UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to _______
Commission file number 0-11038
BOATRACS, INC.
(Name of small business issuer in its charter)
California 33-0644381
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6440 Lusk Blvd. Suite D201, San Diego, CA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 587-1981
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
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
Check if there is no disclosure of delinquent filers in
response to Items 405 of Regulation S-B in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year.
$ 5,248,000
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of February 28, 1998, was
$11,940,000.*
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has 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
The number of shares outstanding of Registrant's common
stock was 15,841,377 shares as of February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format (Check one):
Yes No [X]
________________
*Excludes the common stock held by executive officers,
directors and stockholders whose ownership exceeds 5% of the
common stock outstanding at February 28, 1998. Exclusion of
such shares should not be construed to indicate that any such
person possess the power, direct or indirect, to direct or
cause the direction of the management or policies of the
Registrant or that such person is controlled by or under common
control with the Registrant.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
BOATRACS, Inc.'s ("The Company") objectives include providing
reliable and cost effective data communications system for
commercial vessels including boats, ships and barges (marine
application). To achieve this objective, the Company currently
offers the OmniTRACS satellite-based communications and
tracking system (the "OmniTRACS System") developed,
manufactured and licensed by QUALCOMM, Incorporated
("QUALCOMM"). The Company has certain exclusive distribution
rights for the OmniTRACS System in the United States for marine
application under a License and Distribution Agreement dated
June 13, 1990, as amended from time to time, with QUALCOMM. In
addition, the Company or its wholly owned subsidiary BOATRACS
(Europe) B.V. has agreements with QUALCOMM'S authorized service
providers in Canada and Europe for marine distribution for
Canada and parts of Europe. The Company's 24-hour network
center provides personal message relaying services to
individual vessels and backup services to fleets of vessels.
The Company derives revenue primarily from four sources:
a. Sales of QUALCOMM equipment and software and additional,
complimentary and/or modified equipment created or procured by
the Company for maritime application; and
b. Data transmission and messaging revenues.
c. Software licenses and revenues from custom software
development.
d. Installation and training revenues.
BOATRACS' primary source of customers is the commercial marine
industry, which includes commercial fishermen, fuel
transporters and the workboat industry of the inland waterways
and coastal areas. The industry has demanding service
requirements including mobility, positioning, durability,
confidentiality and integrity of communications signals for the
management of information. Such information includes vessel
logs, supplies, wage information, and fuel and engine
monitoring. The integration of this information directly into
shared-based office computer systems is very important to
BOATRACS' customers. The Company has built software tools for
both the vessel and the office enabling the integration of this
information. Confidentiality of data transmission is an added
concern of commercial maritime fleet operators. For example,
scallop fishermen need to be able to communicate to shore about
their catches and from boat to boat without informing
competitors. Towboat dispatchers need to keep communications
about customers confidential. Two-way radio and cellular phone
service provide mobility but may lack complete privacy and have
limited range.
The need for improved position reporting and communications
abilities for commercial vehicles, such as trucking fleets, was
addressed by QUALCOMM in 1988 with the development of its
OmniTRACS System. The OmniTRACS System provides confidential
two-way data messaging, position reporting and confirmation
services. Through the adaptation and enhancement of QUALCOMM's
already successful OmniTRACS system for marine application,
BOATRACS believes that it has developed cost-effective,
reliable and user-friendly solutions for many of the
communications, vessel tracking and near "real time" data
transfer needs of commercial vessel operators.
Effective November 1, 1997, the Company purchased certain
assets as a going concern of MED Associates, Inc. ("MED"), a
Mississippi based provider of software applications and service
solutions to the commercial work boat industry and oil
companies.
Background
The Company was incorporated in California in 1982 under the
name First National Corporation as a bank holding company.
From 1982 to 1993, the Company provided, through its wholly-
owned subsidiaries, business and individual banking services
and certain corporate trust services.
On November 9, 1993, First National Corporation filed a
voluntary petition under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of California (the "Bankruptcy Court").
First National Corporation sold its principal asset consisting
of 2,125,000 shares of common stock in First National Bank
pursuant to an order of the Bankruptcy Court authorizing and
approving such sale. On December 23, 1994, the Bankruptcy
Court entered its order confirming First National Corporation's
Second Amended Plan of Reorganization (the "Plan of
Reorganization"), which became effective January 3, 1995.
On January 12, 1995, the Company (formerly First National
Corporation) merged with BOATRACS, Inc. ("Old BOATRACS"), a
California corporation formed in 1990 to be a distributor in
the United States marine market of the OmniTRACS satellite-
based communications and tracking system manufactured by
QUALCOMM (the "Merger"). The merger of Old BOATRACS with and
into the Company was implemented pursuant to A Plan and
Agreement of Reorganization by Merger of BOATRACS, Inc. with
and into First National Corporation under the name of
"BOATRACS, Inc." (the "Agreement"). The Agreement was approved
by the Bankruptcy Court as part of the Plan of Reorganization.
First National Corporation had no significant assets at the
effective date of the Merger.
Pursuant to the Merger, the Company, which was the surviving
corporation, changed its corporate name to "BOATRACS, Inc.";
the outstanding shares of Old BOATRACS were converted into the
right to receive slightly less than 95% of the shares of common
stock to be issued by the surviving corporation; and each of
the outstanding shares of First National Corporation was
converted into the right to receive 1/7 of one share of the
common stock of the surviving corporation, with an aggregate of
slightly more than 5% of the shares of common stock issued by
the Company to be issued to the shareholders of First National
Corporation prior to the Merger. As a result of the Merger,
the 63,018 issued and outstanding shares of Old BOATRACS were
converted into the right to receive 9,500,000 shares of the
Company's common stock, and the 3,570,899 issued and
outstanding shares of the common stock of First National
Corporation were converted into the right to receive
approximately 510,000 shares of the Company's common stock.
The Company has continued to operate the business of Old
BOATRACS.
The OmniTRACS and BOATRACS Systems
The OmniTRACS System, as adapted and enhanced by the Company
for marine application (the "BOATRACS System"), provides
confidential two-way data communications between a vessel or
vessels at sea and a base station on land through the use of a
mobile communications terminal ("MCT"), a satellite
communications system and data delivery systems. The BOATRACS
System also allows for hourly position reporting and monitoring
and, using supplementary products, can provide engine
performance and fuel consumption monitoring. As of December
31, 1997, the Company had installed approximately 1200 systems
on marine vessels. The BOATRACS System is effective while a
vessel is within the satellite's "footprint," which extends
approximately 200 to 400 miles offshore most areas of the
continental United States, Canada and parts of Europe. The
BOATRACS System is an interactive communications network
linking a vessel to shore and from shore-based personnel to
vessels and from boat to boat. Messaging and positioning
information are beamed from the vessel, via Ku-band satellite,
to the QUALCOMM Network Management Facility ("NMF") in San
Diego, California or similar facilities in Canada and Europe,
and then onto base stations at the customers' offices or to the
BOATRACS 24-hour network center also in San Diego or to
OceanTrac Systems Limited ("SYSTEMS") in Yarmouth, Canada.
Messages that go to BOATRACS can be relayed by fax, e-mail, or
by an operator via phone or fax. The BOATRACS System is
capable of sending or receiving digital (text) messages or
files to or from a vessel.
The QUALCOMM Automatic Satellite Position Reporting ("QASPR")
system is featured in all BOATRACS mobile units. The NMF uses
the QASPR system to calculate a vessel's position, within a
radius of 1000 feet. This position is made available to shore-
based users. As an option, MCT's can be provided with
integrated global positioning systems ("GPS").
The QUALCOMM NMF is the communications hub of the BOATRACS
System. All communications are transmitted via satellite
through a 9-meter dish located on the QUALCOMM premises. A
backup NMF and dish are maintained by QUALCOMM in Las Vegas,
Nevada. Connections to the QUALCOMM NMF are supported through
existing lease-line and dial-up services. In other countries
where the Company operates, the OMNITRACS system is available
through QUALCOMM'S authorized service providers for that
particular country.
In the United States, satellite service is provided by GE
aboard an existing satellite under a "protected lease" which
guarantees transponders will be available to QUALCOMM through
one of GE's available satellites. In other countries, other
regional or national satellites are utilized by the Company
through arrangements with QUALCOMM's authorized service
providers.
The BOATRACS 24-hour Network Center is located in the San Diego
headquarters and provides message relaying and stand-by backup
services for fleets and individual vessels using the system in
the United States. The San Diego Network Center also
facilitates some services, which are offered to European
vessels. The Company also offers certain services from its
wholly owned subsidiary BOATRACS (Europe) B.V. office in
Leiden, The Netherlands, to European vessels. In addition,
the Company's Canadian distributor, OceanTrac Systems Ltd.
provides services to Canadian vessels from a network center in
Nova Scotia, Canada. Computers communicate to the QUALCOMM NMF
by modem to monitor customer accounts on the system. BOATRACS
operators relay satellite messages between vessels and their
families or business associates on shore and from shore-based
personnel to vessels. Other custom services are also
available.
BOATRACS charges its customers for the transmission of each
message and for the transmission of each character within a
message. There is also a monthly connection fee for the MCT to
be on-line and for hourly position reports. The charges are
subject to certain volume discounts. Additional charges are
assessed for certain services provided by the network centers.
On the Vessel
The MCT consists of three basic components: the Communications
Unit, the Keyboard/Display Unit and the Outdoor Unit. The
Communications Unit is about the size of a briefcase with a
rugged exterior casing. The Keyboard Display Unit has an
imbedded display and is usually kept in the pilot house or
wherever other communication and navigation devices are kept on
the vessel. Messages are both created and received on a four-
or fifteen-line liquid crystal display screen. The Outdoor
Unit is the antenna, which is mounted externally, generally on
top of the vessel wheelhouse. The design of the unit allows
for both ease of installation and efficient use of what is
usually limited space. Software menus and simple wording on
the Keyboard/Display Unit facilitate easy use of the system to
send and receive messages. Although many of BOATRACS'
customers use only the basic MCT, BOATRACS offers optional
products that interface with the basic unit. Customers also
have the option of using personal computer and BOATRACS'
WINDOWS BOATCOMM User Interface Software ("WBUI") instead of
the Keyboard/Display Unit. The WBUI allows for the same
features as the Keyboard Display Unit with the added benefits
of using a full screen and being able to send/receive computer
files of any type.
