<PAGE> 1
UNITED STATES
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 September 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from to
-------------- -------------
Commission file number 0-26140
-------
HIGHWAYMASTER COMMUNICATIONS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0352879
- ---------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16479 Dallas Parkway, Suite 710, Dallas, Texas 75248
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 732-2500
--------------
Not Applicable
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
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 registrant's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding as of
Title of each class November 5, 1997
- ---------------------------------- -------------------------------------
Common Stock, $.01 par value 24,898,986
<PAGE> 2
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
Form 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 1
Consolidated Statements of Operations for the
three months and nine months ended
September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 3
Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended
September 30, 1997 4
Notes to Consolidated Financial Statements 5-6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 11
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 72,134 $ 19,725
Accounts receivable, net 13,441 8,537
Other short-term receivables 1,076 919
Inventory 2,738 3,458
Prepaid expenses 348 231
Pledged securities 17,187 --
------------ ------------
Total current assets 106,924 32,870
Property, plant and equipment, net 8,619 7,756
Long-term receivables 313 1,045
Deposits 237 309
Pledged securities 29,458 --
Other assets 7,259 949
------------ ------------
Total assets $ 152,810 $ 42,929
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,414 $ 3,450
Telecommunications costs payable 4,348 2,805
Accrued warranty 1,057 273
Accrued loss on short-term contracts 169 570
Other current liabilities 2,460 1,167
------------ ------------
Total current liabilities 13,448 8,265
Long term debt 120,825 --
------------ ------------
Total liabilities 134,273 8,265
------------ ------------
Stockholders' equity:
Preferred stock -- --
Common stock 252 251
Additional paid-in capital 149,309 144,829
Accumulated deficit (130,477) (109,869)
Treasury stock (547) (547)
------------ ------------
Total stockholders' equity 18,537 34,664
------------ ------------
Total liabilities and stockholders' equity $ 152,810 $ 42,929
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product $ 8,905 $ 3,426 $ 23,154 $ 9,848
Service 7,267 4,098 18,273 11,548
---------- ---------- ---------- ----------
Total revenues 16,172 7,524 41,427 21,396
---------- ---------- ---------- ----------
Cost of revenues:
Product 7,067 3,321 19,215 9,723
Service 5,789 2,828 14,460 8,243
---------- ---------- ---------- ----------
Total cost of revenues 12,856 6,149 33,675 17,966
---------- ---------- ---------- ----------
Gross profit 3,316 1,375 7,752 3,430
General and administrative expenses 3,306 2,362 10,402 6,661
Sales and marketing expenses 1,852 2,616 5,907 7,327
Engineering expenses 1,155 995 3,367 2,730
Customer service expenses 3,417 2,120 8,955 6,050
---------- ---------- ---------- ----------
Operating loss (6,414) (6,718) (20,879) (19,338)
Interest income 241 77 689 521
Interest expense (418) (603) (418) (1,691)
Other (expense) -- (219) -- (222)
---------- ---------- ---------- ----------
Loss before income taxes and extraordinary item (6,591) (7,463) (20,608) (20,730)
Income tax provision -- -- -- --
---------- ---------- ---------- ----------
Loss before extraordinary item (6,591) (7,463) (20,608) (20,730)
Extraordinary item -- loss on extinguishment of debt -- (317) -- (317)
---------- ---------- ---------- ----------
Net loss $ (6,591) $ (7,780) $ (20,608) $ (21,047)
========== ========== ========== ==========
Per share data:
Loss before extraordinary item $ (0.27) $ (0.37) $ (0.83) $ (1.02)
Extraordinary item -- (0.01) -- (0.02)
---------- ---------- ---------- ----------
Net loss per share $ (0.27) $ (0.38) $ (0.83) $ (1.04)
========== ========== ========== ==========
Weighted average number of shares outstanding 24,868 22,178 24,857 22,079
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1997 1996
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 20,608) ($ 21,047)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,889 1,110
Amortization of discount on notes payable -- 871
Extraordinary item -- 317
(Increase) decrease in accounts receivable (4,904) (1,040)
(Increase) decrease in other receivables 575 382
(Increase) decrease in inventory 720 (3,647)
(Increase) decrease in prepaid expenses and deposits (45) 142
Increase (decrease) in accounts payable 1,964 (585)
Increase (decrease) in accrued expenses and other current liabilities 3,219 1,324
Other (692) 272
---------- ----------
Net cash used in operating activities (17,882) (21,901)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,353) (3,760)
Purchase of pledged securities (46,588) --
---------- ----------
Net cash used in investing activities (50,941) (3,760)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 120,937 --
Proceeds from issuance of common stock, net of issuance costs -- 10,000
Proceeds from issuance of preferred stock and warrants, net of issuance costs -- 19,738
