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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 0-22718
RACOTEK, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE #41-1636021
(State or Other Jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or Organization)
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, $.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 $70,514,000 based on the closing sale price of the
Company's Common Stock as reported on the Nasdaq National Market on March 17,
1997.
The number of shares outstanding of the registrant's common stock, as of March
17, 1997: 24,871,870 shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Racotek, Inc. 1996 Annual Report to Stockholders for the
year ended December 31, 1996, are incorporated by reference into Parts I, II
and IV of this report.
(2) Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 13, 1997, are incorporated by reference into Part III of this
report.
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This report consists of 50 sequentially numbered pages. The exhibit index begins
on sequentially numbered page 21.
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PART I
ITEM 1. BUSINESS
Racotek, Inc. (the "Company") develops, markets and supports software and
provides services for mobile data systems. Racotek's objective is to become a
leading provider of mobile data communications products and services to
businesses that have mobile workers. The Company's products are focused on
extending enterprise information systems to mobile workers, through the use of
Company-developed software that provides connectivity from host computer
applications across multiple wireless and wireline networks to mobile computers
used by a mobile work force. The Company seeks broad adoption of its products by
mobile application developers and large account customers to establish itself as
the market-leading communications software solution for mobile workforces. The
Company provides a wide range of consulting services to facilitate and increase
adoption of mobile workforce technologies, as well as post-installation support
services designed to maximize the integration of mobile systems.
The Company made its initial commercial shipments of its KeyWare-TM- product
in the second quarter of 1995 and has experienced growth in both KeyWare license
revenues and related customer support services revenue. KeyWare facilitates the
two-way exchange of data through the use of distributed computing services. The
KeyWare Wireless Distributed Computing environment is modeled after network
standards defined by Open Software Foundation ("OSF") known as the Distributed
Computing Environment ("DCE"). KeyWare is designed as an open system, allowing
customers the flexibility to make independent wireless network configuration
decisions as they choose the hardware and software components of their wireless
wide area network ("WAN"). Racotek is continuing to research and develop the
compatibility of KeyWare with other wireless networks as they become available.
In the first quarter of 1996, the Company decided to discontinue the
production, purchase and distribution of specialized mobile radio ("SMR")
products. As a result of this decision, the Company wrote-down the remaining SMR
inventories to their net realizable values.
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 development of a substantial market for mobile data
systems, the availability and reliability of wireless networks used with the
Company's products, the Company's ability to develop and maintain advantageous
relationships with providers of other components of a complete mobile data
system (such as hardware and applications software), the impact of competitive
products and pricing 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.
BACKGROUND
The Company believes that 21 million of the estimated 38 million mobile
workers in the United States are engaged in customer service, sales/order entry
and transportation activities. These mobile workers are the principal potential
market for Racotek's products and services. However, the market for mobile data
services is new and undeveloped. Mobile workers who currently have wireless
communication facilities communicate using private dispatch radio, paging
systems, private data systems on dedicated frequencies, cellular telephone and
SMR voice services. A number of mobile workers have no wireless communication
facilities at the present time.
The Company believes that the principal reasons that the market for mobile
data services has been slow to develop are the limited commercial availability
and geographic coverage of wireless networks, cost, technical readiness and
ergonomics of ruggedized mobile computing devices and delays in wireless
application integration. The Company believes that the commercial availability
and geographic coverage of wireless networks are increasing, transmission fees
on wireless networks are declining and that capital costs are beginning to
decline.
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Application software that does not contain mobile data transmission
capability is generally available for businesses in the field service and
transportation industries, and includes functions such as accounting, inventory
control, scheduling, load efficiency, dispatching, collection of shipment and
inventory data, destination addressing and routing information. Because 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.
While the development of application software for mobile workers is somewhat
limited, there are many different wireless networks that could be used to
service mobile workers. These networks have been developed at substantial
expense and provide significant data transmission capacity. For example, ARDIS
grew out of the network originally designed for IBM's field service workers and
provides coverage within buildings to portable computer hardware. In addition,
RAM continues to build a high-capacity nationwide wireless packet data system.
In addition, new technologies are being developed and implemented to offer
additional coverage and feature options, including Cellular Digital Packet Data
("CDPD"), Enhanced Specialized Mobile Radio ("ESMR"), low-earth orbit satellite
("LEO"), digital cellular and Personal Communication Services ("PCS"). See
"Technology."
Hardware and software designed to be used on one of the wireless networks
typically requires changes in the software. Developers of application software
therefore must rewrite a significant portion of their software programs for each
wireless network that they wish to access, and the Company believes that
developers have been reluctant to commit the resources necessary to accomplish
this task. Similarly, the Company believes that the existence of multiple
incompatible wireless networks has made prospective users of mobile data
transmission services reluctant to invest in the hardware, software and training
necessary to implement a mobile data communication system. There is a risk that
certain networks currently available will not survive the competition with other
networks. A network that is optimal for a user's needs today might not continue
to be optimal as the user's needs change. For example, a business that presently
needs metropolitan coverage may at a later stage of its growth require
nationwide coverage. Moreover, as the technology develops, there is the
possibility that a superior network might be introduced that will render one or
more existing networks obsolete. Finally, the hardware used in mobile data
systems, both in-vehicle and at the home office, can be mutually incompatible
and is continuously evolving. Potential customers seek assurance that their
investment in hardware will continue to provide benefits even as standards and
systems evolve.
For these reasons, the Company believes that the lack of a standard
consistent application development environment, as well as the lack of a
consistent interface to different wireless networks, have limited the growth of
the mobile data industry. The Company believes that a link between wireless
networks and business application software is needed to enable significant
growth. Racotek seeks to provide that link with its products.
THE RACOTEK SOLUTION
Racotek has developed its products and services to facilitate development of
mobile data application software by providing a consistent application
development environment to access multiple wireless networks. Racotek offers
technical support and training for the development of mobile data software
applications. The Company believes that its products and services can
significantly facilitate both the adaptation of existing application programs to
include wireless data transmission capabilities and the development of new
software applications designed specially to use wireless networks. The Company's
products insulate application developers from the interface requirements of
various wireless transmission networks and handle such matters as flow control,
message buffering and processor connectivity. Accordingly, applications can be
used on different types of base office computers and mobile computers and over
multiple wireless networks,
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without change to the applications. The Company's software products are
compatible with a wide variety of third party hardware devices. The Company is
committed to develop and support interfaces to the leading mobile and stationary
computing devices.
COMPANY STRATEGY
Racotek's objective is to become a leading provider of mobile data
communication products and services to businesses that have mobile workers. The
Company's strategy includes the following elements:
ENABLE MOBILE APPLICATION SOFTWARE DEVELOPMENT. To encourage acceptance of
its products as the standard operating system for wireless data communication,
Racotek incorporates features and functions that add value for application
developers. These features include providing a client/server development
environment, insulating application programs from the many types of mobile
computers and wireless networks and managing the difficulties of data
transmission in a wireless environment. The Company is committed to increasing
the functionality and performance of its products and to providing the most
robust application development environment possible for mobile data
applications.
PROVIDE PROFESSIONAL SERVICES EXPERTISE. The Company has gained extensive
experience in all phases of wireless mobile data implementations through its
development period and thereafter. The Company is now positioned to provide
these services to customers on a fee basis. Professional Service activities
include project management and implementation services including requirements
consulting, system design and planning, software development, systems
integration, training and installation management.
PROVIDE ACCESS TO MULTIPLE WIRELESS NETWORKS AND HARDWARE DEVICES. The
Company's KeyWare product provides access to multiple wireless networks without
modification to the application software. Racotek believes this will encourage
application software developers to write programs that use Racotek's products,
thereby making it the most efficient way to serve the largest number of
potential users without committing to a single wireless network. Similarly,
KeyWare protects the customer's investment in application software by providing
access to multiple networks. As the customer's needs change or new wireless
networks are introduced, the same application can be used on different networks.
Finally, KeyWare's compatibility with multiple hardware devices provides
customers with the flexibility to upgrade their systems in whole or in part as
new hardware is developed and existing hardware evolves.
FOCUS ON VERTICAL MARKETS. 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, as opposed to
horizontal applications such as electronic mail. Racotek has targeted the field
service, sales/order entry, transportation, utility, insurance, road side
assistance and home health care markets for its initial focus.
PROVIDE MANAGED NETWORK SERVICES. The Company's KeyWare product, resident
expertise in wireless systems and applications, and internally developed
diagnostic tools enable it to provide post-installation support services such as
end-to-end problem identification and resolution. The principal benefits to
customers from this suite of services include higher system reliability, a
single source for problem resolution, and lower support costs.
MAINTAIN DIRECT RELATIONSHIP WITH END USERS. The Company believes that a
direct relationship with end users enhances brand awareness and provides a
channel for customer input. Although the Company might not bill its KeyWare
customers directly for transmission services, the Company intends to maintain a
direct relationship with all of its customers by providing managed network
services, system integration services and on-going maintenance and support.
GENERATE RECURRING REVENUES. The Company believes its managed network
services, KeyWare software subscription program and transmission services, which
are all billed on a monthly basis, provide a recurring revenue stream for the
Company.
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DEVELOP STRATEGIC RELATIONSHIPS. Racotek believes its strategic
relationships with providers of components of a mobile data communication system
significantly enhance its efforts to establish Racotek products as the standard
mobile network operating system. Racotek has established formal relationships
with wireless network providers, computer hardware providers, Value Added
Resellers ("VARs") and system integrators. See "Strategic Relationships."
PRODUCTS AND SERVICES
KEYWARE MOBILE NETWORKING SOFTWARE. The Company announced, in the first
quarter of 1995, the creation of KeyWare, a wireless networking software product
that encompasses the development efforts of RacoNet and a broad range of
extensions. KeyWare is built upon an open client/server server/client
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, Systemwide Synchronization, store and forward, file
transfer and network management. KeyWare is a Wireless Distributed Computing
environment that is designed to be interoperable with many customers' existing
information systems to provide broad wireless and wireline connectivity and to
allow rapid integration of existing applications. KeyWare customers are able to
select ARDIS, CDPD, RAM, paging, circuit switched cellular and satellite
networks for data transmissions. In addition to KeyWare, the Company offers
KeyBuilder, a software development tool, KeyScript, a forms-based mobile
application development software product and KeyWare Database Agent, which
allows database programmers to access wireless data communication services
through KeyWare. For the years ended December 31, 1996 and 1995, revenue from
the sale of software amounted to 10% and 3% of total revenues, respectively.
PROFESSIONAL SERVICES. The Company offers its customers certain consulting
services, project management and implementation services including requirements
consulting, system design and planning, software development, systems
integration, training and installation management. Racotek's professional
services supplement the Company's product offerings by assisting customers in
the 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 preapproved statements of work. The Company commenced providing these types
of services in 1995. For the years ended December 31, 1996 and 1995, revenue
generated from these services accounted for 52% and 29% of total revenues,
respectively.
MANAGED NETWORK SERVICES. The Company's managed network services group
monitors a customer's wireless system performance to detect potential problems
and resolve issues affecting overall system availability. This service provides
customers a single point of contact in a multi-vendor environment. The Company
has developed diagnostic tools in connection with its KeyWare product line to
detect errors in a wireless system. Managed network services are typically
billed on a fixed monthly basis. For the years ended December 31, 1996 and 1995,
revenue from these services amounted to 10% and 1% of total revenues,
respectively.
