Item 1. BUSINESS
General
As used in this Report, unless the context otherwise requires, the term "Company" refers to Teletrac, Inc. ("Teletrac").
This Report contains certain forward-looking statements covering the Company's objectives, planned or expected activities and anticipated financial performance. These forward-looking statements may generally be identified by words such as "expects", "anticipates", "believes", "plans", "should", "will", "may", "projects" (or variants of these words or phrases), or similar language indicating the expression of an opinion or view concerning the future with respect to the Company's financial position, results of operations, prospects or business. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein and those factors discussed in detail in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" section of the Company's Registration Statement on Form S-1 (Registration Number 333-35017), as declared effective by the Securities and Exchange Commission ("SEC") on November 5, 1997 (the "Form S-1").
The Company is a leading provider of vehicle location and wireless data solutions to commercial fleet operators. The Company has developed an information services platform that enables customers to better manage their mobile workforce, provide security for their property and personnel and communicate more effectively with mobile workers. The Company utilizes various wireless data networks to provide vehicle location and data communications. The majority of the location and data traffic today for the Company is carried via the Company-developed proprietary land-based location and data communications technology. In addition, the Company has multiple customers utilizing the cellular digital packet data network (or "CDPD") coupled with global positioning (or "GPS") for location determination. The Company purchases CDPD services from various cellular carriers in certain markets in order to facilitate service to these customers. The Company is also in the process of evaluating other data networks combined with GPS for other applications for commercial fleet operators.
As of December 31, 2000, the Company maintained operations in 13 metropolitan market areas: Los Angeles, Chicago, Detroit, Dallas, Miami, Houston, Orlando, San Francisco, San Diego, Sacramento, Washington D.C./Baltimore, Phoenix and New York. As of December 31, 2000, the Company served approximately 3000 commercial fleet accounts, more than any other provider of fleet vehicle location services, and had approximately 49,657 vehicle applications with commercial customers. In its Los Angeles market, the Company also uses its proprietary location systems to provide vehicle location and stolen vehicle recovery services to consumers. As of December 31, 2000, the Company had approximately 4,467 consumer units in service.
The Company believes that there is substantial demand for reliable, cost-effective information services that offer both location tracking and data communications for metropolitan markets. The Company's products can be used either on a standalone basis or in conjunction with other communications technologies and allows those other technologies to be more effective and efficient. The Company believes that the majority of its target customers' vehicles are currently equipped with wireless communications devices that do not provide automatic location features, such as two-way radio, specialized mobile radio ("SMR"), pagers and cellular devices. The Company's products and services allow commercial fleet operators to (i) increase driver productivity and fleet efficiency, (ii) improve customer service, (iii) limit unauthorized vehicle use, and (iv) reduce driver overtime. The Company's customers include metropolitan commercial fleets (such as trade service providers, delivery services, bus and taxi fleets, ambulance companies, telecommunications companies, utility companies, municipal government vehicles and law enforcement agencies) and long-haul trucking fleets when operating within metropolitan markets.
The Company offers a range of fleet management solutions, depending on the customer's budget and location and messaging needs. All of these solutions involve the installation in each vehicle of a vehicle location unit ("VLU") or a "VLU+" in the case of a CDPD/GPS application. The VLU is a radio transceiver that receives and transmits signals used to determine a vehicle's location. In addition to the VLU, commercial fleet customers purchase software and location services from the Company. The Company's primary product for commercial fleets is Fleet Director Enterprise Edition(R), a proprietary software application that permits simultaneous location of all fleet vehicles on a real-time 24-hour-a-day basis through a digitized map displayed on the customer's dedicated personal computer or network server, which is connected to the Company's Network Control Center. Fleet Director Enterprise Edition (R) can be complemented with the Company's data communication units, which allow two-way messaging between the fleet dispatcher and drivers directly from the Fleet Director Enterprise Edition(R) screen.
In its Los Angeles market, the Company also uses its proprietary location systems to provide vehicle location and stolen vehicle recovery services to consumers. The Company's service locates and tracks stolen vehicles in real time and its equipment can be integrated with a vehicle's alarm system and/or ignition so that it is automatically activated if the vehicle is stolen. The Company's service also allows a subscriber to initiate vehicle location in other emergency or roadside assistance situations. The Company has continued providing consumer service as a legacy of the business acquired from AirTouch Teletrac but has not launched and does not intend to launch any new marketing efforts with respect to this service.
Recent Developments
The aggregate of $3.0 million principal amount of 10% Senior Secured Notes due September 30, 2000 that the Company issued in order to fund operations after the 1999 reorganization was paid off in May of 2000. As a result of the reorganization, the Company has outstanding an aggregate of $15,000,000 Senior Notes with a 9% interest rate due September 30, 2004 (the "Senior Notes"). The Senior Notes have a deferred interest election provision whereby the Company may elect to pay interest by the issuance of Deferred Interest Notes with a 12% interest rate due September 30, 2004. The Company has issued Deferred Interest Notes in the aggregate of $1,800,000 as of December 31, 2000. On March 15, 2001, in conjunction with interest due for the prior six months, the Company issued an additional $900,000 of Deferred Interest Notes.
In May, 2000, Ituran USA purchased the Miami and Orlando networks from the Company pursuant to an option to buy these networks, which was granted by the Company to Ituran USA as part of the 1999 reorganization. The proceeds from the sale were approximately $4.0 million.
On January 9, 2001, the Company entered into a credit facility with Aspen Capital Partners, L.P. The facility provides for a loan of up to $750,000 that is secured by the accounts receivable of the Company, accrues interest at a
rate of prime plus 6% and is due on January 9, 2002. As of March 15, 2001, $550,000 has been drawn down from the facility.
On February 23, 2001, the Company entered into an Agreement and Plan of Merger with Trafficmaster pursuant to which Trafficmaster will acquire the Company for cash (including the assumption of debt). The merger has been approved by the Board of Directors and the holders of a majority of the Company's outstanding Common Stock. In addition, the holders of a majority of the Company's Senior Notes consented to the merger and waived certain rights such holders of Senior Notes may have pursuant to the Indenture governing the terms of the Senior Notes, including the right to receive notice of a Change of Control (as defined in the Indenture) and to require the Company to repurchase their Senior Notes. The Senior Noteholders also waived events of noncompliance or default under the Indenture that would occur as a result of the Company's failure to satisfy the covenants set forth in Sections 4.14 and 5.01(iv) of the Indenture in connection with the merger. Such holders also consented to and approved the adoption of the Supplemental Indenture by the Indenture Trustee amending certain provisions of the Indenture. The Company expects consummation of the merger to occur in April, 2001, subject to the satisfaction of certain closing conditions in the merger agreement, including regulatory approval of the transfer of control of the FCC licenses used in the Company's business. The Company has filed with the SEC a Current Report on Form 8-K, dated March 6, 2001, in connection with this merger agreement.
Commercial Fleet Management
Target Markets
The Company's commercial fleet services provide reliable, cost-effective location information, data communications and fleet management services in real time. The Company markets its fleet management products both to metropolitan fleets and long-haul trucking fleets, which may desire to optimize driver efficiency in metropolitan areas because of the impact on customer service and overall fleet productivity. The Company believes that metropolitan commercial fleets represent the largest market for its existing products.
Many metropolitan commercial fleet operators have not employed location information or data communications because of the lack of cost-effective and reliable alternatives. Two-way voice services (such as cellular, SMR and two-way radio) cost significantly more to provide a similar level of location services and rely on the driver to frequently report vehicle location. A significant number of metropolitan fleet vehicles utilize lower-cost one-way paging services, but such services lack both location tracking and two-way data communications. Management believes the Company's commercial fleet service generates demonstrable cost benefits and efficiency gains for metropolitan fleet customers.
Due to the diversity of metropolitan commercial fleets, the Company's customer base ranges from independent plumbers with five or six vehicles to large municipal bus and ambulance fleets and national delivery companies. The Company's range of products allows it to provide a fleet management solution to meet each segment of these markets. The Company primarily focuses it sales efforts at fleets of at least five vehicles, which it believes can be serviced more cost-effectively than smaller fleets. The Company believes that by utilizing alternative wireless data networks like CDPD, the Company will be able to attract nationwide customers with fleet operations in a number of
metropolitan markets. Among the Company's current customers are Emery Air Freight, Inc., Brinks Incorporated (security transportation), Pepsi, the City of Houston, and department stores such as Target.
Products and Services
The Company offers its customers a range of fleet management, communications and security products. The Company relies on the installation of a VLU or VLU+ in each customer vehicle in order to provide vehicle location and data communication services.
Fleet Management. The Company's fleet management software products and services are designed to address the needs of key vertical markets within the metropolitan fleet marketplace. The vertical markets that the Company is focused on today include municipals, utilities, distribution, services, and on-demand transportation. These vertical markets share common characteristics and represent the best fit for the Company's current products and services. The Company emphasizes a solution approach with these vertical markets emphasizing integration where necessary to the customer's existing back office systems.
Fleet Director Enterprise Edition(R) ("FDEE") is a proprietary software application that provides fleet customers accurate fleet vehicle location through the customer's detailed digitized map of a metropolitan area displayed on the customer's dedicated personal computer or network server, which is connected to the Company's networks. Fleet Director Enterprise Edition(R) displays the position of all VLU-equipped vehicles at periodic intervals determined by the customer (typically every 15 minutes), at the time of each communication with a vehicle and otherwise as specified by the customer. Customers can adjust the level of map detail through a zoom in/zoom out feature, allowing a customer to simultaneously view the location of all fleet vehicles or to focus in on a single vehicle. Fleet operators can establish "zones of compliance" around their customers' locations, their drivers' homes, or other locations to detect whether vehicles enter or leave specific areas. Fleet Director Enterprise Edition(R) also produces reports that detail a driver's route and the time of each stop and provides documentation for customers who require verification of deliveries. Real-time location reports can also be saved on the customer's computer to be retrieved and reviewed on-screen or printed at a later time.
Fleet Director Enterprise Edition(R) can also act as a platform from which the customer can use the Company's two-way communications products (discussed below) to send and receive messages to and from drivers. Customers can type messages directly to drivers from the computer on which Fleet Director Enterprise Edition(R) operates and send the messages to a single vehicle, several vehicles or the entire fleet.
For customers with smaller fleets, the Company also provides a software option called Winfleet. Winfleet is a Microsoft Windows(R)-based program that allows for positioning updates up to 24 hours a day at intervals of 15 to 30 minutes.
Communications. The Company offers two communication systems to its Fleet Director(R) customers. The Mobile Data Terminal ("MDT") is the Company's
more advanced two-way messaging system. It allows for alphanumeric communications from the fleet operator to its drivers and up to thirty-five pre-programmed messages from the drivers to the fleet operator. The Status Messaging Terminal ("SMT") is a low-cost alternative to the MDT. The SMT allows for four pre-programmed messages that may be sent from the customer to the drivers and eight pre-programmed messages that may be sent from the drivers to the customer. The MDT and the SMT are both small terminals typically mounted on the fleet vehicle's dashboard and are connected to the VLU or VLU+.
Both the MDT and the SMT automatically provide customers with an electronic "receipt" when the message is received and therefore do not rely on drivers for vehicle locations or message delivery. As a result, the Company's system provides more reliable location information and messages than many competing technologies. The Company's communication applications generally have lower service costs than conventional real-time, two-way communication services, such as cellular, SMR and Enhanced Specialized Mobile Radio ("ESMR") services.
Security Services. The Company offers its commercial fleet customers several vehicle security and driver safety options that operate through the Company's location networks. A VLU can be connected directly to a vehicle's alarm system, triggering the Company's security system when the alarm is set off, or connected to an alarm button either located in the vehicle or carried remotely by the driver. Customers with Fleet Director Enterprise Edition(R) may also establish a "zone of compliance" that activates the Company's security system when vehicles leave the zone. When the security system is activated, a signal is sent by the VLU to the Company's local network system, which automatically alerts the customer through Fleet Director Enterprise Edition(R). If the customer does not respond, the Company will telephone the customer directly. If the customer believes that the vehicle has been stolen or a driver is in danger, the Company will work directly with the local law enforcement authorities to track the location of the vehicle in real-time. Many customers also attach VLUs directly to valuable cargo or to expensive equipment such as construction equipment. The Company believes it has developed excellent relations with local law enforcement officials due to the past performance of the Company's location system, and that such relations contribute to its ability to quickly recover stolen vehicles and equipment.
