SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 8-K/A
Amendment No. 1
to
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
September 28, 1999
Date of Report (date of earliest event reported)
Advanced Remote Communication Solutions, Inc.
(Exact Name of Registrant as Specified in its Charter)
California 0-11038 33-0644381
(State or Other (Commission (IRS Employer Iden-
Jurisdiction of File Number) tification Number)
Incorporation)
10675 Sorrento Valley Road, Suite 200
San Diego, California 92121
(Address of Principal Executive Offices
Including Zip Code)
(858) 657-0100
(Registrant's Telephone Number,
Including Area Code)
The undersigned Registrant hereby amends its Current Report on
Form 8-K by the addition of financial statements and exhibits as
follows:
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
On September 28, 1999, Advanced Remote Communications Solutions, Inc.,
a California corporation ("ARCOMS"), completed the acquisition of Innovative
Communication Technologies, Inc., a Maryland corporation ("ICTI Maryland").
The acquistion was effected by means of a merger through which ICTI Maryland
was merged with and into ARCOMS' wholly-owned subsidiary, Innovative
Communication Technologies, Inc., a Delaware corporation ("ICTI Delaware").
ICTI Delaware will continue ICTI Maryland's business of the design and
implementation of bandwidth efficient multi-media satellite networks.
Pursuant to the terms of an Agreement and Plan of Reorganization dated
as of August 1, 1999 (the "Merger agreement"), ARCOMS issued an aggregate of
1,665,000 shares of its no par value common stock (the "Stock") to
Mohammed G. Abutaleb, David J. Megel, Jeffrey R. Jacobson and James C.
Crichton, who were the shareholders of ICTI Maryland (collectively, the "ICTI
Shareholders"). The Merger Agreement also provided for (a) the payment by
ARCOMS of an aggregate of $1,500,000 in cash to the ICTI Shareholders; (b) the
issuance of negotiable promissory notes by ARCOMS to the ICTI Shareholders in
the aggregate principal amount of $500,000; and (c) the issuance of
non-negotiable promissory notes by ARCOMS to the ICTI Shareholders in the
aggregate amount of $100,000. Additionally, a non-negotiable note of up to
$400,000 may be issued by ARCOMS to the ICTI Shareholders contingent upon
certain revenue targets being met. This contingent note has not
been recorded in the financial statements. In addition, the cash portion
of the purchase price is subject to adjustment based on the book value of ICTI
Maryland as of the Closing Date. ARCOMS also agreed to issue options to acquire
up to 400,000 shares to officers, employees and consultants of ICTI pursuant to
ARCOMS' 1999 Stock Option Plan.
The funds for the cash payments to the ICTI Shareholders were from
ARCOMS' working capital.
After the acquisition, the ICTI Shareholders will be employed by ICTI
Delaware under employment agreements entered into between ARCOMS, ICTI Delaware,
and each of the ICTI Shareholders. Each of the ICTI Shareholders also entered
into an agreement not to compete with ICTI Delaware's business for a period of
time.
The consideration for the acquisition and the terms of the employment
and non-compete agreements were negotiated at arms' length. In determining
those terms, ARCOMS considered, among other factors: (i) the technology of ICTI
Maryland; (ii) ICTI Maryland's client base; (iii) the synergies between ICTI
Maryland and ARCOMS' operations; (iv) the historical revenues and operations of
ICTI Maryland; and (v) the potential contributions of the ICTI Shareholders to
ARCOMS' business.
REPORT OF INDEPENDENT ACCOUNTANTS
ARGY, WILTSE & ROBINSON LETTERHEAD
To the Board of Directors and Stockholders
of Innovative Communications Technologies, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Innovative Communications
Technologies, Inc. at September 30, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
ARGY, WILTSE & ROBINSON
/S/ Argy, Wiltse & Robinson, P.C.
McLean, Virginia
August 11, 1999
<PAGE>
INNOVATIVE COMMUNICATIONS TECHNOLOGIES, INC.
