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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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, 1997
[ ] 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
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)
Registrant's Telephone Number, Including Area Code: (612) 832-9800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $68,751,531 based on the closing sale price of the
Company's Common Stock as reported on the Nasdaq National Market on March 9,
1998: $2.75
The number of shares outstanding of the registrant's common stock, as of March
9, 1998: 25,000,557 shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on April 30, 1998, are incorporated by reference into Part III of
this report.
(2) Portions of the registration statement on Form S-1 which was declared
effective December 12, 1993, are incorporated by reference into Part III
of this report.
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PART I
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES, INCLUDING THE POSSIBILITY THAT A SUBSTANTIAL MARKET FOR
MOBILE DATA SYSTEMS WILL NOT DEVELOP IN THE TIME FRAMES ANTICIPATED BY THE
COMPANY, THE COMPETITIVE ENVIRONMENT FOR CUSTOMER SPENDING FOR TECHNOLOGY,
WHICH INCLUDES SPENDING FOR YEAR 2000 INITIATIVES, THE POSSIBILITY THAT
PRICING FOR WIRELESS COMPUTING SERVICES AND TECHNOLOGY WILL NOT BE AT A LEVEL
NEEDED TO SUSTAIN LONG-TERM FINANCIAL SUCCESS, AND THE OTHER RISKS DETAILED
BELOW AND FROM TIME TO TIME IN THE COMPANY'S OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE ACTUAL RESULTS THAT THE COMPANY
ACHIEVES MAY MATERIALLY DIFFER FROM ANY FORWARD-LOOKING STATEMENTS DUE TO
SUCH RISKS AND UNCERTAINTIES.
ITEM 1. BUSINESS
Racotek, Inc. ("Racotek" or the "Company") is a systems integrator for
mobile data communication systems. Racotek's objective is to become a leading
provider of mobile data communications services and technologies to businesses
that have mobile workers engaged in on-site customer service. The service and
technology offerings of the Company are focused on extending enterprise
information systems to mobile workers, through the use of mobile computing
software and systems integration services provided by the Company that provide
connectivity from host computer applications across multiple wireless and
wireline networks. The Company also provides post-installation support services
designed to maximize the business benefits made possible by mobile
communications systems.
Services provided by the Company include business case evaluation,
requirements consulting, system design and planning, application software
development, systems integration, training, installation, and organizational
change management. The Company also derives revenue from licenses of its
KeyWare-TM- software product. The ability to utilize KeyWare over many
different configurations of wireless networks and with different types of
hardware allows Racotek the flexibility to make independent recommendations
regarding its clients' wireless network configurations as it helps clients
choose the hardware and software components of their wireless wide area network.
In the first quarter of 1996, the Company decided to discontinue the
production, purchase and distribution of specialized mobile radio ("SMR")
technologies. The Company completely exited from the SMR hardware production and
distribution business in the third quarter of 1997.
BACKGROUND
The Company believes that 8 million of the estimated 38 million mobile
workers in the United States are engaged in on-site customer service, and these
mobile workforces are the principal potential market for Racotek's technologies
and services. The market for mobile data communications services and
technologies remains relatively undeveloped, and many mobile workers do not use
wireless communication at the present time. The Company believes that the
principal reason that the market for mobile data services has been slow to
develop is the complexity of integrating wireless data communication into
existing field service software applications.
Implementation of a wireless data solution requires a significant
amount of work to integrate the wireless application to the client's legacy
systems, which usually also requires the client to significantly change its
business processes. Existing field service software applications include
functions such as accounting, inventory control, scheduling, load efficiency,
dispatching, collection of shipment and inventory data, destination
addressing and routing information. Since few of these application programs
are able to exchange messages or data directly with mobile workers, mobile
workers typically either collect information in written form for later
physical delivery to the base office, or communicate with the base office by
voice communications. In either case, the information is not transmitted in
a form that is immediately accessible by a computer. The information must
instead be entered manually, which often results in delays and increases the
likelihood of inaccuracies. Mobile workers face similar obstacles in
obtaining timely and accurate information from the base office and typically
are unable to access the base office applications. The Company's services
and technologies are intended to alleviate these difficulties, by changing
the client's business processes to give the mobile worker access to on-line
real-time data communication with the client's host computer systems.
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THE RACOTEK SOLUTION
Racotek seeks to be a leader in helping clients enhance the
productivity and value of their mobile workers. This includes understanding
and quantifying the potential business benefits associated with implementing
a mobile communication system, assisting the client in the selection of the
appropriate components, integrating third party or its own application
software, identifying and implementing process change, and measuring the
resulting benefits against the expected benefits.
CORE TECHNOLOGIES AND SERVICES
TECHNOLOGY. The Company's technologies include its KeyWare middleware
technology and other standard commercial software developed by the Company, such
as database interface software, as well as application software customized by
the Company for individual clients. The Company's technology also includes
certain network management software tools that the Company has developed in
order to identify and diagnose problems arising with clients' wireless network
configurations.
KeyWare was introduced to the market in the first quarter of 1995.
KeyWare is a wireless networking software product referred to as
"middleware," and is built upon an open client/server architecture. This
design allows KeyWare's service agents to perform important functions on
behalf of host and portable applications including, among others, Global Name
Management, store and forward, file transfer and network management. KeyWare
is designed to be interoperable with existing information systems to provide
broad wireless and wireline connectivity and to enable integration of
existing applications. For the years ended December 31, 1997, 1996, and
1995, revenues from software licenses was 3%, 10%, and 3% of total revenues,
respectively.
In the third quarter of 1997, the Company decided to no longer sell
KeyWare as a stand-alone product. Instead, the Company will sell KeyWare
only in conjunction with sales of the Company's services, such as application
development and systems integration, in situations where the client and the
Company agree that KeyWare is the appropriate solution for the client's
wireless data communication needs. The Company decided to sell KeyWare only
in conjunction with sales of the Company's services because third party
application software providers, systems integrators and end users faced
significant difficulties deploying complete solutions using any of the mobile
computing middleware currently available. These difficulties arise, in part,
because of the immaturity of the component technologies involved in
developing mobile data solutions, the vast number of choices of components
that must be made in a successful project, and these parties' lack of a
systems integration process tailored to the complexities of mobile computing.
PROFESSIONAL SERVICES. The Company offers its clients certain
consulting services, project management and implementation services including
business process review, requirements consulting, system design and planning,
software development, systems integration, training, installation management,
and organizational change management. Racotek's professional services
usually start with business case evaluations, extend to process improvement,
and often include implementation of a wireless mobile data system. The
Company's professional services can be priced on either a time and materials
or fixed bid basis based on pre-approved statements of work. The Company
commenced providing these types of services in 1995. For the years ended
December 31, 1997, 1996, and 1995, revenue generated from these services
accounted for 60%, 52%, and 29% of total revenues, respectively.
MANAGED NETWORK SERVICES. The Company's managed network services
group monitors a client's wireless system performance to detect potential
problems and resolve issues affecting overall system availability. This
service provides clients a single point of contact in a multi-vendor
environment. The Company has developed diagnostic tools to detect errors in
a wireless system. Managed network services are typically billed monthly on
a fixed basis. For the years ended December 31, 1997, 1996, and 1995,
revenues from these services amounted to 12%, 10%, and 1% of total revenues,
respectively.
TRANSMISSION SERVICES. The Company has agreements with SMR
transmission operators in many locations in the United States that allow
transmission service, principally suited for metropolitan, in-vehicle users.
