U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1997 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 BOATRACS, 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) 6440 Lusk Blvd., Suite D201, San Diego, CA 92121 (Address of Principal Executive Offices) (619) 587-1981 (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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. 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: 12,602,310 shares of common stock as of June 30, 1997. Transitional Small Business Disclosure Format (check one): Yes __ No X PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BOATRACS, INC. Statements of Operations (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 1997 1996 1997 1996 REVENUES: Communications systems $635,524 $413,533 $1,135,348 $874,506 Data transmission & messaging 646,015 490,160 1,277,434 933,792 TOTAL REVENUES 1,281,539 903,693 2,412,782 1,808,298 COSTS AND EXPENSES: Communications systems 419,569 271,953 755,383 576,039 Data transmission & messaging 336,403 262,237 646,780 516,010 Selling, general and administrative 596,443 634,903 1,200,360 1,167,131 TOTAL COSTS AND EXPENSES 1,352,415 1,169,093 2,602,523 2,259,180 LOSS FROM OPERATIONS (70,876) (265,400) (189,741) (450,882) Interest income 2,525 18,989 6,193 36,350 Interest expense -0- (968) (2,060) (2,163) NET LOSS ($68,351) ($247,379) ($185,608) ($416,695) NET LOSS PER SHARE ($.01) ($.02) ($.01) ($.03) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 12,602,310 12,602,310 12,602,310 12,592,578 See Notes to Financial Statements BOATRACS, INC. BALANCE SHEETS June 30, December 31, ASSETS 1997 1996 (Unaudited) CURRENT ASSETS: Cash $303,160 $103,144 Investment Securities 246,473 425,852 Accounts receivable -net 628,265 557,246 Inventories 126,021 92,118 Prepaid expenses and other assets 166,126 73,710 TOTAL CURRENT ASSETS 1,470,045 1,252,070 PROPERTY, at cost 154,710 120,731 NOTES RECEIVABLE 259,463 208,463 TOTAL $1,884,218 $1,581,264 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $1,318,536 $796,666 Note payable--stockholder 45,129 Short-term margin loan on securities 139,268 Deferred compensation- net 45,129 TOTAL CURRENT LIABILITIES 1,363,665 981,063 STOCKHOLDERS' EQUITY: Preferred stock, no par value; 1,000,000 shares authorized, no shares issued Common stock, no par value; 100,000,000 shares authorized, 12,602,310 shares issued and outstanding in 1997 and 1996, respectively 4,210,925 4,210,925 Accumulated deficit (3,374,910)(3,189,302) Note receivable for common stock issued (315,462) (421,422) TOTAL STOCKHOLDERS' EQUITY 520,553 600,201 TOTAL $1,884,218 $1,581,264 See Notes to Financial Statements BOATRACS, INC. STATEMENTS OF CASH FLOWS (Unaudited) Six months ended June 30, 1997 1996 Operating activities: Net loss ($185,608) ($416,695) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 25,193 16,742 Accrued interest on notes receivable -0- (5,466) Changes in assets & liabilities: Accounts receivable (71,019) (188,255) Inventories (33,903) (2,769) Prepaid expenses & other assets (92,416) (38,534) Accounts payable and accrued expenses 521,870 115,895 Net cash provided by (used in) operating activities 164,117 (519,082) Investing activities: Capital expenditures (59,172) (43,827) Net maturities of investment securities 179,379 551,799 Net cash provided by investing activities 120,207 507,972 Financing activities: Payments received on note receivable issued for common stock 105,960 96,157 Short-term margin loan on securities (139,268) Issuance of notes receivable (51,000) (195,621) Payments on long-term debt and capital lease obligation -0- (708) Net cash used in financing activities (84,308) (100,172) Net increase (decrease) in cash 200,016 (111,282) Cash at beginning of period 103,144 151,728 Cash at end of period $303,160 $40,446 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES Common stock issued for services rendered $0 $24,600 See Notes to Financial Statements BOATRACS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying financial statements at June 30, 1997 and 1996 as of and for the six months then ended 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 (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 1997. NOTE 2 - NET LOSS PER SHARE Net Loss per share amounts are calculated by dividing net loss by the weighted average number of common shares outstanding during each period including common stock equivalents. Net loss per share is unchanged on a fully diluted basis for all periods presented. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock. The Company will be required to adopt the new method of reporting EPS for the year ending December 31, 1997. If SFAS No. 128 had been adopted as of January 1, 1997, there would be no change in the EPS calculation as presented on the Statement of Operations as of and for the period ended June 30, 1997. NOTE 3 - BALANCE SHEET DETAILS June 30, December 31, 1997 1996 (Unaudited) Accounts Receivable $ 641,130 $ 570,780 Less allowance for doubtful accounts (12,865) (13,534) $ 628,265 $ 557,246 Property- at cost: Computers and equipment $ 248,166 $ 226,650 Leasehold Improvements 37,656 sub-total $ 285,822 $ 226,650 Less accumulated depreciation (131,112) (105,919) $ 154,710 $ 120,731 Deferred Compensation - Officer (Note 4) $369,230 Less Note Receivable - Officer (Note 4) (324,101) $ 45,129 Depreciation expense was $25,193 for