<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[_] 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)
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)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X NO ___
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding At April 30, 1999
- -------------------------------------- -------------------------------
Common Stock, par value $.01 per share 15,247,212
<PAGE>
INDEX
PART I-FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 9
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
</TABLE>
2
<PAGE>
CUSTOMTRACKS CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,842 $ 54,292
Short-term marketable securities 49,531 26,929
Due from sale of discontinued operations -- 5,304
Other current assets 242 215
------- -------
Total current assets 77,615 86,740
Long-term marketable securities 5,001 --
Property and equipment, net 1,113 158
------- -------
$ 83,729 $ 86,898
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,826 $ 1,574
Liabilities related to discontinued operations 1,710 3,875
------- -------
Total current liabilities 3,536 5,449
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, 10,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 30,000,000 shares 175 174
authorized; 17,495,737 issued, 15,203,837
outstanding in 1999 and 17,384,437 issued, 15,092,537
outstanding in 1998
Additional capital 89,607 88,449
Treasury stock, at cost (11,314) (11,314)
Retained earnings (net of deficit accumulated during the
development stage of $2,415 in 1999) 1,725 4,140
------- -------
Total stockholders' equity 80,193 81,449
------- -------
$ 83,729 $ 86,898
======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
CUSTOMTRACKS CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------
1999 1998
---- ----
<S> <C> <C>
Research and development expenses $ (2,731) $ --
Corporate expenses (775) (1,644)
Investment income 1,061 262
------ ------
Loss from continuing operations before income taxes (2,445) (1,382)
Income tax benefit 30 436
------ ------
Loss from continuing operations (2,415) (946)
Income from discontinued operations, net of income taxes -- 1,305
------ ------
Net income (loss) $ (2,415) $ 359
====== ======
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.16) $ (0.06)
Discontinued operations -- 0.08
------ ------
Net income (loss) $ (0.16) $ 0.02
====== ======
Weighted average shares outstanding 15,124 16,949
====== ======
</TABLE>
See accompanying notes.
4
<PAGE>
CUSTOMTRACKS CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (2,415) $ (946)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 15 5
Non-employee stock option compensation 749 --
Employee stock option compensation -- 363
Changes in assets and liabilities, excluding divestiture of businesses:
Other current assets (27) (50)
Current liabilities 252 313
------- ------
Net cash used by continuing operations (1,426) (315)
Net cash provided by discontinued operations 3,139 2,709
------- ------
Net cash provided by operating activities 1,713 2,394
Cash flows from investing activities:
Purchases of property and equipment, net (970) --
Purchases of marketable securities (47,587) --
Sales and maturities of marketable securities 19,984 1,010
Investing activities of discontinued operations -- (1,019)
------- ------
Net cash used by investing activities (28,573) (9)
Cash flows from financing activities:
Proceeds from exercise of stock options 417 25
------- ------
Net cash provided by financing activities 417 25
Effect of exchange rate changes on cash and cash equivalents (7) (13)
------- ------
Increase (decrease) in cash and cash equivalents (26,450) 2,397
Cash and cash equivalents, beginning of period 54,292 12,583
------- ------
Cash and cash equivalents, end of period $ 27,842 $ 14,980
======= ======
</TABLE>
See accompanying notes.
5
<PAGE>
CUSTOMTRACKS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements, which should be read in conjunction
with the audited consolidated financial statements included in the Company's
1998 Annual Report to Shareholders on Form 10-K, are unaudited but have been
prepared in the ordinary course of business for the purpose of providing
information with respect to the interim periods. The Condensed Consolidated
Balance Sheet at December 31, 1998 was derived from the audited Consolidated
Balance Sheet at that date which is not presented herein. Management of the
Company believes that all adjustments necessary for a fair presentation for such
periods have been included and are of a normal recurring nature, except for the
amortization of the fair value of stock options granted to non-employees as
explained in Note 3. The results of operations for the three-month period ended
March 31, 1999 are not necessarily indicative of the results to be expected for
the full year.
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.
Basic and diluted earnings per common share are both computed based on the
weighted average number of shares of common stock outstanding. The assumed
exercise of outstanding stock options would be antidilutive for all periods
presented.
2. NEW BUSINESS
The Company is developing an Internet transaction payment system and a
digital signature system, and is exploring other Internet-related businesses.
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 current business
endeavors. See Note 3 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
3. NON-EMPLOYEE STOCK OPTIONS
Proposed Director Stock Option Plan
In January 1999, certain non-employee directors were granted immediately
vested 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 become effective 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 was approximately $965,000 or $6.43 per share.
6
<PAGE>
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 in developing software for its new Internet-related businesses. In
exchange for the services to be provided by Lante, the Company will pay cash for
work performed at discounted rates and has issued 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. On the date of grant, these options had an estimated fair value of
$2,865,000 or $5.73 per share, using the Black-Scholes option valuation model.
