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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2003
COMMISSION FILE NUMBER 0-26140
MINORPLANET SYSTEMS USA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 51-0352879
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1155 KAS DRIVE, SUITE 100
RICHARDSON, TEXAS 75081
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code) (972) 301-2000
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of each Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
The aggregate market value of the common equity held by non-affiliates
of the Registrant as of November 25, 2003 was $2,697,772.*
The number of shares outstanding of Registrant's Common Stock was 48,349,161 as
of November 25, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be filed with
the Securities and Exchange Commission within 120 days after August 31, 2003
(the "Proxy Statement") are incorporated by reference into Part III of the Form
10-K.
- ------------------
*Excludes the Common Stock held by executive officers, directors and by
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
November 25, 2003. Exclusion of such shares should not be construed to indicate
that any such person possesses the power, direct or indirect, to direct or cause
the direction of the management or policies of the Registrant or that such
person is controlled by or under common control with the Registrant.
Minorplanet Systems USA, Inc.
FORM 10-K
For the Fiscal Year Ended August 31, 2003
INDEX
Page
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PART I
ITEM 1. BUSINESS................................................................ 1
ITEM 2. PROPERTIES.............................................................. 20
ITEM 3. LEGAL PROCEEDINGS....................................................... 20
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES....................... 22
ITEM 6. SELECTED FINANCIAL DATA................................................. 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............. 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................................ 39
ITEM 9A. CONTROLS AND PROCEDURES................................................. 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................... 39
ITEM 11. EXECUTIVE COMPENSATION.................................................. 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................... 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................................. 41
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PART I
ITEM 1. BUSINESS
GENERAL
The following discussion is qualified in its entirety by the more
detailed information and financial statements (including the notes thereto)
appearing elsewhere in this Annual Report on Form 10-K. Stockholders should
carefully consider the information presented under "Risk Factors" below.
HISTORICAL BACKGROUND
Minorplanet Systems USA, Inc., a Delaware Corporation (the "Company"),
develops and implements mobile communications solutions for service vehicle
fleets, long-haul truck fleets, and other mobile-asset fleets, including
integrated voice, data and position location services. The Company markets and
sells the Vehicle Management Information (TM) ("VMI") product, licensed from
Minorplanet Limited, in the automatic vehicle location ("AVL") market in the
United States. VMI is designed to maximize the productivity of a mobile
workforce as well as reduce vehicle mileage and fuel-related expenses.
The Company's initial product offering, the Series 5000, was developed
for, and sold to, companies that operate in the long-haul trucking market. The
Company provides mobile communications services to the long-haul trucking market
through a wireless enhanced services network, which utilizes patented technology
developed and owned by the Company, to integrate various transmission,
long-distance, switching, tracking and other services provided through contracts
with certain telecommunications companies and cellular carriers. The Company's
wireless enhanced services network covers 98% of the available analog cellular
service areas in the United States, and 100% of the available A-side coverage in
Canada. A-side coverage refers to a type of license awarded by the FCC to
provide cellular service in a specific area. Call processing and related
functions for the Company's enhanced wireless network are provided through the
Company's Network Services Center (the "NSC"). The Company holds 42 United
States and 16 foreign patents that cover certain key features of its network
that are used in locating and communicating with vehicles using the existing
cellular infrastructure.
On December 31, 1999, the Company's wholly owned subsidiary,
HighwayMaster Corporation, a Delaware corporation, merged with and into the
Company. Following the consummation of the merger, the Company was the sole
surviving and operating entity. The merger was undertaken primarily to eliminate
an unnecessary corporate layer, and thus, reduce administrative expenses
associated with maintaining the separate existence of HighwayMaster Corporation.
When the merger became effective, all assets, obligations and liabilities of
HighwayMaster Corporation became the assets, obligations and liabilities of the
Company by operation of law. In connection with the merger, the Company obtained
consents to the assignment of third party contracts from HighwayMaster
Corporation to the Company, and other consents deemed necessary or advisable by
the Company.
Effective April 10, 2000, the Company amended its Certificate of
Incorporation to change its corporate name to @Track Communications, Inc.
On June 5, 2001, the Company effected a 1-for-5 reverse stock split
that was approved by the stockholders at the annual meeting.
On June 21, 2001, the Company consummated the stock issuance
transactions approved by the Company's stockholders at the annual meeting on
June 4, 2001. As a result of the closing of transactions contemplated by that
certain Stock Purchase and Exchange Agreement by and among the Company,
Minorplanet Systems PLC, a United Kingdom public limited company ("Minorplanet
UK"), and Mackay Shields LLC, dated February 14, 2001 (the "Purchase
Agreement"), the Company issued 30,000,000 shares of its common stock (post
reverse stock split) in a change of control transaction to Minorplanet UK, which
was the majority stockholder of the Company prior to the October 6, 2003 stock
transfer to Erin Mills Investment Corporation discussed below. In exchange for
this stock issuance, Minorplanet UK paid the Company $10,000,000 in cash and
transferred to the Company all of the shares of its wholly-owned subsidiary,
Minorplanet Limited and its wholly-owned subsidiary, Mislex (302) Limited, now
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known as, Minorplanet Systems USA Limited, which holds an exclusive,
royalty-free, 99-year license to market, sell and operate Minorplanet UK's
vehicle management information technology in the United States, Canada and
Mexico (the "License Rights"). Upon completion of the stock issuance
transactions, and prior to the October 6, 2003 transfer to Erin Mills,
Minorplanet UK beneficially owned approximately 62% of the outstanding shares of
the Company's common stock, which is the sole voting security of the Company.
On March 15, 2002, the Company completed the sale to Aether Systems,
Inc. ("Aether") of certain assets and licenses related to the Company's
long-haul trucking and asset-tracking businesses pursuant to the Asset Purchase
Agreement effective as of March 15, 2002, by and between the Company and Aether
(the "Sale"). Under the terms of the Asset Purchase Agreement, the Company sold
to Aether assets and related license rights to its Platinum Service software
solution, 20/20V(TM), and TrackWare(R) asset and trailer-tracking products. In
addition, the Company and Aether agreed to form a strategic relationship with
respect to the Company's long-haul customer products, pursuant to which the
Company assigned to Aether all service revenues generated post-closing from its
HighwayMaster Series 5000 ("Series 5000") customer base. Aether, in turn, agreed
to reimburse the Company for the network and airtime service costs related to
providing the Series 5000 service. The two companies also agreed to work jointly
in the adaptation of the Minorplanet VMI technology for the potential
distribution of VMI by Aether to the long-haul-trucking market.
As consideration for the Sale, the Company received $3 million in cash,
of which $0.8 million was held in escrow as of August 31, 2002 and later
released to the Company during the fiscal year ended August 31, 2003 after
certain conditions were met by the Company. The Company also received a note for
$12 million payable, at the option of Aether, in either cash or convertible
preferred stock in three equal installments of $4 million on April 14, May 14,
and June 14, 2002. The consideration for the Sale was determined through
arms-length negotiation between the Company and Aether. Aether later paid cash
in lieu of preferred stock for each of the three $4 million installments. As of
August 31, 2002, all three $4 million cash installments had been received by the
Company from Aether. See the Form 8-K filed by the Company on March 27, 2002
which is incorporated by reference herein and Note 5 to the Consolidated
Financial Statements attached hereto.
Effective July 22, 2002, the Company amended its Certificate of
Incorporation to change its corporate name to Minorplanet Systems USA, Inc.
On October 6, 2003, Minorplanet UK transferred 42.1 percent
(approximately 20.4 million shares) of the Company's outstanding common shares
beneficially owned by Minorplanet UK to Erin Mills Investment Corporation ("Erin
Mills"), ending Minorplanet UK's majority ownership of the Company. Following
the share transfer, Erin Mills beneficially owned 46 percent (approximately 22.2
million shares) of the Company's outstanding common stock, while Minorplanet UK
retains 19.9 percent (approximately 9.6 million shares) of the Company's
outstanding common stock.
In connection with the Minorplanet UK share transfer to Erin Mills, the
Company also obtained an option to repurchase from Erin Mills up to 19.4 million
shares of the Company's common stock at a price of $0.01 for every 1,000 shares,
pursuant to that certain Stock Repurchase Option Agreement between the Company
and Erin Mills dated August 15, 2003. Gerry Quinn, the president of Erin Mills,
currently serves on the Company's board of directors.
In addition, concurrently with these transactions, the Company reached
the following agreements with Minorplanet UK:
- Minorplanet UK irrevocably waived certain approval rights, including
the right to appoint members to the Company's board of directors, as
are currently provided for in that certain Stock Purchase and Exchange
Agreement dated February 14, 2001 and the Company's bylaws;
- Minorplanet UK waived $1.8 million of accrued executive consulting fees
that it had previously billed to the Company.
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- The exclusive License and Distribution Agreement, which grants to the
Company's United Kingdom-based subsidiary a 99-year, royalty-free,
exclusive right and license to market, sell and commercially exploit
the VMI technology in the United States, Canada and Mexico, was amended
to grant Minorplanet UK, or its designee, the right to market and sell
the VMI technology, on a non-exclusive basis, in the Northeast region
of the United States. The Company retained the right to market and sell
the VMI technology under the Minorplanet name and logo in this
Northeast region.
- Minorplanet UK obtained anti-dilution rights from the Company, under
which it has the right to subscribe for and to purchase at the same
price per share as the offering or private sale, that number of shares
necessary to maintain the lesser of (i) the percentage holdings of the
Company's stock on the date of subscription or (ii) 19.9 percent of the
Company's issued and outstanding common stock.
See the Form 8-K's filed by the Company on August 27, 2003 and October 14, 2003
respectively, which contain additional information.
PRODUCTS AND SERVICES
The Company's products and services can be classified into two major
operating segments: Minorplanet Vehicle Management Information (VMI(TM)) and NSC
Systems. NSC Systems includes three separate product and service categories:
truck fleet mobile communications, SBC service vehicles and mobile asset
tracking. The Company began marketing the VMI product during the third calendar
quarter of 2001. Approximately 89% and 11% of the Company's total revenues were
derived from the NSC Systems and VMI operating segments, respectively, during
the year ended August 31, 2003. See operating segment financial information in
Note 20 of the Consolidated Financial Statements attached hereto.
MINORPLANET VEHICLE MANAGEMENT INFORMATION (VMI(TM))
On June 21, 2001, the Company acquired an exclusive, royalty-free,
99-year license to market, sell and operate Minorplanet UK's VMI technology in
the United States, Canada and Mexico.
