U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-11038
BOATRACS, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0644381
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
10675 Sorrento Valley Road, Suite 200, San Diego, CA 92121
(Address of Principal Executive Offices)
(619) 657-0100
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No __
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes X No __
APPLICABLE ONLY TO CORPORATE FILERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 18,889,032 shares of common
stock as of November 10, 1998.
Transitional Small Business Disclosure Format (check one): Yes __ No X
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOATRACS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Ended Nine months Ended
September 30, September 30,
1998 1997 1998 1997
REVENUES:
Communications system $881,543 $788,844 $3,234,154 $1,924,192
Data transmission and
messaging 1,039,488 678,414 2,751,585 1,955,847
Video compression 1,383,951 0 1,383,951 0
_________ _________ _________ _________
TOTAL REVENUES 3,304,982 1,467,258 7,369,690 3,880,039
--------- --------- --------- ---------
COSTS AND EXPENSES:
Communications systems 535,106 459,022 2,024,778 1,214,405
Data transmission and messaging 508,243 338,772 1,465,616 985,552
Video compression 386,798 386,798
Selling, general and
administrative 1,483,927 647,547 3,102,033 1,847,908
--------- ------- --------- ---------
TOTAL COSTS AND
EXPENSES 2,914,074 1,445,341 6,979,225 4,047,865
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 390,908 21,917 390,465 (167,826)
Interest income 2,913 3,109 41,030 9,303
Interest expense (201,556) 0 (201,556) (2,060)
------- - ------- -----
INCOME BEFORE TAXES 192,265 25,026 229,939 (160,583)
Income tax benefit 103,846 0 103,846 0
------- - ------- -
NET INCOME (LOSS) $296,111 $25,026 $333,785 ($160,583)
------- ------ ------- -------
BASIC EARNINGS PER
COMMON SHARE $.02 $.00 $.02 ($.01)
DILUTIVE EARNINGS PER
COMMON SHARE $.01 $.00 $.02 N/A
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 18,690,838 12,604,093 16,809,691 12,602,911
Dilutive effect of:
Employee stock options 1,049,316 572,185 702,536 N/A
Warrants 473,148 25,000 215,117 N/A
Weighted average of common
shares outstanding assuming
dilution 20,213,302 13,201,278 17,727,344 N/A
See Notes to Consolidated Financial Statements
<PAGE>
BOATRACS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1998 1997
(Unaudited)
CURRENT ASSETS:
Cash $471,873 $392,712
Accounts receivable - net 2,640,221 937,010
Inventories 633,893 234,092
Prepaid expenses and other assets 270,780 107,435
------- -------
TOTAL CURRENT ASSETS 4,016,767 1,671,249
PROPERTY - net 757,143 223,863
PATENT - net 17,740,384
NOTES RECEIVABLE 310,463
GOODWILL - net 11,550,847 830,917
---------- -------
TOTAL $34,065,141 $3,036,492
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,446,713 $1,133,997
Accrued expenses 740,581 265,276
Notes payable 8,166,500
Acquisition cost payable 250,000 250,000
------- -------
TOTAL CURRENT LIABILITIES 10,603,794 1,649,273
---------
Notes payable 1,833,500
Deferred tax liability 7,130,084
---------
TOTAL LIABILITIES 19,567,378
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,
18,887,532 and 15,806,977
shares issued and outstanding
in 1998 and 1997, respectively 17,608,167 6,949,244
Notes receivable for common stock
issued (2,117,836)
Accumulated deficit (3,110,404) (3,444,189)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 14,497,763 1,387,219
---------- ---------
TOTAL $34,065,141 $3,036,492
========== =========
See Notes to Consolidated Financial Statements
<PAGE>
BOATRACS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
1998 1997
Operating activities:
Net income (loss) $333,785 ($160,583)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Amortization of deferred taxes (103,846)
Depreciation and amortization 628,643 40,440
Write-off of equipment 4,264
Changes in assets and liabilities:
Accounts receivable, net (1,703,211) (154,058)
Inventories (488,173) (38,022)
Prepaid expenses and other assets (163,345) 1,486
Accounts payable and accrued expenses 788,021 315,572
------- -------
Net cash (used in) provided by operating
activities (708,126) 9,099
Investing activities:
Net cash paid in acquisitions (1,104,665)
Capital expenditures (244,537) (62,143)
Net maturities of investment securities 0 425,852
Net cash (used in) provided by investing
activities (1,349,202) 363,709
Financing activities:
Proceeds from notes receivable
issued for common stock 2,073,562 163,764
Short-term margin loan on securities (139,268)
Cash received for stock options and warrants
issued and exercised 99,927 2,000
Payments on long-term debt (35,000)
Issuance of notes receivable (37,000) (74,000)
------ ------
Net cash provided by (used in) financing
activities 2,136,489 (82,504)
--------- ------
Net increase in cash 79,161 290,304
Cash at beginning of period 392,712 103,144
------- -------
Cash at end of period $471,873 $393,448
SUPPLEMENTAL DISCLOSURE OF NON-CASH ======= =======
INVESTING AND FINANCING ACTIVITIES:
Issuance of notes payable $10,000,000
Common stock issued in acquisitions $10,558,996
Reclassification of evaluation inventory
units to property $88,372
Discount on redemption of note receivable $44,274
for common stock
See Notes to Consolidated Financial Statements
<PAGE>
BOATRACS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements as of and for the nine months ended
September 30, 1998 and 1997 are unaudited and have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for any other interim period or
for the year ending December 31, 1998.
