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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
ADVANCED REMOTE COMMUNICATION SOLUTIONS, 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.)
10675 Sorrento Valley Rd., Suite 200, San Diego, CA
92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 450-7600
.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 require
to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
|X|Yes 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: $14,295,454
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 16, 2000, was
$21,539,180. *
The number of shares outstanding of Registrant's common stock was 20,825,928
as of March 16, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Annual Shareholders meetings to be held on
May 23, 2000 has been incorporated by reference.
.........Transitional Small Business Disclosure Format (Check one): Yes |X|No
----------------
*Excludes the common stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the common stock outstanding at
March 16, 2000. 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
Advanced Remote Communication Solutions, Inc. ("ARCOMS") (formerly
BOATRACS, Inc.) and its wholly owned subsidiaries, Enerdyne
Technologies, Inc. ("Enerdyne"), OceanTrac, Inc., BOATRACS (Europe) B.V.,
Innovative Communications Technologies, Inc. ("ICTI"),
and its divisions BOATRACS and BOATRACS Gulfport ("Gulfport") (collectively
called the "Company"), are engaged in communications,
satellite transmission technology, and provide video compression products to
government and commercial markets.
The Company has three business units:
1. BOATRACS,
2. Enerdyne Technologies, Inc. ("ENERDYNE"), a wholly owned subsidiary,
3. Innovative Communications Technologies, Inc. ("ICTI"), a wholly owned
subsidiary.
BOATRACS
BOATRACS' objectives include providing reliable and cost effective data
communications systems for commercial marine applications. To achieve this
objective, BOATRACS currently offers several satellite-based communications
and tracking systems (the "BOATRACS System") and integrated software
solutions. In addition, BOATRACS or its wholly owned subsidiaries, BOATRACS
(Europe) B.V. and OceanTrac, Ltd., offer similar services in Europe and
Canada, respectively.
BOATRACS' customer base 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 office
computer systems is very important to the Company's customers. The Company's
software includes tools for both the vessel and the office enabling the
integration of this information. The Company also maintains a 24-hour network
center providing personal message relaying services to its customers with
fleets of vessels and to individual vessels.
In order to meet industry demands, in November 1997, BOATRACS purchased
substantially all of the assets of MED Associates, Inc. ("BOATRACS Gulfport")
as a going concern. BOATRACS Gulfport is a Mississippi based provider of
software applications and service solutions to the commercial maritime
industry and oil companies.
ENERDYNE
On July 7, 1998, the Company acquired ENERDYNE, which was a privately held
company located in Santee, California. ENERDYNE develops, builds and sells
digital video compression equipment for the aerospace, military, intelligent
transportation, government and commercial markets.
ENERDYNE was formed in 1984 and initially focused on the development of
proprietary solutions and protocol with the precision necessary to provide
Motion Joint Photographers Expert Group ("MJPEG") based real-time video
compression technology for the United States military. ENERDYNE continues to
develop innovative solutions delivering real-time compressed video for use in
unique applications such as the downlink of multiple video signals from Space
Shuttle Columbia flights, and video transmission solutions for remotely
controlled cranes, tanks and personnel carriers and unmanned airborne
vehicles ("UAV"). ENERDYNE products have broad applications for other video
surveillance markets. ENERDYNE has had success providing solutions for
applications in intelligent transportation systems ("ITS").
ENERDYNE's Adaptive Digital Video System ("ADVS") proprietary technology is
based on digitizing the real-time video from the camera and transfer of the
signal using its patented protocol between its encoder and decoder hardware
manufactured in its own International Organization for Standardization
("ISO") certified facility. In its basic form the encoder takes an analog
signal from a video source, digitizes it, and then compresses it for
transmission. ENERDYNE's products use several compression methods including
MJPEG.
The advantages of digital data with video is that it is easily multiplexed
and can be encrypted and transmitted over many digital mediums. The
transmission quality is not affected by the number of repeaters. Compression
of the digital video allows a lower bandwidth utilization and therefore, can
reduce costs.
ICTI
Effective August 1, 1999, the Company completed the acquisition, by reverse
merger, of ICTI, a privately held company located in Gaithersburg, Maryland.
The purchase price included the payment to the former ICTI shareholders of
$1.5 million in cash and the issuance of 1,665,000 shares of the Company's
common stock and the delivery of promissory notes of $600,000. In addition, a
promissory note of $400,000 was delivered subject to attainment of certain
revenue targets. The Company effectively acquired ICTI's assets of $1.6
million, assumed liabilities of $1.5 million, and recorded goodwill of $5.5
million.
ICTI was formed in 1989, specializing in the field of value-added satellite
communications products and services. ICTI's business includes the provision
of turnkey satellite communications systems and licensing unique software for
the fixed and mobile satellite communications industry. Customers include
international telecommunications common carriers, Internet service providers,
the United States and foreign governments as well as manufacturers of
satellite communications equipment.
ICTI has proprietary technology in Secure Interworking Function, ("SIWF")
that enables secure voice and data communications equipment to operate via
leading-edge compressed communications channels in fixed and mobile
communications environments. ICTI is the industry leader in providing SIWF
software technology to the INMARSAT community. INMARSAT is an international
consortium providing maritime voice, facsimile and data services worldwide
using capacity on a combination of owned and leased satellites.
ICTI also has proprietary technology in Network Management and Bandwidth
Efficient Satellite Transport ("BEST"). BEST technology facilitates the
efficient use of bulk satellite communications capacity in a manner which
dramatically reduces recurring operating costs while increasing throughput
and functionality to users for voice, data, video and Internet applications.
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").
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,
Incorporated (the "Merger"). The Merger was approved by the Bankruptcy Court.
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 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 became the successor to the
business of Old BOATRACS. In May 1999, the Company changed its name to
Advanced Remote Communication Solutions, Inc.
The BOATRACS Systems
The BOATRACS System was adapted and enhanced by the Company for marine
application predicated on the OmniTRACS System developed by QUALCOMM,
Incorporated ("QUALCOMM"). 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. The BOATRACS System is
effective while a vessel is within the satellite's "footprint," which extends
approximately 200 to 400 miles offshore in most areas of the continental
United States, Canada and parts of Europe or world-wide if using other
satellite providers. 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 in most cases. Messaging and positioning information
are forwarded from the vessel, via Ku-band satellite, to the QUALCOMM Network
Management Facility ("NMF") in San Diego, California, or similar facilities
in Europe, and then onto base stations at the customers' offices or to the
Company's 24-hour network operations center ("NOC") also in San Diego.
Messages that go to the Company can be relayed by fax or 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. In San Diego,
the NOC 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 NOC has a dedicated line to
a local internet service provider for internal Internet use as well as
value-added messaging services for vessels and other satellite providers.
The NOC provides message relaying and stand-by backup services for fleets and
individual vessels using the system in the United States, Europe and Canada.
Computers communicate to the QUALCOMM NMF by modem to monitor customer
accounts on the system. 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. The NOC also
provides enhanced communication services to customers, including the relay of
e-mail messaging, broadcast of weather, distribution of data relating to the
customer's positioning and emergency back-up services.
The Company 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 and sells in a range of
approximately $4,000 to $6,000 depending on features and volume discounts.
The design of the unit allows for both ease of installation and efficient use
of normally 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 the Company's customers use only the basic MCT,
optional products that interface with the basic unit are also offered.
Customers also have the option of using a 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 and receive computer files of any type.
Many of the Company's customers also use marine application software programs
developed by BOATRACS' Gulfport division. Such application software enables
onboard users to enter business information into forms that are saved to a
local database and then transmitted to the shore station as files.
In the Office
Generally, a customer with less than four units only uses the NOC. Typically,
a customer who has more than four 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 either the Company's or third party's
communications software containing a mapping function enabling a customer to
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. Some customers also have custom marine application software, which
was developed by BOATRACS' Gulfport division. This application software
stores data files received from the vessels and enables management,
dispatchers, and others to retrieve reports to manage their fleet of vessels
and to provide data to their customers.
Based upon reports from customers, the Company believes that its marine
industry 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 with the Company,
establishing a fixed rate to be paid for messaging services used by the
customer during the contract term.
BOATRACS Gulfport Division
Effective November 1, 1997, the Company purchased certain assets assumed
certain liabilities of BOATRACS Gulfport for cash and common stock. BOATRACS
Gulfport is a developer of external application software services to the
marine industry for use in connection with the BOATRACS System and other
communication systems. The external application software can enhance the
customer's use of operational data sent through the BOATRACS System.
Additionally, BOATRACS Gulfport's proximity to existing and future Company
customers in the work boat industry facilitates more timely customer service
solutions to those customers.
The BOATRACS Gulfport division provides custom developed software
applications to offshore and some inland boat and barge companies. The
BOATRACS Gulfport division's services include systems design, development,
implementation, training and onboard installation. Relationships with key
large customers often lead to serial consulting assignments whereby one
project leads to another. Some customers outsource a significant amount of
their information technology needs to the BOATRACS Gulfport division. The
ability of the BOATRACS Gulfport division to provide solutions for customers
has enhanced the ability of the Company to sell MCTs to vessel operators.
ENERDYNE
The Company acquired ENERDYNE on July 7, 1998 by means of a merger into a
wholly owned subsidiary of the Company. ENERDYNE sells video compression
equipment for aerospace, transportation, military and commercial
applications. The acquisition was funded through the issuance of the
Company's common stock warrants, notes payable and the payment of cash.
ENERDYNE designs and manufactures video, voice and data communication
products that enable the realization of high performance digital video
compression solutions. ENERDYNE's patented technology provides the Company
with a unique market position in video encoders, decoders and multiplexing
equipment used in airborne and ground based digital video systems. Primary
markets for these products include defense, ITS, surveillance and aerospace.
ENERDYNE's products range in price from approximately $1,950 to $23,500
depending on the model and options selected. A multiplexer combining audio,
data and alarms may be used in conjunction with some equipment. ENERDYNE has
focused, and the Company will continue to focus, on developing very high
quality products that have long life cycles and require minimal modification.
ENERDYNE designs, develops and manufactures its products at its ISO certified
facility in Santee, California. Products range from rack mounted industrial
equipment to miniaturized and ruggedized environmentally protected units. The
products are designed to contain interfaces with data channels, including
wire, microwave and fiber optic. ENERDYNE's customers include various United
States and state government agencies including the Navy, Air Force, Army,
NASA, U.S. Department of Transportation in various jurisdictions, and the
Department of Defense.