VMI is designed to maximize the productivity of a mobile workforce as
well as reduce vehicle mileage and fuel related expenses. The VMI technology
consists of: (i) a data control unit ("DCU") that continually monitors and
records a vehicle's position, speed and distance traveled; (ii) a command and
control center ("CCC") which receives and stores in a database information
downloaded from the DCU's; and (iii) software used for communication, messaging
and detailed reporting. VMI uses satellite-based Global Positioning System
("GPS") location technology to acquire a vehicle location on a minute-by-minute
basis, and a global system for mobile communications ("GSM") based cellular
network to transmit data between the DCU's and the CCC. GSM is a digital
technology developed in Europe and has been adapted for North America. GSM is
the most widely used digital standard in the world. The VMI application is
targeted to small and medium sized fleets based in major metropolitan areas
which the Company believes represents a total U.S. market of approximately 20
million vehicles.
VMI provides minute-by-minute visibility into the activities of a
mobile workforce via an extensive reporting system that provides real-time and
exception-based reporting. Real-time reports provide information regarding a
vehicle's location, idling, stop time, speed and distance traveled. With
real-time reporting, the customer can determine when an employee starts or
finishes work, job site arrival times and site visit locations. In addition,
exception reports allow the customer to set various parameters within which
vehicles must operate, and the system will report exceptions including speeding,
extended stops, unscheduled stops, route deviations, visits to barred locations
and excessive idling.
The VMI system also enables text messages to be sent from the CCC to
any mobile phone. Employees can also send messages using free text and
preformatted forms on their mobile phones.
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NSC SYSTEMS
Truck Fleet Mobile Communications
The Company's initial product offering, the Series 5000, was developed
for and, prior to the Sale to Aether on March 15, 2002, was marketed and sold by
the Company to customers that operate mobile fleets in the long-haul trucking
market. This product continues to provide long-haul trucking customers with a
total communications solution that combines voice and data communications
services with satellite-based GPS location technology. The Company also provides
engine monitoring, scanning, mapping and dispatch management applications. The
Series 5000 solutions enable trucking companies of all sizes to maximize their
efficiency as they manage trucks that are often dispersed across the country.
Prior to the Sale to Aether on March 15, 2002, the Series 5000 mobile
communications and information system was fully integrated with the AS/400,
UNIX, and Windows(R) fleet management software solutions from 18 key industry
suppliers. Integration partners included Creative Systems, Innovative
Transportation Systems (ITS), Maddocks Systems' TruckMate(R) for Windows,
ProMiles, TMW Truck Systems and Tom McLeod LoadMaster(TM) Software. Full system
integration provided an end-to-end mobile communications and information system
solution by combining the on-road communications, data collection and tracking
capabilities of the Series 5000 with vendor dispatch software, enabling fleet
operators to improve customer service, manage their dispatch operations more
effectively and, ultimately, increase revenue miles per truck.
For the year ended August 31, 2003, the eight months ended August 31,
2002, and the years ended December 31, 2001 and 2000, truck fleet mobile
communications product and service revenue accounted for approximately 54%, 63%,
41%, and 53% of the Company's total revenue, respectively. The Company completed
the Sale to Aether of certain assets and licenses related to the Company's
long-haul trucking and asset-tracking businesses on March 15, 2002. Under the
terms of the March 15, 2002 Sale, the Company and Aether agreed to form a
strategic relationship with respect to the Company's long-haul customer
products, pursuant to which the Company assigned to Aether all service revenues
generated post-closing from its Series 5000 customer base. Aether, in turn,
agreed to reimburse the Company for the network and airtime service costs
related to providing the Series 5000 service. See the Form 8-K filed by the
Company on March 27, 2002 for more information on the Sale which is incorporated
by reference herein and Note 5 to the Consolidated Financial Statements attached
hereto.
SBC Service Vehicles
In response to a request from the member companies of SBC
Communications, Inc. (the "SBC Companies") for a product which would maximize
the productivity of their service vehicle fleets, the Company developed and sold
to the SBC Companies the Series 5005S mobile unit. The Series 5005S mobile unit
is based on the Series 5000 product offering with customized proprietary
hardware and software, which uses the Company's NSC for data transmission. The
Series 5005S mobile unit was further modified to utilize the GSM/digital network
for transmission for certain SBC Companies.
In addition to fleet monitoring and voice and data communications
capabilities, the Series 5005S mobile units feature alarm-monitoring
functionality. This product feature provides the driver the ability to summon
emergency assistance by pressing a panic alarm button on a key fob when away
from, but in close proximity to, the service vehicle. The panic alarm signal is
intelligently routed to a third party alarm-monitoring center under contract
with the Company that confirms the validity of the alarm with the technician and
then notifies the appropriate safety agency. The GPS data is also transmitted to
the monitoring center to pinpoint the location of the vehicle for the most
efficient dispatch of the safety personnel.
For the year ended August 31, 2003, the eight months ended August 31,
2002, and the years ended December 31, 2001 and 2000, SBC service vehicle
product and service revenue accounted for approximately 33%, 34%, 58%, and 47%
of the Company's total revenue, respectively. As of August 31, 2003, the SBC
Companies have purchased and installed approximately 40,000 Series 5005S mobile
units, of which approximately 34,000 remained installed and in-service. However,
new shipments of the Series 5005S mobile units are expected to be minimal during
the Company's next fiscal year. The Series 5005S mobile units were not part of
the March 15, 2002 Sale to Aether.
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Mobile Asset Tracking - TrackWare(R) & 20/20V(TM)
The Company entered the mobile-asset-tracking market in October 1999
with the introduction of its trailer-tracking product, TrackWare. The TrackWare
product combines the technologies of GPS and control channel messaging to report
location details and specific trailer events, such as connection and
non-connection to a tractor, loaded/unloaded and door open/close status of a
trailer. The TrackWare Remote Unit ("TrackWare Unit") comes equipped with a GPS
satellite receiver, a Cellemetry(R)-enabled cellular transceiver,
microprocessor, antenna, battery and cables. The term Cellemetry-enabled
receiver refers to the analog wireless transceiver utilized by the Company's
TrackWare product which utilizes the Cellemetry network owned and operated by
Cellemetry LLC to send short data messages over the overhead control channel of
the existing analog wireless infrastructure. The Company's analog wireless
transceiver in its TrackWare unit utilizes the Cellemetry network via a Service
Agreement with Cellemetry LLC which includes a license to use the Cellemetry
technology. Cellemetry is a federally registered trademark of Cellemetry LLC.
In March of 2001, the Company announced the launch of 20/20V, a low
cost tracking solution designed for small fleets in the transportation
marketplace. 20/20V uses the Cellemetry data network to communicate location
information at predetermined intervals. Users of the 20/20V application may
access location-based information via the Internet.
The March 15, 2002 Sale of certain assets to Aether included assets
related to the 20/20V and TrackWare product lines. Accordingly, the Company no
longer distributes and sells these product lines as part of its business. See
the Form 8-K filed by the Company on March 27, 2002 which is incorporated by
reference herein and Note 5 to the Consolidated Financial Statements attached
hereto for more information on this transaction.
COMPETITION
MINORPLANET VEHICLE MANAGEMENT INFORMATION (VMI(TM))
The Company believes that its primary competitors in the automatic vehicle
location market include:
- - @ROAD - @Road currently sells an Internet-based solution using the CDPD or
General Packet Radio Services networks of AT&T Wireless, Nextel, Cingular
Wireless, Verizon, and other carriers. The Company believes that @Road
currently has approximately 110,000 units in service.
- - TELETRAC - Teletrac currently sells an Internet-based solution and offers
service on GPRS, CDPD, and Cellemetry wireless networks as well as
Teletrac's own proprietary TDOA networks. The Company believes that
Teletrac, the United States arm of Trafficmaster, currently has more than
60,000 units in service.
- - OTHER REGIONAL COMPETITORS - There are numerous smaller regional companies
vying for a local presence.
A third party study of the automatic vehicle location market conducted
by C.J. Driscoll & Associates noted that this market consists of over 20 million
vehicles and is currently less than 5% penetrated. The Company believes that
this market is highly fragmented. Based on a market size of 20 million vehicles,
Teletrac, @Road, and the Company would each have less than one percent of the
market share.
NSC SYSTEMS
Truck mobile communications
Qualcomm, Inc. ranks first in the truck mobile communications market
with greater than 50% of the market share. Prior to the Sale to Aether, the
Company believed that the Company and Aether ranked second and third in the
marketplace with a market share of approximately 8% and 5%, respectively. Both
Qualcomm and Aether have significantly greater financial and other resources
than the Company.
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- - QUALCOMM - As Qualcomm launched its mobile communications product several
years before the Company, Qualcomm was able to capture greater than 50% of
the market for truck mobile communications. Qualcomm continues to
aggressively target and market to the truck mobile communications
marketplace.
- - AETHER - Motient has been in the marketplace for several years using
satellite and Ardis networks as a foundation for its products. Motient's
MobileMax and Mobile Messaging Service were sold to Aether Systems in 2000.
Aether is aggressively developing and implementing wireless solutions
targeting the transportation and logistics industries. On March 15, 2002,
Aether also purchased certain assets from the Company relating to the
Company's long haul trucking and asset tracking business.
- - TERION - Terion's products and services utilize both digital cellular and FM
radio transmission to send data. Terion products utilize 8-12 foot-high
frequency towers distributed throughout the United States to transmit return
data. In January 2002, Terion filed for protection under Chapter 11 of the
U.S. Bankruptcy Code and announced the discontinuance of its in-cab mobile
communications product.
SBC Service Vehicles
The Company believes that it currently provides products and services
to one of the largest single customers in the service vehicle category with the
SBC Companies. At August 31, 2003, the Company had approximately 34,000 units in
service with the SBC Companies. The initial three-year term of the service
contract with the SBC Companies expired on December 31, 2001. The Company
subsequently renewed its service contract with the SBC Companies for two
consecutive one-year terms which will expire on January 30, 2004.
The Company believes that its primary competitors in the service vehicle market
include:
- - @ROAD - @Road currently sells an Internet-based solution using the CDPD or
General Packet Radio Services networks of AT&T Wireless, Nextel, Cingular
Wireless, Verizon, and other carriers. The Company believes that @Road
currently has approximately 110,000 units in service.
- - TELETRAC - Teletrac currently sells an Internet-based solution and offers
service on GPRS, CDPD, and Cellemetry wireless networks as well as
Teletrac's own proprietary TDOA networks. The Company believes that
Teletrac, the United States arm of Trafficmaster, currently has more than
60,000 units in service.
- - OTHER REGIONAL COMPETITORS - There are numerous smaller regional companies
vying for a local presence.
