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, 2002
|_| 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 June 17, 2002.
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,
2002 2001
REVENUES: (Restated - see
Note 1)
Communications $ 1,604,918 $ 1,734,106
Video compression 923,474 711,555
Satellite transmission technology 1,038,377 651,233
-------------------- -----------------
TOTAL REVENUES 3,566,769 3,096,894
-------------------- -----------------
COSTS AND EXPENSES:
Communications 669,312 726,488
Video compression 316,610 157,301
Satellite transmission technology 424,899 411,309
-------------------- -----------------
Gross Margin 2,155,948 1,801,796
Selling, general and administrative 3,494,594 2,612,680
Research and development 180,346 187,390
-------------------- -----------------
LOSS FROM OPERATIONS (1,518,992) (998,274)
Interest expense - net (134,212) (184,838)
-------------------- -----------------
LOSS BEFORE TAXES (1,653,204) (1,183,112)
Income tax benefit 362,052 259,575
-------------------- -----------------
NET LOSS $ (1,291,152) $ (923,537)
==================== =================
BASIC LOSS PER SHARE $ (0.06) $ (0.04)
DILUTED LOSS PER SHARE $ (0.06) $ (0.04)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIS AND DILUTED 21,214,294 21,090,922
Dilutive effect of:
Employee stock options - -
Warrants - -
Weighted average of common shares outstanding,
assuming dilution 21,214,294 21,090,922
<FN>
See notes to consolidated financial statements.
</FN>
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
------------------ ------------------
ASSETS 2002 2001
(Unaudited)
CURRENT ASSETS:
Cash $167,787 $268,731
Accounts receivable - net 2,803,583 3,810,809
Inventories - net 1,505,454 1,572,944
Prepaid expenses and other assets 809,792 541,962
------------------ ----------------
Total current assets 5,286,616 6,194,446
DEPOSITS & OTHER ASSETS 289,849 289,849
PROPERTY - net 453,392 487,402
CAPITALIZED SOFTWARE - net 219,955 234,871
GOODWILL - net 5,434,138 5,434,138
PATENT - net 13,186,339 13,607,983
------------------ ----------------
TOTAL $24,870,289 $26,248,689
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,550,064 $2,746,200
Accrued expenses 1,680,133 1,015,982
Deferred Revenue 879,444 2,052,838
Current portion of notes payable 279,533 6,685,065
------------------ ----------------
Total current liabilities 5,389,174 12,500,085
DEFERRED REVENUE 2,155,683 1,570,613
DEFERRED TAX LIABILITY 4,184,971 4,364,333
NOTES PAYABLE 6,599,955 -
STOCKHOLDERS' EQUITY:
Convertible preferred series B stock, no par value: 1,000,000
shares authorized, 351 shares issued, liquidation
preference $10,000 per share 3,512,500 3,512,500
Common stock, no par value; 100,000,000 shares authorized,
21,261,627 and 21,201,627 shares issued and outstanding
at 2002 and 2001, respectively 22,298,750 22,280,750
Accumulated deficit (19,270,744) (17,979,592)
------------------ ----------------
Total stockholders' equity 6,540,506 7,813,658
------------------ ----------------
TOTAL $24,870,289 $26,248,689
================== ================
<FN>
See notes to consolidated financial statements.
</FN>
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
2002 2001
Operating activities: (Restated - see
Note 1)
Net loss $(1,291,152) $ (923,537)
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Issuance of common stock for services rendered 18,000 -
Loss on disposal of property - 7,531
Deferred tax benefit (179,362) (112,500)
Depreciation and amortization 508,044 604,784
Changes in assets and liabilities:
Restricted cash - 28,225
Accounts receivable, net 1,007,226 278,249
Inventories, net 67,490 (149,419)
Prepaid expenses and other assets (267,830) (107,458)
Accounts payable and accrued expenses 468,015 (83,992)
Deferred revenue (588,324) 1,372,561
----------------- ----------------
Net cash (used in) provided by operating activities (257,893) 914,444
----------------- ----------------
Investing activities:
Capitalized software - (32,875)
Capital expenditures (37,474) (65,907)
----------------- ----------------
Net cash used in investing activities (37,474) (98,782)
----------------- ----------------
Financing activities:
Proceeds from line of credit - 50,000
Increase in notes payable 194,423 -
Principal payments on notes payable (783,918)
----------------- ----------------
Net cash provided by (used in) financing activities 194,423 (733,918)
----------------- ----------------
Net increase (decrease) in cash (100,944) 81,744
Cash at beginning of period 268,731 2,089
----------------- ----------------
Cash at end of period $ 167,787 $ 83,833
================= ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Covenant not to complete, net reclassified to deposits $ 57,865
and other assets from goodwill, net
<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 months ended
March 31, 2002 and 2001 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 months ended March 31, 2002 are not necessarily indicative
of the results that may be expected for any other interim period or for the year
ending December 31, 2002.