Proceeds from notes payable to related parties -- 5,000
Repayments of notes payable to related parties -- (5,000)
Proceeds from exercise of stock options 295 366
---------- ----------
Net cash provided by financing activities 121,232 30,104
---------- ----------
Net increase in cash 52,409 4,443
Cash and cash equivalents, beginning of period 19,725 23,969
---------- ----------
Cash and cash equivalents, end of period $ 72,134 $ 28,412
========== ==========
Supplemental cash flow information:
Interest paid -- $ 976
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine months ended September 30, 1997
(UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Treasury Stock
--------------- --------------------- Paid-in ----------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit
------ ------ ---------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stockholders' equity at December 31, 1996 1,000 $ --- 25,150,527 $251 $144,829 311,997 ($547) ($109,869)
Exercise of stock options 27,656 1 294
Issuance of warrants 4,186
Net loss (20,608)
----- ------ ---------- ---- -------- ------- ----- ---------
Stockholders' equity at September 30, 1997 1,000 $ --- 25,178,183 $252 $149,309 311,997 ($547) ($130,477)
===== ====== ========== ==== ======== ======= ===== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(Unaudited)
1. BUSINESS OVERVIEW
The Company develops and implements mobile communications
solutions, including integrated voice, data and position location
services, to meet the needs of its customers. The initial application
for the Company's wireless enhanced services has been developed for,
and is currently being marketed and sold to, companies which operate in
the long-haul trucking market. The Company provides long-haul trucking
companies with a comprehensive package of mobile communications and
management control services at low, fixed per minute rates, thereby
enabling its trucking customers to effectively monitor the operations
and improve the performance of their fleets. The Company is currently
developing additional applications for its network to expand the range
of trucking companies that utilize its services and to address the need
of the automotive and other markets. Among other things, the Company
recently entered into a strategic business alliance with Prince
Corporation, a subsidiary of Johnson Controls, Inc. and a leading
supplier of automotive interior systems and components, to develop and
provide an automobile safety and security service, the "AutoLink"
service, to motorists in the United States and Canada. The AutoLink
service is expected to be available on a commercial basis beginning in
late 1998.
At the present time, the Company derives all of its revenues
from the long-haul trucking market from sales and installation of
Mobile Communication Units and charges for its services.
2. BASIS OF PRESENTATION
The unaudited consolidated financial statements presented
herein have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all footnote disclosures required by generally accepted accounting
principles. These consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 1996. The accompanying
consolidated financial statements reflect all adjustments (all of which
are of a normal recurring nature) which are, in the opinion of
management, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the
interim periods. The results for any interim period are not necessarily
indicative of the results for the entire year.
3. LEASING OPERATIONS
The Company leases its products to certain customers with
terms ranging from three to five years. The related contracts are
accounted for as sales-type leases. At December 31, 1996, the total
amounts receivable under sales-type leases was $1,468,000. In March
1997, a customer who represented $1,239,000 of this amount receivable
notified the Company that it intended to terminate its long-term lease
commitment. Although the lease agreement contains termination
penalties, the amount due from this customer is in dispute.
Accordingly, the Company recorded a $1,000,000 charge to reduce the
carrying value of the receivable at March 31, 1997.
5
<PAGE> 8
4. INVENTORIES
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Complete systems $ 843,000 $ 1,265,000
Component parts 1,895,000 2,193,000
------------ ------------
$ 2,738,000 $ 3,458,000
============ ============
</TABLE>
5. LONG TERM DEBT
On September 23, 1997, the Company issued 125,000 Units
comprised of $125,000,000 of 13.75% Senior Notes due September 15,
2005 and warrants to purchase 820,750 shares of common stock. The
warrants are exercisable at a price of $9.625 at any time on or after
the earlier to occur of (i) the first anniversary of the closing date
(September 23, 1997) and (ii) in the event a change in control (as
defined) occurs, the date the Company mails notice thereof to holders
of the notes and warrants. Interest is payable on the notes
semi-annually commencing March 15, 1998. The Company used $46,588,000
of the proceeds from the issuance of the Units to purchase a portfolio
of U. S. Government securities which will provide funds sufficient to
pay in full when due the first six scheduled interest payments on the
notes. This amount, including interest earned thereon, is portrayed in
the accompanying consolidated sheets under the captions "Pledged
Securities."
