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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-26140
HIGHWAYMASTER COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 51-0352879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
16479 DALLAS PARKWAY, SUITE 710
DALLAS, TEXAS 75248
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code): (972) 732-2500
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 last 90 days.
YES X NO
----- -----.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 23, 1998 was $50,006,465.44*
The number of shares outstanding of Registrant's Common Stock was
24,898,986 as of March 23, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 1998 annual meeting of stockholders are incorporated herein by
reference into Part III of this Report. Such proxy statement will be filed with
the Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended December 31, 1997.
Certain exhibits filed with the Registrant's Registration Statement on
S-1 (Registration No. 33-91486), as amended, the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, the Registrant's Form
10-Q Quarterly Report for the quarterly period ended June 30, 1996, the
Registrant's Current Report on Form 8-K filed on October 7, 1996, the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, the Registrant's Form 10-Q Quarterly Report for the quarterly period ended
March 31, 1997, the Registrant's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 1997, and the Registrant's Registration Statement on S-4
(Registration No. 333-38361), as amended, are incorporated herein by reference
into Part IV of this Report.
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*Excludes the Common Stock held by executive officers, directors and by
stockholders whose ownership exceeds 5% of the Common Stock outstanding at March
23, 1998. 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.
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HighwayMaster Communications, Inc.
FORM 10-K
For the Fiscal Year Ended December 31, 1997
INDEX
Page
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PART I .........................................................................................................1
ITEM 1. BUSINESS........................................................................................1
GENERAL .......................................................................................1
The Company............................................................................1
Business Strategy......................................................................2
The Long Haul Trucking Solution........................................................2
Products and Services..................................................................5
Series 5000...................................................................5
Series 3000...................................................................8
AutoLink......................................................................9
Trailer Tracking.............................................................13
Platinum Service.............................................................14
Infrastructure & Operations...........................................................14
Strategic Service Alliances of the Company............................................17
Additional Business Opportunities.....................................................18
Competition...........................................................................19
Patents and Proprietary Technology....................................................21
Regulation............................................................................21
Employees.............................................................................23
RECENT FINANCING TRANSACTIONS..................................................................23
Senior Notes Payable..................................................................23
RISK FACTORS .................................................................................23
Forward Looking Statements............................................................23
Limited Operating History; Significant Losses.........................................23
Limitations Due to Debt...............................................................24
No Remote Disaster Recovery System....................................................24
Switching Complex Operational Difficulties............................................24
AT&T Litigation.......................................................................25
Uncertainty Regarding Patent and Proprietary Rights...................................25
Products in Development...............................................................26
Dependence on Cellular Infrastructure.................................................27
Dependence on Clearinghouse Services..................................................27
Costs Related to Billing Discrepancies................................................28
Network Enhancement; Need to Modify Contractual Relationship..........................28
No Long-Term Product Supply Arrangements..............................................28
Control of Company....................................................................29
Repurchase of Notes Upon Change of Control............................................29
Competition and Technological Change..................................................30
Uncertainty of Government Regulation..................................................31
Dependence on Key Personnel...........................................................33
Year 2000 Software Risk...............................................................33
Expansion Risk........................................................................33
Customer Concentration................................................................33
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Product Liability.....................................................................34
Certain Tax Considerations............................................................34
Common Stock Availability for Purchase by SBW.........................................34
Certain Rights of SBW.................................................................34
Dividend Policy.......................................................................35
Shares Eligible for Future Sale.......................................................35
Volatility of Stock Price.............................................................35
ITEM 2. PROPERTIES.....................................................................................35
Real Property and Leases..............................................................35
ITEM 3. LEGAL PROCEEDINGS..............................................................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................36
PART II ........................................................................................................37
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................................................37
ITEM 6. SELECTED FINANCIAL DATA........................................................................38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................................43
PART III ........................................................................................................44
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................44
ITEM 11. EXECUTIVE COMPENSATION........................................................................44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................................................44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................44
PART IV ........................................................................................................44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...........................................................................44
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PART I
ITEM 1. BUSINESS
GENERAL
The following discussion is qualified in its entirety by the more
detailed information and consolidated 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.
THE COMPANY
The Company develops and implements mobile communications solutions,
including integrated voice, data and position location services, to meet the
needs of its customers. The initial applications for the Company's wireless
enhanced services network have been developed for, and are currently being
marketed and sold to, companies which operate in the long-haul trucking market.
The Company provides long-haul trucking customers with a comprehensive package
of mobile communications and management control services at low, fixed per
minute rates, thereby enabling its trucking customers to effectively monitor the
operations and improve the performance of their fleets. As of December 31, 1997,
the Company had an installed base of 33,122 Series 5000 Mobile Units in service
in the long-haul trucking market.
The Company is currently developing new applications for its wireless
enhanced services network to expand the range of trucking companies that utilize
its services and address the needs of the automotive and other markets. The
Company introduced its Series 3000 Mobile Unit in February 1998, which is less
expensive and offers more limited functionality than its current long-haul
trucking product. The Company is marketing the Series 3000 Mobile Units
primarily to smaller trucking fleets and owner-operators that can benefit from
the Company's enhanced wireless services, including primarily its nationwide
voice communication capabilities, and for whom protection from fraud, effective
call delivery and low airtime charges are critical requirements.
In January 1997, the Company entered into a strategic business alliance
with Prince, a subsidiary of Johnson Controls and a leading supplier of
automotive interior systems and components, pursuant to which the parties are
developing and marketing and will provide a wireless automobile safety and
security service, the AutoLink(R) service, to be offered to motorists in the
United States and Canada. The AutoLink service is expected to be offered on a
commercial basis beginning in late 1998.
In addition, in early 1997, the Company acquired Burlington Motor
Carrier's ("Burlington") proprietary fleet operating software and hired all the
employees from its Management Information Systems group. The Company enhanced
the Burlington fleet operating software to provide a new offering called the
Platinum Service which it made available to additional trucking companies in
November 1997. The Company, through its Platinum Service, offers to its
customers all software, hardware and services necessary for an end-to-end
information management solution. The Platinum Service supports electronic data
interchange ("EDI") for load tendering, billing, shipment status, and funds
transfer; dispatching; logs; safety and claims; fuel management; vehicle
maintenance; rating and billing; accounts receivable; applicant recruiting;
driver management; driver payroll and settlements; sales and marketing, customer
service and driver load matching optimization. In December 1997, the Company
entered into its first customer contract for the Platinum Service program.
Finally, the Company is currently developing a low cost, wireless
trailer tracking service which it expects to offer to the trucking industry.
Pursuant to a memorandum of understanding, BellSouth Corp. ("BellSouth") has
agreed to negotiate a definitive agreement with the Company whereby Bell South
would grant the Company exclusive rights
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to provide a tracking solution for detachable trailers utilizing BellSouth
Cellemetry(R) Data Services, based on technology patented by the company and by
BellSouth.
The Company provides its mobile communications services through its
wireless enhanced services network, which utilizes patented technology developed
by the Company to integrate various transmission, long-distance, switching,
tracking and other services provided through contracts with certain
telecommunications companies and more than 70 cellular carriers. Through its
agreements with cellular carriers, the Company is able to take advantage of the
more than $32 billion which cellular carriers have invested to establish and
expand cellular coverage in the United States. The Company's network covers 99%
of the available cellular service areas in the United States and 100% of the
available A-side coverage in Canada. Call processing and related functions for
the Company's network are provided through a network switching center (the
"NSC") operated on behalf of the Company by IEX Corporation. The Company holds
eleven United States patents that cover certain key features of its network
which are used in locating and communicating with vehicles using the cellular
infrastructure.
Management believes that several significant factors differentiate the
services which the Company is able to provide through its wireless enhanced
services network from conventional cellular service, including the following:
Immediate Nationwide Call Delivery. In order to automatically
(with no user intervention) provide immediate call delivery to cellular
subscribers who travel outside of their home markets, a cellular
carrier must install advanced switching equipment (IS-41 capable),
establish physical connectivity and establish the appropriate roaming
agreements with other cellular carriers. Primarily as a result of the
cost of this advanced switching equipment, the Company believes that
many cellular markets located outside of major metropolitan areas have
not yet implemented automatic call delivery capabilities. HighwayMaster
uses a patented technology which works independently from cellular
carriers' IS-41 protocol to automatically provide immediate call
delivery to its customers on essentially a nationwide basis.
Fraud Control. Conventional cellular service has historically
experienced relatively high levels of fraud. Industry sources estimate
that cellular fraud resulted in losses totaling approximately $650
million in 1995. The Company has been able to significantly limit fraud
through the architecture of its network, which requires that all calls
originated by customers be routed to the NSC and thereby reduces or
eliminates cellular cloning, fraud and call blocking for its customers.
To date, neither the Company nor the cellular carriers which have
properly implemented the Company's protocols have experienced any
identifiable roamer fraud in connection with the mobile communications
services provided through the Company's network.
Low Nationwide Fixed Airtime Charges. The Company believes
that basic cellular air time charges for cellular subscribers who
travel out of their home markets range from as much as $1.00 to $2.00
per day per market and from $0.45 to $1.25 per minute, in addition to
applicable long-distance charges. By comparison, the Company's
customers in the long-haul trucking market are charged a fixed rate of
$0.53 per minute for voice communications within the United States,
which includes long-distance charges.
Additional Value-Added Services. The Company offers its
customers additional value-added services which are not offered by
cellular carriers who are unable to supplement the capabilities of the
existing cellular infrastructure with the features and capabilities of
the Company's network. The value-added services currently offered by
the Company include data transmission and fleet tracking, as well as a
number of other ancillary services, such as estimating times of
arrival, calculating fuel tax mileage and engine monitoring engine
performance.
The Company's principal executive offices are located at 16479 Dallas
Parkway, Suite 710, Dallas, Texas 75248, and its telephone number is (972)
732-2500.
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BUSINESS STRATEGY
The Company's objective is to become a leading provider of mobile
communications services to customers in its targeted markets. To achieve this
objective, the Company will seek to take advantage of the commercial potential
of the HighwayMaster network in four separate ways. First, the Company intends
to achieve greater penetration of the long-haul trucking market by continuing to
increase its base of Series 5000 Mobile Units installed in customers' trucks.