BALANCE SHEETS
September 30,
1998 1997
ASSETS
Current assets
Cash and cash equivalents $142,886 $414,825
Accounts receivable 763,424 1,165,432
Unbilled receivables 95,925 110,616
Income taxes receivable 0 31,750
Inventory 57,972 40,254
Restricted investments 197,500 179,500
Other current assets 1,900 3,887
----- -----
Total current assets 1,259,607 1,946,264
Property and equipment, net 44,639 64,695
------ ------
Total assets $1,304,246 $2,010,959
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $472,947 $229,341
Accrued payroll and related expenses 64,555 114,599
Employee pension payable 48,517 129,213
Billings in excess of revenue recognized 100,665 939,668
Deferred income taxes 80,000 129,000
Dividends payable 0 3,000
Income taxes payable 42,532 0
------ ------
Total current liabilities 809,216 1,544,821
-------- --------
Stockholders' equity
Common stock - $1 par value, 1,000 shares
authorized, 200 shares issued
and outstanding 200 200
Additional paid-in-capital 91,200 91,200
Retained earnings 403,630 374,738
------- -------
Total stockholders' equity 495,030 466,138
Commitments and contingencies
Total liabilities and stockholders'
equity $1,304,246 $2,010,959
========= =========
The accompanying notes are an integral part of these financial
statements
<PAGE>
INNOVATIVE COMMUNICATIONS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Year ended September 30,
1998 1997
Revenue
Contract revenue $4,476,776 $4,469,767
Royalty income 230,689 51,030
------- ------
4,707,465 4,520,797
Costs and expenses
Direct expenses, excluding labor 2,628,462 2,301,328
Overhead and general and administrative 2,080,541 2,378,300
Interest income, net (48,430) (40,276)
------- -------
4,660,573 4,639,352
------- -------
Income (loss) before income taxes 46,892 (118,555)
Provision for (benefit from) income taxes 18,000 (24,000)
------- -------
Net income (loss) 28,892 (94,555)
Retained earnings at the beginning of the year 374,738 472,293
Dividends to stockholders 0 (3,000)
----- ------
Retained earnings at the end of the year $403,630 $374,738
======= =======
The accompanying notes are an integral part of these
financial statements
<PAGE>
INNOVATIVE COMMUNICATIONS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Year ended September 30,
1998 1997
Cash flows from operating activities:
Net income (loss) $ 28,892 $(94,555)
------- ---------
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 39,304 41,362
Deferred income taxes (49,000) (30,000)
Decrease (increase) in accounts
receivable 402,008 (598,009)
Increase in unbilled receivables 14,691 (51,536)
Decrease (increase) in income
taxes receivable 31,750 (17,385)
Increase in inventory (17,718) (40,254)
Decrease in other current assets 1,987 33,488
Increase in accounts payable
and accrued expenses 243,606 130,826
(Decrease) increase in accrued
payroll and related expenses (50,044) 65,023
(Decrease) increase in employee
pension payable (80,696) 41,463
(Decrease) increase in billings
in excess of revenue recognized (839,003) 904,668
(Decrease) increase in dividends
payable (3,000) 3,000
Increase in income taxes payable 42,532 0
------- -------
Total adjustments (263,583) 482,646
------- -------
Net cash (used in) provided by
operating activities (234,691) 388,091
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (19,248) (42,752)
Purchases of investments (18,000) (179,500)
-------- -------
Net cash used in
investing activities (37,248) (222,252)
Cash flows from financing activity:
Distribution to stockholders 0 (3,000)
- -------
Net (decrease) increase in cash and
cash equivalents (271,939) 162,839
Cash and cash equivalents at the
beginning of the year 414,825 251,986
------- -------
Cash and cash equivalents at the
end of the year $142,886 $414,825
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
INNOVATIVE COMMUNICATIONS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Innovative Communications Technologies, Inc. (the Company) was formed in October
1989. The Company, which is privately owned, is engaged in the design and
implementation of bandwidth efficient multimedia satellite networks. The Company
currently provides these services to the Mexican Secretary of the National
Defense and to commercial companies in North and South America and Europe.
Subsequent to September 30, 1998, the Company agreed to a merger and plan of
reorganization with an existing company. Under the proposed terms of the merger
and plan of reorganization, the Company would operate as a wholly-owned
subsidiary of the other company. The merger is currently scheduled to close in
September 1999.
The significant accounting policies followed by the Company are described below.
Revenue recognition
The Company's revenue results primarily from contracts with the Mexican
Secretary of the National Defense and commercial companies. Revenue on
fixed-price contracts includes direct costs and allocated indirect costs plus
recognized profit. Profit is recognized under fixed-price contracts on the
percentage-of-completion basis. Revenue on time-and-material contracts is
recognized based upon time (at established rates) and other direct costs
incurred. Revenue recognized on contracts in excess of related billings is
reflected as unbilled receivables. Losses on contracts are provided for in the
period they are first determined.