ICTI
The Company acquired ICTI effective August 1, 1999. The acquisition was
funded through the issuance of the Company's common stock, notes payable and
the payment of cash.
ICTI designs and implements bandwidth-efficient multimedia satellite networks
by developing customized software to manage and allocate available satellite
power and bandwidth resources to optimize the life-cycle costs of satellite
systems.
ICTI's BEST system, together with the Integrated Network Management System
("INMS"), creates powerful voice, facsimile, data and video transmission
networks in low-cost and low-risk implementations. These systems provide for
broadcast and interactive multimedia applications and can allocate as much of
a network's available bandwidth as needed to any fixed or mobile network site
at any particular time. These networks support a variety of applications
including telephone, facsimile, LAN interconnection, e-mail, video broadcast,
telemedicine, distance learning, imaging and Internet access. Projects range
in price from $200,000 to over $2,000,000.
ICTI also derives revenue from licensing of specialized transport software.
ICTI's SIWF has become the de-facto standard for Secure Telephone Unit
("STU") transport via INMARSAT digital dial up services. SIWF is a digital
signal processing ("DSP") based software program that performs modulation and
demodulation of signals sourced by secure telephones and includes a transport
protocol for the satellite channel or other digital network. The SIWF
software is currently designed to transport U.S. Government ("STU-3") and
NATO ("STU-2B") secure telephones, as well as commercial versions such as the
Motorola SecTel 9600.
Dependence upon Significant Customers
A material source of the Company's revenues comes from two customers,
Tidewater, Inc. and Kirby Corporation, each of which represented 10% of the
Company's total revenues in 1999. In 1998, two significant customers
represented 24% and 10%, respectively of revenues and in 1997, two
significant customers represented 18% and 12% of revenues. The loss of these
customers could have a material adverse effect on the Company.
The major customers may change yearly as they are calculated on total
revenues including sales of communications systems, video transmission
products and other products. Purchases of communication systems and video
transmission products by a customer may not occur yearly and there can be no
assurance that such customers will make significant purchases of products in
the future. No relationship exists between the Company and its significant
customers except normal business relationships. In addition, the BOATRACS
Gulfport division provides software solutions to communication customers of
the Company.
Agreements
Agreements with QUALCOMM
The Company has exclusive distribution rights for the OmniTRACS system in the
United States for marine application within defined coastal waters of the
United States in the Atlantic and Pacific Oceans under a License and
Distribution Agreement dated June 13, 1990, as amended from time to time (the
"Distribution Agreement") with QUALCOMM. The Distribution Agreement had an
initial term of five years with three options to extend for five years each
(provided that the Company 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 and the Company has
exercised its option to extend the Distribution Agreement for the next
additional five-year option. 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 exclusive rights to provide
messaging services to end users of the OmniTRACS system for marine
application.
Under the Distribution Agreement the Company is also required to purchase a
certain number of units annually. The minimum purchase requirement for each
calendar year is to be agreed upon between the Company and QUALCOMM subject
to a minimum of 300 MCT's for the year ending December 31, 1997 and
increasing by 10% each year. The minimum purchase requirement was not met for
the year ended December 31 1999, but was met for the years ended December
1998 and 1997. Because the Company did not purchase the required 1999 minimum
number of MCT's, the Company may be subject to a reduction of discounts in
pricing. As of March 2000, the Company had not been advised by QUALCOMM that
it will be subject to a decrease in pricing discounts and management believes
that such reduction will not occur.
QUALCOMM is responsible for the manufacture and warranty repair of all of the
OmniTRACS units supplied by it 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 the Company desires to sell its core maritime communications business,
QUALCOMM has a right of first refusal under the Distribution Agreement to
purchase the Company's maritime business 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 Federal Communication Commission ("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.
In March 1995, the Company issued 1,112,265 shares of common stock to
QUALCOMM for $737,000. The purchase price of the shares was 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 Distribution Agreement. The transaction was recorded as a note
receivable for common stock issued which was reduced as discounts were
earned. By June 30, 1998, a total of $737,000 in discounts had been earned
reducing the note receivable balance to zero.
In May 1999, the Company issued 60,000 restricted common shares to QUALCOMM
as full payment on $153,600 of certain accounts payable. The shares were
issued at fair market value of $2.56 per share.
Service Provider Agreement with Iceland Telecom
In July 1998, BOATRACS (Europe) B.V. entered into a Service Provider
Agreement with Iceland Telecom, an Icelandic company, which is the EUTELSAT
signatory for Iceland. This agreement appoints BOATRACS (Europe) B.V. to be
the service provider of EUTELSAT services for Iceland.
Agreements with British Telecom
In July 1998, the Company entered into agreements with British Telecom to
become an INMARSAT provider. INMARSAT is an international consortium
providing maritime voice, facsimile and data services worldwide using
capacity on a combination of owned and leased satellites.
Regulation
Domestic Operations
BOATRACS' products are subject to various FCC regulations in the U.S. These
regulations require that the Company's communications products meet certain
radio frequency emission standards and not cause unallowable interference to
other services. 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.
Additional Products
ENERDYNE continues to develop new video compression and related products to
complement the Company's product lines. The products are sold to ENERDYNE's
customers under proprietary names. These products, to be released during
2000, are:
Universal Communications Multiplexers, a more flexible multiplexer
that can deliver data over circuit or packet based networks;
Video Compression Encoder/Decoder with MPEG2 and MPEG1;
Linux Communications Server, which uses Linux as the embedded operating
system.
ICTI is developing new products to expand its licensed software products. The
enhancement and application of SIWF, NMS and BEST technologies to meet the
needs of existing and potential customers in expanding wireless markets
remains a strategic goal. ICTI continues to develop a unique approach to the
rapid design and deployment of multimedia satellite networks. BEST-enabled
networks can be quickly developed using a modular building block approach of
components that can be selected and combined with ICTI's BEST and NMS
software to meet customer communications requirements. In addition, ICTI's
networks are being applied to customer applications requiring access to the
Internet, and ICTI is enhancing its products to better meet the demands of
accessing the Internet effectively.
The Company is seeking strategic alliances with companies that have proven
products or services in markets requiring video compression. In addition, the
Company uses its commercially reasonable best efforts 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 solutions for the respective businesses
including: (i) interfaces and marine related products that require
communications between a vessel and the shore and (ii) new video compression
relationships. The Company 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 increased sales
of products and messaging volume.
The Company is also an INMARSAT provider. As an INMARSAT provider, the
Company will be able to provide global coverage to
customers. See "Risk Factors."
Research and Development
During 1999, 1998 and 1997 the Company spent $1,133,943, $243,271 and
$199,000, respectively, on research and development of new products, services
and software to complement the BOATRACS System and ENERDYNE systems. Research
and development includes labor and the materials used to develop new
products, services and software, and excludes market research activities.
Market Expansion
The Company believes that there is a sizable market in the United States and
abroad for its products and has developed strategies to expand into selected
markets by providing innovative solutions to customer needs. There can be no
assurance that any of the Company's market expansion efforts will be
successful.
ENERDYNE's products specifically address four segments of the video
compression market: defense, ITS, surveillance and aerospace. ENERDYNE plans
to explore and develop new products for significant markets.
The Company believes that there are increased opportunities for ENERDYNE's
products in the ITS market. Uses of video compression products include
highway surveillance/monitoring, wide area detection, ramp monitoring, toll
evasion verification, emergency medical services and toll booth security. The
Company believes that the United States government has appropriated
approximately $200 billion via the Transportation Equity Act commencing in
1998 over the next five years, a portion of which will be dedicated to ITS.
There also appear to be opportunities overseas for the ENERDYNE technology.
It is anticipated that market expansion will be in government, military and
private industries working with transportation management systems. The
potential end user will be a federal, state or local governmental agency
responsible for traffic management in its jurisdiction. There can be no
assurance that the Company's beliefs are accurate.
There has been an upsurge in the use of satellite and wireless systems to
deliver telephone, Internet, business and entertainment video, as well as
personal and commercial data. This has spurred growth in information delivery
that has reduced time and distance barriers, creating a global communications
environment. The efficiency and flexibility of satellite and wireless
solutions has been enhanced by the convergence of advanced digital
compression technology and state-of-the-art transmission capabilities,
coupled with high power satellites to permit the use of very small satellite
earth stations. The wide area coverage of satellites combined with their
inherent broadcast capability provide an important element to the world of
today's multimedia communications. In addition to ubiquity of coverage,
satellites are capable of broadcasting vast amounts of digital information
including video programming and the Internet to a multitude of users. In
areas where it is impossible or impractical to install a fixed, wired
facility, such as developing countries and ocean bodies, satellite technology
has been the medium of choice for providing multimedia services to a
multitude of users.
The Company believes that ICTI's products and services address the needs of
international telecommunications common carriers and large private networks
to offer unique products to their respective customers in mobile and
broadband satellite communications environments. ICTI is expanding its
relationship with its existing customer base. In addition, ICTI is actively
establishing relationships with other common carriers and new service
providers in Europe, the Middle East and South America. There can be no
assurance that any of the Company's market expansion efforts will be
successful.
Sales and Distribution
BOATRACS
Since its inception, the Company has employed an internal direct sales force
and has engaged sales representatives to place the Company's products with
marine electronics dealers, which sell to the end user. In addition, the
Company is continually seeking relationships with third-party distributors,
which 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 salesperson. In the
New England and Atlantic fishing markets the Company has agreements with 32
dealers.
ENERDYNE
ENERDYNE typically sells its product directly to customers through direct
sales and marketing employees. In addition, the Company uses manufacturers'
representatives and sells to system integrators who then package its products
with others to achieve a universal solution for a customer.
ICTI
ICTI employs an internal direct sales force and has engaged foreign sales
representatives to match the Company's products and services to key
customers. The Company is continually seeking foreign sales representatives
and partnerships with complementary organizations to provide access and
support for selected international markets. In addition, the Company licenses
its software products through manufacturers and common carriers in order to
reach end users.
