U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
|_| TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-11038
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0644381
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
10675 Sorrento Valley Road, Suite 200, San Diego, CA 92121
(Address of Principal Executive Offices)
(858) 450-7600
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE FILERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 20,854,428 shares of common stock as
of May 10, 2000.
Transitional Small Business Disclosure Format (check one): Yes __ No X
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
2000 1999
---- ----
REVENUES:
Communications $ 1,576,006 $ 1,631,624
Video compression 715,745 1,435,676
Satellite transmission technology 1,020,778
----------------- ------------------
TOTAL REVENUES 3,312,529 3,067,300
----------------- ------------------
COSTS AND EXPENSES:
Communications 652,425 788,756
Video compression 155,567 371,292
Satellite transmission technology 636,248
Selling, general and administrative 2,701,185 1,415,143
Research and development 253,285 201,807
----------------- ------------------
TOTAL COSTS AND EXPENSES 4,398,710 2,776,998
----------------- ------------------
(LOSS) INCOME FROM OPERATIONS (1,086,181) 290,302
Interest income 10,902 2,545
Interest expense 306,910 204,730
----------------- ------------------
(LOSS) INCOME BEFORE TAXES (1,382,189) 88,117
INCOME TAX BENEFIT 321,475 111,000
----------------- ------------------
NET (LOSS) INCOME $(1,060,714) $ 199,117
================= ==================
BASIC EARNINGS PER COMMON SHARE $ (0.05) $ 0.01
DILUTED EARNINGS PER COMMON SHARE $ (0.05) $ 0.01
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 20,782,388 18,839,476
Dilutive effect of:
Employee stock options - 2,237,888
Warrants - 580,000
Weighted average of common
shares outstanding,
assuming dilution 20,782,388 21,657,364
See notes to consolidated financial statements.
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
------------- -------------
ASSETS 2000 1999
- ------ ---- ----
(Unaudited)
CURRENT ASSETS:
Cash $557,153 $857,634
Accounts receivable - net 3,417,290 4,445,770
Inventories 1,019,046 918,531
Prepaid expenses and other assets 1,034,794 925,750
------------------ ------------------
Total current assets 6,028,283 7,147,685
PROPERTY - net 698,997 705,082
GOODWILL - net 15,683,600 16,023,480
PATENT - net 16,052,885 16,334,135
------------------ ------------------
TOTAL $38,463,765 $40,210,382
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $901,649 $1,831,985
Accrued expenses 1,531,304 1,591,254
Current portion of notes payable 2,518,550 3,254,688
------------------ ------------------
Total current liabilities 4,951,503 6,677,927
NOTES PAYABLE 7,211,910 6,190,088
DEFERRED TAX LIABILITY 6,710,526 6,864,377
STOCKHOLDERS' EQUITY:
Convertible preferred series
A stock, no par value; 1,000,000
shares authorized, 300 shares issued 3,000,000 3,000,000
Common stock, no par value;
100,000,000 shares authorized,
20,845,928 and 20,739,860 shares
issued and outstanding
at 2000 and 1999, respectively 21,631,926 21,459,376
Accumulated deficit (5,042,100) (3,981,386)
------------------ ------------------
Total stockholders' equity 19,589,826 20,477,990
------------------ ------------------
TOTAL $38,463,765 $40,210,382
================== ==================
See notes to consolidated financial statements.
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
2000 1999
---- ----
Operating activities:
Net (loss) income $(1,060,714) $ 199,117
Adjustments to reconcile net income
to net cash used in operating activities:
Deferred tax benefit (153,851) (112,500)
Depreciation and amortization 708,446 548,929
Issuance of stock warrant 82,170
Changes in assets and liabilities:
Accounts receivable, net 1,028,480 (818,143)
Inventories (100,515) 89,056
Prepaid expenses and other assets (109,044) (17,538)
Accounts payable and accrued expenses (990,286) (297,090)
----------------- -----------------
Net cash used in operating activities (595,314) (408,169)
----------------- -----------------
Investing activities:
Capital expenditures (81,231) (42,229)
----------------- -----------------
Net cash used in investing activities (81,231) (42,229)
----------------- -----------------
Financing activities:
Proceeds from line of credit 655,000 650,000
Cash received from stock options exercised 90,380 37,344
Principal payments on notes payable (369,316) (357,601)
----------------- -----------------
Net cash provided by financing activities 376,064 329,743
----------------- -----------------
Net decrease in cash (300,481) (120,655)
Cash at beginning of period 857,634 416,361
----------------- -----------------
Cash at end of period $ 557,153 $ 295,706
================= =================
See notes to consolidated financial statements.