Restatement - ARCOMS' quarterly report on Form 10-QSB for the three month period
ended March 31, 2001 was amended to restate Items 1 and 2 of Part I of our
original Form 10-QSB to reflect the restatement of our consolidated financial
statements. This restatement relates to certain capitalized software costs and
revenue recognition of one particular licensing agreement.
Subsequent to the issuance of our consolidated financial statements for the
quarter ended March 31, 2001, we determined that certain software products for
which costs had been capitalized had not met the definition of technological
feasibility as provided in Statement of Financial Accounting Standards No. 86.
Accordingly, we restated our financial statements for this quarter to reflect
the presentation of such costs as research and development. The restatement
resulted in an increase in research and development expenses of $126,697 for the
three months ended March 31, 2001.
In addition, subsequent to the issuance of our consolidated financial statements
for the quarter ended March 31, 2001, we determined that it would have been
preferable to recognize one time based license fee ratably over the term of the
agreement based on guidance provided by Staff Accounting Bulleting No. 101
issued by the U.S. Securities and Exchange Commission, rather than recognizing
the entire fee upon receipt. The amount of the fee was $1,200,000 all of which
we had recognized in the quarter ended March 31, 2001. The term of the agreement
is 18 months. The restatement results in a decrease to satellite transmission
technology revenue of $1,133,333 for the three months ended March 31, 2001.
Business Conditions - Management's Plan to Continue as a going concern - The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the ordinary course of business. As shown in the accompanying
consolidated financial statements, the Company has incurred net losses of
$1,291,152 for the quarter ended March 31, 2002 and additionally had net losses
of $4,850,555, $9,111,425, and $926,288 for the years ended December 31, 2001,
2000, and 1999, respectively. The loss for the years ended December 31, 2001 and
December 31, 2000 included non-cash impairment charges of $2,300,000 and
$6,000,000, respectively, related to goodwill recorded as a result of the
acquisition of Enerdyne. In addition, during 2001, 2000, and 1999, the Company
undertook significant research and development efforts and refined its marketing
and manufacturing processes, all of which contributed significantly to its net
losses for those years. At March 31, 2002, the Company had an accumulated
deficit of $19,270,744 and at December 31, 2001, the Company had an accumulated
deficit of $17,979,592. Working capital was negative $102,558 at March 31, 2002
and negative $6,305,639 at December 31, 2001, partially the result of
classifying borrowings from the sellers of Enerdyne as a current liability and
an accrual in the amount of $500,000 relating to settlement of a "minimum
purchase requirement" dispute with Qualcomm. At March 31 2002, the debt was
reclassified to a long-term liability (see Note 6).
Reclassification - Certain balances in the prior quarter have been reclassified
to conform to the presentation adopted in the current quarter.
Use of estimates - In preparing the financial statements, we have made estimates
and assumptions that affect the following:
Reported amounts of assets and liabilities at the date of the financial
statements; Disclosure of contingent assets and liabilities at the date
of the financial statements; and Reported amounts of revenues and
expenses during the period.
Actual amounts could differ from those estimates.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted Financial Accounting Standards
Board Statement of Accounting Standards (SFAS) 141, Business Combinations, SFAS
142, Goodwill and Intangible Assets and SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 142 sets forth the accounting for
goodwill and intangible assets already recorded. Commencing January 1, 2002,
goodwill is no longer being amortized. Goodwill will be tested for impairment by
comparing the assets' fair value to the carrying value. Management is in the
process of conducting preliminary valuations of its reporting units and will
finalize the analysis in the second quarter of 2002. With the adoption of SFAS
142, the Company reassessed the useful lives and residual values of all acquired
intangible assets to make any necessary amortization period adjustments. No
amortization period adjustments were necessary.