6. EARNINGS PER SHARE
Net loss per share for the three months and nine months ended
September 30, 1997 was computed by dividing the net loss by the
weighted average number of shares outstanding during the periods. Net
loss per share for the three months and nine months ended September 30,
1996 was computed by dividing the net loss, increased by the accretion
of discount on Series B Preferred Stock ($610,000 and $1,831,000,
respectively), by the weighted average number of shares outstanding
during the periods.
Stock options are excluded from the calculation of weighted
average shares outstanding for the three months and nine months ended
September 30, 1997 and 1996 since their effect would be anti-dilutive.
In February 1997, the FASB issued FAS No. 128, "Earnings per
Share" ("FAS 128"), which is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods.
Effective December 31, 1997, the Company will adopt FAS 128, which
establishes standards for computing and presenting earnings per share
(EPS). Adoption of FAS 128 would not have changed the earnings per
share amounts reported in the accompanying consolidated financial
statements.
7. LITIGATION
As previously reported, the Company is party to a lawsuit
filed in the U.S. District Court, Northern District of Texas, Dallas
Division against AT&T Corp. ("AT&T") and Lucent Technologies, Inc.
("Lucent"). Since the filing of the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, there have been no
material changes. With respect to AT&T's Partial Motion to Dismiss and
Lucent's Motion to Dismiss, the court requested supplemental briefing
in lieu of a hearing on oral arguments. Briefing has concluded and an
Order by the Court will follow.
6
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARABILITY
At the present time the Company's service revenues are generated from
mobile communications units ("mobile units") served by either a switching
complex operated by AT&T (the " AT&T Complex") or by the Company's Network
Services Center ("NSC"). The amount of service revenues and related expenses
recognized by the Company varies significantly based upon whether a particular
customer receives service through the AT&T Complex or the NSC. In the case of
customers served through the AT&T Complex, service charges are collected by
AT&T. The Company receives payment from AT&T for the portion of these service
charges recognized by the Company as revenue and the remainder is retained by
AT&T as compensation for its cost of providing services. In the case of
customers served by the NSC, the entire amount of the service charges to
customers is recognized by the Company as revenue and additional operating and
service expenses are borne by the Company. The operating expenses associated
with the NSC are reflected in the Company's financial statements as general and
administrative expenses (primarily depreciation, allowance for bad debts and
billing expenses) and customer service expenses (other third party and internal
operating expenses). Because of the difference in the economic relationships
described above, to the extent a greater proportion of customers are served by
the NSC, service margins are expected to improve, reflecting the increased
revenues recognized by the Company which are expected to be partially offset by
additional operating and service expenses. Because the operating expenses
associated with the NSC include certain fixed costs, such operating expenses
are not expected to increase proportionately with the number of customers
added.
In September 1997, AT&T notified the Company that it would discontinue
offering services through the AT&T Complex as of December 31, 1997. At September
30, 1997, approximately 10,000 of the total installed base of 29,933 mobile
units were served by the AT&T Complex. It will be necessary for the Company to
convert these remaining mobile units to the NSC by December 31, 1997.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Total revenues for the three months ended September 30, 1997 were $16.2
million compared to $7.5 million for the three months ended September 30, 1996.
Product revenues for the three months ended September 30, 1997 were $8.9 million
compared to $3.4 million for the three months ended September 30, 1996. Service
revenues for the three months ended September 30, 1997 were $7.3 million
compared to $4.1 million for the three months ended September 30, 1996. The
increase in product revenues from the 1996 period to the 1997 period is
primarily attributable to a 164% increase in mobile units sold. Mobile units
sold in the 1996 period were abnormally low due to, among other things,
inefficiencies in connection with a restructuring of the Company's sales force,
and adverse economic conditions affecting the trucking industry. The increase
in service revenues from the 1996 period to the 1997 period is primarily
attributable to the increase in the number of mobile units in service.
Cost of revenues for the three months ended September 30, 1997 was $12.8
million compared to $6.1 million for the three months ended September 30, 1996.
This increase is primarily as a result of the increase in the number of mobile
units sold and in service. Gross profit margin was 20.5% for the three months
ended September 30, 1997 compared to 18.3% for the three months ended September
30, 1996.
Product gross profit margin was 20.6% for the three months ended September
30, 1997 compared to 3.1% for the three months ended September 30, 1996. The
improvement in product gross profit margin from the 1996 period to the 1997
period is primarily due to (i) the absence in the 1997 period, as compared to
the 1996 period, of costs incurred on earlier generation mobile units to make
them compatible with the NSC and (ii) the leverage obtained on the fixed
portion of the Company's installation costs as a result of the significant
increase from the 1996 period to the 1997 period in shipments and
installations.