Second, the Company intends to leverage the capabilities of its network to
develop and implement new applications for the trucking, automotive and other
markets, including the AutoLink service to be offered to motorists in the United
States and Canada, the Platinum Service and trailer tracking. Third, the Company
intends to develop a common hardware platform for the AutoLink product, the
Series 5000 Mobile Units and more advanced versions of its Series 3000 Mobile
Units. A common platform should enable it to take advantage of volume cost
savings that may be derived from AutoLink to reduce the price of its long-haul
trucking products, thereby enabling the Company to expand the segments of the
long-haul trucking market which it is able to serve on an economical basis.
Fourth, the Company intends to pursue opportunities, either alone or in
cooperation with international partners, to export its technology and
applications to selected foreign markets.
THE LONG-HAUL TRUCKING SOLUTION
General
The Company currently provides integrated mobile voice, data, tracking
and fleet management information services to trucking companies and other
private operators in the long-haul trucking market. These services are provided
by linking customers to the Company's network through the installation of Series
5000 Mobile Units in their trucks. The Series 5000 Mobile Unit enables a truck
driver to send and receive voice and data messages and utilize all of the other
features and capabilities of the Company's network. Management believes that the
system offered by the Company to trucking customers represents the most complete
and cost-effective package of mobile communications products and services
currently available to the long-haul trucking industry. A key feature of this
system is its ability to offer voice communication capabilities on essentially a
nationwide basis through the use of the existing cellular infrastructure.
Currently, the Company's primary competitor offers a satellite-based system that
provides data-only mobile communication services with no voice capabilities.
In addition to its voice communications capabilities, the Series 5000
Mobile Unit permits the transmission and receipt of data messages between a
truck and a dispatcher. The Series 5000 Mobile Unit also has navigational
tracking capabilities which allow trucking companies to map a truck's position,
typically within 100 yards, anywhere in the United States and Canada.
Furthermore, the Series 5000 Mobile Unit is capable of performing a number of
other functions such as calculating fuel tax mileage, estimating times of
arrival, storing data and monitoring on-board electronic engine and other
electronic functions. For small to mid-sized fleets, the Company also offers a
dispatch software package that enables a trucking dispatcher to optimize the use
of its fleet by processing data transmitted by the Series 5000 Mobile Units and
performing a variety of fleet management information functions.
The Company is developing a line of Series 3000 Mobile Units, which
are less expensive and offer more limited functionality than its current
long-haul trucking product. The Series 3000 Mobile Unit is designed to provide
voice communication services and additional functions such as the automated
capture and transmission of engine data and other information, as well as
vehicle tracking. The Company believes that the Series 3000 Mobile Units will
allow it to serve a broader segment of the long-haul trucking market, including
smaller fleets and owner-operators who do not require all the features of the
Series 5000 Mobile Unit but can benefit from the advantages of the Company's
wireless enhanced services network, as well as fleets who currently utilize
data-only mobile communications services provided by the Company's competitors.
The Company introduced a basic version of the Series 3000 Mobile Unit in
February 1998, which is expected to be supplanted by a more advanced version of
this product during 1998.
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The Trucking Industry
Based on the Department of Commerce Census, management believes that
there are currently approximately 2.2 million long-haul commercial trucks in the
United States. Although the Company expects to generate sales of Series 5000
Mobile Units in all sectors of the long-haul trucking market, the Company's
primary target market for these products is approximately 800,000 trucks
consisting of trucking fleets and owner-operators who own or operate
larger-sized trucks (Class 6, 7 and 8 trucks) used for long-haul transport
(average distances in excess of 100 miles). Of this group, the mid- and
large-sized fleets (25 or more trucks) totaling approximately 530,000 trucks in
the Department of Commerce Census are the primary target market for the Series
5000 Mobile Unit,while the remaining 270,000 trucks in this group consist mainly
of small-sized fleets (24 or fewer trucks) and are part of the market for both
the Series 5000 and the Series 3000 Mobile Unit. In addition the Company
believes that the Series 3000 Mobile Unit will appeal to fleets of smaller-sized
trucks (Class 1-5 trucks) also used for long-haul transport. Based on the
Department of Commerce's Census, the Company believes that there are currently
approximately 1.4 million trucks in this extended market for the Series 3000
Mobile Unit.
Mobile Communications Needs in the Trucking Industry
The Company believes that demand for the Company's long-haul trucking
application will continue to grow as trucking companies experience increased
industry competition and face mounting internal and external pressures to adopt
mobile communications systems.
External pressures include competition from the increasing number of
trucking companies that are installing mobile communications systems, demands
placed on the long-haul trucking industry to meet just-in-time inventory
demands, and regulatory and environmental requirements. The Company estimates
that at the present time there is an installed base approaching 200,000
integrated mobile communications systems (including those sold by the Company)
in trucking fleets operating in the United States. As just-in-time delivery
inventory control becomes more prevalent, manufacturers increasingly will
require that materials arrive immediately before incorporation into the
manufacturing process. The resulting pressure on trucking companies has
stimulated demand for more efficient two-way communications systems to assure
on-time pick-up and delivery, improved load matching within a widely dispersed
fleet and current tracking of shipment location. In fact, certain large shippers
require all new contracting trucking companies to be equipped with on-board
communications and tracking equipment. Additionally, trucking companies must
maintain detailed records relating to miles driven by state, hours driven by
each driver and other information. Some hazardous substances may only be
transported over certain routes.
Internal pressures include containing costs through improved operating
efficiency, improving driver quality of life thereby reducing critical turnover
rates, and increasing the safety of drivers, capital equipment and cargo by
reducing the likelihood of accidents. The Company's long-haul trucking
application assists trucking companies in improving efficiency by increasing the
utilization of equipment and reducing the number of empty miles and out-of-
route miles. Because of the features and capabilities of the Company's system,
it is not necessary for truck drivers to make frequent stops to place telephone
calls to dispatchers. In addition, the Company's system allows swift and
efficient matching of drivers with shipments, thereby reducing layovers and fuel
costs associated with empty miles.
With driver turnover approaching 100% in the trucking industry today,
the Company believes that trucking companies can increase driver satisfaction
and be more successful in attracting and retaining competent drivers by giving a
driver the ability to contact or be contacted by family and friends while on the
road. Furthermore, since driver bonuses are often calculated based on loaded
miles driven and overall efficiency, drivers benefit from a system that allows
them to be more efficient and avoid unnecessary stops.
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Finally, by allowing a driver to communicate using "hands free"
voice-activated equipment while traveling, the Company's system minimizes the
distractions and hazards of placing or receiving a call while on the road. Voice
commands spoken into a microphone clipped to the visor and synthesized voice
responses from the Series 5000 Mobile Units provide a safety advantage over
traditional cellular telephones, which must be grasped with one hand during
operation, and over full keyboard typing necessary to operate competing
satellite-based systems, which drivers are not permitted to use while the
vehicle is in motion. Further, by enabling the driver to communicate while
traveling in his vehicle, the HighwayMaster system reduces stops to make
telephone calls at truck stops, where management believes a large percentage of
all trucking accidents occur. The HighwayMaster system also automatically
reports time, speed and routes driven by each truck to the dispatcher, which can
be used to enhance safety troubleshooting and driver safety counseling, and the
tracking service enables the trucking company to locate stolen trucks or trucks
involved in a roadside emergency.
PRODUCTS AND SERVICES
The Company has developed, or is in the process of developing, five
mobile communications applications: (i) the Series 5000 Mobile Unit, (ii) the
Series 3000 Mobile Unit, (iii) the AutoLink product, (iv) the Trailer Tracking
product and (v) the Platinum Service.
SERIES 5000
The Company currently provides mobile communications services to its
customers in the long-haul trucking market by linking them to the Company's
network through the installation of Series 5000 Mobile Units in their trucks.
The Series 5000 Mobile Unit enables a truck driver to send and receive voice and
data messages and utilize all of the other features and capabilities of the
Company's network. Management believes that the Series 5000 Mobile Unit
represents the most complete and cost-effective package of mobile communications
products and services currently available to the long-haul trucking industry.
Series 5000 Mobile Unit. The Series 5000 Mobile Unit includes the
following: (i) a menu-driven display module which provides two large lines of
scrollable text on the dashboard, (ii) a microphone which clips on the sun visor
for "hands free" communication utilizing voice-recognition and voice-synthesis
technologies, (iii) a modified cellular telephone handset and cradle, (iv) a
cellular antenna, (v) a GPS navigational antenna, and (vi) a computerized system
module in the vehicle which contains the positional reporting device, the
cellular transceiver and the on-board computer. The system module also houses
voice-activation and voice-synthesis software, data storage capability and
unique technology that significantly reduces the risk of cellular roaming fraud.
The module provides ports to allow for incorporation of current and future
peripheral equipment, such as a fax machine, scanner, printer, engine monitoring
equipment and trailer temperature monitoring. The Series 5000 Mobile Unit was
designed to be "user-friendly," to have installation times that are shorter than
competing satellite unit installations, and to limit driver training to an
average of one hour. The system module is remotely programmable from the host
computer by the trucking company and by HighwayMaster.
Pricing. The Company's Series 5000 products and services are
economically priced to appeal to a wide range of participants in the long-haul
trucking industry. The Company offers the Series 5000 Mobile Unit at a retail
price of $1,995, with tiered discounts for larger volume purchases. The
Company's customers are charged a flat fee of $0.53 per minute for voice
communication within the United States and $0.64 per minute for cross-border
communication in Canada, which includes all cellular air time and long-distance
charges, $0.48 per minute for data transmission within the United States and
$0.59 for cross-border data transmissions and $41 per month per installed Series
5000 Mobile Unit to utilize the system. When the parties sending and receiving
voice communications are both located in Canada, customers are generally charged
amounts which are higher than the flat fees described above. In addition,
callers are charged a fee for each call billed to a separate account, such as a
credit card, calling card or HighwayMaster account. The Series 5000 Mobile Unit
is installed in the customer's trucks, and the dispatcher is equipped with
mapping and management software at no additional charge. This software can be
integrated into the host computer systems operated
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by the Company's customers or can be installed and operated on a personal
computer equipped with a hard disk and a modem.