NOTE 2 - ACQUISITIONS
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 ended 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 is 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 of Septemer 30, 1998 and December 31, 1997. The
results of MED's operations from the date of the acquisition to December 31,
1997 were not significant.
On July 7, 1998, the Company purchased Enerdyne Technologies, Inc.
("Enerdyne"), a provider of versatile, high performance digital video
compression products to the government and commercial markets. The purchase
agreement was amended in November, 1998. Enerdyne, formed in 1984, is located
in Santee, California. The acquisition price of $22.6 million was paid for by
a combination of cash, common stock and notes payable. Goodwill of
approximately $10.3 million was recorded and will be amortized over 16 years.
A patent was acquired as part of the purchase and recorded in the amount of
$18,000,000 and will be amortized over 16 years. The two shareholders of
Enerdyne signed employment contracts with the Company.
Effective July 1, 1998, the Company acquired all of the outstanding shares in
OceanTrac Inc., a Canadian corporation ("OceanTrac"). The acquisition was
effected by the exercise of the Company's rights under a Joint Venture
Agreement entered into among the Company, OceanTrac and OceanTrac Systems
Limited, ("Systems"), a Nova Scotia corporation, during 1996. In addition,
the Company purchased all of the assets of Systems for consideration of 5,000
shares of the Company's common stock. The acquisition of OceanTrac and
Systems resulted in recording of intangibles in the amount of approximately
$388,000 which will be amortized by the Company over ten years.
NOTE 3 - NET EARNINGS PER SHARE-
The consolidated financial statements are presented in accordance with SFAS
No. 128, "Earnings Per Share". Basic earnings per common share are computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per common share incorporate the incremental shares
issuable upon the assumed exercise of stock options and warrants. For the
nine months ended September 30, 1997 the Company reported a net loss and
therefore the incremental shares issuable upon the exercise of stock options
and warrants were not used as they were anti-dilutive.
NOTE 4 - BALANCE SHEET DETAILS
September 30, December 31,
1998 1997
(Unaudited)
Accounts Receivable $2,657,066 $ 949,874
Less allowance for doubtful
accounts 16,845 12,864
------ ------
$2,640,221 $937,010
---------- -------
Inventories:
Raw materials $398,536
Work in process 108,084
Finished goods 127,273 $234,092
------- -------
$633,893 $234,092
------- -------
Property - at cost:
Computers and equipment $1,047,521 $372,597
Less accumulated depreciation 290,378 148,734
------- -------
$757,143 $223,863
------- -------
Patent $18,000,000
Less amortization 259,616
-------
$17,740,384
----------
Goodwill $11,792,313 $845,000
Less amortization 241,466 14,083
------- ------
$11,550,847 $830,917
---------- -------
Depreciation expense was $141,345 for the nine months ended September 30, 1998
and $62,768 for the year ended December 31, 1997. Amortization expense was
$487,297 for the nine months ended September 30, 1998 and $14,083 for the year
ended December 31, 1997.
NOTE 5 - NOTES RECEIVABLE
Canadian Company - The Company had a demand note receivable agreement with a
Canadian company that provides for periodic advances. Outstanding advances on
the note bore interest at 9.0% and were due on demand. The balance of the
note at September 30, 1998 was zero as the Company acquired the Canadian
company in July 1998. (see note 2 - Acquisitions). Advances on the note
totaled $310,463 at December 31, 1997.