A third party study of the automatic vehicle location market conducted
by C.J. Driscoll & Associates noted that this market consists of over 20 million
vehicles and is currently less than 5% penetrated. The Company believes that
this market is highly fragmented. Based on a market size of 20 million vehicles,
Teletrac, @Road, and the Company would each have less than one percent of the
market share.
Mobile Asset Tracking
Prior to the Sale to Aether, the Company believed that its primary
competitors in this market included:
- - QUALCOMM, INC. - Qualcomm announced commercial launch into this market in
January 2001. Qualcomm tested an untethered tracking product with several of
its current customers during 2001. In the third quarter of 2001, Qualcomm
discontinued testing of their untethered tracking product, and pulled the
product from the market.
- - TERION -In January of 2000, Terion introduced a mobile unit which utilizes
the existing analog network to send data over a voice channel. In January
2002, Terion filed for protection under Chapter 11 of the U.S. Bankruptcy
Code and planned to restructure its business to focus exclusively on its
mobile asset tracking product.
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EMPLOYEES
At August 31, 2003, the Company had 204 employees. The Company's
employees are not represented by a collective bargaining agreement.
INFRASTRUCTURE AND OPERATIONS
Networks. The Company uses wireless data and/or voice technologies,
combined with GPS satellite technology, for all of its products. The Company's
strategy is to select and use wireless networks that provide the "best fit" for
each product and application or specific customer need.
The March 15, 2002 Sale to Aether of certain assets and related license
rights included the Company's Platinum Service software solution, 20/20V(TM),
and TrackWare(R) asset and trailer-tracking products. In addition, the Company
and Aether agreed to form a strategic relationship with respect to the Company's
long-haul customer products, pursuant to which the Company assigned to Aether
all service revenues generated post-closing from its Series 5000 customer base.
Aether, in turn, agreed to reimburse the Company for the network and airtime
service costs related to providing the Series 5000 service. The Sale did not
include the Company's NSC or Series 5000 system technology.
Series 5000 Mobile Units. These units use circuit-switched analog
cellular technology for transmitting location, as well as other information, to
the Company's NSC. The NSC then routes the data to the appropriate destination,
which may be a customer's dispatcher workstation for data or any other telephone
for voice communication. In addition, these units take advantage of the
Company's patented Advanced Cellular Transmission Technology ("ACTT"). ACTT is a
one-way data communication technology from the mobile unit back to the NSC. ACTT
takes advantage of unused fields in the cellular control channel to provide very
short data bursts suitable for providing status updates of vehicle location
information. The primary benefit of ACTT is reduced cost to the customer and the
Company of utilizing the overhead control channel for data messaging. The
Company believes that analog cellular technology provides the best ubiquitous
coverage for over-the-road vehicles that travel across the United States. As
digital technologies further penetrate existing cellular infrastructure, digital
cellular networks may become a viable alternative for over-the-road vehicles.
Series 5005S Mobile Units. For service vehicles, as part of the
Company's "best fit" strategy, these units also may be integrated with a GSM
telephone utilizing the 1900 MHz frequency, where required. Global system for
mobile communications ("GSM") is a digital technology developed in Europe and
has been adapted for North America. GSM is the most widely used digital standard
in the world. Since service vehicles primarily operate in urban areas, these
digital networks provide appropriate coverage.
VMI. The VMI technology uses a GSM digital network. Currently, there
are three major carriers providing GSM coverage in the United States: T-Mobile,
Cingular and AT&T Wireless, all of which provide coverage in the major
metropolitan areas in the United States. These carriers have announced joint
arrangements to continue to expand GSM coverage in the United States, including
interoperability among the three carriers. The Company believes the coverage,
bandwidth and price of the GSM network make it best suited for the VMI
technology.
TrackWare and 20/20V Product. The TrackWare Remote Unit and 20/20V unit
use proprietary overhead control channel technology to provide short two-way
data messages on a national basis. This network is provided by a third party
provider, Cellemetry LLC, and the Company's NSC which has been adapted to
integrate with the Cellemetry network.
Network Services Center. The Company's NSC provides switching services
for each Series 5000 and 5005S mobile unit (hereinafter collectively referred to
as "Mobile Unit" or "Mobile Units"), connecting them to the
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nationwide network of cellular providers, the customer's dispatcher workstation
and the nationwide landline telephone network. The NSC is capable of processing,
storing and transmitting data to and from the Mobile Units and provides a
gateway for the Cellemetry network to enable transmission of data to customers.
Additionally, voice communications are routed from each Series 5000 Mobile Unit
through the Company's nationwide enhanced-services network to the NSC, which
automatically completes the call through the public telephone network to the end
user. Voice communications from the customer's dispatcher or personal calls for
the driver are routed through a toll-free telephone number to the NSC, which
completes the call through the appropriate wireless cellular system for the
region in which the truck is operating. Data packets from the host or a Mobile
Unit are stored in the NSC, and then transmitted in cost-effective batches.
Time-critical information, as configured by the customer, is immediately
transmitted to the receiving party. The NSC records data from each transmission,
generates a call record and processes the information into customer billing
records.
Call Routing. Each time a Mobile Unit travels into a new cellular
metropolitan statistical area ("MSA") or rural statistical area ("RSA"), it
automatically registers with the cellular carrier under contract with the
Company. The cellular carrier routes the message to Telecommunications Services
Incorporated, formerly GTE-TSI ("TSI"). Pursuant to a contract with the Company,
TSI provides the NSC with call delivery information utilized by the NSC to
deliver calls to the Mobile Unit as it travels through a new MSA or RSA.
Navigation Technology. GPS technology allows customers to identify the
location of any mobile asset at any time via satellite. GPS is operated by the
United States government, and broadcasts navigational information from a network
of dedicated satellites orbiting the earth. GPS navigational receivers interpret
signals from multiple satellites to determine the receiver's geographical
coordinates, elevation and velocity. GPS navigational signals can be received
worldwide, without adaptation of the receiver unit to foreign standards. The
Company believes that the network of GPS navigational satellites will be
maintained by the United States Defense Department in an operational status for
the foreseeable future. Although stand-alone GPS units are available for
purchase by any consumer at relatively low cost, the Company believes that raw
navigational information is of little use in tracking assets unless the GPS
receiver is integrated with a computer system, such as the Company's mobile
communication units, to record routes traveled relative to mapped roadways or to
transmit position reports to a central dispatcher.
Wireless Infrastructure. The Federal Communications Commission ("FCC")
has provided for a two-operator duopoly in each analog cellular market. Only two
licenses were awarded to provide analog cellular service in any specific
cellular MSA or RSA. One of the two licenses in each market was initially
awarded to a company or group that was affiliated with a local landline
telephone carrier in the market (the "Wireline" or "B-Side" license) and the
other license in each market was initially awarded to a company, individual or
group not affiliated with any landline telephone carrier (the "Non-Wireline" or
"A-Side" license). However, once a license was awarded, the license holder could
sell the license to another qualified entity, including the sale of "B-Side"
licenses to groups not affiliated with the landline telephone carrier, and the
sale of "A-Side" licenses to a landline telephone carrier. The Company's system
utilizes both the A-Side and B-Side carriers in its coverage areas, and has
agreements with both A-Side and B-Side carriers in approximately 75% of its
markets, allowing system redundancy and greater flexibility. In addition to
cellular licenses, the FCC has issued up to six licenses in each market for the
1.9 megahertz ("PCS") spectrum. PCS is generally available in certain
metropolitan markets and surrounding areas.
A number of cellular carriers are in the process of upgrading from
existing analog cellular systems to enhanced systems utilizing digital
technology. However, the Company believes that the large number of analog
telephones already owned by cellular subscribers will ensure that cellular
telephone operators continue to offer services to existing analog users
concurrently with digital users over an extended phase-in period that exceeds
the expected useful life of the current analog Mobile Units.
8
STRATEGIC SERVICE ALLIANCES OF THE COMPANY
Wireless Carriers. The Company has established a network for the United
States that offers mobile communication coverage in 98% of the available analog
wireless service areas in the United States (which covers approximately 95% of
the United States interstate highway system) and 100% of the A-Side coverage in
Canada. The Company has agreements in place with 66 wireless carriers, including
all the regional Bell operating companies, AT&T Wireless Inc. and Rogers Cantel,
Inc., in 706 markets in the United States and Canada. The Company has entered
into contracts with both A-side and B-side carriers in approximately 75% of
United States wireless coverage regions. In most cases, terms of contracts
between the Company and each of its cellular carriers are generally for one
year, with automatic one-year successive renewal terms unless either party
elects to terminate the contract upon 180-day notice prior to the end of the
renewal term. The Company has executed contracts with certain wireless carriers
that provide for an initial three-year term with automatic one-year successive
renewal terms unless either party elects to terminate the contract upon 180-day
notice prior to the end of the renewal term. The Company's agreements with
wireless carriers provide that the Company will not be required to reimburse
carriers for fraudulent usage unless the carriers have fully implemented the
Company's anti-fraud protocol. Although the Company's anti-fraud protocol has
been effective in preventing fraud to date, there can be no assurance that this
will be the case in the future.
TSI. TSI provides clearinghouse functions to the cellular industry,
creating the data link between a foreign network and a traveling vehicle's home
cellular service area, performing credit checking functions and facilitating
roamer incoming call delivery functions. The Company's contract with TSI covers
certain functions that are critical to the Company's ability to instantly
deliver calls nationwide for its NSC network subscribers in connection with the
Company's agreement with Aether. It covers an initial term that began on May 3,
1999 and ends on April 15, 2005. On July 8, 2003, the Company and Aether
extended the transition period during which the Company provides NSC network
services to its network subscribers until January 30, 2005. Upon expiration of
such agreement, the Company may discontinue its purchase of TSI services as it
will no longer provide NSC network services to such network subscribers. As per
the terms of the TSI agreement, subsequent to October 31, 2004, the Company may
terminate the TSI agreement for convenience by providing TSI with 60 days prior
written notice of termination and paying to TSI a termination fee in the amount
of $15,000. See the "Risk Factor" on page 16 relating to the TSI agreements.
Tekelec. Tekelec, formerly IEX Corp., designed, tested and constructed
the NSC. The NSC constitutes a critical link in providing certain enhanced call
processing and data management services and is necessary for the Company to
receive, store and route voice and data transmissions to and from its NSC
Systems customers. The Company currently has a three-year software maintenance
and support agreement with Tekelec that expires on December 31, 2003. In
September of 2003, the Company hired a former employee of Tekelec pursuant to a
one-year employment agreement to provide service and support for the NSC. This
former employee of Tekelec was primarily responsible for servicing the Company
under the three-year maintenance agreement while at Tekelec. The Company
currently believes that this arrangement will be sufficient for the maintenance
and support of the NSC.