Accounting for these options require that they 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. The Company's common
stock price has increased from $7.62 per share at the date of grant to $15.00
per share at March 31, 1999, thereby increasing the estimated fair value of
these options to $6,320,000 or $12.64 per share as of March 31, 1999. The
revalued amount for these options is being amortized over the three year vesting
period; accordingly, the Company's results of operations for the quarter ended
March 31, 1999 include a non-cash charge of $746,000 for amortization of the
fair value of these options. The Company's future results of operations could
be materially impacted by a change in valuation of the stock options issued to
Lante 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.
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.
7
<PAGE>
ITEM 2.
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.
The Company is developing an Internet transaction payment system and a
digital signature system, and is exploring other Internet-related businesses.
The transaction payment system, which uses, in part, the Company's digital
signature technology, will allow consumers to purchase items over the Internet
without divulging personal information to Web merchants. The transaction payment
system is expected to be operational by the end of the third quarter of 1999.
The Company expects its digital signature system to participate in markets
consistent with those described in pending Congressional bills, such as H.R.
1572 (Digital Signature Act of 1999) and H.R. 1714 (Electronic Signatures in
Global and National Commerce Act), which specify both federal and commercial
applications of digital signatures. The Company's digital signature system is
expected to be released for commercial usage before the end of August 1999.
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 current business
endeavors.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Research and development expenses
The Company first incurred development expenses for its current business
endeavors in the first quarter of 1999. Total expenses include a non-cash charge
of $746,000 for amortization of the fair value of stock options granted to a
third party software development firm that is assisting the Company with its
development efforts. See Note 3 to the Condensed Consolidated Financial
Statements for additional discussion regarding non-employee stock options.
Corporate expenses
Corporate expenses decreased from $1,644,000 in 1998 to $775,000 in 1999.
The higher expense level in 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.
Investment income
Investment income increased from $262,000 in 1998 to $1,061,000 in 1999
primarily due to the increase in invested cash and marketable securities
resulting from the sale of the Company's businesses during 1998.
Income tax benefit
The income tax benefit on the loss from continuing operations of $436,000
and $30,000, in 1998 and 1999, respectively, is different from the U.S.
statutory rate of 34%, primarily due to unbenefitted U.S. losses.
Loss from continuing operations
As a result of the foregoing, the Company experienced losses from
continuing operations of $946,000 in 1998 and $2,415,000 in 1999.
8
<PAGE>
DISCONTINUED OPERATIONS
The Company sold all of its operating businesses in 1998 and,
accordingly, their net operating income of $1,305,000 for the three months ended
March 31, 1998 has been reclassified as discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's principal source of liquidity is its cash
investments and marketable securities totaling $82,374,000. The Company plans
to continue to invest its excess cash in high-grade U.S. corporate debt
securities or U.S. government and agency securities.
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
See Note 3 to the Condensed Consolidated Financial Statements regarding the
accounting for stock options granted to non-employees and their potential impact
on the Company's future operating results.
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.
RISKS AND UNCERTAINTIES
Certain assumptions, risks and uncertainties that could affect the
Company's ability to be successful in its current business endeavors include:
(1) the ability of the Company to successfully develop its Internet transaction
payment system and digital signature system and to marshal the personnel and
technical resources to complete the development of these products in a timely
fashion; and (2) the ability of the Company to gain market acceptance for its
products. Also, see the Company's 1998 Annual Report to Shareholders on Form 10-
K, "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Risks and Uncertainties", for other assumptions, risks
and uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended March 31, 1999, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's 1998 Annual Report to
Shareholders on Form 10-K.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following is a list of exhibits filed as part of this
Quarterly Report on Form 10-Q.
DESCRIPTION OF EXHIBITS
-----------------------
*27.1 Financial Data Schedule.
b. No reports of the Registrant on Form 8-K have been filed with the
Securities and Exchange Commission during the three months ended
March 31, 1999.
*Filed herewith.
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CUSTOMTRACKS CORPORATION
(Registrant)
Date: May 12, 1999 By: /s/Steve M. York
----------------
Steve M. York
Senior Vice President, Chief Financial
Officer, and Treasurer
(Principal Financial Officer and
Duly Authorized Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 27,842
<SECURITIES> 49,531
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 77,615
<PP&E> 1,141
<DEPRECIATION> 28
<TOTAL-ASSETS> 83,729
<CURRENT-LIABILITIES> 3,536
<BONDS> 0
0
0
<COMMON> 175
<OTHER-SE> 80,018
<TOTAL-LIABILITY-AND-EQUITY> 83,729
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,445)
<INCOME-TAX> (30)
<INCOME-CONTINUING> (2,415)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,415)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