BOATRACS Network Center
BOATRACS operates a 24-hour Network Center from its San Diego,
California-based offices and a Network Center in Leiden, The
Netherlands where messages are forwarded to vessels and land-
based connections. In addition, OceanTrac Systems Ltd., the
Company's representative in Canada, operates a Network Center
in Nova Scotia. After initial set-up costs are incurred, the
network facility will virtually be a fixed cost operation with
the potential to handle hundreds of additional units at a small
incremental cost.
In San Diego, the BOATRACS' Network Center is linked via a
dedicated telephone line for data transfers via modem directly
to QUALCOMM's NMF in San Diego, where message transmissions to
and from the vessels are formatted and processed. The network
center also has a dedicated line to a local internet service
provider for internal internet use as well as value-added
messaging services for vessels.
Network Management Facilities
One component of the Network Management Facility is an earth
station for communication with the MCTs via satellite. All
individual messages originating from either the NMF or the
vessels are automatically acknowledged electronically upon
receipt and checked for accuracy of transmission by the system.
If not received correctly, the messages are automatically
retransmitted. Since all messages and position reports are
transmitted in data format, they can be stored for later
retrieval and viewing.
In the Office
Generally, a customer with less than four units uses the
Company's 24-hour network service only. Typically, a customer
who has more than four BOATRACS units elects to establish an in-
house base station. The base station provides the customer
with an in-house communications link and vessel-tracking
capability. The base station is comprised of a computer and
BOATRACS or third party communications software containing a
mapping function whereby a customer can follow the progress of
its fleet on a detailed computer map. Communications are
conducted via modem directly between the customer's base
station and the NMF maintained by QUALCOMM for satellite
transmission to the customer's vessels.
Customers in the commercial marine industry have informed the
Company that the BOATRACS System provides much needed services
and has been very effective in saving time and money. Based
upon conversations with customers, the Company believes that
its customers typically experience increased worker
productivity, asset utilization and dispatching
efficiency while saving communications costs. Many customers
enter into a three- to five-year contract, establishing a fixed
rate to be paid for messaging services used by the customer
during the contract term.
Purchase of MED Associates, Inc.
Effective November 1, 1997, the Company purchased certain
assets and liabilities of MED Associates, Inc. ("MED") for
$500,000 cash, and 300,000 shares of common stock. The stock
payment is subject to an option in favor of the Company
exercisable if MED does not achieve a certain earnings level
for the fiscal year ending December 31, 1998. The 300,000
shares delivered under the Purchase Agreement will be decreased
one share for every dollar such earnings are not achieved.
Goodwill in the amount of $845,000 was recorded and will be
amortized over ten years.
MED is a Mississippi-based provider of software applications
and service solutions to the marine industry. The acquisition
was accounted for as a purchase. Accordingly, the assets and
liabilities of MED are included in the consolidated balance
sheet as of December 31, 1997. The results of MED's
operations from the date of the acquisition to December 31,
1997 were not significant.
Dependence upon Significant Customers
The Company's primary source of customers is the commercial
marine industry. The following customers, Tidewater Inc. and
Kirby Corporation, the loss of whom would have a material
adverse effect on the Company operations, each represented more
than 10% of the Company's total sales in 1997. In addition,
MED derives significant portions of its revenues from Tidewater
Inc. (45% of MED's total revenues for November and December).
The major customers may change yearly as they are calculated on
total revenues including sales of communications systems.
Purchases of communication systems by a customer may not occur
yearly and there can be no assurance that such customers will
make significant purchases of the Company's products in the
future. The only relationship between the Company and any of
the above customers is that the Company sells to each customer
communication systems and messaging services. In addition, MED
provides software solutions to certain customers of the
Company.
Agreements
Agreements with QUALCOMM
The Company has distribution rights for the OmniTRACS System in
the United States for marine application under a License and
Distribution Agreement dated June 13, 1990, as amended from
time to time (the "Distribution Agreement") with QUALCOMM. The
Distribution Agreement has an initial term of five years with
three options to extend for five years each (provided that
BOATRACS is in full compliance with the terms of the
Distribution Agreement) for a total of twenty years through
2010. The first option to extend has been exercised by the
Company. The Distribution Agreement calls for the negotiation
in good faith of a new agreement upon the expiration of the
last option.
Under the Distribution Agreement, the Company has certain
exclusive rights to distribute the OmniTRACS System for marine
application and to provide messaging services to end users of
such products for marine application, in the following
geographic areas (the "Territory"): within the coastal waters
of the United States (as defined in the Distribution Agreement)
of the Atlantic and Pacific Oceans.
Under the Distribution Agreement, BOATRACS is required to sell
a certain minimum number of MCTs in order to maintain the
exclusivity of its distribution rights, commencing with
480 MCTs in the aggregate by December 31, 1996. Thereafter,
the minimum purchase requirements for each calendar year are to
be agreed upon between the Company and QUALCOMM subject to a
minimum of 300 MCTs for the calendar year ending December 31,
1997 and increasing by 10% each year thereafter. The
requirements were met for the years ended December 31, 1997 and
1996.
QUALCOMM, a public company with fiscal year ended September 30,
1997 revenues in excess of $2,096 million and current
capitalization in excess of $3.0 billion, is a leader in
digital wireless communications technologies. In the United
States, QUALCOMM manufactures and services the MCTs. QUALCOMM
also directly sells MCTs, along with office-based software and
computers to monitor and communicate with the MCTs, to the
transportation industry. In the United States, QUALCOMM
provides the OmniTRACS service for its own customers as well as
BOATRACS' customers, by leasing the Ku-band satellite
transponders and maintaining the Network Management Facility
which processes all communications between the satellites and
customers' and the Company's base stations. QUALCOMM also
maintains a back-up Network Management Facility in Las Vegas,
Nevada in case of any malfunction to the system in San Diego,
California.
QUALCOMM is responsible for the manufacture and warranty repair
of all of the OmniTRACS units supplied by them subject to the
terms of the Distribution Agreement. Warranties for a
specified period are passed on to the Company's customers.
Extended warranties may be purchased at an additional cost.
If BOATRACS desires to sell its business, QUALCOMM has a right
of first refusal under the Distribution Agreement to purchase
the business of BOATRACS on the terms of the sale to the
proposed transferee.
QUALCOMM's obligation to provide messaging services pursuant to
the Distribution Agreement was contingent upon, among other
things, receiving a permanent license from the FCC to operate
the OmniTRACS System for marine application. This license was
granted to QUALCOMM, effective January 3, 1997, which added
marine capability to use with the OmniTRACS system for up to
100,000 MCTs for a term of 10 years. In addition, the
International Telecommunications Union ("ITU") approved the Ku-
band frequency which OmniTRACS uses for mobile use including
marine applications.
If QUALCOMM becomes unable to provide messaging services either
directly or through a third party, or elects not to remain in
the business of providing such services, QUALCOMM may terminate
the Distribution Agreement with no further liability by giving
BOATRACS six months prior notice. If QUALCOMM elects to
terminate the Distribution Agreement, QUALCOMM shall take
reasonable and necessary steps to enable BOATRACS to continue
to provide messaging services to its end users. BOATRACS may
terminate the Distribution Agreement under certain
circumstances if new technology for a system comparable to the
BOATRACS System is developed by certain entities other than
QUALCOMM.
The Company also entered into a license agreement with QUALCOMM
(the "License Agreement") pursuant to which QUALCOMM will pay
the Company a per copy royalty for the right to use, sublicense
and distribute certain interface software developed and owned
by the Company as an enhancement to QUALCOMM's OmniTRACS
System. The License Agreement term commenced in March 1995 and
will terminate upon the termination of the Distribution
Agreement between the Company and QUALCOMM.
During March 1995, the Company issued 1,112,265 shares of
common stock to QUALCOMM for $737,000. The purchase price of
the shares will be paid by a reduction in the price of certain
products and services currently provided by QUALCOMM to the
Company and, upon satisfaction of certain conditions, the
conversion of a certain non-exclusive territory to an exclusive
territory, under the License Agreement and the Distribution
Agreement. The transaction was recorded as a note receivable
for common stock issued which is reduced as discounts are
earned. Through December 31, 1997, a total of $550,079 in
discounts were earned.
Sub-Service Provider Agreement with ALCATEL QUALCOMM
In March, 1997, the Company's wholly-owned subsidiary BOATRACS
(Europe) B.V. signed a five year Sub-Service Provider Agreement
(the "AQ AGREEMENT") with ALCATEL QUALCOMM, a French company,
which is a joint venture company between the ALCATEL Group and
QUALCOMM. The AQ Agreement appoints BOATRACS to be the
maritime distributor under a similar basis that it operates in
the United States by providing maritime satellite-based
communications and tracking of vessels to certain countries in
Europe.
Agreement with OceanTrac SYSTEMS LIMITED OF CANADA
In September, 1996, the company entered into an agreement with
Oceantrac Systems Limited of Canada ("SYSTEMS") reflecting the
terms of a Memorandum of Understanding between the Company and
SYSTEMS, providing for the establishment of Oceantrac,
Incorporated, a Canadian subsidiary of Systems ("OCEANTRAC").
Under the terms of the agreement, OCEANTRAC will act as the
sole representative of SYSTEMS for marketing, distribution and
sale of the BOATRACS System and any related business in the
territory granted under the license from the Company including
the provinces of Ontario, Quebec, new Brunswick, Prince Edward
Island, Nova Scotia, Newfoundland and Labrador. BOATRACS holds
an option to acquire a majority of the issued and outstanding
shares of the capital stock of OCEANTRAC.