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements as of and for the three
months ended March 31, 2000 and 1999 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2000 are not necessarily indicative of the results
that may be expected for any other interim period or for the year ending
December 31, 2000.
NOTE 2 - BALANCE SHEET DETAILS
3/31/00 12/31/99
------------ -----------
Accounts receivable $3,484,193 $4,527,058
Less allowance for doubtful accounts
and sales return reserve 66,903 81,288
------------- ------------
$3,417,290 $4,445,770
------------- ------------
Inventory:
Raw materials $626,791 $497,052
Work in progress 34,225 179,072
Finished goods 358,030 242,407
------------ ------------
$1,019,046 $918,531
------------ ------------
Property:
Computers and equipment $1,331,274 $1,248,085
Furniture and fixtures 263,532 265,490
Leasehold improvements 55,390 55,390
------------ ------------
1,650,196 1,568,965
Less accumulated depreciation 951,199 863,883
------------ ------------
$698,997 $705,082
------------ ------------
Goodwill $17,481,272 $17,481,272
Less accumulated amortization 1,797,672 1,457,792
------------ ------------
$15,683,600 $16,023,480
------------ ------------
Patent $18,000,000 $18,000,000
Less accumulated amortization 1,947,115 1,665,865
------------ ------------
$16,052,885 $16,334,135
------------ ------------
Accrued expenses:
Taxes payable $454,820 $482,649
Other accrued expenses 1,076,484 1,108,605
------------ ------------
$1,531,304 $1,591,254
------------ ------------
Depreciation expense was $87,316 and $76,137 for the three months ended March
31, 2000 and 1999, respectively. Amortization expense was $621,130 and $472,792
for the three months ended March 31, 2000 and 1999, respectively.
NOTE 3 - ACQUISITIONS
Innovative Communications Technologies, Inc. ("ICTI") - Effective August 1,
1999, the Company completed the acquisition, by reverse merger, of all of the
shares of ICTI, a privately held company located in Gaithersburg, Maryland that
is engaged in the design and implementation of bandwidth efficient multi-media
satellite networks. The purchase price to the former shareholders of ICTI
included the payment of $1.5 million in cash, the issuance of 1,665,000 shares
of the Company's common stock and the delivery of promissory notes in the amount
of $600,000. In addition, the Company delivered a non-interest bearing note in
the amount of $400,000 that is subject to attainment of certain revenue targets.
This note will be recorded in the Company's accounts if and when these targets
are met. The Company effectively acquired ICTI's assets of $1.6 million, assumed
its liabilities of $1.5 million, and recorded goodwill in the amount of $5.5
million, which is being amortized over ten years under the straight line method.
NOTE 4 - NOTES PAYABLE
On February 28, 2000 the Company signed a Change in Terms Agreement with a bank
increasing the line of credit to $1,750,000 and extending the expiry date to
December 29, 2001. At March 31, 2000 the balance on the line of credit was
$1,405,000. The Company is required to meet certain restrictive financial and
operating covenants under the line of credit. The bank has granted a forbearance
for the quarter ended March 31, 2000 pending its review of this Form 10-QSB. The
Company is in the process of re-negotiating the covenants and examining
financing alternatives for ongoing activities and future acquisitions. The bank
has expressed a willingness to continue as the Company's bankers.
NOTE 5 - STOCK OPTIONS
Under the amended and restated 1996 Stock Option Plan ("the Plan"), the Company
may grant incentive and non-qualified options to purchase up to 4,000,000 shares
of common stock to employees, directors and consultants at prices that are not
less than 100% (85% for non-qualified) of fair market value on the date the
options are granted. Options issued under the Plan expire between five and 10
years after the options are granted and generally become exercisable ratably
over a five-year period following the date of grant. At March 31, 2000, there
were 3,018,300 options outstanding under the Plan.
NOTE 6 - GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates three reportable business segments: communications, video
compression and satellite transmission technology. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately based on fundamental differences in their
operations.
