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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
7301 OHMS LANE, SUITE 200, MINNEAPOLIS, MINNESOTA, 55439
(Address of principal executive offices, including zip code)
(612) 832-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class March 31, 1997
---- --------------
Common Stock, $.01 par value 24,918,246
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THIS REPORT CONSISTS OF 12 SEQUENTIALLY NUMBERED PAGES.
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RACOTEK, INC.
INDEX
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
-------
Statements of Operations
Three Months Ended March 31, 1997 and 1996 3
Balance Sheets
March 31, 1997 and December 31, 1996 4
Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II -- OTHER INFORMATION
Items
1-5. Not applicable 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
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PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RACOTEK, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
-------------------------------
1997 1996
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Net revenues:
Products $189 $362
Services 1,550 1,185
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1,739 1,547
Cost and expenses:
Cost of products 179 1,284
Cost of services 1,080 961
Research and development 1,025 1,038
Sales and marketing 1,529 1,904
General and administrative 478 725
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Loss from operations (2,552) (4,365)
Interest Income 127 173
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Net loss ($2,425) ($4,192)
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Net loss per share ($0.10) ($0.17)
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Number of shares used in computation 24,863 24,107
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The accompanying notes are an integral part of the financial statements.
3
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RACOTEK, INC.
BALANCE SHEETS
(in thousands, except per share data)
ASSETS
March 31, December 31,
1997 1996
------------ -------------
(Unaudited)
Current assets:
Cash and cash equivalents $4,003 $2,956
Short-term investments 6,007 8,991
Accounts receivable, net 1,499 1,616
Inventories 343 374
Prepaid expenses and other current assets 269 294
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Total current assets 12,121 14,231
Property and equipment, net 1,820 1,932
Restricted cash 470 470
Capitalized software development costs, net 91 121
Other long-term assets 149 165
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Total assets $14,651 $16,919
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $446 $656
Accrued expenses 977 882
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Total current liabilities 1,423 1,538
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Commitments
Stockholders' equity:
Common stock, $0.01 par value, 35,000 shares
authorized, 24,918 and 24,740 issued and
outstanding at Mar. 31, 1997 and Dec. 31, 1996,
respectively 249 247
Additional paid-in capital 71,148 70,878
Accumulated deficit (58,169) (55,744)
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Total stockholders' equity 13,228 15,381
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Total liabilities and stockholders' equity $14,651 $16,919
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The accompanying notes are an integral part of the financial statements.
4
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RACOTEK, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
March 31,
---------------------------
1997 1996
------------ -------------
Cash flows from operating activities:
Net loss ($2,425) ($4,192)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 237 213
Provision for bad debts 30 327
Write-down of inventories 900
Amortization of discounts on investments (16) 14
Stock issued for consulting services 41 -
Changes in operating assets and liabilities:
Accounts receivable 87 (45)
Inventories 31 (34)
Prepaid expenses and other current assets 25 184
Accounts payable and accrued expenses (115) (462)
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Net cash used in operating activities (2,105) (3,095)
Cash flows from investing activities:
Purchase of investments (1,000) (3,580)
Proceeds from maturity of investments 4,000 6,112
Purchase of property and equipment (79) (62)
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Net cash provided from investing
activities 2,921 2,470
Cash flows from financing activities:
Proceeds from exercises of options 231 42
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Net cash provided from financing
activities 231 42
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Net change in cash and cash equivalents 1,047 (583)
Cash and cash equivalents, beginning of period 2,956 4,397
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Cash and cash equivalents, end of period $4,003 $3,814
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The accompanying notes are an integral part of the financial statements.
5
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NOTES TO FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION:
The unaudited financial statements of Racotek, Inc. ("Racotek" or the
"Company") as of March 31, 1997 and for the three month periods ended March
31, 1997 and 1996 reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly state
the financial position at March 31, 1997 and the results of operations and
cash flows for the reported periods. The results of operations for any
interim period are not necessarily indicative of the results to be expected
for any other interim period or for the full year. The year-end balance
sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
audited financial statements and related notes for the year ended December
31, 1996, which were included in the Company's 1996 Annual Report and
incorporated by reference in its 1996 Form 10-K.
In March 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings per Share", which the Company will adopt effective for its 1997
year end reporting. The Company will be required to report basic net income
per share based on weighted average common shares outstanding, without
considering common equivalent shares, and diluted net income per share based
on weighted average common and common equivalent shares outstanding. Diluted
net income per share would be equivalent to the Company's current reporting
of net loss per common and common equivalent share.
NOTE B. SELECTED BALANCE SHEET INFORMATION (IN THOUSANDS):
MARCH 31, 1997 DECEMBER 31, 1996
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(Unaudited)
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $1,806 $1,956
Less allowance for doubtful accounts (307) (340)
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$1,499 $1,616
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PROPERTY AND EQUIPMENT, NET:
Computer equipment $3,142 $3,064
Furniture and equipment 817 816
Leasehold improvements 213 213
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4,172 4,093
Less accumulated depreciation and
amortization (2,352) (2,161)
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$1,820 $1,932
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6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW IN "FACTORS THAT MAY AFFECT FUTURE RESULTS" AS WELL AS THOSE IDENTIFIED
IN THE COMPANY'S OTHER SEC FILINGS.
OVERVIEW
Racotek first shipped KeyWare-TM- in the second quarter of 1995
and has experienced growth in revenues from both the licensing of KeyWare and
related customer support services since 1995. 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") satellite, and the significant capital costs
required for mobile computing devices. The Company believes that the
commercial availability and coverage of wireless networks are increasing and
that capital costs are beginning to decline.
Most prospective customers wish to test the Company's products and
services during an evaluation period before implementing mobile data
communications throughout their user base. This reduces the amount of
revenues the Company can expect to receive in the near term. The Company
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.