Voice Communications. The Company provides nationwide voice
communications services at a rate of $0.53 per minute for calls within the
United States. By comparison, management believes that currently available
cellular call delivery systems for subscribers who travel out of their home
markets require the payment of rates that are higher than those charged by the
Company. The driver controls the functions of the Series 5000 Mobile Unit by an
enhanced cellular telephone handset. A microphone clipped to the truck's visor
and voice-recognition capability also allow the system to be controlled by the
driver's voice commands. While in a cellular region covered by HighwayMaster, a
driver may initiate telephone calls to any phone number pre-approved by the
dispatcher, and the dispatcher may initiate telephone calls to the driver.
Drivers may be issued calling card accounts by HighwayMaster or use selected
credit cards that allow them to place personal telephone calls to any telephone
number. Such calls are billed separately to the drivers' home addresses. See "--
Infrastructure and Operations." The nationwide call delivery feature, combined
with calling-party payment for calls, sets the Company's product apart from
conventional cellular service.
Data Transmission. The Series 5000 Mobile Unit permits the transmission
and receipt of data between a truck and a dispatcher. The $0.48 per minute
charge for data transmissions within the United States translates into costs as
low as $0.0007 per character for a typical dispatch message of between 600 and
700 characters. The dispatcher may type free form data messages, which appear on
the driver's data display screen on the dashboard and can be stored for future
reference. The driver may send up to 99 pre-programmed status messages with
accompanying numerical data such as "At Dock Loading" or "Trailer Number 21"
that automatically update the trucking company's host computer, eliminating the
data entry function a dispatcher must perform at the trucking company. The
driver also may enter status messages by voice command or through the telephone
handset keypad. Certain options allow the Series 5000 Mobile Unit to monitor
engine speed and temperature, automatically transmitting the data to the
trucking company. Future enhancements may allow for trailer temperature
monitoring and other features.
Facsimile Transmission. The Company provides nationwide facsimile
communications services at a rate of $0.53 per minute for either local or
long-distance fax transmissions. Fax Interface is a recent product advancement
which assists customers in transmission and receipt of documents such as bills
of lading, permits and detailed instructions that a truck driver might need on
an immediate basis.
Fleet Tracking. Precise position and historical route reports are
automatically provided to the dispatcher's computer with each call to or from
the truck. For the cost of $0.48 per minute of data transmission time within the
United States and $0.59 per minute for cross-border data transmissions, the
dispatcher can obtain a real-time position report from a specific truck by
keyboard request. Reports are generally accurate to within 100 yards. These
reports include position logs, which are stored internally, providing historical
route information even if the truck travels out of cellular coverage. A trucking
company's use of these tracking capabilities can improve management and
facilitate better customer service. The navigational tracking capabilities of
the Series 5000 product reduce the number of out-of-route miles and facilitate
efficient matching of drivers with loads, thereby reducing expenses and empty
miles driven.
Fleet Management Software and Information Services. The Company's
PC-based dispatch software package is used primarily by mid- to small-sized
fleets and enables a trucking dispatcher to optimize the use of its fleet by
processing data transmitted by its Series 5000 Mobile Units, managing dispatch
records, driver logs, state fuel tax calculations, route planning and other
functions. The dispatch software can be loaded on to a personal computer
equipped with a modem, or the system can be interfaced directly to be networked
with a midrange or a mainframe computer for access by the dispatcher or a
shipper. The software performs essentially three functions: (i) order entry,
(ii) dispatch and tracking, and (iii) truck reconciliation and mapping. The
order entry function stores and manages the ordering information related to each
shipment, including the assignment of loads to specific trucks, required
delivery times and bills of lading. The dispatch and tracking function utilizes
GPS location information along with data entered by the driver, to provide
information for any truck within the fleet, including destination, load,
drivers' identification and mileage driven. The truck reconciliation and mapping
application provides historical information such as percentage
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of on-time deliveries and miles driven per state for fuel tax calculation. An
online interstate highway map can be used to graphically plot the routes
traveled by each truck. The system can highlight trucks that are running behind
schedule or are available for load pick-ups.
The principal software suppliers that currently market full feature
software application programs to trucking companies offer interfaces to the
HighwayMaster system (which allow data communication directly between the
trucking company's existing mainframe computer and Series 5000 Mobile Units
installed in their trucks). This allows the larger fleet customers who have
their own dispatch software on a mainframe system to continue to use their
existing dispatch software and interface with the HighwayMaster system. These
third party software suppliers generally offer the customized HighwayMaster
interface at reasonable cost directly to their customers. HighwayMaster provides
some custom interface development to very large customers. See " --- Platinum
Service."
Rolling ETA. Rolling ETA(TM) is an enhancement to the Company's Series
5000 Mobile Unit which instructs the microprocessor mounted inside the truck to
calculate the estimated arrival time based upon average speed, hours per day and
delivery parameters and alerts the driver and dispatcher automatically if the
truck is going to miss an arrival time.
Fuel Tax Calculation. The Company is using a software program known as
MileMaster(R) to help customers automate their fuel tax calculations.
MileMaster(R) is an enhancement to the Company's Series 5000 Mobile Unit and the
accompanying host software which allows the Company to provide an automatic,
paperless log of the actual mileage driven in each state as well as state-line
crossings for each truck. This allows the Company's customers to implement an
automated fuel tax calculation system that eliminates the need for drivers to
hand-log their mileage, dates and times as they cross state lines and eliminates
the possibility of human data entry errors.
Current Installed Base
The number of Series 5000 Mobile Units installed in customer vehicles
has grown at a relatively steady rate since commercial operations began in
September 1993. As of December 31, 1997, the Company had installed approximately
33,122 Series 5000 Mobile Units, and had orders to install an additional 8,069
Series 5000 Mobile Units.
As of December 31, 1997, all customers were receiving service through
the NSC and had signed a service contract which generally commits the Company to
provide services for a one-year term. During 1998, the Company intends to
increase the initial term of the service contract for new customers. At the
expiration of the initial term, the contracts continue in effect on a
month-to-month basis unless terminated upon 30 days' written notice by either
party. The Company directly invoices customers served by the NSC for all
enhanced telecommunications services and cellular services, and contract terms
generally permit the Company to increase its service charges to customers upon
30 days' written notice.
Target Market
The Company's primary target market for this product is operators of
larger-sized trucks (Class 6, 7 and 8 trucks) used for long-haul transport
(average distances in excess of 100 miles). Based on the Department of Commerce
Census, management estimates that there are currently approximately 800,000
trucks in the primary target market for the Series 5000 Mobile Unit of which
270,000 consist of small-sized fleets and owner-operators (24 or fewer trucks)
which may be more likely to purchase the Series 3000 product. Management further
estimates that nearly 200,000 trucks are currently equipped with some form of
integrated mobile communications solution, but believes that substantially all
operators in this market will experience significant competitive pressures over
the next five years to adopt some form of integrated mobile communications
solution.
Marketing and Distribution
The Company sells its long-haul trucking application to fleet buyers
primarily through its direct sales force located throughout the nation. As of
December 31, 1997, the Company's direct sales force consisted of 23 persons.
This sales force focuses its efforts on fleets ranging in size from 20 to 3,000
trucks. Accordingly, to increase sales productivity and efficiency and to
decrease sales expenses, the Company has reduced overlaps in sales territories
and made certain related organizational changes. In addition, the Company
intends to intensify its efforts to reach accounts with over 1,000 trucks in
their fleet. Sales to these major accounts generally require a sustained
marketing effort over a period of at least several months. In some cases, major
accounts insist on competitive evaluations or in-the-field test programs prior
to making a commitment to purchase Series 5000 Mobile Units. To target these
major accounts, the Company has created a national account group that is
dedicated to these strategic prospects. National marketing support for the sales
teams includes print advertising in industry journals, direct mail, radio
networks popular with truckers, industry trade shows and on-site marketing
promotions.
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Product Manufacturing and Supply
Comptronix Corporation assembled the Series 5000 Mobile Units until the
third quarter of 1996, when it sold substantially all of its assets and assigned
its customer purchase orders to Sanmina Corporation ("Sanmina"). After the sale,
Sanmina has continued production of Series 5000 Mobile Units for the Company.
The Company also entered into an agreement with K-Tec Electronics Corporation
("K-Tec") for the assembly of Series 5000 Mobile Units. In the future, the
Company expects to fulfill all of its orders for Series 5000 Mobile Units from
K-Tec. The various components used in the assembly of the Series 5000 Mobile
Units (including GPS components and cellular transceivers) are obtained from
certain other manufacturers. All GPS receivers and cellular transceivers for the
Series 5000 Mobile Units are manufactured by Motorola, and the Company believes
that there are a limited number of suppliers that are capable of manufacturing
transceivers that meet the Company's requirements. See "Risk Factors --- No
Long-Term Product Supply Arrangements."
Customer Service and Warranty
HighwayMaster operates a 24-hour, seven days a week customer support
service center to handle customer questions and requests. Regional installation
and customer service offices have been established in Atlanta, Chicago and
Dallas. Effective March 1, 1998, the Company consolidated its regional
operations and closed the Philadelphia and Salt Lake City offices. HighwayMaster
assigns account service representatives to each account of 20 or more trucks to
give personalized training and to assist in configuring the system to provide
the greatest possible economic impact. A one-year limited warranty is provided
to all purchasers of Series 5000 Mobile Units, inclusive of parts, labor and
diagnostic work.
The Company has trained personnel in authorized service centers to
perform installations and warranty of Series 5000 Mobile Units at locations
nationwide, with additional locations to be activated pending training.
Independent contractors in strategic locations throughout the United States have
also been trained to perform installations, charging a fixed rate for each
Series 5000 Mobile Unit installed. In addition, each account of 25 or more
trucks receives two days installation services for which the customer can elect
to have a HighwayMaster representative install Series 5000 Mobile Units or train
personnel of the customer to perform their own installations.