Cash and cash equivalents
Cash and cash equivalents includes cash on hand, demand deposits with financial
institutions and investments with a maturity of three months or less.
Restricted investments
As the Company has the intention and the ability to hold its investments to
maturity, the investments are carried at cost, adjusted for accretion of
discounts.
Inventory
Inventory, which consists of computer and electronic components, is accounted
for using the specific identification method. Inventory is stated at the lower
of cost or market.
<PAGE>
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Expenditures for maintenance and repairs which do not materially
prolong the useful lives of the assets are charged to expense. Depreciation is
computed using the straight-line method over estimated useful lives of three to
seven years. Leasehold improvements are amortized on a straight-line basis over
the shorter of the useful lives of the assets or the term of the lease.
Income taxes
The Company follows the practice of providing for income taxes using the
liability method. Under the liability method, the income tax provision is based
upon income taxes currently payable plus changes in the deferred tax liability
associated with temporary differences.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Concentrations of credit risk
The Company is subject to credit risk concentrations principally from cash and
cash equivalents and accounts receivable. The Company believes the risk of loss
associated with cash and cash equivalents is very low since cash and cash
equivalents are maintained in a financial institution. The Company had cash and
restricted investments on deposit in financial institutions which exceeded the
federally insured limit by approximately $298,000 at September 30, 1998. The
Company's accounts receivable balance consists primarily of amounts due under
contracts with the Mexican Defense Ministry and commercial companies. During the
years ended September 30, 1998 and 1997, revenue from two customers represented
approximately 69% and 61%, respectively, of the Company's revenue. Additionally,
at September 30, 1998 and 1997, accounts receivables from two customers and one
customer, respectively, represented approximately 71% and 75%, respectively, of
the Company's accounts receivable balance. The Company's management assesses the
financial strength of its customers for whom significant contracts are performed
and reviews the accounts receivable balances as a whole to determine the
adequacy of its allowance for doubtful accounts. In addition, the Company
sometimes requires customers to provide a deposit or arrange a letter of credit
prior to commencement of work. The Company generally does not require collateral
from the remaining customers since the receivables are supported by contracts.
NOTE 2 - UNBILLED RECEIVABLES AND BILLINGS IN EXCESS OF REVENUE
- -----------------------------------------------------------------------
RECOGNIZED
----------
Unbilled receivables and billings in excess of revenue recognized at September
30, 1998 and 1997, result from differences between billings, which are
determined based upon contractual terms, and amounts recognized as earned, which
are determined based upon costs incurred and contract performance.
<PAGE>
NOTE 3 - RESTRICTED INVESTMENTS
Restricted investments consist of the following:
September 30, 1998
____________________________________________________
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Certificates
of deposit $ 197,500 $ 0 $ 0 $197,500
======= ==== ===== =====
September 30, 1997
____________________________________________________
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Certificates
of deposit $179,500 $ 0 $ 0 $179,500
======= ===== ====== =====
As of September 30, 1998 and 1997, all investments are scheduled to mature in
one year or less. During the years ended September 30, 1998 and 1997, the
Company had no realized gains or losses from the sale or maturity of
investments.
These investments are restricted as they serve as collateral for letters of
credit (Note 8).
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30,
1998 1997
Computer hardware and software
and office equipment $ 167,219 $ 147,971
Furniture and fixtures 33,112 33,112
Leasehold improvements 9,332 9,332
------------- -------------
209,663 190,415
Less: accumulated depreciation
and amortization (165,024) (125,720)
------------- -------------
$44,639 $64,695
============= =============
Depreciation and amortization expense for the years ended September 30, 1998 and
1997 aggregated $39,304 and $41,362, respectively.
<PAGE>
NOTE 5 - LINE-OF-CREDIT
The Company maintains a line-of-credit under the terms of an agreement which
provides the Company with the ability to borrow $350,000 with interest due
monthly at 3.15% plus the 30-day commercial paper rate. In addition, the
line-of-credit agreement requires the Company's stockholders to personally
maintain an aggregate amount of cash and unencumbered marketable securities of
at least $350,000. The line-of-credit agreement had an initial expiration date
of July 31, 1999 and was subsequently extended to December 31, 2000 (with an
increase in the line-of-credit amount to $600,000). Borrowings under the
line-of-credit are secured by substantially all of the assets of the Company and
are guaranteed by the stockholders of the Company.