With the release of KeyWare and certain marketing agreements, the Company
also can remarket
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transmission service on ARDIS, RAM and certain Cellular Digital Packet Data
("CDPD") providers. Revenues generated from these services accounted for 12%,
10% and 16% of total revenues for the years ended December 31, 1997, 1996 and
1995, respectively.
OTHER DEVELOPMENTS. In 1996, the Company obtained a United States
patent for a technology involving a spectral overlay on cellular systems that
could deliver LAN-like performance over a wide area wirelessly. In 1997, the
Company performed further simulations regarding implementing and using the
technology. In the first quarter of 1998, certain of the Company's research
and development personnel were assigned to work full-time on the overlay,
with the intention of forming a subsidiary and seeking strategic partners to
further develop the technology. Competition for this technology may come
from third-generation cellular personal communication service ("PCS")
technologies, such as the broadband Code Division Multiple Access ("CDMA")
currently being reviewed by international standards bodies.
CLIENT FOCUS
Racotek is concentrating its efforts on reaching the segments of the
mobile communication market that the Company believes has a need for
industry-specific, mission-critical mobile applications. Racotek has
targeted field service for its initial focus, since the Company has a
detailed knowledge and understanding of that segment of the market. The
dispatcher in a field service organization receives service requests, enters
orders and dispatches field service technicians. At present, most
dispatchers communicate with the field service technicians using standard
telephone or two-way voice radio. The dispatcher reads the work assignment,
special instructions and any relevant information he or she may have about
the service request. The service technician takes notes and proceeds to the
assignment. Each dispatcher is generally responsible for 20 or more
technicians. While the dispatcher handles one technician's queries, a number
of other field technicians may have to wait for information or assignment.
This wait time is a significant inefficiency within the field service
industry.
Current users of Racotek core technologies and services have
implemented systems that provide continuous data flow to and from field
service technicians in an effort to increase customer service and
productivity. The Company's technologies and services may enhance the
productivity of mobile workers by providing more information about the
assignment, such as warranty, service history and parts availability.
Wireless data communication is intended to allow the mobile technician to
access the computers residing at the base office without requiring as much
time and preventing the level of misunderstanding that may result from
person-to-person communication.
BACKLOG
To date, the Company typically has operated with little order backlog.
Most of its revenues in each quarter result from orders booked in each quarter.
The Company's typical payment terms are net 30 days from invoice date.
PRODUCT DEVELOPMENT
Although the Company no longer offers KeyWare as a stand-alone product,
the Company will continue to develop enhancements to KeyWare as they are
required for specific clients.
For the years ended December 31, 1997, 1996, and 1995, the Company's
research and development expenses were approximately $3,286,000, $4,211,000 and
$4,170,000, respectively. Included in the 1995 expense was a $742,000 charge
for the acquisition of certain technologies of Business Partners Solutions, Inc.
("BPSI"). The Company expects research and development costs to decrease
further in 1998, and that product enhancements to KeyWare will be directly
funded by clients.
COMPETITION
Competition in the mobile communications industry is intense. The
Company currently faces direct competition in the market for mobile
networking consulting services from larger companies such as IBM and Andersen
Consulting. Also, major software development companies, such as Novell,
Oracle, and Microsoft, as well as computer and communications companies, such
as AT&T and the regional Bell operating companies, are possible sources of
future direct competition for the Company's core
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technologies and services. Certain application software developers,
including Mobile Data Solutions, Inc., have expanded their software to
provide mobile data solutions. In addition, wireless network providers and
hardware manufacturers that the Company seeks to work with as partners could
attempt to provide services for mobile data systems, thereby becoming
competitors, as could providers of field service application software to
field service companies.
Many of the Company's direct, indirect and potential future
competitors have financial, technical, marketing, sales, manufacturing,
distribution and other resources substantially greater than those of the
Company. Some of these competitors have established market positions and
established trade names, trademarks, patents and intellectual property rights
and substantial technological capabilities. The Company faces competition
not only from these established companies, but also from start-up companies
that can actively develop and market new communications technologies and
services. In addition, the Company is likely to face competition in the
future from companies that develop technology comparable or superior to the
Company's technology and offer similar mobile data services to the Company's
actual and prospective clients. Any of these competitive developments could
adversely affect the Company's business, results of operations and financial
condition.
PROPRIETARY RIGHTS
The Company relies on a combination of copyright, trade secret,
patent and trademark laws, and employee and third-party nondisclosure
agreements to protect its intellectual property rights and technologies. The
Company maintains trademark registrations for its principal trademarks in the
U.S. and selected foreign countries.
The Company does not copy-protect or register the copyrights in its
software but does license it principally pursuant to negotiated license
agreements. The Company believes that technical software copy-protection
devices generally can be circumvented and often interfere with a customer's
legitimate use of the software. The Company does not register the copyrights
in its software because registration is not a condition of copyright
protection. The laws of certain countries in which the Company's technologies
are or may be distributed may not protect the Company's technologies and
intellectual property rights to the same extent as the laws of the U.S. It
may be possible for unauthorized third parties to copy the Company's software
or to reverse engineer or obtain and use information that the Company regards
as proprietary. There can be no assurance that the Company's competitors
will not independently develop technologies that are substantially equivalent
or superior to the Company's technologies.
The Company believes that its technologies, intellectual property
and other proprietary rights do not infringe on the proprietary rights of
third parties. From time to time, however, third parties may assert exclusive
patent, copyright and other intellectual property rights to technologies that
are important to the Company. If the Company is unable to license protected
technology used in the Company's technologies, the Company could be
prohibited from manufacturing and marketing such technologies. Litigation,
which could result in substantial cost to and diversion of resources of the
Company, may be necessary to enforce patents or other intellectual property
rights of the Company or to defend the Company against claimed infringement
of the rights of others. The Company also could incur substantial costs to
redesign its technologies, to defend any legal action taken against it or to
pay damages for infringement.
MANUFACTURING
The Company duplicates software and related documentation and
configures clients' mobile data communications systems at the Company's
facilities in suburban Minneapolis, Minnesota. The Company does not
manufacture any of the hardware used by its clients in a mobile data network,
but this hardware is readily available from various sources.
EMPLOYEES
As of December 31, 1997, the Company had 41 full-time employees,
including 10 in corporate services and administration, 6 in business
development, 4 in managed network services, 8 in new platforms and 13 in
systems integration. The employees and the Company are not parties to any
5
collective bargaining agreements, and the Company believes that its relations
with its employees are good.
The Company's success depends to a significant degree upon the
continued contributions of its key management, sales and technical personnel.
The Company's success also depends upon its ability to attract and retain
highly qualified personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in hiring or
retaining qualified personnel.
ITEM 2. PROPERTIES
The Company's headquarters consists of approximately 19,200 square
feet located in a multi-story building in suburban Minneapolis, Minnesota.
The facility is leased pursuant to an agreement that expires in August 2000.