SERIES 3000
The Company is developing a line of Series 3000 Mobile Units, which are
less expensive and offer more limited functionality than its current long-haul
trucking product. The Series 3000 Mobile Unit is designed to provide voice
communication services and can be configured to provide additional functions
such as the automated capture and transmission of engine data. More advanced
models under development are expected to provide additional features on a
limited basis, such as vehicle tracking. The Company believes that the Series
3000 Mobile Units will allow it to serve a broader segment of the long-haul
trucking market, including smaller fleets and owner-operators who do not require
all the features of the Series 5000 Mobile Unit but can benefit from the
advantages of the Company's wireless enhanced services network, as well as
fleets who currently utilize data-only mobile communications services provided
by the Company's competitors. The Company introduced an early version of the
Series 3000 Mobile Unit in February 1998, and expects to supplant it with a more
advanced version of this product during 1998.
The basic version of the Series 3000 Mobile Unit consists of (i) a
cellular telephone handset and cradle, (ii) a cellular antenna and (iii) a
computerized system module. The advanced version of the Series 3000 Mobile Unit
will add a GPS navigational antenna and a more sophisticated computerized system
module. The advanced version of the Series 3000 Mobile Unit may be based upon
the hardware platform currently being developed by the Company in connection
with the AutoLink service or it may be based upon the current Series 3000 Mobile
Unit, contingent upon pricing, timing and quality concerns. See "-- AutoLink."
This version will be capable of interfacing with the vehicle's engine and allow
the customer to add optional software enhancements to enable the unit to perform
additional services such as fax capability and performing fuel tax calculations.
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The Series 3000 Mobile Unit is attractively priced in order to achieve
as high as possible a level of penetration in the targeted segments of the
long-haul trucking industry. The Company offers the Series 3000 Mobile Unit at a
retail price of approximately $745, with discount pricing for larger volume
purchases. Customers who utilize the basic model of the Series 3000 Mobile Unit
pay the same low, fixed per-minute rates for voice and data communications as
those who utilize the Series 5000 Mobile Unit, but are assessed a reduced per
unit charge on a monthly basis of $29.00.
Target Market
The Company's primary target market for the Series 3000 Mobile Unit
consists of small-sized fleets and owner-operators (24 or fewer trucks)
who operate larger-sized trucks (Class 6, 7 and 8 trucks) used for long-haul
transport (average haul in excess of 100 miles). Based on the Department of
Commerce Census, the Company estimates that there are approximately 270,000
trucks in this target market, which is shared with the Series 5000 product.
Furthermore, the Company believes that the Series 3000 Mobile Unit will appeal
to a significant portion of fleets who operate smaller-sized trucks (Class 1-5
trucks) for long-haul transport, which include an estimated 1.4 million trucks.
The Company also believes that the product will appeal to some customers who are
using data-only systems offered by the Company's competitors. The Company
believes that the lower cost of the Series 3000 Mobile Unit should enable it to
achieve significant penetration in these segments of the long-haul trucking
industry given the strong demand for lower-cost voice communications services.
Marketing and Distribution
In order to market the Series 3000 Mobile Unit, the Company intends to
use a sales strategy that combines direct mail, targeted telemarketing, print
advertisements and third party cooperative arrangements for point of purchase
distribution. The Company will use direct mailings and targeted telemarketing to
contact potential long-haul trucking customers and inform them of the features
and benefits of the Series 3000 Mobile Unit. This approach will be supplemented
by print advertisements in trade journals and other publications to introduce
and increase awareness of this product in the trucking industry.
Product Manufacturing and Supply
The Company has an agreement with K-Tec to assemble the Series 3000
Mobile Units which the Company introduced in February 1998. The Company also has
signed a memorandum of understanding with Trimble and is negotiating a
definitive agreement whereby Trimble would develop a hardware component that
could serve as a common platform for both the AutoLink product and other
versions of the Series 5000 and Series 3000 mobile units.
Customer Service and Warranty
Customers who utilize the basic model of the Series 3000 Mobile Unit
have access to the same customer support service center and warranty program as
those who utilize the Series 5000 Mobile Unit.
AUTOLINK
In January 1997, HighwayMaster entered into a strategic business
alliance with Prince pursuant to which the parties will develop and provide the
AutoLink service to motorists in the United States and Canada. Prince is a
subsidiary of Johnson Controls and a leading supplier of automotive interior
systems and components. The basic AutoLink service will provide an intelligent
communications link from the vehicle to the AutoLink Complex with connections to
various emergency, roadside assistance and information services suppliers in
order to provide emergency assistance, roadside assistance and information
services to motorists, including remote tracking of stolen or missing vehicles.
The principal components of the AutoLink system are (i) the end-user interface,
which will be designed and manufactured by Prince, (ii) the in-vehicle
communications and location hardware, which is expected to be manufactured by
Trimble to the Company's specifications and will incorporate certain of the
Company's patented technology, and (iii) the wireless enhanced services network,
which will be provided and managed by the Company.
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The AutoLink product will be offered to both the OEM market (original
equipment manufacturers) and the after-market (owners of existing vehicles). The
Company currently expects that the AutoLink service will be offered on a
commercial basis in the after-market beginning in late 1998 and in the OEM
market beginning in the second half of 1999.
Joint Development Agreement
The Company and Prince are parties to an agreement (the "Joint
Development Agreement") which defines their respective roles and
responsibilities in connection with the development and marketing of the
AutoLink service. The Joint Development Agreement provides that the Company will
(i) be responsible for providing access to the Company's network for the
AutoLink service, (ii) provide general assistance in connection with the design
and development of the AutoLink service, including with respect to network
functionality, product functionality and cellular carrier activation, (iii) lead
sales efforts in certain after-market distribution channels which include its
cellular carrier partners, the Recreational Vehicle ("RV") marketplace,
automotive distributorships and automotive dealerships, (iv) coordinate and
negotiate agreements to ensure the availability of emergency, roadside
assistance and information services and (v) have overall program responsibility
for offering the AutoLink service to the after-market. Prince will (i) have
overall program responsibility for offering the AutoLink service to OEM
customers, (ii) be responsible for the marketing and sale of the AutoLink system
to OEM customers, (iii) coordinate the development of various information
services by one or more suppliers for the OEM customer market and (iv) develop
the end user interface for the AutoLink system, as well as an electronic
interface to the automobile's in-vehicle communications and location hardware.
The name "AutoLink" is a registered trademark of Prince and, under the terms of
the Joint Development Agreement, may be used by the Company only with respect to
the integrated package of services jointly offered by the parties. The term of
the Joint Development Agreement will expire on January 23, 2002, unless earlier
terminated upon the occurrence of specified events.
Under the Joint Development Agreement, the Company expects to receive
from Prince a one-time design fee and reimbursement for certain development
costs. In addition, in consideration of the services provided in the OEM market,
the Company will receive certain fees, including an activation fee, a monthly
per-user charge and service charges for calls placed by or for end-users. The
risk of collection from end-users in the OEM market will generally be borne by
Prince. With respect to the provision of services to the after-market, the
Company will determine the nature and amount of the charges to end-users. Any
fees or charges related to after-market services which exceed the amount of the
fees which the Company would receive for such services in the OEM market will be
equally divided between the Company and Prince. The risk of collection from end-
users in the after-market will generally be borne by the Company. All amounts
received by the Company in connection with the AutoLink business alliance will
be in consideration of network management and other services, and the Company
does not expect to generate any revenues or profits from the sale of the
AutoLink hardware in either the OEM market or the after-market.
The AutoLink project is in its preliminary stages. Accordingly, the
Joint Development Agreement may need to be modified and amended to reflect
developments and understandings reached by the parties as the AutoLink project
matures.
AutoLink Product
The AutoLink product will consist of (i) an end-user interface, into
which there will be integrated a small display module, (ii) a cellular
transceiver, (iii) a computerized system module, (iv) a cellular speaker, (v) a
cellular antenna and (vi) a GPS navigational antenna and receiver. The Company
currently expects that the end-user interface will be located in the vehicle's
rearview mirror or in an overhead console within easy reach of the driver. The
other components of the AutoLink product will be located apart from the end-user
interface in order to improve performance and enhance the security features of
the system.
The design of the AutoLink product has required that the Company, in
conjunction with Prince and its hardware suppliers, develop miniaturized
versions of the principal components included in its Series 5000 Mobile Unit and
reduce
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hardware costs so that the AutoLink product may be offered at a relatively low
price level. The Company intends to take advantage of the AutoLink design
process by incorporating the key technical features of the AutoLink product into
future versions of its Series 5000 Mobile Unit and Series 3000 Mobile Unit. In
addition, the Company will seek to leverage any volume cost savings that may be
derived from the purchase of the AutoLink product to reduce the price of its
long-haul trucking products, thus expanding the segments of the long-haul
trucking market which it is able to serve on an economical basis.
The AutoLink service will be an in-vehicle communication, location and
information service which will offer a variety of safety, security and
convenience features to end users. These services include the following:
Emergency Assistance. By pushing a button on the user
interface, a driver will be connected with an AutoLink service
representative and request emergency assistance. If requested by the
driver or automatically in the event of certain emergencies, the
AutoLink service representative will arrange for the dispatch of local
emergency services to the precise location of the vehicle, which will
be pinpointed using the GPS location capabilities of the AutoLink
product.
Roadside Assistance. By pushing a different button on the user
interface, a driver will be connected with an AutoLink service
representative and request roadside assistance in the event of an
accident, break down or similar occurrence. The AutoLink service
representative will have access to a network of participating roadside
assistance providers to be assembled by the Company in the case of the
after-market and by the OEM in conjunction with their vehicle warranty
program in the case of the OEM market. Based on the location of the
vehicle and the nature of the service required, the representative will
select and dispatch an appropriate roadside assistance provider.
Furthermore, since the AutoLink product can be connected to the engine
and other electronics on the car, the service representative will have
the ability to do certain things for car owners, such as unlock car
doors when keys have been accidentally locked inside, track stolen
vehicles, and even allow automotive service centers to directly access
engine functions and diagnose a problem before the car is brought in
for service.
Information Services. The AutoLink product will eventually
provide drivers with a wide range of information services. For example,
because the AutoLink service can automatically pinpoint the location of
a vehicle, the AutoLink service representative will be able to provide
a lost driver with directions to his destination. Other information
services that may be provided through the AutoLink product include
traffic, weather, news, vehicle location and short message services.