Agreement with Company Officer, Director and Shareholder
On October 15, 1997, Company entered into a promissory note
with an officer, director and shareholder of the company in the
amount of $1,930,915 and a rate of 5.77%. The note was issued
in connection with a Restricted Stock Purchase Agreement of the
same date for a total of 2,900,000 shares of the Company's
stock. The note will be repaid in semi annual installments
with the final payment on April 15, 2000.
Regulation
International Operations
BOATRACS intends to continue its expansion into additional
international markets. In countries which QUALCOMM has an
affiliated OmniTRACS service provider, the Company believes
that such affiliate or BOATRACS will attempt to secure the
necessary regulatory approvals for maritime applications from
the local governmental authorities for the affiliate or the
Company. In countries in which no QUALCOMM affiliate is
operating, the Company will apply to the local governmental
authority for applicable approvals. No assurance can be given
that the Company will be able to obtain the required approvals.
BOATRACS, though a wholly owned subsidiary "Boatracs (Europe)
B.V." maintains a sales and customer support office and network
center in Leiden, The Netherlands. Currently the Company has
MCTs installed on vessels in a number of countries in Europe.
Additional Products
BOATRACS continues to develop new software products to
complement the BOATRACS product line. This software is sold to
BOATRACS' customers under BOATRACS' proprietary names.
The Company is seeking strategic alliances with companies that
have a proven product or service in the marine market. In
addition, BOATRACS strives to stay abreast of new products and
services that can complement its existing product and service
offerings and seeks to build additional strategic relationships
with companies that are developing new interfaces and marine
related products that require communications between a vessel
and the shore. BOATRACS continues to explore ways to
economically enhance these relationships by acquiring either
sales and distribution rights to, or direct ownership of, the
products developed. The Company believes that these efforts
have the potential to result in significant growth in installed
units and message volume in the future.
In June 1996, the Company entered into a reseller arrangement
with Orbital Communications Corporation ("ORBCOMM"), which is
developing a Low-Earth Orbit system ("LEO"), pursuant to which
the Company will distribute ORBCOMM's LEO services to the
worldwide marine market if and when such services become
commercially available. The LEO system, if it proves
successful, will complement BOATRACS' present services. ORBCOMM
estimates the system will be operational during 1998. The
terms of the agreement are currently in dispute.
Market Expansion
Effective November 1, 1997, the Company purchased certain
assets of MED Associates, Inc., a Mississippi based provider of
software applications and service solutions to the marine
industry.
The Company believes that there is a sizable market in the
United States and abroad for its products and has developed a
strategy to expand into selected markets by providing
innovative solutions to customer needs. The following are
descriptions of certain areas of potential market expansion
being explored by the Company. There can be no assurances that
any of the Company's market expansion efforts will be
successful.
Proposed United States Fishing Regulations
As a result of the critical level of various fishing resources,
the National Marine Fisheries Service ("NMFS"), a division of
the United States Department of Commerce, is managing the
population of specific marine species through recently imposed
(but not enforced) regulations of the domestic scallop and
ground fishing fleets. These regulations impose restrictions
on the number of days and locations that certain vessels can
fish. Compliance with these regulations requires a certified
tracking device to monitor on a 24-hour basis the position of
vessels licensed to catch a regulated species. On March 11,
1998, The BOATRACS System was certified by NMFS in this
capacity. The Company believes that the sales potential in the
domestic scallop and ground fishing industries are still
difficult to forecast. It is anticipated that as fish stocks
dwindle, the number of licensed fishing vessels also declines,
but the Company anticipates an increase in sales of MCT's due
to the regulation. Additionally, the currently contemplated
implementation of satellite transponders onboard fishing
vessels may be overruled by emergency measures, alternative
management schemes, or acts of Congress which could close
certain fisheries in total or in part. BOATRACS has installed
more than 160 units on fishing vessels that could fall within
the proposed regulations calling for certified tracking
devices.
International Distribution of the BOATRACS System
Numerous Ku-band satellites currently provide coverage in
regions outside the United States, including Japan, Europe,
Canada, Mexico and regions of the former Soviet Union.
Additionally, QUALCOMM uses a C-Band satellite to provide
coverage in Brazil. As a result, the Company believes that a
significant opportunity exists for utilization of the BOATRACS
System outside of the United States. Because the Company's
business is currently dependent upon services provided by
QUALCOMM through its OmniTRACS operations, the Company's
primary strategy is to expand its services to selected areas of
the world where the OmniTRACS service has been established.
The Company's operations in such areas would be conducted
pursuant to agreements to be negotiated between the Company and
QUALCOMM's local OmniTRACS service providers. In countries in
which no OmniTRACS service provider is operating, the Company
may seek to enter into agreements with providers of other
communications services, if available.
Canada. In September 1996, the Company entered into an
agreement with Oceantrac Systems Limited of Canada ("SYSTEMS")
reflecting the terms of a Memorandum of Understanding between
the Company and SYSTEMS, providing for the establishment of
Oceantrac, Incorporated, a Canadian subsidiary of Systems
("OCEANTRAC"). Under the terms of the agreement, OCEANTRAC
will act as the sole representative of SYSTEMS for marketing,
distribution and sale of the BOATRACS System and any related
business in the territory granted under the license from the
Company including the provinces of Ontario, Quebec, New
Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and
Labrador. BOATRACS holds an option to acquire a majority of
the issued and outstanding shares of the capital stock of
OCEANTRAC.
Europe. The Company's wholly-owned subsidiary BOATRACS
(Europe) B.V. has currently established a network center, sales
and customer support office in The Netherlands to offer the
BOATRACS System in the European and Mediterranean markets.
Except for anticipated modifications to incorporate European
maps, minimal product changes or enhancements are necessary to
enter the European market. The success of the Company's wholly-
owned subsidiary BOATRACS (Europe) B.V. in Europe is in part
dependent upon identifying or developing software solutions and
providing them to the market in a timely manner. The largest
customer of BOATRACS (Europe) B.V. is in Germany and it
continues to offer the Boatracs System as evaluation units to
demonstrate the value-added message relaying and monitoring
services that BOATRACS could provide to the maritime industry
in certain areas of Europe.
BOATRACS intends to focus on three key market sectors in
Europe: fishing, coastal and inland towing. The Company's
wholly-owned subsidiary BOATRACS (Europe) B.V. plans to
establish sales activities in European countries where an
agreement can be reached with the local OmniTRACS service
provider or distributor of other communications services and
where a marine license can be obtained from the local
government. The Company also intends to provide network
services on demand and begin working with industry associations
to better utilize today's technology. Through local sales
agents and a highly focused sales strategy aimed directly at
the largest fleets, BOATRACS hopes to establish a profitable
market in the European marine industry.
Additional Overseas Expansion. The Company has been asked by
various entities to commence activities in Asia and South
America. Expansion in these areas will depend on available
resources, as these are large markets with specific needs. No
decision has yet been made regarding such possible expansion.
Sales and Distribution
Since its inception, the Company has engaged manufacturer's
representatives to place the Company's products with marine
electronics dealers who sell to the end user. The
representatives provided BOATRACS with a much-needed
introduction to the marine market. However, with few
exceptions, BOATRACS has not had success from the dealer and
manufacturers' representative system of distribution. Except
in the New England fishing market, most of the selling and
distributing has been generated by the San Diego office and its
field sales representatives. Although some dealers provide
excellent local service, the Company assigns salespeople to
geographic areas where there is a concentration of potential
customers. In addition, the Company is continually seeking
relationships with third-party distributors who can provide
sales and service support for its products. The Company
believes that such arrangements have the potential to result in
sales in areas where it is not cost-effective to have a full-
time BOATRACS salesperson. In the New England and Atlantic
fishing markets the Company has agreements with ten dealers.
Competition
The mobile communications industry is highly competitive. The
industry includes major domestic and international companies,
many of which have financial, technical, marketing, sales,
distribution and other resources substantially greater than
those of the Company. The Company competes in its market on
the basis of product quality, reliability, price, customer
support and product features. The Company believes that it is
generally competitive with respect to each of these factors.
The following is an overview of certain products and services
that compete with BOATRACS products and services:
Alternative Satellite Service Providers. Several competing
entities provide satellite-based mobile voice and data systems
in marine markets. INMARSAT, an international consortium,
provides maritime voice, facsimile and data services nearly
worldwide using capacity on a combination of owned and leased
satellites. American Mobile Satellite Corporation currently
offers data communications and vessel tracking using its newly
launched L-band satellite, and a voice-based system. ARGOS
provides one-way (ship to shore) communications and position
reporting in many parts of the world. When ARGOS operates on
the Japanese ADEOS2 satellite they will offer two-way
communication. INMARSAT is approved to provide Global Marine
Distress Safety System ("GMDSS") notices and communications.
GMDSS requires shipping vessels of a certain nature and size
that operate certain routes to have a GMDSS approved
communications system by February, 1999. The Company is at a
disadvantage without such approval. The BOATRACS System cannot
become GMDSS approved because the BOATRACS system's coverage is
not global. EUTELSAT, a European organization, has lobbied the
International Maritime Organization ("IMO") to consider
approving a regional category that would allow vessels
operating in a specific regional area to utilize a regional-
based system such as the BOATRACS System. Alternatively, a
request to be recognized as a distress monitoring and safety
system to individual countries in which the Company operates
could be made, but there are no assurances that countries would
respond to such a request. If such approval is not obtained,
the Company will be at a disadvantage when attempting to sell
to certain shipping, workboat, and towing companies. In
December, 1997, OceanTrac Systems Limited signed a Memo of
Understanding with the Department of National Defense of Canada
which defines their relationship in search and rescue
operations ("SAR").
Within the Canadian Federal SAR system, there is a requirement
for a single Initial Point of Contact (IPOC) for service
providers like OceanTrac Systems Limited. The MOU establishes
the Rescue Coordination Center (RCC) in Halifax, Canada, as the
IPOC for marine emergency calls received by OceanTrac Systems
Limited and outlines the procedures for OceanTrac Systems
Limited to forward information to RCC Halifax, and assist in
resolving SAR cases.