the six months ended June 30, 1997 and $44,420 for the year ended December 31, 1996. NOTE 4 - NOTES RECEIVABLE Canadian Company - The Company has a demand note receivable agreement with a Canadian company that provides for periodic advances. Outstanding advances on the note bear interest at 9.0% and are due on demand. Advances on the note totaled $259,463 and $208,463 at June 30, 1997 and December 31, 1996, respectively. The note receivable has been classified as long-term based upon the Company's intent not to request payment prior to July 1, 1998. In September 1996, the Company entered into an agreement with the Canadian company whereby the Canadian company, through its subsidiary, will act as the sole representative for marketing, distribution and sale of the BOATRACS system, and any related business in certain specified Canadian territory. Stockholder - During 1995, the Company entered into a note receivable agreement with an individual who is an officer, director and majority stockholder of the Company under which it agreed to advance up to $369,230. Advances were secured by an agreed upon offset to related deferred compensation. The advances bore interest at 5.5% and were due on demand. Advances under the agreement totaled $310,000 at December 31, 1996, plus accrued interest. Terms of the note receivable agreement allow satisfaction of the balance as an offset to related deferred compensation. In the first quarter of 1997, the note was offset against the deferred compensation and the remaining $45,129 was reclassified as a short-term note payable to the stockholder. NOTE 5 - AGREEMENTS WITH QUALCOMM INCORPORATED On March 31, 1995, the Company entered into a Subscription Agreement and an Amendment (#6) to the License and Distribution Agreement with QUALCOMM Incorporated, the Company's supplier of OmniTRACS Satellite-based communications and tracking equipment. Through these two agreements QUALCOMM acquired 1,112,265 shares, or approximately 9%, of the Company's common stock. The shares were issued for a total consideration of $737,000 which will be paid by providing discounts on future purchases of OmniTRACS equipment and data transmission and messaging from QUALCOMM. The transaction was recorded as a note receivable for shares issued which is reduced as discounts are earned. During the second quarter of 1997, a total of $59,652 in discounts had been earned reducing the receivable balance to $315,462, compared to the second quarter of the prior year when $47,399 of discounts were earned reducing the receivable balance to $508,822. NOTE 6 - SELLING STOCKHOLDER REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION On May 13, 1997, a Registration Statement on Form SB-2 was accepted by the Securities & Exchange Commission, which provides for registration of 5,490,956 shares of common stock on behalf of certain selling stockholders, including (1) certain stockholders of the predecessor company to BOATRACS; (2) QUALCOMM, Inc., the Company's sole supplier; (3) shares received by a director on conversion of a note; and (4) shares issued in a private placement in the last quarter of 1995. The Company did not receive any proceeds from the transaction. NOTE 7 - STOCK OPTIONS Under the 1996 Stock Option Plan ("the Plan"), the Company may grant incentive and non-qualified options to purchase up to 1,000,000 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 seven years after the options are granted and generally become exercisable ratably over a five-year period following the date of grant. At June 30, 1997, there were 573,500 options outstanding. The Company applies Accounting Principles Board of Opinion no. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its Plan. Accordingly, no compensation expense has been recognized for its stock-based compensation plan. Had compensation cost been determined based upon the fair value at the grant date for awards under the Plan consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and pro forma net loss for the period ended December 31, 1996 would have been increased by approximately $166,000, or $0.0l per share. Under FASB 123, the fair value of the options granted during 1996 is estimated as approximately $830,000 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no dividend yield, expected volatility of 344%, risk-free interest rate of 6.5%, and expected life of seven years. NOTE 8 - SALARY REDUCTION SIMPLIFIED EMPLOYER PLAN (SAR-SEP) During September 1996, the Company approved the adoption of a Salary Reduction Simplified Employer Plan (SAR-SEP) allowing eligible employees to contribute savings on a pretax basis effective January 1996. Employees may contribute up to 15% of their salary, not to exceed $9,500 annually. A discretionary contribution is determined each year by the Company. As of the quarter ended June 30, 1997, the Company elected not to contribute to the Plan. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company has distribution rights in the United States for marine application of the OmniTRACS system of satellite- based communications and tracking systems manufactured by QUALCOMM Incorporated ("QUALCOMM"). The OmniTRACS system provides confidential two-way communications between vessels at sea and base stations on land or with other vessels and is effective while a vessel is within the satellite's "footprint," which extends roughly 200 to 400 miles offshore of the continental United States. The system also allows for hourly position tracking, monitoring, and data transmission and, using supplementary products, can provide engine performance and fuel consumption monitoring. 