RACOTEK TRANSMISSION SERVICES. The Company has agreements with SMR
transmission operators in over 15,000 cities in the United States and Canada
that allow transmission service, principally suitable for metropolitan,
in-vehicle users. With the release of KeyWare and certain marketing agreements,
the Company also can remarket transmission service on ARDIS, RAM and certain
CDPD providers. Revenue generated from these services accounted for 10%, 16% and
18% of total revenue for the years ended December 31, 1996, 1995 and 1994,
respectively.
In addition to the above products and services, other components of a
wireless data system include:
MOBILE WORKGROUP SERVER. The mobile workgroup server is a network gateway
located at the customer's base office that provides message storage, flow
control and connectivity between the host computer, the wireless network and the
mobile computers. The mobile workgroup server employs an industry standard
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Intel-based computer and a real-time, multi-tasking communications front-end
processor. The mobile workgroup server is configured from standard hardware that
can be purchased from Racotek or third party suppliers.
RADIO/MODEM. The Radio/Modem provides the wireless transmission between the
mobile computing device and the wireless network. Radio/modems are now available
from several vendors in PCMCIA standard form factors and compatibilities,
enabling embedded wireless connectivity, or wireless connectivity using
available external PCMCIA slots. The development of smaller and lower cost
radio/modems that are well-integrated into ruggedized mobile computing devices
designed on standard platforms, such as DOS or Windows, is critical to
wide-scale adoption of mobile workforce technologies. The radio/modem can be
purchased from various third party suppliers or from Racotek.
MOBILE COMPUTER. The mobile computer is a customer-selected,
third-party-supplied device that runs the customer's mobile application
software. PC-compatible computers and any other computers that have implemented
the application program interface are usable on the system without change to the
application program. Mobile computers are available from a number of third party
suppliers.
WIRELESS NETWORKS. KeyWare uses the ARDIS, CDPD, RAM, SMR, paging, circuit
switched cellular, Orbcomm satellite and NORCOM satellite networks. Racotek is
continuing to research and develop the compatibility of KeyWare with other
wireless networks.
Aggregate revenues generated from the above-mentioned hardware products
represented, 18%, 51% and 79% of total revenues for the years ended December 31,
1996, 1995 and 1994, respectively. This decrease reflects the Company's decision
to discontinue the production, purchase and distribution of proprietary SMR
products.
CUSTOMERS
Racotek has 61 customers and approximately 9,900 mobile workers using its
products. These customers are primarily in the following market segments: field
service, less-than-truckload ("LTL") trucking, insurance and sales/order entry.
For the year ended December 31, 1994, sales to Quicksilver Express Courier, Inc.
and American Freightways each represented more than 10% of the Company's total
revenues. For the year ended December 31, 1995, sales to American Freightways,
The Hertz Corporation and Arrowsmith Technologies, Inc. each represented more
than 10% of the Company's total revenues. For the year ended December 31, 1996,
sales to American Freightways was more than 10% of the Company's total revenues.
FIELD SERVICE. 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 problem within the field service industry.
Current users of Racotek products and services have implemented a system
that provides continuous data flow to and from field service technicians
increasing customer service and productivity. Racotek products and services can
improve the clarity of the assignment and, using the system, all information
(such as warranty, service history and parts availability) at the base office
may be electronically accessed by the field service technician.
Ameritech, Bell South Telecommunications, Caterpillar, Datacard, Unisys,
Xerox Canada Ltd., Public Service Electric & Gas Co., and Neopost are field
service businesses that are currently testing or using Racotek products and
services for mobile data systems.
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LESS-THAN-TRUCKLOAD TRUCKING. LTL trucking companies carry loads containing
shipments from multiple customers at one time. LTL trucking therefore requires
frequent and detailed communication between dispatcher and driver to meet
demands for freight flow and dock management. At present, LTL trucking companies
generally rely on voice communication between the dispatcher and driver. Voice
communication is time-consuming, subject to misinterpretation and creates
significant driver inefficiency. In addition, drivers may be out of their trucks
and miss information. Pick-up information, including destination, number of
pieces, freight weight and priority, is often too detailed and voluminous for
drivers to communicate by voice. Consequently, shipment planning can be delayed
until the driver returns to the dock, and transportation time may be lost.
The Racotek mobile data system addresses these problems by providing a
real-time data transmission system to improve the accuracy and timeliness of the
information transmitted, enabling more information to be transmitted in a
shorter period of time and holding messages while the driver is out of the
vehicle. As drivers complete a freight pick-up, they can use the Racotek mobile
data system to transmit the relevant information, allowing logistics planning to
take place hours earlier than before. This provides opportunities for improved
resource utilization, quicker freight delivery and improved customer service and
satisfaction.
American Freightways, New Penn Motor Express, Overnite Transportation and
Northwest Transport Service Inc. are LTL trucking companies that are currently
testing or using the Racotek products and services.
SALES/ORDER ENTRY. In this market, sales people visit retail stores and
take orders for merchandise to fill the necessary shelf space. At the end of the
day, this information is forwarded to a distribution warehouse where orders are
processed and trucks are then loaded. The time lag in getting the information to
the distribution center may result in overtime, missed shipments and, most
importantly, empty shelf space for businesses. With KeyWare, sales people take
orders in the field and transmit them directly to the warehouse on a real-time
basis. The orders can be immediately assembled for next day delivery, thus
reducing overtime and assuring full shelf space.
Pepsi Cola Allied Bottlers, Inc., Pepsi Cola & National Brand Beverages,
Ltd. and Hertz Corporation are sales/order entry companies that are currently
testing or using Racotek products and services.
In addition to the above-named market segments, the Company has customers in
the following market segments: insurance, healthcare, cable television and
utilities.
SALES
Racotek's sales strategy is to develop large national accounts as early,
high profile adopters of its products and services. The Company considers a
large account to be a customer that operates 500 or more mobile units. The
Company uses both its direct sales organization and industry experts to show
prospective customers the economic benefits of increased productivity, improved
customer service and lower costs. Typically, the Company sells to senior
operations management within a company. In addition to approaching large
prospective customers through its direct sales force, the Company has developed
relationships with large system integrators such as Andersen Consulting and
Electronic Data Systems; manufacturers of terminals and hand-held computer
equipment such as IBM and Telxon Corporation; and major wireless network
providers such as ARDIS and RAM. The Company believes these relationships will
lead to contacts with large prospective customers. The Company also expects to
have an efficient indirect channel of VARs to market the small and mid-sized
companies.
The Company's professional services group is able to provide services to
assist customers in implementing a wireless data system. These front-end
consulting services are necessary and critical for the successful implementation
of mobile data. Based on years of experience in mobile data, the Company
believes it is well positioned to provide customers these services.
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Of the Company's 10 sales people, 7 are assigned to major accounts, two are
industry experts and one is responsible for developing relationships with
systems integrators, manufacturers of computer equipment, major wireless network
providers and VARs.
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 and the
Company generally does not allow product returns.
STRATEGIC RELATIONSHIPS
In February 1992, the Company entered into an agreement with Motorola to
develop and market RacoNet mobile data services over Motorola's owned and
operated SMR systems. Under the terms of this 10-year agreement, Racotek has
developed a line of products and services that is specifically adapted to
Motorola's SMR service. Both Racotek and Motorola may distribute these products
and services. Motorola advanced $4.5 million for development of the product
technology, market and distribution channels, all of which has been converted
into stock of the Company. Motorola also purchased additional shares of the
Company's stock.
In addition to its contract with Motorola for purchase of airtime, the
Company has agreements with various independent SMR providers nationwide. Under
these agreements, the Company purchases airtime to provide its transmission
services to local customers. The agreements typically have a term of two years
and are renewable on an annual basis thereafter. Either party may terminate the
agreement by giving notice within 90 days of the end of a renewal period.
During 1994, the Company entered into agreements with ARDIS and RAM to
resell services provided by these two wireless networks. During 1995, the
Company entered into agreements with AT&T Wireless Services, Wireless Data
Division, Bell Atlantic/NYNEX Mobile and GTE whereby Racotek could market their
services.
In March 1996, the Company entered into an agreement with IBM whereby IBM
serves as a "preferred services provider" of Racotek products and services. IBM
is a single point of contact for customers seeking wireless mobile data systems
and solutions. During 1996, the Company was selected by Lockheed Martin
Information Systems and Technologies to be a charter member of the Mobile
Computing Alliance-TM-. This alliance intends to develop best-of-breed wireless
solutions for field force automation. During 1996, the Company also signed an
agreement with NORCOM Networks Corp. to provide satellite data transmission
services.
PRODUCT DEVELOPMENT
During 1996, the Company's major product development activities centered
around KeyWare, the Company's wireless networking software. The KeyWare product,
which was announced in the first quarter of 1995, provides the connectivity and
interoperability for existing enterprise applications to mobile and portable
workers through multiple wireless networks simultaneously. In 1996, the
Company's development efforts focused on broadening KeyWare's market by
increasing the number of wireless networks, operating systems and mobile
hardware platforms that KeyWare will support. KeyWare is currently designed to
work with ARDIS, RAM, CDPD, SMR, paging, circuit switch cellular and certain
satellite networks. The KeyWare product isolates applications from changes in
wireless network technology and provides special tools and services to aid
application developers. The KeyWare product has been developed to provide
customers with choices of host platforms and operating systems, LAN/WAN
connections, wireless networks, mobile platforms, operating systems, wireless
modems, network management tools, development tools, flexible API and
interfacing options and database usage.
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Racotek intends to expand the number of wireless networks that are supported
under the KeyWare product as they become available. The Company's ability to
extend the KeyWare system to other networks will depend in part on its ability
to enter into and maintain relationships with wireless network providers on
economically favorable terms. The Company's inability to obtain high-quality,
reliable, continuous airtime from wireless network providers could adversely
affect the Company's business. See "Technology."
For the years ended December 31, 1996, 1995 and 1994, the Company's research
and development expenses were approximately $4,211,000, $4,170,000 and
$3,035,000 respectively. Included in the 1995 expense was a $742,000 charge for
the acquisition of certain technologies of BPSI.
COMPETITION
Competition in the communications industry is intense. The Company currently
faces direct competition in the market for mobile networking software from IBM,
Informix Software, Inc., Mobileware Corp., Nettech Systems, Inc., Oracle
Corporation and Software Corporation of America. Furthermore, major software
development companies, such as Novell, Inc. and Microsoft Corporation, as well
as computer and communications companies, such as AT&T and the regional Bell
operating companies ("RBOCs"), are possible sources of future direct competition
for the Company's products and services. Certain application software
developers, including Alliance Systems, Inc. and Mobile Data Solutions, Inc.,
have expanded their software to provide parts of a mobile data solution. In
addition, wireless network providers and hardware manufacturers that the Company
seeks to work with as partners could attempt to provide mobile data systems that
do not include KeyWare or other Racotek products or services, thereby becoming
competitors.
In addition to these direct competitors, the Company presently faces
competition from providers of other mobile communication services that customers
might view as substitutes for wireless data transmission, such as cellular
telephone, paging and conventional two-way voice radio. In the future,
additional competition can be expected as companies seek to exploit new
technologies that are developed for wireless communications, such as satellites
(geosynchronous, LEOs and VSATs), ESMR, CDPD digital cellular, two-way
acknowledged paging and PCS. The Company's inability to compete successfully
would decrease the number of the Company's customers, which could adversely
affect the Company's revenues and business.
Motorola competes with the Company in the mobile communications market
generally as a provider of communications products and technologies. The
Company's relationship with Motorola is in conflict with Motorola's role as one
of the Company's potential competitors. If Motorola determines that its
relationship with the Company is detrimental to Motorola's business as a whole,
or if Motorola for any reason decides not to pursue actively its relationship
with the Company, the Company's business could be adversely affected. See
"Strategic Relationships."