Sales and Marketing; Customer Service
The Company uses a direct sales force to sell its commercial vehicle location and fleet management services, and has a sales force located in each market where it operates. The Company's sales efforts rely on sales managers who supervise the sales activities of sales representatives, contact and negotiate with larger potential customers, and have authority to negotiate prices within defined parameters. Sales commissions generally are directly linked to the number of units a sales person sells. As of December 31, 2000, the Company's direct sales force consisted of approximately 34 employees.
The Company's advertising and marketing efforts are generally directed to local and regional markets and its strategy has focused on print advertising in industry journals, direct mail, videos, telemarketing, industry trade shows and on-site marketing promotions and demonstrations.
Consumer Vehicle Services
The Company is currently focusing on its core business of commercial fleet management. As a legacy of the business acquired from AirTouch Teletrac in January 1996 (the "Acquisition"), the Company has continued to provide consumer service (now sold under the name Teletracer(TM)) and has allowed dealer arrangements in place at the time of the Acquisition to continue, but has not launched any new marketing efforts. The imbedded base of consumer customers has continued to decline over the past several years. In addition, the Company has sold off a portion of its customers to Ituran in its Miami market. As of December 31, 2000, the Company provided consumer auto security services to approximately 4,400 vehicles.
Target Market
The demand for vehicle security products and services has grown as consumers have become increasingly concerned with vehicle theft. The consumer vehicle security industry encompasses a number of security products and services, including mechanical theft-prevention devices such as The Club(R), installed automated vehicle alarms and vehicle recovery services such as LoJack(R).
The vehicle security industry has developed rapidly since the late 1970s, as motor vehicle theft has increased. Vehicle theft and the demand for vehicle security are higher in the metropolitan centers and surrounding suburbs serviced by the Company.
Products and Services
The Company's proprietary location technology and VLU equipment can be used for consumer applications without modification. A VLU is installed in a consumer's vehicle and is generally connected to a security alarm and/or integrated with the vehicle's internal ignition system. By connecting the unit to a vehicle security alarm, vehicle recovery service can be initiated automatically. If the vehicle alarm is triggered, the unit emits an emergency locate signal, notifying the Company's regional control center of a potential vehicle theft. Each regional control center is staffed twenty-four hours a day, seven days a week with Company employees who contact local law enforcement authorities and direct them to the location of the stolen vehicle. The Company currently distributes its consumer product and services through auto dealers, electronic retailers and other distributors.
The Company's ability to offer automated, reliable and real-time service differentiates its stolen vehicle recovery service from other available services. The VLU provides automatic vehicle tracking at the time of theft. This is in contrast to other vehicle recovery services, such as LoJack(R), that require a subscriber to report a vehicle stolen in order to begin the tracking process.
The Company also offers a proprietary telephone-operated mobile information service called OZZ(R). This service allows its subscribers telephone access to a computer that will locate a subscriber's vehicle in real-time and report its location for compliance, security and convenience purposes. The subscriber calls the Teletrac OZZ(R) telephone number, enters a personal identification number for the vehicle to be located and within seconds receives
an automated voice response indicating the location of the vehicle at that time. In addition to providing the customer with the location of the vehicle, OZZ(R) is a "mobile yellow pages" that provides the customer the location of nearby prominent businesses or landmarks from a menu of choices. The customer can call OZZ(R) and obtain information such as the location of the nearest fast food restaurant, automatic teller machine, gas station, hospital, police station, or interstate on-ramp. Teletrac offers OZZ(R) to both consumer and commercial customers. The OZZ(R) service can also be used to remotely instruct the VLU to lock/unlock the doors of the vehicle. The firm that has contracted to provide roadside assistance service for the Company estimates that 25% of roadside assistance calls are for keys locked in the vehicle.
All of the Company's consumer customers can telephone the Company's call-in Roadside Assistance Program, and the Company will have a tow truck sent to the caller's location. Under its Automated Roadside Assistance Program, offered to its customers at a higher monthly fee, the Company can direct a tow truck directly to a subscribing customer's location when the customer presses a roadside assistance button installed in his or her vehicle.
Technology
The Company utilizes various wireless data networks to provide vehicle location and data communications. The majority of the location and data traffic today for the Company is carried via the Company-developed proprietary land-based location and data communications technology. In addition, the Company has multiple customers utilizing CDPD coupled with GPS for location determination. The Company is also in the process of evaluating other data networks combined with GPS for other applications for commercial fleet operators.
The Company has developed a proprietary, accurate and reliable spread spectrum-based wireless network architecture that provides for both location determination and two-way messaging. The Company's low-cost wireless network architecture permits cost-effective and accurate location and messaging services in metropolitan areas. The Company's networks use multilateration-based techniques and land-based receivers for position determination, avoiding the "line-of-sight" problems that may arise for satellite-based systems in urban areas where tall buildings can block a satellite's view of a vehicle. The Company believes that its land-based multilateration techniques are uniquely appropriate for precise location determination in urban settings and that it can accurately locate a vehicle equipped with its equipment in real-time within a range of less than one-half of an average city block (approximately 150 feet).
In order to locate a subscriber vehicle, the Company's local network broadcasts a "paging" transmission (the "Forward Link") simultaneously from each transmitter on the network. The Forward Link is used to transmit both location commands and alphanumeric messages to the VLU. Each subscriber's vehicle is equipped with a VLU, a videocassette-sized "transceiver" unit that responds to the location command of the Forward Link by emitting a response signal (the "Reverse Link"). The Reverse Link is received by at least four nearby base station units ("BSUs") which calculate both the time of transmission of the Forward Link and the time of arrival of the Reverse Link and relay this data, via wireline telephone networks, to the Network Control Center ("NCC"), the
local network's data processing center. The NCC uses the Company's proprietary network software to calculate the location of the VLU from the information received by the BSUs. The NCC consists of the Company's radio-frequency control equipment, telecommunication access connection computers, proprietary software and the Company's customer database. The NCC instantaneously relays the location information to a subscriber's Fleet Director(R) software application or OZZ(R) call-in request (via automated response).
The Company's customers can also use the Forward Link to transmit alphanumeric messages from their centralized dispatch office to their fleet vehicles and the Reverse Link to transmit more limited messages from vehicles to the centralized dispatch office. The network system can transmit alphanumeric messages at a transmission speed of 2,400 bits per second.
At December 31, 2000, the Company maintained and operated its proprietary network in six metropolitan markets: Los Angeles, Chicago, Detroit, Dallas, Houston, and San Diego. In New York, Washington D.C./Baltimore, Miami and Orlando, Ituran USA owns, operates and maintains the proprietary network and the Company pays Ituran USA a monthly fee for usage on their network for the Company's subscribers in those markets.
In a number of customer vehicle applications, the Company utilizes CDPD coupled with GPS for location determination. The vehicle is equipped with a subscriber unit (the VLU+) that includes both a CDPD wireless data modem and a GPS receiver. The CDPD services are provided by certain cellular carriers who have built packet data capabilities onto their existing cellular networks. The Company currently has a nationwide reseller agreement with AT&T for CDPD services. The CDPD services are available in over 80 metropolitan markets across the U.S. For the VLU+ service offering, the Company also provides wireless data or messaging communications by combining SMT or MDT terminals with the VLU+. The messaging information is transmitted over the CDPD network and delivered to the customer in a similar fashion as with the Company's proprietary network.
Network and Subscriber Equipment
The Company terminated its agreements with Tadiran, its former supplier of VLUs, in December 1998. The Company does not expect to purchase additional VLUs because inventory is expected to be sufficient to cover projected sales. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." The Company has contracted with a San Diego-based manufacturer for VLU+s. The components of the VLU+ are generally off-the-shelf wireless components that are available commercially from a number of different manufacturers.
The Company's network also includes a number of components that are used in the wireless messaging industry. The Company purchases standard transmitters from Glenayre Technologies, Inc. and Motorola, Inc. The transmitters, which are similar to transmitters used in one-way paging networks, transmit the Forward Link in a manner similar to a paging network. Much of the Company's communications equipment, its antennas and many other components of its networks are also available through a number of existing suppliers of wireless messaging equipment.
Competition
The Company currently faces competition for each type of service it offers. The Company expects that in the future it will face competition from new technologies as well as from existing products. Certain of the Company's competitors are larger and have substantially greater financial and research and development resources and more extensive marketing and selling organizations than the Company. There can be no assurance that additional competitors will not enter markets that the Company already serves or plans to serve or that the Company will be able to withstand such competition. Moreover, changes in technology could lower the cost of competitive services to a level where the Company's services would become less competitive or where the Company would need to reduce its service prices in order to remain competitive, which could have a material adverse effect on the Company's business.
Commercial Vehicle Market
The Company knows of three basic classes of products that offer commercial location and messaging capabilities competitive with the Company's products: (i) GPS, private satellite and Loran-C systems, (ii) LMS systems and (iii) traditional wireless communication.
GPS, Private Satellite and Loran-C Systems. GPS, certain private satellite networks and Loran-C can provide location information, and when paired with a communications system, may provide a system competitive with the Company's products. GPS systems receive signals from NAVSTAR satellites, U.S. government-funded satellites used for position location. GPS systems and certain private satellite systems use satellite ranging techniques to measure a GPS device's distance relative to a group of satellites in space. Typically, a GPS device must be in "sight" of several satellites to receive adequate transmission data for the determination of relative location on earth. The Loran-C system uses land-based transmitting stations to send a low-frequency radio signal that is used by a vehicle to calculate its position relative to the location of other Loran-C transmitters. Satellite and Loran-C systems are generally not as effective as LMS networks such as the Company's in metropolitan areas. Because GPS and other satellite services require "line of sight" to the orbiting satellite, dense metropolitan areas, parking garages, tunnels or other covered areas can impact the system's effectiveness and reliability. Loran-C systems also frequently have difficulty penetrating "metropolitan canyons" and therefore may provide inaccurate position readings in urban areas.
In most GPS, private satellite and Loran-C vehicle location systems, vehicle-mounted equipment gathers location data and transmits it by a wireless communication system to a dispatch center. There are a number of wireless systems that can be linked to a satellite system or a Loran-C system to transmit location information to a dispatch center:
o Cellular and PCS Communication Systems- Cellular and PCS systems can provide local or nationwide networks to transmit location information to a dispatcher. However, cellular and PCS operators generally price their airtime at price levels that do not allow for frequent location information transmittals by vehicles equipped with GPS, private satellite or Loran-C systems to dispatchers on a cost-basis competitive with the Company. Most vehicle location
systems that link a satellite or Loran-C location system with a cellular or PCS communication system, such as HighwayMaster, are best-suited for long-haul trucking fleets. In addition, in certain U.S. markets, some cellular operators have added a data service over their existing cellular infrastructure that can improve the cost and delivery of location information over existing cellular networks. The data service, called CDPD, is an overlay of a packet switched data service on a traditional cellular system. CDPD is available in approximately 80 metropolitan markets throughout the U.S., including all the markets, other than Los Angeles, in which the Company is currently operating or plans to operate. One company that is currently utilizing CDPD coupled with GPS to the metropolitan fleet market is @Road, a publicly-held corporation based in Fremont, California. At December 31, 2000, @Road had approximately 40,000 units installed.
o SMR/ESMR- SMR has traditionally been used to serve the needs of local dispatch services, such as taxis and couriers, which typically broadcast short messages to a large number of units. Several SMR operators are constructing ESMR digital systems that offer mobile telephone services. Some SMR and ESMR providers are beginning to integrate GPS with their systems to determine location and transmit the location information back to the subscriber via the SMR or ESMR communications network.
o Satellite-based Communications- Satellite-based communication is accomplished through transmission of a signal from a vehicle-based transmitter to a satellite, which automatically retransmits the signal to a dispatcher. Such systems provide seamless nationwide service for transmitting location information, but do not currently transmit location data at a cost competitive with the Company's system. Vehicle location products with satellite-based communications are currently offered by Orbcomm Global, L.P. and Qualcomm, Inc.
o Dedicated Wireless Networks- ARDIS and RAM are dedicated wireless two-way data networks that also can be used to transmit location information through integration with GPS. ARDIS is owned by American Mobile Satellite Corporation and RAM is owned by a joint venture between RAM Broadcasting Corp. and BellSouth. Both wireless providers cover primarily metropolitan markets. ARDIS covers approximately the top 400 markets in the United States, and RAM reports coverage in approximately the top 100 markets (in both cases, including all the markets in which the Company currently operates or plans to operate).
LMS Systems. The Company knows of other companies that are developing competitive LMS location and messaging systems. Pinpoint Communications Inc., METS Inc./MobileVision, L.P. and Comtrak Inc. each have developed technologies that use LMS spectrum to provide both location information and messaging. Such alternative LMS systems are also land-based wireless systems suited for providing accurate and cost-effective service in metropolitan areas. Current LMS operators and prospective LMS operators may also benefit from an FCC auction of three frequency bands, including the band on which the Company's system operates, for LMS purposes. The Company believes
that, to date, it is the only company that has established a commercially operational LMS network in the U.S.