T-Mobile. The Company markets and sells T-Mobile GSM data services to
its VMI customers as an agent of T-Mobile pursuant to a National Premier Dealer
Agreement entered into with T-Mobile USA, Inc. on January 1, 2003 so that such
VMI customers have a direct contractual relationship for the purchase of GSM
data services with T-Mobile. The agreement has an initial term of two years and
automatically terminates unless the Company provides written notice of its
intent to renew to T-Mobile at least 60 days prior to the end the term.
The Company also resells T-Mobile GSM data services to the Company's
VMI customers pursuant to a reseller agreement with T-Mobile. The reseller
agreement has an initial term of one year which continues on a month-to-month
basis following the expiration of such initial term unless terminated by either
party on written notice. The initial term of the reseller agreement has expired
and the reseller agreement is currently on a month-to-month term. See Risk
Factor on page 20 regarding risks associated with this relationship.
Cingular Wireless LLC. On March 30, 1999, the Company and Southwestern
Bell Mobile Systems Inc., now known as Cingular Wireless LLC ("Cingular"),
executed an Administrative Carrier Agreement with an initial term of three years
that automatically renews for five additional consecutive one-year terms under
which Cingular provides to the Company clearinghouse services and cellular
service. See the "Risk Factor" on page 17 regarding risks associated with this
relationship. On July 8, 2002, the Company and Cingular executed an Authorized
Agency Agreement and First Amendment thereto whereby the Company will act as an
agent of Cingular to market and sell Cingular GSM data services to the Company's
VMI system customers so that such customers will have a direct contractual
relationship for the purchase of GSM data services from Cingular.
Alarm Monitoring Services. On May 25, 2000, the Company and Criticom
International Corporation ("CIC") entered into a Monitoring Services Agreement
with an initial term of three years that automatically renews for successive
two-year terms pursuant to which CIC provides certain panic alarm monitoring
services for the Company in connection with the Company's obligations to the SBC
Companies. See the "Risk Factor" on page 16 relating to the CIC relationship.
9
Key Suppliers. The Company does not manufacture or assemble its
products. The Company purchases its VMI products from manufacturers selected by
Minorplanet UK under the terms of the Exclusive Distribution and License
Agreement entered into on June 21, 2001. The Company also subcontracts for the
manufacture of its other products from various suppliers.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company has obtained 42 United States patents and 16 foreign
patents and has applied for, and has pending, additional United States and
foreign patents. In general, the Company's existing patents claim inventions
involving the innovative and novel utilization of the existing wireless
infrastructure as well as the particular operational features and functionality
of certain of the Company's historical products and services. The Company's
software is also protected under patents, federal and state trade secret law and
federal copyright law. See the "Risk Factor" on page 19 relating to risks
associated with the Company's intellectual property.
RESEARCH AND DEVELOPMENT
The Company currently relies on Minorplanet UK for research and
development for new products and services. Pursuant to the Exclusive License and
Distribution Agreement with Minorplanet UK, the Company pays $1 million per year
to Minorplanet UK for research and development. See the "Risk Factor" on page 18
regarding research and development reliance.
REGULATION
The Company's products and services are subject to various regulations
promulgated by the FCC that apply to the wireless communications industry
generally. The Company's Mobile Units, DCU's, CCC's and its TrackWare(R) Units
must meet certain radio frequency emission standards so as to avoid interfering
with other devices. The Company relies on the manufacturer of the cellular
transceiver components of the Mobile Units, DCU's, CCC's and the TrackWare(R)
Units to carry out appropriate testing and regulatory compliance procedures
regarding the radio emissions of the cellular transceiver component.
The FCC also controls several other aspects of the wireless industry
that affect the Company's ability to provide services. The FCC controls the
amount of radio spectrum available to cellular carriers, which could eventually
limit growth in cellular carrier capacity.
The FCC also regulates telecommunications service providers or common
carriers, requiring approval for entry into the marketplace and regulating the
service rates offered through tariff filing requirements. Additionally, most
states regulate rates and market entry for telecommunications service providers.
In order to encourage growth within the information services segment of the
telecommunications industry, the FCC issued an order creating the enhanced
services exemption from regulation. In general, providers of enhanced services
are not subject to regulation by the FCC or the various state regulatory
agencies. Services qualify as enhanced services if data is transmitted between
the provider and customer so that the customer is able to interact with or
manipulate the data regardless of whether the services provided include
telecommunications transmission components, such as wireless or long distance
services. The Company believes that the services it provides to its customers in
connection with the Mobile Units, DCU's, CCC's and TrackWare(TM) Units qualify
as enhanced services and are exempt from both FCC and state regulation.
Alternatively, the Company believes that its services may be characterized as a
private network not offered to the public at large but offered to specific group
of users, which management believes should also serve to exempt the Company from
FCC and state regulation.
The wireless telecommunications industry currently is experiencing
significant regulatory changes that may require a re-examination of laws and
regulations applicable to the Company's operations. The Company's services may
be characterized by the FCC as Commercial Mobile Radio Services ("CMRS"). If the
Company's services are classified as CMRS, the Company may be subject to FCC
regulation as a telecommunications service provider. However, the FCC has
decided to forbear from most regulation of the CMRS marketplace, including
regulation of the rates and terms of market entry for interstate services
offered by CMRS providers. In addition, the U.S. Congress has preempted state
regulation of CMRS market entry and rates. FCC decisions thus far have enhanced
the
10
development of CMRS, including requiring local telephone companies to offer
interconnection and access to their networks to CMRS providers and to establish
reciprocal compensation arrangements with CMRS providers for the transportation
and termination of calls at prices that are cost-based and reasonable.
If any services offered by the Company are determined to be
telecommunications services by the FCC, the revenues generated from these
services would be subject to the required contribution to the federal universal
service fund. At this time, revenues generated from the Company's services that
meet the definition of enhanced services are not subject to FCC-mandated
universal service fund contribution. However, based on a conservative
interpretation, the Company has historically reported certain revenues generated
by the personal calling plan service offered by the Company as a
telecommunications service for purposes of federal universal service fund
contribution filings. Various states have instituted their own universal service
fund mechanisms which may or may not follow the federal statutes in exempting
revenues generated by enhanced services. The Company cannot predict the impact
of any future requirements to contribute to state and federal universal service
mechanisms. See the "Risk Factor" on page 17 regarding these risks.
RECAPITALIZATION TRANSACTION
On June 21, 2001, the Company consummated the stock issuance
transactions approved by the Company's stockholders at the annual meeting on
June 4, 2001. As a result of the closing of transactions contemplated by the
Purchase Agreement, the Company issued 30,000,000 shares of the its common stock
in a change of control transaction to Minorplanet UK. In exchange for this stock
issuance, Minorplanet UK paid the Company $10,000,000 in cash and transferred to
the Company all of the shares of its wholly-owned subsidiary, Minorplanet
Limited, which holds an exclusive, royalty-free, 99-year license to market, sell
and operate Minorplanet UK's vehicle management information technology in the
United States, Canada and Mexico. As of August 31, 2003, Minorplanet UK
beneficially owned approximately 62% of the outstanding shares of the Company's
common stock which is the sole voting security of the Company.
The Company also issued 12,670,497 shares of its common stock (valued
at $1.60 per share) to holders of its Senior Notes due 2005 ("Senior Notes"), in
exchange for the cancellation of Senior Notes with an aggregate principal amount
of $80,022,000 (the "Exchange Offer"). On August 31, 2003, the total principal
amount of Senior Notes that remains outstanding is $14,333,000. The foregoing
stock issuance transactions are hereinafter collectively referred to as the
"Recapitalization." As a result of the Recapitalization, the Company
significantly reduced its indebtedness and related interest expense. In
addition, the Company acquired the VMI technology and commenced distribution of
Minorplanet UK's VMI product in the United States.
Pursuant to the Purchase Agreement, the Company appointed two
additional directors to the Company's board of directors that were designated by
Minorplanet UK: Messrs. Robert Kelly and Andrew Tillman. Mr. Tillman was
subsequently replaced with Michael Abrahams as one of the two Minorplanet UK
Designees. The Purchase Agreement provided that Minorplanet UK had the right to
designate two of the seven directors in the future (the "Investor Directors"),
and to maintain proportionate representation on the board of directors and its
committees. Given Minorplanet UK's then current ownership, however, it had the
right to elect all director nominees if it decided to do so. In addition, the
Purchase Agreement also provided that so long as Minorplanet UK had the right to
designate Minorplanet UK Directors (i.e., it owns at least 5% of the outstanding
common stock of the Company), none of the following actions could be taken
unless approved by all of the Minorplanet UK Directors:
- any capital expenditure by the Company that is not contemplated in any
current annual budget which exceeds $200,000;
- the hiring and firing of any Company officer or senior executive
reporting to the chief executive officer who has an annual salary of
$130,000 or more, or entering into employment agreements with these
individuals or amendments to existing agreements;
- the direct or indirect redemption, purchase or making of any payments
with respect to stock appreciation rights and similar types of stock
plans;
11
- the sale, lease or transfer of any assets of the Company representing
5% or more of the Company's consolidated assets, or the merger,
consolidation, recapitalization, reclassification or other changes to
the capital stock of the Company; except as required under law, the
taking or instituting of bankruptcy or similar proceedings;
- the issuance, purchase, acquisition or redemption of any capital stock
or any notes or debt convertible into equity;
- the acquisition of another entity;
- the entering into any agreement or contract which commits the Company
to pay more than $1,000,000 or with a term in excess of 12 months and
requiring payments in the aggregate which exceed $200,000;
- the amendment of the Company's Certificate of Incorporation or Bylaws
that would adversely affect holders of the Company's common stock or
Minorplanet UK's rights under the Purchase Agreement;
- the exiting of, or entering into a different line of business;
- the incurrence of any indebtedness or liability or the making of any
loan except in the ordinary course of business;
- the placing of any lien on the Company's assets or properties; or
- the adoption or implementation of any anti-takeover provision that
would adversely affect Minorplanet UK.
On October 6, 2003, Minorplanet UK transferred 42.1 percent
(approximately 20.4 million shares) of the Company's outstanding common shares
beneficially owned by Minorplanet UK to Erin Mills, ending Minorplanet UK's
majority ownership of the Company. Following the share transfer, Erin Mills
beneficially owned 46 percent (approximately 22.2 million shares) of the
Company's outstanding common stock, while Minorplanet UK retains 19.9 percent
(approximately 9.6 million shares) of the Company's outstanding common stock.