Radio. Although radios are required for most vessels, many
small businesses rely exclusively on radios for their
communication needs throughout the marine industry. Radio can
be used to communicate with a marine operator, who can in turn
place a long distance telephone call for the radio user.
Typically, the cost of the marine operator together with the
long distance telephone charges can be significant. Radio is
not dependable in inclement weather, lacks confidentiality, and
does not always provide a clear signal.
Cellular phone. Cellular phone provides clear, easy to use
communication to many boats including pleasure boats and
commercial shipping, workboat, and towing operators. Although
a cellular system provides a clear hook-up and a reliable
service, it is relatively more expensive. The cellular range
is also limited because the networks of cell sites were placed
in locations most suitable for automobiles and not for vessels.
This means that coverage on the water is limited. Cellular
phones are usually out of range ten miles from the coast;
however, in the United States, Waterway Communications Systems,
Inc. ("Watercomm") provides cellular radio phone service for
vessels operating on inland waterways. Watercomm phones
utilize radio towers placed along the major U.S. rivers to send
and receive voice and data transmissions. Watercomm users
incur a connection charge as well as a per-minute usage charge,
based on where the vessel is operating. In Europe, GSM, the
European cellular phone service, offers extensive coverage and
plans to provide coverage to nearly all of Europe's population.
GSM cellular phone service also provides a user the convenience
of using a single phone in many different countries; however,
there are significant roaming charges when roaming in a non-
home country.
Proprietary Information
The Company relies on a combination of copyrights, trade
secrets, trademarks and proprietary information to maintain and
enhance its competitive position. According to reports filed
with the Commission, QUALCOMM has been granted United States
patents and has patent applications pending in the United
States with respect to the OmniTRACS System. QUALCOMM has also
reported that it actively pursues patent protection in other
countries of interest, which protection may or may not cover
OmniTRACS products.
Employees
At December 31, 1997, the Company had 20 full-time and 5 part-
time employees.
RISK FACTORS
The Company wishes to caution readers that the following risk
factors, among others, in some cases have affected, and in the
future could affect, the Company's actual results and could
cause the Company's actual results in the future to differ
materially from those expressed in any forward-looking
statements made by, or on behalf, of the Company.
The foundation of the Company's business is the License and
Distribution Agreement between QUALCOMM and the Company
pursuant to which 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. QUALCOMM is the sole supplier of the
equipment sold by the Company and provides certain services
that are essential to the Company's business. Should QUALCOMM
decide to discontinue its satellite communications business or
the manufacture of such equipment, the Company would be unable
to continue its operations. In addition, any manufacturing
delay or difficulty in procuring components experienced by
QUALCOMM resulting in a shortage of available OmniTRACS units
could have a material adverse impact on the Company's business
and financial results. Under the License and Distribution
Agreement, QUALCOMM retains all ownership rights to the
OmniTRACS software and all updates, upgrades, improvements or
modifications thereto, whether made by QUALCOMM or the Company.
Additionally, the Company is dependent upon QUALCOMM's
OmniTRACS system which currently operates on leased Ku-band
satellite transponders in the areas where the Company is
active. The Company has been informed that in the United
States QUALCOMM's satellite transponder lease and the position
reporting satellite transponder lease run through the year
2001. QUALCOMM reports that they believe any additional
transponder capacity that is required will be available on
acceptable terms. However, there can be no assurance that the
satellite transponders leased by QUALCOMM will continue to
function or that future transponder capacity will be available
on acceptable terms when needed. Any failure by QUALCOMM to
maintain adequate satellite capacity would have a material
adverse effect on the Company's business and financial results.
In Europe, the Company relies on EUTELSAT'S satellites, and in
Canada the Company relies on Canada Satellite Communications,
Inc. ("CANCOM"), a Canadian company and QUALCOMM's service
provider in Canada, for contracted satellite capacity. There
can be no assurance that the transponders used in Europe and
Canada will continue to function or that future transponder
capacity will be available on acceptable terms as needed. Any
failure by the providers to maintain adequate satellite
capacity would have a material adverse effect on the Company's
business and financial results.
All message transmissions to and from vessels equipped with the
Company's products are formatted and processed in QUALCOMM's
Network Management Facility (NMF) in the United States or at an
NMF operated by QUALCOMM's licensees in Europe and Canada. Any
interruption in this service would have a material adverse
effect on the Company's business and financial results.
Further, the messaging service provided by the Company involves
data transfers via standard telephone lines and any system
failure or natural disaster that resulted in an interruption of
stable telephone service would have a material adverse effect
on the Company's business and financial results.
QUALCOMM filed an application with the FCC for a standard
experimental license with a two-year term, which was granted
effective August 18, 1995. In addition, QUALCOMM pursued a
Petition for Rulemaking which it filed with the FCC in 1992 to
amend the Table of Frequency Allocations permitting non-
experimental use of the frequencies utilized by the OmniTRACS
System in the United States coastal waters. Effective January
3, 1997, this license was granted to QUALCOMM, which added
marine capability to use with the OmniTRACS system for up to
100,000 MCTs for a term of 10 years. There can be no assurance
that QUALCOMM's current license will continue to be renewed.
In the event of non-renewal or revocation of QUALCOMM's license
by the FCC, the License and Distribution Agreement between
QUALCOMM and the Company may be terminated and the Company may
be unable to continue its United States operations.
According to reports filed with the Commission, QUALCOMM has
been granted United States patents and has patent applications
pending in the United States with respect to its OmniTRACS
system, which is distributed by the Company for marine
applications. QUALCOMM has also reported that it actively
pursues patent protection in other countries of interest, which
protection may or may not cover OmniTRACS products. There can
be no assurance that the pending patent applications will be
granted, that QUALCOMM's patents or copyrights will provide
adequate protection, or that competitors will not independently
develop or patent technologies that are substantially
equivalent or superior to the OmniTRACS System. From time to
time, certain companies may assert exclusive patent, copyright
and other intellectual property rights to technologies which
are important to the industry or to the products distributed by
the Company. If QUALCOMM is unable to license protected
technology used in its products, or if the OmniTRACS product
were found to infringe on protected technology, QUALCOMM could
be prohibited from marketing such products. In such
circumstances, the Company would be unable to continue its
operations.
In countries in which the Company contracts with QUALCOMM's
local OmniTRACS service provider, the Company believes that
such service provider or BOATRACS will be responsible for
securing the necessary regulatory approvals for maritime
operations from the local governments. The Company and such
local service providers may be less prominent in such
international markets than local competitors and may have less
opportunity to influence regulatory and standards policies. In
countries in which the Company contracts with distributors of
other communications systems, the Company may apply to the
local governments for applicable approvals. No assurance can
be given that the Company will be able to obtain the required
approvals. Changes in the regulation of QUALCOMM's OmniTRACS
system, or the inability to obtain foreign regulatory
approvals, could have a material adverse effect on the
Company's operating results and its ability to expand its
business in the future.
The Company's primary competition to its U.S. OmniTRACS system
operations includes American Mobile Satellite Corporation
("AMSC"). AMSC and its resellers are offering services through
the AMSC satellite which was launched in 1995. These
competitors are aggressively pricing their products and could
continue to do so in the future. In addition, these
competitors are offering new value-added products and services
similar to those developed or being developed by QUALCOMM.
Emergence of new competitors, particularly those offering lower
cost products and future LEO satellite communications systems,
may impact margins and intensify competition in new markets.
The company also faces competition abroad from numerous
suppliers of equipment and services. These include Inmarsat
and its authorized resellers through its INMARSAT C
geostationary satellite service. In addition, the Company is
facing competition abroad from various terrestrial based
systems and specifically in Europe from GSM-based terrestrial
systems. All of these competitors are aggressively pricing
their products and services and the Company can continue to
expect pricing pressures.
Pursuant to the License and Distribution Agreement between
QUALCOMM and the Company, if the Company desires to sell its
business, QUALCOMM has a right of first refusal to purchase the
Company's business on the terms of the sale to the proposed
transferee.
The Company is subject to a number of other risks, including;
loss of senior management; dependence on large customers
concentrated in the commercial marine industry; loss of fishing
resources which are in decline in many areas of the world; the
risks associated with international expansion, including local
regulatory requirements, no prior experience in managing
foreign operations, and fluctuations in currency exchange
rates; operating restrictions imposed by contractual
relationships with foreign firms; risks associated with
business expansion and the acquisition of additional
businesses; competition with companies that have greater
financial, technical and marketing resources than the Company;
fluctuations in the Company's quarterly operating results; and
lack of liquidity for the Company's common stock, which could
result in significant price fluctuations in response to
operating results and other factors.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its 8,300 square foot facility located at
6440 Lusk Blvd., San Diego, California, under four non-
cancelable operating leases, which expire in September 1998.
In addition, in December 1996, the Company signed a five year
lease for office space in the Netherlands commencing January 1,
1997, and leases 2507 square foot in Gulfport, Mississippi
under two leases which expire January, 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending legal proceedings to
which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock began trading in the over-the-
counter market in March 1995 and is quoted on the OTC Bulletin
Board under the symbol "BTRK". The following table sets fiscal
1997 and 1996 high and low bid quotations for the common stock
as provided by the National Association of Securities Dealers,
Inc.:
High Bid Low Bid
Quarter Ended
December 31, 1997 $2.75 $1.00
September 30, 1997 1.56 .94
June 30, 1997 1.50 .50
March 31, 1997 1.81 1.00
December 31, 1996 1.50 .63
September 30, 1996 1.50 .75
June 30, 1996 2.00 .75
March 31, 1996 .94 .75
On February 28, l998, the closing high and low bid price of the
common stock, as reported on the OTC Bulletin Board, was $2.25.