Racotek competes with other providers of wireless communications services by
attempting to demonstrate to customers the superiority of Racotek products in
price and performance terms and by endeavoring to enter into agreements with
other providers so that Racotek can resell their transmission services as part
of a package that includes RacoNet or KeyWare. There can be no assurance that
the Company will be able to enter into or maintain relationships with wireless
network providers, or that any such relationships will be on financially
favorable terms. See "Strategic Relationships."
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 entrenched market positions and established tradenames,
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 products 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 customers. Any of
these competitive developments could adversely affect the Company's business.
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TECHNOLOGY
WIRELESS NETWORKS
ARDIS. ARDIS grew out of the network originally designed for IBM's field
service workers in 1983 and supports portable remote units. ARDIS concentrates
many base stations with overlapping coverage to improve in-building penetration.
ARDIS links all of its cities via a dedicated backbone network and supports
nationwide roaming.
CELLULAR. Cellular uses low power base stations that cover individual cells
as small as a few miles in diameter. Each cell slightly overlaps the coverage of
the six cells that surround it. Consequently, a given pair of frequencies can be
re-used many times within the small metropolitan area as long as it is not used
in two adjacent cells. Multiple cells continuously monitor the receive signal
strength of each active mobile unit, and the control system initiates a transfer
at the time when the signal strength drops below a specified level at the base
station of the cell the mobile unit is leaving and rises above a specified level
at the base station of the cell the unit is entering. The FCC has allocated 832
channel pairs, 416 per carrier in each market, to cellular radio.
CELLULAR DIGITAL PACKET DATA. A consortium of cellular telephone carriers
has announced that its members will implement the CDPD protocol, which uses
IBM's CelluPlan II technology to allow packages of data to be transmitted over
the idle voice channels of existing analog cellular voice networks and provide a
data-over-cellular networking capability nationwide. The deployment of CDPD is
proceeding although at a much slower rate than originally announced.
NEXT GENERATION SPECIALIZED MOBILE RADIO, INTEGRATED DISPATCH ENHANCED
NETWORK ("IDEN"). The largest SMR operator, NEXTEL, received FCC permission to
offer ESMR service through the use of Motorola's iDEN digital radio technology.
ESMR is intended to increase the capacity of the SMR frequencies that NEXTEL
currently licenses.
PERSONAL COMMUNICATIONS SERVICES (PCS). Personal communications services
generally refer to digital wireless spectrum, technology and service offerings
being deployed based on FCC spectrum auctions in 1994, 1995 and 1996. Auctions
of spectrum and resulting technology fall into two categories: broadband PCS and
narrow-band PCS. Broadband PCS, with spectrum licensees including AT&T, and
various consortia including the RBOCS, Sprint and several cable companies, are
generally focusing on voice and short-messaging services and are expected to
compete directly with existing cellular services in each market. Narrow-band
PCS, including companies such as Mtel (which offers the SkyTel 2-Way messaging
service), AT&T and PageNet have a range of strategies including less
spectrum-intensive short messaging services and wireless voicemail, depending on
the licensee.
RAM MOBILE DATA. RAM has deployed its wireless packet data network in the
major markets in the U.S. RAM's technology is based on MOBITEX, a standard
packet protocol on which operational systems have been based in a number of
foreign countries.
SATELLITE NETWORKS. There are several companies that provide wireless data
or voice transmission services through satellites. For example, QUALCOMM Inc.
provides a data transmission service for the long-haul trucking industry called
OmniTRACS. Orbital Communications Corp. is deploying a messaging services
supported by a Low Earth Orbit satellite, and American Mobile Satellite
Corporation has deployed a geosynchronous mobile voice and data satellite
covering North America.
SPECIALIZED MOBILE RADIO NETWORKS. SMR refers to certain blocks of radio
channels licensed by the FCC primarily to businesses that resell voice
transmission services. Trunked radio uses transmission channel management
techniques to aggregate traffic from individual subscriber lines to share a
smaller number of radio channels. There are three major trunked radio equipment
vendors, Motorola, E.F. Johnson Co. and
10
<PAGE>
GE Mobile Communications, each of which uses a different proprietary signaling
scheme to accomplish the channel allocation and management process for analog
signals, and each of which uses a different approach to handling data.
SPREAD SPECTRUM. Unlike wireless networks that use radio frequencies that
the FCC licenses to specific users on an exclusive basis, spread spectrum packet
radio may operate without license in the 902-928 MHz. band. Metricom, Inc. has
developed a digital, packet-switched, spread spectrum radio technology as the
basis of its wireless data communications system for the electric utility
industry. Unlike circuit-switched radio, in which a transmission channel is
assigned to the exclusive use of an individual user or pair of users for the
duration of a call, packet-switched radio allocates transmission capacity to a
user only while a packet actually is being transmitted. In addition, several
companies have designed local area spread spectrum systems targeting warehouse
and factory communications.
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 products. The Company has received a U.S.
letter patent claiming a data overlay on trunked voice radio, and has made
corresponding filings in Australia, Brazil, Canada, the European Patent Office,
Israel, Japan, Korea, Mexico and Taiwan. The Company has also filed patent
applications on KeyWare Time Synchronization and KeyWare Adaptive Concatenation
processes. These applications have been filed in the United States and the
above-mentioned foreign countries. In addition, the Company is pursuing
trademark registrations for three principal marks 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 unsigned, "shrink wrap" 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 products are or may be
distributed do not protect the Company's products 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 products, 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 products, the Company could be prohibited from manufacturing and
marketing such products. 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 products, to defend any legal action
taken against it or to pay damages for infringement.
MANUFACTURING
The Company duplicates software and related documentation and configures
customers' mobile data communications systems at the Company's facilities in
Minneapolis, Minnesota. The Company does not manufacture any of the hardware
used by its customers in a mobile data network, but this hardware is readily
available from various sources.
11
<PAGE>
EMPLOYEES
As of December 31, 1996, the Company had 94 full-time employees, including 8
in finance and administration, 5 in marketing, 12 in sales and support, 66 in
technology solutions and sales and 3 in operations. The employees and the
Company are not parties to any 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, including
Michael Fabiaschi, Isaac Shpantzer, Paul Edelhertz and David Maenke. 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 32,400 square feet
located in a multi-story building in Minneapolis, Minnesota. The facility is
leased pursuant to an agreement that expires in July 2000. The Company has
certain expansion rights under its lease to increase facility size. In addition,
the Company has leased approximately 12,400 square feet for staging,
integration, shipping and receiving at a separate location in Minneapolis,
Minnesota. The facility is leased pursuant to a lease that expires in April
1997. The Company also has sales offices in Boston, Massachusetts, Chicago,
Illinois, Petaluma, California and Dallas, Texas. 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 the
Company's 1996 Annual Report, which are incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any significant litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is contained in the section entitled
"Common Stock" appearing in the Company's Annual Report to Stockholders for the
year ended December 31, 1996. Such information is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is contained in the section entitled
"Selected Financial Data" appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996. Such information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is contained in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing in the Company's Annual Report to Stockholders for the
year ended December 31, 1996. Such information is incorporated herein by
reference.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the sections entitled
"Balance Sheets," "Statements of Operations," "Statements of Stockholders'
Equity," "Statements of Cash Flows," "Notes to Financial Statements" and "Report
of Independent Accountants" appearing in the Annual Report to Stockholders for
the year ended December 31, 1996. Such information is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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
"Compliance under Section 16(a) of the Securities Exchange Act of 1934,"
appearing in the Company's Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 13, 1997
(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.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1), (a)(2) Financial Statements and Financial Statement Schedule. Reference is made to
and (d) "Index to Financial Statements and Financial Statement Schedule" filed as
part of this Annual Report on Form 10-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 February 19, 1997.
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
55439.(1)
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
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)
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)
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
13.01 Portions of the Annual Report to Stockholders of the Registrant for the year
ended December 31, 1996. Except for those portions of such Annual Report
expressly incorporated herein by reference, such Annual Report shall not be
deemed a "filed" document.
23.01 Consent of Coopers & Lybrand L.L.P.
</TABLE>
- ------------------------
* 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.
ITEM 14(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter.
16
<PAGE>
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.
By /s/ MICHAEL A. FABIASCHI
-----------------------------------------
Michael A. Fabiaschi,
Date: March 28, 1997 PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each person whose signature appears below constitutes and appoints Michael
A. Fabiaschi and David J. Maenke, 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 A. FABIASCHI
- ------------------------------ President and Chief March 28, 1997
Michael A. Fabiaschi Executive Officer
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ DAVID J. MAENKE
- ------------------------------ Chief Financial Officer March 28, 1997
David J. Maenke and Secretary
OTHER DIRECTORS:
/s/ YUVAL ALMOG
- ------------------------------ Chairman of the Board March 28, 1997
Yuval Almog
/s/ JOSEPH B. COSTELLO
- ------------------------------ Director March 28, 1997
Joseph B. Costello
/s/ DIXON R. DOLL
- ------------------------------ Director March 28, 1997
Dixon R. Doll
/s/ DONALD L. LUCAS
- ------------------------------ Director March 28, 1997
Donald L. Lucas
/s/ LEIF G. SODERBERG
- ------------------------------ Director March 28, 1997
Leif G. Soderberg
17
<PAGE>
RACOTEK, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(ITEM 14(A))
Information incorporated by reference to the Racotek, Inc. Annual Report to
Stockholders to be delivered to stockholders in connection with the Annual
Meeting of Stockholders on May 13, 1997:
<TABLE>
<CAPTION>
PAGE REFERENCE
---------------------------
ANNUAL REPORT
FORM 10-K TO STOCKHOLDERS
---------- ---------------
<S> <C> <C>
Financial Statements:
Balance Sheets..................................................................... 21
Statements of Operations........................................................... 22
Statements of Stockholders' Equity................................................. 23
Statements of Cash Flows........................................................... 24
Notes to Financial Statements...................................................... 25 - 29
Report of Independent Accountants.................................................... 30
Report of Independent Accountants on Financial Statement Schedule.................... 19
Schedules:
II. Valuation and Qualifying Accounts................................................ 20
</TABLE>
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements or notes
thereto.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of Racotek, Inc.:
Our report on the financial statements of Racotek, Inc. has been
incorporated by reference in this Form 10-K from page 30 of the 1996 Annual
Report to Stockholders of Racotek, Inc. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 18 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
_________/s/ COOPERS & LYBRAND________
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
January 14, 1997
19
<PAGE>
RACOTEK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D
------------- ----------- ----------- COLUMN E
COLUMN A BALANCE AT ADDITIONS DEDUCTIONS -------------
- ---------------------------------------------------------------- BEGINNING OF CHARGED TO FROM BALANCE AT
DESCRIPTION PERIOD EXPENSE ALLOWANCE END OF PERIOD
- ---------------------------------------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
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
Warranty reserve (included in other accrued expenses)......... 157 0 (149) 8
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
Warranty reserve (included in other accrued expenses)......... 30 191 (64) 157
Year ended December 31, 1994:
Allowance for doubtful accounts (deducted from accounts
receivable).................................................. 90 192 (132) 150
Inventory obsolescence reserve (deducted from inventories).... 221 295 (127) 389
Warranty reserve (included in other accrued expenses)......... 27 66 (63) 30
</TABLE>
20
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- --------- --------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
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
February 19, 1997.................................................................... 24
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 55439.(1)
10.13 Form of Indemnification Agreement entered into by the Registrant and each of its
directors and executive officers.(1)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- --------- --------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
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)
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)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- --------- --------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
13.01 Annual Report to Stockholders of the Registrant for the year ended December 31, 1996.
Except for those portions of such Annual Report expressly incorporated herein by
reference, such Annual Report shall not be deemed a "filed" document................. 35
23.01 Consent of Coopers & Lybrand L.L.P..................................................... 50
</TABLE>
- ------------------------
* 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.