The Company has certain expansion rights under its lease to increase facility
size. The Company also has a sales office in Larkspur, California. The
Company believes that its facilities are adequate to meet its anticipated
level of operations for the foreseeable future. For additional information
concerning the Company's lease obligations, see Note 3 to the Company's
financial statements included in this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the Company's shareholders was held on January
7, 1998. The sole proposal considered at the meeting was to (i) increase the
pool of stock options available for grant under the Company's 1993 Equity
Incentive Plan (the "Plan") from 3,200,000, to 5,700,000 shares, (ii)
increase the maximum number of shares of Common Stock that may be received
under the Plan from 750,000 shares over the term of the Plan to 750,000
shares per calendar year, and (iii) make this maximum grant limitation
applicable to all employees of the Company participating in the Plan. The
shareholders approved the increase, with 13,703,543 votes cast in favor of
the increase, 1,075,102 votes cast against the increase, 22,978 abstentions,
and no broker non-votes.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK (UNAUDITED):
The Company's common stock began trading on December 10, 1993, on the NASDAQ
National Market under the symbol "RACO," in connection with its initial
public offering. A summary of the range of high and low closing prices for
the Company's common stock for the period from December 10, 1993, through
December 31, 1997, is presented below. These prices reflect interdealer
prices and do not include retail markups, markdowns or commissions.
HIGH LOW
- ----------------------------------------------------------
1995
First Quarter 7.25 3.13
Second Quarter 6.50 4.38
Third Quarter 7.88 5.25
Fourth Quarter 6.75 5.00
1996
First Quarter 5.50 4.25
Second Quarter 7.00 3.88
Third Quarter 6.25 3.50
Fourth Quarter 6.38 3.75
1997
First Quarter 4.88 3.25
Second Quarter 3.50 2.13
Third Quarter 2.63 1.50
Fourth Quarter 2.06 1.00
The Company has never paid cash dividends on its capital stock and does not
anticipate declaring or paying any cash dividends in the foreseeable future.
The Company intends to retain future earnings, if any, for the development of
its business.
As of March 9, 1998, the Company had 380 stockholders of record.
7
ITEM 6. SELECTED FINANCIAL DATA.
STATEMENTS OF OPERATIONS DATA (for the years ended December 31)
(In thousands, except per share data)
1997 1996 1995 1994 1993
----------------------------------------------------
Net revenues:
Services $ 4,744 $ 4,977 $ 2,790 $ 847 $ 106
Products 876 1,906 3,298 3,106 2,313
- -------------------------------------------------------------------------------
Total revenues 5,620 6,883 6,088 3,953 2,419
Cost and expenses:
Cost of services 4,227 3,499 1,314 370 83
Cost of products 1,266 2,027 3,001 2,953 2,754
Research and
development 3,286 4,211 4,170 3,035 1,848
Sales and marketing 4,149 6,249 9,045 7,647 4,599
General and
administrative 2,463 2,000 2,240 2,920 1,142
- -------------------------------------------------------------------------------
Loss from operations (9,771) (11,103) (13,682) (12,972) (8,007)
Interest income 427 859 1,335 1,447 347
- -------------------------------------------------------------------------------
Net loss $(9,344) ($10,244) ($12,347) ($11,525) ($7,660)
- -------------------------------------------------------------------------------
Net loss per share -
basic and diluted ($0.37) ($0.42) ($0.52) ($0.49) ($1.79)
Weighted average
common shares
outstanding (1) 24,932 24,372 23,765 23,443 4,273
BALANCE SHEET DATA (at December 31)
(In thousands)
1997 1996 1995 1994 1993
-------------------------------------------------
Cash and cash equivalents
and short-term investments $5,336 $11,947 $15,042 $27,407 $46,430
Working capital 5,132 12,693 16,781 29,486 46,118
Total assets 7,237 16,919 27,116 38,070 50,097
Total common
stockholders' equity 6,277 15,381 25,378 36,613 47,404
(1) As required by Securities and Exchange Commission regulations, common and
common equivalent shares issued by the Company during the twelve month period
immediately preceding the filing of an initial public offering have been
included in the calculation of shares used in computing the 1993 net loss per
share as if they were outstanding for all periods through December 31, 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Racotek provides solutions to clients throughout the United
States, that enable clients to increase the productivity and value of their
mobile workers, by providing wireless system integration services including
consulting services, wireless networking and application software and network
management support. During 1997, the Company reduced its workforce from
approximately 95 employees to approximately 40 employees; consolidated and
closed several facilities; and reduced the carrying value of certain assets
no longer expected to be used in operations. As a result of these actions,
the Company recorded one-time charges totaling approximately $1,900,000
during the third quarter. The Company took these actions because of slower
than expected market and
8
related revenue growth. Although these actions reduced the Company's expected
operating expense level to less than $2,000,000 per quarter, the Company
expects to incur losses into 1998. The Company must increase its revenue in
order to reach profitability. The Company currently derives most of its
revenue from systems integration services including business case evaluation,
system planning and design, software development, training, installation and
change management. In the long-term, the Company believes that the recurring
revenue from providing monthly network support will constitute a substantial
source of revenue.
RESULTS OF OPERATIONS
NET REVENUES
Service revenues were $4,744,000, $4,977,000 and $2,790,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. The revenue
increased between 1995 and 1996 as the Company allocated more resources and
focused more on generating revenues from systems integration services. In
1997, the Company began to shift the focus of its business from performing
small, technical roles within larger projects to providing its clients with
management and implementation assistance for those projects. These larger
opportunities require longer sales development time than do technical
assistance, and the transition to this mode of sales required a significant
amount of time and attention from the Company's management and key personnel.
The Company derives a substantial amount of its revenues from a small number
of clients. Accordingly, the timing and amount of integration services
performed for these clients has caused the Company's service revenues to
fluctuate. The Company expects this volatility in service revenues to
continue in 1998.
In 1996, the Company made the decision to discontinue the
production, purchase and distribution of SMR products. In 1997, the Company
completed the exit from its SMR hardware operations and continued its
transition to focusing on the sale of its system integration services instead
of selling stand-alone software products. As a result of these decisions,
product revenues were $876,000, $1,906,000 and $3,298,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company expects product
revenues, which will consist primarily of wireless networking and application
software, to be significantly less during 1998 as a result of the Company's
focus on deriving revenues from system integration services rather than
product sales.
COST OF REVENUES
Cost of service revenues were $4,227,000, $3,499,000 and
$1,314,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increases in costs resulted primarily from the cost of
recruiting personnel with the skills to deliver large systems integration
projects, and the transfer and utilization of certain research and
development and sales and marketing personnel into the systems integration
services group. The one-time charges recorded during the third quarter of
1997 included approximately $211,000 of severance and related costs
associated with eliminating personnel with specializations in areas no longer
pertinent to the Company's systems integration offerings.
Cost of product revenues were $1,266,000, $2,027,000 and
$3,001,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease from 1996 to 1997 is primarily due to a $900,000
charge recorded in the first quarter of 1996, resulting from the Company's
decision to write-down the remaining SMR inventories to their net realizable
values at that time. The Company recorded several one-time charges in the
third quarter of 1997, including approximately $425,000 of costs incurred to
complete the Company's exit from SMR hardware production and distribution.
The Company expects the cost of product revenues to be significantly less
during 1998, as a result of the Company's focus on deriving revenues from
system integration services, rather than product sales.
RESEARCH AND DEVELOPMENT
Research and development expenses were $3,286,000, $4,211,000 and
$4,170,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. As a result of the focus on systems integration services rather
than product sales, the research and development staff was reduced during the
third quarter of 1997. Research and development expenses were lower than in
previous years and are expected to decline further during 1998 as software
product development and
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existing product enhancement activities decline in connection with the
Company's transition to primarily providing systems integration services.