The communications segment consists of the operations of Boatracs, Boatracs
Gulfport ("Gulfport"), Boatracs Europe ("Europe") and OceanTrac Limited
("OceanTrac"). The communications segment has exclusive distribution rights in
the United States for marine application of the OmniTRACS(R) system of
satellite-based communication and tracking systems manufactured by QUALCOMM
Incorporated ("QUALCOMM"). In addition, the Company's wholly owned subsidiaries,
Europe and OceanTrac, have agreements with QUALCOMM's authorized service
providers in Europe and Canada for marine distribution of OmniTRACS(R) in parts
of Europe and Canada. Gulfport is a provider of software applications and
service solutions to the commercial work boat and petroleum industries,
including customers of Boatracs.
The video compression segment consists of the operations of Enerdyne
Technologies, Inc. ("Enerdyne") which the Company acquired in July 1998.
Enerdyne is a provider of versatile, high performance digital video compression
products and multiplexing equipment to government and commercial markets.
The satellite transmission technology segment consists of the operations of
ICTI, which the Company acquired effective August 1999 (see Note 3). ICTI is
engaged in designing and implementing bandwidth efficient multimedia satellite
networks and develops customized software solutions to manage and allocate
available satellite power/bandwidth resources to optimize a satellite system's
lifecycle costs.
In 1998 there were two segments, communications and video compression. In 1997
there was only one segment, communications. Corporate overhead expenses have
been allocated based on revenue percentages of each segment to total revenues.
Information by industry segment for the three months ended March 31, 2000 is set
forth below.
Commun- Video Satellite
ications Compression Technology Consolidated
---------- ----------- ----------- -------------
Revenues $1,576,006 $ 715,745 $1,020,778 $3,312,529
Income (loss)from $59,930 $(844,067) $(302,044) $(1,086,181)
operations
Interest income $4,645 $1,320 $4,937 $10,902
Interest expense $39,094 $191,409 $76,407 $306,910
Depreciation and $75,645 $486,400 $146,401 $708,446
amortization
Total assets $3,553,920 $27,933,704 $6,976,141 $38,463,765
Information by industry segment for the three months ended March 31, 1999 is set
forth below.
Video
Communications Compression Consolidated
--------------- --------------- ---------------
Revenues $1,631,624 $ 1,435,676 $3,067,300
Income from operations $43,702 $246,600 $290,302
Interest income $1,613 $932 $2,545
Interest expense $2,304 $202,426 $204,730
Depreciation and
amortization $72,651 $476,278 $548,929
Total assets $3,077,774 $30,111,982 $33,189,756
The Company has two foreign subsidiaries: Europe and OceanTrac. Europe is
located in the Netherlands and provides communication services to the European
market. OceanTrac provides communication services in Eastern Canada. In
addition, Enerdyne and ICTI have foreign sales. The following table presents
revenues and long lived assets (excluding goodwill) for each of the geographical
areas in which the Company operates:
3 months As of 3 months As of
ended 3/31/2000 ended 3/31/2000
3/31/2000 Long- 3/31/2000 Long-
Lived Lived
Revenues Assets Revenues Assets
----------- ----------- ------------ -----------
United States $2,441,873 $16,704,036 $2,953,530 $17,786,732
International 870,656 47,846 113,770 95,588
---------- ----------- ---------- -----------
Total $3,312,529 $16,751,882 $3,067,300 $17,882,320
---------- ----------- ----------- -----------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company has three business units:
1. Boatracs,
2. Enerdyne Technologies, Inc. ("ENERDYNE"), a wholly owned
subsidiary, and
3. Innovative Communications Technologies, Inc. ("ICTI"), a
wholly owned subsidiary.
Statements within this 10-QSB which are not historical facts, including
statements about strategies and expectations for new and existing products,
technologies, and opportunities, are forward-looking statements that involve
risks and uncertainties. The Company wishes to caution readers to the risk
factors inherent to the business including, but not limited to, the continuing
reliance upon QUALCOMM, one of the major suppliers of equipment sold by the
Company, and reliance upon QUALCOMM's Network Management Facility through which
the Company's message transmissions are formatted and processed. These and other
risks are more fully described in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1999.
For the three months ended March 31, 2000 and 1999
Total revenues for the quarter ended March 31, 2000, were $3,312,529 an
increase of $245,229 or 8% compared to total revenues of $3,067,300 for the
quarter ended March 31, 1999.