Target Markets
There are currently 198.3 million vehicles on the roads in the United
States. In addition, the number of new vehicles sold in the United States in
1996 totaled approximately 15.1 million.
The OEM customer market consists of new manufactured vehicles in which
the AutoLink product is installed by the manufacturer, at the point of import or
by an authorized dealer for whom the manufacturer has placed an order. In most
cases, it is expected that the automotive end-user will secure the AutoLink
services (i) as a part of a vehicle option package, in which case the price of
the services may be included in purchase price for the vehicle or (ii) through
the payment of a monthly service fee by the end user.
The after-market consists of all markets other than the OEM market. In
most cases, after-market sales will consist of sales to the owners of existing
vehicles. Vehicle owners electing to receive the AutoLink service will pay for
the AutoLink product and the installation thereof, as well as a monthly service
fee.
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Marketing and Distribution
Prince will be responsible for marketing, sales and distribution of the
AutoLink product in the OEM market and to specific after-market distribution
channels previously described. It is expected that Prince will leverage its
experience in the automotive industry and relationships with automobile
manufacturers to obtain orders for the AutoLink product beginning with the 2000
model year, which will be introduced by automobile manufacturers in the second
half of 1999, although there is no assurance that this will be the case. To
date, no orders have been placed for the AutoLink product, although Prince is
currently engaged in discussions and negotiations with various automobile
manufacturers. Prince will also assume lead responsibility for sales of the
AutoLink product in the recreational vehicle and automobile dealer distribution
channels of the after-market business.
HighwayMaster will be primarily responsible for marketing, sales and
distribution of the AutoLink product in the after-market. At the present time,
the Company intends to establish distribution arrangements with one or more
cellular distributors and resell the product to cellular carriers who are
included in the Company's enhanced wireless network. It is expected that these
cellular carriers would offer the AutoLink product to consumers in conjunction
with or as an enhancement to local cellular service. To date both BellSouth and
Southwestern Bell Wireless ("SBW") have entered into memoranda of understanding
with the Company to offer the AutoLink product to their customers. The Company
also has entered into a memorandum of understanding with CellStar which
contemplates that CellStar will act as the exclusive distributor for the
AutoLink product in the after-market, including supplying the cellular carriers.
The Company expects that its arrangements with CellStar will be governed by a
definitive distribution contract which will provide for an initial two-year term
commencing from the initial date of factory production. There can be no
assurance that the Company and CellStar will in fact enter into such a
distribution contract or as to the terms thereof, which are expected to be the
subject of further negotiations between the parties. Assuming that satisfactory
arrangements can be made for distribution of the AutoLink product, the Company
expects to begin offering the AutoLink service in the after-market beginning in
late 1998.
Product Manufacturing and Supply
Prince and the Company are currently negotiating a definitive agreement
with Trimble, pursuant to a memorandum of understanding, whereby Trimble would
manufacture the in-vehicle communications and location hardware included in the
AutoLink product but no assurance can be given that such an agreement will be
reached or as to the terms thereof. In the case of products to be sold in the
OEM market, orders will be placed with the hardware supplier either by Prince or
directly by automobile manufacturers who elect to incorporate the AutoLink
product into their vehicles. In the case of products to be sold in the
after-market, the Company expects that, in order to accelerate the launch of the
AutoLink service, it may be necessary for it to place an order with the hardware
supplier for up to 100,000 units. Under the terms of any such order, the Company
would be directly responsible for payment of the purchase price for these units.
Although no assurances can be given in this regard, the Company believes that it
should be able to make satisfactory arrangements with potential distributors and
cellular carriers pursuant to which they would undertake to purchase and resell
all or substantially all of these units in the after-market.
Network Management Services
Under the Joint Development Agreement, the Company will be responsible
for managing and monitoring network services and ensuring that the AutoLink
service has access to a nationwide, proprietary cellular network. In addition,
it will be required to identify and engage a third party to conduct network
system performance and design reviews to ensure that the network operates in
accordance with the agreed specifications. In order to fulfill its network
management obligations, the Company is currently planning to construct the
AutoLink Complex in 1998. In addition, in order to begin offering the AutoLink
service on a commercial basis, it will be necessary for the Company to amend its
contracts with cellular carriers to allow the Company to utilize their cellular
systems to provide emergency and roadside assistance service to motorists in
their home markets. The Company has begun to seek amendments to its contracts
with cellular carriers and to date has amended the contracts with 59 carriers.
There can be no assurance that
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it will be able to obtain amendments covering all areas in which it currently
provides mobile communications services to long-haul trucks. See "Risk Factors
- --- Dependence on Cellular Infrastructure" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
TRAILER TRACKING PRODUCT
The Company is currently engaged in developing a Trailer Tracking
product. The initial release of this product will provide GPS-based location
tracking for untethered trailers used in the trucking industry. Future releases
of the product may provide event driven information such as tether/untether,
trailer loaded/unloaded, rear door open, etc. The Company expects to base the
Trailer Tracking product on Cellemetry short data messaging technology, allowing
it to use the existing cellular infrastructure in conjunction with BellSouth's
Cellemetry(R) Gateway and HighwayMaster's Network Services Center to send
information from the trailer back to the trucking Company. The Company expects
the initial release of this product to be late in 1998.
Target Market
The Company expects its target market for the Trailer Tracking product
will consist of mid- and large-sized fleets which utilize trailers in both
long-haul and short-haul transport. Based on statistics quoted in trade
publications this market includes up to 2.4 million trailers. The Company
believes the low up-front price and low monthly service costs should enable it
to achieve significant penetration in this segment of the transportation
industry given the strong demand and lack of current low cost provider.
Marketing and Distribution
At this time, the Company expects to utilize print advertisements in
trade journals and other publications as well as participation in trade shows to
increase awareness of this product. The Company will utilize its field sales
force to sell the Trailer Tracking product. The Company's strategy for marketing
of the Trailer Tracking product has not yet been tested or implemented, and
there can be no assurance that the Company will be successful in achieving
substantial sales.
Product Manufacturing and Supply
The Company expects to contract with K-Tec to assemble and produce its
Trailer Tracking product, although no assurances can be made that this agreement
can be reached and what the terms may be. The Company is negotiating with
various vendors to supply the base components. There can be no assurance that
the Company will be able to make arrangements with these vendors to manufacture
the hardware components of the advanced versions of the Trailer Tracking product
or, if successful in making such arrangements, as to the terms thereof.
The Trailer Tracking product is at the early stages of product development.
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PLATINUM SERVICE
In April 1997, the Company entered into an agreement with Burlington
which provides for the installation of up to 2,000 Series 5000 Mobile Units in
Burlington's fleet of long-haul trucks. As part of the transaction, the Company
purchased exclusive ownership rights to Burlington's proprietary fleet operating
and management information software and has assumed the operation of its data
center and computer systems. The Company has added capacity to the Burlington
data center in order to provide a broad range of data processing services to
other trucking companies, which would essentially replace such companies'
existing management information systems departments with services, software and
hardware to be provided by the Company. Added capacity will enable the Company
to use the software and data center previously owned by Burlington in
conjunction with the HighwayMaster network to offer its customers levels of
integration not previously available in the trucking industry. Management
currently expects that the primary market for the data processing services to be
offered by the Company will consist of small- to mid-size fleets which have
significant fleet management and other logistical requirements but have not yet
made substantial investments in information technology. The Company unveiled
this Platinum Service product to the market in the last quarter of 1997 and is
currently providing these services to two customers.
INFRASTRUCTURE AND OPERATIONS
Network Configuration
The diagram set forth below depicts the configuration of the
HighwayMaster network, as it is currently utilized to provide services through
the Series 5000 Mobile Units and the Series 3000 Mobile Units and is expected to
be utilized to provide services through the AutoLink product and Trailer
Tracking product:
[Diagram of HighwayMaster network, which illustrates the connections
among (1) the mobile communications unit, (2) the cellular carrier, (3) GTE-TSI,
(4) EDS, (5) the NSC, (6) long distance and local exchange carriers, (7) the
dispatcher PC, (8) all other telephones, (9) GPS satellites, (10) the AutoLink
emergency response center (in the case of the AutoLink product only) and (11)
roadside assistance, emergency response and information services providers (in
the case of the AutoLink product only).]
Series 5000 and 3000 Mobile Units. The processes illustrated above are
fully automated, allowing communication with drivers from any telephone in the
United States and Canada. As the driver enters a new cellular coverage area, the
HighwayMaster unit (1) automatically sends an identifying signal to the cellular
carrier (2). This cellular carrier information is sent via specialized hardware
and software provided by GTE-TSI (3) and occasionally EDS (4) to the NSC (5) so
the NSC will be able to direct future incoming calls for that driver to the
appropriate cellular carrier.
When the driver makes a phone call, the HighwayMaster unit (1) is
connected to the NSC (5) via the cellular carrier (2) and existing long distance
lines (6), and the NSC switches the call to the appropriate destination, which
may be the Dispatcher PC for data (7) or any other telephone for voice (8). The
Company's NSC requires entry of a personal billing account or selected credit
card number for separate billing of personal calls.
When dispatchers or outside callers desire to call a driver, their
calls are switched by the NSC (5) directly over existing long distance lines and
local exchange carriers (6) to the appropriate cellular carrier (2), which
completes the call to the driver (1). Data messages are first stored in the NSC
(5) and then passed to or from the Dispatcher PC (7) and the HighwayMaster unit
(1).
The HighwayMaster unit (1) automatically records a precise position
report obtained from GPS satellites (9) on a continuous basis. This log of
reports and any other stored data is uploaded to the appropriate switching
complex with every business voice or data call made to or from the HighwayMaster
unit. Additionally, the Dispatcher PC (7) can initiate a call at any time to
obtain an immediate position report from any truck.
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AutoLink Product. By pushing a button on the user interface (1) or
automatically in certain circumstances (such as in the event of airbag
deployment), the AutoLink product is connected to a switching complex similar to
the NSC and to be constructed during 1998 (5) via the cellular carrier (2) and
existing long distance lines (6). The switching complex routes the call to the
appropriate AutoLink response center (10) and the driver of the vehicle is
connected with an AutoLink service representative. The AutoLink product (1)
automatically records a precise position report obtained from GPS satellites (9)
on a continuous basis, which is uploaded to the AutoLink response center
whenever a telephone link is established. The AutoLink service representative
can then dispatch roadside assistance or emergency response services to the
precise location of the vehicle or provide certain information services (11).