As of March 31, 2002
Gross Carrying Amount Accumulated Amortization
Amortized Intangible Assets
Patent $18,299,990 $5,113,651
Non-compete Agreements 125,000 67,135
TOTAL $18,424,990 $5,180,786
Unamortized Intangible Asset
Goodwill $ 9,102,022 $3,667,884
Aggregate Amortization Expense:
For the quarter ended March 31, 2002 $428,589
Estimated Amortization Expense:
For year ending December 31, 2002 $1,714,356
For year ending December 31, 2003 $1,714,356
For year ending December 31, 2004 $1,688,881
For year ending December 31, 2005 $1,689,376
For year ending December 31, 2006 $1,686,576
The following table reflects the reconciliation of reported net loss and net
loss per share to the amounts adjusted for the exclusion of goodwill
amortization:
Three Months Ended March 31,
2002 2001
Net Loss $(1,291,152) $(923,537)
Add Back: Goodwill Amortization 0 222,481
Adjusted Net Loss $(1,291,152) $(701,056)
Basic and Diluted Loss Per Share: $(.06) $(.04)
Add Back: Goodwill Amortization 0 .01
Adjusted Net Loss $(.06) $(.03)
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
March 31 2002, the adoption of SFAS No. 144 did not have an effect on the
Company's consolidated financial statements.
NOTE 3 - BALANCE SHEET DETAILS
3/31/2002 12/31/2001
---------------- ----------------
Accounts receivable $2,928,818 $3,936,044
Less allowance for doubtful accounts (125,235) (125,235)
---------------- ----------------
$2,803,583 $3,810,809
---------------- ----------------
Inventory:
Raw materials $927,675 $927,575
Work in progress 220,956 956 270,242
Finished goods 444,882 463,186
---------------- ----------------
$1,593,513 $1,661,003
Less allowance for obsolete inventory (88,059) (88,059)
---------------- ----------------
$1,505,454 $1,572,944
---------------- ----------------
Property:
Computers and equipment $1,395,090 $1,357,615
Furniture and fixtures 219,953 219,953
Leasehold improvements 84,531 84,531
---------------- ----------------
1,699,574 1,662,099
Less accumulated depreciation (1,246,182) (1,174,697)
---------------- ----------------
$453,392 $487,402
---------------- ----------------
Goodwill $9,102,022 $9,102,022
Less accumulated amortization (3,667,884) (3,667,884)
---------------- ----------------
$5,434,138 $5,434,138
---------------- ----------------
Patent $18,299,990 $18,299,990
Less accumulated amortization (5,113,651) (4,692,007)
---------------- ----------------
$13,186,339 $13,607,983
---------------- -------------
NOTE 4 - LINE OF CREDIT AND NOTES PAYABLE
On January 29, 2002, the Company signed a Change in Terms Agreement with its
bank, extending the maturity date to April 30, 2002 from January 31, 2002 on a
line of credit. On May 29, 2002 the Company signed a Loan Modification
Agreement" (the "Agreement") extending the maturity date on the line of credit
to May 30, 2003. The Agreement also required a payment of $750,000 bringing the
principal balance to $1,500,000 and the interest rate was changed to prime plus
one and one-half percent, but in no event less than 6.5%. In addition, the line
of credit was converted from a revolving to a non-revolving term loan facility
and the Company has no right to further draws or disbursements.
The interest rate at March 31, 2002 was 6.5% and the balance on the line of
credit was $2,250,000. The Company is required to meet certain restrictive
financial and operating covenants under the line of credit. The Company was not
in compliance with the debt covenants on December 31, 2001 nor March 31, 2002.
Pursuant to the Agreement dated May 29, 2002 the bank waived the existing
defaults so the debt which was previously classified as current was reclassified
as long term. In addition the bank replaced certain of the existing covenants
with new covenants. The bank has also prohibited making principal payments
totaling approximately $1,031,000 on the senior notes and $1.1 million on the
subordinated notes to the two former owners of Enerdyne Technologies, Inc.
through March 31, 2002 and further prohibited making any future principal
payments on either of the notes until the balance of the line of credit has been
fully paid. The maturity of the subordinated notes has been extended through
January 1, 2004 and the holders of the senior notes and the subordinated notes
have permanently waived the all events of default through May 29, 2002.
On May 16 2002, the Company entered in a secured promissory note with a private
company in the amount of $500,000 accruing interest at prime plus 3.25%. This
note was converted into preferred stock on May 31, 2002. See Note 6.
NOTE 5 - 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"). 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 March 31, 2002 is set
forth below.
Commun- Video Satellite
Ications Compression Technology Consolidated
---------------- ---------------- ----------------- ---------------------
Revenues $1,604,918 $923,474 $1,038,377 $3,566,769
Income (loss) from
operations $(267,901) $(1,021,656) $(229,435) $(1,518,992)
Interest expense, net $(17,234) $(9,714) $(107,264) $(134,212)
Depreciation and
amortization $28,503 $460,111 $19,430 $508,044
Total assets $2,001,238 $16,052,157 $6,816,894 $24,870,289
Information by business segment for the three months ended March 31, 2001 is set
forth below.