The Company had no interest expense for the years ended September 30, 1998 and
1997.
NOTE 6 - INCOME TAXES
The components of the provision for (benefit from) income taxes consist of the
following:
Year ended September 30,
1998 1997
Current income taxes ---- ----
Federal $56,000 $5,000
State 11,000 1,000
Deferred income taxes
Federal (41,000) (25,000)
State (8,000) (5,000)
------ ------
$18,000 $(24,000)
====== =======
Deferred taxes result from differences between financial statement and income
tax reporting of income and deductions. Temporary differences giving rise to
deferred taxes consist primarily of the use of the cash basis method of
accounting for income tax purposes. The Company paid income taxes during the
years ended September 30, 1998 and 1997 of $16,000 and $36,049, respectively.
NOTE 7 - RETIREMENT PLANS
During the year ended September 30, 1998, the Company adopted a 401(k) Profit
Sharing Plan (the 401(k) Plan) for all eligible employees. Participants may make
voluntary contributions of up to 15% of their annual compensation to the 401(k)
Plan. Company contributions to the 401(k) Plan include a matching contribution
of 25% of each employees' salary reduction up to 6% of each employee's annual
compensation and an additional contribution at the discretion of management.
Company contributions vest to the participants ratably over a five year period.
The Company made contributions of $51,961 to the 401(k) Plan for the year ended
September 30, 1998.
<PAGE>
During the year ended September 30, 1997 and for a portion of the year ended
September 30, 1998, the Company maintained a Simplified Employee Pension Plan
(the SEP Plan) for all employees who were over the age of 21 and had two years
of service with the Company. Company contributions to the SEP Plan were at the
discretion of management and vested to the participants immediately. Company
contributions to the SEP Plan for the year ended September 30, 1997 were
$127,213. The Company made no contributions to the SEP Plan for the year ended
September 30, 1998.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases
The Company has several noncancelable operating leases for office space and
equipment that expire at various dates through June 2004. The office lease for
the Company's headquarters provides for an annual 3.0% escalation of the base
rent. The following is a schedule by year of future minimum lease payments
required under operating leases which have initial or remaining noncancelable
lease terms in excess of one year at September 30, 1998:
Year ending September 30,
1999 $ 168,000
2000 156,000
2001 160,000
2002 159,000
2003 153,000
2004 111,000
----------
$ 907,000
==========
Rent expense aggregated $120,004 and $99,152 for the years ended September 30,
1998 and 1997, respectively.
Letters of credit
At September 30, 1998 and 1997, the Company has $197,500 and $179,500,
respectively, of outstanding letters of credit which serve as collateral for
performance under the contract with the Mexican Secretary of the National
Defense.
Litigation
At September 30, 1998, the Company is involved in two legal matters. Outside
legal counsel for the Company has advised that, at this stage in the
proceedings, he cannot offer an opinion as to the probable outcome. Management
of the Company intends to vigorously defend its position.
ARGY, WILTSE & ROBINSON LETTERHEAD
August 11, 1999
To the Board of Directors and Stockholders
of Innovative Communications Technologies, Inc.:
We have reviewed the accompanying balance sheet of Innovative Communications
Technologies, Inc. as of June 30, 1999, and the related statements of income and
retained earnings and of cash flows for the nine month period then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Innovative Communications Technologies, Inc.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
ARGY, WILTSE & ROBINSON
/s/ Argy,Wiltse & Robinson, P.C.
McLean, Virginia
August 11, 1999
<PAGE>
INNOVATIVE COMMUNICATIONS TECHNOLOGIES, INC.