SALES AND MARKETING
Sales and marketing expenses were $4,149,000, $6,249,000 and
$9,045,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. In connection with the Company's focus on systems integration
services, a charge of approximately $202,000 was recorded in the third
quarter of 1997 for severance and facility consolidation costs in the sales
and marketing area. Despite this charge, sales and marketing expenses were
lower than in previous years and are expected to decline further during 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,463,000, $2,000,000
and $2,240,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in 1997 is primarily due to approximately $803,000
of facility and relocation charges recorded in the third quarter of 1997.
The Company expects general and administrative expense levels to decline
further in 1998 as a result of previous cost-reduction measures implemented
by the Company.
INTEREST INCOME
Interest income was $427,000, $859,000 and $1,335,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. The decreases
are primarily the result of a decrease in investments, which were used to
fund operating activities during 1997.
Liquidity and Capital Resources
As of December 31, 1997, the Company had no significant capital
spending or purchase commitments and had cash and investments totaling
$5,336,000 and working capital of $5,132,000. For the years ended December
31, 1997, 1996 and 1995 the Company used $6,709,000, $8,376,000 and
$10,823,000, respectively of cash for operating activities. The amount of
cash used in operating activities during 1997 and 1996 decreased as a result
of cost-reduction efforts. These cost reductions will reduce the amount of
cash that the Company anticipates will be required to fund operating
activities in 1998. The cash provided from investing activities in 1997,
1996 and 1995 was primarily from investments that matured in those years. No
significant financing activities occurred in 1997, 1996 or 1995.
With the implementation of the cost-reduction measures during
1996 and 1997, the Company believes its existing capital resources will be
sufficient to meet its cash requirements into 1999.
NEW ACCOUNTING STANDARDS
In October 1997, the AICPA's Accounting Standards Executive
Committee issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition," which must be adopted by the Company effective January 1, 1998.
Management does not anticipate that the adoption of this SOP will have a
significant impact on the Company's financial position or results of
operations.
Effective at year-end 1998, the Company will adopt Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which requires disclosure of segment
data in a manner consistent with that used by an enterprise for internal
management reporting and decision making. The Company believes that it will
report its operations as a single segment under SFAS No. 131.
FACTORS THAT MAY AFFECT FUTURE RESULTS
There can be no assurance that the Company's business will grow
as anticipated or that the Company will achieve or sustain profitability on a
quarterly or annual basis in the future. The Company derives a substantial
part of its revenues from a small number of clients whom, after evaluating
the Company's capabilities, decide whether to engage the Company to create
business case evaluations, consult on change management practices and, in
some cases, to design, implement and deploy their mobile computing systems.
A decision by any one of these clients to delay a mobile computing project
may have a material adverse effect on the Company's business and results of
operations.
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The Company has decided to focus its efforts in the near term on
selling its system integration services to clients in a small number of
vertical markets, such as field service. Although the Company believes that
such specialization will increase its effectiveness, it also means that the
Company's failure in any one of these areas will have a significant adverse
impact on overall Company performance.
In order for the Company's revenues from consulting and
integration services to grow, the Company must continue to add more clients
and larger projects to plan, design and implement mobile computing systems.
The Company's inability to obtain clients for large-scale consulting and
integration services or the Company's inability to leverage its consulting
and integration services to obtain additional revenues from its software
licenses and network support services could materially and adversely affect
the growth of its business.
Competition in the mobile computing industry is intense. Major
software development companies, as well as computer, database and
communication companies, are possible sources of future direct competition
for the Company's products and services. Many of the Company's current and
possible direct competitors have financial, technical, marketing, sales,
manufacturing, distribution and other resources substantially greater than
those of the Company.
In addition to the factors listed above, actual results could
vary materially from the foregoing forward-looking statements due to the
Company's inability to hire and retain qualified personnel, the risk that the
Company may need to enhance products and services beyond what is currently
planned, the levels of promotion and marketing required to promote the
Company's products and services so as to attain a competitive position in the
marketplace, or other risks and uncertainties identified in this Annual
Report and the Company's other filings with the SEC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE.
The following Financial Statements, Supplemental Schedule and Independent
Accountants Report thereon are included herein (page numbers refer to pages
in this Report):
Page
----
Report of Independent Accountants 16
Balance Sheets as of December 31, 1997 and 1996 17
Statements of Operations for the years ended December 31, 1997,
1996 and 1995 18
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 19
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 20
Notes to Financial Statements 21 - 27
Supplemental Schedule - Schedule II Valuation and Qualifying Accounts 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors and executive officers and
compliance with Section 16(a) required by this item is contained in the sections
entitled "Nominees" in Proposal No. 1, "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance," appearing in the Company's Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held on April 30, 1998 (Proxy Statement"). Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is contained in the sections entitled
"Director Compensation" in Proposal No. 1, "Executive Compensation," and
"Compensation Committee Interlocks and Insider Participation," appearing in the
Company's Proxy Statement. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is contained in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Company's Proxy Statement. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained in the section entitled
"Certain Transactions" appearing in the Company's Proxy Statement. Such
information is incorporated herein by reference.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a)(3) and (c) Exhibits
2.01 Asset Purchase Agreement dated October 23, 1995 between the
Registrant and Business Partner Solutions, Inc.(7)
3.01 Registrant's Third Amended and Restated Certificate of
Incorporation.(2)
3.02 Certificate of Designation specifying the terms of the Series A
Junior Participating Preferred Stock of the Registrant as filed
with the Delaware Secretary of State on September 14, 1994.(4)
3.03 Registrant's Bylaws, as amended.(4)
4.01 Form of specimen certificate for Registrant's Common Stock.(1)
4.02 Rights Agreement dated September 12, 1994 between the
Registrant and Norwest Bank Minnesota, N.A., as Rights Agent,
which includes as exhibits thereto the form of rights
certificate and the summary of rights to purchase preferred
shares.(4)
10.01** Registrant's 1989 Stock Option Plan, as amended, and related
documents.(1)
10.02 Registrant's 1993 Equity Incentive Plan and related documents,
as amended through January 10, 1998.
10.03** Registrant's 1993 Directors Stock Plan, as amended, and related
documents, as amended through November 14, 1995.(7)
10.04** Registrant's 1994 Officer's Option Plan.(6)
10.05 Stock Purchase Agreement, Series D Convertible Preferred
Shares, between the Registrant and various investors dated
July 29, 1993.(1)
10.06 Form of Warrant as Issued to certain Stockholders of the
Registrant.(1)
10.07* Agreement by and between the Registrant and Motorola, Inc.
dated February 28, 1992 and Amendment Number One dated June 10,
1993.(1)
10.08 Technology License Agreement by and between the Registrant and
E.F. Johnson Company dated November 16, 1990.(1)
10.09 Software License Agreement by and between the Registrant and
E.F. Johnson Company dated July 24, 1990.(1)
10.10 Ramp Agreement (and related Software License Agreement, Demo/
Development Kit Loan Addendum, RacoNet Services Agreement and
Mutual Non-Disclosure Agreement) by and between the Registrant
and American Freightways dated May 1993.(1)
10.11 Lease Agreement by and between the Registrant and Southmark
Prime Plus, L.P. dated February 17, 1992, for premises at 7401
Metro Boulevard, Edina, MN 55439.(1)
10.12 Lease Agreement by and between the Registrant and Hamilton
Associates dated August 10, 1993, for premises at 6421 Cecilia
Circle, Bloomington, MN 5439.(1)
10.13 Form of Indemnification Agreement entered into by the
Registrant and each of its directors and executive officers.(1)
10.14** Letter Agreement by and between Registrant and William D. Baker
dated August 29, 1993.(1)
10.15** Employment Agreement by and between Registrant and Michael
Fabiaschi dated July 23, 1991.(1)
13
10.16** Employment Agreement by and between Registrant and Richard A.