7
<PAGE> 10
Average sales price per mobile unit decreased primarily as a result of a larger
percentage of sales qualifying for the Company's most favorable tier pricing.
This decrease in average sales price was offset by a lower average cost per
mobile unit sold. The lower average cost per mobile unit is primarily
attributable to manufacturing and procurement economies.
Service gross profit margin was 20.3% for the three months ended September
30, 1997 compared to 31.0% for the three months ended September 30, 1996. As
previously reported, the Company incurs certain costs for airtime usage that are
not billable to customers under current billing practices. New billing data
received in July 1997, indicates that the portion of airtime usage not billable
to customers is higher than previously believed by the Company and used as the
basis for recording accounting estimates. This changed relationship between cost
of cellular airtime paid for by the Company and airtime billable to customers is
the reason for the decrease in service gross profit margin. The Company is
currently in the process of evaluating the factors underlying the increase in
cellular airtime costs and will attempt to identify technical adjustments and
modifications that may enable it to improve its service gross profit margin. At
the present time, the Company's evaluation of these factors is in its
preliminary stages and there can be no assurance that the Company's results of
operations in future periods will not be impacted by the same or similar
factors.
General and administrative expenses for the three months ended September
30, 1997 were $3.3 million compared to $2.4 million for the three months ended
September 30, 1996. The most significant increases in general and administrative
expenses from the 1996 period to the 1997 period were bad debt expense,
depreciation expense and professional fees. The Company records an allowance for
doubtful accounts based on a percentage of sales. Accordingly, bad debt expense
increased because of the significant increase in revenues from the 1996 period
to the 1997 period. The increase in professional fees is primarily due to legal
fees in connection with the AT&T litigation.
Sales and marketing expenses for the three months ended September 30, 1997
were $1.9 million compared to $2.6 million for the three months ended September
30, 1996. The decrease from the 1996 period to the 1997 period is primarily
related to a reduction in the number of sales and marketing employees. The 1996
period was characterized by expansion of the sales force. Sales and marketing
expenses for the 1997 period reflects the results of a realignment of the sales
force to coincide with the Company's target markets.
Engineering expenses for the three months ended September 30, 1997 were
$1.2 million compared to $1.0 million for the three months ended September 30,
1996. This increase is primarily attributable to increases in payroll related
costs as a result of an increase in the number of engineering personnel.
Customer service expenses for the three months ended September 30, 1997
were $3.4 million compared to $2.1 million for the three months ended September
30, 1996. This increase is primarily attributable to (i) NSC operating expenses
and (ii) costs incurred as a result of the increased number of mobile units
shipped and in service.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Total revenues for the nine months ended September 30, 1997 were $41.4
million compared to $21.4 million for the nine months ended September 30, 1996.
Product revenues for the nine months ended September 30, 1997 were $23.2 million
compared to $9.8 million for the nine months ended September 30, 1996. Service
revenues for the nine months ended September 30, 1997 were $18.3 million
compared to $11.5 million for the nine months ended September 30, 1996. The
increase in product revenues from the 1996 period to the 1997 period is
primarily attributable to a 155% increase in mobile units sold. Mobile units
sold in the 1996 period were abnormally low due to, among other things,
inefficiencies in connection with a restructuring of the Company's sales force,
and adverse economic conditions affecting the trucking industry. The increase
in service revenues from the 1996 period to the 1997 period is primarily
attributable to the increase in the number of mobile units in service.
8
<PAGE> 11
Cost of revenues for the nine months ended September 30, 1997 was $33.7
million compared to $18.0 million for the nine months ended September 30, 1996.
This increase is primarily as a result of the increase in the number of mobile
units sold and in service. Gross profit margin was 18.7% for the nine months
ended September 30, 1997 compared to 16.0% for the nine months ended September
30, 1996.
Product gross profit margin was 17.0% for the nine months ended September
30, 1997 compared to 1.3% for the nine months ended September 30, 1996. The
improvement in product gross profit margin from the 1996 period to the 1997
period is primarily due to (i) the absence in the 1997 period, as compared to
the 1996 period, of costs incurred on earlier generation mobile units to make
them compatible with the NSC and (ii) the leverage obtained on the fixed
portion of the Company's installation costs as a result of the significant
increase from the 1996 period to the 1997 period in shipments and
installations. Average sales price per mobile unit decreased primarily as a
result of a larger percentage of sales qualifying for the Company's most
favorable tier pricing. This decrease in average sales price was offset by a
lower average cost per mobile unit sold. The lower average cost per mobile unit
is primarily attributable to manufacturing and procurement economies.