In September 1996, the Company entered into a Joint Venture 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. Under the Joint Venture agreement, the Company was granted an
option to purchase 3,100 of the 5,100 outstanding shares of the Canadian
company from OceanTrac Systems LTD, the sole shareholder, for a price of U.S.
$6.12 per share. The Company also received a warrant to purchase an
additional 4,900 shares of the Canadian company for a price of U.S. $6.12 per
share. On July 1 1998, the Company exercised both the option and warrant.
(see note 2 - Acquisitions).
Stockholder - On October 15,1997, the Company received a promissory note from
an officer, director and shareholder of the Company in the amount of
$1,930,915 with 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 called for semi-annual installments
with the final payment due on April 15, 2000. The principal balance at
December 31, 1997 was $1,930,915. Accrued interest was $23,211 at December
31, 1997. During June 1998 the note and accrued interest were purchased by an
outside party at a discount of $44,274, which was recorded as a deduction to
the common stock originally issued.
NOTE 6 - NOTES PAYABLE
In connection with the acquisition of Enerdyne on July 7, 1998 (see note 2),
the Company issued two notes payable in the total amount of $10,000,000 to the
previous owners and their investment bankers . Notes in the amount of
$8,000,000 are senior promissory notes payable on July 7, 1999 and bearing
interest at 8.5% per annum. The other notes are subordinated promissory notes
in the amount of $2,000,000 with specified minimum annual payments and any
remaining amounts payable June 31, 2002 and bearing interest at 8.5% per
annum. The current portion of the subordinated promissory note is $166,500.
A First Amendment to The Agreement And Plan of Reorganization ("Amendment")
was executed effective July 7, 1998. The Amendment provides that if at least
50% of the principal amount due under the certain Senior Promissory Notes
(defined in the Agreement and Plan of Reorganization) payable to the former
shareholders of Enerdyne (the "Former Shareholders") then: (a) the
Non-statutory Stock Option Agreement between the Company and the Former
Shareholders is amended by increasing, in accordance with specified formulas,
the number of option shares and the exercise price; (b) the Guaranty in favor
of the Former Shareholders executed by two of the Company's directors,
officers and principal shareholders is amended. If the prepayment is not
made in accordance with the Amendment, the Company will issue 500,000
options to each of the Former Shareholders at an exercise price of $2.00
per share.
NOTE 7 - AGREEMENTS WITH QUALCOMM INCORPORATED
On March 31, 1995, the Company entered into a Subscription Agreement and an
Amendment (#6) to the License and Distribution Agreement with QUALCOMM
Incorporated, the Company's supplier of OmniTRACS Satellite-based
communications and tracking equipment. Through these two agreements QUALCOMM
acquired 1,112,265 shares, or approximately 7%, of the Company's common stock.
The shares were issued for a total consideration of $737,000, which is paid by
providing discounts on future purchases of OmniTRACS equipment and data
transmission and messaging from QUALCOMM. The transaction was recorded as a
note receivable for shares issued which is reduced as discounts are earned.
During the second quarter of 1998, the final discount was earned which
eliminated the receivable balance, compared to the third quarter of the prior
year when $57,804 of discounts were earned reducing the receivable balance to
$257,658.
NOTE 8 - SELLING STOCKHOLDER REGISTRATION WITH THE SECURITIES AND EXCHANGE
COMMISSION
On April 29, 1998, a Registration Statement on Form SB-2 was filed with the
Securities & Exchange Commission ("Commission") which provides for
registration of 5,370,070 shares (later revised to 9,900,070) of common stock
on behalf of certain selling stockholders, including (1) QUALCOMM, Inc., the
Company's sole supplier, (2) shares received by an officer and director in
connection with a Restricted Stock Purchase Agreement, (3) warrants granted to
two directors of the Company, (4) warrants granted to a Company consultant and
(5) shares purchased by shareholders in private transactions. The Company did
not receive any proceeds related directly to the Form SB-2. The Registration
Statement is not yet effective and is currently under review by the
Commission.
NOTE 9 - STOCK OPTIONS
Under the amended 1996 Stock Option Plan ("the Plan"), the Company may grant
incentive and non-qualified options to purchase up to 2,000,000 shares of
common stock to employees, directors and consultants at prices that are not
less than 100% (85% for non-qualified) of fair market value on the date the
options are granted. Options issued under the Plan expire seven years after
the options are granted and generally become exercisable ratably over a five-
year period following the date of grant. At September 30, 1998, there were
1,319,800 options under the plan outstanding.
