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 September 30, 2001
|_| 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: 21,261,627 shares of common stock as
of November 11, 2001.
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 September 30, Nine Months Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
REVENUES: (As restated (As restated
see Note 1) see Note 1)
Communications $ 1,613,115 $ 1,954,262 4,994,938 $ 5,585,170
Video compression 707,546 979,993 1,823,891 2,705,545
Satellite transmission technology 1,452,113 976,177 5,556,591 3,187,645
-------------- ---------------- --------------- ----------------
TOTAL REVENUES 3,772,774 3,910,432 12,375,420 11,478,360
-------------- ---------------- --------------- ----------------
COSTS AND EXPENSES:
Communications 626,384 803,351 2,050,620 2,372,676
Video compression 181,047 231,847 453,655 648,932
Satellite transmission technology 904,596 662,154 2,173,148 2,097,831
-------------- ---------------- --------------- ----------------
Gross margin 2,060,747 2,213,080 7,697,997 6,358,921
Selling, general and administrative 2,515,591 2,528,955 7,668,698 8,087,907
Research and development 42,796 340,132 140,354 853,299
-------------- ---------------- --------------- ----------------
LOSS FROM OPERATIONS (497,640) (656,007) (111,055) (2,582,285)
Interest expense - net 103,393 200,515 478,343 701,668
-------------- ---------------- --------------- ----------------
LOSS BEFORE TAXES (601,033) (856,522) (589,398) (3,283,953)
Income tax benefit 91,772 177,777 82,777 774,079
-------------- ---------------- --------------- ----------------
LOSS BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (509,261) (678,745) (506,621) (2,509,874)
Cumulative effect of a change in accounting principle - - - (333,275)
-------------- ---------------- --------------- ----------------
NET LOSS $ (509,261) $ (678,745) $ (506,621) $ (2,843,149)
============== ================ =============== ================
BASIC AND DILUTED EARNINGS PER SHARE:
Loss before cumulative effect of a change in
accounting principle $ (0.02) $ (0.03) $ (0.02) $ (0.12)
Cumulative effect on prior years of a change in
accounting principle - - - $ (0.02)
-------------- ---------------- --------------- ----------------
LOSS PER COMMON SHARE $ (0.02) $ (0.03) $ (0.02) $ (0.14)
============== ================ =============== ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - basic and diluted 21,198,637 21,085,050 21,135,126 20,926,151
<FN>
See notes to consolidated financial statements.
</FN>
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
----------------- -----------------
ASSETS 2001 2000
- ------ ---- ----
(Unaudited)
CURRENT ASSETS:
Cash $211,243 $2,089
Restricted cash - 28,225
Accounts receivable - net 3,129,622 3,263,327
Contract receivable 2,000,000 -
Inventories - net 1,480,600 1,361,075
Prepaid expenses and other assets 1,886,165 1,328,931
----------------- ---------------
Total current assets 8,707,630 5,983,647
RESTRICTED CASH 230,874 123,874
PROPERTY - net 497,311 574,912
CAPITALIZED SOFTWARE - net 1,242,141 345,654
GOODWILL - net 7,975,679 8,663,958
PATENT - net 14,365,385 15,209,135
----------------- ---------------
$33,019,020 $30,901,180
----------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,574,936 $1,563,886
Accrued expenses 2,086,226 1,075,149
Deferred revenue 1,300,811 311,461
Current portion of notes payable 3,311,707 5,571,388
----------------- ---------------
Total current liabilities 9,273,680 8,521,884
DEFERRED REVENUE 2,166,671 -
NOTES PAYABLE 3,096,325 3,115,831
DEFERRED TAX LIABILITY 6,035,526 6,373,026
----------------- ---------------
Total liabilities 20,831,798 18,010,741
STOCKHOLDERS' EQUITY:
Convertible preferred series B stock, no par value: 1,000,000
shares authorized, 376.25 shares issued, liquidation
preference $10,000 per share 3,762,500 3,762,500
Common stock, no par value; 100,000,000 shares authorized,
21,261,627 and 21,090,922 shares issued and outstanding 22,283,750 22,220,750
at 2001 and 2000, respectively
Accumulated deficit (13,599,432) (13,092,811)
----------------- ---------------
Total stockholders' equity 12,446,818 12,890,439
----------------- ---------------
$33,019,020 $30,901,180
----------------- ---------------
<FN>
See notes to consolidated financial statements.