Item 14(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter.
23
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RACOTEK, INC.
1993 EQUITY INCENTIVE PLAN
As Adopted October 21, 1993
As Amended December 22, 1995
As Amended February 19, 1997
1. PURPOSE. The purpose of the Plan is to provide incentives to attract,
retain and motivate eligible persons whose present and potential contributions
are important to the success of the Company, its Parents, Subsidiaries and
Affiliates, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 24.
2. SHARES SUBJECT TO THE PLAN.
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 18, the
total number of Shares reserved and available for grant and issuance
pursuant to the Plan shall be 3,200,000 Shares. Any Shares issuable upon
exercise of options granted pursuant to the 1989 Stock Option Plan (the
"PRIOR PLAN") that expire or become unexercisable for any reason without
having been exercised in full shall no longer be available for distribution
under the Prior Plan, but shall be available for distribution under this
Plan. Subject to Sections 2.2 and 18, Shares shall again be available for
grant and issuance in connection with future Awards under the Plan that: (a)
are subject to issuance upon exercise of an Option but cease to be subject
to such Option for any reason other than exercise of such Option, (b) are
subject to an Award granted hereunder but are forfeited or are repurchased
by the Company at the original issue price, or (c) are subject to an Award
that otherwise terminates without Shares being issued.
2.2 ADJUSTMENT OF SHARES. In the event that the number of outstanding
Shares is changed by a stock dividend, recapitalization, stock split,
reverse stock split, subdivision, combination, reclassification or similar
change in the capital structure of the Company without consideration, then
(a) the number of Shares reserved for issuance under the Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and
(c) the number of Shares subject to other outstanding Awards shall be
proportionately adjusted, subject to any required action by the Board or the
stockholders of the Company and compliance with applicable securities laws;
PROVIDED, HOWEVER, that fractions of a Share shall not be issued but shall
either be paid in cash at Fair Market Value or shall be rounded up to the
nearest Share, as determined by the Committee; and PROVIDED, FURTHER, that
the Exercise Price of any Option may not be decreased to below the par value
of the Shares.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisers of the Company or any Parent, Subsidiary or Affiliate of the
Company; PROVIDED such consultants, contractors and advisers render bona fide
services not in connection with the offer and sale of securities in a
capital-raising transaction. "Named Executive Officers" (as that term is defined
in Item 402(a)(3) of Regulation S-K promulgated under the Exchange Act) shall
each be eligible to receive up to an aggregate maximum of 750,000 Shares over
the term of the Plan. A person may be granted more than one Award under the
Plan.
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. The Plan shall be administered by the
Committee or the Board acting as the Committee. Subject to the general
purposes, terms and conditions of the Plan, and to the direction of the
Board, the Committee shall have full power to implement and carry out the
Plan. The Committee shall have the authority to:
(a) construe and interpret the Plan, any Award Agreement and any
other agreement or document executed pursuant to the Plan;
(b) prescribe, amend and rescind rules and regulations relating to
the Plan;
<PAGE>
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination,
in tandem, in replacement of, or as alternatives to, other Awards under
the Plan or any other incentive or compensation plan of the Company or
any Parent, Subsidiary or Affiliate of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of the Plan.
4.2 COMMITTEE DISCRETION. Any determination made by the Committee with
respect to any Award shall be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of the
Plan or Award, at any later time, and such determination shall be final and
binding on the Company and all persons having an interest in any Award under
the Plan. The Committee may delegate to one or more officers of the Company
the authority to grant an Award under the Plan to Participants who are not
Insiders of the Company.
4.3 EXCHANGE ACT REQUIREMENTS. If two or more members of the Board are
Outside Directors, the Committee shall be comprised of at least two members
of the Board, all of whom are Outside Directors and Disinterested Persons.
The Company will take appropriate steps to comply with the disinterested
administration requirements of Section 16(b) of the Exchange Act, which
shall consist of the appointment by the Board of a Committee consisting of
not less than two members of the Board, each of whom is a Disinterested
Person.
5. OPTIONS. The Committee may grant Options to eligible persons and shall
determine whether such Options shall be Incentive Stock Options within the
meaning of the Code ("ISOS") or Nonqualified Stock Options ("NQSOS"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 FORM OF OPTION GRANT. Each Option granted under the Plan shall be
evidenced by an Award Agreement which shall expressly identify the Option as
an ISO or NQSO ("STOCK OPTION AGREEMENT"), and be in such form and contain
such provisions (which need not be the same for each Participant) as the
Committee shall from time to time approve, and which shall comply with and
be subject to the terms and conditions of the Plan.
5.2 DATE OF GRANT. The date of grant of an Option shall be the date on
which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy
of the Plan will be delivered to the Participant within a reasonable time
after the granting of the Option.
5.3 EXERCISE PERIOD. Options shall be exercisable within the times or
upon the events determined by the Committee as set forth in the Stock Option
Agreement; PROVIDED, HOWEVER, that no Option shall be exercisable after the
expiration of one hundred twenty (120) months from the date the Option is
granted, and provided further that no ISO granted to a person who directly
or by attribution owns more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or any
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Parent or Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") shall be
exercisable after the expiration of five (5) years from the date the Option
is granted. The Committee also may provide for the exercise of Options to
become exercisable at one time or from time to time, periodically or
otherwise, in such number or percentage as the Committee determines.
5.4 EXERCISE PRICE. The Exercise Price shall be determined by the
Committee when the Option is granted and may be not less than 85% of the
Fair Market Value of the Shares on the date of grant; provided that (i) the
Exercise Price of an ISO shall be not less than 100% of the Fair Market
Value of the Shares on the date of grant and (ii) the Exercise Price of any
ISO granted to a Ten Percent Stockholder shall not be less than 110% of the
Fair Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of the Plan.
5.5 METHOD OF EXERCISE. Options may be exercised only by delivery to
the Company of a written stock option exercise agreement (the "EXERCISE
AGREEMENT") in a form approved by the Committee (which need not be the same
for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares, if any, and such representations and
agreements regarding Participant's investment intent and access to
information, if any, as may be required or desirable by the Company to
comply with applicable securities laws, together with payment in full of the
Exercise Price for the number of Shares being purchased.
5.6 TERMINATION. Notwithstanding the exercise periods set forth in the
Stock Option Agreement, exercise of an Option shall always be subject to the
following:
(a) If the Participant is Terminated for any reason except death or
Disability, then Participant may exercise such Participant's Options only
to the extent that such Options would have been exercisable upon the
Termination Date no later than ninety (90) days after the Termination
Date (or such shorter time period as may be specified in the Stock Option
Agreement), but in any event, no later than the expiration date of the
Options.
(b) If the Participant is terminated because of death or Disability
(or the participant dies within three months of such termination), then
Participant's Options may be exercised only to the extent that such
Options would have been exercisable by Participant on the Termination
Date and must be exercised by Participant (or Participant's legal
representative or authorized assignee) no later than twelve (12) months
after the Termination Date (or such shorter time period as may be
specified in the Stock Option Agreement), but in any event no later than
the expiration date of the Options.
5.7 LIMITATIONS ON EXERCISE. The Committee may specify a reasonable
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value (determined
as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year
(under the Plan or under any other incentive stock option plan of the
Company or any Affiliate, Parent or Subsidiary of the Company) shall not
exceed $100,000. If the Fair Market Value of Shares on the date of grant
with respect to which ISOs are exercisable for the first time by a
Participant during any calendar year exceeds $100,000, the Options for the
first $100,000 worth of Shares to become exercisable in such calendar year
shall be ISOs and the Options for the amount in excess of $100,000 that
become exercisable in that calendar year shall be NQSOs. In the event that
the Code or the regulations promulgated thereunder are amended after the
Effective Date of the Plan to provide for a different limit on the Fair
Market Value of Shares permitted to be subject to ISOs, such different limit
shall be automatically incorporated herein and shall apply to any Options
granted after the effective date of such amendment.
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<PAGE>
5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may modify,
extend or renew outstanding Options and authorize the grant of new Options
in substitution therefor, provided that any such action may not, without the
written consent of Participant, impair any of Participant's rights under any
Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered shall be treated in accordance with Section
424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a
written notice to them; PROVIDED, HOWEVER, that the Exercise Price may not
be reduced below the minimum Exercise Price that would be permitted under
Section 5.4 of the Plan for Options granted on the date the action is taken
to reduce the Exercise Price; PROVIDED, FURTHER, that the Exercise Price
shall not be reduced below the par value of the Shares, if any.
5.10 NO DISQUALIFICATION. Notwithstanding any other provision in the
Plan, no term of the Plan relating to ISOs shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify the Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
to sell to an eligible person Shares that are subject to restrictions. The
Committee shall determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the "PURCHASE PRICE"), the
restrictions to which the Shares shall be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 FORM OF RESTRICTED STOCK AWARD. All purchases under a Restricted
Stock Award made pursuant to the Plan shall be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that shall be in such form
(which need not be the same for each Participant) as the Committee shall
from time to time approve, and shall comply with and be subject to the terms
and conditions of the Plan. The offer of Restricted Stock shall be accepted
by the Participant's execution and delivery of the Restricted Stock Purchase
Agreement and full payment for the Shares to the Company within thirty (30)
days from the date the Restricted Stock Purchase Agreement is delivered to
the person. If such person does not execute and deliver the Restricted Stock
Purchase Agreement along with full payment for the Shares to the Company
within thirty (30) days, then the offer shall terminate, unless otherwise
determined by the Committee.
6.2 PURCHASE PRICE. The Purchase Price of Shares sold pursuant to a
Restricted Stock Award shall be determined by the Committee and shall be at
least 85% of the Fair Market Value of the Shares when the Restricted Stock
Award is granted, except in the case of a sale to a Ten Percent Stockholder,
in which case the Purchase Price shall be 100% of the Fair Market Value.
Payment of the Purchase Price may be made in accordance with Section 8 of
the Plan.
6.3 RESTRICTIONS. Restricted Stock Awards shall be subject to such
restrictions as the Committee may impose. The Committee may provide for the
lapse of such restrictions in installments and may accelerate or waive such
restrictions, in whole or part, based on length of service, performance or
such other factors or criteria as the Committee may determine.
7. STOCK BONUSES.
7.1 AWARDS OF STOCK BONUSES. A Stock Bonus is an award of Shares
(which may consist of Restricted Stock) for services rendered to the Company
or any Parent, Subsidiary or Affiliate of the Company. A Stock Bonus may be
awarded for past services already rendered to the Company, or any Parent,
Subsidiary or Affiliate of the Company pursuant to an Award Agreement (the
"STOCK BONUS AGREEMENT") that shall be in such form (which need not be the
same for each Participant) as the Committee shall from time to time approve,
and shall comply with and be subject to the terms and conditions of the
Plan. A Stock Bonus may be awarded upon satisfaction of such performance
goals as are set out in advance in Participant's individual Award Agreement
(the "PERFORMANCE STOCK BONUS
4
<PAGE>
AGREEMENT") that shall be in such form (which need not be the same for each
Participant) as the Committee shall from time to time approve, and shall
comply with and be subject to the terms and conditions of the Plan. Stock
Bonuses may vary from Participant to Participant and between groups of
Participants, and may be based upon the achievement of the Company, Parent,
Subsidiary or Affiliate and/or individual performance factors or upon such
other criteria as the Committee may determine.