Competition
BOATRACS
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. BOATRACS believes that it is currently competitive with
respect to each of these factors. However, BOATRACS' competitors are
aggressively pricing their products and will likely continue to do so in the
future. In addition, competitors are offering new value-added products and
services similar to those developed or being developed by the Company or
QUALCOMM. Emergence of new competitors, particularly those offering lower
cost products, enhancements, additional features and Low-Earth Orbit ("LEO")
satellite communications systems, may impact margins and intensify
competition in new markets. Two LEO systems offer voice: IRIDIUM, which has
been commercially available but has experienced significant economic
setbacks, and GLOBALSTAR, which has begun limited commercial service.
ORBCOMM, also a LEO system, does not offer voice but offers short data and
location services and is now commercially available. Due to their long-term
unproven capabilities, the Company cannot predict how its competitors'
products and services will compete directly against the BOATRACS existing
products and services. The Company is exploring ways to compete with and/or
offer this new generation of products and services. However, the competition
could have a material impact upon the BOATRACS business.
The following is an overview of certain products and services that compete
with BOATRACS' communications products and services:
Alternative Satellite Service Providers. Several competing entities provide
satellite-based mobile voice and data systems in marine markets. INMARSAT
provides maritime voice, facsimile and data services 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 it 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 on international
voyages to have a GMDSS approved communications system. The BOATRACS System
cannot become GMDSS approved because the BOATRACS System's coverage is not
global. The Company is at a disadvantage without such approval.
H F Radio. At least one competitor, Globe Wireless, Inc., now operates a
network of H F radio stations that allow for email capabilities and transfer
of data files. Globe Wireless, Inc. states that its system operates "much
like a digital cellular network except it is worldwide." Globe Wireless, Inc.
competes directly with the Company. It has also advertised the ability to
deliver software system solutions for its customers. The Company is uncertain
whether H F radio is as dependable as satellite communications.
Cellular phone. Cellular phone provides clear, easy to use communication to
many boats including pleasure boats and commercial shipping, workboat and
towing operators. The cellular range is 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.
ENERDYNE
Video Compression Products. ENERDYNE competes with a number of companies in
its current markets each of which provides one or more products offered by
the Company and some of which have access to greater financial resources. The
following are significant competitors to ENERDYNE's products and services:
L-3 Communications Corp. - L-3 Communications Corp. was formed in 1997 by
Lockheed Martin, Lehman Brothers Capital Partners III and
ex-Loral Corporation management. The Conic Division of this company
provides numerous components and products for the military and
aerospace markets including video compression/expansion systems and
encryption/decryption modules. L-3 Communications Corp. is
also a major customer of ENERDYNE, purchasing video compression products
and integrating them with L-3 Communication Corp. products
for sale in the defense and aerospace industries.
Aydin Corporation - Aydin Corporation produces a line of data acquisition
products including airborne and ground systems for gathering, processing,
formatting, and transmitting information related to satellites, spacecraft,
aircraft and missiles. Their products include a line of rugged airborne and
ground station telemetry products capable of capturing and transmitting
digital video.
Delta Information Systems ("Delta") - Delta produces a number of video
related products including encoders and decoders. Certain Delta products are
purchased by Aydin Corporation and integrated into the systems of Aydin
Corporation and are sold to the U.S.
Department of Defense.
Odetics - Odetics is a supplier of communications equipment for the
television broadcast, video security, telecommunications and ITS markets.
Odetics' subsidiary, Odetics ITS, has developed the Vantage Video Detection
System, which is a single camera product that provides cost effective video
detection for a variety of temporary or permanent one-camera applications,
and the Vantage Plus, which is a multicamera intersection control product
with modular design utilizing from one to six cameras. Both systems offer
accurate vehicle detection during all weather and lighting conditions using
motion stabilization techniques for top performance even in high wind
conditions. They also send surveillance quality video images to remote
viewing locations over existing communication path enabling users to view
live traffic operations.
Fiber Options - Fiber Options develops, manufactures and markets fiber optic
systems for transmitting video, audio and data used for surveillance,
broadcast and professional video, industrial controls and transportation.
Racal Data Group - Racal Data Group develops, manufactures and services
communication network solutions. They provide secure and managed access to
multimedia information networks and enables the customers to transition to
Integrated Services Digital Network ("ISDN"), Frame Relay, and Asynchronous
Transfer Mode ("ATM").
ADPRO of Australia - ADPRO of Australia's Vision Systems division markets a
range of video based products for the security and surveillance market. Its
products include:
Remote video transmission product which allows more of the site to be
secured and managed from a central monitoring station via the telephone
network.
High performance video intrusion detection which are detectors that
connect to a standard video camera and alert an operator when an
intrusion is occurring.
Video framestore which captures a series of images around the time
of the alarm.
Passive infrared detectors which are long ranging passive infrared detectors
for outdoor environments.
Value-Added System Integration. ICTI competes with mid-sized system
integration companies. ICTI has the competitive advantage of being able to
provide highly skilled system engineering to solve highly complex and custom
communications problems. The following are competitors to ICTI's system
integration products and services:
SDS International - SDS International, Inc. ("SDS") is a supplier of turnkey
earth station systems worldwide. SDS designs, integrates and installs systems
for domestic and international use.
TriPoint Global Communications, Inc. - TriPoint Global Communications,
Inc., is a full service provider of satellite and wireless
communications products, services and installations of satellite earth
stations. RSI Global Communications Systems, a subsidiary
of TriPoint Global Communications, Inc. designs, integrates and installs
satellite earth stations for domestic and international use.
Licensed Software Products. ICTI competes with few companies in its
provision of licensed software products. The following are
significant competitors to ICTI's licensed software products:
Comsat Corporation - Comsat Corporation is the U.S. Signatory to the INTELSAT
and INMARSAT satellite consortiums. Comsat Laboratories, a division of Comsat
Corporation, is a research and development center that develops specialized
technologies for application in the mobile and fixed satellite communications
industry.
Other Companies - There are a number of other small companies such as DSPSE
and DataPump Ltd. that provide contract and licensed software development
services. These companies typically only provide subsets of the licensed
product suites offered by ICTI.
Certain of these companies are also suppliers to ICTI.
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 Securities and Exchange Commission
("SEC"), 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.
ENERDYNE currently holds patent no. 5633686 in the United States, for ADVS.
The patent covers a system in which a decoder at a receiving station for a
digitally encoded signal is able to automatically adapt to varying formats
and operating modes. The method is independent of the particular video format
or compression scheme employed, and functions with any transmission medium
and bandwidth. The patent was filed on September 14, 1994 and issued on May
27, 1997. ENERDYNE currently has two trademarks: ADVS(R) (Adaptive Digital
Video System) and Passlink(TM).
ICTI relies on a combination of registered and unregistered copyrights, trade
secrets, trademarks and proprietary information to enhance its competitive
position. ICTI currently has patent applications pending in the United States
and other countries with respect to its BEST technology.
Employees
At December 31, 1999, the Company and its subsidiaries had 100 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 maritime communications business is the
Distribution Agreement pursuant to which BOATRACS has exclusive 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 major supplier of the communications equipment sold by
BOATRACS and provides certain services that are essential to the BOATRACS
business. If QUALCOMM decides to discontinue its satellite communications
business or the manufacture of such equipment, the Company would be unable to
continue its core communications business. While BOATRACS has an agreement
with QUALCOMM for the products and services provided by it, QUALCOMM has the
right to terminate this Agreement under certain circumstances. 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 BOATRACS' business and financial results. Under
the Distribution Agreement, QUALCOMM retains all ownership rights to the
OmniTRACS software and all updates, upgrades, improvements or modifications
thereto, whether made by QUALCOMM or BOATRACS. Additionally, BOATRACS is
dependent upon QUALCOMM's OmniTRACS system, which currently operates on
leased Ku-band satellite transponders in the areas where BOATRACS is active.
BOATRACS 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 has informed the Company that it believes any
additional required transponder capacity 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.
BOATRACS has a direct contract with EUTELSAT, the satellite segment operator
in Europe through Iceland Telecom. In Canada, BOATRACS relies on its service
provider, CANCOM Mobile, which has relationships with Canadian satellite
providers. In the United States, BOATRACS relies on its service provider,
QUALCOMM, which has relationships with satellite providers in the United
States. The Company is not privy to the details of its service providers'
contracts with satellite providers. There can be no assurance that the
transponders used in Europe, Canada and the United States 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 BOATRACS' business and
financial results.
The messaging service provided by BOATRACS involves data transfers via
standard telephone lines. BOATRACS' operations rely upon the availability of
stable telephone connections between BOATRACS and QUALCOMM's Network
Management Facility and between BOATRACS, its customers, the Internet and
QUALCOMM's Network Management Facility. See "Business." 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.
According to reports filed with the Securities and Exchange Commission
("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 BOATRACS 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 BOATRACS. 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, BOATRACS would be unable to continue its communication
operations.
ENERDYNE holds a patent in the United States for its ADVS. Should ENERDYNE's
competitors develop or patent technologies that are substantially equivalent
or superior to ENERDYNE's patent, ENERDYNE's position in the market could be
compromised.
The integration of BOATRACS', ENERDYNE's and ICTI's operations will require
substantial capital funding and the dedication of management resources that
may temporarily detract attention from the day-to-day operations of the
combined company. The combination of the three companies will also require
coordination of their research and development and sales and marketing
efforts. The difficulties of combining the three companies may be increased
by the necessity of coordinating geographically separated organizations,
integrating personnel with disparate business backgrounds and combining three
different corporate cultures. The process of combining the three
organizations may cause an interruption of, or a loss of momentum in the
activities of any or all of the companies' businesses, which could have an
adverse effect on the revenue and operating results of the combined company,
at least in the near term. There can be no assurance that the combined entity
will be able to retain its key technical and management personnel or that the
combined entity will realize any of the anticipated benefits of the merger.
Failure to effectively accomplish the integration of the three companies'
operations could have an adverse effect on the combined company's results of
operations and financial condition.
ENERDYNE has relied heavily on the transportation and governmental markets
for its revenues. Military and other governmental spending cuts could impact
profits. ENERDYNE relies on continuing technological innovation, including
innovations which are internally generated and technology developed by third
parties. Competing technologies could impact revenues and profit margins as
well as provide incentive for more competition. Devoting resources to
internally generated technological innovation would require devotion of
engineering, sales and marketing resources which might result in a shift in
focus from existing product lines and markets. Technological innovation may
also lead to obsolescence of components used in ENERDYNE's products or create
compatibility problems with existing units.