Communications revenue, which consist of revenues from the sale of Boatracs
systems, software and data transmission and messaging were $1,576,006 or 47% of
total revenues, a net decrease of $55,618 or 3% compared to $1,631,624 or 53% of
total revenues in the first quarter of 1999. The decrease in communications
revenue compared to the same period of the prior year is due primarily to a
reduction in sales of Boatracs systems in the amount of $88,080, or 48%, and a
reduction in software revenues in the amount of $36,366, or 10%.
Video compression revenues were $715,745 or 22% of total revenues, a decrease of
$719,931, or 50%, compared to $1,435,676 or 47% of total revenues in the prior
comparable period. The decrease in video compression revenues is due primarily
to the recognition of revenue attributable to a particular sale for quarter
ended March 31, 1999.
Revenues from satellite transmission technology were $1,020,778 or 31% of total
revenues for the quarter ended March 31, 2000. Revenues were less than in prior
quarters due to delay in the conclusion of several major contracts. The Company
acquired ICTI effective August 1, 1999 (see Note 3).
Communications expense was $652,425 or 41% of communications revenues for the
quarter ended March 31, 2000, a decrease of $136,331 or 17%, compared to
$788,756 which represented 48% of communications revenue in the comparable
quarter of the prior year. The dollar decrease is consistent with the decrease
in communications revenue in the quarter. Communications expense includes data
transmission and messaging expenses of $375,246 for the quarter ended March 31,
2000 compared to $445,604 in the comparable quarter of the prior year, a
decrease of $70,358 or 16% reflecting a new contract with volume discounts from
the supplier commencing in the second quarter of 1999. Overall gross margin for
communications increased to 59% in the quarter ended March 31, 2000 from 52% in
the same period of the prior year. While the gross margin on the sale of
Boatracs systems remained relatively unchanged, the margin on data transmission
and messaging increased 8% to 67% from 59%. This increase was partially offset
by a decrease in software margins of 4% for the quarter.
Video compression expenses were $155,567 or 22% of video compression revenues
for the quarter ended March 31, 2000, a decrease of $215,725 or 58% compared to
$371,292 or 26% of video compression revenues in the same period of the prior
year. The decrease in expenses reflects the decrease in video compression sales.
The increase in margin of 4% reflects changes in the mix of products sold.
Satellite transmission technology expenses were $636,248 or 62% of satellite
transmission technology revenues. ICTI was acquired by the Company effective
August 1, 1999.
Selling, general and administrative expenses were $2,701,185 or 82% of total
revenues for the quarter ended March 31, 2000, an increase of $1,286,042 or 91%,
compared to $1,415,143 or 46% of total revenues in the prior corresponding
quarter. Of the total expenses for the quarter ended March 31, 2000,
approximately $538,000 relates to ICTI, acquired by the Company effective August
1, 1999. Overall, accounting, commissions, insurance, legal, office rent and
salary expenses increased, offset by minor decreases in consulting and
shareholder relations. In addition, marketing expenses increased significantly
due to the marketing of new products and amortization expense increased by
$148,338 to $621,130 for the quarter ended March 31, 2000 compared to $472,792
in the prior comparable period. Depreciation expense increased by $11,179 to
$87,316 for the three months ended March 31, 2000 compared to $76,137 in the
same comparable prior period.
Research and development expenses were $253,285 or 8% of total revenues for the
quarter ended March 31, 2000, an increase of $51,478 or 26% compared to research
and development expenses of $201,807 or 7% of total revenues in the comparable
quarter of the prior year.
Interest expense in the amount of $306,910 for the first quarter of 2000 and
$204,730 in the first quarter of 1999, primarily represents interest on notes
payable issued in connection with the acquisitions of Enerdyne and ICTI, and
warrants issued to a bank.
The income tax benefit of $321,475 for the quarter ended March 31, 2000 and
$111,000 for the same quarter in the prior year represents the amortization of a
temporary tax difference on the life of a patent.
Earnings before interest, taxes, depreciation and amortization for the quarter
ended March 31, 2000 was negative $377,734 compared to $838,544 in the first
quarter of 1999.