7.2 TERMS OF STOCK BONUSES. The Committee shall determine the number
of Shares to be awarded to the Participant and whether such Shares shall be
Restricted Stock. If the Stock Bonus is being earned upon the satisfaction
of performance goals pursuant to a Performance Stock Bonus Agreement, then
the Committee shall determine: (a) the nature, length and starting date of
any period during which performance is to be measured (the "PERFORMANCE
PERIOD") for each Stock Bonus; (b) the performance goals and criteria to be
used to measure the performance, if any; (c) the number of Shares that may
be awarded to the Participant; and (d) the extent to which such Stock
Bonuses have been earned. Performance Periods may overlap and Participants
may participate simultaneously with respect to Stock Bonuses that are
subject to different Performance Periods and different performance goals and
other criteria. The number of Shares may be fixed or may vary in accordance
with such performance goals and criteria as may be determined by the
Committee. The Committee may adjust the performance goals applicable to the
Stock Bonuses to take into account changes in law and accounting or tax
rules and to make such adjustments as the Committee deems necessary or
appropriate to reflect the impact of extraordinary or unusual items, events
or circumstances to avoid windfalls or hardships.
7.3 FORM OF PAYMENT. The earned portion of a Stock Bonus may be paid
currently or on a deferred basis with such interest or dividend equivalent,
if any, as the Committee may determine. Payment may be made in the form of
cash, whole Shares, including Restricted Stock, or a combination thereof,
either in a lump sum payment or in installments, all as the Committee shall
determine.
7.4 TERMINATION DURING PERFORMANCE PERIOD. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
shall be entitled to payment (whether in Shares, cash or otherwise) with
respect to the Stock Bonus only to the extent earned as of the date of
Termination in accordance with the Performance Stock Bonus Agreement, unless
the Committee shall determine otherwise.
8. PAYMENT FOR SHARE PURCHASES.
8.1 PAYMENT. Payment for Shares purchased pursuant to the Plan may be
made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of Shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for within the
meaning of SEC Rule 144 (and, if such shares were purchased from the Company
by use of a promissory note, such note has been fully paid with respect to
such Shares); or (2) were obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate sufficient
to avoid imputation of income under Sections 483 and 1274 of the Code;
PROVIDED, HOWEVER, that Participants who are not employees of the Company
shall not be entitled to purchase Shares with a promissory note unless the
note is adequately secured by collateral other than the Shares; PROVIDED,
FURTHER, that the portion of the Purchase Price equal to the par value of
the Shares, if any, must be paid in cash;
(d) by waiver of compensation due or accrued to Participant for services
rendered;
(e) by tender of property;
5
<PAGE>
(f) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from Participant and a
broker-dealer that is a member of the National Association of Securities
Dealers (an "NASD Dealer") whereby Participant irrevocably elects to
exercise the Option and to sell a portion of the Shares so purchased to
pay for the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
(2) through a "margin" commitment from Participant and an NASD Dealer
whereby Participant irrevocably elects to exercise the Option and to
pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the Exercise
Price, and whereby the NASD Dealer irrevocably commits upon receipt of
such Shares to forward the exercise price directly to the Company;
(g) by any combination of the foregoing.
8.2 LOAN GUARANTEES. The Committee may help the Participant pay for
Shares purchased under the Plan by authorizing a guarantee by the Company of
a third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in
satisfaction of Awards granted under the Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under the Plan,
payments in satisfaction of Awards are to be made in cash, such payment
shall be net of an amount sufficient to satisfy federal, state, and local
withholding tax requirements.
9.2 STOCK WITHHOLDING. When, under applicable tax laws, a Participant
incurs tax liability in connection with the exercise or vesting of any Award
that is subject to tax withholding and the Participant is obligated to pay
the Company the amount required to be withheld, the Committee may allow the
Participant to satisfy the minimum withholding tax obligation by electing to
have the Company withhold from the Shares to be issued that number of Shares
having a Fair Market Value equal to the minimum amount required to be
withheld, determined on the date that the amount of tax to be withheld is to
be determined (the "TAX DATE"). All elections by a Participant to have
Shares withheld for this purpose shall be made in writing in a form
acceptable to the Committee and shall be subject to the following
restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, then except as provided below, the election shall be
irrevocable as to the particular Shares as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of the
Committee;
(d) if the Participant is an Insider and if the Company is subject to
Section 16(b) of the Exchange Act: (1) the election may not be made within
six (6) months of the date of grant of the Award, except as otherwise
permitted by SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A)
the election to use stock withholding must be irrevocably made at least six
(6) months prior to the Tax Date (although such election may be revoked at
any time at least six (6) months prior to the Tax Date) or (B) the exercise
of the Option or election to use stock withholding must be made in the ten
(10) day period beginning on the third day following the release of the
Company's quarterly or annual summary statement of sales or earnings;
PROVIDED, that, prior to the date the Company elects to comply with the
requirements of Rule 16b-3, as amended effective May 1, 1992, the provisions
of former Rule 16b-3(e) of the Exchange Act shall apply with respect to any
such elections; and
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<PAGE>
(e) in the event that the Tax Date is deferred until six (6) months
after the delivery of Shares under Section 83(b) of the Code, the
Participant shall receive the full number of Shares with respect to which
the exercise occurs, but such Participant shall be unconditionally obligated
to tender back to the Company the proper number of Shares on the Tax Date.
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 VOTING AND DIVIDENDS. No Participant shall have any of the rights
of a stockholder with respect to any Shares until the Shares are issued to
the Participant. After Shares are issued to the Participant, the Participant
shall be a stockholder and have all the rights of a stockholder with respect
to such Shares, including the right to vote and receive all dividends or
other distributions made or paid with respect to such Shares; PROVIDED, that
if such Shares are Restricted Stock, then any new, additional or different
securities the Participant may become entitled to receive with respect to
such Shares by virtue of a stock dividend, stock split or any other change
in the corporate or capital structure of the Company shall be subject to the
same restrictions as the Restricted Stock; PROVIDED, FURTHER, that the
Participant shall have no right to retain such dividends or distributions
with respect to Shares that are repurchased at the Participant's original
Purchase Price pursuant to Section 12.
10.2 FINANCIAL STATEMENTS. The Company shall provide financial
statements to each Participant prior to such Participant's purchase of
Shares under the Plan, and to each Participant annually during the period
such Participant has Options outstanding; PROVIDED, HOWEVER, the Company
shall not be required to provide such financial statements to Participants
whose services in connection with the Company assure them access to
equivalent information.
11. TRANSFERABILITY. Awards granted under the Plan, and any interest
therein, shall not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution or as consistent with the specific
Plan and Award Agreement provisions relating thereto. During the lifetime of the
Participant an Award shall be exercisable only by the Participant, and any
elections with respect to an Award, may be made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement (a)
a right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party, and/or (b) a
right to repurchase a portion of or all Shares held by a Participant following
such Participant's Termination at any time within ninety (90) days after the
later of Participant's Termination Date and the date Participant purchases
Shares under the Plan, for cash or cancellation of purchase money indebtedness,
at: (A) with respect to Shares that are "Vested" (as defined in the Award
Agreement), the higher of: (l) Participant's original Purchase Price, or (2) the
Fair Market Value of such Shares on Participant's Termination Date, PROVIDED,
such right of repurchase terminates when the Company's securities become
publicly traded; or (B) with respect to Shares that are not "Vested" (as defined
in the Award Agreement), at the Participant's original Purchase Price, provided,
that the right to repurchase at the original Purchase Price lapses at the rate
of at least 20% per year over 5 years from the date the Shares were purchased,
and if the right to repurchase is assignable, the assignee must pay the Company,
upon assignment of the right to repurchase, cash equal to the excess of the Fair
Market Value of the Shares over the original Purchase Price.
13. CERTIFICATES. All certificates for Shares or other securities
delivered under the Plan shall be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates, together with stock powers or other
7
<PAGE>
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under the Plan shall be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; PROVIDED, HOWEVER, that the Committee may
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company shall have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant shall be required to execute and deliver a written
pledge agreement in such form as the Committee shall from time to time approve.
The Shares purchased with the promissory note may be released from the pledge on
a prorata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant shall agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award shall not be
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed, as they are in effect on the date of grant of the
Award and also on the date of exercise or other issuance. Notwithstanding any
other provision in the Plan, the Company shall have no obligation to issue or
deliver certificates for Shares under the Plan prior to (a) obtaining any
approvals from governmental agencies that the Company determines are necessary
or advisable, and/or (b) completion of any registration or other qualification
of such shares under any state or federal law or ruling of any governmental body
that the Company determines to be necessary or advisable. The Company shall be
under no obligation to register the Shares with the SEC or to effect compliance
with the registration, qualification or listing requirements of any state
securities laws, stock exchange or automated quotation system, and the Company
shall have no liability for any inability or failure to do so.
17. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award granted
under the Plan shall confer or be deemed to confer on any Participant any right
to continue in the employ of, or other relationship with, the Company or any
Parent, Subsidiary or Affiliate of the Company or limit in any way the right of
the Company or any Parent, Subsidiary or Affiliate of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
18.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR. In the event of
(a) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the
stockholders of the Company and the Awards granted under the Plan are
assumed or replaced by the successor corporation, which assumption shall be
binding on all Participants), (b) a dissolution or liquidation of the
Company, (c) the sale of substantially all of the assets of the Company, or
(d) any other transaction which qualifies as a "corporate transaction" under
Section 424(a) of the Code wherein the stockholders of the Company give up
all of their equity interest in the Company (EXCEPT for the acquisition,
sale or transfer of all or substantially all of the outstanding shares of
the Company), any or all outstanding Awards may be assumed or replaced by
the successor corporation, which assumption or replacement shall be binding
on
8
<PAGE>
all Participants. In the alternative, the successor corporation may
substitute equivalent Awards or provide substantially similar consideration
to Participants as was provided to stockholders (after taking into account
the existing provisions of the Awards). The successor corporation may also
issue, in place of outstanding Shares of the Company held by the
Participant, substantially similar shares or other property subject
repurchase restrictions no less favorable to the Participant.
18.2 EXPIRATION OF OPTIONS. In the event such successor corporation,
if any, refuses to assume or substitute the Options as provided above,
pursuant to a transaction described in Susection 18.1(a), (b), (c) or (d)
above, such Option shall, notwithstanding any contrary terms of the Award,
accelerate and become exercisable in full prior to the consummation of such
transaction.
18.3 OTHER TREATMENT OF AWARDS. Subject to any greater rights granted
to Participants under the foregoing provisions of this Section 18, in the
event of the occurrence of any transaction described in Section 18.1, any
outstanding Awards shall be treated as provided in the applicable agreement
or plan of merger, consolidation, dissolution, liquidation, sale of assets
or other "corporate transaction."
18.4 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time to time,
also may substitute or assume outstanding awards granted by another company,
whether in connection with an acquisition of such other company or otherwise, by
either (a) granting an Award under the Plan in substitution of such other
company's award, or (b) assuming such award as if it had been granted under the
Plan if the terms of such assumed award could be applied to an Award granted
under the Plan. Such substitution or assumption shall be permissible if the
holder of the substituted or assumed award would have been eligible to be
granted an Award under the Plan if the other company had applied the rules of
the Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award shall remain unchanged
(EXCEPT that the exercise price and the number and nature of Shares issuable
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. The Plan shall become effective on
the date that it is adopted by the Board (the "EFFECTIVE DATE"). The Plan shall
be approved by the stockholders of the Company (excluding Shares issued pursuant
to this Plan), consistent with applicable laws, within twelve months before or
after the Effective Date. Upon the Effective Date, the Board may grant Awards
pursuant to the Plan; PROVIDED, HOWEVER, that: (a) no Option may be exercised
prior to initial stockholder approval of the Plan; (b) no Option granted
pursuant to an increase in the number of Shares approved by the Board shall be
exercised prior to the time such increase has been approved by the stockholders
of the Company; and (c) in the event that stockholder approval is not obtained
within the time period provided herein, all Awards granted hereunder shall be
cancelled, any Shares issued pursuant to any Award shall be cancelled and any
purchase of Shares hereunder shall be rescinded. After the Company becomes
subject to Section 16(b) of the Exchange Act, the Company will comply with the
requirements of Rule 16b-3 (or its successor), as amended, with respect to
stockholder approval.