Traditional Wireless Communication. Many fleet managers use existing SMR, ESMR, two-way radio, cellular or paging systems to communicate with vehicles and obtain their location. Such systems are less reliable than the Company's products, however, because they rely exclusively on drivers to accurately identify their location.
Consumer Vehicle Market
LoJack(R). The Company's principal competitor to date in the consumer vehicle market has been LoJack(R). The LoJack(R) system is based on a VHF transponder (essentially a homing device) with a range of approximately two miles. The LoJack(R) vehicle recovery system requires a customer to report a stolen vehicle to LoJack(R) in order to initiate the location process. Once a stolen vehicle report is received, LoJack(R) personnel activate the transponder unit located in the stolen vehicle by transmitting a signal across the area in which the vehicle was stolen. Police equipped with LoJack(R) equipment track the signal from the stolen vehicle by the strength of the signal. The LoJack(R) system is not an automatic, real-time, screen-based tracking system, and it does not provide the service features of the Company's OZZ(R) and roadside assistance products.
GPS/Cellular Systems. Several companies have begun to link GPS location technology with cellular communications to create emergency location systems for consumer vehicles. Carcop(R), Onstar(TM) and Lincoln Rescu(TM) all rely on this technology to provide emergency roadside assistance and/or stolen car recovery. Such systems, because they are based on GPS locating technology, can be less effective in metropolitan areas where most auto thefts occur.
Theft Deterrents. A number of products are currently sold for vehicle theft deterrence. Consumer products range from The Club(R) to automatic alarm systems. While such systems do not provide the location information or range of services of the Company's consumer products, they are often available at a significantly lower cost.
Product Protection
The Company currently has no material patents and generally seeks to protect its proprietary network software, software products and trade secrets by requiring that its consultants, employees and others with access to such software and trade secrets sign nondisclosure and confidentiality agreements. Management believes that these actions provide appropriate legal protection for the Company's intellectual property rights in its software and products. Furthermore, management believes that the competitive position of the Company depends primarily on the technical competence and creative ability of its personnel and that its business is not materially dependent on patents, copyright protection or trademarks.
Regulation
The construction, operation and acquisition of radio-based systems in the LMS industry in the U.S. are subject to regulation by the FCC under the
Communications Act. Multilateration LMS is a service operating under new FCC rules. As such, the LMS rules have not been subject to any significant interpretation by the FCC in written decisions.
As a pioneer in this new service, the Company may operate under rules with significant ambiguities. The application of largely uninterpreted rules in situations that the Company may encounter will present matters of first impression to the FCC's staff. The Company cannot predict how changes to or interpretations of these rules may affect its operations or its business plans.
Construction and Operation of Grandfathered Systems
The FCC adopted its initial rules for the LMS service in 1995. The FCC's LMS rules provide for the "grandfathering" of LMS systems, such as those of the Company, that were in operation or authorized as of February 3, 1995. LMS licenses granted prior to the 1995 rules, including those under which the Company operates its system, were granted for individual transmitter sites. The FCC's rules provide that future LMS licenses will be granted on a geographic basis and awarded through auctions. The FCC stopped accepting applications for new site-based LMS facilities in 1995, pending its development of rules and procedures for auctioning the LMS spectrum on a geographic area basis.
To maintain grandfathered status for its existing licenses, the Company was required, among other things, to complete its construction of licensed transmitter sites by January 1, 1997, to a level where each system would be capable of locating a vehicle. By December 31, 1996, the Company had constructed LMS systems capable of locating a vehicle in 26 markets, including the six markets in which the Company had systems that were in operation prior to 1995. The grandfathered authorizations issued to the Company allow the operation of multilateration LMS base stations at particular sites specified in the authorization, subject to a requirement that base stations may not be relocated to a site more than two kilometers from an initially authorized site. In a few instances, the Company has obtained waivers from the FCC to permit location of a transmitter site to a location more than two kilometers from the original site. In December 1998, the Company requested that the FCC cancel licenses in three markets, and the Company also has assigned licenses for some of its original markets. The Company continues to hold grandfathered multilateration LMS licenses for locations in and around Chicago, Los Angeles/San Diego, Dallas, Houston and Detroit.
Current FCC rules do not provide for grandfathered LMS licensees like the Company to construct "fill-in" transmitters to service gaps in the service coverage area due to terrain obstructions. On December 18, 1997, however, the FCC granted the Company, at the Company's request, a waiver that permits the Company to obtain authorizations for new "fill-in" transmitters within the coverage area of its facilities. The Commission granted the Company's applications for "fill-in" transmitters in several markets. Under the terms of the waiver order, the Company may no longer submit applications for "fill-in" transmitters.
In July, 1998, the FCC adopted auction rules for the multilateration LMS service, and the auction began in February 1999, for 528 licenses representing three frequency blocks in 176 geographic LMS license areas which,
in the aggregate, encompassed all of the United States. In the auction, four bidders acquired 289 of the licenses. No minimum bid was placed on the remaining licenses and they remain unassigned. The Company did not bid for spectrum in the LMS auction. The FCC has tentatively scheduled a further auction for the remaining unassigned LMS licenses for June 6, 2001. The Company understands that the FCC will expect cooperative arrangements for sharing between grandfathered licensees and the EA licensees resulting from the auction. The Company will be permitted to continue operating its grandfathered facilities in that EA, but it will be precluded from expanding its coverage area within such EA.
Permissible Use Restrictions and Interconnection
The FCC's rules do not contemplate that LMS be used for "general messaging purposes," but LMS systems may transmit status and instructional messages, either voice or non-voice, so long as they are related to the location or monitoring functions of the system. This restriction precludes an LMS licensee from offering messaging services other than as part of its location and monitoring services. Under the FCC's rules, LMS service may include location of non-vehicular traffic, so long as the primary operations involve location of vehicles.
In addition, the FCC order requires that interconnection to the public switched telephone network be on a "store and forward" basis. This requirement limits the Company's ability to offer real-time voice communications services, except with respect to emergency communications. LMS customers may engage in delayed voice or data messaging over the telephone system. The FCC set a thirty-second delay as the "safe harbor" for store and forward interconnection but acknowledged that other approaches may also be acceptable depending upon the configuration of the system.
Regulatory Certification and Foreign Ownership
The FCC has not declared whether multilateration LMS will be classified as a private mobile radio service (PMRS) or as a commercial mobile radio service (CMRS), but has proposed to classify LMS providers on a case-by-case basis. The Company believes that, because of the nature of its operation, its licenses are properly treated as PMRS rather than CMRS.
If the Company's services were reclassified as CMRS rather than as PMRS, the Company would be subject to fees, fund contribution requirements and regulations applicable to CMRS carriers such as cellular and PCS. In addition, the Company, which holds its FCC authorizations through a wholly-owned subsidiary, Teletrac License, Inc., would be subject to the foreign ownership restrictions under the Communications Act that apply to the parent corporations of CMRS licensees. Under this restriction, non-U.S. persons would not be permitted to hold, directly or indirectly, in the aggregate, more than 25% of the ownership or 25% of the voting rights in the Company, absent a waiver or determination by the FCC that a higher level of foreign ownership would be in the public interest.
Although the Company is controlled by U.S. citizens, non-U.S. persons currently hold slightly more than 25% of the ownership of the Company. If the FCC were to reclassify its multilateration LMS as CMRS at a time when the Company's level of foreign ownership or foreign voting rights exceeded 25%, the
Company would be required to obtain a public interest determination from the FCC approving its level of foreign ownership or to restructure its ownership to meet the 25% benchmark. World Trade Organization ("WTO") agreements and the FCC's rules and policies implementing the WTO telecommunications agreements recognize the national policy of permitting foreign investments by WTO member countries in U.S. entities that control CMRS licenses. The FCC's implementation of the WTO agreements would require the Company, if its services were classified as CMRS and its foreign ownership exceeded the benchmark to obtain a public interest determination from the FCC. The FCC typically grants these determinations routinely to permit investment from nationals of WTO member countries.
Technical Requirements
Multilateration LMS systems must use equipment that is "type-accepted" by the FCC. Under the type-acceptance procedure, the FCC confirms that the model of equipment proposed for use in a particular radio service conforms to the technical requirements for the service as specified in the FCC's rules. All equipment used by the Company that is required to be type-accepted has been type-accepted.
Multilateration LMS systems operate on frequencies that have been allocated to LMS by the FCC on a secondary basis. This means that LMS operations cannot cause interference to, and may be required to accept interference from, users of those same or adjacent frequencies in the industrial, scientific, and medical radio service and in the Federal government's radio location service. In addition, under Part 15 of the FCC's rules, certain unlicensed radio devices (such as spread spectrum devices used for local area networks) operate on the same or adjacent frequencies as LMS systems. Although multilateration LMS systems generally have priority in the use of their frequencies over such Part 15 devices, the FCC's rules provide a "safe harbor" for the operation of Part 15 devices in LMS spectrum. If a Part 15 device is operated in a manner that satisfies those safe harbor requirements (which were designed to avoid or minimize the risk of interference to LMS services), an LMS system that nonetheless suffers interference from such a Part 15 device may have no recourse other than to negotiate with the Part 15 user on methods for eliminating or reducing the interference. In addition, as a condition of the LMS license, the FCC has stated that operators of new LMS systems must perform testing to demonstrate that the system does not cause unacceptable interference to Part 15 devices. To date, the FCC has specifically declined to specify the nature of such testing and how they might be used to determine whether the multilateration LMS system is causing unacceptable interference to Part 15 devices. The FCC has indicated that the purpose of the testing is to ensure that multilateration LMS licensees make efforts to minimize interference to existing Part 15 devices when designing and constructing their systems; Part 15 devices remain secondary to multilateration LMS operations.
Current FCC Applications and Proceedings
The Company may have various applications pending before the FCC from time to time in the ordinary course of business, in connection with the implementation of the Company's planned merger with Trafficmaster plc, and in connection with the renewal of its grandfathered multilateration LMS licenses, which expire beginning in March 2001.
Other Proceedings. Other proceedings pending from time to time at the FCC may affect the business and operations of the Company, including but not limited to, (i) changes in spectrum allotments and usage restrictions that may permit the operation of terrestrial location-related services in other bands; (ii) changes in FCC rules and policies governing interconnection with the switched telephone network; (iii) rule making proceedings to develop the rules and policies that will govern the auction of the LMS spectrum; (iv) changes in the general licensing rules and policies of the FCC affecting LMS applications; and (v) auctions for additional licenses available for the provision of location and monitoring services, and (vi) changes in FCC regulatory policies generally governing the land mobile communication services.
The Company cannot predict when the FCC will act on any of these matters or what effect such action may have on its business.
Employees
At December 31, 2000, the Company had approximately 224 employees. Substantially all of the Company's employees are full-time. The Company's employees are not unionized and the Company believes that its relations with its employees are good.
Item 2.
Item 2. DESCRIPTION OF PROPERTIES
As of December 31, 2000, the Company had approximately 217 site and tower leases for the operation of its transmitters and other equipment on commercial broadcast towers and at other fixed sites. The Company believes that in general the terms of its leases are competitive based on market conditions. The Company believes its facilities are suitable and adequate for its purposes. The Company relocates its transmission and receiver sites from time to time and does not anticipate any material problems in obtaining and retaining site and tower leases in the future.
Item 3.
Item 3. LEGAL PROCEEDINGS
Prior to the acquisition of AirTouch Teletrac, PacTel Teletrac (predecessor to AirTouch Teletrac) brought an action before the United States Patent and Trademark Trial and Appeal Board against T.A.B. Systems ("TAB") opposing TAB's registration of the mark "Teletrak." The Trademark Trial and Appeal Board granted PacTel Teletrac's motion for summary judgment, but summary judgment was reversed by the U.S. Court of Appeals for the Federal Circuit. TAB then filed an infringement action against PacTel Teletrac, the Company and other parties in the U.S. District Court for the Central District of California. On December 22, 1997, the District Court granted summary judgment in favor of the Company. This decision was appealed by TAB to the U.S. Court of Appeals for the Ninth Circuit and such appeal was pending as of the date the Company filed its bankruptcy petition. The Bankruptcy Court issued an order permitting the Ninth Circuit appeal to proceed. Oral arguments were heard on April 10, 2000. On March 20, 2001, the Ninth Circuit Court of Appeals filed a decision affirming the District Court's grant of summary judgment. Under the terms of the Asset Purchase Agreement between AirTouch Teletrac and the Company, AirTouch Teletrac must pay the costs of any litigation relating to this matter and must indemnify the Company against any losses relating thereto. AirTouch Teletrac has notified the Company that it intends to continue to litigate this matter on its own behalf as well as on behalf of the Company, and that it will bear the cost of such
litigation. There can be no assurance that AirTouch Teletrac will be successful in such litigation or that AirTouch Teletrac will honor its indemnification obligations (including any costs or losses relating to a change of name, if required as a result of the litigation).