The AutoLink service representative (10) is also able to initiate a call to the
AutoLink product (1) via the switching center (5) without driver involvement.
This enables the service representative to perform services such as unlocking
doors and tracking stolen vehicles.
Trailer Tracking Product. The HighwayMaster unit (1) automatically
records a precise position report obtained from GPS satellites (9) and reports
the data to the NSC (5) on a scheduled basis. Additionally, the Dispatcher PC
(7) can initiate a call at any time to obtain an immediate position report from
any trailer.
Wireless Telephony. Cellular communication is the primary medium for
wireless voice communication currently in use in the United States. The cellular
infrastructure utilized by the Company is already in place. By contrast, the
Company's satellite, ESMR and personal communications services ("PCS")
competitors must expend substantial amounts of capital and several years of
development time to construct networks capable of transmitting and receiving
voice messages from customers nationwide.
The Federal Communications Commission (the "FCC") has provided for a
two-operator duopoly in each cellular market. Only two licenses are awarded to
provide cellular service in any specific cellular MSA or RSA. One of the two
licenses in each market is initially awarded to a company or group that is
affiliated with a local landline telephone carrier in the market (the "Wireline"
or "B-Side" license) and the other license in each market is initially awarded
to a company, individual or group not affiliated with any landline telephone
carrier (the "Non-Wireline" or "ASide" license). The HighwayMaster system
utilizes both the A-Side and B-Side carriers in its coverage areas, and has
agreements with both carriers in approximately 30% 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 to PCS providers. At the
present time, PCS is generally available only in certain metropolitan markets
but is expected to create increased competition for cellular operators where
available.
Increased demand for cellular service is driving investment in cellular
networks and improving service coverage. Cumulative capital investment within
the cellular industry has reached $37 billion as of June 1997, up from $6.3
billion in December 1990. Total number of cell sites increased to 38,650 in June
1997, up from 10,307 in December 1992. Total cellular customers reached more
than 48.0 million in June 1997.
Management believes that ordinary cellular subscribers utilizing
services outside of their home market will continue to be assessed roamer and
long-distance surcharges, although roaming rates are expected to decline.
Another shortcoming in current roamer usage of cellular services is that the
cellular industry has failed to provide an effective and universal incoming call
delivery system to subscribers on a nationwide basis. Current
autonomous-registration call delivery systems are generally available in urban
areas and are becoming more prevalent in rural markets. These shortcomings in
nationwide cellular coverage have been overcome in the HighwayMaster system,
because it offers nationwide call delivery in coverage areas which include
approximately 95% of the United States interstate highway system, and air time
rates that are free of roamer and variable long-distance surcharges.
Management believes that due to the large number of existing cellular
subscribers, consumer ownership of many cellular telephones and the extensive
capital investment by cellular carriers in the existing cellular infrastructure,
it is unlikely that the existing cellular network will be abandoned or replaced
by ESMR or other competing technologies. A number of cellular carriers are in
the process of upgrading from existing analog cellular systems to enhanced
systems
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utilizing digital technology. However, management 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 or indefinite phase-in period
that exceeds the expected useful life of the Series 5000 Mobile Units.
Enhanced Service Complexes. Call processing, data management and other
switching services for the Company's network are provided through the NSC. From
1993 through 1996, all such services were provided to the Company and its
customers through the AT&T Complex. AT&T terminated the AT&T Contract effective
as of June 29, 1996. In the third quarter of 1996, the Company began commercial
service with its own switching complex, the NSC, which was designed and
constructed for the Company by IEX. In September 1997, AT&T notified the Company
that it would discontinue offering services through the AT&T Complex as of
December 31, 1997. The remaining customers being serviced by the AT&T Complex
were transitioned over to service through the NSC by December 31, 1997.
Customers have generally reported improved service on the NSC after
transitioning from the AT&T Complex.
The NSC provides switching services among each Series 5000 Mobile Unit,
the HighwayMaster nationwide enhanced services network, the dispatcher PC and
the nationwide landline telephone network. The NSC is capable of processing,
storing and transmitting voice and data transmissions. Voice communications are
routed from each Series 5000 Mobile Unit through the HighwayMaster nationwide
enhanced services network to the NSC. It automatically completes the call
through the public telephone network to the end user. Voice communications from
the 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 Series 5000 Mobile Unit are stored in the NSC, then
transmitted in cost-effective batches. Time critical information, as determined
by the trucking company, is immediately transmitted to the receiving party. The
switching complex records data from each transmission, generates a call record
and processes the information into customer billing records. HighwayMaster can
increase capacity of the NSC as needed to meet growing caller demands by
increasing the line capacity and number of modems and controllers.
The Company believes that the NSC has certain advantages over what the
AT&T Complex offered. The NSC generally incorporates more advanced architecture
and offers additional functions not previously available through the AT&T
Complex. In addition, the NSC gives HighwayMaster increased flexibility to add
new features and services without having to negotiate contract modifications
with AT&T and also enhances the Company's ability to monitor operations and
perform diagnostic functions to identify problems.
Call Routing. Each time a Series 5000 Mobile Unit travels into a new
MSA or RSA, it automatically registers with the cellular carrier under contract
with the Company. The cellular carrier routes the message to GTE-TSI or EDS,
which are also under contract with the Company and provides the NSC with call
delivery information necessary for the NSC to deliver calls to the Series 5000
Mobile Unit as it travels through the new MSA or RSA. Subsequent telephone calls
or data transmissions originating from the Series 5000 Mobile Unit are
recognized by the local cellular carrier and screened to allow call routing only
through the NSC, where additional screening is conducted.
Before a call originating from a Series 5000 Mobile Unit is received by
the NSC, the Series 5000 Mobile Unit must establish an encoded electronic
"handshake" with the NSC. The effective elimination of roamer fraud is a factor
in the Company's ability to contract with local cellular carriers throughout the
country.
Navigation Technology. GPS allows users to identify the location of any
truck 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 units available for civilian use are generally accurate within 100
yards. GPS navigational signals can be received worldwide, without adaptation of
the receiver unit to foreign standards. Management 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
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for purchase by any consumer at relatively low cost, raw navigational
information is of little use to trucking companies unless the GPS receiver is
integrated with a computer system, such as the Series 5000 Mobile Unit, to
record routes traveled relative to mapped roadways or to transmit position
reports to a central dispatcher.
The Company's use of government-operated GPS satellites differs
substantially from competitors' use of satellites for two-way communications.
GPS satellites send one-way signals to mobile receivers, allowing the Series
5000 Mobile Unit to plot its geographical coordinates. GPS satellites are not
capable of two-way communication, and no charges are assessed to users of the
GPS services. For two-way mobile communications, the Company relies exclusively
on earth-based cellular systems. The Company's primary competitors utilize
leased or owned communications satellites for two-way data communications,
incurring costs associated with ownership or leasing of satellite communication
capacity.
STRATEGIC SERVICE ALLIANCES OF THE COMPANY
Local Cellular Carriers. HighwayMaster has established a network for
United States-based trucking operators that offers mobile communication coverage
in 99% of the available cellular 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
more than 70 cellular carriers, including all the regional Bell operating
companies, GTE, and Rogers Cantel, Inc., in more than 715 markets in the United
States and Canada. The Company has entered into contracts with both A-side and
B-side carriers in approximately 30% of United States cellular coverage regions.
Management expects its back-up coverage to continue to increase as more
relationships are established. Management believes that local cellular carriers
are motivated to make capacity available to the Company for various reasons,
including (i) increases in volume of air time usage, (ii) no customer service
expense, (iii) the inability of customers using the HighwayMaster system to
switch to another cellular carrier, (iv) no customer acquisition costs, (v)
access to a national customer base not otherwise available to local cellular
carriers, (vi) use of the HighwayMaster system by long-haul truckers who
typically travel through less dense cellular coverage areas, (vii) use of the
HighwayMaster system by truckers typically during off-peak time periods and
(viii) no expenses associated with fraudulent usage as a result of the security
protection afforded by the HighwayMaster system. In most cases, current 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 30-days' notice prior to June 30 of
each year. The Company has recently executed new contracts with certain of its
cellular carriers that are substantially similar to the existing contracts
except that they provide for an initial three-year term. The Company's
agreements with cellular carriers provide that the Company will not be required
to reimburse carriers for fraudulent usage unless the carriers have fully
implemented the Company's protocol. Although the Company's protocol has been
effective to prevent fraud to date, there can be no assurance that this will be
the case in the future.
The Company's current contracts with cellular carriers permit the
Company to utilize their cellular networks to provide mobile communications
services to vehicles engaged in long-haul trucking and certain recreational uses
so long as such vehicles travel outside of their home areas for specified
periods of time. In order to begin offering the AutoLink service on a commercial
basis, it will be necessary for the Company to amend its contracts with cellular
carriers to allow the Company to utilize their cellular systems to provide
emergency and roadside assistance service to motorists in their home markets.
The Company has begun the process of amending its contracts with cellular
carriers, and to date has amended the contracts with 59 carriers. However, there
can be no assurance that it will be able to obtain amendments covering all areas
in which it currently provides mobile communications services to long-haul
trucks.
GTE-TSI and EDS. GTE-TSI and EDS provide clearinghouse functions to the
cellular industry, creating the data link between a foreign network and a
roamer's home cellular service area, performing credit checking functions and
facilitating roamer incoming call delivery functions. The Company's contract
with GTE-TSI covers certain functions that are critical to the Company's ability
to instantly deliver calls nationwide. It covers an initial term of three years
that ended March 14, 1998. The Company is guaranteed the right to renew the
contract for up to 10 one-year periods beyond the initial term, at a reasonable
rate to be determined by GTE-TSI. The agreement provides for mutual exclusivity
by
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the Company and GTE-TSI with respect to the provision and use of certain
critical call delivery features to provide service to the trucking industry. The
Company is currently renegotiating the GTE-TSI contract and anticipates
finalizing it by early in the second quarter. The agreement between the Company
and EDS involves the provision by EDS of certain clearinghouse functions in
connection with EDS' cellular carrier customers. Fewer data processing functions
are conducted by EDS due to the Company's consolidation of certain common data
processing functions with GTE-TSI. The agreement with EDS expires on October 24,
1998 and is renewable for subsequent one-year terms unless 60-days' notice is
provided prior to the termination date of the agreement. See "Risk Factors --
Dependence on Clearinghouse Services."