The Company 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 extensive experience in building, enabling and supporting
mobile data systems will continue to contribute to growth in professional
service revenues, and that customers who purchase the Company's professional
services may become purchasers of its other products and services.
RESULTS OF OPERATIONS
NET REVENUES
Product revenues decreased from $362,000 for the quarter ended March 31,
1996 to $189,000 for the quarter ended March 31, 1997. The decrease in
product revenues resulted from the Company's decision during 1996 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 from $1,185,000 for the quarter ended March
31, 1996 to $1,550,000 for the quarter ended March 31, 1997. This increase is
primarily the result of the Company's increased focus on marketing and
providing consulting services. For the quarter ended March 31, 1997, the
Company earned $1,140,000 in revenues from consulting services as compared to
$853,000 for the quarter ended March 31, 1996. Managed network services and
transmission services, which are the other primary components of service
revenues, both increased due to an increase in the size of the Company's
mobile user base.
7
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COST OF REVENUES
Cost of product revenues decreased from $1,284,000 for the quarter ended
March 31, 1996 to $179,000 for the quarter ended March 31, 1997. Gross
margins for the first quarter increased from -255% in 1996 to 5% in 1997.
Cost of products for the quarter ended March 31, 1996 included a charge of
approximately $900,000 resulting from the write-down of the Company's
remaining SMR inventories to their net realizable values. The Company
believes product margins will improve in the future with the change in the
product mix to higher-margin software license sales and a reduction in
hardware sales.
Cost of services increased from $961,000 for the quarter ended March 31,
1996 to $1,080,000 for the quarter ended March 31, 1997. The increase in the
cost of services resulted primarily from an increase in the volume of
services performed and a related increase in consulting personnel. Service
margins increased from 19% for the quarter ended March 31, 1996 to 30% for
the quarter ended March 31, 1997 due to the increase in higher margin
consulting services revenue.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased from $1,038,000 for the
quarter ended March 31, 1996 to $1,025,000 for the quarter ended March 31,
1997. The Company expects research and development expenses to continue to
decrease throughout 1997 due to the overall cost-reduction measures
implemented by the Company.
SALES AND MARKETING
Sales and marketing expenses decreased from $1,904,000 for the quarter
ended March 31, 1996 to $1,529,000 for the quarter ended March 31, 1997. The
decrease was due to the cost reduction measures taken in 1996 when the
Company made the decision to discontinue the purchase and distribution of SMR
related products. The Company expects sales and marketing expenses to
continue to remain constant or increase slightly in 1997 as the Company
continues to promote its service and software products aggressively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased from $725,000 for the
quarter ended March 31, 1996 to $478,000 for the quarter ended March 31,
1997. The decrease was due to the cost-reduction measures taken when the
Company made the decision to discontinue the purchase and distribution of
SMR products in 1996. The Company expects general and administrative expenses
to continue to decrease throughout 1997 due to the overall cost-reduction
measures implemented by the Company.
INTEREST INCOME
Interest income decreased from $173,000 for the quarter ended March 31,
1996 to $127,000 for the quarter ended March 31, 1997. The decrease is the
result of a decrease in investments as the cash was required to fund
operating activities. The decrease is also related to declining interest
rates on these investments.
8
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had no significant capital spending or
purchase commitments and had cash and investments totaling $10,010,000 and
working capital of $10,698,000. For the three months ended March 31, 1997,
the Company used $2,105,000 of cash in its operating activities, compared to
$3,095,000 of cash for the three months ended March 31, 1996. The amount of
cash used in operating activities decreased as a result of revenue growth and
cost-reduction efforts, including the decision to discontinue producing,
purchasing and distributing SMR products during 1996. The Company expects to
continue to incur negative cash flows from operating activities through at
least 1997. Net cash of $2,921,000 provided by investing activities during
the three months ended March 31, 1997 resulted primarily from investments
that matured in those years, net of investment purchases. The Company
generated $231,000 of cash from financing activities for the three months
ended March 31, 1997 from the exercise of stock options.
The Company believes that its existing capital resources will be
sufficient to meet the Company's cash requirements into 1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS
There can be no assurance that the Company's business will grow as
anticipated or that the Company will achieve or sustain profitability on a
quarterly or annual basis in the future. Delays in the commercial
availability and geographic coverage of new wireless networks may continue to
impede or prevent substantial growth of the Company'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. The Company's inability to offer products and services to
customers on new wireless networks could have a material adverse effect on
the Company's business.
The Company'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 the Company's customers on a continuous basis. The Company'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.
The Company'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 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 the Company's business.
9
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The Company 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 attractive 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 the Company's revenue 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, the Company must continue to add more customers and larger projects to
build, enable and support data mobility systems. The Company'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.
The Company derives a substantial part of its revenue from a small number
of customers whom, after evaluating the Company's products, proceed to
install the Company's 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 may have a material adverse effect on the
Company'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 the
Company's products and services. Many of the Company's current and possible
direct competitors have financial, technical, marketing, sales,
manufacturing, distribution and other resources substantially greater than
those of the Company. In addition to 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 addition to the factors listed above, actual results could vary
materially from the foregoing forward-looking statements due to the Company's
inability to hire and retain qualified personnel, the risk that the Company
may need to enhance products beyond what was initially planned or if other
risks and uncertainties identified in this Form 10-Q and the Company's other
filings with the SEC occur.
10
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RACOTEK, INC.
By: Michael Fabiaschi
-----------------
Michael Fabiaschi
President and Chief Executive Officer
By: David J. Maenke
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David J. Maenke
Chief Financial Officer and Secretary
Dated: May 8, 1997
12
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