As of March 10,1998, the Company had 300 holders of record of
its common stock. In addition, approximately 3.4 million
shares are held in street name accounts. The Company has not
paid any dividends since the Merger and does not currently
intend to declare any dividends.
The quotations set forth above represent inter-dealer prices
without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions. The existence of
quotations for the Common Stock should not be deemed to imply
that there is an established public trading market for the
Company's common stock.
ITEM 6. 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.
In addition, the Company develops application software for
marine applications of the OmniTRACS system. The OmniTRACS
system, as adapted and enhanced by the Company for marine
application, 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 and monitoring and, using
supplementary products, can provide engine performance and fuel
consumption monitoring.
The Company was incorporated in California in 1982 under the
name First National Corporation as a bank holding company.
From 1982 to 1993, the Company provided, through its wholly-
owned subsidiaries, business and individual banking services
and certain corporate trust services.
On November 9, 1993, First National Corporation filed a
voluntary petition under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of California. On January 12, 1995, the
Company (formerly First National Corporation) merged with Old
BOATRACS, a California corporation formed in 1990 to be a
distributor in the United States marine market of the OmniTRACS
satellite-based communications and tracking system manufactured
by QUALCOMM. The merger of Old BOATRACS with and into the
Company was implemented pursuant to a Plan and Agreement of
Reorganization that was approved by the Bankruptcy Court.
First National Corporation had no significant assets or
operations at the effective date of the Merger. For accounting
purposes, the Merger has been treated as a recapitalization of
Old BOATRACS with Old BOATRACS as the acquirer. Accordingly,
the financial information presented herein represents that of
Old BOATRACS.
Results of Operations
The following table sets forth for the periods indicated the
relative percentages that certain income and expense items bear
to total revenues:
Year Ended December 31,
1997 1996 1995
% % %
Revenues
Communications systems 46.8 40.8 48.7
Data transmission and messaging 53.2 59.2 51.3
Total 100.0 100.0 100.0
Operating expenses:
Communications systems 30.8 26.1 33.8
Data transmission and messaging 27.0 31.1 31.2
Selling, general and 47.7 70.3 60.4
administrative expenses
Loss from operations (5.6) (27.5) (25.4)
Other income (expense) .7 1.6 .9
Net loss (4.9) (25.9) (24.5)
Years ended December 31, 1997 and 1996
Total revenues for the year ended December 31, 1997 were
$5,247,541, an increase of $1,746,359 or 49.9% as compared to
total revenues of $3,501,182 for the year ended December 31,
1996.
Communications systems revenues, which consists principally of
revenues from the sale of BOATRACS equipment and related
software, were $2,456,638 or 47% of total revenues, an increase
of $1,028,816 or 72% over the prior year. This growth in
communications systems revenues is attributable primarily to an
increase in sales of equipment to new customers in Europe and
Canada and increased software sales in the United States.
Communication system revenues also includes two months revenue
of a software applications provider which the Company purchased
effective November, 1997.
Data transmission and messaging revenues, which consist of fees
for messaging services provided to BOATRACS units installed on
vessels, were $2,790,903 or 53% of total revenues, an increase
of $717,543 or 35% compared to $2,073,360 or 59% of total
revenues in the prior year. The increase in data transmission
and messaging revenues primarily reflects an overall increase
in messaging services provided by the company as a result of
growth in the number of units installed on vessels in prior
periods and increased usage by some customers.
Communications systems expenses were $1,615,929 or 66% of
communications systems revenues for 1996, an increase of
$702,865 or 77%, compared to $913,064 which represented 64% of
communications systems revenues in 1996. The dollar increase
in expenses primarily reflects increased equipment sales in
Europe and Canada and related software. The increase in
communications systems expenses as a percentage of
communications systems revenues is primarily due to the
inclusion of two months of expenses of the recently purchased
software applications provider. Without these expenses the
percentage would be unchanged from the prior year. Data
transmission and messaging expenses were $1,418,461 or 51% of
data transmission and messaging revenues in 1997, an increase
of $328,742 or 30%, compared to $1,089,719 which represented
53% of data transmission and messaging revenues in the prior
year. The dollar increase in costs reflects increased data
transmission and messaging services rendered due to increased
equipment sales and related usage. The decrease in data
transmission messaging costs as a percentage of data
transmission messaging revenues is due to increased margin on
messaging services due to the continuing increase in revenues
over the relatively fixed costs of providing this service, and
increasing sales to fleet customers with greater utilization of
the system.
Selling, general and administrative expenses were $2,505,190 or
48% of total revenues for 1997, an increase of $44,172 or 2%,
compared to $2,461,018 or 70% of total revenues in the prior
year. The increased dollar amount is primarily attributable to
various increased expenses including salary and related
expenses, outside consultants, advertising and shareholder
relations and certain prepaid consultant costs offset by a
decrease in legal, computer consultants, telephone and European
expenses. In 1997, the selling, general and administrative
expenses include two months of expenses of the recently
purchased software provider. In addition, selling, general and
administrative expenses include two months amortization of
goodwill on the purchase of MED in the amount of $14,083. The
Company anticipates that the dollar amount of selling, general
and administrative expenses will increase in the future to
accommodate the Company's growth.
Interest expense in 1997 was $2,060 or .04% of total revenues,
a decrease of $876 or 30% compared to $2,936 which was .08% of
total revenues in the prior year. Interest income was $39,212
or .7% of total revenues a decrease of $20,905 or 35% compared
to $60,117 or 2% in the prior year due to lower investment
balances during 1997.
As a result of the factors described above, net loss was
$254,887 for 1997 compared to $905,438 for 1996, a decreased
loss of $650,551 or 72%.
Years ended December 31, 1996 and 1995
Total revenues for the year ended December 31, 1996 were
$3,501,182, an increase of $834,498 or 31.3% as compared to
total revenues of $2,666,684 for the year ended December 31,
1995.
Communications systems revenues, which consists principally of
revenues from the sale of BOATRACS equipment and related
software, were $1,427,822 or 41% of total revenues, an increase
of $128,492 or 10% over the prior year. This growth in
communications systems revenues is attributable primarily to an
increase in sales of equipment to new and existing customers.
Data transmission and messaging revenues, which consist of fees
for messaging services provided to BOATRACS units installed on
vessels, were $2,073,360 or 59% of total revenues, an increase
of $706,006 or 52% compared to $1,367,354 or 51% of total
revenues in the prior year. The increase in messaging revenues
primarily reflects an overall increase in messaging services
provided by the Company as a result of growth in the number of
units installed on vessels in prior periods and increased usage
by some customers.
Communications systems expenses were $913,064 or 64% of
communications systems revenues for 1996, an increase of
$12,084 or 1.34%, compared to $900,980 which represented 69% of
communications systems revenues in 1995. The dollar increase
in expenses primarily reflects increased equipment sales and
related software. The decrease in communications systems
expenses as a percentage of communications systems revenues is
primarily due to a reduction in the cost charged by the
supplier to the Company per unit commencing in the second
quarter of 1996. Data transmission and messaging expenses were
$1,089,719 or 53% of data transmission and messaging revenues
in 1996, an increase of $256,571 or 31%, compared to $833,148
which represented 61% of data transmission and messaging
revenues in the prior year. The dollar increase in costs
reflects increased data transmission services rendered due to
increased equipment sales and related usage. The decrease in
data transmission and messaging costs as a percentage of data
transmission and messaging revenues is due to increased margin
on data transmission and messaging services due to the
continuing increase in revenues over the relatively fixed costs
of providing this service, an increase in sales to fleet
customers with greater utilization of the system, and a change
in the price structure charged by the Company's supplier.
Selling, general and administrative expenses were $2,461,018 or
70% of total revenues for 1996, an increase of $850,157 or 53%,
compared to $1,610,861 or 60% of total revenues in the prior
year. The increased dollar amount is primarily attributable to
significant increased expenses incurred in development of the
European market including travel and the hiring of consultants,
and the operation of a network center in the Netherlands. In
the United States, the increased dollar amount is primarily
attributable to payroll and related expenses due to the hiring
of additional sales and technical personnel, increased costs in
shareholder relations, advertising, insurance and general
office expenses offset by a decrease in legal and accounting
expenses. In addition, the Company has incurred significant
increased costs on the development of software to facilitate
customer operations. The Company anticipates that the dollar
amount of selling, general and administrative expenses will
increase in the future to accommodate the Company's growth. A
breakdown of operating results for 1996 on a geographic basis
reflects pretax income of approximately $360,000 for U.S.
operations before software research and development expenses.
European operations lost approximately $905,000 before research
and development expenses, due to start-up and marketing costs
incurred in the development of the market.
Interest expense in 1996 was $2,936 or .08% of total revenues,
a decrease of $13,213 or 82%, compared to $16,149 which was .6%
of total revenues in the prior year. The dollar decrease
reflects the effects of lower debt outstanding during 1996.
Interest income was $60,117 or 2% of total revenues, an
increase of $18,799 or 45% compared to $41,318 or 2% in the
prior year due to interest earned on funds invested as a result
of the amount raised in a private placement in September 1995
in the net amount of $1,904,292.
As a result of the factors described above, net loss was
$905,438 for 1996 compared to $653,136 for 1995, an increased
loss of $252,302 or 39%.
Liquidity and Capital Resources
The Company's cash balance at December 31, 1997 was $392,712,
an increase of $289,568, or 281% over the December 31, 1996
cash balance of $103,144. At December 31, 1997, working
capital was $21,976, a decrease of $249,031 from the working
capital of $271,007 at December 31, 1996. Cash of $135,015 was
used in operating activities, cash of $702,954 was used in
investing activities, and cash of $857,507 was provided by
financing activities during 1997.