Commun- Video Satellite
ications Compression Technology Consolidated
------------- ---------------- ------------------ ---------------------
Revenues $1,734,106 $711,555 $651,233 $3,096,894
Income (loss) from
operations $198,993 $(614,774) $(582,493) $(998,274)
Interest expense, net
$19,890 $157,828 $7,120 $184,838
Depreciation and
amortization $64,104 $381,517 $159,163 $604,784
Total assets $3,211,686 $20,623,599 $6,584,509 $30,419,794
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. The
financial position and results of operations of our foreign subsidiaries are
generally determined using the U.S. dollar as the functional currency.
Transactional gains and losses are included in determining net income for the
period in which the exchange rate changes. Such amounts have remained immaterial
on the aggregate. 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 3/31/02 Three months ended 3/31/01
Long Long
Revenues Lived Assets Revenues Lived Assets
United States $2,892,731 $14,149,007 $2,330,980 $15,839,878
International 674,038 528 765,914 5,716
----------------- -------------------- --------------------- ---------------
Total $3,566,769 $14,149,535 $3,096,894 $15,845,594
----------------- -------------------- --------------------- ---------------
NOTE 6 - SUBSEQUENT EVENTS
Recapitalization Arrangement
On May 31, 2002, the Company entered into an agreement (the "Stock Purchase
Agreement") with two private companies (the "Purchasers"). Under the Stock
Purchase Agreement, the Company sold an aggregate of 10,667 shares of two newly
designated classes of the Company's preferred stock, having a total aggregate
purchase price of $4,000,000 to the Purchasers pursuant to a private placement
exempt from registration under the Securities Act. As part of the total purchase
price, $500,000 was paid through cancellation/conversion of a promissory note
that was entered into on May 16, 2002 (see Note 4). In addition, the Company
plans to offer all existing holders of its Series B Preferred Stock to exchange
such shares for shares of a third newly designated class of its preferred stock.
The holders of all classes of the preferred stock are entitled to receive, when
and if declared by the Board of Directors, cumulative cash dividends, in
preference and priority to dividends on any junior stock at 10% per annum. In
addition, each share of the newly designated classes of preferred stock is
convertible into common stock at various conversion prices and may be adjusted
for certain recapitalization events.
As part of the transaction described above, the Chairman of the Company's Board
of Directors resigned his chairmanship as well as the position as chief
executive officer and president, and four of the remaining five members of the
Company's Board of Directors resigned their directorships. In addition, three
new directors were appointed to the Company's Board of Directors, one of whom
was also appointed Chairman of the Company's Board of Directors. In addition,
the Stock Purchase Agreement required modifications of the Company's debt
agreement with its bank as well as its debt agreements with the two former
owners of Enerdyne Technologies, Inc. These modifications have extended the
maturity dates of the loans and waived all violations of the relative covenant
requirements through the date of the agreement (see Note 4). In addition, the
Stock Purchase Agreement grants the investors the exclusive right, exercisable
by delivery of written notice to the Company during the period from August 2,
2002 through June 1, 2003 to purchase the assets of the Company's Boatracs
division at a purchase price as defined in the agreement. In the event that the
investors exercise their option to purchase Boatracs' assets, they may tender
the Series C Preferred Stock toward the purchase price, which shall be valued at
their original purchase price plus accrued but unpaid dividends thereon.
In conjunction with the Stock Purchase Agreement, the Company also entered into
an employment contract with the chief executive officer, in accordance with
which and upon the approval of the Board of Directors, the Company granted the
executive nonstatutory stock options to purchase 3,000,000 shares of the
Company's common stock.