In connection with the Minorplanet UK share transfer to Erin Mills, the
Company also obtained an option to repurchase from Erin Mills up to 19.4 million
shares of the Company's common stock at a price of $0.01 for every 1,000 shares,
pursuant to that certain Stock Repurchase Option Agreement between the Company
and Erin Mills dated August 15, 2003. Gerry Quinn, the president of Erin Mills,
currently serves on the Company's board of directors.
In addition, concurrently with these transactions, the Company also
reached the following agreements with Minorplanet UK:
- Minorplanet UK irrevocably waived the approval rights granted to the
Minorplanet UK Directors set forth above, including the right to
appoint members to the Company's board of directors, as are currently
provided for in that certain Stock Purchase and Exchange Agreement
dated February 14, 2001 and the Company's bylaws;
- Minorplanet UK waived $1.8 million of accrued executive consulting fees
that it had previously billed to the Company.
- The exclusive License and Distribution Agreement, which grants to the
Company's United Kingdom-based subsidiary a 99-year, royalty-free,
exclusive right and license to market, sell and commercially exploit
the VMI technology in the United States, Canada and Mexico, was amended
to grant Minorplanet UK, or its designee, the right to market and sell
the VMI technology, on a non-exclusive basis, in the Northeast region
of the United States. The Company retained the right to market and sell
the VMI technology under the Minorplanet name and logo in this
Northeast region.
12
- Minorplanet UK obtained anti-dilution rights from the Company, under
which it has the right to subscribe for and to purchase at the same
price per share as the offering or private sale, that number of shares
necessary to maintain the lesser of (i) the percentage holdings of the
Company's stock on the date of subscription or (ii) 19.9 percent of the
Company's issued and outstanding common stock.
See the Form 8-K's filed by the Company on August 27, 2003 and October 14,
2003 respectively, which contain additional information.
RISK FACTORS
Forward-Looking Statements.
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, that are based upon management's current beliefs and projections, as
well as assumptions made by and information currently available to management.
In some cases, you can identify these forward-looking statements by words such
as, "anticipate," "believe," "estimate," "expect," "may," "could," "intend,"
"predict," "potential" and similar expressions that are intended to identify
forward-looking statements. Any statement or conclusion concerning future events
is a forward-looking statement, and should not be interpreted as a promise or
conclusion that the event will occur. The Company's actual operating results or
the actual occurrence of any such event could differ materially from those
projected in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in this risk factor
section, as well as those discussed elsewhere in this Form 10-K or in the
documents incorporated herein by reference.
The Company has operated at a significant loss in recent periods and it is
anticipated that such losses may continue in the near future.
The Company has incurred significant operating losses since inception,
and has limited financial resources to support itself until such time that it is
able to generate positive cash flow from operations. Net cash used in operating
activities during the year ended August 31, 2003, the eight months ended August
31, 2002, and the years ended December 31, 2001 and 2000 was $13.1 million,
$10.2 million, $12.4 million, and $7.5 million, respectively. For the year ended
August 31, 2003, cash used for operating activities was primarily attributable
to the ongoing VMI operations. For the eight months ended August 31, 2002, cash
used for operating activities was primarily attributable to the hiring and
staffing of personnel for the expansion of VMI sales to open market locations in
Dallas, Houston, Atlanta and Los Angeles.
The Company has been unable to achieve the projected sales volumes
under its current sales model. Management is actively working to revise the
current sales model to achieve the volumes necessary for positive cash flow and
eventual profitability. However, in order to continue as a going concern and
ultimately achieve a profitable level of operations, the Company believes it
will need a minimum of $5 million in additional capital resources to sustain its
normal operations for the next twelve months. To that end, the Company is
actively seeking additional funding. The Company may obtain the funds in the
form of stock issuance, debt securities, or a combination of the two, or
otherwise. The sale of additional equity or convertible debt securities would
result in additional dilution to existing stockholders. If additional funds are
raised through the issuance of debt securities, holders of these securities
could obtain certain rights and preferences senior to holders of the Company's
common stock, as well as restrict the Company's operations. There can be no
assurance that additional financing will be available or available on
commercially acceptable terms. Should the Company not continue as a going
concern, it may be unable to realize its assets and discharge its liabilities in
the normal course of business. The financial statements do not include any
adjustments relating to the recoverability of the recorded assets or the amounts
and classification of the liabilities that might be necessary should the Company
be unable to continue as a going concern.
The Company believes the VMI license rights will provide the Company
significant marketing potential of the licensed VMI technology, enhancing future
results of operations and reducing the need for capital resources to develop
similar technology. Also, as a result of the Sale to Aether of certain assets
and licenses related to the Company's long-haul trucking and asset-tracking
businesses, Aether is contractually obligated to continue to reimburse the
Company for the network and airtime service costs related to providing service
for Series 5000 units
13
as long as such units remain active on the Company's network. On July 8, 2003,
the Company and Aether extended the transition period during which such Series
5000 units remain active on the Company's network until January 30, 2005.
As of August 31, 2003, the Company had approximately 34,000 units in
service with the SBC Companies, under the Service Vehicle Contract, which
accounted for approximately 62% of the Company's installed base. In February
2003, the Company signed a one-year extension of this contract to provide mobile
location and communication services to SBC service vehicles through January 30,
2004.
Critical success factors in management's plans to achieve positive cash
flow from operations include:
- Ability to raise additional capital resources.
- Significant market acceptance of the VMI product line in the U.S.
Management believes the market for products such as VMI represents a
total potential of approximately 20 million vehicles. Currently,
management believes this market is less than five percent penetrated
with asset tracking and vehicle information management solutions.
- Maintain and expand the Company's direct sales channel. New
salespersons will require training and time to become productive. In
addition, there is significant competition for qualified salespersons,
and the Company must continue to offer attractive compensation plans
and opportunities to attract qualified salespersons.
- Maintain and expand indirect distribution channels.
- Securing and maintaining adequate third party leasing sources for
customers who purchase VMI.
There can be no assurances that any of these success factors will be
realized or maintained.
The Company has until January 6, 2004 to achieve compliance with the Nasdaq
SmallCap continued listing requirement, and failure to achieve compliance and
retain its Nasdaq SmallCap listing may adversely impact the liquidity of the
Company's common stock and the ability of the Company to raise additional
capital or continue operations.
On October 8, 2003, the Company received notice from the Nasdaq Staff
stating that the Company is not in compliance with Marketplace Rule 4310(c)(4),
which requires the closing bid price of the Company's common stock to be at
least $1.00 per share. As Nasdaq has previously granted two 180-day extensions,
the Company was given 90 additional calendar days, or until January 6, 2004, to
demonstrate 10 consecutive trading days whereby the minimum bid price for the
Company's common stock closes at $1.00 per share or more. If the Company fails
to demonstrate compliance with this minimum bid price requirement for 10
consecutive trading days on or before January 6, 2004, the Nasdaq Staff will
issue a written notification to the Company delisting the Company's common stock
from the Nasdaq SmallCap Market. At such time, the Company may appeal the Nasdaq
Staff's determination with the Nasdaq Listing Qualifications Panel, which stays
the effectiveness of the delisting pending a hearing with the Nasdaq Listing
Qualifications Panel. There can be no assurance that the Nasdaq Listing
Qualifications Panel will reverse the Staff's decision to delist the Company's
securities. The Company intends to effect a reverse stock split which it
anticipates will bring the Company into compliance with the minimum bid closing
price requirement.
On October 9, 2003, the Company's board of directors approved the
amendment of Article IV of the Company's certificate of incorporation, and
additional actions, to effect a one-for-five reverse stock split of the
Company's outstanding common stock. The amendment will reduce the number of
issued and outstanding shares of the Company's common stock by approximately
4/5, with each 5 shares of common stock currently outstanding, referred to as
"old common stock," becoming 1 share of "new common stock." Further, each option
to purchase 5 shares of the Company's common stock under the Company's 1994
stock option plan will become the option to purchase 1 share of its common
stock.
Effective November 7, 2003, Mackay Shields LLC ("Mackay") and Erin
Mills Investment Corporation ("Erin Mills"), stockholders collectively holding
more than 50% of the Company's outstanding common stock, executed a stockholder
consent approving the one-for-five reverse stock split. As of November 7, 2003,
Mackay owned 10,699,794 shares and Erin Mills owned 22,196,182 shares of the
Company's common stock, respectively,
14
which is approximately 22% and 46%, respectively, of the total number of
outstanding shares of the Company's common stock, its sole voting security.
Under Delaware law, any action that is required to be taken, or that may be
taken, at any annual or special meeting of stockholders of a Delaware
corporation may be taken, without a meeting, without prior notice and without a
vote, if a written consent, setting forth the action taken, is signed by the
holder or holders of the outstanding voting securities having not less than the
minimum number of votes necessary to authorize such action.
The reverse split will be effected approximately 21 days after the
mailing of an Information Statement on Schedule 14C to stockholders of record as
of November 7, 2003. On November 12, 2003, the Company filed a Definitive
Information Statement on Schedule 14C with the SEC, and mailed the Information
Statement to stockholders of record.
If the closing bid price for the Company's common stock remains below
$1.00 per share and it is no longer listed on the Nasdaq SmallCap Market, the
Company's common stock may be deemed to be penny stock. If the Company's common
stock is considered penny stock, it will be subject to rules that impose
additional sales practices on broker-dealers who sell the Company's securities.
For example, broker-dealers selling penny stock must make a special suitability
determination for the purchaser and must have received the purchaser's written
consent to the transaction prior to sale. Also, a disclosure schedule must be
prepared before any transaction involving a penny stock can be completed,
including required disclosure concerning:
- sales commissions payable to both the broker-dealer and the
registered representative; and
- current quotations for the securities.
Monthly statements are also required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stock. Because of these additional obligations, some
brokers may not effect transactions in penny stocks. This could have a material
and adverse effect on the market for the Company's common stock, and the ability
of stockholders to sell shares.
The principal effect of the reverse stock split will be to decrease the
number of shares of common stock that will be outstanding from approximately
48,349,161 to approximately 9,669,832 shares. In addition, the board of
directors will take appropriate action to adjust proportionately the number of
shares of common stock issuable upon exercise of outstanding options under the
1994 stock option plan to reflect the reverse stock split. All of the Company's
outstanding warrants will be automatically adjusted to reflect the reverse stock
split. As a result, following the effective date, the number of shares of common
stock issuable upon the exercise of outstanding options under the 1994 stock
option plan will be reduced from approximately 1,627,424 shares to approximately
325,484 shares.