BALANCE SHEET
JUNE 30, 1999
ASSETS
Current assets
Cash and cash equivalents $ 752,747
Restricted cash 34,052
Accounts receivable 198,794
Unbilled receivables 373,500
Inventory 40,618
Other current assets 2,561
---------
Total current assets 1,402,272
Property and equipment, net 28,285
Deposits 12,379
---------
Total assets $1,442,936
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $300,061
Accrued payroll and related expenses 216,314
Employee pension payable 41,829
Billings in excess of revenue recognized 66,332
Income taxes payable 120,019
Deferred income taxes 48,000
------
Total current liabilities 792,555
Stockholders' equity
Common stock - $1 par value, 1,000 shares
authorized, 200 shares issued and outstanding 200
Additional paid-in-capital 91,200
Retained earnings 558,981
-------
Total stockholders' equity 650,381
Commitments and contingencies --------
Total liabilities and stockholders' equity $1,442,936
=========
See accompanying notes and accountants' review report
<PAGE>
INNOVATIVE COMMUNICATIONS TECHNOLOGIES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
NINE MONTH PERIOD ENDED JUNE 30, 1999
Revenue
Contract revenue $2,791,150
Royalty income 1,630,750
---------
4,421,900
Costs and expenses ---------
Direct expenses 2,207,510
Overhead and general and administrative 1,976,811
Interest income,net (31,772)
---------
4,152,549
---------
Income before income taxes 269,351
Provision for income taxes (114,000)
---------
Net income 155,351
Retained earnings at the beginning of the period 403,630
--------
Retained earnings at the end of the period $558,981
========
See accompanying notes and accountant's review report
<PAGE>
INNOVATIVE COMMUNICATIONS TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
NINE MONTH PERIOD ENDED JUNE 30, 1999
Cash flows from operating activities:
Net income $155,351
-------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 25,539
Deferred income taxes (32,000)
Loss on disposition of property and equipment 9,481
Decrease in accounts receivable 564,630
Increase in unbilled receivables (277,575)
Decrease in inventory 17,354
Increase in other current assets (661)
Decrease in accounts payable and accrued expenses (172,886)
Increase in accrued payroll and related expenses 151,759
Decrease in employee pension payable (6,688)
Decrease in billings in excess of revenue
recognized (34,333)
Increase in income taxes payable 77,487
------
Total adjustments 322,107
-------
Net cash provided by operating activities 477,458
-------
Cash flows from investing activities:
Increase in restricted cash (34,052)
Proceeds from maturities of investments 197,500
Purchases of property and equipment (18,666)
Increase in deposits (12,379)
-------
Net cash provided by investing activities 132,403
-------
Net increase in cash and cash equivalents 609,861
Cash and cash equivalents at the beginning of the period 142,886
-------
Cash and cash equivalents at the end of the period $752,747
=======
See accompanying notes and accountants' review report
<PAGE>
INNOVATIVE COMMUNICATIONS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Innovative Communications Technologies, Inc. (the Company) was formed in October
1989. The Company, which is privately owned, is engaged in the design and
implementation of bandwidth efficient multimedia satellite networks. The Company
currently provides these services to the Mexican Secretary of the National
Defense and to commercial companies in North and South America and Europe.
During the year ended June 30, 1999, the Company agreed to a merger and plan of
reorganization with an existing company. Under the proposed terms of the merger
and plan of reorganization, the Company would operate as a wholly-owned
subsidiary of the other company. The merger is scheduled to close in September
1999.
The significant accounting policies followed by the Company are described below.
Revenue recognition
The Company's revenue results primarily from contracts with the Mexican
Secretary of the National Defense and commercial companies. Revenue on
fixed-price contracts includes direct costs and allocated indirect costs plus
recognized profit. Profit is recognized under fixed-price contracts on the
percentage-of-completion basis. Revenue on time-and-material contracts is
recognized based upon time (at established rates) and other direct costs
incurred. Revenue recognized on contracts in excess of related billings is
reflected as unbilled receivables. Losses on contracts are provided for in the
period they are first determined.
Cash and cash equivalents
Cash and cash equivalents includes cash on hand, demand deposits with financial
institutions and investments with a maturity of three months or less.
Inventory
Inventory, which consists of computer and electronic components, is accounted
for using the specific identification method. Inventory is stated at the lower
of cost or market.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Expenditures for maintenance and repairs which do not materially
prolong the useful lives of the assets are charged to expense. Depreciation is
computed using the straight-line method over estimated useful lives of three to
seven years. Leasehold improvements are amortized on a straight-line basis over
the shorter of the useful lives of the assets or the term of the lease.