Cortese dated March 14, 1994.(2)
10.17 Investment Management Agreement between the Registrant and
Investment Advisers, Inc. dated December 10, 1991.(1)
10.18 Memo of Understanding by and between the Registrant and
Lenbrook, Inc. dated March 24, 1992, as amended.(1)
10.19 Memo of Understanding by and between the Registrant and
Lenbrook, Inc. dated May 1993.(1)
10.20 Agreement by and between the Registrant and Quicksilver Express
Courier, Inc. dated January 14, 1992, including Letter
Agreement dated July 19, 1991, as amended.(1)
10.21 Letter Agreement by and between the Registrant and NW Transport
Service, Inc. dated September 17, 1991.(1)
10.22 Bulk Reseller Agreement by and between the Registrant and
ARDIS, dated December 23, 1993.(2)
10.23 Lease Agreement by and between the Registrant and Connecticut
General Life Insurance Company dated May 2, 1994 for premises
at 7301 Ohms Lane, Edina, MN 55439.(3)
10.24 Amendment dated September 30, 1994 to Technology License
Agreement by and between the Registrant and E.F. Johnson
Company.(5)
10.25 Sublease agreement dated October 27, 1994 by and between the
Registrant and Information Advantages, Inc. for premises at
7401 Metro Blvd., Edina, MN 55439.(5)
10.26 Value-Added Reseller Agreement by and between the Registrant
and RAM Mobile Data USA Limited Partnership dated October 10,
1994.(5)
10.27** Separation Agreement dated November 7, 1994 by and between the
Registrant and William D. Baker.(6)
10.28 License Agreement by and between the Registrant and Ericsson GE
Mobile Communications Inc. dated November 29, 1994.(6)
10.29** Amendment to Amended Employment Agreement dated February 29,
1996 by and between the Registrant and Richard A. Cortese.(7)
10.30** Amended Employment Agreement dated February 29, 1996 by and
between the Registrant and Michael A. Fabiaschi.(7)
10.31** Letter Agreement between the Registrant and Emmett Hume dated
January 3, 1995.(7)
10.32** Amendments to Amended Employment Agreement by and between
Registrant and Richard A. Cortese dated June 6, 1996 and
September 24, 1996.(8)
10.33** Letter agreement by and between Registrant and Steve Swantek
dated April 9, 1997.(9)
10.34** Letter agreement by and between Registrant and Isaac Shpantzer
dated April 4, 1997.(9)
10.35** Letter agreement by and between Registrant and Norm Smith dated
June 30, 1997.(9)
10.36** Letter agreement by and between Registrant and Norm Smith dated
September 29, 1997.(10)
10.37** Letter agreement by and between Registrant and Vladi Kelman
dated September 25, 1997.(10)
10.38** Letter agreement by and between Registrant and Dave Maenke
dated September 25, 1997.(10)
10.39** Letter agreement by and between Registrant and Paul Edelhertz
dated September 25, 1997.(10)
14
10.40 Sublease Agreement dated November 18, 1997, by and between
Registrant and ATIO Corporation USA, Inc. for premises at 7301
Ohms Lane, Edina, MN 55439.
10.41 Change in Control Employment and Severance Agreement dated
March 10, 1998, by and between Registrant and Michael A.
Fabiaschi.
10.42 Change in Control Employment and Severance Agreement dated
March 10, 1998, by and between Registrant and Steve Swantek.
10.43 Change in Control Employment and Severance Agreement dated
March 10, 1998, by and between Registrant and Paul Edelhertz.
23.01 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
* Confidential treatment has been obtained for certain portions
of this agreement.
** Management contract or compensatory plan required to be filed
as an exhibit to Form 10-K.
(1) Filed as an Exhibit to the Company's Registration Statement
on Form S-1 (No. 33-70728), that was declared effective
December 9, 1993 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Form 10-Q for the
quarterly period ended June 30, 1994 and incorporated herein
by reference.
(4) Filed as an Exhibit to the Company's Report on Form 8-K that
was filed with the Securities and Exchange Commission on
September 15, 1994 and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Form 10-Q for the
quarterly period ended September 30, 1994 and incorporated
herein by reference.
(6) Filed as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Form 10-Q for the
quarterly period ended September 30, 1996 and incorporated
herein by reference.
(9) Filed as an Exhibit to the Company's Form 10-Q for the
quarterly period ended June 30, 1997 and incorporated herein
by reference.
(10) Filed as an Exhibit to the Company's Form 10-Q for the
quarterly period ended September 30, 1997 and incorporated
herein by reference.
Item 14(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter.
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Racotek, Inc.:
We have audited the financial statements and financial statement schedule of
Racotek, Inc. included on pages 17 to 28 of this Form 10-K. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 financial position of Racotek, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
January 12, 1998
16
RACOTEK, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
1997 1996
-------- --------
Current assets:
Cash and cash equivalents $ 3,103 $ 2,956
Short-term investments 2,233 8,991
Accounts receivable, net 561 1,616
Inventories - 374
Prepaid expenses and other current assets 195 294
-------- --------
Total current assets 6,092 14,231
Property and equipment, net 786 1,932
Restricted cash 355 470
Capitalized software development costs, net - 121
Other long-term assets 4 165
-------- --------
Total assets $ 7,237 $ 16,919
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 6 656
Accrued expenses 651 808
Deferred revenue 303 74
-------- --------
Total current liabilities 960 1,538
-------- --------
Commitments (Note 3)
Stockholders' equity:
Common stock, $0.01 par value, 35,000,000
shares authorized, 24,998,558 and 24,740,293
issued and outstanding at December 31,
and 1996, respectively 250 247
Additional paid-in capital 71,265 70,878
Accumulated deficit (65,088) (55,744)
Promissory note receivable from stockholder (150) -
-------- --------
Total stockholders' equity 6,277 15,381
-------- --------
Total liabilities and stockholders' equity $ 7,237 $ 16,919
-------- --------
-------- --------
The accompanying notes are an integral part of the financial statements.
17
RACOTEK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1997 1996 2995
----------- ----------- -----------
Net revenues:
Services $ 4,744 $ 4,977 $ 2,790
Products 876 1,906 3,298
----------- ----------- -----------
5,620 6,883 6,088
Cost and expenses:
Cost of services 4,227 3,499 1,314
Cost of products 1,266 2,027 3,001
Research and development 3,286 4,211 4,170
Sales and marketing 4,149 6,249 9,045
General and administrative 2,463 2,000 2,240
----------- ----------- -----------
Loss from operations (9,771) (11,103) (13,682)
Interest income 427 859 1,335
----------- ----------- -----------
Net loss $ (9,344) $ (10,244) $ (12,347)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share - basic and diluted $ (0.37) $ (0.42) $ (0.52)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 24,931,750 24,372,464 23,764,673
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the financial statements.