ICTI has a patent application pending in the United States and other
countries related to ICTI's BEST technology. There is no assurance that any
of the pending patents will be granted. Similarly, should ICTI's competitors
develop or patent technologies that are substantially equivalent or superior
to ICTI's patent, ICTI's position in the market could be compromised.
ICTI derives royalty income from licenses related to the use of SIWF
technology over the INMARSAT satellite system. Technological innovation may
lead to obsolescence of the services offered through the INMARSAT system,
thereby impacting ICTI's royalty income.
The Company may need to raise additional capital to fund operations and
growth. The Company has not determined the amount, if any, or the source of
any capital which might be required. The issuance of common stock and
warrants and options to purchase common stock will result in dilution to
existing shareholders.
In countries in which BOATRACS contracts with QUALCOMM's local OmniTRACS
service provider, BOATRACS believes that such service provider or BOATRACS
will be responsible for securing the necessary regulatory approvals, licenses
and permits and/or renewals thereof for maritime operations from the local
governments and authorities. BOATRACS 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 BOATRACS contracts with distributors of other
communications systems, BOATRACS may apply to the local governments for
applicable approvals. No assurance can be given that BOATRACS will be able to
obtain the required approvals, licenses and permits and/or renewals thereof.
Changes in the regulation of QUALCOMM's OmniTRACS system, or the inability to
obtain foreign regulatory approvals, licenses and permits and/or renewals
thereof, could have a material adverse effect on BOATRACS operating results
and its ability to expand its business in the future.
The mobile communications industry is highly competitive. See "Competition."
ENERDYNE competes with a number of companies in its current market, each of
which provides one or more products offered by ENERDYNE and some of which
have access to greater financial resources. ENERDYNE faces increased domestic
competition, and as technological innovation becomes more available foreign
and domestic competition is increasing. There is no assurance that ENERDYNE
will continue to be competitive in its existing and prospective markets. See
"Business -- Competition."
The sales cycles of BOATRACS, ENERDYNE and ICTI are not even throughout the
year. The sales process takes a considerable amount of time for the companies
to close a sale. ENERDYNE's customers include governmental departments and
the sales cycle is often slow to complete. In addition, the sales staff may
spend considerable time on sales leads which do not come to fruition.
The Company is currently expanding its operations abroad. The Company has
limited experience in managing foreign operations. International expansion
efforts are likely to strain the Company's management, financial and other
resources. Any failure of the Company to expand in an efficient manner or to
manage its dispersed organization could have a material adverse impact on the
Company's business and financial results. Other risks that will be faced by
the Company in its international business include costly regulatory
requirements; unexpected changes in regulatory requirements; application of
foreign law; fluctuations in currency exchange rates (which could materially
and adversely affect the Company's results of operation and, in addition, may
have an adverse effect on demand for the Company's products abroad); tariffs
or other barriers; difficulties in staffing and managing foreign operations;
political and economic instability; difficulties in accounts receivable
collection; extended payment terms; and potentially negative tax
consequences. Additionally, ENERDYNE's and ICTI's products and technology
could be subject to restrictions on sales to certain foreign countries by the
United States Government or by foreign governments on sales originating in
the United States. These factors could have an adverse impact on the
Company's business and financial results in the future or require the Company
to modify its current business practices.
The Company recently became an INMARSAT provider. Even as an INMARSAT
provider, the Company will continue to compete against other INMARSAT
providers. The Company has limited experience in reselling INMARSAT services.
Such expansion of service and product offerings could strain the resources
and possibly deteriorate the Company's reputation with customers, and could
have a material adverse impact on the Company's core communications business.
See "Business -- Market Expansion."
The Company's products are subject to various Federal Communications
Commission ("FCC") regulations in the U.S. These regulations require that the
Company's products meet certain radio frequency emission standards and not
cause unallowable interference to other services. 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 mobile communication terminals 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
communication operations.
Pursuant to the Distribution Agreement between 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. QUALCOMM's
right of first refusal could adversely affect the ability of the Company to
sell its business to a third party purchaser.
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. In addition, the Company is subject to
foreign regulations, export restrictions and limitations on foreign sales to
certain countries.
Year 2000 Issues. In the operation of its business, the Company uses
commercial computer software primarily purchased from or provided by
independent software vendors. During 1997 and 1998, the Company began an
analysis of the 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), and determined that such
commercial software was already substantially year 2000 compliant, and that
completion of year 2000 compliance would not have a material impact on the
Company's business, operations or financial condition.
The Company performed an internal analysis and finalized a specific written
plan to address the year 2000 issues for both internally developed products
and products developed and manufactured by QUALCOMM. QUALCOMM had assured the
Company that all the products supplied to the Company during the course of
the relationship and going forward would be upgraded to ensure compliance
with year 2000 standards. This assurance was at no charge to the Company or
customers but the Company was required to exchange certain chip sets of its
customers at minimal cost.
For internally developed products, software was upgraded and tested prior to
year-end. Development costs associated with the upgrade were included in
operations as incurred. The Company spent a total of approximately $25,000.
The Company has not experienced significant year 2000 issues subsequent to
December 31, 1999 and does not currently believe that it will incur material
costs or experience material disruptions in its business associated with the
year 2000. Although the Company believes it has taken the appropriate steps
to address year 2000 readiness, there is no guarantee that the Company's
efforts will prevent a material adverse impact on the results of operations
and financial condition.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has various lease agreements for offices and manufacturing
facilities. The Company's leases have rent escalation terms based on the
Consumer Price Index, which will affect future minimum lease payments. The
Company leases its corporate office space under a non-cancelable operating
lease that expires in December 2002. ENERDYNE leases a 9,800 square foot
facility in Santee, California which expires in November 2000, and Gulfport
leases a 2,500 square foot facility in Gulfport, Mississippi which expired in
December 1999 and is "month-to-month" while a new lease is negotiated.
BOATRACS (Europe) B.V. leases a facility in Leiden, The Netherlands, which
expires in December 2001. ICTI leases a 10,300 square foot facility in
Gaithersburg, Maryland which expires in 2004. Total rent expense was
$348,640, $217,157 and $57,894 for the years ended December 31, 1999, 1998
and 1997, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any current or 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.
<PAGE>
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 1999 and 1998 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, 1999 $3.00 $2.13
September 30, 1999 $3.00 $2.19
June 30, 1999 $2.97 $1.88
March 31, 1999 $2.66 $1.81
December 31, 1998 $3.13 $1.75
September 30, 1998 $4.81 $2.63
June 30, 1998 $4.94 $3.25
March 31, 1998 $4.00 $2.06
On March 16, 2000, the closing price of the common stock, as reported on the
OTC Bulletin Board, was $2.81. As of March 16, 2000, the Company had
approximately 310 holders of record of its common stock. In addition,
approximately 4.9 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. In addition, the Company's bank debt has
restrictive covenants which do not allow dividends to be paid.
The quotations set forth above represent inter-dealer prices without retail
mark-up, markdown 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.
In September and December 1999, the Company issued a total of 16,921 shares
to a Company employee under the terms of an employment agreement effective
November 1997 and were issued in reliance on the exemption set forth in
Section 4 (2) of the Securities Act of 1933 (the "Act"). The shares were
valued at $3.34 per share (9,568 shares) and $2.04 per share (7,353 shares).
On September 28, 1999 the Company issued 1,665,000 shares of the Company's
common stock to former shareholders of ICTI valued at $2.125 per share, which
represented a 15% discount from the market value due to trading restrictions
on the stock. The shares were issued pursuant to the terms of an Agreement
and Plan of Reorganization in reliance on the exemption set forth in Section
4 (2) of the Act. (See note 2.)
In April 1999, the Company entered into an asset purchase agreement with two
individuals to purchase a communications components business. The Company
paid $50,000 in cash and issued 75,000 restricted common shares in reliance
on the exemption set forth in Section 4 (2) of the Act, valued at $2.03 per
share. Goodwill of approximately $200,000 was recorded as a result of the
transaction.
In May 1999, the Company issued 60,000 restricted common shares, in reliance
on the exemption set forth in Section 4 (2) of the Act to QUALCOMM as full
payment on $153,600 of certain accounts payable. The shares were issued at
fair market value of $2.56 per share.
In June 1999, the Company entered into the Series A Preferred Stock Purchase
Agreement with a private company. Pursuant to this agreement, the Company
issued 300 restricted shares of convertible preferred Series A stock
("Preferred Stock") under Rule 506 of the Securities Act for an aggregate
purchase price of $3,000,000. The holder of the preferred stock is entitled
to receive, when and if declared by the Board of Directors, cumulative cash
dividends, in preference and priority to dividends on any junior stock at 9%
per annum. Each share of the preferred stock valued at $10,000, is
convertible into common stock at a conversion price of $4.00 per common share
and may be adjusted for certain recapitalization events.
In June 1998, the Company issued a warrant to purchase 25,000 shares of
common stock at $4.44 per share, to a charitable trust in connection with the
purchase of a promissory note from a director and officer of the Company. The
securities were issued in reliance on the exemption set forth in Section 4
(2) of the Act.
Effective July 1998, the Company issued 5,000 shares of common stock valued
at $4.75 per share in connection with the acquisition of OceanTrac, Inc. The
securities were issued in reliance on the exemption set forth in Section 4
(2) of the Act.
In July 1998, the Company acquired ENERDYNE for $22.6 million in a
combination of cash, common stock and notes. A total of 3,000,000 common
shares were issued, 2,930,700 of which were issued to the former shareholders
of ENERDYNE and the remainder to the financial advisors. In addition the
former owners received a total of 488,225 warrants to purchase common stock
at a price of $2.00 per share and stock options to purchase a total of
1,327,000 shares of common stock at $2.65 per share. The securities were
issued in reliance on the exemption set forth in Section 4 (2) of the Act.
In November 1997, the Company issued 240,000 shares of common stock valued at
$1.40 per share to the previous owner of MED Associates, Inc. in connection
with an asset purchase agreement.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company has three business units:
1. BOATRACS,
2. Enerdyne Technologies, Inc. ("ENERDYNE"), a wholly owned
subsidiary, and
3. Innovative Communications Technologies, Inc. ("ICTI"), a
wholly owned subsidiary.