The Company settled the litigation in Bankruptcy Court with Milgo Solutions f/k/a Raycal-Datacom, Inc. ("Milgo") and Newcourt Leasing, Inc. ("Newcourt") regarding certain telecommunications equipment that the Company believes it purchased from Milgo. Milgo and Newcourt asserted that the Company did not purchase this equipment, and alleged that the Company holds same pursuant to one or more leases. The settlement stipulation, which was approved by Bankruptcy Court on October 27, 2000 and became final and non-appealable on November 21, 2000, provides that the Company shall pay Milgo the sum of $1,000,000 over a three-year term, in monthly installments and without interest. As part of the settlement, complete mutual releases were delivered in favor of all parties.
The Company was a defendant in an American Arbitration Association ("AAA") proceeding brought by StarTrac, Inc. ("StarTrac") on or about February 23, 2000. StarTrac asserted that the Company breached the dealer agreement between the parties and sought actual and punitive damages. The Company denied the claims asserted by StarTrac and initially felt that these claims were discharged by the bankruptcy proceeding and filed a motion to enforce the injunction created by the Plan of Reorganization. However, the Bankruptcy Court determined that the allegations set forth by StarTrac were too intertwined with both pre and post-effective date events to enforce the injunction. The parties arbitrated the matter and on January 26, 2001, the AAA rendered a decision in favor of Teletrac and denying StarTrac's claims.
The Company is from time to time subject to claims and suits arising in the ordinary course of business. The Company is not currently a party to any proceeding that, in management's opinion, is likely to have a material adverse effect on the Company's business.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
There is no established trading market for the Company's Common Stock.
The Company has not paid any cash dividends to the holders of its equity securities. The ability of the Company to pay dividends is restricted by the Indenture dated September 29, 1999 between the Company and HSBC Bank USA, as Trustee, which governs the Senior Notes.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Set forth below are selected historical financial data of the
Company and its predecessor. Certain of such historical financial and operating data have been derived from the audited consolidated financial statements of the Company and its predecessor as of and for the periods noted. The data contained in the following table should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Company's and its predecessor's audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report.
On September 29, 1999, the Company's Plan of Reorganization was declared effective (the "Reorganization"). For the three months ended December 31, 1999, the Company has adopted Fresh Start Accounting in accordance with the AICPA's Statement of Position No. 90-7 ("SOP 90-7"). As a result, all financial statements presented for periods prior to September 30, 1999 are reflected as those of the predecessor company. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Consolidated Financial Statements."
In accordance with the SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), the Company has changed its accounting for Equipment Revenue as of January 1, 2000 to be recognized over the expected life of the customer relationship rather than in the month in which the equipment is installed. As a result, unaudited pro forma financial data is presented to reflect the adoption of SAB 101 for all periods presented.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company is a leading national provider of vehicle location and fleet management services in metropolitan areas. The Company currently has operations relating to commercial fleet management and consumer vehicle services. The commercial fleet management provides products and services that allow fleet operators to increase driver productivity, improve customer service, limit unauthorized vehicle use, and reduce driver overtime. The consumer vehicle services provide real-time stolen vehicle recovery, vehicle location, and roadside assistance. Management's Discussion and Analysis of Financial Condition and Results of Operations contain statements regarding matters that are not historical facts, but rather are forward-looking statements. These statements are based on current financial and economic conditions and current expectations and involve risk and uncertainties. The Company's actual results may differ materially from the results discussed in forward-looking statements. There can be no assurance that the Company's future operations will generate operating or net income. Factors that might cause such a difference include, but are not limited to, the "Risk Factors" set forth in the Company's Form S-1 filed on September 5, 1997.
On September 15, 1999, the Reorganization was confirmed by the United States Bankruptcy Court and it was effective on September 29, 1999. As a result of the Reorganization, the recording of the restructuring transaction and the implementation of Fresh Start Accounting, the Company's results of operations after September 30, 1999 (the cutoff date used for financial reporting purposes) are not comparable to results reported in prior periods.
On February 23, 2001, the Company entered into an Agreement and Plan of Merger with Trafficmaster pursuant to which Trafficmaster will acquire the Company for cash (including the assumption of debt). The merger has been approved by the Board of Directors and the holders of a majority of the Company's outstanding Common Stock. In addition, the holders of a majority of the Company's Senior Notes consented to the merger and waived certain rights such holders of Senior Notes may have pursuant to the Indenture, governing the terms of the Senior Notes, including the right to receive notice of a Change of Control (as defined in the Indenture) and to require the Company to repurchase their Senior Notes. The Senior Noteholders also waived events of noncompliance or default under the Indenture that would occur as a result of the Company's failure to satisfy the covenants set forth in Sections 4.14 and 5.01(iv) of the Indenture in connection with the merger. Such holders also consented to and approved the adoption of the Supplemental Indenture by the Indenture Trustee amending certain provisions of the Indenture. The Company expects consummation of the merger to occur in April, 2001, subject to the satisfaction of certain closing conditions in the merger agreement, including regulatory approval of the transfer of control of the FCC licenses used in the Company's business. The Company has filed with the SEC a Current Report on Form 8-K, dated March 6, 2001, in connection with this merger agreement.
In accordance with SAB 101, the Company changed its revenue recognition on sales of commercial systems to be recognized over the expected life of the customer relationship. See the Consolidated Statements of Operations included in the accompanying Consolidated Financial Statements for the impact of the cumulative effect of change in accounting principle.
The twelve-month information provided below for the year 1999 does not comply with SOP 90-7 requirements for companies upon emergence from bankruptcy, which requirements call for separate reporting for the newly reorganized company and the predecessor company. To facilitate a meaningful comparison of the Company's year-to-date operating performance in fiscal years 2000, 1999 and 1998, the following discussion of results of operations on a consolidated basis is presented on a traditional comparative basis for all periods presented.
Twelve Months Ended -------------------------------------------- 12/31/2000 12/31/1999 12/31/1998 ---------- ---------- ----------
OPERATING REVENUES:
Service revenue $21,823,318 $21,296,671 $18,028,832 Equipment revenue 8,685,468 8,531,404 10,585,835 Other revenue 243,905 3,078,667 - ----------- ----------- ----------- Total operating revenues 30,752,691 32,906,742 28,614,667 ----------- ----------- -----------
OPERATING EXPENSES:
Cost of service revenue 3,252,826 3,208,951 4,206,939 Cost of equipment revenue 7,879,704 6,138,824 9,261,564 Selling, general and administrative 17,964,052 21,480,659 30,217,327 Engineering and research 3,975,945 6,022,639 10,624,945 and development costs Refrequencing costs - - 390,000 Restructuring charge and other - - 19,667,557 Depreciation and amortization 1,419,609 4,668,644 5,781,103 ------------ ------------ ------------
LOSS FROM OPERATIONS (3,739,445) (8,612,975) (51,534,768)
OTHER EXPENSE (INCOME):
Interest expense 2,116,677 8,635,018 14,501,454 Interest and other income (268,861) (939,838) (2,616,394) Gain on disposal (2,198,253) - - ------------ ------------ ------------
LOSS BEFORE REORGANIZATION AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (3,389,008) (16,308,155) (63,419,828)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 4,827,516 - -
REORGANIZATION COSTS - 1,321,746 - GAIN ON DEBT DISCHARGE/REORGANIZATION - (123,774,589) - ------------ ------------- ------------
(LOSS) GAIN BEFORE INCOME TAXES (8,216,524) 106,144,688 (63,419,828)
PROVISION FOR INCOME TAXES - - - ------------ ------------- ------------
NET (LOSS) INCOME (8,216,524) 106,144,688 (63,419,828)
PREFERRED DIVIDENDS - $4,145,596 $5,839,674 ------------ ------------- ------------
(LOSS) INCOME APPLICABLE TO COMMON STOCKHOLDERS $(8,216,524) $101,999,092 $(69,259,502) ============= ============== =============
RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared to Unaudited Pro Forma Year Ended December 31, 1999.
OPERATING REVENUES. Total operating revenues for 2000 were $30.8 million, compared to $32.9 million in 1999.
Service revenues, which include revenues from both unit sales and rental units, increased to $21.8 million in 2000 from $21.3 million in 1999. The average commercial service revenue per vehicle application increased to $33.90 in December 2000 from $30.95 in December 1999 as a result of an increase in both ancillary services and monthly airtime rates.
Equipment revenues increased to $8.7 million for the year ended December 31, 2000 from $8.5 million for the year ended December 31, 1999. Gross commercial sales (installations) decreased to 11,480 units for the year ended December 31, 2000 from 13,561 units for year ended December 31, 1999. The effect of SAB 101 increased the revenue for the year ended December 31, 2000 by $2.4 million.
COST OF SERVICE REVENUES. Cost of service revenues includes the direct cost of providing service (network telephone, billing, roadside assistance and bad debt expense). Cost of service revenues increased to $3.3 million for the twelve months ended December 31, 2000 from $3.2 million for the twelve months ended December 31, 1999.
COST OF EQUIPMENT REVENUES. Cost of equipment revenues includes the direct cost of equipment provided to customers, installation and other direct ancillary equipment. Cost of equipment revenues increased to $7.9 million for the twelve months ended December 31, 2000 from $6.1 million for the twelve months ended December 31, 1999. The effect of SAB 101 increased the cost of equipment for the year ended December 31, 2000 by $1.9 million.
SELLING, GENERAL AND ADMINISTRATIVE, ENGINEERING AND RESEARCH AND DEVELOPMENT EXPENSES. Selling, general and administrative, engineering, and research and development expenses decreased by $5.6 million, to $21.9 million for the twelve months ended December 31, 2000 from $27.5 million for the twelve months ended December 31, 1999. The Company reduced expenses through significant reductions in personnel along with the closing of the San Francisco/Sacramento network and sale of the New York and Washington D.C./Baltimore networks. The Company's cost of research and development activities was not material in either 2000 and 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased for the twelve months ended December 31, 2000 to $1.4 million from $4.7 million for the twelve months ended December 31, 1999, primarily due to depreciation on fewer assets due to the sale of the New York and Washington D.C. networks to Ituran USA and the closing of the San Francisco/Sacramento network as well as lower cost bases resulting from Fresh Start Accounting beginning on October 1, 1999.
OPERATING LOSSES. Operating losses incurred by the Company were $3.7 million for the twelve months ended December 31, 2000, as compared to $8.6 million for the twelve months ended December 31, 1999, for the reasons discussed above.
INTEREST EXPENSE. Interest expense was $2.1 million for the twelve months ended December 31, 2000 compared to $8.6 million for the twelve months ended December 31, 1999, and primarily relates to the senior notes. The decrease is a result of the reduction in the senior notes from $105 million to $15 million as part of the reorganization.
REORGANIZATION COSTS. Reorganization costs were $1.3 million for the twelve months ended December 31, 1999. These costs primarily represent professional fees incurred to effect the Reorganization.
GAIN ON DEBT DISCHARGE/REORGANIZATION. The gain on debt discharge and reorganization was $123.8 million for the twelve months ended December 31, 1999. See Note 3 to the Consolidated Financial Statements for a description of the gain.
NET LOSS. For the reasons discussed above and the cumulative effect of SAB 101 for $4.8 million, net loss was $8.2 million for twelve months ended December 31, 2000 compared to $106.1 million net income for twelve months ended December 31, 1999.
TAX BENEFIT. No tax benefit has been recognized for any period due to the uncertainty of net operating loss carry-forward utilization.
Unaudited Pro Forma Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
OPERATING REVENUES. Total operating revenues for 1999 were $32.9 million, compared to $28.6 million in 1998, an increase of 15%.
Service revenues, which include revenues from both unit sales and rental units, increased to $21.3 million in 1999 from $18.0 million in 1998, an increase of 18%. The average commercial service revenue per vehicle application increased to $30.95 in December 1999 from $24.99 in December 1998 as a result of an increase in both ancillary services and monthly airtime rates.