Service gross profit margin was 20.9% for the nine months ended September
30, 1997 compared to 28.6% for the nine months ended September 30, 1996. The
Company incurs certain costs for airtime usage that are not billable to
customers under current billing practices. During the nine months ended
September 30, 1997, the Company recorded an adjustment to increase cellular
airtime cost, a component of cost of service revenue, based on new billing data
received in July 1997. This new billing data indicates that the portion of
airtime usage not billable to customers is higher than previously believed by
the Company and used as the basis for recording accounting estimates. This
changed relationship between cost of cellular airtime paid for by the Company
and airtime billable to customers is the reason for the decrease in service
gross profit margin. As noted above, the Company is currently in the process of
evaluating the factors underlying the increase in cellular airtime costs, but
such evaluation is in its preliminary stages and there can be no assurance that
the Company's results of operations in future periods will not be impacted by
the same or similar factors.
General and administrative expenses for the nine months ended September 30,
1997 were $10.4 million compared to $6.7 million for the nine months ended
September 30, 1996. The most significant increases in general and administrative
expenses from the 1996 period to the 1997 period were bad debt expense,
depreciation expense, and professional fees. The Company records an allowance
for doubtful accounts based on a percentage of sales. Accordingly, bad debt
expense increased (i) because of the significant increase in revenues from the
1996 period to the 1997 period and (ii) because of a $1 million charge recorded
to provide for loss on the sales-type lease receivable due from a customer as a
result of the customer's early termination of the lease. See Note 3 of the
footnotes to the accompanying consolidated financial statements.
Sales and marketing expenses for the nine months ended September 30, 1997
were $5.9 million compared to $7.3 million for the nine months ended September
30, 1996. The decrease from the 1996 period to the 1997 period is primarily
related to a reduction in the number of sales and marketing employees. The 1996
period was characterized by expansion of the sales force. Sales and marketing
expenses for the 1997 period reflects the results of a realignment of the sales
force to coincide with the Company's target markets.
Engineering expenses for the nine months ended September 30, 1997 were $3.4
million compared to $2.7 million for the nine months ended September 30, 1996.
This increase is primarily attributable to increases in payroll related costs as
a result of an increase in the number of engineering personnel.
Customer service expenses for the nine months ended September 30, 1997 were
$9.0 million compared to $6.1 million for the nine months ended September 30,
1996. This increase is primarily attributable to (i) NSC operating expenses and
(ii) costs incurred as a result of the increased number of mobile units shipped
and in service.
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's business historically has not required substantial capital
expenditures. However, during 1996 the Company completed and placed into service
the new NSC at a cost of $4.8 million. In addition, in order to provide the
AutoLink service, the Company will need to construct a new switching complex
(the "AutoLink Complex") as contemplated by its joint development contract with
Prince. Construction of the AutoLink Complex is scheduled to take place in 1998
at a projected cost of approximately $4.0 million. The Company will also need
to expand the capacity of the NSC during the next twelve months to meet the
needs of the larger number of customers expected to begin receiving services
though such facility. The projected cost of expanding the capacity of the NSC
is estimated at $1.5 million.
The Company is currently negotiating with Motorola to supply a hardware
component that will provide a common platform for both the AutoLink product and
more advanced versions of its mobile communication units. If the Company enters
into such an agreement with Motorola, it could involve an obligation by the
Company to purchase up to 100,000 units. Accordingly, such an agreement with
Motorola would involve a substantial capital commitment on the part of the
Company.
Net cash consumed by operating activities during the nine months ended
September 30, 1997 was $17.9 million due primarily to a $20.6 loss from
operations.
In September 1997, the Company issued 125,000 Units comprised of
$125,000,000 of 13.75% Senior Notes due September 15, 2005 and warrants to
purchase 820,750 shares of common stock. Net proceeds to the Company, after
deducting underwriters' discount and estimated offering expenses, are expected
to be approximately $120.3 million. The Company used $46.6 million of the
proceeds from the issuance of the Units to purchase a portfolio of U. S.
Government securities which will provide funds sufficient to pay in full when
due the first six scheduled interest payments on the notes. The remaining
proceeds, approximating $73.7 million, will be used for general corporate
purposes, including (i) to fund working capital requirements and operating
losses expected to be incurred in connection with the continued growth and
development of the Company's long-haul trucking application, (ii) to fund
expenditures relating to the development of new mobile communications services
to be provided through the Company's network, including new long-haul trucking
applications and the AutoLink service, and (iii) to fund capital expenditures
required to expand the capacity of the NSC to enable it to serve a larger
number of long-haul trucking customers and to construct the AutoLink Complex.