There were no investment securities at December 31, 1997, a
decrease of $425,852, compared to the prior year balance of
$425,852, due to excess funds being invested in cash
equivalents. In addition, funds were also used in operations
during the year. Accounts receivable net of an allowance for
uncollectible amounts increased $379,764 to $937,010 due
primarily to higher messaging billings during the year and the
acquisition of MED Associates. Prepaid expenses and other
assets were $107,435 at December 31, 1997, an increase of
$33,725 or 46% due primarily to increased prepaid insurance,
deposits and interest receivable. Inventory at December 31,
1997 was $234,092, compared to $92,118 in the prior year, an
increase of $141,974 due primarily to units held for future
sales in Europe and the United States. Property, net of
accumulated depreciation, was $223,863 at December 31, 1997,
compared to $120,731 in the prior year, an increase of $103,132
or 85%, due primarily to the purchase of additional computer
equipment and office furniture. Notes receivable increased to
$310,463 at December 31, 1997, from $208,463 at December 31,
1996, an increase of $102,000 or 49%, due to the increase of a
loan to a Canadian distributor, which is expected to continue
to increase during 1998. Goodwill in the amount of $845,000
was recorded in the acquisition of MED Associates.
Accounts payable were $1,133,997 at December 31, 1997, an
increase of $404,074 or 55% compared to a balance of $729,923
in the prior year due to higher vendor payables owing to the
Company's supplier resulting primarily to increased messaging
costs. Accrued expenses were $265,276 at December 31, 1997, an
increase of $198,533 or 297% compared to a balance of $66,743
at the prior year due to increased accruals including Europe
and MED. Acquisition costs payable in the amount of $250,000
payable in December, 1998, relates to the purchase of MED. A
short-term margin loan was paid off at December 31, 1997,
compared to a balance of $139,268 at December 31, 1996,
reflecting borrowings against investment securities.
Deferred compensation, net of borrowings, was paid off at
December 31, 1997, compared to $45,129 at December 31, 1996.
The borrowings had been offset against deferred compensation in
accordance with the amended terms of the note.
Any future funding requirements will be satisfied through
potential public and private financing. The known resources of
liquidity of the Company, coupled with the projections for
revenue, are expected to cover the Company's cash needs until
at least the end of 1998.
The Company anticipates making capital expenditures in excess
of $100,000 during 1998. To date the Company has financed its
working capital needs through private loans, the issuance of
stock and cash generated from operations. Expansion of the
Company's business may require a commitment of substantial
funds. To the extent that the net proceeds of 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.
Year 2000 Issues
In the operation of its business, the Company uses commercial
computer software primarily purchased from or provided by
independent software vendors. After an analysis of the
Company's exposure to the impact of "year 2000 issues" (i.e.
issues that may arise resulting from computer programs that use
only the last two, rather than all four, digits of the year),
management has determined that such commercial software is
already substantially year 2000 compliant, and that completion
of year 2000 compliance should not have a material impact on
the Company's business, operations or financial condition.
Management is not in a position to evaluate the extent (if any)
to which any year 2000 issues that may affect the economy
generally or any suppliers or others with whom the Company does
business in particular would also be likely to affect the
Company.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated financial statements as of December
31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, and the report of Deloitte and
Touche LLP, independent accountants, are included in this
report on pages F-2 through F-12.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a)
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Part III, Items 9, 10, 11 and 12
is hereby incorporated by reference to the Company's definitive
Proxy Statement to be mailed to shareholders in April, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of, or
incorporated by reference into this Annual Report on Form 10-KSB.
(1) Financial Statements: The following consolidated financial
statements and Independent Auditors' Report are included in this
report beginning on page F-1.
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31,
1997 and 1996 F-3
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996 and 1995 F-4
Statements of Stockholders' Equity/(Deficit)
for the years ended December 31, 1997, 1996 and 1995 F-5
Statements of Consolidated Cash Flows for the
years ended December 31, 1997, 1996 and 1995 F-6
Notes to consolidated financial statements F-7 - F-13
(2) Financial Statements Schedules: See Exhibit 11.
(b) REPORTS ON FORM 8-K.
The Company filed Form 8-K on January 13, 1998, in connection
with a Asset Purchase Agreement dated as of November 1, 1997,
between MED Associates, Inc. and Charles J. Drobny, Jr. and
Pamel M. Drobny, providing for the purchase of significant
assets of MED Associates, Inc. by the Company. The 8-K was
amended on March 31, 1998.
(c) EXHIBITS.
The following exhibits are filed as part of, or incorporated by
reference into, this Annual Report on Form 10-KSB.
EXHIBIT INDEX
Exhibits Description
2 Plan of Reorganization by Merger(1)
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Amended and Restated Bylaws(1)
3.3 Amendment of the Bylaws, Article III, Section 2(9)
4.1 Form of the Company's Common Stock Certificate(4)
4.2 Form of Subscription Agreement--October 1994 investors(4)
4.3 Subscription Agreement--QUALCOMM(4)
4.4 Second Amended Plan of Reorganization of
First National Corporation(2)
4.5 Bankruptcy court order confirming Second Amended Plan
of Reorganization(3)
4.6 Warrant to Purchase Common Stock of BOATRACS, Inc.(7).
10.1* License and Distribution Agreement dated June 13, 1990,
by and between QUALCOMM and the Company, as amended(5)
10.2* License Agreement dated March 31, 1995, between the
Company and QUALCOMM(4)
10.3 Employment Agreement--Michael Silverman(4)
10.4 Employment Agreement--Annette Friskopp, as amended(4)
10.5 Stock Issuance/Employment Agreement between the
Company and Annette Friskopp, as amended(4)
10.6 Convertible Promissory Note dated July 1, 1994(4)
10.7 Addendum to Stock Issuance/Employment Agreement
between the Company and Annette Friskopp dated
July 1, 1995(6)
10.8* Agreement entered into between BOATRACS, Inc. and
Oceantrac Systems Limited and Oceantrac Incorporated,
effective September 1996(8)
10.9 BOATRACS, Inc. Amended 1996 Stock Option Plan(10)
10.10 Restricted Stock Purchase Agreement between Boatracs,
Inc. and Jon Gilbert dated October 15, 1997 (11)
10.11 Pledge Agreement between Boatracs, Inc. and Jon Gilbert
dated October 15, 1997 (11)
10.12 Promissory Note between Boatracs, Inc. and Jon Gilbert
dated October 15, 1997 (11)
10.13 Employment Agreement between Boatracs, Inc. and Charles
Drobny, Jr. effective November 1, 1997. (12)
11 Statement regarding computation of net loss per share
(filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
23 Independent Auditors' Consent (filed herewith)
___________________________
(1) Incorporated by reference to the exhibit of the same
number to the Company's Current Report on Form 8-K dated
January 12, 1995.
(2) Incorporated by reference to Exhibit A to First National
Corporation's Current Report on Form 8-K dated January 9,
1995 ("FNC 8-K").
(3) Incorporated by reference to Exhibit B to the FNC 8-K.
(4) Incorporated by reference to the exhibit of the same
number to the Company's Form S-1, SEC File No. 33-91284, filed
with the SEC on May 4, 1995.
(5) Incorporated by reference to the exhibit of the same
number to the Company's Amendment No. 3 to Form S-1, SEC File
No. 33-91284, filed with the SEC on July 6, 1995.
(6) Incorporated by reference to the exhibit of the same
number to the Company's Form S-1, SEC file No. 33-98810 filed
with the SEC on October 31, 1995.
(7) Incorporated by reference to the exhibit of the same
number to the Company's Form 10-K filed with the SEC
March 1996.
(8) Incorporated by reference to the exhibit of the same
number to the Company's Form 10-QSB filed with the SEC November 1996.
(9) Incorporated by reference to the Company's Form 10-QSB
filed with the SEC in May, 1996.
(10) Incorporated by reference to the Company's Form S-8
filed with the SEC on June 20, 1997.
(11) Incorporated by reference to the Company's Form 10-QSB filed
with the SEC on 11/14/97.
(12) Incorporated by reference to the Company's Form 8-KA filed with
the SEC on March 31, 1998.
*Confidential treatment requested
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
March 27, 1997
BOATRACS, INC.
By: /s/ Michael Silverman
Michael Silverman
Chairman of the Board
Power of Attorney
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Michael
Silverman and Annette Friskopp, and each of them, as his true
and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any and
all amendments to this Report, and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that all said attorneys-
in-fact and agents, or any of them or their or his substitute
or substituted, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed below by the following
persons on behalf of Registrant in the capacities and on the
dates indicated.
/s/ Michael Silverman Chairman of the Board, March 27, 1998
Michael Silverman and Director
/s/ Jon S. Gilbert President, Chief
Jon S. Gilbert Executive Officer March 27, 1998
and Director
/s/ Annette Friskopp Chief Operating Officer March 27, 1998
Annette Friskopp and Director
/s/ Curt McLeland Chief Financial Officer March 27, 1998
Curt McLeland and Chief Accounting
Officer
/s/ Giles Bateman Director March 27, 1998
Giles Bateman
/s/ Luis Maizel Director March 27, 1998
Luis Maizel
/s/ Julius Trump Director March 27, 1998
Julius Trump
/s/ Mitchell Lynn Director March 27, 1998
Mitchell Lynn
<PAGE>
(DELOITTE & TOUCHE LLP LETTERHEAD)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Boatracs, Inc.:
We have audited the accompanying consolidated balance sheets of
Boatracs, Inc. (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
February 20, 1998
<PAGE>
BOATRACS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash $ 392,712 $ 103,144
Investment securities 425,852
Accounts receivable - net 937,010 557,246
Inventories 234,092 92,118
Prepaid expenses and other assets 107,435 73,710
Total current assets 1,671,249 1,252,070
PROPERTY, at cost 223,863 120,731
NOTES RECEIVABLE 310,463 208,463
GOODWILL 830,917
TOTAL $ 3,036,492 $1,581,264
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,133,997 $ 729,923
Accrued expenses 265,276 66,743
Acquisition cost payable 250,000
Short-term margin loan on securities 139,268
Deferred compensation - net 45,129
Total current liabilities 1,649,273 981,063
COMMITMENTS (Notes 5 and 9)
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, 15,806,977 and
12,602,310 shares issued and
outstanding in 1997 and 1996,
respectively 6,949,244 4,210,925
Notes receivable for common stock
issued (2,117,836) (421,422)
Accumulated deficit (3,444,189) (3,189,302)
Total stockholders' equity 1,387,219 600,201
TOTAL $ 3,036,492 $1,581,264
See notes to consolidated financial statements.