Equipment revenues decreased to $8.5 million for the year ended December 31, 1999 from $10.6 million for the year ended December 31, 1998, principally due to lower gross sales over the period. Gross commercial sales (installations) decreased to 13,561 vehicle applications for the year ended December 31, 1999 from 20,600 vehicle applications for year ended December 31, 1998 due to fewer sales personnel. Average equipment revenue per vehicle application increased to $629.11 for 1999 from $513.88 for 1998 mostly due to fewer discounts being offered to customers.
Equipment rental revenues, which are included in total equipment revenues, increased to approximately $826,000 for the twelve months ended December 31, 1999 from $573,000 for the twelve months ended December 31, 1998.
COST OF SERVICE REVENUES. Cost of service revenues includes the direct cost of providing service (network telephone, billing, roadside assistance and bad debt expense). Cost of service revenues decreased to $3.2 million for the twelve months ended December 31, 1999 from $4.2 million for the
twelve months ended December 31, 1998. The reduction is a reflection of the sale of the New York and Washington D.C./Baltimore networks to Ituran USA and the closing of the San Francisco/Sacramento network.
COST OF EQUIPMENT REVENUES. Cost of equipment revenues includes the direct cost of equipment provided to customers, installation and other direct ancillary equipment. Cost of equipment revenues decreased to $6.1 million for the twelve months ended December 31, 1999 from $9.3 million for the twelve months ended December 31, 1998. Cost of equipment revenues includes a one-time charge to write down inventory by approximately $1.1 million at the end of 1998.
SELLING, GENERAL AND ADMINISTRATIVE, ENGINEERING AND RESEARCH AND DEVELOPMENT EXPENSES. Selling, general and administrative, engineering, and research and development expenses decreased by $13.3 million, from $40.8 million for the twelve months ended December 31, 1998 to $27.5 million for the twelve months ended December 31, 1999. The Company reduced expenses through significant reductions in personnel along with the closing of the San Francisco/Sacramento network and sale of the New York and Washington D.C./Baltimore networks. The Company had no material research and development costs in 1999, compared with $1.5 million in 1998.
REFREQUENCING COSTS. Refrequency costs accrued for the twelve months ended December 31, 1998 was $0.4 million. The accrual reflects a change in estimate for the total refrequencing liability.
RESTRUCTURING CHARGE AND OTHER. The Company recorded a charge of $19.7 million for the twelve months ended December 31, 1998. The charge was the result of management and organizational changes designed to improve profitability, increase customer focus, and decrease customer cancellations by becoming technologically neutral. The Company no longer plans to open new markets using its proprietary RF networks and has written-down assets and the costs of deinstalling those assets amounting to $17.3 million. The Company has terminated its agreement with its VLU supplier and was subject to a penalty and write-off totaling $1.4 million of VLU's that were not on the correct frequency. The Company cancelled its revolving credit agreement and wrote-off the unamortized deferred costs of $0.8 million. The Company also expensed deferred costs of $0.2 million for certain RF related projects.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased for the twelve months ended December 31, 1999 to $4.7 million from $5.8 million for the twelve months ended December 31, 1998, primarily due to depreciation on fewer assets due to the sale of the New York and Washington D.C. networks to Ituran USA and the closing of the San Francisco/Sacramento network as well as lower cost bases resulting from Fresh Start Accounting beginning on October 1, 1999.
OPERATING LOSSES. Operating losses incurred by the Company were $8.6 million for the twelve months ended December 31, 1999, as compared to $51.5 million for the twelve months ended December 31, 1998, for the reasons discussed above.
INTEREST EXPENSE. Interest expense was $8.6 million for the twelve months ended December 31, 1999, compared to $14.5 million for the twelve months ended December 31, 1998. The decrease relates to the cancellation of the
Predecessor Company's old senior note as part of the Reorganization as well as reduced interest expense on the new debt instruments.
REORGANIZATION COSTS. Reorganization costs were $1.3 million for the twelve months ended December 31, 1999. These costs primarily represent professional fees incurred to effect the Reorganization.
GAIN ON DEBT DISCHARGE/REORGANIZATION. The gain on debt discharge and reorganization was $123.8 million for the twelve months ended December 31, 1999. See Note 3 to the Consolidated Financial Statements for a further discussion of this gain.
NET (LOSS) INCOME . For the reasons discussed above there was net income of $105.6 million for the twelve months ended December 31, 1999, compared to a net loss of $63.4 million for twelve months ended December 31, 1998.
TAX BENEFIT. No tax benefit has been recognized for any period due to the uncertainty of net operating loss carry-forward utilization.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures were $1.5 million for the twelve months ended December 31, 2000, primarily for the development of the Company's internal software and database platforms. The Company currently expects that its aggregate capital expenditures will be less than $2.0 million for 2001. These capital expenditures will consist primarily of costs associated with internal software development, the maintenance of existing markets, and other capital improvements.
As a result of the Reorganization, the Company has outstanding an aggregate $15,000,000 of Senior Notes. The Senior Notes have a deferred interest election provision whereby the Company may elect to pay interest by the issuance of Deferred Interest Notes with a 12% interest rate due September 30, 2004. The Company has issued Deferred Interest Notes in the aggregate of $1,800,000 as of December 31, 2000. On March 15, 2001, in conjunction with interest due for the prior six months, the Company issued an additional $900,000 of Deferred Interest Notes.
In May 2000, the Company paid off its $3,000,000 Senior Secured Note with the proceeds from the sale of the Miami and Orlando networks to Ituran USA. In January of 2001, the Company entered into a credit facility for a maximum of $750,000. The credit facility is secured by the accounts receivable of the Company. As of March 15, 2001, $550,000 has been drawn down from the facility. Pursuant to the merger agreement with Trafficmaster, all amounts owing under this facility would be repaid no later than the effective time of the merger.
The Company has incurred recurring losses and has an overall stockholders' deficit of $7,459,212 as of December 31, 2000. In addition, the Company has long-term commitments that will require additional financing to meet those commitments. There is no assurance that the Company can reduce expenses sufficiently enough or be able to raise additional capital if needed to meet its commitments. In particular, if for any reason the contemplated merger with Trafficmaster is not consummated, the Company will be required to seek additional financing to support its operations. There can be no assurance that such financing will be available on acceptable terms, if at all.
YEAR 2000 COMPLIANCE AND EXPENDITURES
To date we have not spent material amounts to comply with accounting and statutory requirements regarding the Year 2000. We believe that we will spend minimal additional amounts in the foreseeable future. The Company did not incur any significant changes to its results of operations from increased costs due to the Year 2000. The Company was not affected by any significant changes in the Company's customers buying patterns and did not experience an increase in returns in Year 2000.
INFLATION
The Company believes that, to date, inflation has not had a material effect on its results of operations. Although inflation may in the future effect the cost of VLU and messaging units sold by the Company, the Company expects that technology and engineering improvements are likely to offset any foreseeable cost increases.
FASB PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 ("SFAS No. 137"), an amendment of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 137 is effective for fiscal years beginning after June 15, 2000. The Company believes the adoption of SFAS No. 137 will not have a material effect on the Company's consolidated results of operations or financial condition.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The fair market value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. Based on our market risk sensitive instruments outstanding at December 31, 2000 and 1999, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such dates.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements listed in the accompanying Index to Consolidated Financial Statements which appear elsewhere in this Annual Report. Information required by the schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes thereto.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
TELETRAC, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants..................................... 30 Consolidated Balance Sheets as of December 31, 2000 and 1999....................................................................... 31 Consolidated Statements of Operations for the year ended December 31, 2000, the three months ended December 31, 1999, the nine months ended September 30, 1999 and the year ended December 31, 1998 ..................................................................... 33 Consolidated Statements of Cash Flows for the year ended December 31, 2000, the three months ended December 31, 1999, the nine months ended September 30, 1999 and the year ended December 31, 1998 ............................ 34 Consolidated Statements of Stockholders' (Deficit) Equity for the year ended December 31, 2000, the three months ended December 31, 1999, the nine months ended September 30, 1999 and the year ended December 31, 1998 ............ 35 Notes to Consolidated Financial Statements .................................. 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Teletrac, Inc.:
We have audited the accompanying consolidated balance sheets of Teletrac, Inc. and subsidiary (a Delaware company) as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' (deficit) equity and cash flows for the year ended December 31, 2000, the three months ended December 31, 1999, the nine months ended September 30, 1999, and the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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 Teletrac, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the year ended December 31, 2000, the three months ended December 31, 1999, the nine months ended September 30, 1999, and the year ended December 31, 1998 in conformity with accounting principals generally accepted in the United States.
The Company had recurring losses and has an overall stockholders' deficit of $7,459,212 as of December 31, 2000. In addition, the Company has long-term debt that could require additional equity or debt financing. The Company has entered into an agreement to be acquired as further discussed in Note 1. If the contemplated merger is not consummated, the Company will be required to seek additional financing to support its operations and long-term debt commitments. There can be no assurance that such financing will be available on acceptable terms, if at all.
ARTHUR ANDERSEN LLP San Diego, California March 15, 2001
TELETRAC, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
The accompanying notes are an integral part of these consolidated financial statements.
TELETRAC, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000, THE THREE MONTHS ENDED DECEMBER 31, 1999, THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998
The accompanying notes are an integral part of these consolidated financial statements.
TELETRAC, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000, THE THREE MONTHS ENDED DECEMBER 31, 1999, THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
TELETRAC, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY FOR THE YEAR ENDED DECEMBER 31, 2000, THE THREE MONTHS ENDED DECEMBER 31, 1999, THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998
The accompanying notes are an integral part of these consolidated financial statements.
TELETRAC INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Teletrac, Inc., a Delaware corporation, through its wholly-owned subsidiary, Teletrac License, Inc. (collectively, the "Company"), controls licenses issued by the Federal Communications Commission (FCC) to construct and operate radio location networks for the purpose of locating, tracking and communicating with commercial fleet and consumer vehicles as a result of its acquisition of AirTouch Teletrac. As of December 31, 2000, the Company operated in thirteen metropolitan markets: Los Angeles, Chicago, Detroit, Dallas, Miami, Houston, Orlando, San Francisco, San Diego, Sacramento, Washington D.C./Baltimore, Phoenix and New York. The Company also uses its proprietary location systems to provide vehicle location and stolen vehicle recovery services to consumers in its Los Angeles market. The networks consist primarily of antennas, transmission and receiving equipment, customer-owned vehicle locating units (VLUs) that receive and transmit signals, and operating centers that interpret and relay the transmissions.
On June 9, 1999 the Company filed for voluntary protection under Chapter 11 of the U.S. Bankruptcy Code. On September 15, 1999, the Company's Prenegotiated Plan of Reorganization was approved by the United States Bankruptcy Court and was declared effective on September 29, 1999 (the "Reorganization"). Pursuant to the Reorganization, $105.0 million in 14% Senior Secured Notes were cancelled in exchange for cash, and/or new indebtedness, and/or new equity interests, certain indebtedness was reinstated, certain claims were settled, executory contracts and unexpired leases were assumed or rejected, certain prepetition claims were discharged, and the new members of the new Board of Directors of the Company were designated. The Company distributed to creditors approximately $21.6 million in restricted cash, $0.2 million in unrestricted cash, $15.0 million principal amount of its 9% Senior Notes due September 30, 2004 (the "Senior Notes"), equity securities consisting of 10 million shares of new common stock and 800,000 warrants, each of which is convertible into one share of new common stock at an exercise price of $7.40 per share.
In order to fund operations of the Company post Reorganization, the Company issued an aggregate of $3.0 million principal amount of 10% Senior Secured Notes due September 30, 2000 (the "Senior Secured Notes"). The Senior Secured Notes had quarterly interest payments and 3,000,000 detachable warrants, each of which is convertible into one share of new common stock at an exercise price of $0.05 per share. These warrants have been valued at $468,000 and have been amortized to interest expense in the accompanying statement of operations. The principal and interest were paid in full in May 2000.
In May, 2000, Ituran USA purchased the Miami and Orlando networks from the Company pursuant to an option to buy these networks, which was granted by the Company to Ituran USA as part of the Reorganization. The proceeds from the sale were approximately $4.0 million and were used to repay the Senior Secured Notes discussed above.
