-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JsZ3MAi+rnHBOIt7cp9ScKJhIdFwbg4sZirAdf5TO1g9cUqgRLVo02lYvzwSk7ha MQfNE1O7gG7amma5CPW5KQ== 0000912057-97-010994.txt : 19970401 0000912057-97-010994.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-010994 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RACOTEK INC CENTRAL INDEX KEY: 0000883741 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 411636021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22718 FILM NUMBER: 97568656 BUSINESS ADDRESS: STREET 1: 7301 OHMS LANE STE 200 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6128329800 MAIL ADDRESS: STREET 1: 7301 OHMS LANE STREET 2: STE 200 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This report consists of 50 sequentially numbered pages. The exhibit index begins on sequentially numbered page 21. 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. 2 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, 3 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. 4 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 5 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. 6 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. 7 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. 8 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. 9 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 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 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 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 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (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)
14 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)
15 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.
- ------------------------ * 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 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 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:
PAGE REFERENCE --------------------------- ANNUAL REPORT FORM 10-K TO STOCKHOLDERS ---------- --------------- 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
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 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 RACOTEK, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
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 - ---------------------------------------------------------------- ------------- ----------- ----------- ------------- 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
20 INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - --------- --------------------------------------------------------------------------------------- ----------------- 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)
21
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - --------- --------------------------------------------------------------------------------------- ----------------- 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)
22
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - --------- --------------------------------------------------------------------------------------- ----------------- 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
- ------------------------ * 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 EX-10.02 2 1993 EQUITY INCENTIVE PLAN 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; (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 2 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. 3 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 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 (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 6 (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 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 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 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 (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 EX-13.01 3 ANNUAL REPORT TO STOCKHOLDERS 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 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 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 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 RACOTEK, INC. BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1996 1995 --------- --------- 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 --------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 21 RACOTEK, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1996 1995 1994 ------------ ------------ ------------ 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 ------------ ------------ ------------ ------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 22 RACOTEK, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMMON STOCK ---------------------------------------- ADDITIONAL TOTAL $.01 PAR PAID-IN ACCUMULATED STOCKHOLDERS' SHARES VALUE CAPITAL DEFICIT EQUITY ------------ ------------ ------------ ------------ ------------ 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 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 23 RACOTEK, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 24 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 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:
ACCOUNTS RECEIVABLE, NET: 1996 1995 - ------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------
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.
PROPERTY AND EQUIPMENT, NET: 1996 1995 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 - --------------------------------------------------------------------------------
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 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:
YEAR ENDING OPERATING SUBLEASE DECEMBER 31 LEASES INCOME 1997 $ 772 $ 77 1998 592 -- 1999 549 -- 2000 320 --
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:
WEIGHTED AVERAGE PRICE PER EXERCISE SHARES SHARE PRICE - ------------------------------------------------------------------------------------- Balances, December 31,1993 2,532,093 $.05-10.125 1.58 Granted 777,577 3.25-12.625 3.79 Exercised (522,605) .05-.55 .11 Cancelled (227,092) .10-12.625 5.26 - ------------------------------------------------------------------------------------- Balances, December 31, 1994 2,559,973 .05-12.625 2.08 Granted 873,803 3.125-7.625 5.35 Exercised (501,423) .05-4.63 .96 Cancelled (98,428) .20-12.625 4.90 - ------------------------------------------------------------------------------------- Balances, December 31, 1995 2,833,925 .10-12.625 3.04 Granted 1,215,346 3.625-6.00 4.68 Exercised (696,847) .10-4.75 .35 Cancelled (440,752) .40-12.625 5.26 - ------------------------------------------------------------------------------------- Balances, December 31, 1996 2,911,672 .10-12.625 4.17 - ------------------------------------------------------------------------------------- Options exercisable at December 31, 1996 1,369,799 .10-12.625 3.45 - -------------------------------------------------------------------------------------
STOCK BASED COMPENSATION: No compensation cost has been recognized for the plans. Had compensation cost for the plans been determined based on the fair value of options at the grant date for awards in 1996 and 1995, the company's net loss and net loss per share would have increased to the pro forma amounts indicated below: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 Net loss As reported ($ 10,244) ($ 12,347) Pro forma (11,204) (12,655) - ------------------------------------------------------------- Net loss per share As reported ($ .42) ($ .52) Pro forma (.46) (.53)
27 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:
ASSUMPTIONS 1996 1995 - ------------------------------------------------------------------ Risk-free interest rates 5.27% - 6.77% 5.46% - 7.75% Volatility 50% 50% Expected lives (months) 60 60 - ------------------------------------------------------------------
The company does not anticipate paying dividends in the near future. The following table summarizes information about fixed-price stock options outstanding at December 31, 1996:
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 - -------------------------------------------------------------------------------------------------------------------------- $ .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 --------------------------------------------------------------------------------------------------------------------------
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 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:
1996 1995 1994 - ---------------------------------------------------------------------------- CUSTOMER 1 4% CUSTOMER 2 11% 18% 12% CUSTOMER 3 15% 45% CUSTOMER 4 12% - -----------------------------------------------------------------------------
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.
HIGH LOW - ----------------------------------------------- 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
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 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 RACOTEK, INC. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENTS OF OPERATIONS DATA (for the years ended December 31)
1996 1995 1994 1993 1992 ----------------------------------------------------------------------- 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) 1996 1995 1994 1993 1992 ----------------------------------------------------------------------- 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)
(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 EX-23.01 4 CONSENT OF COOPERS & LYBRAND 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 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,956 8,991 1,956 (340) 374 14,231 4,092 (2,160) 16,919 1,538 0 0 0 71,125 0 16,919 1,906 6,883 2,027 5,526 12,460 0 0 (10,244) 0 0 0 0 0 (10,244) (.42) (.42)
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