See accountants' review report
<PAGE>
Income taxes
The Company follows the practice of providing for income taxes using the
liability method. Under the liability method, the income tax provision is based
upon income taxes currently payable plus changes in the deferred tax liability
associated with temporary differences.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Concentrations of credit risk
The Company is subject to credit risk concentrations principally from cash and
cash equivalents and accounts receivable. The Company believes the risk of loss
associated with cash and cash equivalents is very low since cash and cash
equivalents are maintained in financial institutions. At June 30, 1999, the
Company had cash on deposit at federal and non-federal institutions which
exceeded the federal insured limit by approximately $1,090,000. The Company's
accounts receivable balance consists primarily of amounts due under contracts
with the Mexican Defense Ministry and commercial companies. During the nine
month period ended June 30, 1999, revenue from two customers represented
approximately 60% of the Company's revenue. The Company's management assesses
the financial strength of its customers for whom significant contracts are
performed and reviews the accounts receivable balances as a whole to determine
the adequacy of its allowance for doubtful accounts. In addition, the Company
sometimes requires customers to provide a deposit or arrange a letter of credit
prior to commencement of work. The Company does not require collateral from the
remaining customers since the receivables are supported by contracts.
NOTE 2 - UNBILLED RECEIVABLES AND BILLINGS IN EXCESS OF REVENUE
RECOGNIZED
Unbilled receivables and billings in excess of revenue recognized at June 30,
1999, result from differences between billings, which are determined based upon
contractual terms, and amounts recognized as earned, which are determined based
upon costs incurred and contract performance.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30, 1999:
Computer, office equipment and software $ 171,609
Furniture and fixtures 22,130
-------------
193,739
Less: accumulated depreciation and amortization (165,454)
-------------
$ 28,285
=============
Depreciation and amortization expense for the nine month period ended June 30,
1999 aggregated $25,539.
<PAGE>
NOTE 4 - LINE-OF-CREDIT
The Company maintains a line-of-credit under the terms of an agreement which
provides the Company with the ability to borrow $350,000 with interest due
monthly at 3.15% plus the 30-day commercial paper rate. At June 30, 1999, the
Company was utilizing $86,700 of the available line- of-credit balance as
collateral for two letters of credit (Note 7). In addition, the line-of-credit
agreement requires the Company's stockholders to personally maintain an
aggregate amount of cash and unencumbered marketable securities of at least
$350,000. The line-of-credit agreement had an initial expiration date of July
31, 1999 and was subsequently extended to December 31, 2000 (with an increase in
the line-of-credit amount to $600,000). Borrowings under the line-of-credit are
secured by substantially all of the assets of the Company and are guaranteed by
the stockholders of the Company.
Interest paid, which approximated interest expense for the nine month period
ended June 30, 1999, was approximately $250.
NOTE 5 - INCOME TAXES
The components of the income tax provision consist of the following for the nine
month period ended June 30, 1999:
Current income taxes
Federal $ 122,000
State 24,000
Deferred income taxes
Federal (27,000)
State (5,000)
-------
$ 114,000
========
Deferred taxes result from differences between financial statement and tax
reporting of income and deductions. Temporary differences giving rise to
deferred taxes consist primarily of the use of the cash basis method of
accounting for income tax purposes. The Company paid income taxes during the
nine month period ended June 30, 1999 of $68,513.
NOTE 6 - RETIREMENT PLAN
The Company maintains a 401(k) Profit Sharing Plan (Plan) for all eligible
employees. Participants may make voluntary contributions of up to 15% of their
annual compensation to the Plan. Company contributions to the Plan include a
matching contribution of 25% of the employees' salary reduction up to 6% of
annual compensation and an additional contribution at the discretion of
management. Company contributions vest to the participants ratably over a five
year period. The Company recorded Plan contributions of $52,409 for the nine
month period ended June 30, 1999.
<PAGE>
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
The Company has several noncancelable operating leases for office space and
equipment that expire at various dates through June 2004. The office lease for
the Company's headquarters provides for an annual 3.0% escalation of the base
rent. The following is a schedule by year of future minimum lease payments
required under operating leases which have initial or remaining noncancelable
lease terms in excess of one year at June 30, 1999:
Year ended June 30,
2000 $ 155,000
2001 159,000
2002 145,000
2003 148,000
2004 147,000
-----------
$ 754,000
===========
Rent expense aggregated $128,379 for the nine month period ended June 30, 1999.
Letters of credit
At June 30, 1999, the Company has $120,752 of outstanding letters of credit
which serve as collateral for performance under contracts with the Mexican
Secretary of the National Defense and a commercial customer. The collateral for
the letters of credit includes a money market fund in the amount of $34,052
while the remaining amount is secured through an available line-of-credit
balance (Note 4). The money market fund is classified as restricted cash on the
balance sheet.