On February 23, 2001, the Company entered into a merger agreement with Trafficmaster plc ("Trafficmaster") pursuant to which Trafficmaster will acquire the Company for cash (including the assumption of debt). The merger has been approved by the Board of Directors and the holders of a majority of the Company's outstanding common stock. In addition, the holders of a majority of the Company's outstanding 9% Senior Secured Notes due September 2004 (the "Senior Notes") consented to the merger and waived certain rights such holders of Senior Notes may have pursuant to the Indenture, dated as of September 29, 1999 between the Company and HSBC Bank USA, as Trustee (the "Indenture") governing the terms of the Senior Notes, including the right to receive notice of a Change of Control (as defined in the Indenture) and to require the Company to repurchase their Senior Notes. The Senior Noteholders also waived events of noncompliance or default under the Indenture that would occur as a result of the Company's failure to satisfy the covenants set forth in Sections 4.14 and 5.01(iv) of the Indenture in connection with the merger. Such holders also consented to and approved the adoption of a supplemental indenture (the "Supplemental Indenture") by the Indenture Trustee amending certain provisions of the Indenture. The Company expects consummation of the merger to occur in April, 2001, subject to the satisfaction of certain closing conditions in the merger agreement, including regulatory approval of the transfer of control of the FCC licenses used in the Company's business. The Company has filed with the Securities and Exchange Commission (the "SEC") a Current Report on Form 8-K, dated March 6, 2001, in connection with this merger agreement.
The Company has incurred recurring losses and has an overall stockholders' deficit of $7,459,212 as of December 3, 2000. Also, the Company has long-term commitments that will require additional financing. There is no assurance that the Company can reduce expenses sufficiently enough or be able to raise additional capital if needed to meet its commitments. In particular, if for any reason the contemplated merger with Trafficmaster is not consummated, the Company will be required to seek additional financing to support its operations. There can be no assurance that such financing will be available on acceptable terms, if at all.
2. ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company services the commercial market for use in fleet management and the consumer market for individual vehicle tracking. The commercial systems include VLUs, computer hardware, and vehicle tracking software. For the year ended December 31, 1998, the nine months ended September 30, 1999 and the three months ended December 31, 1999, the Company recognized sales of commercial systems upon installation of the system. However, in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements," the Company changed its revenue recognition on sales of commercial systems to be recognized over the expected life of the customer relationship. This resulted in a cumulative effect of change in accounting principle of $4.8 million as of January 1, 2000, recorded in the fourth quarter of the year ended December 31, 2000. As a result, the Company restated its first three quarters of fiscal 2000 results. See Note 12 for a more complete presentation of the effect of SAB 101 on the quarterly financial results. The commercial service fee revenues are recognized monthly as the services are provided. The VLUs for the consumer market are sold along with monthly service contracts. Service revenues for the consumer market may be paid in advance and are recognized monthly as earned.
Cash and Cash Equivalents
The Company considers investments, which consist primarily of investments in commercial paper purchased with a maturity of three months or less to be cash equivalents. The carrying amounts approximate fair value due to the short maturities of these instruments.
Inventories
Inventories consist of VLUs, computer systems and other receiving and transmitting equipment held for sale. Inventories are stated at the lower of cost or market using the first-in, first-out method of valuation.
Inventories consist of the following at December 31:
2000 1999 ----------------- -----------------
Vehicle Location Units ("VLU") $3,417,073 $5,538,409
Messaging units 998,412 944,686
Computers and software 251,657 328,016
Other inventory 605,768 578,046 ----------------- -----------------
Total inventories 5,272,910 7,389,157
Less: Long-term inventories 1,144,800 2,977,650 ----------------- -----------------
Current portion $4,128,110 $4,411,507 ================= =================
In connection with a supply agreement with a vendor, the Company was required to purchase minimum quantities of VLU's. These purchase requirements resulted in inventory quantities which exceed the next year's anticipated demand. The Company does not have plans to alter its technology in its existing markets. Accordingly, quantities in excess of one year's anticipated demand have been classified as long-term inventory in the accompanying consolidated balance sheets.
Property and Equipment
The Company provides for depreciation expense using the straight-line method over five to seven years for all categories other than leasehold improvements, which are depreciated over the life of the lease. Property and equipment are recorded at cost. In accordance with Fresh Start Accounting, property and equipment were reflected at fair market values based on the equity valuation of the Company as of September 30, 1999.
December 31, 2000 December 31, 1999 ----------------- -----------------
System software and equipment $5,897,369 $5,803,006 Computer equipment 2,065,037 1,371,926 Furniture and fixtures 679,818 666,875 Automobiles 87,086 118,015
Leasehold improvements 76,881 101,005
Construction in progress 34,769 2,533 ----------------- ----------------- 8,840,960 8,063,360
Less: accumulated depreciaiton (1,544,401) (322,602) ----------------- ----------------- Net property and equipment $7,296,559 $7,740,758 ================= =================
Maintenance and repair expenses are charged to operations as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations.
The Company capitalizes certain costs incurred in the development of internal-use software. As a result, approximately $860,000 and $547,000 is capitalized as of December 31, 2000 and 1999, respectively. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software and (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use software project. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose.
Licenses and Other
Licenses represent a long-term intangible asset that allows FCC authorization to broadcast at designated frequencies. They are amortized using the straight-line method over 15 years. FCC license terms are for 5-year periods with unlimited options to renew for subsequent 5-year periods. These licenses were revalued as part of Fresh Start Accounting and account for approximately $0.3 million of licenses and other. The remaining $0.9 million relates to product development costs for FDEE and will be expensed in future periods through costs of equipment revenues.
The Company accounts for software development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, whereby costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs are capitalized. Technological feasibility is established upon completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility have been capitalized in other assets on the accompanying consolidated balance sheets and were approximately $894,000 and $95,000 at December 31, 2000 and 1999, respectively.
Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived assets based on expected undiscounted cash flows and recognizes impairments, if any.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee and non-employee directors compensation plan using the intrinsic value method and provides pro forma disclosures of net loss as if the fair value method had been applied in measuring compensation expense.
Income Taxes
Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities applying tax regulations existing at the end of the reporting period. The Company has fully reserved its deferred tax asset, principally consisting of net operating loss carry-forward generated as of December 31, 2000 and 1999.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 ("SFAS No. 137"), an amendment of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 137 is effective for fiscal years beginning after June 15, 2000. The Company believes the adoption of SFAS No. 137 will not have a material effect on the Company's consolidated results of operations or financial condition.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: the carrying amount reported on the balance sheet approximates the fair value for cash, short-term borrowings and current maturities of long-term obligations; and the fair value for the Company's fixed rate long-term obligations is estimated based on the current rates offered to the Company for obligations of the same remaining maturities. Based on the above, amounts reported on the consolidated balance sheet above for financial instruments approximate fair value.
Reclassifications
Certain amounts previously reported in the 1999 financial statements have been reclassified to conform with the 2000 presentation.
3. FRESH START ACCOUNTING:
As of September 30, 1999, the Company adopted Fresh Start Accounting in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Fresh Start Accounting resulted in material changes to the consolidated balance sheet,
including valuation of assets, intangible assets, and liabilities at fair market value and valuation of equity based upon the appraised reorganization value of the ongoing business.
The Company's reorganization equity value of $2.3 million was based on an equity valuation performed by an independent firm in accordance with standards established by the American Society of Appraisers and submitted to the court as part of the Plan of Reorganization. The equity valuation resulted in a lower value than the historical carrying value of the net assets. As such, the difference was applied as a reduction to the carrying values of long-term assets.
The following sets forth the results of Fresh Start Accounting:
Explanations of the above adjustments are as follows:
a) To remove the restricted cash of $21,644,345 that was paid to the 14% Senior Secured Note holders and an adjustment of $700,000 to accounts receivable for realizability due to the Reorganization.
b) To adjust the property and equipment to estimated fair market value and to decrease the identifiable assets by the reorganization value less the identifiable assets.
c) To decrease the intangible assets by the amount in excess of the reorganization value.
d) To reflect the cancellation of debtor-in-possession financing and issuance of new current obligations.
e) To adjust current liabilities to fair market value.
f) Remove old Senior Note, remove accrued interest on 14% Senior Secured Notes, remove cancelled debts and remove accrued interest on debtor-in-possession financing.
g) To reflect the issuance of the 9% Senior Notes.
h) To reflect the cancellation of the Series A, A-1 and B preferred stock.
i) To reflect cancellation of the Class A and B common stock and predecessor warrants.
j) To reflect the issuance of 10,000,000 shares of new common stock (par value $0.01) at estimated fair market value.
k) To record new warrants on $3,000,000 10% Senior Secured Notes.
l) To reflect the elimination of stockholders' equity of the Predecessor Company.
m) Remove positive accumulated earnings after posting gain from debt discharge and reorganization charges.
n) Post debt discharge and reorganization gain against retained deficit.
4. REORGANIZATION COSTS:
In accordance with SOP 90-7, expenses of the Predecessor Company resulting from the Reorganization are reported separately as reorganization items in the accompanying consolidated statement of operations, and are summarized below:
Nine Months Ended September 30, 1999 ------------------ Legal fees $1,245,029 Court fees 27,500 Printing fees 49,217 ------------------ $1,321,746 ==================
5. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following as of December 31:
2000 1999 ---- ----
The Company holds leases on automobile, furniture, telephone and frequency receiving and transmitting equipment for periods greater than one year.
The 9% Senior Notes have a deferred interest election provision which the Company elected in September 2000, which resulted in the 12% Deferred Interest Note. On March 15, 2001, the Company elected to convert the interest payable for the 9% Senior Notes into an additional 12% Deferred Interest Note for $900,000.
Principal maturities of long-term obligations as of December 31, 2000 follows:
Fiscal year ending
2001 $ 500,000 2002 322,647 2003 304,075 2004 17,250,000 ----------------
TOTAL: $ 18,376,722 ================
On January 9, 2001, the Company entered into a credit facility with Aspen Capital Partners, L.P., a holder of approximately 19% of the Company's outstanding common stock. The facility provides for a loan of up to $750,000 that is secured by the accounts receivable of the Company, accrues interest at a rate of prime plus 6% and is due on January 9, 2002.
6. STOCKHOLDERS' (DEFICIT) EQUITY:
Common Stock
The Company's authorized capital stock consists of 20,000,000 shares of common stock, par value $0.01 per share.
The holders of the common stock are entitled to one vote per share on all matters on which stockholders are entitled to vote. The holders of common stock are entitled to receive such dividends as may be declared by the Board of Directors.
Stock Options
The Company has reserved 1,346,071 shares of common stock for issuance pursuant to the exercise of nonqualified and incentive stock options under its 1999 Stock Option and Restricted Stock Purchase Plan (the "Plan"). The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized in 1999.
The following table represents the total number of option shares granted and forfeited under all plans for the twelve months ended December 31, 2001:
Outstanding at December 31, 1999 1,188,500 --------- Granted 30,000 Forfeited 139,500 --------- Outstanding at December 31, 2000 1,079,000 =========
The shares were issued with an excise price of $0.16, based on the equity valuation of the Company during the Reorganization.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued by the Financial Accounting Standards Board in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Adoption of SFAS No. 123 is optional, however, pro forma disclosures as if the Company had adopted the cost recognition method are required. Had compensation cost for stock options awarded under the Plan been determined consistent with SFAS No. 123, the effect to net income and earnings per share would have been immaterial.
The Black-Scholes option valuation model was used in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions such as expected option life and expected stock price volatility. Because the Company's employee stock-based compensation plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from those plans.
The fair value at date of grant for options granted during fiscal 2000 and 1999 were $.21 and $.20, respectively, and were estimated using the Black-Scholes option pricing model with the following assumptions:
Options Options Granted Granted in 1999 in 2000 ------- ------- Volatility 1.0% 1.0% Dividend yield 0.00% 0.00% Risk free interest rate 5.8% 6.53% Expected option life 3-5 years 3-5 years
7. EMPLOYEE BENEFIT PLANS:
The Company sponsors a defined-contribution profit sharing 401(k) plan (the "401(k) Plan") which covers all full-time employees. The benefits of the 401(k) Plan are based on years of service, the employee's compensation, employee contributions and earnings of plan assets. The Company's funding policy is to contribute an amount equal to $0.50 for every dollar contributed by the employees up to $1,000 annually. The Company contributed approximately $106,000 and $164,536 during 2000 and 1999, respectively.
8. INCOME TAXES:
Deferred income taxes are provided for temporary differences between the financial accounting basis and tax basis of assets and liabilities and temporary differences in reporting income and expense.
The Company's Net Operating Losses ("NOL's") and Alternative Minimum Tax ("AMT") NOL's total approximately $70 million and $63.8 million, respectively, for 2000. However, the utilization of these NOL's is limited under Internal Revenue Code Section 382. Pursuant to the Plan of Reorganization, the Company incurred a greater than fifty percent ownership change, thereby, subjecting the NOL's to the Section 382 limitations. The Company estimates that only $17.2 million of NOL's are available to be utilized to offset future taxable income due to the Section 382 limitations.