Liquidity and Capital Resources
The Company's cash balance at March 31, 2000 was $557,153, a decrease of
$300,481 compared to the December 31, 1999 cash balance of $857,634. At March
31, 2000, working capital was $1,076,780, an increase of $607,022 from the
working capital of $469,758 at December 31, 1999. Cash of $595,314 was used in
operating activities, cash of $81,231 was used in investing activities and cash
of $376,064 was provided by financing activities in the first three months of
2000.
The Company signed a Change in Terms Agreement increasing the line of credit
agreement with a bank to borrow up to $1,750,000 at an interest rate equal to
the lender's prime rate, which was 9% on March 31, 2000, and extending the
expiry date to December 29, 2001. At March 31, 2000, $1,405,000 was drawn on the
line of credit. The Company is required to meet certain restrictive financial
and operating covenants under the line of credit. The bank has granted a
forbearance for the quarter ended March 31, 2000 pending its review of this
Form 10-QSB. The Company is in the process of re-negotiating the covenants and
examining financing alternatives for ongoing activities and future
acquisitions. The bank has expressed a willingness to continue as the Company's
bankers.
Accounts receivable net of an allowance for uncollectible accounts decreased by
$1,028,480 to $3,417,290 at March 31, 2000 from $4,445,770 at December 31, 1999
due primarily to the decrease in total revenues for the quarter ended March 31,
2000. Property, net of accumulated depreciation, was $698,997 at March 31, 2000,
a decrease of $6,085 from December 31, 1999, due primarily to depreciation
expense. Goodwill, net of accumulated amortization, decreased by $339,880 to
$15,683,600 due to amortization expense in the first quarter of 2000. Patent,
net of accumulated amortization, decreased by $281,250 from December 31, 1999,
due to amortization expense in the first three months of 2000.
Accounts payable was $901,649 at March 31, 2000, a decrease of $930,336 compared
to $1,831,985 at December 31, 1999. Accrued expenses decreased by $59,950 at
March 31, 2000 to $1,531,304 from $1,591,254. When combining accounts payable
and accrued expenses there is a $990,286 decrease due primarily to a reduction
in revenues and associated expenses. Total notes payable (short term plus long
term) in the amount of $9,730,460 at March 31, 2000, compared to $9,444,776 at
December 31, 1999, relates to a promissory note to a bank entered into December
1998 and notes owing to the previous owners of Enerdyne and ICTI. The balance
increased by $655,000 at March 31, 2000 compared to December 31, 1999 due to
drawings on the line of credit, offset by payments of $369,316.
The Company anticipates making capital expenditures in excess of $300,000 during
2000, excluding assets acquired in acquisitions. To date, the Company has
financed its working capital needs through private loans, the issuance of stock
and cash generated from operations. Expansion of the Company's business may
require a commitment of substantial funds. To the extent that the net proceeds
of private financing activities and internally generated funds are insufficient
to fund the Company's operating requirements, it may be necessary for the
Company to seek additional funding, either through collaborative arrangements or
through public or private financing. There can be no assurance that additional
financing will be available on acceptable terms or at all. If additional funds
are raised by issuing equity securities, dilution to the existing shareholders
may result. If adequate funds are not available, the Company's business would be
adversely affected.
Year 2000 Issues
The Company has not experienced significant year 2000 issues subsequent to
December 31, 1999 and does not currently believe that it will incur material
costs or experience material disruptions in its business associated with the
year 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any current or pending legal proceedings to which
the Company is a party.
ITEM 2. CHANGES IN SECURITIES
In March 2000, the Company issued a warrant to purchase 50,000 shares of common
stock at $2.53 per share to a bank. The warrant has a life of 63 months and was
issued in reliance on the exemption set forth in Section 4 (2) of the Securities
Act of 1933. Should the Company's relationship with the bank terminate, the life
of the warrant would be reversed to 18 months from the date of such termination.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
ITEM 5. OTHER INFORMATION
Inapplicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the Undersigned,
thereunto duly authorized.
ADVANCED REMOTE COMMUNICATION SOLUTIONS, Inc.
Registrant
May 12, 2000 /s/ MICHAEL L. SILVERMAN
Date MICHAEL SILVERMAN
PRESIDENT, CHIEF EXECUTIVE OFFICER
CHAIRMAN OF THE BOARD
May 12, 2000 /s/ DEAN B. KERNUS
Date CHIEF FINANCIAL OFFICER