Pursuant to the acquisition agreement as amended with Enerdyne (see note 2),
the Company has a contingency to issue additional options to former Enerdyne
shareholders. (see note 6),
NOTE 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. As of the quarter ended
September 30, 1998, the Company elected not to contribute to the Plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company has distribution rights in the United States for marine
application of the OmniTRACS system of satellite-based communications and
tracking systems manufactured by QUALCOMM Incorporated ("QUALCOMM"). In
addition, the Company develops application software for marine application of
the OmniTRACS system. The OmniTRACS system, as adapted and enhanced by the
Company for marine applications, provides confidential two-way communications
between vessels at sea and base stations on land or with other vessels and is
effective while a vessel is within the satellite's "footprint," which extends
roughly 200 to 400 miles offshore of the continental United States. The
system also allows for hourly position tracking, monitoring, and data
transmission and, using supplementary products, can provide engine performance
and fuel consumption monitoring.
On July 7, 1998, the Company purchased Enerdyne Technologies, Inc.,
("Enerdyne"),a provider of versatile, high performance digital video
compression products to the government and commercial markets. Enerdyne,
formed in 1984, is located in Santee, California.
Statements within this 10-QSB which are not historical facts, including
statements about strategies and expectations for new and existing products,
technologies, and opportunities, are forward-looking statements that involve
risks and uncertainties. The Company wishes to caution readers to the risk
factors inherent to the business including, but not limited to, the continuing
reliance upon QUALCOMM, Inc., the sole supplier of equipment sold by the
Company, and reliance upon QUALCOMM's Network Management Facility through
which the Company's message transmissions are formatted and processed. These
and other risks are more fully described in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
For the three months ended September 30, 1998 and 1997
Total revenues for the quarter ended September 30, 1998, were $3,304,982 an
increase of $1,837,724 or 125.3% as compared to total revenues of $1,467,258
for the quarter ended September 30, 1997.
Communications systems revenues, which consist of revenues from the sale of
BOATRACS systems, related software and revenues from MED Associates, Inc.
("MED") were $881,543 or 26.7% of total revenues, an increase of $92,699 or
11.8% compared to $788,844 or 53.8% of total revenues in the third quarter of
1997. The increase in communication systems revenues compared to the same
period of the prior year, primarily reflects increased software revenues in
the amount of $240,348 from MED which the Company acquired in November, 1997
(see Note 2). The increase was offset by a decrease in the sale of
communications units in Europe and Canada in the third quarter of 1998
compared to the same period of 1997 in the amount of $222,734. Data
transmission and messaging revenues were $1,039,488 or 31.5% of total
revenues, an increase of $361,074 or 53.2% compared to $678,414 or 46.2% of
total revenues in the third quarter of 1997. The increase in revenues
reflects an overall increase in data transmission and messaging services
provided by the Company as a result of growth in the number of BOATRACS
systems installed on vessels. Video compression revenues which are revenues
from Enerdyne which the Company acquired on July 7, 1998, (see note 2) were
$1,383,951 or 41.9% of total revenues.
Communications systems expenses were $535,106 or 60.7% of communications
systems revenues for the quarter ended September 30, 1998, an increase of
$76,084 or 16.6%, compared to $459,022 which represented 58.2% of
communications systems revenues in the corresponding quarter of the prior
year. The dollar increase in expenses primarily reflects the increase in
software sales of MED. Data transmission and messaging expenses were $508,243
or 48.9% of data transmission and messaging revenues for the quarter ended
September 30, 1998, an increase of $169,471 or 50.0%, compared to $338,772
which represented 49.9% of data transmission and messaging revenues in the
corresponding quarter of the prior year. The dollar increase in costs
reflects increased data transmission and messaging services rendered for
transmission and messaging activities due to the greater number of BOATRACS
systems installed on vessels. The gross margin in the third quarter of 1998
was unchanged from the same quarter of the prior year. Video compression
expenses were $386,798 in the third quarter which was 28.0% of video
compression revenues.