</FN>
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
2001 2000
---- ----
(As restated
Operating activities: see Note 1)
Net loss $ (506,621) $ (2,843,149)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Loss on disposal of property 7,531 -
Deferred tax benefit (337,500) (378,851)
Depreciation and amortization 1,802,064 2,131,441
Issuance of common stock and stock warrants and options 53,000 139,125
Changes in assets and liabilities:
Restricted cash (78,775) -
Accounts receivable, net 133,705 1,132,254
Inventories, net (119,525) (317,656)
Prepaid expenses and other assets (557,234) (128,592)
Deferred revenue 1,156,021 -
Accounts payable and accrued expenses 2,022,127 (1,154,490)
------------------ ------------------
Net cash provided by (used in) operating
activities 3,574,793 (1,419,918)
------------------ ------------------
Investing activities:
Capitalized software (948,184) -
Capital expenditures (148,268) (138,849)
------------------ ------------------
Net cash used in investing activities (1,096,452) (138,849)
------------------ ------------------
Financing activities:
Proceeds from line of credit 450,000 1,705,000
Payments on line of credit (150,000) (755,000)
Issuance of series B preferred stock - 762,500
Issuance of common shares, net 10,000 425,897
Cash received from stock options exercised - 154,972
Principal payments on notes payable (2,579,187) (1,474,142)
------------------ ------------------
Net cash (used in) provided by financing activities (2,269,187) 819,227
------------------ ------------------
Net increase (decrease) in cash 209,154 (739,540)
Cash at beginning of period 2,089 857,634
------------------ ------------------
Cash at end of period $ 211,243 $ 118,094
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of Series A Preferred Stock into Series B - $ 3,000,000
Increase in account receivables due to deferred revenue $2,000,000 -
<FN>
See notes to consolidated financial statements.
</FN>
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements as of the three and nine
months ended September 30, 2001 and 2000 are unaudited and have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America 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 and nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for any other interim
period or for the year ending December 31, 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements. SAB No.
101 provides guidance in applying accounting principles generally accepted in
the United States of America to revenue recognition in financial statements,
including the recognition of non-refundable up-front payments received in
conjunction with contractual arrangements that have multiple performance
elements and require continuing involvement. SAB No. 101 requires that such fees
be recognized as products are delivered or services are performed that represent
the culmination of a separate earnings process.
Prior to the adoption of SAB No. 101, the Company recognized sales of
communication equipment at the time the equipment was shipped to customers.
However, under the provisions of SAB No. 101, the delivery of equipment by the
Company is not considered the culmination of an earnings process until the
related messaging service is provided by the Company to its customers. The
Company implemented SAB No. 101 in the fourth quarter of 2000 as a change in
accounting principle, retroactive to January 1, 2000, by deferring and
recognizing these up-front payments over the estimated period of the messaging
services. The cumulative effect of this change through December 31, 1999, which
was recorded in 2000, of changing the method of revenue recognition was
$(333,275) or $(0.01) per share. However, the effect on the results of
operations for the three and nine months ended September 30, 2000, which have
been restated in accordance with SAB 101, was an increase in revenue of $198,413
and $692,477 respectively, an increase in cost of goods sold by $93,388 and
$336,316, and a decrease of loss before cumulative effect of change in
accounting principle of $69,320 and $235,069 compared to the results previously
reported for the three and nine months ended September 30, 2000, respectively.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001 and
Statement 142 effective January 1, 2002. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. Any
impairment loss will be measured as of the date of adoption and recognized as
the cumulative effect of a change in accounting principle in the first interim
period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of approximately $7.7 million, unamortized identifiable intangible
assets in the amount of approximately $14 million which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense related to
goodwill was $1,359,522 and $688,279 for the year ended December 31, 2000 and
the nine months ended September 30, 2001, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Company's financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed Of," it retains many of the fundamental provisions of SFAS No. 121,
including the recognition and measurement of the impairment of long-lived assets
to be held and used, and the measurement of long-lived assets to be disposed of
by sale. SFAS No. 144 also supersedes the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30 (APB No. 30), "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. However, it retains
the requirement in APB No. 30 to report separately discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. At this time, the Company does not anticipate that the
adoption of SFAS No.144 will have a material effect on the Company's
consolidated financial statements.