<PAGE>
BOATRACS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
REVENUES:
Communications systems $ 2,456,638 $ 1,427,822 $ 1,299,330
Data Transmission &
Messaging 2,790,903 2,073,360 1,367,354
_________ _________ _________
Total revenues 5,247,541 3,501,182 2,666,684
COSTS AND EXPENSES:
Communications systems 1,615,929 913,064 900,980
Data Transmission &
Messaging 1,418,461 1,089,719 833,148
Selling, general and
administrative 2,505,190 2,461,018 1,610,861
_________ _________ ________
Total costs and expenses 5,539,580 4,463,801 3,344,989
LOSS FROM OPERATIONS (292,039) (962,619) (678,305)
INTEREST INCOME 39,212 60,117 41,318
INTEREST EXPENSE (2,060) (2,936) (16,149)
_______ _______ _______
NET LOSS $ (254,887) $ (905,438) $ (653,136)
======= ======= =======
NET LOSS PER SHARE $ (0.02) $ (0.07) $ (0.06)
===== ====== ======
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 13,535,433 12,597,471 11,277,245
========== ========== ==========
See notes to consolidated financial statements.
<PAGE>
BOATRACS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Note
Receivable Total
Common Stock for Common Stockholders'
___________________ Accumulated Stock Equity
Shares Amount Deficit Issued (Deficit)
BALANCE,
JANUARY 1, 1995 9,500,000 $1,379,412 $(1,630,728) $ (251,316)
Common stock
issued in
connection with:
Merger 510,386 (50,000) (50,000)
Long-term debt
and accrued
interest
conversion 179,684 215,621 215,621
Note
receivable 1,112,265 737,000 $ (737,000)
Stock sale 1,275,375 1,904,292 1,904,292
Payments
received on
note
receivable 132,021 132,021
Net loss (653,136) (653,136)
__________ _________ _________ _______ _________
BALANCE,
DECEMBER 31,
1995 12,577,710 4,186,325 (2,283,864) (604,979) 1,297,482
Common stock
issued in
connection
with services
rendered 24,600 24,600 24,600
Payments received
on note
receivable 183,557 183,557
Net loss (905,438) (905,438)
__________ _________ _________ _______ ______
BALANCE,
DECEMBER 31,
1996 12,602,310 4,210,925 (3,189,302) (421,422) 600,201
Common stock
issued through
exercise of
stock options 4,667 4,792 4,792
Common stock
issued through
Restricted Stock
Purchase
Agreement 2,900,000 2,320,000 2,320,000
Receivable issued in
connection with
Restricted
Stock Purchase
Agreement (1,930,915) (1,930,915)
Common stock
issued through
acquisition 300,000 420,000 420,000
Payments received
on note
receivable 234,501 234,501
Issuance costs
in connection
with Common
Stock issued (6,473) (6,473)
Net loss (254,887) (254,887)
__________ _________ __________ _________ __________
BALANCE,
DECEMBER 31,
1997 15,806,977 $6,949,244 $(3,444,189) $(2,117,836) $1,387,219
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
OPERATING ACTIVITIES:
Net loss $ (254,887) $ (905,438) $ (653,136)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss on disposal of assets 15,907
Depreciation and amortization 76,851 44,420 32,890
Net accretion of discount on
investment securities (42,204) (27,505)
Provision for bad debts 18,297
Changes in assets and liabilities:
Accounts receivable (379,764) (149,754) (233,397)
Inventories (141,974) (59,809) (20,778)
Prepaid expenses and other (33,725) (57,085) (6,333)
Accounts and acquisition costs
payable and accrued expenses 852,607 127,801 337,897
Accrued interest payable 5,421
Net cash provided by
(used in) operating _______ _________ _______
activities 135,015 (1,042,069) (546,644)
INVESTING ACTIVITIES:
Purchase of investment securities (2,825,799) (2,096,344)
Proceeds from maturities of
investment securities 425,852 3,907,000 659,000
Issuance of notes receivable (102,000) (114,143) (205,775)
Capital expenditures (181,806) (92,752) (66,549)
Goodwill purchased through
acquisition (845,000)
Net cash (used in) provided _______ _______ _________
by investing activities (702,954) 874,306 (1,709,668)
FINANCING ACTIVITIES:
Payments received on note receivable
issued for common stock 234,501 183,557 132,021
Proceeds from short-term margin loan (139,268) 139,268
Repayment of net deferred compensation (45,129) (203,646) (160,026)
Net proceeds from issuance of common
stock 387,403 1,904,292
Common stock issued in acquisition 420,000
Net cash provided by _______ _______ _________
financing activities 857,507 119,179 1,876,287
NET INCREASE (DECREASE) IN CASH 289,568 (48,584) (380,025)
CASH AT BEGINNING OF YEAR 103,144 151,728 531,753
_______ _______ _______
CASH AT END OF YEAR $ 392,712 $ 103,144 $ 151,728
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 2,936 $ 10,416
===== ======
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services
rendered $ 24,600
Common stock issued for note ======
receivable $1,930,915 $737,000
Conversion of escrow deposit to ========= =======
equity $ 50,000
======
See notes to consolidated financial statements.
<PAGE>
BOATRACS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - BOATRACS, Inc. and its wholly owned
subsidiary BOATRACS (Europe) B.V. (collectively called the
"Company") is primarily engaged in the business of distribution
of the OmniTRACS satellite-based communications and tracking
system for marine application under a license and distribution
agreement with QUALCOMM, Incorporated ("Qualcomm", see Note 9).
Under the agreement, the Company sells mobile communications
terminals and software for use on board marine vessels and by
marine dispatchers. In addition, the Company also provides 24-
hour data transmission and messaging services. Effective
November 1, 1997, the Company purchased certain assets of MED
Associates, Inc. ("MED") for $500,000 cash and 300,000 shares of
common stock. The stock payment is subject to an option in
favor of the Company exercisable if MED does not achieve a
certain earnings level for the year ending December 31, 1998.
The 300,000 shares delivered under the Purchase Agreement will
be decreased one share for every dollar such earnings are not
achieved. Goodwill in the amount of $845,000 was recorded and
will be amortized over ten years. MED is a Mississippi based
provider of software applications and service solutions to the
commercial workboat industry and to oil companies.
Principles of Consolidation - The accompanying consolidated
financial statements include the accounts of the Company. All
significant intercompany balances have been eliminated in
consolidation.
Investment Securities - Investment securities represent U.S.
Treasury securities that the Company has the positive intent and
ability to hold to maturity which are reported at amortized
cost. Interest earned on these investment securities is
included in interest income.
Inventories - Inventories, which are comprised entirely of
finished goods, are carried at the lower of cost (specific
identification) or market.
Property - Property is stated at cost. Depreciation is provided
under a straight-line method for assets acquired in 1996 and
thereafter, and an accelerated method for assets purchased prior
to 1996 over the estimated useful lives of the assets (generally
3-5 years). Goodwill is amortized over 10 years.
Revenue Recognition - Revenue from the sale of communication
systems is recognized at the time the equipment is shipped to
the customer. Revenue from messaging is recognized at the time
the transmission is made by the customer.
Significant Customers - Major customers individually accounted
for 18%, 12% and 9% of 1997 sales, 26%, 15% and 8% of 1996
sales, and 23%, 18% and 12% of 1995 sales. In addition, MED
derives significant business from the same customers as the
Company. In November and December, 1997, MED derived 45% of its
total business from the Company's largest customer. Accounts
receivable from these customers aggregated (including the MED
receivables) $437,077 and $300,413 at December 31, 1997 and
December 31, 1996 respectively. The Company has not
historically experienced any significant losses on its accounts
receivable. Revenues from European customers accounted for 12%
of revenues in 1997. No European revenues were earned in 1996
and 1995.
Stock-Based Compensation - Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation,"
encourages, but does require companies to record compensation
cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, " Accounting for
Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Net Loss Per Share - Net loss per share is calculated using the
weighted average number of shares outstanding during each year.
In February, 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" (EPS). This statement requires
the presentation of earnings per share to reflect both "Basic
EPS" and "Diluted EPS" on the face of the income statement.
Common stock equivalents would have an anti-dilutive effect on
the net loss, and therefore diluted EPS is not presented.
Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications - Certain amounts in the 1996 and 1995
financial statements have been reclassified to conform to the
1997 presentation.
2. Acquisition - On November 1, 1997, the Company purchased certain
assets and liabilities of MED Associates, Inc. ("MED") for
$500,000 cash, and 300,000 shares of restricted common stock.
The stock is subject to an option by the Company to purchase all
of the issued stock if a certain earnings level for the fiscal
year ending December 31, 1998, is not met and will be decreased
one share for every dollar such earnings are not achieved.
Goodwill in the amount of $845,000 was recorded and will be
amortized over ten years.
MED is a Mississippi-based provider of software applications and
service solutions to the marine industry. The acquisition was
accounted for as a purchase. Accordingly, the assets and
liabilities of MED are included in the consolidated balance
sheet as of December 31, 1997. The results of MED's operations
from the date of the acquisition to December 31, 1997 were not
significant.
The following pro-forma results are not necessarily indicative
of what actually would have occurred if the acquisition had been
completed as of the beginning of the fiscal year, nor are they
necessarily indicative of future consolidated results.