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, Inc., the sole supplier 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 described fully in the Company's Annual Report on Form 10- KSB for the year ended December 31, 1996. For the three months ended June 30, 1997 and 1996 Total revenues for the quarter ended June 30, 1997, were $1,281,539, an increase of $377,846 or 41.8% as compared to total revenues of $903,693 for the quarter ended June 30, 1996. Communications systems revenues, which consists of revenues from the sale of BOATRACS systems and related software, were $635,524 or 49.6% of total revenues, an increase of $221,991 or 53.7% compared to $413,533 or 45.8% of total revenues in the second quarter of 1996. The increase in communication systems revenues primarily reflects increased sales of communication units to vessels in Europe and Canada and an increase in FuelMate and software revenues compared to the same period in 1996. Data transmission and messaging revenues were $646,015 or 50.4% of total revenues, an increase of $155,855 or 31.8% compared to $490,160 or 54.2% of total revenues in the second quarter of 1996. The increase in revenues reflects an overall increase in data transmission and messaging services provided by the Company as a result of growth in the number of BOATRACS systems installed on vessels and increased usage by some customers. Communications systems expenses were $419,569 or 66% of communications systems revenues for the quarter ended June 30, 1997, an increase of $147,616 or 54.3%, compared to $271,953 which represented 65.8% of communications systems revenues in the corresponding quarter of the prior year. The dollar increase in expenses primarily reflects the increase in sales of BOATRACS systems. Communication systems expenses as a percentage of communication systems revenues was relatively unchanged from the prior year. Data transmission and messaging expenses were $336,403 or 52.1% of data transmission and messaging revenues for the quarter ended June 30, 1997, an increase of $74,166 or 28.3%, compared to $262,237 which represented 53.5% of data transmission and messaging revenues in the corresponding quarter of the prior year. The dollar increase in costs reflects increased data transmission and messaging services rendered due to increased BOATRACS systems installed on vessels. The decrease in data transmission and messaging costs as a percentage of data transmission and messaging revenues is due to the continuing increase in revenues over the relatively fixed costs of providing this service. Selling, general and administrative expenses were $596,443 or 46.5% of total revenues for the quarter ended June 30, 1997, a decrease of $38,460 or 6.1%, compared to $634,903 or 70.3% of total revenues in the prior corresponding quarter. The decreased dollar amount is primarily attributable to a reduction in expenses incurred, primarily certain general operating expenses, legal expenses and costs associated with the European office, including consultant fees and travel expenses. In addition, the Company incurred costs in the development of software to facilitate customer operations, which were also reduced during the second quarter compared to the second quarter of the prior year. The software development costs are written off as incurred. A breakdown of operating results for the second quarter 1997 on a geographical basis reflects a pretax profit of approximately $176,000 for U.S. operations before research and development expenses. Interest income of $2,525 in the quarter ended June 30, 1997, represents interest earned on investments. This represents a decrease of $16,464 or 86.7%, compared to interest income of $18,989 in the second quarter of 1996. There was no interest expense for the quarter ended June 30, 1997, a decrease of $968 compared to the prior corresponding quarter. For the six months ended June 30, 1997 and 1996 Total revenues for the six month ended June 30, 1997, were $2,412,782, an increase of $604,484 or 33.4% as compared to total revenues of $1,808,298 for the six months ended June 30, 1996. Communications systems revenues, which consists of revenues from the sale of the BOATRACS system and related software, were $1,135,348 or 47.1% of total revenues, an increase of $260,842 or 29.8% compared to $874,506 or 48.4% of total revenues in the same period of 1996. The increase in communication systems revenues primarily reflects increased sales of communication units to vessels in Europe and Canada partially offset by a reduction in FuelMate revenues in the first six months of 1997 compared to the same period in 1996. Data transmission and messaging revenues were $1,277,434 or 52.9% of total revenues, an increase of $343,642 or 36.8% compared to $933,792 or 51.6% of total revenues in the same period of 1996. The increase in revenues reflects an overall increase in data transmission and messaging services provided by the Company as a result of growth in the number of BOATRACS systems installed on vessels and increased usage by some customers. Communications systems expenses were $755,383 or 66.5% of communications systems revenues for the six