The components of net deferred tax assets (liabilities) are as follows (in thousands):
9. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases for office space and antenna sites for periods greater than one year. Minimum payments under such operating leases are as follows (in thousands):
Year Ending -----------
2001 $1,448
2002 847
2003 456
2004 313
2005 278
Thereafter 80 ------- Total $ 3,422 =======
Employment Agreements
The five most senior officers of the Company (the "Principal Officers") have employment agreements with the Company (the "Employment Agreements"). The Employment Agreements of four officers were initially for a period of two years commencing on September 29, 1999. One officer's employment commenced on January 17, 2000. On September 28, 2000, each of the officer's agreements was amended to extend the term to September 29, 2002.
The Employment Agreements all provide the same terms, other than salary and salary position, for each of the Principal Officers and provide for aggregate salaries of $872,000 per annum.
In addition to base compensation, the Employment Agreements also provide that each Principal Officer is eligible for a bonus, which shall be established by the Compensation Committee of the Board of Directors and shall be based on target performance objectives set by the Compensation Committee. The Employment Agreements also grant three of the officers options to purchase 75,000 shares of Common Stock of the Company and one officer options to purchase 30,000 shares of Common Stock of the Company, all pursuant to the Company's stock option plan, which is described below.
The Employment Agreements contain a provision stating that in the event that the employee is terminated other than for cause and/or in the event that all or a majority of the stock or the assets are sold to a purchaser, he shall be entitled to severance compensation equal to the lesser of (i) one year's base salary or (ii) the amount of the base salary for the remaining term of his employment agreement. The Employment Agreements also include a confidentiality provision that survives the employee's term of employment for three years. The Employment Agreements also contain a non-competition provision that remains in effect for a period of two years after the employee's termination.
10. RESTRUCTURING CHARGE:
In the fourth quarter of 1998, the Company recorded a restructuring charge of approximately $19.7 million. The charge was the result of management and organizational changes designed to improve profitability, increase customer focus, and decrease customer cancellations by becoming technologically neutral. The major components of the restructuring charge are as follows (in thousands):
Write-down RF network assets in unopened markets $16,562 VLU contract termination costs 1,373 Deinstallation costs 809 Revolver cancellation 752 Abandoned RF projects 172 ------- Total $19,668 =======
The Company no longer plans to open new markets using its proprietary RF networks and has written down assets and the costs of deinstalling those assets. The Company has terminated its agreement with its VLU supplier and was subject to a penalty and wrote-off VLU's that were not on the correct frequency. The Company cancelled its revolving credit agreement and wrote-off the deferred costs of the facility. The Company also expensed deferred costs of certain RF related projects. As of December 31, 2000, no costs remain accrued for the restructuring.
11. LEGAL PROCEEDINGS:
Prior to the acquisition of AirTouch Teletrac, PacTel Teletrac (predecessor to AirTouch Teletrac) brought an action before the United States Patent and Trademark Trial and Appeal Board against T.A.B. Systems ("TAB") opposing TAB's registration of the mark "Teletrak." The Trademark Trial and Appeal Board granted PacTel Teletrac's motion for summary judgment, but summary judgment was reversed by the U.S. Court of Appeals for the Federal Circuit. TAB then filed an infringement action against PacTel Teletrac, the Company and other parties in the U.S. District Court for the Central District of California. On December 22, 1997, the District Court granted summary judgment in favor of the Company. This decision was appealed by TAB to the U.S. Court of Appeals for the Ninth Circuit and such appeal was pending as of the date the Company filed its bankruptcy petition. The Bankruptcy Court issued an order permitting the Ninth Circuit appeal to proceed. Oral arguments were heard on April 10, 2000. On March 20, 2001 the Ninth Circuit Court of Appeals filed a decision affirming the District Court's grant of summary judgment. Under the terms of the Asset Purchase Agreement between AirTouch Teletrac and the Company, AirTouch Teletrac must pay the costs of any litigation relating to this matter and must indemnify the Company against any losses relating thereto. AirTouch Teletrac has notified the Company that it intends to continue to litigate this matter on its own behalf as well as on behalf of the Company, and that it will bear the cost of such litigation. There can be no assurance that AirTouch Teletrac will be successful in such litigation or that AirTouch Teletrac will honor its indemnification obligations (including any costs or losses relating to a change of name, if required as a result of the litigation).
The Company settled the litigation in Bankruptcy Court with Milgo Solutions f/k/a Raycal-Datacom, Inc. ("Milgo") and Newcourt Leasing, Inc. ("Newcourt") regarding certain telecommunications equipment that the Company believes it purchased from Milgo. Milgo and Newcourt asserted that the Company did not purchase this equipment, and alleged that the Company holds same pursuant to one or more leases. The settlement stipulation, which was approved by Bankruptcy Court on October 27, 2000 and became final and non-appealable on November 21, 2000, provides that the Company shall pay Milgo the sum of $1,000,000 over a three-year term, in monthly installments and without interest. As part of the settlement, complete mutual releases were delivered in favor of all parties.
The Company was a defendant in an American Arbitration Association ("AAA") proceeding brought by Star Trac, Inc. ("StarTrac") on or about February 23, 2000. StarTrac asserted that the Company breached the dealer agreement between the parties and sought actual and punitive damages. The Company denied the claims asserted by StarTrac initially on the basis that these claims were discharged by the bankruptcy proceeding and filed a motion to enforce the injunction created by the Plan of Reorganization. However, the Bankruptcy Court determined that the allegations set forth by StarTrac were too intertwined with both pre and post-effective date events to enforce the injunction. The parties arbitrated the matter and on January 26, 2001, the AAA rendered a decision in favor of Teletrac and denying StarTrac's claims.
The Company is from time to time subject to claims and suits arising in the ordinary course of business. The Company is not currently a party to any proceeding that, in management's opinion, is likely to have a material adverse effect on the Company's business.
12. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION:
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2000 and 1999, as restated to reflect the change in accounting principle effective January 1, 2000 discussed in Note 2, and a reconciliation of amounts previously reported to the amounts as restated (in thousands):
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors and the executive officers of the Company and their ages as of December 31, 2000, are as follows:
Name Age Position - ----- --- --------
Steven D. Scheiwe 40 Chief Executive Officer, General Counsel and Director Alan B. Howe 39 Chief Financial Officer, Vice- President of Finance and Corporate Development Steven M. Settelmayer 41 Vice-President of Sales and Marketing Charles A. Scheiwe 34 Controller Kenneth A. Wiesner 37 Vice-President of Customer Operations Paul M. Albert, Jr. 57 Director Mark E. Holliday 32 Director Neil Subin 36 Director R. Ted Weschler 39 Director
Steven D. Scheiwe, the Chief Executive Officer and General Counsel of Teletrac, served as General Counsel and Secretary of Teletrac from November 1995 through September 1999. He also served as General Counsel and Secretary of Premiere Page, Inc. ("Premiere Page"), a leading Southeast paging company, from its 1988 start up as well as the predecessor companies to Premiere Page. He was actively involved in raising capital, developing real estate, and managing human resources. Mr. Scheiwe received his B.A. from the University of Colorado in 1982 and a J.D. degree from Washburn University in 1986.
Alan B. Howe, the Chief Financial Officer, Vice-President of Finance and Corporate Development of Teletrac, joined Teletrac in November 1995 from Wireless Co., L.P. ("Wireless"), where he served as Director of Corporate Development. Wireless, a joint venture of Sprint, TCI, Comcast and Cox Cable, successfully acquired multiple personal communication system licenses throughout the United States. Prior to his affiliation with Wireless Co., Mr. Howe held various finance positions at Sprint in its Wireless Task Force and Corporate Treasury Group. Before joining Sprint, Mr. Howe was an assistant Vice-President at Manufacturers Hanover Trust. He received an M.B.A. from Indiana University, Graduate School of Business, and a B.A. from the University of Illinois.
Steven M. Settelmayer, Director of Sales and Marketing, has been with Teletrac since 1995. Prior to his current role, he served as Sales Manager, Branch Manager and Project Manager for the team that developed Teletrac's advanced integrated marketing and sales automation system. Prior to joining Teletrac, Mr. Settelmayer worked for Rockwell International from July 1995 through November 1995, most recently as Western Regional Sales Manager for the FleetMaster Group. Prior to this he had served four years as one of the top performing and innovative sales executives for Air Touch Teletrac. Mr.
Settelmayer received his BS in Industrial Marketing from San Francisco State University.
Charles A. Scheiwe has served as Controller of Teletrac since 1995, in which position he has been responsible for Teletrac's back office operations, including accounting, billing and information systems. Mr. Scheiwe, a certified public accountant, joined Teletrac in 1995 from Pentapage, where he served as its Controller. Prior to Pentapage, Mr. Scheiwe held various positions at Premiere Page from 1989 through 1995. Mr. Scheiwe received his B.A./B.S. from the University of Colorado in 1989.
Kenneth A. Wiesner, the Vice-President of Customer Operations, is responsible for product distribution, product maintenance and service implementation. He also manages field operations, national support and national help desk support. Prior to joining Teletrac, Mr. Wiesner served as Regional Vice-President of Premiere Page from 1995 through 1997, in which position his responsibilities included overall sales growth, proper maintenance of the Premiere System, and management of the Customer Services Department. Mr. Wiesner received his B.A./B.S. from the University of Missouri and an M.B.A. in Finance from Rockhurst University in Kansas City, Missouri.
Paul M. Albert, Jr. has served as a director of EarthWatch Incorporated since June 1999. Since December 1996, Mr. Albert has been retained as a consultant and/or employee of The Globecon Group, a financial services consulting company and also serves as an independent finance and capital market consultant to corporate clients. Prior to such time, from September 1996 to November 1996, Mr. Albert served as a consultant to Eccles Associates, Inc., a financial consulting company working primarily with multinational financial institutions in developing countries. From September 1983 to February 1996, he served as a Managing Director, Investment Banking of Prudential Securities, Inc., a financial services company. Mr. Albert received an A.B. degree from Princeton University in 1964 and an M.B.A. degree from Columbia University Graudate School of Business in 1970.
Mark E. Holliday founded and has been the Managing Director of Heartland Capital Corp. ("Heartland") since 1995. Heartland is a private hedge fund focusing primarily on financially distressed companies. Prior to forming Heartland, Mr. Holliday was affiliated with Option Opportunities and Continental Partners. Mr. Holliday is a graduate of Northwestern University.
Neil Subin is the Managing Director of Trendex Capital Management, a private hedge fund focusing primarily on distressed and bankrupt companies. Prior to forming Trendex Capital Management in 1991, Mr. Subin was affiliated with Oppenheimer & Co. Mr. Subin currently is a member of the Board of Directors of Nucentrix Broadband Networks, Inc., a provider of wireless broadband network and multichannel subscription television services, located in Plano, Texas. Mr. Subin received a Bachelor of Arts degree from Brooklyn College in 1985.
R. Ted Weschler is the Managing Partner of Peninsula Capital Advisors, LLC, a private investment management firm in Charlottesville, Virginia, a position he has held since January 1, 2000. Mr. Weschler previously served as an executive officer of Quad-C, Inc. ("Quad-C") since its formation in 1989. Quad-C is a Charlottesville, Virginia-based investment firm that primarily
engages in the acquisition of businesses in partnership with company management. Mr. Weschler is currently a director of Nucentrix Broadband Networks, Inc., a provider of wireless broadband network and multichannel subscription television services, located in Plano, Texas; WSFS Financial Corporation, a thrift holding company based in Wilmington, Delaware; Deerfield Healthcare Corporation, a provider of adult day care; Virginia National Bank, a national banking association and NWS Holdings, a national furniture retailer. Prior to the formation of Quad-C, Mr. Weschler was employed by W.R. Grace & Co., focusing on acquisition and divestiture activities associated with W.R. Grace's restaurant, retail, healthcare, natural resources and chemical operations. Mr. Weschler received a Bachelor of Science degree in Economics with concentrations in Finance and Accounting from The Wharton School of the University of Pennsylvania in 1983.
The executive officers of the Company are elected by the Board of Directors and serve at its discretion.
All directors are elected annually and hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. Directors do not receive an annual retainer or meeting attendance fees. However, the Company reimburses non-management directors for expenses incurred in attending meetings of the Board of Directors.