Pending the use of the net proceeds for the purposed describe above, the
Company has invested such proceeds in investment grade debt securities.
The Company's cash and cash equivalents balance at September 30, 1997 was
$72.1 million compared to $19.7 million at December 31, 1996. Based on the
Company's projected operating results, the Company believes its existing capital
resources will be sufficient to fund its currently anticipated operating needs
and capital expenditure requirements through at least December 31, 1998.
INFLATION
The Company believes that to date inflation has not had a material effect
on its results of operations. Although inflation may in the future affect the
cost of the Mobile Communication Units sold by the Company, the Company expects
that economies of scale and engineering improvements are likely to offset any
foreseeable cost increases.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this report, including without
limitation, certain statements in this Item 2 under the captions "---Results of
Operations" and "---Liquidity and Capital Resources," may constitute forward
looking statements. Although the Company believes that the expectations
10
<PAGE> 13
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations ("cautionary statements") are disclosed in this report and the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 (under
the caption "Business --- Risk Factors" and elsewhere). All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
11
<PAGE> 14
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings --
AT&T Litigation. As previously reported, the Company is party to a
lawsuit filed in the U.S. District Court, Northern District of Texas,
Dallas Division against AT&T Corp. ("AT&T") and Lucent Technologies,
Inc. ("Lucent"). Since the filing of the Company's Form 10-Q Quarterly
Report for the quarterly period ended June 30, 1997, there have been no
material changes. AT&T has notified its joint customers that it will be
terminating services from the AT&T Complex effective December 31, 1997,
requiring customers to transfer to the NSC who had not done so
previously. Although the Company views this as a positive development,
it is not expected to have a near-term impact on the litigation. With
respect to AT&T's Partial Motion to Dismiss and Lucent's Motion to
Dismiss, the court requested supplemental briefing in lieu of a hearing
on oral arguments. Briefing has concluded and an Order by the Court
will follow.
Item 2. Changes in Securities --
On September 23, 1997, the Company sold 125,000 Units, each consisting
of $1,000 principal amount of Series A 13 3/4% Senior Notes due 2005
(the "Series A Notes") and one warrant (a "Warrant") to purchase 6.566
shares of common stock, $0.01 par value. The Warrants are exercisable
at a price of $9.625 per share, subject to certain anti-dilution
provisions. Warrant holders may exercise the Warrants at any time on or
after the earlier to occur of (i) September 23, 1998 and (ii) in the
event a change of control occurs, the date the Company mails notice
thereof to the holders of Series A Notes and Warrants. Unless
exercised, the Warrants will expire on September 15, 2005. If all
Warrants were exercised as of the date of issuance, the Warrants would
represent approximately 3% of the Common Stock outstanding on a
fully-diluted basis after giving effect to the exercise of certain
outstanding options or rights issued by the Company. The Series A Notes
and Warrants will become separable no later than upon the commencement
of an exchange offer explained more fully below.
The Units were sold by the Company on September 23, 1997 to Bear,
Stearns & Co. Inc. and Smith Barney Inc. (the "Initial Purchasers")
pursuant to a Purchase Agreement dated September 18, 1997 (the "Purchase
Agreement"). The Initial Purchasers subsequently resold the Units to
qualified institutional buyers pursuant to Rule 144A under the
Securities Act and pursuant to offers and sales that occurred outside
the United States within the meaning of Regulation S under the
Securities Act.
Pursuant to the Purchase Agreement, the Company and the Initial
Purchasers entered into a Senior Notes Registration Rights Agreement,
dated September 23, 1997 (the "Senior Notes Registration Rights
Agreement"), which grants the holders of the Series A Notes certain
exchange and registration rights. The Company agreed for the benefit of
the holders of the Series A Notes, that after the issuance of the
Series A Notes it would file a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), relating to
an exchange offer (the "Exchange Offer") in which the Company allows
the holders of the Series A Notes to exchange them for Series B Notes
which have terms substantially identical to the Series A Notes, except
that they will not be subject to certain transfer restrictions. In
October 1997, the Company filed a Registration Statement on Form S-4
with the Securities and Exchange Commission (the "Commission") to
satisfy its obligations under the Senior Notes Registration Rights
Agreement. Such Registration Statement was declared effective by the
Commission on November 4, 1997 and the Exchange Offer will expire on
December 10, 1997 unless extended by the Company.