The Company's board of directors believes that the reverse stock split
is likely to result in the bid price of its common stock rising above the $1.00
minimum bid price requirement, thereby permitting the continued listing of its
common stock on the Nasdaq SmallCap Market. However, there can be no assurance
that the market price of the Company's common stock will rise in proportion to
the reduction in the number of outstanding shares resulting from the reverse
stock split or that the market price of the Company's common stock will rise or
remain above $1.00 after the one-for-five reverse stock split. Failure to
maintain the Nasdaq SmallCap Market listing may adversely affect the Company's
ability to raise additional capital to continue operations which would have a
material adverse affect on the Company's business, financial condition and
results of operations.
A natural disaster, terrorist attack or similar event could significantly hinder
the delivery of the Company's services to its customers due to the lack of an
effective remote back-up communications system.
Currently, the Company's disaster recovery systems focus on internal
redundancy and diverse routing around and within the NSC operated by the
Company. The Company does not currently have access to a remote back-up complex
that would enable it to continue to provide mobile communications services to
customers in the event of a natural disaster or other occurrence that rendered
the NSC unavailable. Accordingly, the Company's business is subject to the risk
that such a disaster, terrorist attack or other occurrence could hinder or
prevent the
15
Company from continuing to provide services to some or all of its customers. See
"Business -- Infrastructure and Operations."
If the Company's sole provider of alarm-monitoring services for SBC becomes
unable to provide such services in support of the Series 5005S units in service
with SBC, the Company's cost to obtain this service could increase
substantially, or the Company may be forced to expend funds to develop this
service itself.
The Company relies on CIC as its sole provide of certain alarm
monitoring services to the SBC Companies as required by the SBC Contract. The
contract has an initial term of three years and automatically renews for
successive two-year terms unless terminated by either party on 120 days notice.
While the Company has no reason to believe that this contract will not be
renewed by CIC, it is possible that CIC could fail to renew the contract in an
attempt to renegotiate higher rates to be paid by the Company. If the Company is
unable to renew its Monitoring Services Agreement with CIC or renew it with
rates similar to the current rates paid by the Company under the contract, the
Company may be required to develop its own alarm monitoring center, including
obtaining the required licenses, or execute an agreement with another alarm
monitoring services provider, which agreement may not be available on
commercially acceptable terms. As the Company has limited resources, it may be
unable to develop its own monitoring services center or successfully continue
with an alternate provider, either of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company relies on wireless service agreements to deliver its vehicle
tracking services that have short terms, and the failure of the Company to renew
or replace these agreements as they expire would increase the cost to the
Company of delivering its services.
The Company utilizes the existing wireless telephone infrastructure,
with certain enhancements, as the wireless segment of the Company's network. In
most cases, terms of contracts between the Company and each of its wireless
carriers are for one year, with automatic one-year successive renewal terms,
unless either party elects to terminate the contract upon 180 days notice prior
to the end of the renewal term. The Company has executed contracts with certain
wireless carriers that provide for an initial three-year term with automatic
one-year successive renewal terms unless either party elects to terminate the
contract upon 180-day notice prior to the end of the renewal term. In order to
continue to provide mobile communications services to its customers, the Company
must continue to renew its agreements with individual wireless carriers. A
failure on the part of the Company to renew or replace its contracts with
wireless carriers at rates similar to those charged to its competitors could
have a material adverse effect on its business, financial condition and results
of operations.
As the Company relies on TSI to provide essential clearinghouse services for its
NSC network subscribers, an extensive failure in the TSI Network or
unavailability of the TSI network could force the Company to make costly design
changes to the Company's network.
TSI provides clearinghouse functions to the cellular industry, creating
the data link between a foreign network and a traveling vehicle's home cellular
service area, performing credit checking functions and facilitating roamer
incoming call delivery functions. The Company's contract with TSI covers certain
functions that are critical to the Company's ability to instantly deliver calls
nationwide for the Company's NSC network subscribers in connection with the
Company's agreement with Aether. It covers an initial term that began on May 3,
1999 and ends on April 15, 2005. On July 8, 2003, the Company and Aether
extended the transition period during which the Company provides NSC network
services to its network subscribers until January 30, 2005. Upon expiration of
such agreement, the Company may discontinue its purchase of TSI services as it
will no longer provide NSC network services to such network subscribers. As per
the terms of the TSI agreement, subsequent to October 31, 2004, the Company may
terminate the TSI agreement for convenience by providing TSI with 60 days prior
written notice of termination and paying to TSI a termination fee in the amount
of $15,000. A failure in the TSI network prior to January 30, 2005 could have a
material adverse effect on the Company's business, financial condition and
results of operations.
16
As the Company relies on Cingular for various cellular clearinghouse services,
its inability to renew its agreement with Cingular could significantly increase
the Company's cost of obtaining this necessary service.
On March 30, 1999, the Company and Southwestern Bell Mobile Systems,
Inc., now known as Cingular Wireless, executed an Administrative Carrier
Agreement whereby Cingular provides clearinghouse services to the Company,
including the direct payment of the Company's cellular service providers for
cellular airtime through the cellular clearinghouse process. The Agreement
provides for an initial term of three years that automatically renews for five
additional consecutive one-year terms. While the Company has no reason to
believe that Cingular will not renew the Agreement, it is possible that Cingular
will attempt to renegotiate higher rates for the services which it provides at
the time of renewal. If the Company is unable to negotiate commercial reasonable
rate increases, the Company's service margins could be reduced substantially. If
the Company is unable to renew because it cannot reach agreement on commercially
reasonable rate increases, the failure to renew this contract and continue
existing arrangements for payment to the Company's cellular service providers
could require the Company to post security deposits or provide other financial
assurances, which could have a material adverse effect on its business,
financial condition or results of operations. Cingular also provides the
Company's customers with analog cellular service as per a Cellular Service
Agreement originally entered into on June 7, 1993 and last amended on May 7,
1999 for a three-year term with automatic renewal for successive one-year terms
unless either party provides a minimum of 90 days written notice of intent to
terminate prior to the expiration any renewal period. See "Business -- Strategic
Services Alliances of the Company."
If the Company's services are deemed to be telecommunication services under FCC
and other state regulations, the Company would have to begin contributing to
state and federal universal service contribution funds.
If any services offered by the Company are determined to be
telecommunications services by the FCC, the revenues generated from these
services would be subject to the required contribution to the federal universal
service fund. At this time, revenues generated from the Company's services that
meet the definition of enhanced services are not subject to FCC mandated
universal service fund contribution. However, based on a conservative
interpretation, the Company has historically reported certain revenues generated
by the personal calling plan service offered by the Company as a
telecommunications service for purposes of federal universal service fund
contribution filings. Various states have instituted their own universal service
fund mechanisms that may or may not follow the federal statutes in exempting
revenues generated by enhanced services. The Company cannot predict the impact
of any requirement to contribute to state and federal universal service
mechanisms.
Long-distance providers are regulated by the FCC and states. The
Company currently believes that such regulations do not apply to the Company
based on the Company's determination that it is an enhanced service provider.
The reclassification of the Company's services as long distance services could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company depends heavily on its key personnel, and the loss of one or more of
these individuals could have a material adverse effect on the Company.
The Company is dependent on the efforts of:
- - W. Michael Smith, Executive Vice President, Chief Operating Officer and
Treasurer;
- - J. Raymond Bilbao, Senior Vice President, General Counsel and Secretary;
- - a group of employees with technical knowledge regarding the Company's
systems.
The Company has one-year term employment agreements with Messrs. Smith
and Bilbao. The initial one-year term of these employment agreements expired on
June 21, 2002, but have been renewed automatically on a month-to-month basis.
The loss of services of one or more of these individuals could materially and
adversely affect the business of the Company and its future prospects. The
Company does not maintain key-man life insurance on any of the Company's
officers or employees. The Company's future success will also depend on its
ability to attract and retain additional management and technical personnel
required in connection with the growth and development of its business.
17
The Company is dependent on Minorplanet UK for its research and development
associated with the VMI products.
The Company is dependent on Minorplanet UK research and development to
provide modifications, upgrades and new product versions for the VMI product.
The timeliness and quality of these development efforts are not in the direct
control of the Company. The failure of Minorplanet UK to provide timely and
quality changes to the VMI product could have material adverse effect on the
Company's business, financial condition and results of operations.
The Company's current business plan contemplates significant expansion, which
the Company may be unable to manage.
To the extent that the Company is successful in implementing its
business strategy, the Company may experience periods of rapid expansion in the
future. In order to manage growth effectively in the complex environment in
which it operates, the Company will need to maintain and improve its operating
and financial systems and expand, train and manage its employee base. In
addition, the Company must carefully manage production and inventory levels to
meet product demand and facilitate new product introductions. Inaccuracies in
demand forecasts could result in insufficient or excessive inventories and
disproportionate overhead expenses. The Company must also expand the capacity of
its sales, distribution and installation networks in order to achieve continued
growth in its existing and future markets. In general, the failure to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
Much of the Company's sales are derived from one customer, the loss of which
could significantly reduce the Company's revenues.
The SBC Companies accounted for approximately 62% of the Company's
installed base, including network services subscribers, as of August 31, 2003.
The term of the Company's contract with the SBC Companies expires on January 30,
2004. While the Company expects to renew the contract, there can be no
assurances that the Company will be able to renew such contract on commercially
reasonable terms or at all. The loss of SBC, or any event, occurrence or
development which adversely affects the relationship between the Company and
SBC, could have a material adverse effect upon the Company's business, financial
condition and results of operations.
Substantial product liability claims could have a material adverse effect on the
Company by creating additional costs to the Company to pay and/or settle these
claims.
Testing, manufacturing and use of the Company's products entail the
risk of product liability. Although management believes its products offer
safety advantages over conventional cellular telephones, it is possible that
operation of the product may give rise to product liability claims. Product
liability claims present a risk of protracted litigation, substantial money
damages, attorney's fees, costs and expenses, and diversion of management
attention. In addition, as the Company provides alarm-monitoring services in
connection with the SBC contract, the Company is exposed to an increased risk of
litigation regarding various safety, performance and related matters. Product
liability claims that exceed policy limits applicable to the Company's liability
insurance or that are excluded from the policy coverage could have a material
adverse effect on the Company's business, or financial condition and results of
operations.
The Company does not expect to pay dividends in the foreseeable future.
The Company has never paid cash dividends on its Common Stock and has
no plans to do so in the foreseeable future. The Company intends to retain
earnings, if any, to develop and expand its business.
The price of the Company's common stock is volatile.