Selling, general and administrative expenses were $1,483,927 or 44.9% of total
revenues for the quarter ended September 30, 1998, an increase of $836,380 or
129.2%, compared to $647,547 or 44.1% of total revenues in the prior
corresponding quarter. The increased dollar amount is primarily attributable
to increases in operating expenses in connection with three acquisitions which
the Company entered into since September 30, 1997. Salary expenses increased
due to additional employees in the amount of $347,742, legal and accounting
expenses increased by $63,599 and rent increased by $64,662 due to new
corporate offices and additional offices due to the acquisitions. In
addition, amortization of goodwill and patent was $445,048 in the third
quarter of 1998. Depreciation increased by $53,948. Software development costs
are written off as incurred.
Earnings before interest, taxes, depreciation and amortization for the quarter
ended September 30,1998 were $905,151 compared to $37,164 in the third quarter
of 1997.
Interest expense in the amount of $201,556 for the third quarter of 1998
represents interest on notes payable issued in connection with the acquisition
of Enerdyne on July 7, 1998.
The income tax benefit recorded in the amount of $103,846 in the quarter ended
September 30, 1998 represents the amortization of a temporary tax difference
on the life of the Enerdyne patent.
For the nine months ended September 30, 1998 and 1997
Total revenues for the nine months ended September 30, 1998 were $7,369,690 an
increase of $3,489,651 or 89.9% as compared to total revenues of $3,880,039
for the nine months ended September 30, 1997.
Communications systems revenues, which consist of revenues from the sale of
BOATRACS systems, related software and revenues from MED Associates, Inc.
("MED") were $3,234,154 or 43.9% of total revenues, an increase of
$1,309,962 or 68.1% compared to $1,924,192 or 49.6% of total revenues in the
first nine months of 1997. The increase in communication systems revenues
compared to the same period in the prior year, primarily reflects increased
sales of communication units to vessels in the United States in the amount of
$1.1 million, and an increase in software revenues due to the income of MED
which the Company acquired in November, 1997 (see note 2). The increase was
partially offset by a decrease in the sale of communications units in Europe
and Canada in the amount of $640,136 in the first nine months of 1998 compared
to the same period in 1997. Data transmission and messaging revenues were
$2,751,585 or 37.3% of total revenues, an increase of $795,738 or 40.7%
compared to $1,955,847 or 50.4% of total revenues in the comparable nine
months of 1997. The increase in revenues reflects an overall increase in data
transmission and messaging services provided by the Company as a result of
growth in the number of BOATRACS systems installed on vessels. Video
compression revenues which are revenues from Enerdyne which the Company
acquired on July 7, 1998, were $1,383,951 or 18.8% of total revenues
Communications systems expenses were $2,024,778 or 62.6% of communications
systems revenues for the nine months ended September 30, 1998, an increase
of $810,373 or 66.7% compared to $1,214,405 which represented 63.1% of
communications systems revenues in the corresponding nine months of the
prior year. The dollar increase in expenses primarily reflects the
increase in sales of BOATRACS systems and software expenses of MED. Gross
margin for communications systems remained relatively unchanged at 37.4%
for the nine months ended September 30, 1998 compared to a gross margin of
36.9% for the same period in the prior year. The margin for MED software
(MED was acquired in the 4th quarter of 1997) for the nine months ended
September 30, 1998 was 21% which was offset by the Canadian and European
lower margin units sold in the comparable nine months of the prior year.
Data transmission and messaging expenses were $1,465,616 or 53.3% of data
transmission and messaging revenues for the nine months ended September 30,
1998, an increase of $480,064 or 48.7% compared to $985,552 which
represented 50.4% of data transmission and messaging revenues in the
corresponding nine months of 1997. The dollar increase in costs reflects
increased data transmission and messaging services rendered due to
increased BOATRACS systems installed on vessels. The decrease in gross
margin in data transmission and messaging revenues is due to a continuing
change in the customer mix in the United States and an increase in European
and Canadian customers where the margin is lower.
Selling, general and administrative expenses were $3,102,033 or 42.1% of total
revenues for the nine months ended September 30, 1998, an increase of
$1,254,125 or 67.9% compared to $1,847,908 or 47.6% of total revenues in the
corresponding nine months of 1997. The increase dollar amount is in part
attributable to increases in operating expenses in connection with three
acquisitions which the Company entered into since September 30, 1997.