Additionally, pursuant to the Purchase Agreement, the Company and the
Initial Purchasers entered into a Warrant Registration Rights
Agreement, dated September 23, 1997 (the "Warrant Registration Rights
Agreement"), pursuant to which the Company is required to file a shelf
registration statement under the Securities Act covering the resale of
the Warrants and the issuance of the shares of common stock upon
exercise of the Warrants. The Company is required to file such shelf
registration statement within 270 days after September 23, 1997
("Closing Date") and to use its best efforts to cause such registration
statement to be declared effective on or before 365 days after the
Closing Date.
12
<PAGE> 15
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 - See the Index to Exhibits.
(b) Reports on Form 8-K -- None.
13
<PAGE> 16
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.
HIGHWAYMASTER COMMUNICATIONS, INC.
Date: November 7, 1997
By: /s/ William C. Saunders
---------------------------------------------
William C. Saunders
President and Chief Executive Officer
By: /s/ J. Philip McCormick
---------------------------------------------
J. Philip McCormick
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
14
<PAGE> 17
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
QUARTERLY REPORT
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
----------------------------
HIGHWAYMASTER COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
EXHIBITS
===============================================================================
<PAGE> 18
(3) Exhibits
3.1 - Certificate of Incorporation of the Company, as amended.(1)(9)
3.2 - Amended and Restated By-Laws of the Company.(11)
4.1 - Specimen of certificate representing Common Stock, $.01 par
value, of the Company.(1) 4.2 -Warrant Certificate, dated
September 27, 1996, issued to SBW.(7)
4.3 - Recapitalization Agreement, dated September 27, 1996, by and
among the Company, the Erin Mills Stockholders, the Carlyle
Stockholders and the other persons named therein.(7)
4.4 - Amended and Restated Stockholders' Agreement, dated September
27, 1996, by and among the Company, SBW, the Erin Mills
Stockholders, the Carlyle Stockholders, the By-Word Stockholders
and the other persons named therein.(7)
4.5 - Indenture dated September 23, 1997 by and among the Company,
HighwayMaster Corporation and Texas Commerce Bank, National
Association.(12)
4.6 - Pledge Agreement dated September 23, 1997 by and among the
Company, Bear, Stearns & Co. Inc. and Smith Barney Inc.(12)
4.7 - Registration Rights Agreement dated September 23, 1997 by and
among the Company, HighwayMaster Corporation, Bear, Stearns &
Co. Inc. and Smith Barney Inc.(12)
4.8 - Warrant Agreement dated September 23, 1997 by and among the
Company, Bear, Stearns & Co. Inc. and Smith Barney Inc.(12)
4.9 - Warrant Registration Rights Agreement dated September 23, 1997
by and among the Company, Bear, Stearns & Co. Inc. and Smith
Barney, Inc.(12)
10.1 - License Agreement, dated April 23, 1992, by and between Voice
Control Systems and the Company (as successor to By-Word
Technologies, Inc.)(1)
10.2 - Agency Agreement, dated February 1, 1993, between the Company
and Saunders, Lubinski & White, Inc.(1)
10.3 - Employment Agreement, dated February 4, 1994, by and between
HighwayMaster Corporation and William C. Kennedy, Jr., as
amended.(1)(5)
10.4 - Employment Agreement, dated February 4, 1994, by and between
HighwayMaster Corporation and William C. Saunders, as
amended.(1)(5)
10.5 - Employment Agreement, dated November 23, 1994, by and between
HighwayMaster Corporation and Gordon D. Quick.(1)(5)
10.6 - Amended and Restated 1994 Stock Option Plan of the Company,
dated February 4, 1994, as amended.(1)(5)(6)
10.7 - Purchase Agreement, dated September 27, 1996, between the
Company and SBW.(7)
10.8 - Mobile Communications (Voice and Data) Services Agreement,
dated as of July 15, 1993, between the Company and EDS Personal
Communications Corporation.(1)(2)
10.9 - Services Agreement, dated March 14, 1995, between the Company
and GTE Telecommunications Services Incorporated.(1)(2)
10.10 - Services Agreement, dated March 20, 1996, between the Company
and GTE-Mobile Communications Service Corporation.(3)(4)
10.11 - Agreement, dated June 8, 1994, between the Company and
Truckstops of America, Inc.(1)
<PAGE> 19
10.12 - Amendment dated November 16, 1995 to that certain Mobile
Communications (Voice and Data) Services Agreement, dated as of
July 15, 1993, between the Company and EDS Personal
Communications Corporation.(3)(4)
10.13 - Letter Agreement, dated April 5, 1995, between the Company and
IEX Corporation.(1)
10.14 - Product Development Agreement, dated December 21, 1995, between
the Company and IEX Corporation.(3)(4)
10.15 - Technical Services Agreement, dated September 27, 1996, between
the HM Corporation and SBW.(7)
10.16 - Letter Agreement, dated February 19, 1996, between the Company
and IEX Corporation.(3)
10.17 - Form of Adoption Agreement, Regional Prototype Cash or Deferred
Profit-Sharing Plan and Trust Sponsored by McKay Hochman Co.,
Inc., relating to the HighwayMaster Corporation 401(k) Plan.(1)
10.18 - Agreement, dated December 3, 1996, between the Company and
Pickett Racing.(8)
10.19 - Software Transfer Agreement, dated April 25, 1997 between the
Company and Burlington Motor Carriers, Inc.(9)(10)
10.20 - Purchase Agreement dated September 18, 1997 by and among the
Company, HighwayMaster Corporation, Bear, Stearns & Co. Inc. and
Smith Barney Inc.(12)
11 - Statement re: Computation of Per Share Earnings.(13)
27 - Financial Data Schedule.(13)
- ---------
(1) Filed in connection with the Company's Registration Statement on Form
S-1, as amended (No. 33-91486) effective June 22, 1995.