Settlement with QUALCOMM
Under a license and distribution agreement (the "Distribution Agreement") the
Company has with Qualcomm, Incorporated ("QUALCOMM"), the Company is required to
comply with "minimum purchase requirements" annually. In accordance with an
amendment to the Distribution Agreement, the Company and QUALCOMM agreed that
commencing January 1, 2000 and annually thereafter, the required minimum
purchase requirements will be mutually agreed upon by QUALCOMM and the Company,
except that for each subsequent annual period thereafter, the Company shall
purchase an additional number of units equal to at least ten percent (10%) of
the minimum purchase requirement for the immediately preceding year. On March 7,
2002, QUALCOMM asserted that the Company was in default of the "minimum purchase
requirements" for 2001. The Company directed QUALCOMM's attention to the
applicable amendment to the Distribution Agreement and had invited QUALCOMM to
enter into negotiations for the purpose of agreeing upon the minimum purchase
requirements. The Company had, also under protest, issued a purchase order to
QUALCOMM for a sufficient number of units to comply with QUALCOMM's demand in
order to preserve the Company's rights, which was rejected by QUALCOMM. The
Company and QUALCOMM then entered into good faith negotiations in an attempt to
agree to minimum purchase requirements without prejudice to the parties'
respective asserted positions.
On June 3, 2002, the Company executed an amendment to the Distribution Agreement
(the "Amendment") and paid QUALCOMM $500,000 in order to reinstate ARCOMS'
exclusivity rights under the Distribution Agreement. The exclusivity was
reinstated through September 30, 2002 without any additional purchase
requirements. In accordance with the Amendment, ARCOMS released QUALCOMM and
waived any existing or future claims, liabilities, or arguments contesting the
number of units to be purchased to meet the minimum purchase requirements for
maintaining exclusivity under the Distribution Agreement for 2003 and all prior
years. The Amendment also defined the revised minimum purchase requirements
under the Distribution Agreement. In accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies," the Company recorded
the payment of $500,000 to QUALCOMM as a contingent liability as of March 31,
2002 with a corresponding increase to selling, general and administrative
expenses for the quarter then ended.
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, 2001.
For the three months ended March 31, 2002 and 2001
Total revenues for the quarter ended March 31, 2002, were $3,566,769 a increase
of $469,875 or 15% compared to total revenues of $3,096,894 for the quarter
ended March 31, 2001.
Communications revenues, which consist of revenues from the sale of Boatracs
systems, software and data transmission and messaging, were $1,604,918 or 45% of
total revenues for the quarter ended March 31, 2002, a decrease of $129,188 or
7% compared to $1,734,106 or 56% of total revenues for the quarter ended March
31, 2001. The decrease in communication revenues was caused by an approximate
decrease of $63,000 or 5% in data transmission and messaging revenues and also a
decrease in system and software sales.
Video compression revenues were $923,474 or 26% of total revenues for the
quarter ended March 31, 2002, an increase of $211,919 or 30%, compared to
$711,555 or 23% of total revenues in the prior comparable quarter. The increase
was primarily due to the completion of engineering of new products and a
stronger focus on sales and marketing and building new channels.
Revenues from satellite transmission technology were $1,038,377 or 29% of total
revenues for the quarter ended March 31, 2002 compared to revenues of $651,233
or 21% of total revenues in the first quarter of 2001. The increase in revenues
of $387,144 or 59% is due primarily to the accretion of deferred revenue under a
time based license arrangement sold in the prior year.
Communications expenses were $669,312 or 42% of communications revenues for the
quarter ended March 31, 2002, a decrease of $57,176 or 8%, compared to $726,488
which represented 42% of communications revenue in the comparable quarter of the
prior year. Overall, gross margin for communications remained consistent at 58%.
Video compression expense was $316,610 or 34% of video compression revenues for
the quarter ended March 31 2002 an increase of $159,309 or 101% compared to
$157,301 or 22% of video compression revenues in the same period of the prior
year. Gross margin decreased 12% to 66% in the first quarter compared to a 78%
margin in the same quarter of the prior year due to increased costs of a long
term project.
Satellite transmission technology expenses were $424,899 or 41% of satellite
transmission technology revenues for the quarter ended March 31, 2002, an
increase of $13,590 or 3%, compared to $411,309 or 63% of satellite transmission
technology revenues in the prior year first quarter. The increase in gross
margin of 22% to 59% from 37% in the prior year relates primarily to revenues
from the accretion of a time based license recorded in the first quarter of 2002
compared to the prior year, which do not have associated costs of good sold.
Selling, general and administrative expenses were $3,494,594 or 98% of total
revenues for the quarter ended March 31, 2002, an increase of $881,914 or 34%,
compared to $2,612,680 or 84% of total revenues in the prior comparable quarter.
The increase was primarily due to a $500,000 contingent accrual recorded to
settle distribution exclusivity issues with Qualcomm (see Note 6). In addition,
salary expense increased to $1.3 million from approximately $840,000, primarily
due to normal annual salary increases and a head count increase in engineering
and technical staff positions at the video compression segment. Accounting
expense increased by $62,000 or 160% due to costs associated with a change in
auditors and the restatement of certain transactions. These increases were
offset by decreases in legal expenses and marketing expenses. Amortization
expense decreased $90,000 to $436,600 due to the implementation SFAS 141, which
no longer requires the amortization of goodwill.