BOATRACS
Effective November 1, 1997, the Company acquired certain assets of BOATRACS
Gulfport for an adjusted amount of $280,000 in cash and 240,000 shares of
common stock valued at $1.40 per share. The results of BOATRACS Gulfport's
operations from the date of the acquisition to December 31, 1997 were not
significant. Goodwill in the amount of $541,000 was recorded in the
acquisition and is being amortized under the straight-line method over ten
years.
Effective July 1, 1998, the Company acquired all of the outstanding shares in
OceanTrac, a Canadian corporation. The Company issued 5,000 shares of its
common stock valued at $4.75 per share and forgave notes totaling $310,463.
The acquisition of OceanTrac resulted in recording intangibles in the amount
of approximately $388,000 and are being amortized under the straight-line
method over ten years.
ENERDYNE
On July 7, 1998, the Company acquired ENERDYNE by means of a merger with a
wholly owned subsidiary of the Company. ENERDYNE is a provider of versatile,
high performance digital video compression products to government and
commercial markets. 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. A patent in the amount
of $18 million and goodwill in the amount of $10.5 million were recorded and
are being amortized over sixteen years under the straight line method. The
two shareholders of ENERDYNE signed employment contracts with the Company for
one and two years, respectively, and one shareholder was elected to the
Company's board of directors in September 1998.
The First Amendment to the Agreement and Plan of Reorganization (the
"Amendment") in connection with the ENERDYNE Acquisition was executed
effective July 7, 1998. The Amendment increased the number of compensatory
option shares and exercise price subject to a specific paydown on the
acquisition notes payable to the selling shareholders. On December 29, 1998
bank financing was obtained to effect the compensatory contingency per the
Amendment and the options were revised to 663,500 at an exercise price of
$2.65 per share in accordance with the calculations and provisions in the
Amendment.
ICTI
Effective August 1, 1999, the Company completed the acquisition of ICTI, a
privately held company located in Gaithersburg, Maryland by means of a merger
into a wholly owned subsidiary of the Company. The purchase price included
payment to the former ICTI shareholders of $1.5 million in cash, and the
issuance of 1,665,000 shares of the Company's common stock and delivery of
promissory notes in the amount of $600,000. In addition, a promissory note in
the amount of $400,000 was delivered subject to attainment of certain revenue
targets. The Company effectively acquired ICTI's assets of $1.6 million,
assumed its liabilities of $1.5 million and recorded goodwill of $5.5 million
which is being amortized over ten years under the straight line method.
The acquisitions of BOATRACS Gulfport, ENERDYNE and ICTI represent the
Company's continuing efforts to diversify its operations. The Company intends
to continue to evaluate other acquisition opportunities.
The Company recognizes revenue from the sale of communication systems at the
time the equipment is shipped to the customer. Revenue from data transmission
and messaging is recognized at the time the transmission is made by the
customer. Revenues from the sale of video compression units, which do not
entail significant customization or customer modification is recognized upon
shipment of products to customers. Revenue that relates to satellite
transmission technology software arises from satellite software arrangements.
Revenue that relate to software arrangements that require significant product
modification or customization of software are recorded using the percentage
of completion method as costs are incurred. Revenues from software
arrangements that do not require significant modification or customization of
software are recorded when delivery has occurred. Enerdyne's products are
generally subject to a 12-month warranty. The Company does not accrue for
estimated future claims, based upon historical experience.
<PAGE>
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,
-------------------------
1999 1998 1997
% % %
Revenues:
Communications .......................... 48.2 77.8 100.0
Video compression ....................... 28.4 22.2
Satellite transmission technology ...... 23.4
----- ----- -----
Total ............................. 100.0 100.0 100.0
Operating expenses:
Communications .......................... 19.4 42.8 57.5
Video compression ....................... 8.3 7.2
Satellite transmission technology ....... 11.8
Selling, general and administrative ..... 53.7 44.3 44.3
Research and development ................ 7.9 2.4 3.8
----- ----- -----
(Loss) income from operations ........... (1.1) 3.3 (5.6)
Interest (expense) income ............... (4.9) (3.6) .7
Income tax (provision) benefit ......... (.5) 4.1
----- ----- -----
Net (loss) income ...................... (6.5) 3.8 (4.9)
----- ----- -----
Years ended December 31, 1999 and 1998
Total revenues for the twelve months ended December 31, 1999 were
$14,295,454, an increase of $4,122,134 or 41% as compared to
total revenues of $10,173,320 for the prior year ended December 31, 1998.
Communications revenue, which consist of revenues from the sale of BOATRACS
systems, software and data transmission and messaging were $6,889,171 or 48%
of total revenues, a decrease of $1,025,337 or 13% compared to $7,914,508 or
78% of total revenues for the year ended December 31, 1998. The decrease in
communications revenue, compared to the same period in the prior year,
primarily relates to a decrease in the sale of MCTs and related software in
1999 in the amount of $1,744,237 or 43%, offset in part, by an increase in
data transmission and messaging revenues of $718,900 or 19% compared to the
prior year. The increase in data transmission and messaging revenues
reflects an overall increase in services provided by BOATRACS as a result of
growth in the number of systems installed on vessels.
Video compression revenues, which are revenues from Enerdyne were $4,056,674
or 28% of total revenues, an increase of $1,797,862 or 80% compared to
$2,258,812 or 22% of total revenues in the prior year. The Company acquired
Enerdyne in July 1998 and 1998 revenues only include six months compared to
12 months for 1999.
Revenues from satellite transmission technology were $3,349,609 or 23% of
total revenues for the year ended December 31, 1999. Satellite transmission
technology revenues are generated from ICTI, acquired by the Company
effective August 1, 1999.
Communications expense was $2,769,991 or 40% of communications revenue for
the year ended December 31, 1999, a decrease of $1,583,261 or 36% compared
to $4,353,252 or 55% of communications revenue in the prior year. The dollar
decrease is consistent with the decrease in communications revenue in 1999
over the prior year. In addition, expenses from data transmission and
messaging decreased $392,289 or 21% reflecting a new contract with volume
discounts from the supplier, commencing in the second half of 1998, with an
additional reduction in the second quarter of 1999. Overall gross margin for
communications increased 15% to 60% for the year ended December 31, 1999
from 45% for the same period of the prior year. While the gross margin on
the sale of MCT's remained relatively unchanged, other software margins
increased 6% to 37% from 31% in the prior year. The margin on data
transmission and messaging increased 16% to 67% at December 31, 1999 from
51% in the prior year.
Video compression expenses were $1,184,524 or 29% of video compression
revenues for the year ended December 31, 1999, compared to $731,752 or 32%
of video compression revenues for the prior year. The prior year expenses
included only six months as Enerdyne was acquired July 1998. The increase in
gross margin to 71% from 68% primarily relates to a change in product mix.
Satellite transmission technology expenses were $1,681,229 or 50% of
satellite transmission technology revenues. ICTI was
acquired by the Company effective August 1, 1999.
Selling, general and administrative expenses for the year ended December 31,
1999 were $7,673,493 or 54% of total revenues, an increase of $3,161,241 or
70% compared to $4,512,252 or 44% of total revenues in the prior year. The
increased dollar amount is primarily attributable to overall increases
including the expenses of ICTI acquired effective August 1, 1999. In
addition, 1999 included a full year of Enerdyne's expenses compared to only
six months in 1998. Salary increased by a total of $755,736 or 38% due to
additional personnel including the personnel at ICTI and general salary
increases. Office expenses increased by $239,912 or 87% primarily due to
additional personnel and related office supplies. Insurance expense
increased by $105,763 or 75% due to acquisitions and related increases in
personnel. Office rent increased by $131,483 or 61% due to additional office
space being rented. Travel expense increased by $169,750 or 78% due to
additional personnel, trade show attendance and travel by sales personnel.
Marketing increased by $97,339 or 116% due to the addition of an in-house
marketing department. These increases in selling, general and administrative
expenses were partially offset by decreases in accounting fees of $18,636 or
19% and legal expenses of $58,703 or 28% due to costs associated with the
acquisitions. In addition, bad debt expense decreased by $19,141 or 28%.
Depreciation expense for the year ending December 31, 1999 was $327,960, an
increase of $110,993 or 51% compared to the prior year due to acquisitions
of companies and new capital equipment. Amortization expense for the year
ended December 31, 1999 increased by $1,175,293 or 122% to $2,141,722 due to
the amortization of goodwill and a patent acquired in acquisitions.
Research and development expenses were $1,133,943 for the year ended December
31, 1999, an increase of $890,672 compared to the prior year expenses of
$243,271. Expenses were incurred at both the ENERDYNE and BOATRACS divisions
in research and development of new and potential products. Research and
development expenses include labor and materials.
Interest income increased by $17,842 to $65,265 from $47,423. Interest
expense increased $363,914 or 88% to $777,249 from $413,335 in the prior year
primarily due to a full year's interest expense on notes recorded as part of
the ENERDYNE acquisition in July 1998 compared to six months interest expense
in the prior year.
Income tax provision in the amount of $66,578 for the year ended December
31, 1999 represents an increase of $488,788 from an
income tax benefit of $422,210 in the prior year.
Earnings before interest, taxes, depreciation and amortization for the year
ended December 31, 1999 were $2,322,860, an increase of 53% compared to
$1,518,334 in the prior year.
Years ended December 31, 1998 and 1997
Total revenues for the twelve months ended December 31, 1998 were
$10,173,320, an increase of $4,969,404 or 95.5% as compared to
total revenues of $5,203,916 for the prior year ended December 31, 1997.
Communications revenue which consist of revenues from the sale of BOATRACS
systems, related software, revenues of BOATRACS Gulfport and data
transmission and messaging were $7,914,508 or 78% of total revenues, an
increase of $2,710,592 or 52% compared to $5,203,916 or 100% of total
revenues for the year ended December 31, 1997. Revenues from the sale from
MCT's in the United States increased by $1,075,196 or 87%. Software revenues
from BOATRACS Gulfport, which was purchased effective November 1997,
increased by $1,026,606, compared to the revenues for two months of the prior
year. The increase was partially offset by a decrease in communication sales
in Europe and Canada of $468,705 or 66% during 1998. Data transmission and
messaging revenues were $3,881,244 an increase of $1,090,341 or 39% compared
to $2,790,903 in the prior year. The increase in revenues reflects an overall
increase in data transmission and messaging services provided by BOATRACS 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 in July 1998, were $2,258,812 or 22% of total revenues.