During 2000, the Board of Directors held ten meetings. The only standing committees of the Board of Directors are the Audit Committee and the Compensation Committee. During 2000, the members of the Audit Committee were Mark Holliday, Neil Subin and Paul Albert. The Audit Committee periodically consults with the Company's management and independent public accountants on financial matters, including the Company's internal financial controls and procedures. The Audit Committee held three meetings in 2000. During 2000, the members of the Compensation Committee were Steven Scheiwe, Neil Subin and Ted Weschler. The Compensation Committee approves compensation arrangements for the Company's executive officers and administers the Company's stock option plans. The Compensation Committee held two meetings in 2000.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information as to the Chief Executive Officer and the four other highest paid executive officers of the Company for the fiscal year ended December 31, 2000:
Employment Agreements
The five most senior officers of the Company (the "Principal Officers") have employment agreements with the Company (the "Employment Agreements"). The Employment Agreement of each of Messrs. S. Scheiwe, Howe, C. Scheiwe and Weisner was initially for a period of two years commencing on September 29, 1999. Mr. Settelmayer's employment commenced on January 17, 2000. On September 28, 2000, each of these agreements was amended to extend the term to September 29, 2002.
The Employment Agreements all provide the same terms, other than salary and position, for each of the Principal Officers. Steven D. Scheiwe's Employment Agreement defines his position as Chief Executive Officer, Vice President, General Counsel and Secretary of the Company and provides for a salary of $210,000 per annum. Alan B. Howe's Employment Agreement defines his position as Chief Financial Officer and Vice President of Finance and Corporate Development of the Company and provides for a salary of $174,000 per annum. Steven M. Settelmayer's Employment Agreement defines his position as Vice President of Sales and provides for a salary of $174,000 per annum. Charles A. Schiewe's employment agreement defines his position as Controller and provides for a salary of $140,400 per annum. Kenneth A. Weisner's Employment Agreement defines his position as Vice President of Customer Operations of the Company and provides for a salary of $174,000 per annum.
In addition to base compensation, the Employment Agreements also provide that each Principal Officer is eligible for a bonus, which shall be established by the Compensation Committee of the Board of Directors and shall be based on target performance objectives set by the Compensation Committee. The Employment Agreements also grant each of Messrs. S. Scheiwe, Howe, C. Scheiwe and Weisner options to purchase 75,000 shares of common stock of the Company and Mr. Settelmayer options to purchase 30,000 shares of common stock of the Company, all pursuant to the Company's stock option plan, which is described below.
The Employment Agreements contain a provision stating that in the event that the employee is terminated other than for cause and/or in the event that all or a majority of the stock or the assets are sold to a purchaser, he shall be entitled to severance compensation equal to the lesser of (i) one year's base salary or (ii) the amount of the base salary for the remaining term of his employment agreement. The Employment Agreements also include a confidentiality provision that survives the employee's term of employment for three years. The Employment Agreements also contain a non-competition provision that remains in effect for a period of two years after the employee's termination.
401(k) Plan
The Company maintains a 401(k) Savings Plan for its full-time employees that permits employee contributions up to 15% of annual compensation to the plan on a pre-tax basis. In addition, the Company may make a matching contribution of up to 50% of each participating employee's annual compensation, not to exceed $1,000, before taxes. The Company may also make additional discretionary contributions to the plan in any plan year up to the annual 401(k) plan contribution limits as defined in the Internal Revenue Code of 1986, as amended. The plan is administered by the Compensation Committee.
For the plan year ended December 31, 2000, the Company has accrued an aggregate of approximately $106,000 for matching contributions to the plan in 2000.
Stock Option Plan
In connection with the Reorganization, on September 29, 1999, the Company adopted the 1999 Stock Option and Restricted Stock Purchase Plan (the "Plan") in order to provide incentives to attract, retain and motivate highly competent persons as officers, non-employee directors and key employees of the Company by providing them with options to purchase new common stock of the Company. Additionally, the Plan is intended to assist in further aligning the interests of the Company's directors, officers, key employees and consultants to those of its stockholders. The Plan provides for the granting of "non-qualified stock options" and "incentive stock options" to acquire common stock of the Company and the granting of rights, or "awards" to purchase common stock of the Company subject to certain restrictions.
The Plan is administered by the Compensation Committee of the Board of Directors of the Company, which has the sole authority under the Plan to: (i) select the employees who will be granted options or awards to purchase common stock, (ii) designate whether options will be granted as incentive stock options or as non-qualified stock options; (iii) establish the number of shares of common stock that may be issued under each option or award; (iv) determine the time and the conditions subject to which options may be exercised in whole or in part and awards may be made; (v) determine the amount and the form of the consideration that may be used to purchase shares of common stock upon exercise of an option or award; (vi) impose restrictions and/or conditions with respect to shares of common stock acquired upon exercise of an option or award; (vii) determine the circumstances under which shares of common stock acquired upon exercise of any option or award may be subject to repurchase by the Company; (viii) determine the circumstances and conditions subject to which shares acquired upon exercise of an option or award may be sold or transferred; (ix)
establish a vesting provision for any option or award relating to the time or circumstance when an option or award may be exercised; (x) accelerate the time when outstanding options may be exercised; and (xi) establish any other terms, restrictions and/or conditions applicable to any option or award not inconsistent with the provisions of the Plan.
The purchase price of common stock upon exercise of incentive stock options must not be less than the fair market value of the common stock at the date of the grant or, in the case of incentive stock options issues to holders of more than 10% of the outstanding common stock, 110% of the fair market value. The maximum term of the incentive stock options is ten years, or five years in the case of 10% shareholders. The aggregate fair market value, on the date of the grant, of the common stock for which incentive stock options are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Options granted under the Plan are generally nontransferable by the optionee and must be exercised by the optionee during the period of the optionee's employment or service with the Company and within the optionee's lifetime or within a specified period following termination of employment or service or the optionee's death.
The Company is currently authorized to issue an aggregate 1,500,000 shares under the Plan and has reserved 1,346,071 shares for issuance pursuant to the exercise of nonqualified and incentive stock options.
The exercise price of the options is $0.16 and was determined based on the equity valuation of the Company during the Reorganization. As of December 31, 2000, options to purchase 1,246,750 shares were granted, and 167,750 forfeited, leaving options to purchase 1,079,000 shares outstanding.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the information regarding the beneficial ownership of the Company's common stock, par value $0.01 per share, as of December 31, 2000 by (i) certain stockholders or groups of related stockholders who, individually or as a group, are the beneficial owners of 5% or more of the common stock, (ii) the Chief Executive Officer of the Company, the four other most highly compensated executive officers of the Company and the directors of the Company and (iii) the executive officers and directors of the Company as a group.
SHARES BENEFICIALLY PERCENTAGE NAME AND ADDRESS OWNED (1) OWNERSHIP (2) - ----------------- --------------- -------------
Principal Stockholders:
Aspen Partners ................................. 2,602,544 (3) 24.4% 1114 Avenue of the Americas, 38th Floor New York, NY 10036
Capital Research ............................... 2,586,580 (3) 24.2% 135 South State College Blvd.
Brea, CA 92821
Lutheran Brotherhood ........................... 1,583,620 (4) 15.2% 625 Fourth Avenue South Minneapolis, MN 55415
Equitable Life Assurance Society ............... 1,003,112 (5) 9.6% 1345 Avenue of the Americas, 37th Floor New York, NY 10105
TD Securities (USA) Inc ........................ 848,787 8.5% 31 West 52nd Street New York, NY 10019-6101
Miller, Lloyd I Funds .......................... 820,841 (6) 8.0% 4550 Gordon Drive Naples, FL 34102
Bank of Montreal ............................... 633,449 (7) 6.2% 115 S. LaSalle Chicago, IL 60603
Paul M. Albert, Jr. ............................ 75,000 (8) *
Mark E. Holliday ............................... 25,000 (8) *
Neil Subin ..................................... 230,221 (9) 2.3%
Steven D. Scheiwe .............................. 75,000 (8) *
R. Ted Weschler ................................ 75,000 (8) *
Alan B. Howe ................................... 75,000 (8) *
Steve M. Settelmayer ........................... 75,000 (8) *
Charles A. Scheiwe ............................. 75,000 (8) *
Kenneth A. Weisner ............................. 75,000 (8) *
All Executive Officers and Directors as a Group (9 people) 780,221 (10) 7.4%
- -------------
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1 and 2) Financial Statements.
See Index to Consolidated Financial Statements herein.
(3) Exhibits:
Exhibit Number Description
2.1 The Company's Second Amended Plan of Reorganization, dated as of August 4, 1999 and effective as of September 29, 1999 (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on September 30, 1999).
3.1 Amended and Restated Certificate of Incorporation of the Company as filed with the Secretary of State of Delaware on September 29, 1999 (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on September 30, 1999).
3.2 By-laws of the Company adopted on September 29, 1999 (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.1 Form of Indenture between the Company and HSBC Bank USA with respect to the 9% Note due 2004 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.2 Form of 9% Note Due 2004 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.3 Form of Deferred Interest Note (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.4 Form of Senior Secured Note and Class A Warrant Purchase Agreement among the Company and the several Purchasers named in Schedule I thereto (incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.5 Form of 10% Senior Secured Note due 2000 (incorporated by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.6 Form of Class A Stock Purchase Warrant (incorporated by reference to Exhibit 4.6 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.7 Form of Security Agreement between the Company and the several purchasers on the signature page thereto (incorporated by reference to Exhibit 4.7 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.8 The Company and its Subsidiaries 1999 Stock Option and Restricted Stock Purchase Plan (incorporated by reference to Exhibit 4.9 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.9 Form of Class B Stock Purchase Warrant (incorporated by reference to Exhibit 4.10 to the Company's Current Report on Form 8-K filed on September 30, 1999).
4.10 Form of Supplemental Indenture between the Company. and HSBC Bank USA (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed March 6, 2001).
10.1 Mobile Data Terminal Purchase Agreement, dated as of February 8, 1996, between Micronet, Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K filed March 30, 2000).
*10.2 Amendment to Mobile Data Terminal Purchase Agreement, dated September 20, 1999, between Micronet, Inc. and the Company (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K filed March 30, 2000).
10.3 Employment Agreement, dated as of September 29, 1999, between Steven D. Scheiwe and the Company (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed March 30, 2000).
10.4 Employment Agreement, dated as of September 29, 1999, between Alan Howe and the Company (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K filed March 30, 2000).
10.5 Employment Agreement, dated as of September 29, 1999, between Charles Scheiwe and the Company (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K filed March 30, 2000).
10.6 Employment Agreement, dated as of September 29, 1999, between Kenneth Weisner and the Company (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K filed March 30, 2000).
10.7 Letter agreement, dated as of September 28, 2000, amending and extending the Employment Agreement between Steven D. Scheiwe and the Company.
10.8 Letter agreement, dated as of September 28, 2000, amending and extending the Employment Agreement between Alan Howe and the Company.
10.9 Letter agreement, dated as of September 28, 2000, amending and extending the Employment Agreement between Charles Scheiwe and the Company.
10.10 Letter agreement, dated as of September 28, 2000, amending and extending the Employment Agreement between Kenneth Weisner and the Company.
10.11 Employment Agreement, dated as of January 17, 2000, between Steven Settelmayer and the Company.
10.12 Letter agreement, dated as of September 28, 2000, amending and extending the Employment Agreement between Steven Settelmayer and the Company.
10.13 Agreement and Plan of Merger, dated as of February 23, 2001, by and among Trafficmaster plc, TT merger Sub, Inc., Teletrac, Inc. and Steven D. Scheiwe, as Stockholder Representative (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed March 6, 2001).
21.1 Subsidiaries of the Registrant.
- ----------- * Certain confidential portions have been omitted from this Exhibit and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2
(b) Reports on Form 8-K filed during the last quarter of the fiscal year ended December 31, 2000:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 22, 2001 TELETRAC, INC. By: /s/ STEVEN D. SCHEIWE --------------------------------- Steven D. Scheiwe Chief Executive Officer, General Counsel and Director
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.
Signature Title Date - --------------- ----- ----
/s/ ALAN B. HOWE Chief Financial Officer, Vice- March 22, 2001 - ----------------------- President of Finance and Alan B. Howe Corporate Development
/s/ CHARLES SCHEIWE Controller March 22, 2001 - ----------------------- Charles Scheiwe
/s/ KENNETH A. WIESNER Vice-President of Customer March 22, 2001 - ----------------------- Relations Kenneth A. Wiesner
/s/ PAUL M. ALBERT, JR. Director March 22, 2001 - ----------------------- Paul M. Albert, Jr.
/s/ MARK E. HOLLIDAY Director March 22, 2001 - ----------------------- Mark E. Holliday
/s/ NEIL SUBIN Director March 22, 2001 - ----------------------- Neil Subin
/s/ R. TED WESCHLER Director March 22, 2001 - ----------------------- R. Ted Weschler