Research and development expenses were $180,346 or 5% of total revenues for the
quarter ended March 31, 2002, a decrease of $7,044 or 4% compared to research
and development expenses of $187,390 or 6% of total revenues in the prior
comparable quarter. The quarter ended March 31, 2001 research and development
balance has been restated (see note 1).
Interest expense, net was $134,212 for the first quarter of 2002 and $184,838
for the first quarter of 2001, a decrease of $50,626 or 27% due primarily to the
repayment of the Company's term note with a bank in the second quarter of 2001.
The income tax benefit for the quarter ended March 31, 2002 was $362,052
compared to an income tax benefit of $259,575 the prior comparable quarter.
Liquidity and Capital Resources
The Company's cash balance at March 31, 2002 was $167,787, a decrease of
$100,944 compared to the December 31, 2001 cash balance of $268,731. At March
31, 2002, working capital was negative $102,558 an increase of $6,203,081 from
the negative working capital of $6,305,639 at December 31, 2001. Cash of
$275,893 was used in operating activities, cash of $37,474 was used in investing
activities and cash of $212,423 was provided by financing activities in the
first three months of 2002.
The Company anticipates making capital expenditures of at least $200,000 in the
year ended December 31, 2002, 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. The report of independent auditors on
the Company's December 31, 2001 financial statements includes an explanatory
paragraph indicating there is substantial doubt about the Company's ability to
continue as a going concern. The Company has since reported an increase in
revenues for the three months ended March 31, 2002 and have entered into a
recapitalization arrangement (see Note 6) as part of its plan to secure
additional financing and restructure current debt arrangements. 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 will result. If adequate funds are not available in
the future, the Company's business would be adversely affected. See Note 6.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our invested cash
without significantly increasing risk of loss. Our financial instruments include
cash, accounts receivable, accounts payable, accrued liabilities and debt. At
March 31, 2002, the carrying value of our financial instruments approximated
their fair values. Our policy is not to enter into derivative financial
instruments. In addition, we do not enter into any futures or forward contracts
and therefore, we do not have significant market risk exposure with respect to
commodity prices. Our interest expense is sensitive to changes in the general
level of interest rates as our credit facility has interest rates based upon
market prime rates, as discussed in the note to the Consolidated Financial
Statements. To-date, we have not experienced significant losses due to increases
in market prime rates. Although we transact our business in U.S. dollars, future
fluctuations in the value of the U.S. dollar may affect the price
competitiveness of our products. However, we do not believe that we currently
have any significant direct foreign currency exchange rate risk and have not
hedged exposures denominated in foreign currencies or any other derivative
financial instruments.
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 and which may have an adverse effect on the Company.
...
ITEM 2. CHANGES IN SECURITIES
See Note 6, "Subsequent Events".
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 31, 2001 the Company was in default under its existing revolving
credit facility and Subordinated notes due to failure to meet certain financial
ratio covenants and as such, balances were classified as current. In May 2002,
we entered into an amendment to our credit facility and subordinated notes,
which, among other provisions, waived the defaults that existed at December 31,
2001 and reset all covenants for 2002 and subsequent years and as such, the
balances were reclassified as long-term and current. For further information see
Note 4 to the condensed consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Stock Purchase Agreement referred to in Note 6 - Subsequent Events has been
filed as an attachment to the Companys' Form 8-K dated June 17, 2002. The Form
8-K is incorporated by reference to this Form 10-QSB.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index
Exhibit Description
10.45 Employment Agreement between ARCOMS and Brandon Nixon dated May 30, 2002
(filed herewith).
10.46 Loan Modification Agreement between ARCOMS, Enerdyne and
First National Bank dated May 29, 2002 (filed herewith).
In March 2002, the Company filed Form 8-K advising the Securities and Exchange
Commission of a change in the Registrant's Certifying Accountants. Amendments
No. 1, 2 and 3 to the 8-K were filed on April 19 2002, May 22 2002, and June 11
2002, respectively.
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
June 17 2002 /s/ BRANDON L. NIXON
Date BRANDON L. NIXON
CHIEF EXECUTIVE OFFICER
CHAIRMAN
June 17 2002 /s/ DEAN B. KERNUS
Date CHIEF FINANCIAL OFFICER