NOTE 3 - BALANCE SHEET DETAILS
9/30/2001 12/31/2000
---------------- ----------------
Accounts receivable $2,124,628 $3,185,722
Accounts receivable - unbilled 1,087,515 135,225
---------------- ----------------
3,212,143 $3,320,947
Less allowance for doubtful
accounts (82,521) (57,620)
---------------- ----------------
$3,129,622 $3,263,327
---------------- ----------------
Inventory:
Raw materials $827,862 $693,568
Work in progress 243,708 204,790
Finished goods 449,030 502,717
---------------- ----------------
$1,520,600 $1,401,075
Less allowance for obsolete inventory (40,000) (40,000)
---------------- ----------------
$1,480,600 $1,361,075
---------------- ----------------
Property:
Computers and equipment $1,520,121 $1,428,178
Furniture and fixtures 219,953 268,310
Leasehold improvements 83,573 88,832
---------------- ----------------
1,823,647 1,785,320
Less accumulated depreciation (1,326,336) (1,210,408)
--------------- ----------------
$497,311 $574,912
---------------- ----------------
Capitalized software $1,293,838 $345,654
Less accumulated amortization (51,697) -
---------------- ----------------
$1,242,141 $345,654
---------------- ----------------
Goodwill $11,481,272 $11,481,272
Less accumulated amortization (3,505,593) (2,817,314)
---------------- ----------------
$7,975,679 $8,663,958
---------------- ----------------
Patent $18,000,000 $18,000,000
Less accumulated amortization (3,634,615) (2,790,865)
---------------- ----------------
$14,365,385 $15,209,135
---------------- ----------------
Accrued expenses:
Taxes payable $796,586 $269,586
Other accrued expenses 1,289,640 805,563
---------------- ----------------
$2,086,226 $1,075,149
---------------- ----------------
NOTE 4 - SIGNIFICANT CONTRACTS
During the second quarter of 2001, the Company received $1 million in connection
with the termination of a license agreement with a customer of Innovative
Communications Technologies, Inc. (ICTI). As this fee represented, in part, an
agreed-upon amount in lieu of future guaranteed royalty payments contractually
due under the original agreement, the Company has recorded the $1 million as
satellite transmission technology revenue in the second quarter.
On June 22, 2001, ICTI entered into a new exclusive license agreement for the
use of technology. The initial term of the exclusive license is through November
2004. Upon execution of the agreement in the second quarter, the Company
received a $1.5 million cash payment, which represents the first of four
guaranteed royalty payments totaling $3.5 million to be recorded over the
license term. The Company will recognize the guaranteed payments systematically
over the license period. Revenue of $83,333 and $250,000 was recognized in the
second and third quarters respectively, reducing the balance of deferred revenue
related to this license agreement to $3,166,667. Included in the long term
contract receivable on the consolidated balance sheet is $2 million representing
the remaining guaranteed royalty payments due under the license agreement. In
October 2001, the Company signed an agreement that satisfied the remaining
guaranteed payments due under this license agreement. See Note 7 - Subsequent
Event.
NOTE 5 - NOTES PAYABLE
On August 13, 2001, the Company signed a Change in Terms Agreement with its
bank, increasing the line of credit to $2 million from $1.750 million and
decreasing the interest rate to equal the lender's prime plus one and one half
percent from the lender's prime plus two percent. At September 30, 2001 the
balance on the line of credit, expiring December 31, 2001, was $2 million. The
Company is required to meet certain restrictive financial and operating
covenants under the line of credit. The Company was in compliance with the debt
covenants on September 30, 2001. Pursuant to the Agreement, the bank has
prohibited principal payments totaling approximately $1,700,000 on notes
payable, which were due over twelve months through October 1, 2001 to the two
former owners of Enerdyne Technologies, Inc. One former owner is a director of
the Company.
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"), ARCOMS 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. 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.
Corporate overhead expenses have been allocated based on revenue percentages of
each segment to total revenues.
Information by business segment for the three months ended September 30, 2001 is
set forth below.
Commun- Video Satellite
ications Compression Technology Consolidated
----------- ------------ ------------- ------------
Revenues $1,613,115 $707,546 $1,452,113 $3,772,774
Income (loss)
from operations $304,211 $(570,052) $(231,799) $(497,640)
Interest expense,
net $10,915 $82,767 $9,711 $103,393
Depreciation and
amortization $53,375 $396,282 $152,933 $602,590
Information by business segment for the nine months ended September 30, 2001 is
set forth below.
Commun- Video Satellite
ications Compression Technology Consolidated
----------- ------------- ------------ --------------
Revenues $4,994,938 $1,823,891 $5,556,591 $12,375,420
Income (loss)
from operations $868,973 $(1,787,919) $807,891 $(111,055)
Interest expense,
net $42,033 $389,249 $47,061 $478,343
Depreciation and
amortization $161,242 $1,172,402 $468,420 $1,802,064
Total assets $2,547,468 $20,927,949 $9,543,603 $33,019,020
Information by business segment for the three months ended September 30, 2000 is
set forth below. The segment information has been restated from the amounts
previously reported (see Note 1).