Communications expenses were $4,353,252 or 55% of communications revenue for
the year ended December 31, 1998, an increase of $1,362,487 or 46% compared
to $2,990,765 which represented 57% of communications revenue in the prior
year. The dollar increase in expenses primarily reflects the increase in
sales of BOATRACS systems, software expenses of BOATRACS Gulfport and data
transmission and messaging services provided. Gross margin overall was 45%
compared to 43% in the prior year. The gross margin on revenues on the sale
of MCT's increased 4% to 39% due primarily to a decrease in the cost of units
from the supplier during the second half of the year. The margin on data
transmission and messaging remained relatively flat at 51% in 1998 compared
to 49% in 1997. The Company received a reduction in costs from the service
provider during the second half of 1998. This reduction was offset by lower
margins in Europe and Canada.
Selling, general and administrative expenses for the year ended December 31,
1998 were $4,512,252 or 44% of total revenues, an increase of $2,206,062 or
96% compared to $2,306,190 or 44% of total revenues in the prior year. The
increased dollar amount is primarily attributable to increases in operating
expenses in connection with three acquisitions, which the Company has entered
into since November 1, 1997. Accounting and legal expenses increased by a
total of $163,406 primarily due to additional expenses in connection with the
acquisition of ENERDYNE and BOATRACS Gulfport during 1998. Salary expense
increased to $1,769,100 from $659,917, an increase of $1,109,183 or 168%
primarily as a result of additional employees due to acquisitions. Office
rent was $217,157 compared to $57,894 in the prior year, an increase of
$159,263 or 275% due to additional offices and a new BOATRACS corporate
office to which the Company relocated in July 1998. Insurance expense was
$141,482 compared to total insurance expense of $100,425 in the prior year,
an increase of $41,057 or 41% primarily due to the additional subsidiaries.
Amortization expense for the year ended December 31, 1998 was $966,429 due to
the amortization of goodwill recorded as a result of the acquisition of
BOATRACS Gulfport, ENERDYNE and OceanTrac, and amortization of the patent
acquired in the acquisition of ENERDYNE. Depreciation expense was $216,967
compared to $62,768 in the prior year, an increase of $154,199 or 246% due to
the acquisition of the subsidiaries' assets and new assets acquired in
connection with the corporate office relocation. The increase in expenses was
offset by a reduction in consulting expense in the amount of $105,015 or 30%
and a decrease in shareholder relations in the amount of $72,024 or 67%.
Research and development of new products and software for the year ended
December 31, 1998 was $243,271 compared to $199,000 in the
prior year, an increase of $44,271 or 22%.
Interest income of $47,423 for the year ended December 31, 1998 relates to
interest earned on cash balances. This represents an increase of $8,211 or
21% compared to interest income of $39,212 in the prior year. Interest
expense was $413,335 for the year ended December 31, 1998, an increase of
$411,275 compared to the prior year. Interest expense in 1998 relates to
interest paid or accrued on notes payable issued in connection with the
purchase of Enerdyne.
The income tax benefit recorded in the amount of $422,210 for the year ended
December 31, 1998 represents the amortization of a temporary tax difference
on the life of the Enerdyne patent.
Earnings before interest, taxes, depreciation and amortization for the year
ended December 31, 1998 were $1,518,334 compared to a
negative $229,271 for the same period of the prior year.
Liquidity and Capital Resources
The Company's cash balance at December 31, 1999 was $857,634, an increase of
$441,273, or 106% over the December 31, 1998 cash balance of $416,361. At
December 31, 1999 working capital was $469,758 an increase of $652,616 from
the negative working capital of $182,858 at December 31, 1998. Cash of
$37,236 was provided by operating activities, cash of $1,703,706 was used in
investing activities and cash of $2,107,743 was provided by financing
activities during 1999.
The Company's liquidity was affected by $3 million received from the issuance
of convertible preferred Series A stock in June 1999. The Company paid $1.5
million cash for the acquisition of ICTI and as partial consideration, the
Company issued $600,000 in notes payable, $500,000 of which is due and
payable in January 2000.
Accounts receivable, net of an allowance for uncollectible accounts increased
by $2,125,366 to $4,445,770 at year-end from $2,320,404 at December 31, 1998
due primarily to the acquisition of ICTI during 1999 and December sales.
Inventory increased by $233,794 and prepaid expenses and other assets
increased by $666,371 due to the acquisition of ICTI during 1999. Included in
prepaid expenses and other assets are deferred income taxes of $615,523 at
December 31, 1999. Property, net of accumulated depreciation, was $705,082 at
December 31, 1999, a decrease of $33,255 over the prior year due primarily to
depreciation expense in 1999. Goodwill, net of amortization, increased by
$4,831,347 in the year ending December 31, 1999 due to the acquisition of
ICTI.
Accounts payable were $1,831,985 at December 31, 1999 an increase of $763,638
or 71% compared to a balance of $1,068,347 in the prior year primarily due to
the acquisition of ICTI and the inclusion of certain trade payable accruals
which were classified as accrued expenses in the prior year. The increase was
partially offset by a change in terms from a major supplier. Accrued expenses
increased by $526,261 or 49% at December 31, 1999 to $1,591,254. The increase
is due primarily to the inclusion of taxes payable in the amount of $482,649
in 1999.
The total of short and long term notes payable were $9,444,776 for the year
ended December 31, 1999 compared to $9,825,177 in the prior year, a decrease
of $380,401. Principal payments of $1,730,401 were made on notes payable
during 1999. In addition, notes payable of $600,000 were recorded in the
acquisition of ICTI and the Company's line of credit was $750,000 at
year-end. On February 28, 2000 the Company signed a Change in Terms Agreement
with a bank increasing the line of credit facility to $1,750,000. The line of
credit expires on December 29, 2001.
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 the end of 2000.
The Company anticipates making capital expenditures in excess of $200,000
during 2000. 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.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated financial statements as of December 31, 1999 and
1998, and for each of the three years in the period ended December 31, 1999,
and the report of Deloitte and Touche, LLP, independent accountants, are
included in this report on pages F-1 through F-17.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
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 2000.
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
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 is included in this
report beginning on page F-1.
Page
Independent Auditors' Report ...................................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 ...... F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 .............................. F-3
Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 .............................. F-4
Statements of Consolidated Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ............................. F-5
Notes to consolidated financial statements ........................ F-6-F-17
(2)......Financial Statements Schedules: See Exhibit 11.
(b) REPORTS ON FORM 8-K.
2.1 Agreement of Merger and Plan of Reorganization dated as of August 1, 1999 by
and among Advanced Remote Communication Solutions, Inc., a California
corporation, Innovative Communications Technologies, Inc., a Maryland
corporation; and Innovative Communications Technologies, Inc., a Delaware
corporation and the shareholders of Innovative Communications Technologies,
Inc., a Maryland corporation. Incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed with the Commission on October 7, 1999 and the
Company's Form 8-K/A filed with the Commission on December 10, 1999.
(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)
3.2 Amended and Restated Bylaws (1)
3.3 Amendment of the Bylaws, Article III, Section 2 (5)
3.4 Certificate of Amendment and Restatement of Articles of
Incorporation (19)
4.1 Form of the Company's Common Stock Certificate (2) 10.1*License and
Distribution Agreement dated June 13, 1990,
by and between QUALCOMM and the Company, as amended (3)
10.2* License Agreement dated March 31, 1995, between the
Company and QUALCOMM (2)
10.3 Employment Agreement--Michael Silverman (2)
10.9 BOATRACS, Inc. Amended 1996 Stock Option Plan (6)
10.10 Restricted Stock Purchase Agreement between BOATRACS, Inc. and Jon
Gilbert dated October 15, 1997 (7)
10.11 Pledge Agreement between BOATRACS, Inc. and Jon Gilbert dated October
15, 1997 (7)
10.12 Promissory Note between BOATRACS, Inc. and Jon Gilbert dated October
15, 1997 (7)
10.13 Employment Agreement between BOATRACS, Inc. and Charles Drobny, Jr.
effective November 1, 1997 (8)
10.14 Agreement and Plan of Reorganization dated July 7, 1998 by and between
BOATRACS, Inc., Enerdyne Technologies, Inc., BOATRACS
Acquisition, Inc., Scott T. Boden and Irene Shinsato. (9)
10.15 Employment Agreement dated July 7, 1998 between Scott T. Boden and
Enerdyne Technologies, Inc. (9)
10.16 Option Agreement dated July 7, 1998 between Scott T. Boden and
BOATRACS, Inc. (13)
10.17 Employment Agreement dated July 7, 1998 between Irene Shinsato and
Enerdyne Technologies, Inc. (9)
10.18 Option Agreement dated July 7, 1998 between Irene Shinsato and
BOATRACS Inc. (13)
10.19 Financial Statements of Enerdyne Technologies, Inc. (10)
10.20 First Amendment to Agreement and Plan of Reorganization between
BOATRACS, Inc., BOATRACS Acquisition, Inc., Enerdyne
Technologies, Inc., Scott T. Boden, Irene Shinsato, Jon Gilbert
and Michael Silverman (11)
10.21 Financial Statements of MED Associates, Inc. (12)
10.22 Loan Agreement effective December 29, 1998 between BOATRACS, Inc. and
Enerdyne Technologies, Inc. (Borrower) and First
National Bank (Lender) (13)
10.23 Promissory Note in the amount of $4,250,000 dated December 29, 1998,
between BOATRACS, Inc.: ET. AL. (Borrower) and
First National Bank (Lender) (13)
10.24 Promissory Note in the amount of $750,000 dated December 29, 1998
between BOATRACS, Inc.: ET. AL. (Borrower) and First
National Bank (Lender) (13)
10.25 Commercial Pledge and Security Agreement between BOATRACS, Inc.:ET. AL.
(Borrower), BOATRACS, Inc. (Grantor) and First National Bank (Lender(13)
10.26 Commercial Security Agreement between BOATRACS, Inc.: ET. AL.
(Borrower), Enerdyne Technologies, Inc. (Grantor) and
First National Bank (Lender) (13)
10.27 Commercial Security Agreement between BOATRACS, Inc.: ET.AL.
(Borrower), BOATRACS, Inc. (Grantor) and First National
Bank (Lender) (13)
10.28 Commercial Security Agreement between BOATRACS, Inc.: ET. AL.
(Borrower), BOATRACS (Europe) B.V. and Oceantrac (Grantor)
and First National Bank (Lender) (13)
10.29 Collateral Assignment, Patent Mortgage and Security Agreement as
of December 29, 1998 between Enerdyne Technologies, Inc., a
California corporation (Grantor) and First National Bank, a
national banking association (Grantee) (13)
10.30 BOATRACS, Inc. Amended 1996 Stock Option Plan (14)
10.31 Agreement of Merger and Plan of Reorganization between Advanced Remote
Communication Solutions, Inc. and Innovative
Communications Technologies, Inc. and its shareholders dated effective
August 1, 1999 (15)
10.32 Financial statements of Innovative Communications Technologies, Inc(16)
10.33 Employment agreement with Mohammed G. Abutaleb dated September 28,
1999 (18)
10.34 Change in Terms Agreement between the Company (Borrower) and First
National Bank (Lender) (filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
23.1 Independent Auditors' consent (filed herewith)
---------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Company's Form 8-K dated January 12, 1995.