18
RACOTEK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMMON STOCK
----------------------------------------
ADDITIONAL PROMISSORY TOTAL
$0.01 PAR PAID-IN ACCUMULATED NOTE STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT RECEIVABLE EQUITY
-----------------------------------------------------------------------------------------
Balances at December 31, 1994 23,414,260 $234 $69,532 $(33,153) $ - $ 36,613
Exercise of incentive stock options 501,423 5 479 - - 484
Exercise of warrants 12,872 - 25 - - 25
Shares issued in exchange for
acquisition of technology 114,891 1 602 - - 603
NET LOSS - - - (12,347) - (12,347)
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 24,043,446 240 70,638 (45,500) - 25,378
Exercise of incentive stock options 696,847 7 240 - - 247
Net loss - - - (10,244) - (10,244)
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 24,740,293 247 70,878 (55,744) - 15,381
Exercise of incentive stock options 258,265 2 241 - - 243
Stock options issued to consultants - 1 146 - - 147
Net loss - - - (9,344) - (9,344)
Promissory note receivable - - - - (150) (150)
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 24,998,558 $250 $71,265 $(65,088) $(150) $ 6,277
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
19
RACOTEK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
------- -------- --------
Cash flows from operating activities:
Net loss $(9,344) $(10,244) $(12,347)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,011 969 817
Write-down of fixed assets 519
Provision for bad debts 118 233 180
Write-down of inventories 207 1,110 569
Amortization of premiums (discounts) on 8 (94) (236)
Stock issued for consulting services 147 - -
Stock consideration (Note 5) - - 603
Changes in operating assets and liabilities:
Accounts receivable 937 (195) (477)
Inventories 167 (179) 31
Prepaid expenses and other current assets 99 224 (244)
Current liabilities (578) (200) 281
------- -------- --------
Net cash used in operating activities (6,709) (8,376) (10,823)
Cash flows from investing activities:
Purchase of investments (2,250) (18,712) (15,685)
Proceeds from maturity of investments 9,000 25,512 27,889
Purchase of property and equipment (105) (313) (693)
Acquisition of assets (Note 4) - - (223)
Other 3 86 (49)
------- -------- --------
Net cash provided from investing activities 6,648 6,573 11,239
Cash flows from financing activities:
Proceeds from exercises of options and warrants 243 247 509
Changes in restricted cash 115 115 115
Advance to stockholder (150) - -
------- -------- --------
Net cash provided from financing activities 208 362 624
------- -------- --------
Net increase (decrease) in cash and cash equivalents 147 (1,441) 1,040
Cash and cash equivalents, beginning of period 2,956 4,397 3,357
------- -------- --------
Cash and cash equivalents, end of period $ 3,103 $ 2,956 $ 4,397
------- -------- --------
------- -------- --------
The accompanying notes are an integral part of the financial statements.
20
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Racotek, Inc. provides solutions to clients throughout the United States,
designed to enable clients to increase the productivity and value of their
mobile workers by providing wireless system integration services including
consulting services, wireless networking and application software and network
management support.
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. The most significant areas
which require the use of management estimates relate to the allowances for
inventory obsolescence and doubtful accounts as well as determinations
concerning establishment of technological feasibility of software products and
assessments of recoverability of capitalized software development costs.
CASH EQUIVALENTS AND INVESTMENTS:
The Company considers all highly liquid investments in money market funds or
other investments with initial maturities of three months or less to be cash
equivalents. Investments with original maturities in excess of three months are
classified as short-term or long-term investments based on their remaining
maturities.
The Company's investments as of December 31, 1997 and 1996, are considered by
management to be "held to maturity," and therefore are reported at their
amortized cost. Amortization of premiums or discounts are included in results
of operations.
REVENUE RECOGNITION:
Revenues from consulting services are recognized as the services are performed.
Customer support revenues are recognized ratably over the term of the underlying
support agreements.
Revenue from software sold under license agreements is recognized as revenue
upon shipment if there are no post-delivery obligations, and if the terms of
the agreement are such that the payment of the obligation is non-cancelable
and non-refundable. Generally, other product revenue is recognized upon
shipment.
In October 1997, the AICPA's Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which the
Company is required to adopt effective January 1, 1998. Management does not
anticipate that the adoption of this SOP will change the Company's revenue
recognition practices or otherwise impact the Company's financial position or
results of operations.
INVENTORIES:
Inventories were stated at the lower of cost or market, with cost determined
using the first-in, first-out method.
RESEARCH AND DEVELOPMENT COSTS:
The Company capitalizes software development costs incurred in developing a
product once technological feasibility of the product has been determined. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenue, estimated economic life and changes in software
and hardware technology. Amortization of
21
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
capitalized software development costs begins when the product is available for
general release to customers and is computed on the basis of each product's
projected revenues, but not less than on a straight-line basis over the
remaining estimated economic life of the product of approximately five years.
There were no software development costs capitalized during 1997 or 1996.
Software development costs capitalized during 1995 were $110. Amortization
expense of $121, $120 and $123 relating to capitalized costs was recognized for
the years ended December 31, 1997, 1996 and 1995, respectively.
All other research and development expenditures are charged to expense as
incurred.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Significant additions or
improvements extending asset lives are capitalized; normal maintenance and
repair costs are expensed as incurred. Depreciation is determined using the
straight-line method over the estimated useful lives of the assets which
range from two to seven years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful lives of the
assets or the underlying lease term (approximately five years). The cost and
related accumulated depreciation or amortization of assets sold or disposed
of are removed from the accounts and the resulting gain or loss is included
in operations.
INCOME TAXES:
The Company utilizes the asset and liability method of accounting for income
taxes whereby deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the years in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the sum of
the tax currently payable and the change in the deferred tax assets and
liabilities during the period.
STOCK-BASED COMPENSATION:
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Company accounts for stock-based compensation to non-employees using the fair
value method prescribed by Statements of Financial Accounting Standards (SFAS)
No. 123. Accordingly, compensation costs for stock options granted to employees
is measured as the excess, if any, of the value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Compensation cost for stock options granted to non-employees is measured as the
fair value of the option at the date of grant. Such compensation costs, if any,
are amortized on a straight-line basis over the underlying option vesting terms.
NET LOSS PER SHARE:
Basic and diluted net loss per share is computed by dividing the net loss by the
weighted average number of shares of common stock outstanding during the period.
Common stock equivalents were excluded from the net loss per share computation
as their effect is antidilutive. Common stock options could potentially dilute
basic earnings per share in future periods if the Company generates net income.
BUSINESS SEGMENTS:
Effective at year-end 1998, the Company will adopt SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information," which requires
disclosure of segment data in a manner consistent with that used by an
enterprise for internal management reporting and decision making. The Company
believes that it will report its operations as a single segment under SFAS No.
131.
22
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
2. SELECTED BALANCE SHEET INFORMATION:
December 31,
---------------------------
1997 1996
-------- --------
Accounts Receivable, Net:
Accounts receivable $ 785 $ 1,956
Less allowance for doubtful accounts (224) (340)
------- -------
$ 561 $ 1,616
------- -------
------- -------
Inventories:
Components $ - $ 60
Finished goods - 314
------- -------
$ - $ 374
------- -------
------- -------
Property and Equipment, Net:
Computer equipment $ 1,453 $ 3,064
Furniture and equipment 679 816
Leasehold improvements 106 213
------- -------
2,238 4,093
Less accumulated depreciation
and amortization (1,452) (2,161)
------- -------
$ 786 $ 1,932
------- -------
------- -------
In the third quarter of 1997, the Company wrote-off approximately $519 of
property and equipment in connection with a reduction in the number of employees
and the consolidation and closing of facilities.
Accrued Expenses:
Compensation and relocation $169 $236
Vacation 120 186
Deferred rent 101 141
Accrued legal 55 24
Other 206 221
---- ----
$651 $808
---- ----
---- ----
INVESTMENTS:
The Company's investments consisted of $2,233 and $8,991 of U.S. Government and
agency debt securities as of December 31, 1997 and 1996, respectively, including
unamortized discounts of $17 as of December 31, 1997, and premiums and discounts
of $14 and $23 as of December 31, 1996, respectively. Investments held as of
December 31, 1997, have various maturity dates through April 1998. As of
December 31, 1997, the Company's investments had an aggregate fair market value,
based on quoted market prices, of $2,243.