Historically, the market prices for securities of emerging companies in
the telecommunications industry have been highly volatile. Future announcements
concerning the Company or its competitors, including results of technological
innovations, new commercial products, financial transactions, government
regulations, proprietary
18
rights or product or patent litigation, may have a significant impact on the
market price of the Company's common stock. The Company's stock price has been
highly volatile in recent periods.
The Company may not be able to adequately protect its patents and other
proprietary technology, and its rights may be challenged by others.
The Company's services are highly dependent upon its technology and the
scope and limitations of its proprietary rights therein. In order to protect its
technology, the Company relies on a combination of patents, copyrights and trade
secret laws, as well as certain customer licensing agreements, employee and
third-party confidentiality and non-disclosure agreements, and other similar
arrangements. If the Company's assertion of proprietary rights is held to be
invalid or if another party's use of the Company's technology were to occur to
any substantial degree, the Company's business, financial condition and results
of operations could be materially adversely affected.
The patents and other intellectual property rights of the Company
cannot prevent competitors from developing competing systems using other
terrestrial wireless communications systems or using the cellular system through
a different method. While the Company believes that the nature and scope of the
Company's communications system, including the Company's strategic business and
technological relationships, would be difficult for a competitor to duplicate,
there can be no assurance that a competitor would consider these hindrances to
be material in light of the market potential. A competitor could invest time and
resources in an attempt to duplicate certain key features of the Company's
products and services, which could result in increased competition and have a
material adverse effect on the Company's business.
Several of the Company's competitors have obtained and can be expected
to obtain patents that cover products or services directly or indirectly related
to those offered by the Company. There can be no assurance that the Company is
aware of all patents containing claims that may pose a risk of infringement by
its products or services. In addition, patent applications in the United States
are confidential until a patent is issued and, accordingly, the Company cannot
evaluate the extent to which its products or services may infringe on future
patent rights held by others. In general, if it were determined that any of the
Company's products, services or planned enhancements infringed valid patent
rights held by others, the Company would be required to obtain licenses (which
might require the payment of royalties) to develop and market such products,
services or enhancements from the holders of the patents, to redesign such
products or services to avoid infringement, or cease marketing such products or
services or developing such enhancements. In such event, the Company also might
be required to pay past royalties or other damages. There can be no assurance
that the Company would be able to obtain licenses on commercially reasonable
terms, or that it would be able to design and incorporate alternative
technologies,, without a material adverse effect on its business, financial
condition and results of operations.
The failure of wireless carriers to offer circuit switched data on GSM networks
may require the Company to retrofit its installed base of VMI units with VMI
units which utilize GSM/GPRS.
The Company's VMI product currently utilizes circuit-switched data on
existing GSM networks to transmit data messages. Several major U.S. wireless
carriers have indicated that they may cease to support circuit switched data on
their GSM networks, but will require their customers to utilize General Packet
Radio Services ("GPRS") to transmit data messages on their GSM networks.
Minorplanet UK, the supplier of the Company's VMI product, is currently
developing a VMI product which utilizes GPRS instead of circuit switched data.
The Company anticipates that the GPRS version of the VMI product will be
commercially available in the first half of 2004. If the U.S. wireless carriers
fail to continue to support circuit-switched data on their GSM networks and/or
the Company fails to obtain a GPRS-enabled VMI unit, such failures could have a
material adverse effect on its business, financial condition and results of
operations.
The Company faces significant competition in the automatic vehicle location
marketplace.
The Company's vehicle management information product faces significant
competition from several other suppliers of similar products, some of which may
have greater financial and technological resources. The Company can provide no
assurance that its products will compete successfully with the products of its
competitors or that it
19
will adapt to changes in the business, regulatory or technological environment
as successfully as the Company's competitors.
A small number of the Company's stockholders own a substantial amount of the
Company's shares of common stock, and if such stockholders were to sell those
shares in the public market within a short period of time, the price of the
Company's common stock on the Nasdaq SmallCap Market could drop significantly.
Minorplanet UK currently holds 9,621,483 shares of the Company's common
stock (approximately 19.9% of the Company's outstanding shares), 3,183,491
shares of which are eligible for resale under this prospectus, and Mackay
Shields currently holds 10,699,794 shares of the Company's common stock
(approximately 22.1% of the Company's outstanding shares), all of which are
eligible for public resale. In addition, other stockholders also own substantial
amounts of shares of the Company's common stock. Sales of a large number of
shares of the Company's common stock or even the availability of a substantial
number of shares for sale could have the effect of reducing the price per share
of the Company's common stock on the Nasdaq SmallCap Market, especially given
that the Company's common stock is thinly traded on that market.
The Company relies primarily on T-Mobile for the provision of GSM data services
to its VMI customers and its inability to renew its agreements with T-Mobile may
increase the Company's costs of providing GSM data services to its VMI customers
or result in a decrease in GSM coverage for its VMI customers.
The Company markets and sells T-Mobile GSM data services to its VMI
customers as an agent of T-Mobile pursuant to a National Premier Dealer
Agreement entered into with T-Mobile USA, Inc. on January 1, 2003 so that such
VMI customers have a direct contractual relationship for the purchase of GSM
data services with T-Mobile. The agreement has an initial term of two years and
automatically terminates unless the Company provides written notice of its
intent to renew to T-Mobile at least 60 days prior to the end the term.
The Company also resells T-Mobile GSM data services to the Company's
VMI customers pursuant to a reseller agreement with T-Mobile. The reseller
agreement has an initial term of one year which continues on a month-to-month
basis following the expiration of such initial term unless terminated by either
party on written notice. The initial term of the reseller agreement has expired
and the reseller agreement is currently on a month-to-month term.
If the Company is unable to renew such agreements with T-Mobile, the
Company may have to negotiate and execute a GSM data service agreement with
another wireless carrier or fully implement its Authorized Agency Agreement with
Cingular Wireless. There can be no assurances that the Company will be able to
obtain a GSM data service agreement on terms as favorable as its agreement with
T-Mobile and its failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 2. PROPERTIES
REAL PROPERTY AND LEASES
The Company does not own any real property. The Company leases
approximately 73,400 square feet of office space for its corporate headquarters
in Richardson, Texas, of which approximately 34,200 square feet is sub-leased to
two other companies. The Company leases approximately 25,000 square feet of
warehouse and office space in Plano, Texas. The Company also leases a total of
10,300 square feet for three VMI sales and operations offices located in
Houston, Texas, Atlanta, Georgia and Los Angeles, California.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
In the first quarter of 2001, K*TEC Electronics Corporation ("K*TEC"),
the outsource manufacturer that supplies substantially all of the Company's
finished goods inventory asserted a claim against the Company for reimbursement
for excess and obsolete inventory purchased in its capacity for use in the
manufacture of the Company's products. Following review of the claim, the
Company believed that it had meritorious defenses to the alleged claim and
vigorously denied liability. In April 2001, K*TEC refused to ship products,
placing the Company on "credit hold," refused to ship finished goods unless the
Company prepaid for such finished goods, refused to ship finished goods unless
the Company paid the excess inventory balance, refused to manufacture goods, and
refused to process goods received under Return Merchandise Authorizations
("RMA's"). K*TEC also refused to return to the Company certain test equipment
and RMA equipment owned by the Company.
On May 18, 2001, the Company filed an Original Petition styled and
numbered @Track Communications, Inc, f/k/a HighwayMaster Corporation v. K-TEC
Electronics Corporation, Cause No. 01-04173 in the B44th District Court of
Dallas County, Texas seeking recovery against K*TEC for breach of contract,
breach of bailment and conversion, replevin, and also seeking a declaratory
judgment, an accounting, attorney's fees and costs of court (the "Dallas
Lawsuit").
On June 21, 2001 K*TEC filed an Original Petition styled and numbered
K*Tec Electronics Corporation, L.P. doing business as K*Tec Electronics v.
@Track Communications, Inc. formerly known as HighwayMaster Corporation, Cause
No. 01CV-119321 in the 268th District Court of Fort Bend County, Texas seeking
recovery against the Company for sworn account, breach of contract, promissory
estoppel, quasi-estoppel, equitable estoppel, quantum meruit, negligent
misrepresentation, attorney's fees and costs of court (the "Fort Bend Lawsuit").
On July 10, 2001, the Company and K*TEC reached agreement on all
material terms of settlement of the lawsuits subject to the execution of a
definitive settlement document. As per the settlement, the Company will
20
continue to utilize K*TEC as a manufacturer. On October 9, 2001, the Company and
K*TEC executed a Compromise Settlement Agreement. In accordance with the
Compromise Settlement Agreement, the parties have filed an Agreed Order
Dismissing with Prejudice both the Dallas Lawsuit and the Fort Bend Lawsuit.
The Company recorded a provision of $2.2 million as its estimate of the cost to
be incurred to settle this litigation, of which $0.5 million had been paid as of
August 31, 2003.
On April 4, 2003, the Company and K*TEC entered into an amendment to
the Compromise Settlement Agreement pursuant to which the Company agreed to
issue purchase orders to K*TEC for the manufacture of 6,000 VMI data control
units in lieu of and in full and final settlement of the Company's obligation to
make the final $1.7 million payment to K*TEC under the Compromise Settlement
Agreement. Specifically, the Company will issue to K*TEC twelve separate
purchase orders for the manufacture of a total of 6,000 VMI data control units
to be delivered over a twelve-month period. In addition to the agreed upon unit
price of the data control units, the Company agreed to pay a $275 surcharge per
unit which will compensate K*TEC for the remaining $1.7 million payable under
the Compromise Settlement Agreement. The Company will take delivery of the
initial lot of 500 units within 30 days of the Company's approval of K*TEC's
first production article with an additional 500 units being delivered to the
Company on the first day of each month thereafter until all 6,000 units have
been delivered. Payment for each 500-unit lot is due upon receipt of each
shipment. As of August 31, 2003, the Company had not approved K*TEC's first
production article.
The Company is involved in various claims and lawsuits incidental to
its business, primarily collections lawsuits in which the Company is seeking
payment of amounts owed to it by customers. In connection with the Company's
efforts to collect payments from a small number of former customers, such former
customers have on occasion alleged breaches of contractual obligations under
service agreements with the Company. The Company does not believe that these
claims and lawsuits will have a material adverse affect on the Company's
business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2003 Annual Meeting of Stockholders (the "Annual
Meeting") was held on August 8, 2003. At the Annual Meeting, the stockholders of
the Company (i) elected each of the persons listed below to serve as a director
of the Company until the next Annual Meeting of Stockholders or until their
respective successors have been duly elected and qualified; and (ii) ratified
the engagement of Deloitte & Touche LLP as the Company's independent auditors
for the fiscal year ending August 31, 2003. The Company had 48,349,161 shares of
common stock outstanding as of July 16, 2003, the record date for the Annual
Meeting. At the Annual Meeting, holders of a total of 30,977,306 shares of
common stock were present in person or represented by proxy. The following sets
forth information regarding the results of the voting at the Annual Meeting:
Proposal 1: Election of Directors
Shares Voting Shares
Director In Favor Withheld
-------- ------------- --------
Gerry C. Quinn 30,944,846 32,460
John T. Stupka 30,944,846 32,460
Michael D. Beverley 30,944,846 32,460
Proposal 2: The ratification of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending August 31, 2003.