Litigation
At June 30, 1999, the Company is involved in two legal matters. Outside counsel
for the Company has advised that at this stage in the proceedings, he cannot
offer an opinion as to the probable outcome. Management of the Company intends
to vigorously defend its position.
Item 7
(b) Proforma Financial Information
The following unaudited proforma condensed consolidated statements of operations
for the year ended December 31, 1998 and for the six months ended June 30, 1999
give effect as if the acquisition of ICTI occurred as of January 1, 1998 and
January 1, 1999, respectively. The condensed consolidated balance sheet as of
June 30, 1999 gives effect to the acquisition as if such transaction occurred on
January 1, 1999.
The pro forma condensed consolidated financial statements have been prepared
by the management of the Company based on the historical financial statements
of the Company and of ICTI using the purchase method of accounting. Assumptions
and adjustments are discussed in the accompanying notes to the pro forma
condensed consolidated financial statements. In the opinion of management of
the Company, all pro forma adjustments necessary to state fairly such pro
forma financial information have been made. The unaudited pro forma condensed
consolidated financial statements are not necessarily indicative of what actual
results of operations would have been for the period had the transaction
occurred on the dates indicated. In addition, such financial statements do not
purport to indicate the results of future operations of financial position of
the Company from the acquisition date forward.
The following data should be read in conjunction with the ARCOMS consolidated
financial statements and related notes and ICTI financial statements and related
notes included elsewhere in this document.
ARCOMS
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN 000'S, EXCEPT PER SHARE DATA)
ADJUST-
ARCOMS ICTI MENTS TOTAL
REVENUES $10,173 $4,707 14,880
COST OF SALES 5,085 2,628 7,713
----------------------- ---------
GROSS PROFIT 5,088 2,079 7,167
SELLING, GENERAL &
ADMINISTRATIVE 4,755 2,080 * 466 7,301
----------------------- ---------
INCOME (LOSS) 333 (1) (134)
OPERATIONS
INTEREST (EXPENSE) INCOME, NET (366) 48 1) (45) (363)
----------------------- ---------
(LOSS) INCOME BEFORE (33) 47 (497)
TAXES
TAX BENEFIT (EXPENSE) 422 (18) 5) (12) 392
----------------------- ----------------------
NET INCOME $ 389 $ 29 409 (105)
======================= ======================
BASIC EARNINGS PER SHARE $ 0.02 $ (0.01)
DILUTED EARNINGS PER $ 0.02 $ (0.01)
SHARE
WEIGHTED SHARES 17,333 18,998
OUTSTANDING
WEIGHTED SHARES
OUTSTANDING ASSUMING
DILUTION 18,358 18,998
Notes to pro forma condensed consolidated financial statement of operations for
year ended December 31, 1998: (Note that the financials for ICTI are for the
year ended September 30, 1998.)
The following entries have been made to adjust the condensed consolidated
statements of operations for the year ended December 31, 1998 as if the
acquisition of ICTI had taken effect as of January 1, 1998.
* For ease of presentation, entries 2, 3 and 4 have been combined.
DR CR
--------------------------
1. To record interest expense on notes payable issued.
Interest expense 45
Interest payable 45
2. To record amortization expense on goodwill in the amount of $5.4 million.
Amortization expense 540
Goodwill 540
3. To record amortization expense on a non-compete agreement.
Amortization expense 28
Non compete agreement 28
4. To adjust salary expense to the amount specified in employment
agreements.
Cash 102
Selling, general and administrative 102
5. To record the income tax effect of all pro forma adjustments.
Income tax expense 12
Income tax payable 12
ARCOMS
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(IN 000'S EXCEPT PER SHARE DATA)
ADJUST-
ARCOMS ICTI MENTS TOTAL
REVENUES $ 5,545 $ 2,948 8,493
COST OF SALES 2,169 1,472 3,641
---------------------------- ----------
GROSS PROFIT 3,376 1,476 4,852
SELLING, GENERAL &
ADMINISTRATIVE 3,356 1,318 (5) 4,669
---------------------------- ----------
INCOME (LOSS) FROM 20 158 183
OPERATIONS
INTEREST (EXPENSE) INCOME, NET (402) 21 1) (23) (404)
---------------------------- ----------
(LOSS) INCOME BEFORE (382) 179 (221)
TAX BENEFIT (EXPENSE) 223 (76) 6) (101) 46
---------------------------- ------------------------
NET INCOME $ (159) $ 103 18 (175)
============================ ========================
BASIC EARNINGS PER SHARE $ (0.01) $ (0.01)
DILUTED EARNINGS PER $ (0.01) $ (0.01)
SHARE
WEIGHTED SHARES 18,886 20,551
OUTSTANDING
WEIGHTED SHARES
OUTSTANDING ASSUMING
DILUTION 18,886 20,551
Notes to pro forma condensed consolidated financial statement of operations for
six months ended June 30, 1999.