3. LEASE COMMITMENTS:
The Company leases office facilities under terms of a noncancelable operating
lease which expires in August 2000. This lease requires the Company to pay a
pro rata share of the lessor's operating costs.
The lease requires the Company to maintain a restricted cash balance as
collateral for the lessor which declines throughout the lease term. Total rent
expense, including a pro rata share of the lessor's operating costs, were $767,
$642 and $581, for the years ended December 31, 1997, 1996 and 1995,
respectively.
In 1996 and 1997, the Company recorded accruals of $40 and $93, respectively, to
recognize costs to be incurred under terms of a prior lease agreement for other
premises in excess of estimated sublease income to be earned under terms of the
sublease agreement for those premises.
23
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
Future minimum lease payments under noncancelable operating leases are as
follows:
Year Ending December 31 Operating Leases
----------------------- ----------------
1998 $381
1999 289
2000 169
4. ACQUISITION:
On December 27, 1995, the Company acquired certain assets, including certain
technologies from Business Partners Solutions, Inc. in exchange for $362 cash
and $603 of Racotek common stock (114,891 shares). The acquisition was
accounted for as a purchase. Accordingly, the purchase price was allocated to
the acquired assets based upon their relative fair values. The acquisition also
resulted in a $742 charge to research and development expense in the fourth
quarter of 1995.
5. STOCKHOLDERS' EQUITY:
The Company's Stock Incentive and Option Plans (the Plans) provide for grants of
stock options and stock awards. The number of common shares available for grant
pursuant to the Plans were 621,753, 420,611 and 1,195,205 as of December 31,
1997, 1996 and 1995, respectively.
Options become exercisable over periods of up to four years from the date of
grant and expire within ten years from date of grant.
The following table details option activity:
Weighted
Price Per Average Exercise
Options Option Price
--------- ------------ ----------------
Balances, December 31, 1994 2,559,973 $0.05-12.625 $2.08
Granted 873,803 3.125-7.625 3.79
Exercised (501,423) 0.05-4.63 0.11
Canceled (98,428) 0.20-12.625 5.26
Balances, December 31, 1995 2,833,925 $0.10-12.625 $2.08
Granted 1,215,346 3.625-6.00 5.35
Exercised (696,847) 0.10-4.75 0.96
Canceled (440,752) 0.40-12.625 4.90
Balances, December 31, 1996 2,911,672 $0.10-12.625 $3.04
Granted 2,078,572 1.50-4.3125 2.37
Exercised (255,265) 0.20-3.88 1.16
Canceled (1,284,714) 0.10-12.625 5.06
Balances, December 31, 1997 3,450,265 $0.20-12.625 $2.69
Options exercisable at December 31, 1997 1,068,906 $0.20-12.625 $3.11
On October 20, 1997, the Company allowed employees to reprice outstanding stock
options to the market value of the Company's stock as of October 20, 1997. In
connection with the repricing of outstanding stock options, all repriced options
started vesting on October 20, 1997, and will become exercisable over periods of
up to four years from October 20, 1997. Eligible employees elected to reprice
approximately 293,000 options, with original exercise prices ranging from $2.25
to $12.625, to $1.50. The Company's officers and directors elected not to
reprice any of their options.
24
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCKHOLDERS' EQUITY, CONTINUED:
STOCK-BASED COMPENSATION:
No compensation cost has been recognized for stock options granted to employees
or directors under the 1989 Stock Option Plan, the 1993 Equity Incentive Plan or
the 1993 Directors Option Plan (collectively referred to as "the Plans"). Had
compensation cost for the Plans been determined based on the fair value of
options at the grant date for awards in 1997, 1996 and 1995, the Company's net
loss and net loss per share would have increased to the pro forma amounts
indicated below:
(In thousands, except per share amounts)
1997 1996 1995
--------- --------- ---------
Net loss As reported $ (9,344) $(10,244) $(12,347)
Pro forma (10,508) (11,180) (12,632)
Net loss per share - As reported $ (.37) $ (.42) $ (.52)
basic and diluted Pro forma (.42) (.46) (.54)
The pro forma effect on the net loss for 1997, 1996 and 1995 is not fully
representative of the pro forma affect on net earnings (loss) in future years
because these years do not take into consideration pro forma compensation
expense related to grants made prior to 1995. In addition, during 1997 the
Company recognized $37 of pro forma compensation expense as a result of the
option repricing described previously.
The aggregate fair value of options granted during 1997, 1996 and 1995,
respectively, was $881, $1,671 and $1,602 for the 1993 Equity Incentive Plan and
$193, $328 and $52 for the 1993 Directors Option Plan. The aggregate fair value
was calculated by using the fair value of each option grant on the date of
grant, utilizing the Black-Scholes option-pricing model and the following key
assumptions for the Plans:
Assumptions 1997 1996 1995
- -------------------------------------------------------------------------------
Risk-free interest rates 5.27% - 6.77% 5.27% - 6.77% 5.46% - 7.75%
Volatility 35.789% 50% 50%
Expected lives (months) 60 60 60
- -------------------------------------------------------------------------------
The Company does not anticipate paying dividends in the near future.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
----------------------------------- ---------------------------------
Number Weighted- Number
Outstanding at Average Weighted- Exercisable at Weighted-
Range of December 31, Remaining Average Exercise December 31, Average Exercise
Exercise Prices 1997 Contractual Life Price 1997 Price
- -----------------------------------------------------------------------------------------------------------
$0.20 - .55 267,350 47 $0.21 267,350 $0.21
1.50 - 3.00 1,791,481 112 1.83 62,500 1.69
3.125 - 4.6875 876,428 95 3.78 418,117 3.60
4.75 - 12.625 515,006 97 5.13 320,939 5.18
- -----------------------------------------------------------------------------------------------------------
PREFERRED STOCK:
The Company's certificate of incorporation authorizes issuance of up to
5,000,000 preferred shares with a par value of $0.01 and allows the Company's
Board of Directors, without obtaining the stockholders' approval, to issue
preferred stock. There were no preferred shares issued or outstanding as of
December 31, 1997 or 1996.
WARRANTS:
In connection with notes payable issued to stockholders in 1991, warrants were
issued for the purchase of 364,207 shares of Series C convertible preferred
stock at $2.00 per share. These warrants were immediately exercisable and
expired five years from the date of issuance. All unexercised warrants to
25
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
purchase 231,618 shares of preferred stock were converted to warrants for the
purchase of 231,618 shares of common stock when the Company completed its
initial public offering in December 1993. The warrantholders exercised warrants
for the purchase of 12,872 shares in 1995. There are no warrants outstanding as
of December 31, 1997.
STOCKHOLDER RIGHTS PLAN:
On September 7, 1994, the Board of Directors adopted a Stockholder Rights Plan.
Under this plan, the Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each share of common stock outstanding as
of September 28, 1994 (the "Record Date"). In addition, one Right will be
issued with each share of common stock that becomes outstanding after the Record
Date, except in certain circumstances. All Rights will expire on September 12,
2004, unless the Company extends the expiration date, redeems the Rights or
exchanges the Rights for common stock.