(2) 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.
(3) 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.
(4) Incorporated by reference to the exhibit of the same number to the
Company's Form 10-K filed with the SEC March 1996. (5) Incorporated by
reference to the Company's Form 10-QSB filed with the SEC in
May 1996.
(6) Incorporated by reference to the Company's Form S-8 filed with the SEC
on June 20, 1997.
(7) Incorporated by reference to the Company's Form 10-QSB filed with the
SEC on November 14, 1997
(8) Incorporated by reference to the Company's Form 8-K/A filed with the
SEC on March 31, 1998.
(9) Incorporated by reference to the Company's Form 8-K filed with the SEC
on July 21, 1998.
(10) Incorporated by reference to the Company's Form 8-K/A, Amendment No.
1, filed with the SEC on August 14, 1998.
(11) Incorporated by reference to the Company's Form 8-K/A, Amendment No.
2, filed with the SEC on November 18, 1998.
(12) Incorporated by reference to the Company's Form 8-K/1, Amendment No. 1,
filed with the SEC on March 31, 1998.
(13) Incorporated by reference to the Company's Form 10-KSB filed with the
SEC on March 30, 1999
(14) Incorporated by reference to the Company's Form S-8 filed with the SE
on June 15, 1999.
(15) Incorporated by reference to the Company's Form 8-K filed with the SEC
on October 7, 1999
(16) Incorporated by reference to the Company's Form 8-K/A filed with the
SEC on December 10, 1999
(17) Incorporated by reference to the Company' Form 10-QSB filed with the
SEC on August 16, 1999
(18) Incorporated by reference to the Company's Form 10-QSB filed with the
SEC on November 15, 1999
*Confidential treatment requested
<PAGE>
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, 2000
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 Dean Kernus, 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 L.Silverman Chairman of the Board, March 27, 2000
--------------
Michael L. Silverman .. C.E.O., President
/s/ Jon S. Gilbert .... Director March 27, 2000
--------------
Jon S. Gilbert
/s/ Giles Bateman ..... Director March 27, 2000
--------------
Giles H. Bateman
/s/ Luis Maizel ....... Director March 27, 2000
--------------
Luis Maizel
/s/ Mitchell G. Lynn .. Director March 27, 2000
--------------
Mitchell G. Lynn
/s/ Scott T. Boden .... Director March 27, 2000
--------------
Scott T. Boden
<PAGE>
/s/ Thomas Bernard .... Director March 27, 2000
----------------
Thomas Bernard
/s/ Mohammed Abutaleb . Director March 27, 2000
----------------
Mohammed Abutaleb
/s/ Dean B. Kernus ..... Chief Financial March 27, 2000
--------------
Dean B. Kernus ........ Officer
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Advanced Remote Communication Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced Remote
Communication Solutions, Inc. (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally accepted
in the United States of America. 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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with auditing
standards generally accepted in the United States of America.
March 16, 2000
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS ........................................... 1999 1998
CURRENT ASSETS:
Cash ........................................ $ 857,634 $ 416,361
Accounts receivable - net ..................... 4,445,770 2,320,404
Inventories .................................... 918,531 684,737
Prepaid expenses and other assets .................925,750 259,379
------------ ------------
Total current assets ................ 7,147,685 3,680,881
PROPERTY - net ..................................... 705,082 738,337
GOODWILL - net ................................. 16,023,480 11,192,133
PATENT - net .................................... 16,334,135 17,459,135
------------ ------------
TOTAL ......................................... $ 40,210,382 $ 33,070,486
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................ $ 1,831,985 $ 1,068,347
Accrued expenses ................................1,591,254 1,064,993
Current portion of notes payable ............... 3,254,688 1,730,399
------------ ------------
Total current liabilities ............ 6,677,927 3,863,739
NOTES PAYABLE .................................. 6,190,088 8,094,778
DEFERRED TAX LIABILITY .......................... 6,864,377 6,639,584
COMMITMENTS (Notes 4, 9 and 12)
STOCKHOLDERS' EQUITY:
Convertible preferred series A stock
no par value; 1,000,000 ........... 3,000,000
shares authorized, 300 shares issued
Common stock, no par value; 100,000,000
shares authorized, 20,739,860 and
18,834,032 shares issued and outstanding
at 1999 and 1998, respectively 21,459,376 17,527,483
Accumulated deficit ........................... (3,981,386) (3,055,098)
------------ ------------
Total stockholders' equity ........... 20,477,990 14,472,385
------------ ------------
TOTAL ........................................ $ 40,210,382 $ 33,070,486
============ ============
See notes to consolidated financial statements.
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
REVENUES
Communications $ 6,889,171 $ 7,914,508 $ 5,203,916
Video compression 4,056,674 2,258,812
Satellite transmission
technology 3,349,609
------------ ------------- -----------
Total revenues 14,295,454 10,173,320 5,203,916
------------ ------------- -----------
COSTS AND EXPENSES:
Communications 2,769,991 4,353,252 2,990,765
Video compression 1,184,524 731,752
Satellite transmission
technology 1,681,229
Selling, general and
administrative 7,673,493 4,512,252 2,306,190
Research and development 1,133,943 243,271 199,000
------------ ------------ ------------
Total costs
and expenses 14,443,180 9,840,527 5,495,955
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (147,726) 332,793 (292,039)
INTEREST INCOME 65,265 47,423 39,212
INTEREST EXPENSE (777,249) (413,335) (2,060)
------------ ------------ ------------
LOSS BEFORE TAXES (859,710) (33,119) (254,887)
INCOME TAX (PROVISION) BENEFIT (66,578) 422,210
------------ ------------ -----------
NET (LOSS) INCOME $ (926,288) $ 389,091 $ (254,887)
============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ (0.05) $ 0.02 $ (0.02)
DILUTED EARNINGS PER COMMON SHARE $ (0.05) $ 0.02 $ (0.02)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 19,380,503 17,333,426 13,535,433
Dilutive effect of:
Employee stock options 737,557
Warrants 286,651
Weighted average common shares
outstanding, assuming dilution 19,380,503 18,357,634 13,535,433
See notes to consolidated financial statements
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accum Note Total
Common Stock Preferred Stock ulated Receiv Stock
Shares Amount Deficit able holder'
BALANCE, JANUARY equity
1, 1997 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 (1,930,915) 389,085
Common stock
issued in
connection with
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
Common stock
issued
through
exercise of
stock options
and warrants 82,055 103,243 103,243
Discounted
payments
received
on note
receivable
for common
stock (44,274) 2,117,836 2,073,562
Common stock
issued
for acquis
itions 2,945,000 10,519,270 10,519,270
Net income 389,091 389,091
DECEMBER
31, 1998 18,834,032 17,527,483 (3,055,098) - 14,472,385
Common
stock
issued
through
exercise of
stock options 88,907 43,143 43,143
Common stock
issued for
acquisitions 1,740,000 3,690,000 3,690,000
Common stock
issued to
vendor in
payment for
accounts
payable 60,000 153,750 153,750
Common stock
issued in
accordance with
employment
agreement 16,921 45,000 45,000
Convertible
preferred
series A
stock issued 300 $3,000,000 3,000,000
Net loss (926,288) (926,288)
BALANCE,
DECEMBER
31, 1999 20,739,860 $21,459,376 300$3,000,00(3,981,386) $ - $ 20,477,990
See notes to consolidated financial statements.
F-8
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1999 1998 1997
OPERATING ACTIVITIES:
Net (loss) income $ (926,288) $ 389,091 $ (254,887)
Adjustments to
reconcile net loss
(income) to net cash
provided by
used in) operating
activities:
Change in deferred
tax liability 224,793 (422,210)
Loss on disposal
of assets 15,907
Depreciation and
amortization 2,469,682 1,183,396 76,851
Provision for bad debts 17,088 68,651
Changes in assets and
liabilities:
Accounts receivable (2,142,454) (1,452,045) (379,764)
Inventories (233,794) (450,645) (141,974)
Prepaid expenses
and other assets (815,439) (151,944) (33,725)
Accounts payable
and accrued expenses 1,443,648 734,067 852,607
Net cash provided by
(used in) operating
activities 37,236 (101,639) 135,015
INVESTING ACTIVITIES:
Net cash paid for
acquisitions (1,579,109) (1,458,691) (425,000)
Proceeds from sale of
investment securities 149,068 425,852
Issuance of notes
receivable (102,000)
Capital expenditures (273,665) (388,003) (181,806)
Net cash used in
investing activities (1,703,706) (1,846,694) (282,954)
FINANCING ACTIVITIES:
Proceeds from note
receivable issued for
common stock 2,073,562 234,501
Proceeds from short-term
margin loan (139,268)
Repayment of net
deferred compensation (45,129)
Cash received for stock
options and warrants
exercised 88,143 103,243
Principal payments
on notes payable (1,730,400) (204,823)
Proceeds from line
of credit 750,000
Proceeds from issuance
of common stock 387,403
Proceeds from issuance
of convertible
preferred series
A stock 3,000,000
Net cash provided by
financing activities 2,107,743 1,971,982 437,507
NET INCREASE IN CASH 441,273 23,649 289,568
CASH AT BEGINNING OF YEAR 416,361 392,712 103,144
CASH AT END OF YEAR $ 857,634 $ 416,361 $ 392,712
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for interest $ 720,127 $ 413,335
SUPPLEMENTAL
DISCLOSURES FOR
NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of notes payable
for acquisitions $ 600,000 $ 10,000,000
Common stock issued for
acquisitions and payments
on accounts payable $ 3,843,750 $ 10,558,996 $ 420,000
Discount on redemption of
note receivable for
common stock $ 44,274
Common stock issued for note receivable $ 1,930,915
See notes to consolidated financial statements.