months ended June 30, 1997, an increase of $179,344 or 31.1%, compared to $576,039 which represented 65.9% of communications systems revenues in the corresponding period of the prior year. The dollar increase in expenses primarily reflects the increase in sales of BOATRACS systems. The increase in communications systems expenses as a percentage of communications systems revenues is primarily due to more units sold at volume discounts in 1997, compared to 1996. Data transmission and messaging expenses were $646,780 or 50.6% of data transmission and messaging revenues for the six months ended June 30, 1997, an increase of $130,770 or 25.3%, compared to $516,010 which represented 55.3% of data transmission and messaging revenues in the corresponding period of the prior year. The dollar increase in costs reflects increased data transmission and messaging services rendered due to increased BOATRACS systems installed on vessels. The decrease in data transmission and messaging costs as a percentage of data transmission and messaging revenues is due to the continuing increase in revenues over the relatively fixed costs of providing this service. Selling, general and administrative expenses were $1,200,360 or 49.8% of total revenues for the six months ended June 30, 1997, an increase of $33,229 or 2.8%, compared to $1,167,131 or 64.5% of total revenues in the prior corresponding period. The increased dollar amount is primarily attributable to additional expenses incurred, including commissions paid on the sale of communication units, increased salary expenses, increases in office expenses offset by a reduction in travel, telephone and legal expenses. In addition, the Company has incurred a small increase in costs pursuing the commencement of operations in Europe, including opening and maintaining a data transmission and messaging center in The Netherlands, and payment to various consultants. The Company also incurred costs in the development of software to facilitate customer operations; however, these costs were reduced for the six months ending June 30, 1997, compared to the same period of the prior year. The costs are written off as incurred. A breakdown of operating results for the six months ended June 30, 1997 on a geographical basis reflects a pretax profit of approximately $336,000 for U.S. operations before research and development expenses. Interest income of $6,193 in the six months ended June 30, 1997, represents interest earned on investments. This represents a decrease of $30,157 or 83%, compared to interest income of $36,350 in the same period of 1996. Interest expense for the six months ended June 30, 1997, was $2,060 or .09% of total revenues, a decrease of $103 compared to $2,163 which was .12% of total revenues in the prior corresponding period. Liquidity and Capital Resources The Company's cash balance at June 30, 1997, was $303,160, an increase of $200,016 over the December 31, 1996 cash balance of $103,144. At June 30, 1997, working capital was $106,380, a decrease of $164,627 from the working capital of $271,007 at December 31, 1996. Cash of $164,117 was provided by operating activities, cash of $120,207 was provided by investing activities and cash of $84,308 was used in financing activities in the first six months of 1997. Net accounts receivable increased $71,019 at June 30, 1997, compared to December 31, 1996, due to the increased sales and data transmission and messaging charges in the second quarter not yet paid for. Inventory increased $33,903 at June 30, 1997, compared to year end primarily due to the purchase of units for sale to potential European customers. Prepaid expenses were $92,416 higher primarily due to the timing of prepaid insurance, other miscellaneous prepaids and a deposit paid on a future sale. Notes receivable increased $51,000 at June 30, 1997, compared to year end due to monies loaned in connection with Promissory Notes (see note 4). Accounts payable and other accrued expenses increased $521,870 at June 30, 1997, compared to year end primarily due to an increase of payables due to the supplier of BOATRACS communications and messaging systems. Reduction of note receivable for common stock issued in the amount of $105,960 relates to discounts received on purchases of equipment and data transmission and messaging from the supplier as provided in accordance with the terms of the Note (see note 5.) The Company anticipates making capital expenditures in excess of $80,000 during 1997. 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 additional funds. To the extent that the net proceeds of recent 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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Inapplicable ITEM 2. CHANGES IN SECURITIES Inapplicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Inapplicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Results of the May 7, 1997, shareholder's meeting were reported in Form 10-QSB for the period ended March 31, 1997. ITEM 5. OTHER INFORMATION Inapplicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Item (a)(1) Exhibit 11 - Computation re Net Loss per share (filed herewith). 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. BOATRACS, Inc. Registrant August 1, 1997 /S/ MICHAEL SILVERMAN Date Michael Silverman Chief Executive Officer August 1, 1997 /S/ DALE FISHER Date Dale Fisher Chief Financial Officer Rev. 7/31/97