IEX Corp. IEX designed, tested, constructed and serves as facility
manager for the NSC. The NSC constitutes a critical link in providing certain
enhanced call processing, data management services and is necessary for the
Company to receive, store and route voice and data transmissions to and from its
customers. See "-- Infrastructure and Operations."
GTE Wireless. GTE Wireless indirectly provides a significant amount of
cellular coverage for the HighwayMaster network and pays all cellular carriers
for HighwayMaster, billing the Company on a monthly basis. The term of the
current agreement with GTE Wireless expires in March 1999.
SBC. In connection with its strategic investment in the Company in
September 1996, SBC entered into a Technical Services Agreement with the Company
pursuant to which SBC or one or more of its affiliates will provide the Company
with certain technical and advisory services relating to the operation and
improvement of its network. The Company believes that the availability of these
services from SBC has the potential of allowing it to accelerate the development
and implementation of various features of its network and mobile communications
services.
ADDITIONAL BUSINESS OPPORTUNITIES
Burlington Contract
In 1997, HighwayMaster entered into an agreement with Burlington, one
of the largest truckload carriers and logistics providers in North America,
which provides for the installation of up to 2,000 Series 5000 Mobile Units in
Burlington's fleet of long-haul trucks. As part of the transaction, the Company
purchased exclusive ownership rights to Burlington's proprietary fleet operating
and management information software and has assumed the operation of its data
center and computer systems. HighwayMaster has added capacity to the data center
previously owned by Burlington in order to provide a broad range of data
processing services to other trucking companies which would essentially replace
such companies' existing management information systems departments with
services, software and hardware to be provided by HighwayMaster. Added capacity
would enable HighwayMaster to use the Burlington software and data center in
conjunction with the HighwayMaster mobile communications system to offer its
customers levels of integration not previously available in the trucking
industry. HighwayMaster is currently developing and providing these services for
two customers.
Other Opportunities
The Company believes that substantial expansion opportunities exist
within international markets that are served by cellular service. The Company
currently provides certain mobile communications services to Canadian-based
operators who provide a remote call forwarding line (also known as a foreign
exchange line) from their dispatcher PC to the United States. The Company's
ability to provide such services to owner-operators and operators of small
fleets in Canada is limited given that they cannot easily afford the expense of
a remote call forwarding line. There are approximately 200,000 larger-size
trucks operating in Canada, many of which travel extensively in the United
States. Mexico offers another avenue for expansion if agreements with cellular
carriers and installation of necessary infrastructure interfaces can be
established. According to one industry source, in 1993, there were approximately
250,000 medium and larger sized trucks and buses operating in Mexico. Management
believes that expansion into Europe may prove to be viable for the Company
because trucking companies in Europe face many of the same demands as companies
in the United States and the European cellular infrastructure is highly
developed. However, engineering
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changes would be necessary to build a HighwayMaster system adapted to European
cellular technology and multiple languages. A data-only satellite-based
competitor of the Company currently is operating in Europe, Japan and certain
other developed countries.
The most recent Truck Inventory and Use Survey published by the United
States Census Bureau indicated that in 1992 there were 2.6 million medium and
heavy commercial trucks in the United States. Future refinements, which may
eventually provide city street map detail, should allow the HighwayMaster system
to be used by intra-city courier services, local bus companies and police, fire
and ambulance services. In addition to these software enhancements, it will be
necessary for the Company to revise its working relationships with the affected
local cellular carriers before the Company attempts to expand its customer base
to include localized intra-city users and to provide certain changes to its
Company Complex to service a more localized market. See "---- Infrastructure and
Operations".
In addition, the Company is developing and intends to market additional
wireless voice and data solutions, network services, logistics software and
wireless computer communications devices to other freight and field service
operations on a local and national basis (some of which may require
modifications to equipment and existing contracts with cellular carriers and
other parties). Management has identified several potential markets, some of
which would require modification to the Series 5000 Mobile Unit or HighwayMaster
system's infrastructure.
Management also believes interstate bus companies could benefit from
the HighwayMaster system in its present configuration in order to contact
drivers to bypass small town bus stops with no passengers for pickup. The
Company also intends to market the HighwayMaster system to railroads for use in
locomotives and railcars as well as to the commercial marine industry. In
addition, management believes that the more than 2 million recreational vehicles
in the United States constitute a potential market for the Company's services.
COMPETITION
In each of the markets currently targeted by the Company, there are a
number of other companies that offer or plan to offer some form of two-way
mobile communication using a variety of different technologies which compete or
could eventually be used to compete with the Company. These companies primarily
utilize satellite-based communications technologies, SMR, enhanced specialized
mobile radio ("ESMR"), and wireless technologies, including paging systems and
terrestrial links for dedicated short range communications systems.
Conventional Satellite Communications. Satellite communication is
accomplished through transmission of a signal from an earth-based transmitter to
a satellite, which automatically retransmits the signal to an earth-based
receiver. Many communication satellites are geo-stationary, and remain over a
single point over the equator by orbiting the earth in the same direction and at
the same speed as the rotation of the earth. Mobile equipment designed for
satellite communication is equipped with highly specialized rotating antennae
which are continuously directed toward the satellite, and utilize highly complex
data or voice compression systems to minimize demands on satellite capacity.
This type of mobile communication equipment broadcasts over the radio frequency
spectrum, and domestically the FCC regulates and controls the number of
satellite communications systems that may be placed in service.
Satellite communication available to the transportation industry
generally utilizes a single earth station to transmit and receive data via
satellite to and from satellite communication units installed in trucks.
Messages created by truck drivers on an onboard keyboard can be stored,
compressed and transmitted in short bursts. Although voice communication is
theoretically possible for mobile communication systems that utilize satellite
transmissions, the current limited capacity and current high cost of satellite
communication have tended to limit offerings to data-only services.
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Satellite systems currently cover 100% of the continental United
States, and their comprehensive coverage may be perceived by truckers and
trucking companies as an advantage over the cellular system. The Company
believes that any marketing or operational advantage derived from satellite
coverage, as compared to the HighwayMaster system (which covers approximately
95% of the United States interstate highway system), is mitigated by the fact
that satellite systems require more costly equipment and do not currently offer
voice communication on an economical basis and by the fact that users of the
satellite system can experience queuing delays during peak periods between
transmission and receipt of messages. In addition, because geo-stationary
satellites stay over the equator, transmission and receipt of data in North
America is sometimes interrupted or rendered impossible by obstacles on the
southern horizon, such as nearby tall buildings or mountains.
At the present time, the Company's primary satellite competitor in the
long-haul trucking market is Qualcomm, which markets its products and services
primarily to large fleets, offers two international satellite-based
communication systems: (i) OmniTRACS, which provides two-way data messaging and
tracking services, and (ii) TrailerTRACS, which provides trailer monitoring.
Drivers access and utilize the system through an onboard keyboard and data
display screen. Qualcomm offers or plans to offer its products and services in
certain of the international markets targeted by the Company, including Canada,
Mexico and Europe. Qualcomm reported that as of January 1998 it had delivered
over 210,000 OmniTRACS systems worldwide. The Company believes that the
satellite-based communication products and services offered by Qualcomm are
generally more expensive than the Company's products and services. However,
Qualcomm has recently offered lower prices for quantity purchases and
reduced-cost trial periods in an effort to improve its competitiveness.
At least one other entity offers or plans to offer satellite-based data
communication and tracking services to the long-haul trucking industry. AMSC, a
geo-stationary system which is owned by a consortium of satellite and
communications companies offers a satellite-based system that is similar to the
Qualcomm system in that the mobile communications equipment consists of a
keyboard and data screen mounted in each truck. Recent enhancements allow dual
SMR or satellite communication in a single unit. The AMSC system offers both
voice and data communications and recently announced it plans to acquire
Motorola's Ardis data messaging business.
Middle and Low Earth Orbit Satellites. In order to maintain a
stationary position over the earth, communication satellites currently in use
must maintain a very high orbit, which requires earth stations to generate
relatively high powered transmissions for communication with the satellite.
Certain entities, including Qualcomm, are participating in the development of
MEO and LEO satellite networks, which are designed to employ multiple satellites
in relatively lower earth orbits, rapidly circling the earth. The lower earth
orbits should facilitate both voice and data communication services and will be
accessible through relatively lower powered transmitters and receivers, allowing
them to be installed in portable communication equipment. In terms of product
and service offerings, MEO and LEO systems can be expected to compete directly
with cellular services, including the HighwayMaster products and services, and
will offer coverage in remote areas and foreign countries currently unserved by
cellular carriers. However, due to the substantial capital investment required
to place these systems in service, the Company believes that the MEO and LEO-
based voice call rates are expected to be higher than the $0.53 per minute rate
charged to HighwayMaster's customers.
Specialized Mobile Radio. SMR has traditionally been used to serve the
needs of local dispatch services such as taxis and couriers, which typically
broadcast short messages to a large number of units. SMR wireless communication
systems rely on high-powered voice or data transmissions among widely-spaced
receiver/ transmitter sites within a discrete local or regional area. These
systems generally have lower capacity to support simultaneous transmissions in a
given area than do cellular systems, which transmit and receive radio
communications from numerous closely-spaced cell sites. The radio hardware
currently used to operate the various SMR systems varies widely, making it
impossible for a customer to "roam" into a neighboring region that is served by
a carrier with a different hardware configuration.
Enhanced Specialized Mobile Radio. ESMR operators are currently
developing and implementing ESMR digital technology to offer relatively low-cost
mobile telephone services, with construction expected to be completed in several
years. One operator, Nextel, Inc., is developing a nationwide digital ESMR
network to provide mobile
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telephone service and has begun providing service in dozens of major
metropolitan areas. Nextel is developing its ESMR network using uniform
standards and a coordinated infrastructure to provide mobile telephone services
with no roaming charges anywhere in the U.S. Other local and regional ESMR
operators in addition to Nextel may eventually be able to offer region-to-region
calling and call delivery services which will compete with the Company's
services.