Increases include salary and related accruals in the amount of $680,913, legal
and accounting expenses in the amount of $135,387 and rent in the amount of
$92,432. These increased expenses were partially offset by a reduction in
consulting fees in the amount of $105,098 and shareholder relations in the
amount of $45,554. Included in selling, general and administrative expenses
for the nine months ended September 30, 1998 is amortization in the amount of
$487,297 relating to goodwill and the patent acquired in the Enerdyne
acquisition. Depreciation expense for the nine months ended September 30,
1998 was $141,345 compared to $43,713 in the prior year. Software development
costs are written off as incurred.
Earnings before interest, taxes, depreciation and amortization for the nine
months ended September 30, 1998 was $1,019,107 compared to a loss of $124,113
in the prior nine months in 1997.-
Interest income of $41,030 for the nine months ended September 30, 1998,
primarily represents interest earned on a promissory note which was repaid
during June 1998 . This represents an increase of $31,727 or 341.0% compared
to $9,303 in the prior year which represented interest earned on investments.
The income tax benefit recorded in the amount of $103,846 for the nine months
ended September 30, 1998 represents the amortization of a temporary tax
difference on the life of the Enerdyne patent.
Liquidity and Capital Resources
The Company's cash balance at September 30, 1998, was $471,873, an increase of
$79,161 compared to the December 31, 1997 cash balance of $392,712. At
September 30, 1998, working capital was a negative $6,587,027 a decrease of
$6,609,003 from the working capital of $21,976 at December 31, 1997. Cash of
$708,126 was used in operating activities, cash of $1,349,202 was used in
investing activities and cash of $2,136,489 was provided by financing
activities in the first nine months of 1998.
The Company's liquidity was affected by $2 million paid for the acquisition of
Enerdyne, partially financed by the collection of a $2 million receivable for
stock issued during the nine months ended September 30, 1998 to a Company
director and officer. As partial consideration for the acquisition of
Enerdyne, the Company issued $10,000,000 of notes payable of which $8,000,000
are due and payable in July, 1999 carrying an interest rate of 8.5%. In
addition the short term portion of subordinated notes in the total amount of
$2,000,000 in the amount of $166,500 is due within the next twelve months.
The Company anticipates making capital expenditures in excess of $300,000
during 1998 (other than cash for acquisitions) primarily on computer and
office equipment, including office furniture and equipment for new office
space which the Company relocated to during July 1998. This amount excludes
any capital expenditures which may result from the acquisition of Enerdyne
Technologies, Inc. ("Enerdyne"). (See note 2).
To date the Company has financed its working capital needs through private
loans, the issuance of stock and cash generated from operations. Expansion of
the Company's business may require a commitment of additional funds. To the
extent that the net proceeds of recent private financing activities and
internally generated funds are insufficient to fund the Company's operating
requirements, it may be necessary for the Company to seek additional funding,
either through collaborative arrangements or through public or private
financing. There can be no assurance that additional financing will be
available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, dilution to the existing shareholders may result.
If adequate funds are not available, the Company's business would be adversely
affected.
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), the Company
believes 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;
however, the Company is still assessing the impact of the year 2000 issue.
The Company has performed an internal analysis and is in the process of
finalizing a specific written plan to address the year 2000 issues for both
internally developed products and products developed and manufactured by
Qualcomm. Qualcomm has assured the Company that all the products supplied to
BOATRACS, Inc. during the course of the relationship and going forward will be
upgraded to ensure compliance with Year 2000 standards. This assurance will
be at no charge to the Company or customers but the Company may be required to
exchange certain chip sets of our customers at minimal cost.
For internally developed products, the upgrade process is in final testing
phase and will be completed by the end of the current fiscal year.
Development costs associated with the upgrade have been included in operations
as incurred. The Company's preliminary review shows that the potential future
cost to complete the conversion is estimated at $20,000 and will also be
included in operations as incurred.
The Company 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. Failure of one or more of the supplier's computer
products to be year 2000 compliant would have a material effect on the
Company's business.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 9, 1998, the Company filed a complaint in the United States District
Court, Southern District of California (the "California Action") against
Seacor Marine, Inc. ("Seacor Marine") and Globe Wireless, Inc. ("Globe")
seeking damages and injunctive relief for copyright infringement, unfair
competition and declaratory relief arising from the alleged infringement of
the Company's copyright registration No. TXU 799-101 (the "Boatracs
Software"). The Company filed a motion to amend its complaint in the
California Action to include Seacor Smit Inc. ("Seacor Smit") as a defendant
in the California Action. The Boatracs Software formed part of the assets
acquired from MED. On May 8, 1998, Seacor Marine and Globe filed a lawsuit in
the District Court of Harris County, Texas (the "Texas Action") against the
Company, Summerwood, Inc. and Charles J. Drobny, Jr. asserting causes of
action and seeking damages and injunctive relief for misappropriation of trade
secrets, misappropriation of confidential business information, conversion,
breach of contract and unfair competition.