Votes in favor: 30,947,916
Votes against: 820
Abstentions: 28,570
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock was initially offered to the public on June
22, 1995, and was quoted on the Nasdaq National Market ("Nasdaq NMS") through
close of business on February 1, 1999, after which time it began trading on the
Nasdaq SmallCap Market ("Nasdaq SmallCap") under the symbol "HWYM." The
Company's common stock currently trades under the symbol "MNPL." The following
table sets forth the range of high and low trading prices on the Nasdaq SmallCap
Market, as applicable, for the Common Stock for the periods indicated. Such
price quotations represent inter-dealer prices without retail markup, markdown
or commission and may not necessarily represent actual transactions.
BID PRICES
HIGH LOW
---- ---
2001
First Quarter $ 1.31 $0.38
Second Quarter $ 1.90 $0.32
Third Quarter $ 1.79 $0.93
Fourth Quarter $ 1.65 $0.84
2002
First Quarter $ 4.00 $1.22
Second Quarter $ 2.18 $0.96
Two months ended August 31, 2002 $ 1.06 $0.82
2003
First Quarter $ 1.04 $0.53
Second Quarter $ 0.99 $0.58
Third Quarter $ 0.71 $0.44
Fourth Quarter $ 0.70 $0.48
The prices of the Company's Common Stock for the second, third, and
fourth quarters of 2001 as well as for all periods thereafter, reflect a 1-for-5
reverse stock split which the Company effected during the second quarter of
2001.
There were 175 registered holders of common stock and an estimated
2,900 broker/dealers who beneficially hold common stock on behalf of
stockholders as of November 25, 2003. The last sales price for the Company's
Common Stock as reported on November 25, 2003 was $0.44. The Company did not pay
dividends on its Common Stock for the fiscal year ended August 31, 2003 and has
no plans to do so in the foreseeable future.
On September 18, 1998, the SEC declared effective the Company's
registration statement on Form S-3 which was filed to register warrants and
warrant shares as required pursuant to the Warrant Registration Rights Agreement
entered into as part of the Company's 1997 Debt Offering. Under the terms of the
Warrant Registration Rights Agreement, the Company is obligated to use its best
efforts to keep the Registration Statement continuously effective until the
earlier of (i) the expiration of the warrants or (ii) the time when all warrants
have been exercised; provided, however, that during any consecutive 365-day
period, the Company may suspend the effectiveness of the registration statement
on up to two occasions for a period of not more than 45 consecutive days in
connection with a possible acquisition, business combination or other
development affecting the Company if the board of directors determines that
disclosure thereof would not be in the best interests of the Company. The
Company will not receive any proceeds from the sale of the warrants by the
selling warrant holders. To the extent that any warrants are exercised, the
Company will receive the exercise price for the warrant shares. During the
fiscal year ended August 31, 2003, no warrants were sold and no warrant shares
were exercised.
22
The holders of the Company's common stock that acquired their shares
pursuant to the Purchase Agreement or the Exchange Offer transactions the
Company completed on June 21, 2001 are entitled to certain registration rights
pursuant to a registration rights agreement the Company also entered into with
these stockholders. Pursuant to this registration rights agreement, 15,293,745
shares of the Company's common stock (2,700,000 shares of which were owned by
Minorplanet UK) were registered for resale under a Form S-3 registration
statement that was declared effective with the SEC on October 23, 2001. On up to
three separate occasions, but no more than twice in any twelve-month period, the
holders of at least ten percent (10%) of the Company's shares that were
registered are entitled to request that the Company undertake an underwritten
offering of such shares if the proposed offering has anticipated aggregate
proceeds in excess of $10,000,000 at the time of the request. The Company is
required to keep this Form S-3 registration statement effective until any
holders entitled to sell shares of the Company's common stock under it are
otherwise entitled to sell such shares without restriction pursuant to Rule 144
under the Securities Act.
In addition to the registration rights described above, pursuant to
this registration rights agreement, the holders of at least fifteen percent
(15%) of the then outstanding common stock issued pursuant to the Purchase
Agreement and Exchange Offer transactions are entitled to require the Company,
on up to five separate occasions, but no more than twice in any twelve-month
period, to register shares of the Company's common stock for resale if the
proposed offering has anticipated aggregate proceeds in excess of $10,000,000 at
the time the registration request is made. Also, subject to certain limitations,
all of these stockholders that are deemed to be parties to this registration
rights agreement are generally entitled to include such shares (a piggyback
right) in any transaction in which we sell our common stock to the public. The
foregoing registration rights are subject to limitations as to amount by the
underwriters of any offering and to blackout periods in which the Company's
management may delay an offering for a limited period of time.
Under the terms of the Purchase Agreement and a Lockup Agreement
executed by the exchanging note holders in connection with the June 21, 2001
Exchange Offer, all of the selling stockholders (except for Minorplanet UK)
agreed to certain contractual lock-up restrictions regarding the resale of the
shares they acquired in the Exchange Offer. On June 16, 2002, all remaining
shares were released from lock-up provisions and such stockholders are now free
to resell all of their shares subject to compliance with applicable securities
laws. See Risk Factor relating to sales by substantial stockholders on page 20.
In connection with the closing of the transactions contemplated by the
Purchase Agreement, the stockholders approved Amendment Number 2 to the
Company's 1994 Amended and Restated Stock Option Plan (the "Plan") which
increased the number of shares of the Company's common stock available for
issuance (on a post reverse stock split basis) to 5,100,000 shares. Accordingly,
on October 10, 2001, the Company filed a Form S-8 registration statement
covering an additional 4,729,737 shares that may be issued under the Plan.
At the Company's 2002 Annual Meeting of Stockholders held on May 21,
2002, the stockholders approved the amendment to the Company's Amended and
Restated 1994 Stock Option Plan increasing the number of shares of common stock
issuable under the stock option plan to 7,208,000 shares.
23
The following table summarizes information about the Company's equity
compensation plans at August 31, 2003:
(a) (b) (c)
Number of securities
Weighted average remaining available for
Number of securities to be exercise price of future issuance under
issued upon exercise of outstanding equity compensation plans
outstanding options, options, warrants, (excluding securities
Plan Category warrants and rights and rights reflected in column (a))
------------- ------------------- ---------- ------------------------
Equity compensation plans
approved by security holders 1,628,904 $1.41 4,646,642
Equity compensation plans not
approved by security holders 302,360 1.71 --
--------- ----- ---------
1,931,264 $1.45 4,646,642
========= ===== =========
On June 1, 2003, the Company granted warrants to a consultant for the
purchase of 75,000, 125,000, and 100,000 shares of common stock at exercise
prices of $0.70, $1.40, and $2.80 per share, respectively. All these warrants
are exercisable as of August 31, 2003 and the warrants expire on June 1, 2007.
A director of the Company holds options granted on June 22, 1998 outside
of the Plan to purchase 760 shares of common stock of the Company at a price of
$2.50 per share. All of these options are exercisable at August 31, 2003. The
options expire six years from the date of grant.
The Company granted warrants to a consultant for the purchase of 1,600
shares of common stock at a price of $5.63 per share on March 31, 2000. All of
these warrants are exercisable at August 31, 2003 and the warrants have no
expiration date.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The selected financial data set forth for each of the four years in the
period ended December 31, 2001, the eight month transition period ended August
31, 2002, due to the change in fiscal year end, and the year ended August 31,
2003, have been derived from audited financial statements, including the balance
sheets at August 31, 2003, August 31, 2002, December 31, 2001, 2000, 1999 and
1998 and the related statements of operations, of cash flows and of changes in
stockholders' equity (deficit) for each of the four years in the period ended
December 31, 2001, as well as the eight month period ended August 31, 2002 and
year ended August 31, 2003, and notes thereto appearing elsewhere herein. The
selected financial data provided for the eight months ended August 31, 2001 and
twelve months ended August 31, 2002 is provided for comparable purposes and has
been derived from unaudited financial statements, including the balance sheet at
August 31, 2001 and August 31, 2002. As a result of the adoption of SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," as a
cumulative effect change in accounting principle in 2000, results for 2000,
2001, the eight months ended August 31, 2002, and the year ended August 31, 2003
are not comparable to prior periods.
24
Twelve months ended Eight,months ended
August 31, August 31,
2003 2002 2002 2001
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(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA
Revenues:
Product $ 2,319 $ 11,936 $ 5,074 $ 12,796
Ratable product 9,837 9,618 6,780 7,026
Service 32,755 45,216 30,102 32,844
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Total revenues 44,911 66,770 41,956 52,666
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Cost of revenues:
Product 1,953 9,426 3,996 9,810
Ratable product 6,871 7,634 5,213 5,814
Service 17,508 24,515 16,155 18,204
Inventory write-down to net realizable value - 4,693 - -
Provision for settlement of litigation - 100 100 2,100
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Total cost of revenues 26,332 46,368 25,464 35,928
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Gross profit 18,579 20,402 16,492 16,738
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Expenses:
General and administrative 9,456 11,856 7,943 8,349
Customer service 3,988 5,396 3,411 5,051
Sales and marketing 11,632 10,386 8,600 2,784
Engineering 1,800 2,433 1,374 4,107
Network services center - 1,045 461 1,168
Severance and AutoLink termination costs - - - -
Depreciation and amortization 5,626 7,087 4,322 4,673
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32,502 38,203 26,111 26,132
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Operating loss (13,923) (17,801) (9,619) (9,394)
Interest income 447 539 457 420
Interest expense (2,118) (2,124) (1,411) (6,642)
Other (expense) income (426) (183) (183) -
Gain on recapitalization and extinguishment of debt - - - 59,461
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(Loss) income before income taxes and
cumulative effect of accounting change (16,020) (19,569) (10,756) 43,845
Income tax benefit - 978 978 -
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(Loss) income before cumulative effect
of accounting change (16,020) (18,591) (9,778) 43,845
Cumulative effect of accounting change - - - -
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Net (loss) income $ (16,020) $ (18,591) $ (9,778) $ 43,845
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Basic and diluted (loss) income per share:
(Loss) income before cumulative effect
of accounting change