Commun- Video Satellite
ications Compression Technology Consolidated
-------------- ----------- ----------- --------------
Revenues $1,954,262 $979,993 $976,177 $3,910,432
Income (loss)
from operations $382,145 $(595,049) $(443,103) $(656,007)
Interest expense,
net $16,146 $176,156 $8,213 $200,515
Depreciation and
amortization $72,375 $491,366 $148,866 $712,607
Information by business segment for the nine months ended September 30, 2000 is
set forth below. The segment information has been restated from the amounts
previously reported (see Note 1).
Commun- Video Satellite
ications Compression Technology Consolidated
----------- ------------- ------------- --------------
Revenues $5,585,170 $2,705,545 $3,187,645 $11,478,360
Income (loss)
from operations $713,463 $(2,185,458) $(1,110,290) $(2,582,285)
Interest expense,
net $87,981 $563,076 $50,611 $701,668
Depreciation and
amortization $215,597 $1,469,687 $446,157 $2,131,441
Total assets $3,256,851 $27,331,158 $6,204,235 $36,792,244
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 tables present
revenues and long lived assets for each of the geographical areas in which the
Company operates:
Three months ended 9/30/01 Three months ended 9/30/00
-------------------- --------------------
Long Long
Revenues Lived Assets Revenues Lived Assets
United States $2,301,909 $24,309,024 $3,251,738 $31,046,285
International 1,470,865 2,366 658,694 32,941
------------------------------ -------------- -------------
Total $3,772,774 $24,311,390 $3,910,432 $31,079,226
------------------------------ -------------- -------------
Nine months ended Nine months ended
9/30/01 9/30/00
------- -------
Revenues Revenues
United States $6,692,728 $9,170,607
International 5,682,692 2,307,753
------------------- ------------------
Total $12,375,420 $11,478,360
------------------ ------------------
NOTE 7 - SUBSEQUENT EVENTS
In October, 2001 the Company received approximately $1.4 million, satisfying an
obligation for it to be paid future guaranteed royalty payments totaling $2.0
million. These future guaranteed royalty payments had been due to be paid at
specified dates in 2003 and 2004. See Note 4 - Significant Contracts. The amount
received of $1.4 million may be applied by the payer against any royalties or
other fees owed to the Company up to the original amount of future guaranteed
royalty payments of $2 million, adjusted for interest.
On October 31, 2001, the Company announced that it has entered into a letter
of intent regarding the potential sale of the assets of its Boatracs
business unit to Qualcomm Wireless Business Solutions, a division of
Qualcomm Incorporated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------------------------------
Overview
The Company has three business segments:
1. Boatracs, the communications segment,
2. Enerdyne Technologies, Inc. ("ENERDYNE"), the video compression segment,
a wholly owned subsidiary, and
3. Innovative Communications Technologies, Inc.("ICTI"),the satellite
technology segment, 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
Boatracs business segment, reliance upon QUALCOMM's Network Management Facility
through which the Boatracs' business segment message transmissions are formatted
and processed, the development of more advanced technology by competitors and
continuing technological innovation by the Company. These and other risks are
more fully described in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2000.
For the three months ended September 30, 2001 and 2000
Total revenues for the quarter ended September 30, 2001, were $3,772,774, a
decrease of $137,658 or 4% compared to total revenues of $3,910,432 for the
quarter ended September 30, 2000.
Communications revenues, which consist of revenues from the sale of Boatracs
systems, software and data transmission and messaging, were $1,613,115 or 43% of
total revenues for the quarter ended September 30, 2001, a decrease of $341,147
or 17% compared to $1,954,262 or 50% of total revenues for the quarter ended
September 30, 2000. Revenues for the quarter ended September 30, 2000 have been
restated for SAB No. 101 (see Note 1). The decrease in communication revenues
was caused by lower system and software sales and a small decrease in data
transmission and messaging revenues.
Video compression revenues were $707,546 or 19% of total revenues for the
quarter ended September 30, 2001, a decrease of $272,447 or 28%, compared to
$979,993 or 25% of total revenues in the prior comparable quarter. This was
caused by delays in the development of product software applications.