The Company has entered into a Compromise Settlement Agreement and Mutual
Release (the "Agreement") with Seacor Marine, Seacor Smit and Globe. Under
the terms of the agreement, Seacor Marine, Seacor Smit and Globe acknowledge
the Company's ownership and title to the Boatracs Software are subject to
certain terms and conditions specified in the Agreement. In addition, the
Company has acknowledged and agreed to Globe's ownership and title to certain
software programs known as GlobeOffshore subject to certain terms and
conditions specified in the Agreement. Except for the obligations specified
in the Agreement, the parties have agreed to release one another from any
claims asserted by the parties in both the California and the Texas Action.
The financial obligations of the Company in this matter are limited to legal
fees of approximately $75,000.
ITEM 2. CHANGES IN SECURITIES
Inapplicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
ITEM 5. OTHER INFORMATION
Inapplicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Item:
(a)(1) Exhibit 11 - Computation of Net Earnings per share
(filed herewith).
7 (a) Financial Statements of Business Acquired - Auditied Financial
Statements of Enerdyne Technologies, Inc. for the periods ended
March 31, 1998 and June 30, 1997. Incorporated by reference to 7
(a) on the Company's Form 8-K/A filed with the Commission on
August 14, 1998.
7 (b) Proforma Financial Information - Unaudited pro forma condensed
consolidated statements of operations for the three months ended
March 31, 1998 and for the twelve months ended December 31, 1997.
Incorporated by reference to 7 (b) to the Company's Form 8-K/A
filed with the Commission on August 14, 1998.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
Undersigned, thereunto duly authorized.
BOATRACS, Inc.
Registrant
November 14, 1998 /s/ MICHAEL SILVERMAN
Date MICHAEL SILVERMAN
CHAIRMAN OF THE BOARD
November 14, 1998 /s/ JON GILBERT
Date JON GILBERT
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
November 14, 1998 /s/ CURT MCLELAND
Date CURT MCLELAND
CHIEF FINANCIAL OFFICER
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except earnings per share data)
Basic and Diluted
Earnings per Share:
Three Months ended Nine Months ended
September 30, September 30,
1998 1997 1998 1997
Net Income (Loss) $296 $25 $334 $(161)
Basic Earnings per
Common Share $.02 $.00 $.02 ($.01)
Diluted Earnings
per Common Share $.01 $.00 $.02 N/A
Weighted average common
shares outstanding 18,691 12,604 16,810 12,603
Weighted average common
shares outstanding
assuming dilution 20,213 13,201 17,727 N/A
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 471,873
<SECURITIES> 0
<RECEIVABLES> 2,657,066
<ALLOWANCES> 16,845
<INVENTORY> 633,893
<CURRENT-ASSETS> 4,016,767
<PP&E> 1,047,521
<DEPRECIATION> 290,378
<TOTAL-ASSETS> 34,065,141
<CURRENT-LIABILITIES> 10,603,794
<BONDS> 0
<COMMON> 17,608,167
0
0
<OTHER-SE> (3,110,404)
<TOTAL-LIABILITY-AND-EQUITY> 34,065,141
<SALES> 7,369,690
<TOTAL-REVENUES> 7,369,690
<CGS> 3,877,192
<TOTAL-COSTS> 3,877,192
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,556
<INCOME-PRETAX> 229,939
<INCOME-TAX> 103,846
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333,785
<EPS-PRIMARY> 0
<EPS-DILUTED> .02
</TABLE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except earnings per share data)
Basic and Diluted
Earnings per Share:
Three Months ended Nine Months ended
September 30, September 30,
1998 1997 1998 1997
Net Income (Loss) $296 $25 $334 $(161)
Basic Earnings per
Common Share $.02 $.00 $.02 ($.01)
Diluted Earnings
per Common Share $.01 $.00 $.02 N/A
Weighted average common
shares outstanding 18,691 12,604 16,810 12,603
Weighted average common
shares outstanding
assuming dilution 20,213 13,201 17,727 N/A