The Rights are initially attached to the Company's Common Stock and will not
trade separately. If a person or a group acquires 20 percent or more of the
Company's common stock (an "Acquiring Person") or announces an intention to make
a tender offer for 20 percent or more of the Company's common stock, then the
Rights will be distributed (the "Distribution Date") and will thereafter trade
separately from the common stock. Upon the Distribution Date, each Right may be
exercised for 1/100th of a share of a newly designated Series A Junior
Participating Preferred Stock at an exercise price of $25.00.
Upon a person or group becoming an Acquiring Person, holders of the Rights
(other than the Acquiring Person) will have the right to acquire shares of the
Company's common stock at a substantially discounted price in lieu of the
preferred stock. Additionally, if, after the Distribution Date, the Company
merges into or engages in certain other business combination transactions with
an Acquiring Person or 50 percent or more of its assets are sold in a
transaction with an Acquiring Person, the holders of Rights (other than the
Acquiring Person) will have the right to receive shares of common stock of the
acquiring corporation at a substantially discounted price.
After a person or a group has become an Acquiring Person, the Company's Board of
Directors may, at its option, require the exchange of outstanding Rights (other
than those held by the Acquiring Person) for common stock at an exchange ratio
of one share of the Company's common stock per Right. The board also has the
right to redeem outstanding Rights at any time prior to the Distribution Date
(or later in certain circumstances) at a price of $0.005 per Right. The terms
of the Rights, including the period to redeem the Rights, may be amended by the
Company's Board of Directors in certain circumstances.
6. INCOME TAXES:
As of December 31, 1997, the Company had generated net operating loss
carryforwards of approximately $66,989 for tax reporting purposes that may be
offset against future taxable income through 2012. In addition, the Company had
approximately $447 of future deductible temporary differences as of December 31,
1997, relating primarily to allowances for bad debts, approximately $731 of
research and development charges recognized immediately for financial reporting
purposes (Note 4) that are amortizable over 15 years for tax reporting purposes,
and approximately $537 of research and development tax credit carryovers
available to reduce future income taxes. These credits expire from 2005 through
2012. The Company also had approximately $103 of future taxable temporary
differences related primarily to accelerated depreciation for tax reporting
purposes. Valuation allowances have been established for the entire tax benefit
associated with the carryforwards and net future deductible temporary
differences as of December 31, 1997 and 1996.
Certain stock transactions, including sales of stock and granting of options and
warrants to purchase stock, caused a change in the Company's ownership which,
under the Internal Revenue Code, will limit the amount of net operating loss
carryforwards which may be utilized on an annual basis to offset taxable income
in future periods.
26
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
7. EMPLOYEE SAVINGS PLAN:
The Company offers a 401(k) defined contribution benefit plan which covers
employees who have attained 21 years of age and have been employed by the
Company for at least three months. Participants may contribute up to 20% of
their compensation in any plan year subject to an annual limitation. Employer
contributions may be made at the discretion of the Company's Board of Directors.
No Company contributions have been made to the Plan.
8. MAJOR CUSTOMER AND EXPORT SALES:
A portion of the Company's revenues have been derived from major clients for the
years ended December 31, 1997, 1996 and 1995 as follows:
1997 1996 1995
-------------------------------------------
Customer 1 8% 11% 18%
Customer 2 7% 5% 15%
Customer 3 - 1% 12%
27
RACOTEK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------- ---------------------------------------------------------------------
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING OF CHARGED TO FROM END OF
DESCRIPTION PERIOD EXPENSE ALLOWANCE PERIOD
- --------------------------------------------------------- ---------------------------------------------------------------------
Year ended December 31, 1997
Allowance for doubtful accounts (deducted
from accounts receivable)......................... $340 $ 118 $ (234) $224
Inventory obsolescence reserve (deducted
from inventories)................................. 856 207 (1,063) 0
Year ended December 31, 1996
Allowance for doubtful accounts (deducted
from accounts receivable)......................... 197 233 (90) 340
Inventory obsolescence reserve (deducted
from inventories)................................. 353 1,110 (607) 856
Year ended December 31, 1995
Allowance for doubtful accounts (deducted
from accounts receivable)......................... 150 180 (133) 197
Inventory obsolescence reserve (deducted
from inventories)................................. 389 569 (605) 353
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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.
Dated: March 19, 1998 By /s/ Michael A. Fabiaschi
------------------------------------
Michael A. Fabiaschi,
President and Chief Executive Officer
Each person whose signature appears below constitutes and appoints Michael A.
Fabiaschi and, jointly and severally, his true and lawful attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to
sign amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or his substitute or substitutes, may 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.
Name Title Date
- ---- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
/s/ Michael Fabiaschi President and Chief March 19, 1998
- ---------------------------- Executive Officer and
Michael Fabiaschi Acting Chief Financial Officer
OTHER DIRECTORS:
/s/ Joseph B. Costello Chairman of the Board March 19, 1998
- ----------------------------
Joseph B. Costello
/s/ Dixon R. Doll Director March 19, 1998
- ----------------------------
Dixon R. Doll
/s/ James L. Osborn Director March 19, 1998
- ----------------------------
James L. Osborn
/s/ Norman D. Smith Chief Operating Officer March 19, 1998
- ----------------------------
Norman D. Smith
29
ANNUAL MEETING
The Racotek, Inc. annual stockholders' meeting will be held at the
Marriott City Center, 30 South Seventh Street, Minneapolis, Minnesota, 55402,
at 11:00 a.m. C.S.T. on Thursday, April 30, 1998.
SHAREHOLDER INFORMATION
Racotek common stock trades on the Nasdaq National Market under the
symbol RACO. Stockholders and prospective investors are welcome to call,
write or fax Racotek with questions or requests for additional information.
Copies of Racotek's Annual Report on Form 10-K for the year ended December
31, 1997, may be obtained without charge by directing inquiries to:
RACOTEK, INC. DIRECTORS CORPORATE OFFICERS
INVESTOR RELATIONS Joseph B. Costello Michael A. Fabiaschi
7301 OHMS LANE, SUITE 200 Chairman of the Board President, Chief
MINNEAPOLIS, MN 55439 Racotek, Inc. Executive Officer
TEL: 612-832-9800 and Acting Chief
FAX: 612-832-9383 Michael Fabiaschi Financial Officer
WEBSITE: http:\\www.racotek.com President and Chief Executive Officer
Racotek, Inc. Norman D. Smith
Norwest Bank Minnesota, N.A. Executive Vice
Stock Transfer Department Dixon R. Doll President and Chief
161 North Concord Exchange Founder and Chairman Operating Officer
P.O. Box 738 The DMW Group
South St. Paul, MN 55075-0738 Paul Edelhertz
Tel: 612-450-4101 James L. Osborn Vice President of
Fax: 612-450-4078 General Manager of Customer Solutions
International iDEN Infrastructure
Independent Accountants Division of Motorola's Land Steve Swantek
Coopers & Lybrand L.L.P. Mobile Products Sector Vice President of
Minneapolis, MN Division of Motorola's Land Sales and Marketing
Mobile Products Sector
Corporate Counsel Isaac Shpantzer
Cooley & Godward Norman D. Smith Fellow and Senior
Palo Alto, CA Executive Vice President and Vice President of
Chief Operating Officer Technology
COMMITTEES OF THE BOARD Vladi Kelman
Vice President
AUDIT COMMITTEE of Product
Joseph B. Costello Development
James L. Osborn
COMPENSATION COMMITTEE
Joseph B. Costello
Dixon R. Doll
30