(2) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued in connection with
Registration Statement on Form S-1 (No. 33-91486) effective June 22,
1995.
(3) Filed in connection with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(4) Certain confidential portions deleted pursuant to Application for
Confidential Treatment filed in connection with the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(5) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)(4).
(6) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 1996.
(7) Filed in connection with the Company's Current Report on Form 8-K filed
on October 7, 1996.
(8) Filed in connection with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
<PAGE> 20
(9) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended March 31, 1997.
(10) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment issued in connection with the
Company's Form 10-Q Quarterly Report for the quarterly period ended
March 31, 1997.
(11) Filed in connection with the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 1997.
(12) Filed in connection with the Company's Registration Statement on Form
S-4, as amended (No. 333-38361).
(13) Filed herewith.
<PAGE> 1
EXHIBIT 11
HIGHWAYMASTER COMMUNICATIONS, INC. AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
Loss before accretion and extraordinary item $ (6,591,000) $ (7,463,000) $(20,608,000) $(20,730,000)
Accretion of Series B preferred stock -- (610,000) -- (1,831,000)
------------ ------------ ------------ ------------
Loss before extraordinary item (6,591,000) (8,073,000) (20,608,000) (22,561,000)
Extraordinary item -- (317,000) -- (317,000)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (6,591,000) $ (8,390,000) $(20,608,000) $(22,878,000)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Weighted average number of shares outstanding, net of
treasury shares 24,868,225 22,178,389 24,856,772 22,078,547
Additional weighted average shares for assumed exercise
of stock options, net of shares assumed to be
repurchased with exercise proceeds -- -- -- --
------------ ------------ ------------ ------------
Weighted average number of shares outstanding 24,868,225 22,178,389 24,856,772 22,078,547
============ ============ ============ ============
NET LOSS PER COMMON SHARE APPLICABLE TO COMMON STOCKHOLDERS
Loss before accretion and extraordinary item $ (0.27) $ (0.34) $ (0.83) $ (0.94)
Accretion of Series B preferred stock -- (0.03) -- (0.08)
------------ ------------ ------------ ------------
Loss before extraordinary item (0.27) (0.37) (0.83) (1.02)
Extraordinary item -- (0.01) -- (0.02)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (0.27) $ (0.38) $ (0.83) $ (1.04)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000944400
<NAME> HIGHWAYMASTER COMMUNICATIONS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 72,134
<SECURITIES> 0
<RECEIVABLES> 15,050
<ALLOWANCES> 1,609
<INVENTORY> 2,738
<CURRENT-ASSETS> 106,924
<PP&E> 11,781
<DEPRECIATION> 3,162
<TOTAL-ASSETS> 152,810
<CURRENT-LIABILITIES> 13,448
<BONDS> 120,825
0
0
<COMMON> 252
<OTHER-SE> 18,285
<TOTAL-LIABILITY-AND-EQUITY> 152,810
<SALES> 23,154
<TOTAL-REVENUES> 41,427
<CGS> 19,215
<TOTAL-COSTS> 33,675
<OTHER-EXPENSES> 28,631
<LOSS-PROVISION> 1,788
<INTEREST-EXPENSE> 418
<INCOME-PRETAX> (20,608)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,608)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> 0.00
</TABLE>