20. TERM OF PLAN. The Plan will terminate ten (10) years from the
Effective Date or, if earlier, the date of stockholder approval.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate
or amend the Plan in any respect, including without limitation amendment of any
form of Award Agreement or instrument to be executed pursuant to the Plan;
PROVIDED, HOWEVER, that the Board shall not, without the approval of the
stockholders of the Company, amend the Plan in any manner that requires such
stockholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans or pursuant to the Exchange Act
or Rule 16b-3 (or its successor), as amended, thereunder.
9
<PAGE>
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board, the submission of the Plan to the stockholders of the Company for
approval, nor any provision of the Plan shall be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under the Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. GOVERNING LAW. The Plan and all agreements, documents and instruments
entered into pursuant to the Plan shall be governed by and construed in
accordance with the internal laws of the State of Minnesota except to the extent
required to be governed under the General Corporation Law of the State of
Delaware.
24. DEFINITIONS. As used in the Plan, the following terms shall have the
following meanings:
"AFFILIATE" means any corporation that directly, or indirectly through one
or more intermediaries, controls or is controlled by, or is under common control
with, another corporation, where "control" (including the terms "controlled by"
and "under common control with") means the possession, direct or indirect, of
the power to cause the direction of the management and policies of the
corporation, whether through the ownership of voting securities, by contract or
otherwise.
"AWARD" means any award under the Plan, including any Option, Restricted
Stock or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed written
agreement between the Company and the Participant setting forth the terms and
conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to administer the
Plan, or if no committee is appointed, the Board.
"COMPANY" means Racotek, Inc., a corporation organized under the laws of the
State of Delaware, or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent, partial or
total, within the meaning of Section 22(e)(3) of the Code, as determined by the
Committee.
"DISINTERESTED PERSON" shall have the meaning set forth in Rule
16b-3(c)(2)(i) as promulgated by the SEC under Section 16(b) of the Exchange
Act, as such rule is amended from time to time and as interpreted by the SEC.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may purchase
the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the NASDAQ National Market
System, its last reported sale price on the NASDAQ National Market System
or, if no such reported sale takes place on such date, the average of the
closing bid and asked prices;
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, the last reported sale price or, if no such
reported sale takes place on such date, the average of the closing bid and
asked prices on the principal national securities exchange on which the
Common Stock is listed or admitted to trading;
10
<PAGE>
(c) if such Common Stock is publicly traded but is not quoted on the
NASDAQ National Market System nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and asked
prices on such date, as reported by The Wall Street Journal, for the
over-the-counter market; or
(d) if none of the foregoing is applicable, by the Board of Directors of
the Company in good faith.
"INSIDER" means an officer or director of the Company or any other person
whose transactions in the Company's Common Stock are subject to Section 16 of
the Exchange Act.
"OPTION" means an award of an option to purchase Shares pursuant to Section
5.
"OUTSIDE DIRECTOR" shall mean any director who is not (i) a current employee
of the Company or any Parent, Subsidiary or Affiliate of the Company, (ii) a
former employee of the Company or any Parent, Subsidiary or Affiliate of the
Company who is receiving compensation for prior services (other than benefits
under a tax-qualified pension plan), (iii) a current or former officer of the
Company or any Parent, Subsidiary or Affiliate of the Company or (iv) currently
receiving compensation for personal services in any capacity, other than as a
director, from the Company or any Parent, Subsidiary or Affiliate of the
Company; provided, however, that at such time as the term "Outside Director", as
used in Section 162(m) is defined in regulations promulgated under Section
162(m) of the Code, "Outside Director" shall have the meaning set forth in such
regulations, as amended from time to time and as interpreted by the Internal
Revenue Service.
"PARENT" means any corporation (other than the Company) in an unbroken chain
of corporations ending with the Company, if at the time of the granting of an
Award under the Plan, each of such corporations other than the Company owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under the Plan.
"PLAN" means this Racotek, Inc. 1993 Equity Incentive Plan, as amended from
time to time.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 6.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock, $0.01 par value,
reserved for issuance under the Plan, as adjusted pursuant to Sections 2 and 15,
and any successor security.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant
to Section 7.
"SUBSIDIARY" means any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if, at the time of granting of
the Award, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of the Plan with respect
to a Participant, that the Participant has ceased to provide services as an
employee, director, consultant, independent contractor or adviser, to the
Company or a Parent, Subsidiary or Affiliate of the Company, except in the case
of sick leave, military leave, or any other leave of absence approved by the
Committee, PROVIDED, that such leave is for a period of not more than ninety
(90) days, or reinstatement upon the expiration of such leave is guaranteed by
contract or statute. The Committee shall have sole discretion to determine
whether a Participant has ceased to provide services and the effective date on
which the Participant ceased to provide services (the "TERMINATION DATE").
11
<PAGE>
RACOTEK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Racotek first shipped KeyWare-TM- in second quarter 1995 and has experienced
growth in revenues from both the licensing of KeyWare and related customer
support services between 1995 and 1996. However, the company expects to incur
substantial losses at least through 1997 because customers are delaying
implementation of wireless mobile data systems. These delays have occurred as a
result of the limited commercial availability and geographic coverage of
wireless networks, such as cellular digital packet data (CDPD) and low-earth
orbit (LEO) satellites, and the significant capital costs required for mobile
computing devices. Racotek believes that the commercial availability and
coverage of wireless networks are increasing and that capital costs are
beginning to decline. However, actual results could vary materially from the
foregoing forward-looking statements due to decisions by wireless network
providers not to deploy or extend their networks, decisions by manufacturers of
mobile computing devices to modify or discontinue relevant product lines,
competitive conditions facing wireless network providers and computing device
manufacturers, and other risks and uncertainties identified in this annual
report and in the company's Securities and Exchange Commission (SEC) filings.
There can be no assurance that Racotek's business will grow as anticipated or
that the company will achieve or sustain profitability on a quarterly or an
annual basis in the future.
Most prospective customers wish to test Racotek's products and services
during an evaluation period before implementing mobile data communication
throughout their user base. This reduces the amount of revenue the company can
expect to receive in the near term. Racotek continues to add new customers and
believes that the recurring revenue from providing monthly support, software
maintenance and transmission services to customers will constitute a substantial
source of revenue in the long term. However, actual results could vary
materially from the foregoing forward-looking statements because substantial
growth in revenues requires a significant number of new customers and the
broader roll-out of mobile data at a significant number of existing customers.
There can be no assurance that the company's revenue will grow as anticipated or
that customer roll-outs will occur at the rate necessary to achieve and sustain
profitability.
Racotek has an increasing percentage of net revenues derived from
professional services, including system planning, software development, system
integration, training and installation management. The company believes that its
experience in building, enabling and supporting mobile data systems will
continue to contribute to growth in professional services revenue and that
customers who purchase Racotek's professional services may become purchasers of
its other products and services. However, actual results could vary materially
from the foregoing forward-looking statements if few customers are persuaded to
implement and operate mobile data systems, if the company's competitors succeed
in attracting large numbers of customers or if other risks and uncertainties
identified in this annual report and in the company's SEC filings occur.
RESULTS OF OPERATIONS
NET REVENUES: Product revenues were $1,906,000, $3,298,000 and $3,106,000
for the years ended December 31, 1996, 1995 and 1994, respectively. The decrease
in 1996 product revenues resulted from the company's decision to discontinue the
production, purchase and distribution of specialized mobile radio (SMR)
products. Product revenue per mobile user also decreased as a result of the
introduction of KeyWare because, unlike the SMR-based products, KeyWare does not
require customers to purchase the company's proprietary hardware. Product
revenues will continue to fluctuate based on product mix, initial customer
shipments, and the timing and extent of customer roll-outs of their total user
base.
Service revenues increased to $4,977,000 for the year ended December 31,
1996, from $2,790,000 and $847,000 for the years ended December 31, 1995 and
1994, respectively. The increases are primarily the result of the company's
increased focus on marketing and providing consulting services and managed
network services for its KeyWare customers. Net revenues from these services,
in aggregate, increased to $4,274,000 for the year ended December 31, 1996,
from $1,838,000 and $125,000 for the years ended December 31, 1995 and 1994,
respectively. Transmission services revenue, which is the other primary
component of service revenues and which is primarily SMR-based, decreased in
conjunction with the company's decision to stop producing, purchasing and
distributing SMR products.
17
<PAGE>
RACOTEK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COST OF REVENUES: Cost of product revenues were $2,027,000, $3,001,000 and
$2,953,000 for the years ended December 31, 1996, 1995 and 1994, respectively,
resulting in product margins of -6 percent, 9 percent and 5 percent. In 1996,
Racotek recorded a $900,000 charge to write down the company's remaining SMR
inventories to their estimated net realizable values. Excluding the effect of
this write-down, 1996 product margins were 41 percent. The increase over 1994
and 1995 is due to the shift in product mix to more software license sales. The
company believes product margins will continue to improve in the future as the
product mix continues to change to more higher-margin software license sales and
less hardware sales. However, actual results could vary materially from the
foregoing forward-looking statement if the company fails to achieve its
anticipated volume of sales or if other risks and uncertainties identified in
this annual report and in the company's SEC filings occur.
Cost of services were $3,499,000, $1,314,000 and $370,000 for the years
ended December 31, 1996, 1995 and 1994, respectively, resulting in service
margins of 30 percent, 53 percent and 56 percent. The increase in cost of
services corresponds to the increases in service revenues and resulted
principally from the addition of personnel required to perform consulting
services. The decline in the service margin in 1996 is related to the costs of
hiring and training consulting personnel to perform the additional consulting
services the company expects in the future. While Racotek believes consulting
services will continue to increase in 1997, actual results could vary materially
from the foregoing forward-looking statements if the company cannot continue to
hire and retain qualified personnel to provide these services or if other risks
and uncertainties identified in this annual report and in the company's other
filings with the SEC occur.
RESEARCH AND DEVELOPMENT: Research and development expenses were
$4,211,000, $4,170,000 and $3,035,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Included in 1995 research and development
expenses was a one-time charge of $742,000 relating to the acquisition of
certain technologies from Business Partner Solutions, Inc. The increases in
1995 and 1996 were primarily the result of adding engineering personnel to
enhance the company's existing products. Racotek expects research and
development expenses in 1997 to decrease from 1996 levels. However, actual
results could vary materially from the foregoing forward-looking statement if
Racotek acquires other technologies, if it becomes necessary for the company
to enhance its products beyond what was initially planned for 1997 or if
other risks and uncertainties identified in this annual report or in the
company's other SEC filings occur.
