music
companies, the Company agreed to issue the firm options to purchase 20,000
shares of the Company's common stock at an exercise price of $8.61 per share,
representing the average closing price of the Company's common stock for the
twenty trading days centered around the date of the agreement. The options
will vest, if at all, on a pro rata basis when any or all of the five targeted
companies begin using the Company's Internet transaction payment system. The
options expire at the end of six years. The estimated fair value of these
options at the grant date using the Black-Scholes option valuation model is
$107,000 or $5.35 per share.
Accounting for Non-Employee Stock Options
The Financial Accounting Standards Board recently concluded its initial
deliberations on several practice issues under APB 25. The proposed effective
date of a new financial accounting standard setting forth these conclusions
would be its issuance date, which presently is expected to be in September
1999, but would apply to all stock option grants subsequent to December 15,
1998. A consequence of the application of the tentative conclusions would be
that outside directors that receive stock options would not be included under
the scope of APB 25 because they would no longer be considered employees.
Stock option grants to outside directors after December 15, 1998 would,
therefore, give rise to compensation expense, determined in accordance with
the following paragraph, and recognized over the vesting period for periods
subsequent to the effective date of the new accounting standard.
The accounting for equity instruments, such as the stock options discussed
in the paragraphs above, issued to non-employees for services rendered is
governed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" and Emerging Issues Task Force Issue No. 96-18
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." These
pronouncements require the fair value of equity instruments given as
consideration for services rendered be recognized as a non-cash charge to
income over the shorter of the vesting or service period. The equity
instruments must be revalued on each subsequent reporting date until
performance is complete with a cumulative catch up adjustment recognized for
any changes in their fair value. As a result, the Company's future results of
operations could be materially impacted by a change in valuation of the stock
options discussed above, or other equity instruments granted in the future to
non-employees, as a result of future increases or decreases in the price of
the Company's common stock. However, the required accounting treatment will
have no impact on the Company's cash flows or total stockholders' equity.
F-15