Revenues from satellite transmission technology were $1,452,113 or 38% of total
revenues for the quarter ended September 30, 2001 compared to revenues of
$976,177 or 25% of total revenues in the third quarter of 2000. The increase in
revenues of $475,936 or 49% is due primarily to an increase in system
integration projects during the quarter and increased royalty payments.
Communications expenses were $626,384 or 39% of communications revenues for the
quarter ended September 30, 2001, a decrease of $176,967 or 22%, compared to
$803,351 which represented 41% of communications revenue in the comparable
quarter of the prior year. Gross margin for communications increased 2% in the
quarter ended September 30, 2001 to 61% from 59% in the same period of the prior
year due to an increase in the margins on the sale of Boatracs systems, offset
by a decline in the margin on software revenues.
Video compression expense was $181,047 or 26% of video compression revenues for
the quarter ended September 30, 2001, a decrease of $50,800 or 22% compared to
$231,847 or 24% of video compression revenues in the same period of the prior
year. Gross margin declined 2% to 74% in the third quarter compared to a 76%
margin in the same quarter of the prior year.
Satellite transmission technology expenses were $904,596 or 62% of satellite
transmission technology revenues for the quarter ended September 30, 2001, an
increase of $242,442 or 37%, compared to $662,154 or 68% of satellite
transmission technology revenues in the prior year third quarter. The increase
in gross margin of 6% to 38% from 32% in the prior year relates primarily to
revenues from royalty payments recorded in the third quarter of 2001 which do
not have associated costs of good sold.
Selling, general and administrative expenses were $2,515,591 or 67% of total
revenues for the quarter ended September 30, 2001, a decrease of $13,364 or 1%,
compared to $2,528,955 or 65% of total revenues in the prior year comparable
quarter. Salary, rent and office supplies increased in the third quarter
compared to the prior third quarter offset by decreases in accounting,
insurance, legal and marketing expenses. Amortization expense decreased $86,304
to $534,826 due to an impairment charge to goodwill in the fourth quarter of
2000 related to the Enerdyne acquisition, decreasing future amortization
expense.
Research and development expenses were $42,796 or 1% of total revenues for the
quarter ended September 30, 2001, a decrease of $297,336 or 87% compared to
research and development expenses of $340,132 or 9% of total revenues in the
prior comparable quarter. The decrease relates to research and development
projects having reached technological feasibility and the subsequent costs have
been capitalized in accordance with SFAS 86.
Interest expense, net was $103,393 for the third quarter of 2001 and $200,515
for the third quarter of 2000, a decrease of $97,122 or 48% due primarily to the
reduction of principal on the Company's term note with a bank.
The income tax benefit for the quarter ended September 30, 2001 was $91,772
compared to an income tax benefit of $177,777 the prior comparable quarter.
For the nine months ended September 30, 2001 and 2000
Total revenues for the nine months ended September 30, 2001, were $12,375,420,
an increase of $897,060 or 8% compared to total revenues of $11,478,360 for the
nine months ended September 30, 2000.
Communications revenues, which consist of revenues from the sale of Boatracs
systems, software and data transmission and messaging, were $4,994,938 or 40% of
total revenues for the nine months ended September 30, 2001, a decrease of
$590,232 or 11% compared to $5,585,170 or 49% of total revenues for the nine
months ended September 30, 2000. Revenues for the nine months ended September
30, 2000 have been restated for SAB No. 101 (see Note 1). The decrease in
communication revenues was caused by lower system and software sales partially
offset by an increase in data transmission and messaging revenues.
Video compression revenues were $1,823,891 or 15% of total revenues for the nine
months ended September 30, 2001, a decrease of $881,654, or 33%, compared to
$2,705,545 or 23% of total revenues in the prior comparable period. This was
caused by delays in the development of product software applications.
Revenues from satellite transmission technology were $5,556,591 or 45% of total
revenues for the nine months ended September 30, 2001 compared to revenues of
$3,187,645 or 28% of total revenues in the comparable nine months of 2000. The
increase in revenues of $2,368,946 or 74% is due primarily to license fees
recorded in the first and second quarters of 2001 totaling $2.2 million.
Communications expenses were $2,050,620 or 41% of communications revenues for
the nine months ended September 30, 2001, a decrease of $322,056 or 14%,
compared to $2,372,676 which represented 42% of communications revenue in the
comparable nine months of the prior year. Gross margin for communications
increased one percent to 59% in the nine months ended September 30, 2001 from
58% in the comparable nine months of the prior year, reflecting a higher margin
on Boatracs system sales, offset by a reduced margin on software revenue. Data
transmission and messaging revenues remained constant.