SALES AND MARKETING: Sales and marketing expenses were $6,249,000,
$9,045,000 and $7,647,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Expenses were up in 1995, primarily because of increases
in sales, support and marketing personnel and costs related to travel, sales
commissions, trade shows and marketing materials to promote the company's
products and services, including the introduction of KeyWare. Sales and
marketing expenses decreased in 1996 as a result of cost-reduction measures
related to the company's decision to discontinue the marketing and sale of
SMR products. Racotek expects sales and marketing expenses to increase from
1996 levels as the company continues to promote its service and software
products aggressively. However, actual results could vary materially from the
foregoing forward-looking statement if the company determines that revenue
growth is insufficient to support increased sales and marketing expenditures
or if other risks and uncertainties identified in this annual report or in
the company's other SEC filings occur.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were
$2,000,000, $2,240,000 and $2,920,000 for the years ended December 31, 1996,
1995 and 1994, respectively. The 1994 amount included a one-time charge of
$651,000 for stock options granted to the company's former president at an
exercise price less than the then-quoted market price. Expenses decreased in
1996 because of cost-reduction measures taken when the company decided to
discontinue producing, purchasing and distributing SMR products.
18
<PAGE>
RACOTEK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTEREST INCOME: Interest income was $859,000, $1,335,000 and $1,447,000
for the years ended December 31, 1996, 1995 and 1994, respectively. Interest
income is derived from the investment of the net proceeds from the company's
initial public offering in December 1993. The decreases in 1995 and 1996 were
related to a reduction in the amount of investments as the cash was required
to fund operating activities. The 1996 decrease is also related to declining
interest rates on these investments.
NET OPERATING LOSS CARRYFORWARD: At December 31, 1996, Racotek had net
operating loss carryforwards for federal income tax purposes of approximately
$56,246,000. Under federal income tax laws, due to prior changes in stock
ownership, the company's use of its net operating loss carryforwards is
limited on an annual basis. The net operating loss carryforwards will expire
in various years between 2005 and 2011.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31,1996, Racotek had no significant capital spending or
purchase commitments and had cash and investments totaling $11,947,000 and
working capital of $12,693,000. For the years ended December 31, 1996, 1995
and 1994, the company used $8,376,000, $10,823,000 and $12,897,000,
respectively, of cash for its operating activities. The amount of cash used
in operating activities decreased in both 1995 and 1996 as a result of
revenue growth and cost-reduction efforts, including the decision to
discontinue producing, purchasing and distributing SMR products. Racotek
expects to continue to incur negative cashflows from operating activities
through at least 1997. Cash used in investing activities in 1994 was for the
purchase of investments resulting from the cash provided from the company's
initial public offering in December 1993. The cash provided from investing
activities in 1996 and 1995 was primarily from investments that matured in
those years. No significant financing activity occurred in 1996 or 1995.
Racotek believes that its existing capital resources will be sufficient
to meet the company's cash requirements into 1998. However, actual results
could vary materially from the foregoing forward-looking statement due to the
market acceptance of the company's products and services, and other factors
identified in this annual report and in the company's SEC filings.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Delays in the commercial availability and geographic coverage of new
wireless networks may continue to impede or prevent substantial growth of
Racotek's business. There can be no assurance that the services offered by
new wireless networks will attain commercial availability, that they will be
available in a significant number of metropolitan areas or that they will
provide a scope of geographic coverage attractive to customers in the
metropolitan areas where they are available. Racotek's inability to offer
products and services to customers on new wireless networks could have a
material adverse effect on the company's business.
Racotek's ability to provide communication services is dependent upon
contractual relationships with wireless network providers. There can be no
assurance that the company will be able to enter into or maintain
relationships with wireless network providers, that any such relationships
will be on economically favorable terms or that wireless network providers
may not choose to compete against rather than cooperate with the company.
Furthermore, there can be no assurance that wireless network providers will
have the capacity, ability and FCC authorization to provide high-quality
airtime to Racotek's customers on a continuous basis. Racotek's inability to
obtain high-quality, reliable, continuous airtime from or maintain
cooperative relationships with wireless network providers would materially
and adversely affect the company's business.
Racotek's success is affected by application software developers who help
create a market for the company's products by writing their application software
programs so that the programs implement
19
<PAGE>
RACOTEK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
mobile data transmission through KeyWare. There can be no assurance that the
application software developers will choose to make their computer programs
compatible with KeyWare. Furthermore, there can be no assurance that the
application software developers who implement mobile data transmission
through KeyWare will be successful in developing and marketing their
Racotek-compatible products or will continue to use the company's products in
their business. In addition, delays by these developers in completing their
wireless application software integration is impeding the company's efforts
to persuade existing and prospective customers to implement the products
across their entire fleets. Continuing delays in wireless application
software integration could have a material adverse impact on Racotek's
business.
Racotek depends on third-party hardware manufacturers to develop and
maintain computer hardware devices that are suitable for mobile data
applications, such as handheld and vehicle-mounted devices, and to make these
devices available to customers at attractive prices. The prices for these
hardware devices have declined and are expected to continue to decline. The
company's ability to sell its products is affected by the price of these
hardware devices. Unless dependable, fully featured, KeyWare-compatible
mobile devices are available at competitive prices, customers will be
reluctant to implement mobile data systems and become Racotek customers,
which would materially and adversely affect the company's business.
A substantial portion of Racotek's revenues is derived from providing
consulting services to mobile data users. Consulting services cannot be
standardized and mass-marketed as readily as software, and they may not
provide as consistent a source of recurring revenue as monthly support,
software maintenance and transmission services are expected to provide. In
order for the company's revenues from consulting services to continue to
grow, Racotek must continue to add more customers and larger projects to
build, enable and support data mobility systems. Racotek's inability to
identify customers for its large-scale consulting services and/or the
company's inability to use its consulting services to obtain additional
customers for its software licenses, support and transmission services could
materially and adversely affect the growth of its business.
Racotek derives a substantial part of its revenue from a small number of
customers who, after evaluating the company's products, proceed to install
its products throughout their total user base. A decision by any one of these
customers to delay or abandon roll-out of the company's products across an
entire fleet could have a material adverse effect on Racotek's business and
results of operations.
Competition in the communication industry is intense. Major software
development companies, as well as computer, database and communications
companies, are possible sources of future direct competition for Racotek'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 Racotek.
In addition to these direct competitors, the company presently faces
competition from providers of other mobile communication services that
customers might view as substitutes for wireless data transmission, such as
cellular telephone, paging and conventional two-way voice radio.
20
<PAGE>
RACOTEK, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 2,956 $ 4,397
Short-term investments..................................................................... 8,991 10,645
Accounts receivable, net................................................................... 1,616 1,654
Inventories................................................................................ 374 1,305
Prepaid expenses and other current assets.................................................. 294 518
--------- ---------
Total current assets..................................................................... 14,231 18,519
Long-term investments........................................................................ -- 5,052
Property and equipment, net.................................................................. 1,932 2,316
Restricted cash.............................................................................. 470 585
Capitalized software development costs, net.................................................. 121 241
Other long-term assets....................................................................... 165 403
--------- ---------
Total assets............................................................................. $ 16,919 $ 27,116
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................... $ 656 $ 638
Accrued expenses........................................................................... 882 1,100
--------- ---------
Total current liabilities................................................................ 1,538 1,738
Commitments (Note 3).........................................................................
Stockholders' equity:
Common stock, $.01 par value, 35,000,000 shares authorized, 24,740,293 and 24,043,446
issued and outstanding at December 31, 1996 and 1995, respectively........................ 247 240
Additional paid-in capital................................................................. 70,878 70,638
Accumulated deficit........................................................................ (55,744) (45,500)
--------- ---------
Total stockholders' equity............................................................... 15,381 25,378
--------- ---------
Total liabilities and stockholders' equity................................................... $ 16,919 $ 27,116
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
21
<PAGE>
RACOTEK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Products.............................................................. $ 1,906 $ 3,298 $ 3,106
Services.............................................................. 4,977 2,790 847
------------ ------------ ------------
6,883 6,088 3,953
Cost and expenses:
Cost of products...................................................... 2,027 3,001 2,953
Cost of services...................................................... 3,499 1,314 370
Research and development.............................................. 4,211 4,170 3,035
Sales and marketing................................................... 6,249 9,045 7,647
General and administrative............................................ 2,000 2,240 2,920
------------ ------------ ------------
Loss from operations.................................................... (11,103) (13,682) (12,972)
Interest income......................................................... 859 1,335 1,447
------------ ------------ ------------
Net loss................................................................ ($ 10,244) ($ 12,347) ($ 11,525)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share...................................................... ($ 0.42) ($ 0.52) ($ 0.49)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding..................................... 24,372,464 23,764,673 23,442,624
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
22
<PAGE>
RACOTEK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------
ADDITIONAL TOTAL
$.01 PAR PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993.............. 23,074,154 $ 231 $ 68,801 ($ 21,628) $ 47,404
Exercise of incentive stock options........ 522,605 5 51 -- 56
Exercise of warrants....................... 24,228 -- 48 -- 48
Shares reacquired.......................... (206,727) (2) (19) -- (21)
Options granted to the company's former
president for the purchase of 206,727
shares at $.10 per share.................. -- -- 651 -- 651
Net loss................................... -- -- -- (11,525) (11,525)
------------ ------------ ------------ ------------ ------------
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
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
23
<PAGE>
RACOTEK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... ($ 10,244) ($ 12,347) ($ 11,525)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 969 817 486
Provision for write-down of inventories......................................... 1,110 569 295
Provision for bad debts and returns............................................. 233 180 192
Stock compensation.............................................................. 651
Stock consideration (Note 4).................................................... - 603 -
Amortization of discounts on investments........................................ (94) (236) (118)
Changes in operating assets and liabilities:
Accounts receivable............................................................. (195) (477) (601)
Inventories..................................................................... (179) 31 (1,050)
Prepaid expenses and other current assets....................................... 224 (244) 9
Accounts payable and accrued expenses........................................... (200) 281 (1,236)
--------- --------- ---------
Net cash used in operating activities......................................... (8,376) (10,823) (12,897)
Cash flows from investing activities:
Purchase of investments......................................................... (18,712) (15,685) (35,898)
Proceeds from maturity of investments........................................... 25,512 27,889 16,017
Purchase of property and equipment.............................................. (313) (693) (1,710)
Acquisition of assets (Note 4).................................................. - (223) -
Capitalized software development costs.......................................... - (110) (90)
Other........................................................................... 86 61 (402)
--------- --------- ---------
Net cash provided by (used in) investing activities........................... 6,573 11,239 (22,083)
Cash flows from financing activities:
Proceeds from exercises of options and warrants................................. 247 509 104
Changes in restricted cash...................................................... 115 115 (510)
Repurchase of common stock...................................................... - - (21)
--------- --------- ---------
Net cash provided by (used in) financing activities........................... 362 624 (427)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (1,441) 1,040 (35,407)
Cash and cash equivalents, beginning of year...................................... 4,397 3,357 38,764
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 2,956 $ 4,397 $ 3,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
24
<PAGE>
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
BUSINESS DESCRIPTION: Racotek, Inc., designs, develops, markets and supports
mobile data communications products and services throughout the United States.
The company also offers consulting, education, installation and systems
integration services primarily to support its customers' use of its software
products.
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 that require the use of management estimates relate to
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.
MARKET RISK: Potential customers of Racotek's wireless mobile data products and
services have delayed implementing wireless mobile data systems principally
because of the limited commercial availability and geographic coverage of
existing wireless networks, delays in completing wireless application software
integration and the significant capital costs required. Accordingly, sales of
the company's products and services will be affected by these factors.
CASH EQUIVALENTS AND INVESTMENTS: Racotek 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- or long-term
investments based on the remaining maturity.
Pursuant to Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, Racotek's investments as of
December 31, 1996 and 1995, 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: 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-cancellable and non-refundable. Generally, other product revenue is
recognized upon shipment.
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.