The following entries have been made to adjust the condensed consolidated
statements of operations for the six months ended June 30, 1999 as if the
acquisition of ICTI had taken effect as of January 1, 1999.
* For ease of presentation, entries 2, 3 and 4 have been combined.
DR CR
-----------------------------
1. To record 6 months interest expense on notes payable.
Interest expense 23
Interest payable 23
2. To record 6 months amortization expense on goodwill in the
amount of $5.4 million.
Amortization expense 270
Goodwill 270
3. To record 6 months amortization expense related to non-compete
agreements.
Amortization expense 14
Non compete agreement 14
4. To adjust salary and benefit expense to the amount specified in employment
agreements.
Cash 217
Accounts payable 72
Selling, general and administrative 289
5. To record the income tax expense effect of all pro forma adjustments.
Income tax expense 101
Taxes payable 101
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1999
(in 000's) ADJUST-
ARCOMS ICTI MENTS TOTAL
ASSETS
Cash $ 2,770 $ 787 1) (1,500) $ 2,274
5) 217
Other current assets 2,971 616 3,587
-------------------- ------------
Total current assets 5,741 1,403 5,861
Property - net 703 28 731
Patent - net 16,897 16,897
Goodwill - net 10,984 1) 5,400 16,225
1) 125
2) (270)
3) (14)
Other assets 12 12
-------------------- -------------
Total assets $ 34,325 $ 1,443 $ 39,726
===================== =============
LIABILITIES AND STOCK-
HOLDERS EQUITY
Accounts payable $ 893 $ 300 1) 387 $ 1,681
6) 101
Other current
liabilities 2,496 493 5) (72)
4) 23
1) 47 2,987
------------------- -------------
Total current
liabilities 3,389 793 4,668
Notes payable 6,859 1) 600 7,459
Deferred tax liability 6,415 6,415
Preferred stock 3,000 3,000
Common stock, no par
value 17,876 1) 3,538 21,414
Additional paid-in
capital 91 1) (91) -
Retained earnings (3,214) 559 2) (270) (3,230)
3) (14)
4) (23)
5) 289
6) (101)
1) (456)
Total liabilities and
stock-holders ------------------ ------------
equity $ 34,325 $ 1,443 $ 39,726
================== ============
Notes to pro forma condensed consolidated balance sheet:
1) To record purchase of ICTI and eliminate retained earnings prior to 12/31/98
Dr. Goodwill 5,400
Non-compete agreement 125
Retained earnings 456
Paid in capital 91
Cr. Accounts Payable to Shareholders 387
Notes payable 600
Net current liabilities 47
Common stock 3,538
Cash 1,500
The above purchase price allocation is preliminary and may change upon final
determination of the fair value of net assets acquired. An amortization period
of 10 years has been selected and utilized in the pro forma financial statements
for goodwill and an amortization period of 4-1/2 years has been selected and
utilized in the pro forma financial statements for the covenant not
to compete which are expected in all material respects to be representative
of the amortization expense that will result from the ultimate allocation of
the specific intangible assets.
2) To record 6 months amortization of goodwill using a 10 year life
Dr. Retained earnings 270
Cr. Goodwill 270
3) To record 6 months amortization on a covenant not to compete using a
4-1/2 year life.
Dr. Retained earnings 14
Cr. Goodwill 14
4) To record 6 months interest expense on notes payable at 7.5%
Dr. Retained earnings 23
Cr. Other current liabilities 23
5) To adjust salaries and benefits to the amounts specified in employment
agreements.
Dr. Cash 217
Accrued expenses 72
Cr. Retained Earnings 289
6) To record income tax expense giving effect to adjustments for 6 months
Dr. Income tax expense 101
Cr. Accrued liability 101
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 5, 1999 ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
/s/ Michael L. Silverman,
Chairman of the Board