Boatracs MED Pro-Forma
_________ _____ _________
1997 1997 1997
Total Revenues $ 5,247,541 $ 877,309 $ 6,124,850
Net (Loss) Income from
Operations $ (292,039) $ 798,369 $ 506,330
Net (Loss) Income $ (254,887) $ 78,940 $ (175,947)
_______ ______ _______
Weighted Average Shares 13,785,296
EPS $ (0.01)
3. BALANCE SHEET DETAILS
1997 1996
Accounts Receivable $949,874 $570,780
Less allowance for
doubtful accounts 12,864 13,534
_______ _______
$937,010 $557,246
Property - at cost:
Computers and equipment $372,597 $226,650
Less accumulated depreciation 148,734 105,919
________ _______
$223,863 $120,731
Goodwill $845,000
Less Amortization 14,083
_______
$830,917
Deferred Compensation -
Officer (Note 8) $369,230
Less Note Receivable -
Officer ( Note 4) 324,101
______
$ 45,129
Depreciation expense was $62,768, $44,420, and $24,334 for the
years ended December 31, 1997, 1996, 1995 respectively.
Amortization expense for the year ended December 31, 1997 was
$14,083.
4. NOTES RECEIVABLE
Canadian Company - The Company has a note receivable agreement
with a Canadian company. Outstanding advances on the note bear
interest at 9.0% and are due on demand. Advances on the note
totaled $310,463 and $208,463 at December 31, 1997 and 1996,
respectively. The note has been classified as long-term based
upon the Company's intent not to request payment prior to
January 1, 1999.
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.
5. LEASES
Facility Leases - The Company leases its facilities under seven
non-cancelable operating leases, which expire through September
2001. Rent expense was approximately $57,894, $51,900, and
$31,900 for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, MED's rent expense was $1,500 for
the months of November and December, 1997. The Company's leases
have rent escalation terms based on the Consumer Price Index,
which will affect future minimum lease payments.
Capital Lease - Included in property at December 31, 1997 and
December 31, 1996 is property acquired under a capital lease of
$6,289. All obligations in connection with this lease were paid
during 1996.
Future minimum lease payments under non-cancelable operating
leases at December 31, 1997 are summarized as follows:
Year Ending December 31,
1998 $95,527
1999 47,580
2000 26,436
2001 26,436
_______
Total $195,979
6. INCOME TAXES
The Company elected C Corporation status effective October 1994.
Due to a valuation allowance provided for deferred income tax
assets for the years ended December 31, 1997, 1996 and 1995 and
the period from October 1, 1994 to December 31, 1994, the
Company's effective income tax rate is 0%.
The tax effects of significant items comprising the Company's
deferred income tax assets were approximately as follows:
1997 1996
Deferred income tax assets:
Net operating loss carryforwards $830,000 $634,000
Deferred employee compensation 0 160,000
Tax credits 49,000 12,000
Allowance for uncollectible accounts 6,000 6,000
Deferred income 16,000 1,000
State income taxes 400 500
Other reserves 15,000 6,000
_______ _______
Total deferred income tax assets 916,000 819,500
Less valuation allowance (916,000) (819,000)
_______ _______
Net deferred income tax assets $ 0 $ 0
======= =======
At December 31, 1997, the Company had unused net operating loss
carryforwards of approximately $2,187,000 for Federal income tax
purposes which expire at various dates from 2005 to 2012. The
Company has unused net operating loss carry forwards of
approximately $978,000 for state income tax purposes which
expire at various dates from 1999 to 2002.
Deferred income taxes are recorded to reflect the net tax
effects of temporary differences between the carrying amount of
assets and liabilities for financial reporting and income tax
purposes. A valuation allowance is maintained to reduce
deferred income tax assets to an amount which, in the opinion of
management, will more likely than not be realized by the
Company.
7. STOCKHOLDERS' EQUITY (DEFICIT)
Note Receivable Issued for Common Stock - During March 1995, the
Company issued 1,112,265 shares of common stock to Qualcomm (see
Note 9) for $737,000. The purchase price of the shares will be
paid by a reduction in the price of certain products and
services currently provided by Qualcomm to the Company and, upon
satisfaction of certain conditions, the conversion of a certain
non-exclusive territory to an exclusive territory, under the
license and distribution agreement (see Note 9). The
transaction was recorded as a note receivable for common stock
issued which is reduced as discounts are earned. Through
December 31, 1997, a total of $550,079 in discounts was earned.
In October, 1997, the company issued 2,900,000 shares of common
stock to an officer/director of the company. In connection with
the shares, the Company received a promissory note in the amount
of $1,930,915 bearing 5.77% interest. The note requires
payments of $420,240 on April 15 and October 15 of each year
commencing in 1998 with the final payment due on April 15, 2000.
The note has been recorded as a reduction of equity on the
balance sheet.
Stock Warrants - During October 1995, the Company issued 25,000
common stock purchase warrants. The warrants represent the
right to purchase one share of the Company's common stock at
$1.50 and expire during October 1998.
Stock Options - During January 1996, the Company entered into a
Non-Circumvention Agreement with a financial consultant. The
agreement included a grant of 50,000 stock options at $1.50
each. There is no expiration date on the agreement, however the
agreement may be terminated by the company at will.
Registration Statements with the Securities and Exchange
Commission - During 1995, the Company filed two registration
statements on Form S-1 with the Securities and Exchange
Commission, registering a total of 6,049,684 shares of the
Company's common stock. The Company did not receive any
proceeds from these transactions.
During May 1996, the Company filed Post-Effective Amendment No.
3 to its Form S-1, which provides for registration of 6,033,385
shares on behalf of certain selling stockholders. The Company
did not receive any proceeds from this transaction.
During May, 1997, the Company filed a registration statement on
Form SB-2 that provides for registration of 5,490,956 shares on
behalf of selling stockholders. The Company did not receive any
proceeds from these transactions.
Stock Option Plan - 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. Stock option transactions are summarized below:
Number Price
of Shares per Share
Outstanding, January 1, 1996 0
Granted 730,500 $1.00 - $1.81
Canceled (21,000) $1.00 - $1.81
______
Outstanding, December 31, 1996 709,500 $1.00 - $1.81
Granted 167,500 $1.1875 - $1.25
Cancelled (208,934) $1.00 - $1.18
Exercised ( 4,667) $1.00 - $1.125
_______
Outstanding, December 31, 1997 663,399 $1.00 - $1.81
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, 1997 and 1996 would have
been increased by approximately $73,327 and $33,200, or $0.01
per share for each of the two years respectively.
Under FASB 123, the fair value of the options granted during
1997 is estimated as approximately $208,000 on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: no dividend yield, expected volatility of 277%,
risk-free interest rate of 5.5%, and expected life of 5.5 years.
The following table summarizes information as of December 31,
1997 concerning currently outstanding and exercisable options:
Options Outstanding Options Exercisable
___________________________________ ____________________
Weighted Weighted
Weighted Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
$1.00 - $1.81 663,399 5.5 $1.12 123,179 $1.10
8. RELATED PARTY TRANSACTIONS
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. The note
was fully repaid at December 31, 1997. Advances under the
agreement totaled $310,000 at December 31, 1996, plus accrued
interest. Terms of the note receivable agreement allowed
satisfaction of the balance as an offset to related deferred
compensation.
On October 15, 1997, Company received a promissory note from an
officer, director and shareholder of the Company in the amount
of $1,930,915 and a rate of 5.77%. The note was issued in
connection with a Restricted Stock Purchase Agreement of the
same date for a total of 2,900,000 shares of the Company's stock
(see Note 7). The note will be repaid in semi annual
installments with the final payment on April 15, 2000.
9. LICENSE AND DISTRIBUTION AGREEMENT
On June 13, 1990, the Company entered into a license and
distribution agreement, as amended through August 26, 1996, with
Qualcomm. Pursuant to the agreement, the Company was appointed
Qualcomm's exclusive and non-exclusive distributor, in defined
territories, of the OmniTRACS satellite-based communications and
tracking system (the "System") for marine applications. During
1996, the Company reached certain sales goals and became the
exclusive distributor in previously non-exclusive territories.
The Company was also appointed provider of message services to
the users of the System. In connection therewith, the Company
was also granted an exclusive and non-exclusive license to
certain software used with the System. Qualcomm was granted an
exclusive perpetual, worldwide, royalty free license to any
improvements made by the Company to the System or related
software.
Under the agreement, the Company is required to sell a certain
minimum number of systems in order to maintain the exclusivity
of its distribution rights. The minimum purchase requirements
for each calendar year is to be agreed upon between the Company
and Qualcomm subject to a minimum of 300 systems for calendar
year ended December 31, 1997 and increasing by 10% each year
thereafter. The Company met this requirement in 1997.
If Qualcomm is unable to provide service or elects not to remain
in business, they may terminate the agreement with six months'
notice and have no further liability. Qualcomm shall take such
steps, which are reasonable and necessary to enable the Company
to continue to provide the message services to its existing end
users.
The agreement expires during June 2000 and may be renewed for
two additional five-year periods. The agreement is subject to
re-negotiation at the end of the option period.
Sub-service Provider Agreement - During 1997, the Company
entered into a Sub-Service Provider Agreement with ALCATEL
Qualcomm, a French company, whereby the Company was appointed to
be the maritime distributor under a similar basis that it
operates in the United States by providing maritime satellite-
based communications and tracking of vessels to certain
countries in Europe.
10. 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. In 1997
and 1996, the Company did not elect to contribute to the Plan.
*****************
EXHIBIT 11
STATEMENT RE: BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
(in thousands, except earnings (loss) per share data)
For the Year Ended December 31,
1997 1996 1995
Net Earnings (Loss) <$254> <$905> <$653>
Basic Weighted average common
shares outstanding* 13,535 12,597 11,277
Net Loss per share <$.02> <$.07> <$.06>
* Common stock equivalents are considered anti-dilutive and
therefore are not included in the diluted computation.
EXHIBIT 21
Subsidiaries of the Registrant
BOATRACS (Europe) B.V. (wholly-owned).
(DELOITTE & TOUCHE LLP LETTERHEAD)
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the
Registration Statement of Boatracs, Inc. on Form S-8
of our report dated February 20, 1998, appearing in
this Annual Report on Form 10-KSB of Boatracs, Inc.
for the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 30, 1998
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