INVENTORIES: Inventories are 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 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 1996. Software
development costs capitalized in 1995 and 1994 were $110 and $90, respectively.
Amortization expense of $120, $123 and $82 relating to these costs was
recognized for the years ended December 31, 1996, 1995 and 1994, 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 three 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.
25
<PAGE>
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES: Racotek uses 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: In accordance with Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS NO. 123),
Racotek has chosen to continue 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 SFAS No. 123. Accordingly, compensation costs for
stock options granted to employees are 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 costs for stock options
granted to non-employees are measured as the excess of the fair value of the
option over the amount the holder must pay to acquire the stock. Such
compensation costs, if any, are amortized on a straight-line basis over the
underlying option vesting terms.
NET LOSS PER SHARE: 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.
2. SELECTED BALANCE SHEET
INFORMATION AT DECEMBER 31,
1996 AND 1995:
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE, NET: 1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------------------
Accounts receivable $ 1,956 $ 1,851
Less allowance
for doubtful accounts (340) (197)
- -------------------------------------------------------------------------------------
$ 1,616 $ 1,654
- -------------------------------------------------------------------------------------
INVENTORIES:
Components $ 60 $ 104
Finished goods 314 1,201
- -------------------------------------------------------------------------------------
$ 374 $ 1,305
- -------------------------------------------------------------------------------------
</TABLE>
The company has periodically written down the carrying values of certain
inventories to their estimated net realizable values. These write-downs, charged
to cost of sales, totaled $1,110, $569, and $295, for the years ended December
31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT, NET: 1996 1995
<S> <C> <C>
Computer equipment $ 3,064 $ 2,732
Furniture and equipment 816 835
Leasehold improvements 213 213
- --------------------------------------------------------------------------------
4,093 3,780
Less accumulated depreciation
and amortization (2,161) (1,464)
- --------------------------------------------------------------------------------
$ 1,932 $ 2,316
- --------------------------------------------------------------------------------
ACCRUED EXPENSES:
Compensation $ 236 $ 207
Vacation 186 240
Deferred rent 141 160
Warranty 8 157
Other 311 336
- --------------------------------------------------------------------------------
$ 882 $ 1,100
- --------------------------------------------------------------------------------
</TABLE>
INVESTMENTS: The company's investments consisted of $8,991 and $15,697 of U.S.
government and agency debt securities, including unamortized premiums and
discounts of $14 and $23 as of December 31, 1996, and unamortized premiums of
$85 as of December 31, 1995. Investments held as of December 31, 1996, have
various maturity dates through November 1997. As of December 31, 1996, the
company's investments had an aggregate fair market value, based on quoted market
prices, of $8,995.
3. LEASE COMMITMENTS:
Racotek leases office facilities under terms of a non-cancellable operating
lease that expires in July 2000. The company also leases warehouse facilities
under a non-cancellable operating lease that expires in April 1997. Both leases
require the company to pay a pro rata share of the lessors' operating costs.
Racotek's office facility lease requires the company to maintain a restricted
cash balance as collateral for the lessor, which declines throughout the lease
term ($470 and $585 at December 31, 1996 and 1995, respectively). Total rent
expense, including a pro rata share of the lessor's operating costs were $642,
$581 and $346, for the years ended December 31, 1996, 1995 and 1994,
respectively.
During 1994, Racotek entered into a sublease agreement with a third party to
sublease its prior office facility. During 1994 and 1996, the company recorded
accruals of
26
<PAGE>
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
$125 and $40, respectively, to recognize costs to be incurred under terms of its
prior lease agreement in excess of estimated sublease income to be earned under
terms of the sublease agreement.
Future minimum lease payments under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING SUBLEASE
DECEMBER 31 LEASES INCOME
<S> <C> <C>
1997 $ 772 $ 77
1998 592 --
1999 549 --
2000 320 --
</TABLE>
4. ACQUISITION:On December 27, 1995, Racotek acquired certain assets, including
certain technologies from BUSINESS PARTNERS SOLUTIONS, INC., in exchange for
$362 in 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 on 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:Racotek's Stock Incentive and Option Plans provide for
grants of stock options and stock awards. The number of common shares
available for grant pursuant to the plans were 420,611, 1,195,205 and
870,580 as of December 31, 1996, 1995 and 1994.
Options become exercisable over periods of up to four years from the date of
grant and expire within 10 years from the date of grant.
The following table details option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER EXERCISE
SHARES SHARE PRICE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
Balances,
December 31,1993 2,532,093 $.05-10.125 1.58
Granted 777,577 3.25-12.625 3.79
Exercised (522,605) .05-.55 .11
Cancelled (227,092) .10-12.625 5.26
- -------------------------------------------------------------------------------------
Balances,
December 31, 1994 2,559,973 .05-12.625 2.08
Granted 873,803 3.125-7.625 5.35
Exercised (501,423) .05-4.63 .96
Cancelled (98,428) .20-12.625 4.90
- -------------------------------------------------------------------------------------
Balances,
December 31, 1995 2,833,925 .10-12.625 3.04
Granted 1,215,346 3.625-6.00 4.68
Exercised (696,847) .10-4.75 .35
Cancelled (440,752) .40-12.625 5.26
- -------------------------------------------------------------------------------------
Balances,
December 31, 1996 2,911,672 .10-12.625 4.17
- -------------------------------------------------------------------------------------
Options exercisable
at December 31, 1996 1,369,799 .10-12.625 3.45
- -------------------------------------------------------------------------------------
</TABLE>
STOCK BASED COMPENSATION: No compensation cost has been recognized for the
plans. Had compensation cost for the plans been determined based on the fair
value of options at the grant date for awards in 1996 and 1995, the company's
net loss and net loss per share would have increased to the pro forma amounts
indicated below:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Net loss As reported ($ 10,244) ($ 12,347)
Pro forma (11,204) (12,655)
- -------------------------------------------------------------
Net loss per share As reported ($ .42) ($ .52)
Pro forma (.46) (.53)
</TABLE>
27
<PAGE>
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
The aggregate fair value of options granted during 1996 and 1995, respectively,
were $1,671 and $1,602 for the 1993 Equity Incentive Plan and $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:
<TABLE>
<CAPTION>
ASSUMPTIONS 1996 1995
<S> <C> <C>
- ------------------------------------------------------------------
Risk-free interest rates 5.27% - 6.77% 5.46% - 7.75%
Volatility 50% 50%
Expected lives (months) 60 60
- ------------------------------------------------------------------
</TABLE>
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, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE
EXERCISE NUMBER OUTSTANDING AT REMAINING CONTRACTUAL WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES DECEMBER 31, 1996 LIFE (IN MONTHS) EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
$ .10 - .60 426,421 61 $ .24 422,469 $ .24
3.125 - 4.688 1,235,685 101 3.73 498,324 3.42
4.75 - 7.125 1,061,566 107 5.44 346,346 5.56
7.25 - 10.875 138,375 100 8.01 59,751 8.43
11.00 - 12.625 49,625 86 11.42 42,909 11.34
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
PREFERRED STOCK: Racotek's certificate of incorporation authorizes issuance of
up to 5,000,000 preferred shares and allows the company's board of directors,
without obtaining the stockholders' approval, to issue preferred stock.
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
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 and 24,228 shares in 1995 and 1994, respectively.
There are no warrants outstanding as of December 31, 1996.
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
28
<PAGE>
RACOTEK, INC.
NOTES TO FINANCIAL STATEMENTS
receive shares of common stock of the acquiring corporation at a substantially
discounted price.
After a person 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, 1996, the Company had generated net operating loss
carryforwards of approximately $56,246 for tax reporting purposes that may be
offset against future taxable income through 2011. In addition, the Company had
approximately $2,612 of future deductible temporary differences as of December
31, 1996, related primarily to allowances for inventory obsolescence and bad
debts, and approximately $742 of research and development charges recognized
immediately for financial reporting purposes (Note 4) which are amortizable over
15 years for tax reporting purposes, and approximately $512 of research and
development tax credit carryovers available to reduce future income taxes. These
credits expire from 2005 through 2011. The Company also had approximately $432
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, 1996 and 1995.
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.
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 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 sales has been derived from major customers for the
years ended December 31, 1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
CUSTOMER 1 4%
CUSTOMER 2 11% 18% 12%
CUSTOMER 3 15% 45%
CUSTOMER 4 12%
- -----------------------------------------------------------------------------
</TABLE>
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, 1996, is presented below. These prices reflect interdealer
prices and do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
- -----------------------------------------------
1993
Fourth Quarter $ 10.50 $ 7.00
1994
First Quarter 14.38 9.00
Second Quarter 10.38 5.88
Third Quarter 7.00 2.75
Fourth Quarter 5.00 3.00
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
</TABLE>
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 17, 1997, the Company had 470 stockholders of record.
29
<PAGE>
RACOTEK, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Racotek, Inc.:
We have audited the accompanying balance sheets of Racotek, Inc. as of December
31, 1996 and 1995, and the related statements of operations, cash flows, and
stockholders' equity for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
January 14, 1997
30
<PAGE>
RACOTEK, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA (for the years ended December 31)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
Net revenues:
Products $ 1,906 $ 3,298 $ 3,106 $ 2,313 $ 756
Services 4,977 2,790 847 106 30
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues 6,883 6,088 3,953 2,419 786
Cost and expenses:
Cost of products 2,027 3,001 2,953 2,754 846
Cost of services 3,499 1,314 370 83 16
Research and development 4,211 4,170 3,035 1,848 1,895
Sales and marketing 6,249 9,045 7,647 4,599 2,522
General and administrative 2,000 2,240 2,920 1,142 861
- ----------------------------------------------------------------------------------------------------------------------------
Loss from operations (11,103) (13,682) (12,972) (8,007) (5,354)
Other income, net 859 1,335 1,447 347 213
- ----------------------------------------------------------------------------------------------------------------------------
Net loss ($10,244) ($12,347) ($11,525) ($7,660) ($5,141)
- ----------------------------------------------------------------------------------------------------------------------------
Net loss per share ($ 0.42) ($ 0.52) ($ 0.49) ($ 1.79) ($ 1.41)
Weighted average
shares outstanding (1) 24,372,464 23,764,673 23,442,624 4,273,440 3,654,226
BALANCE SHEET DATA (at December 31)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
Cash and cash equivalents
and short-term investments $ 11,947 $ 15,042 $ 27,407 $ 46,430 $ 5,332
Working capital 12,693 16,781 29,486 46,118 5,875
Total assets 16,919 27,116 38,070 50,097 7,536
Mandatorily redeemable
preferred stock (2) -- -- -- -- 19,730
Total common stockholders'
equity (deficiency) 15,381 25,378 36,613 47,404 (13,809)
</TABLE>
(1) AS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATIONS, COMMON AND
COMMON EQUIVALENT SHARES ISSUED BY THE COMPANY DURING THE 12 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.
(2) THE MANDATORILY REDEEMABLE PREFERRED STOCK WAS CONVERTED TO COMMON STOCK
UPON THE COMPLETION OF THE COMPANY'S INITIAL PUBLIC OFFERING OF COMMON STOCK
IN DECEMBER 1993.
31
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Racotek, Inc. on Form S-8 (File No. 33-73456) of our reports dated January
14, 1997, on our audits of the financial statements and financial statement
schedule of Racotek, Inc. as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995, and 1994, which reports are included in or
incorporated by reference in this Annual Report on Form 10-K.
_________/s/ COOPERS & LYBRAND________
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ANNUAL FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,956
<SECURITIES> 8,991
<RECEIVABLES> 1,956
<ALLOWANCES> (340)
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0
0
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