Paging Services. At considerably less cost than full two-way mobile
communication, several long-haul truckers and fleet operators have purchased or
leased paging systems that allow a dispatcher to send a message to a driver.
Management believes that pagers are used by trucking companies as a "temporary
fix," since pagers do not offer full- function two-way communications services
and cannot track vehicle locations. Some paging companies have begun to offer
limited time-delayed two-way messaging capabilities, although initial
shortcomings in coverage, voice service and tracking capabilities are likely to
limit their use in the long-haul trucking market.
Other Services. Other services are being proposed that could
potentially compete with the HighwayMaster system. For example, the FCC
currently is considering whether to allocate 75 megahertz of spectrum in the
5.850-5.925 GHz band to establish DSRC systems for the deployment of intelligent
transportation systems to provide terrestrial wireless communication links
between vehicles traveling at highway speeds and roadside systems. Current
DSRC-based services include en-route driver information, freight mobility
tracking, traffic control and automated roadside safety inspection. If these
services can be provided inexpensively, they may compete with the Company's
services.
Telecommunications Act of 1996. The Telecommunications Act is intended
to increase competition in virtually every arena of communications and eliminate
many regulatory barriers to new competitors. It is unknown at this time what
effect this legislation will have on the Company's ability to compete in the
marketplace. See "Risk Factors -- Uncertainty of Government Regulation."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company has obtained eleven domestic patents and has applied for
additional domestic and foreign patents. In general, the Company's existing
patents relate to certain features and capabilities of the HighwayMaster used in
locating and communicating with vehicles through the cellular infrastructure.
The Company's software is also entitled to certain protections under state trade
secret law and federal copyright law. See "Risk Factors -- Uncertainty Regarding
Patents and Proprietary Rights."
REGULATION
The Company's products and services are subject to various regulations
promulgated by the FCC which apply to the wireless communications industry
generally. The Company's Series 5000 Mobile Units must meet certain radio
frequency emission standards and not cause unallowable interference to other
services. The Company has relied on the manufacturer of the cellular transceiver
component of the Series 5000 Mobile Units, which is currently Motorola, 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. Management expects the FCC to expand
capacity available to the cellular industry as it becomes necessary in order to
maintain current levels of service, although there is no assurance that such
expansion will occur.
The Company believes that the nature of its services does not require
the Company to be classified as a common carrier for either wireless or
long-distance regulatory purposes. This conclusion is based on several
alternative regulatory interpretations, including the classification of the
HighwayMaster service as a private network whose service is not offered to the
public at large, but rather targeted to specific users such as the long-haul
trucking industry and other
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owners of commercial vehicles. In addition, each customer arrangement is
tailored to fit the communication needs of that particular customer.
Alternatively, the Company can be classified as an enhanced services provider,
and thus not subject to common carrier regulation, because the HighwayMaster
proprietary hardware and software processing applications act on information
transmitted by subscribers, who then receive information in return from
HighwayMaster regarding the status of their commercial vehicles. The Company
relies on its long-distance provider to comply with any long-distance regulatory
requirements.
The wireless telecommunications industry currently is experiencing
significant regulatory changes which may require a re-examination of laws and
regulations applicable to the Company's operations. For example, both the
present HighwayMaster service and the future AutoLink service may be considered
to be CMRS. CMRS providers are treated as common carriers, except that the FCC
has decided to forbear from most common carrier regulation of the CMRS
marketplace, including regulation of the rates and terms of entry for interstate
services offered by CMRS providers. In addition, Congress has preempted state
regulation of CMRS entry and rates. Recent FCC decisions have enhanced the
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 just and reasonable.
To the extent that services offered by the Company are determined to be
telecommunications services (which would not include enhanced services offered
by the Company), the Company would be required to contribute to the mechanisms
established by the FCC and various states to preserve and advance universal
service. At the federal level, the Company's universal service contribution
would be based on the end-user telecommunications revenues generated by those
services that are determined to be telecommunications services. The Company
cannot predict the impact of any requirement to contribute to state and federal
universal service mechanisms.
The Company's regulatory status also may change as a result of offering
the AutoLink service, which will be offered indiscriminately to the public at
large, with no individualized or customized contracts, and thus may be
considered a common carrier service. However, the Company believes that it will
nonetheless be regulated as a private carrier if, as currently contemplated, the
AutoLink service does not offer interconnection to the public switched network.
If the Company's interpretation of its regulatory status proves to be incorrect
and it is deemed to be a common carrier, the Company may be required to offer
its services upon reasonable request from any member of the public, it may be
required to offer its services on a basis that is not unreasonably
discriminatory, and, in certain states that regulate common carriers, it must
comply with various regulatory requirements established by state public utility
commissions, or their governing statutes, including procedures related to
customer deposits, the filing of registration or notification letters, and the
filing of tariffs. Changes in regulation of cellular common carriers also may
require equal access by customers to the long-distance provider of their choice.
Although regulations applicable to common carriers would add certain
administrative costs and possible complications to the Company's relationships
with its long-distance provider and cellular carriers, the Company believes that
common carrier status would not require the Company to make substantial changes
to its current services. Finally, certain public utility commissions could take
the position that approval would be needed prior to any transfer of control of
the Company. There can be no assurance that compliance with such regulations
would not have a material adverse effect on the Company's operations.
Long-distance providers face regulatory schemes similar to cellular
carriers, with greater state involvement in requiring posting of bonds as
security against customer deposits and in other matters. The Company believes
current long-distance regulations apply to the companies providing long-distance
services directly to Company customers, without long-distance regulatory
involvement by the Company.
The Company currently provides mobile communications services to
Canadian-based operators only if such operators provide a remote call forwarding
line (also known as a foreign exchange line) from their dispatcher PC to the
United States. This limits the Company's ability to provide such services in
Canada, especially to owner-operators and operators of small fleets that cannot
easily afford the expense of a remote call forwarding line. There can be no
assurance that the Company will be able to resolve the issues required to permit
it to expand the scope of its Canadian operations, including the provision of
the AutoLink service.
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EMPLOYEES
As of December 31, 1997 the Company employed approximately 365 individuals,
of whom 71 are engaged in engineering and product development, 107 in customer
service, 33 in sales and marketing and 154 in administrative or executive
functions. None of the Company's employees are represented by a labor union and
management considers its relationship with its employees to be generally good.
RECENT FINANCING TRANSACTIONS
Senior Notes Payable
On September 23, 1997, the Company issued 125,000 Units ("Units") comprised
of $125,000,000 of 13.75% Senior Notes ("Notes") due September 15, 2005 and
warrants to purchase 820,750 shares of common stock. The warrants are
exercisable at a price of $9.625 at any time on or after the earlier to occur of
(i) the first anniversary of the closing date and (ii) in the event a Change in
Control (as defined in the Indenture Agreement) occurs, the date the Company
mails notice thereof to holders of the Notes and warrants. Interest is payable
on the Notes semi-annually and commenced March 15, 1998. The Company used
$46,588,000 of the proceeds from the issuance of the Units to purchase a
portfolio of U.S. Government securities which will provide funds sufficient to
pay in full when due the first six scheduled interest payments on the Notes.
This amount, including interest earned thereon, is portrayed in the accompanying
consolidated balance sheets under the caption "Pledged Securities."
The Indenture for the Senior Notes contains certain covenants that, among other
things limit the ability of the Company to incur additional indebtedness, pay
dividends or make other distributions, repurchase any capital stock or
subordinated indebtedness, make certain investments, create certain liens, enter
into certain transactions with affiliates, sell assets, enter into certain
mergers and consolidations, or enter into sale and leaseback transactions. The
Company may incur up to $15,000,000 of additional indebtedness in the event
certain conditions are satisfied.
The Notes are redeemable at any time on or after September 15, 2001 at the
redemption prices declining annually from 110.313% of principal amount in 2001
to 100.00% of principal amount in 2004, plus accrued and unpaid interest. Prior
to September 15, 2001, the Company may redeem up to 35% in the aggregate
principal amount of the Notes at a redemption price of 113.75% of the principal
amount thereof, plus accrued and unpaid interest with the net proceeds of a
qualifying equity offering (as defined).
RISK FACTORS
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act that are based upon management's beliefs, as well as
assumptions made by and information currently available to management. When used
in this Form 10-K, the words "anticipate," "believe," "estimate" or "expect" and
similar expressions are intended to identify forward-looking statements. Any
statement that an event will happen in the future is a forward-looking
statement, and should not be interpreted as a promise that the event will occur.
The Company's actual results 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 section, as well as those discussed
elsewhere in this Form 10-K or in the documents incorporated herein by
reference.
LIMITED OPERATING HISTORY; SIGNIFICANT LOSSES
The Company commenced its operations in April 1992 and has a limited
operating history. The Company began offering its long-haul trucking application
on a commercial basis in September 1993. Since its inception, the Company has
experienced significant operating losses and as a result it has a substantial
accumulated deficit. In order to achieve
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a profitable level of operations, the Company must significantly increase its
installed base of Series 5000 Mobile Units and generate substantially greater
service and airtime revenues. The Company expects to continue to incur losses
and negative cash flow from operations in the future. There can be no assurance
that the Company's future operations will generate operating or net income or
positive cash flow from operations. The Company intends to use a substantial
portion of the proceeds from the Notes to fund future operating losses. If the
Company does not achieve significant operating and net income and positive cash
flow in accordance with its current long-term objectives and expectations, it
will not have the funds required to pay the principal amount of the Notes at
maturity in 2005 or to make interest payments on the Notes beyond the three-year
period during which the payment of interest is provided for through the Pledged
Securities. If the Company is unable to service the Notes using earnings or cash
flow from operations, it will have to examine alternate means of repayment that
could include restructuring or refinancing its indebtedness or seeking
additional sources of debt or equity financing. There can be no assurance either
that the Indenture would permit the Company to pursue alternative means of
repayment or that the Company would be able to effect such a restructuring or
refinancing or obtain such additi