Video compression expense was $453,655 or 25% of video compression revenues for
the nine months ended September 30, 2001, a decrease of $195,277 or 30% compared
to $648,932 or 24% of video compression revenues in the same period of the prior
year. Gross margin decreased by one percent to 75%.
Satellite transmission technology expenses were $2,173,148 or 39% of satellite
transmission technology revenues for the nine months ended September 30, 2001,
an increase of $75,317 or 4%, compared to $2,097,831 or 66% of satellite
transmission technology revenues in the prior year nine months. The increase in
gross margin of 27% to 61% from 34% in the prior year relates to revenues from
license fees in the first and second quarter of 2001 that do not have associated
costs.
Selling, general and administrative expenses were $7,668,698 or 62% of total
revenues for the nine months ended September 30, 2001, a decrease of $419,209 or
5%, compared to $8,087,907 or 70% of total revenues in the prior comparable
period. Salary, travel and marketing expenses declined for the nine months
offset by increases in commission and rent expenses. Amortization expense
decreased $279,665 to $1,583,726 due to an impairment charge to goodwill in the
fourth quarter of 2000 related to the Enerdyne acquisition, decreasing future
amortization expense.
Research and development expenses were $140,354 or 1% of total revenues for the
nine months ended September 30, 2001, a decrease of $712,945 or 84% compared to
research and development expenses of $853,299 or 7% of total revenues in the
prior comparable nine months. The decrease relates to research and development
projects having reached technological feasibility and the subsequent costs have
been capitalized.
Interest expense, net was $478,343 for the first nine months of 2001 and
$701,668 for the first nine months of 2000, a decrease of $223,325 or 32% due
primarily to the reduction of principal on the Company's term note with a bank.
The income tax benefit for the nine months ended September 30, 2001 was $82,777
compared to income tax benefit of $774,079 in the prior comparable period.
Liquidity and Capital Resources
The Company's cash balance at September 30, 2001 was $211,243, an increase of
$209,154 compared to the December 31, 2000 cash balance of $2,089. At September
30, 2001, working capital was negative $566,050, an increase of $1,972,187 from
the negative working capital of $2,538,237 at December 31, 2000. Cash of
$3,574,793 was provided by operating activities, cash of $1,096,452 was used in
investing activities and cash of $2,269,187 was used in financing activities in
the first nine months of 2001. During the nine months ended September 30, 2001,
the Company received total payments of $2.5 million related to two different
license agreements. Of this payment, $1.8 million was used to pay off the
Company's bank term note.
On August 13, 2001, the Company signed a Change in Terms Agreement increasing
the line of credit to $2 million from $1.75 million and decreasing the interest
rate to equal the lender's prime plus one and one half percent from the lender's
prime plus two percent. At September 30, 2001, $2,000,000 was drawn on the line
of credit expiring December 31, 2001. The Company is required to meet certain
restrictive financial and operating covenants under the bank debt. The Company
was in compliance with the debt covenants on September 30, 2001.
The Company anticipates making capital expenditures of at least $100,000 in the
fourth quarter, 2001, excluding assets that may be acquired in business
combinations. To date, the Company has financed its working capital needs
through private loans, bank debt, the issuance of common and preferred stock and
cash generated from operations. Any 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. When additional funds
are raised by issuing equity securities, dilution to the existing shareholders
result. If adequate funds are not available in the future, the Company's
business would be adversely affected.
The report of independent auditors on the Company's December 31, 2000 financial
statements includes an explanatory paragraph indicating there is substantial
doubt about the Company's ability to continue as a going concern. The Company
believes that going forward, it will be able to continue as a going concern. The
Company reported an increase in revenues and earnings for the nine months ended
September 30, 2001 and paid off the term debt with its bank. In addition, the
Company received total payments of $2.5 million in the second quarter relating
to two different license agreements. This payment resulted in an increase to
cash provided by operating activities. In August, the Company negotiated an
increase in its line of credit to $2,000,000 and a reduction in the interest on
the line of credit to lender's prime rate plus one and one half percent. See
Note 7 - Subsequent Event
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any current or pending legal proceedings to which it
is a party.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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
November 14, 2001 /s/ MICHAEL L. SILVERMAN
- ------------------ ------------------------
Date MICHAEL SILVERMAN
PRESIDENT, CHIEF EXECUTIVE OFFICER CHAIRMAN
OF THE BOARD
November 14, 2001 /s/ DEAN B. KERNUS
- ----------------- --------------------------------------
Date CHIEF FINANCIAL OFFICER