ADVANCED REMOTE COMMUNICATION SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Advanced Remote Communication Solutions, Inc.
("ARCOMS") (formerly BOATRACS, Inc.) and its wholly owned subsidiaries,
Enerdyne Technologies, Inc. ("Enerdyne"), OceanTrac, Inc., BOATRACS
(Europe) B.V., Innovative Communications Technologies, Inc. ("ICTI"), and
its divisions BOATRACS and BOATRACS Gulfport ("Gulfport") (collectively
called the "Company"), are engaged in communications and satellite
transmission technology, and provide video compression products to
government and commercial markets. The communications business segment of
the Company distributes the OmniTRACS satellite-based communications and
tracking system for marine application under a license and distribution
agreement with QUALCOMM, Incorporated ("QUALCOMM," see Notes 8 and 9).
Under the QUALCOMM 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.
The Company acquired ICTI effective August 1, 1999. ICTI is engaged in the
design and implementation of bandwidth efficient multimedia satellite
networks and develops customized software solutions to manage and allocate
available satellite power/bandwidth resources to optimize a satellite
system's lifecycle costs.
Enerdyne provides digital video compression products to government and
commercial markets.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of ARCOMS and its divisions and wholly
owned subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Accounts Receivable - Included in accounts receivable at December 31, 1999
are amounts representing costs and estimated earnings in excess of billing
on construction contracts in the amount of $469,000.
Investment Securities - Investment securities represented U.S. Treasury
securities that the Company held to maturity, and were reported at
amortized cost, which approximated fair value. During 1999, the Company
sold securities of a minority shareholder and realized a long-term capital
gain of $149,000.
Inventories - Inventories are comprised of raw materials, work in process
and furnished goods and are carried at the lower of average cost or
market.
Property, Goodwill and Patent - Property is recorded at cost. Depreciation
is provided under the straight-line method over the estimated useful lives
of the assets (generally three to seven years). Goodwill resulting from
the acquisitions of Enerdyne and ICTI is amortized under the straight line
method over 10 and 16 years, respectively, and the Company's patent is
amortized over 16 years.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" requires that impairment losses be recognized when the
carrying value of an asset will not be recognizable based on future cash
flows. The Company's policy is to evaluate, at each balance sheet date,
the appropriateness of the carrying value of the unamortized balances of
its patent, goodwill and other long-lived assets on the basis of estimated
future cash flows and other factors. If such evaluation were to indicate a
material impairment of these intangible assets, such impairment would be
recognized by a write down of the applicable asset to its estimated fair
value.
Revenue Recognition - Revenue from the sale of communication systems is
recognized at the time the equipment is shipped to the customer. Revenue
from data transmission and messaging is recognized at the time the
transmission is made by the customer. Revenues from the sale of video
compression units, which do not entail significant customization or
customer modification is recognized upon shipment of products to
customers. Revenue that relates to satellite transmission technology
software arises from satellite software arrangements. Revenue that relate
to software arrangements that require significant product modification or
customization of software are recorded using the percentage of completion
method as costs are incurred. Revenues from software arrangements that do
not require significant modification or customization of software are
recorded when delivery has occurred. Enerdyne's products are generally
subject to a 12-month warranty. The Company does not accrue for estimated
future claims, based upon historical experience.
Significant Customers - A material source of the Company's revenues comes
from two customers, each of which represented approximately 10% of the
Company's total revenues in 1999. Accounts receivable from these customers
aggregated $407,817 at December 31, 1999. In 1998, significant customers
represented 24% and 10% of total revenues, respectively, and accounts
receivable from these customers aggregated $387,432. In 1997, significant
customers represented 18% and 12% of total revenues, respectively, and
accounts receivable from these customers aggregated $437,077. The loss of
these customers could have a material adverse effect on the Company. The
Company has not historically experienced significant losses on its
accounts receivable.
Stock-Based Compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not 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 exercise
price.
Net Income (Loss) Per Share - Net income (loss) per share is calculated
using the weighted average number of shares outstanding during each year,
pursuant to SFAS No. 128, "Earnings per Share."
Segment Information - In 1998, SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" was issued. Accordingly, the
Company has disclosed all applicable results of operations by segment and
geographic details as prescribed.
Accounting for derivative instruments and hedging activities - In 1998,
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. This standard, which establishes new accounting
and reporting standards for derivative financial instruments, must be
adopted no later than January 1, 2001. The Company is currently analyzing
the effect of this standard but does not expect it to have a material
effect on the Company's financial position.
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 year. Actual results could differ from those
estimates.
Reclassifications - Certain amounts in the 1998 and 1997 financial
statements have been reclassified to conform
to the 1999 presentation.
2. ACQUISITIONS
Innovative Communications Technologies, Inc. - Effective August 1, 1999,
the Company completed the acquisition, by reverse merger, of all of the
shares of ICTI, a privately held company located in Gaithersburg, Maryland
that is engaged in the design and implementation of bandwidth efficient
multi-media satellite networks. The purchase price to the former
shareholders of ICTI included the payment of $1.5 million in cash, and the
issuance of 1,665,000 shares of the Company's common stock and the
delivery of promissory notes in the amount of $600,000 (see Note 5). In
addition, the Company delivered a non-interest note in the amount of
$400,000 that is subject to attainment of certain revenue targets. This
note will be recorded in the Company's accounts if and when these targets
are met. The Company effectively acquired ICTI's assets of $1.6 million,
assumed its liabilities of $1.5 million, and recorded goodwill in the
amount of $5.5 million, which is being amortized over ten years under the
straight line method.
The following summarized unaudited pro forma financial information assumes
the acquisition had occurred on January 1 of each period:
Year Year
ended ended
------------ -------------
PROFORMA INFORMATION (Unaudited) ................ 12/31/99 12/31/98
------------ -------------
Net sales ......................................$ 17,913,508 $ 14,880,000
Net loss ..................................... $ (910,000) $ (105,000)
Basic loss per common share .................. $ (.04) $ (.01)
Diluted loss per common share ................. $ (.04) $ (.01)
Weighted average common shares outstanding ....... 20,612,000 18,998,000
Weighted average common shares outstanding, n/a n/a
assuming dilution
Enerdyne Technologies, Inc. - On July 7, 1998, the Company acquired all of
the outstanding shares of Enerdyne, a provider of versatile, high
performance digital video compression products to government and
commercial markets. Enerdyne was formed in 1984 and is located in Santee,
California. The acquisition price of $22.6 million included the payment of
$2 million in cash, and the issuance of 3 million shares of the Company's
common stock and promissory notes of $10,000,000. In addition, options and
warrants were granted to the previous owners (see Note 7). A patent in the
amount of $18 million and goodwill in the amount of $10.5 million were
recorded as a result of the acquisition and are being amortized over 16
years under the straight-line method. The two selling shareholders of
Enerdyne signed employment contracts with the Company for one and two
years, respectively, and one selling shareholder was elected to the
Company's board of directors in September 1998.
The first amendment to the Agreement and Plan of Reorganization (the
"Amendment") in connection with the Enerdyne acquisition was executed
effective July 7, 1998. The Amendment increased the number of compensatory
option shares and exercise price subject to a specific paydown on the
acquisition notes payable to the selling shareholders (see Note 7). On
December 29, 1998 bank financing was obtained to effect the compensatory
contingency per the Amendment (see Note 5) and the options were revised to
663,500 at an exercise price of $2.65 in accordance with the calculations
and provisions in the Amendment.
The following summarized unaudited pro forma financial information assumes
the acquisition had occurred on January 1 of each year:
PROFORMA INFORMATION (Unaudited) ......... 1998 1997
Net sales ................................. $ 5,657,842 $12,421,000
Net income ................................ $ 295,086 $ 1,184,000
Basic earnings per common share .......... $ .02 $ .08
Diluted earnings per common share ......... $ .01 $ .07
Weighted average common shares outstanding 18,870,412 16,535,000
Weighted average common shares outstanding,
assuming dilution ......................... 20,309,195 16,677,000
OceanTrac Inc. - Effective July 1, 1998, the Company acquired all of the
outstanding shares of OceanTrac, Inc., a Canadian corporation
("OceanTrac"). The acquisition price included the Company's issuance of
5,000 shares of common stock valued at $4.75 per share and forgiveness of
notes totaling $310,463. The acquisition of OceanTrac resulted in
recording intangibles of approximately $388,000, which are being amortized
under the straight-line method over 10 years.
Boatracs Gulfport - Effective November 1, 1997, the Company purchased
certain assets and assumed certain liabilities of MED Associates, Inc.
("Gulfport"), a Mississippi based provider of software applications and
service solutions to the marine industry, for $280,000 in cash and 240,000
shares of restricted common stock valued at $1.40 per share. Goodwill in
the amount of $541,000 was recorded and is being amortized under the
straight-line method over 10 years.
3. BALANCE SHEET DETAILS
1999 1998
----------- -----------
Accounts receivable ............................. $ 4,527,058 $ 2,384,604
Less allowance for doubtful accounts and sales
return reserve ........................... 81,288 64,200
----------- -----------
$ 4,445,770 $ 2,320,404
----------- -----------
Inventory:
Raw materials .............................. $ 497,052 $ 364,889
Work in progress ........................... 179,072 214,155
Finished goods ............................. 242,407 105,693
----------- -----------
$ 918,531 $ 684,73
----------- -----------
Property:
Computers and equipment ..................... $ 1,248,085 $ 835,320
Furniture and fixtures ...................... 265,490 211,905
Leasehold improvements ...................... 55,390 55,390
----------- -----------
1,568,965 1,102,615
Less accumulated depreciation ........... 863,883 364,278
----------- -----------
$ 705,082 $ 738,337
----------- -----------
Goodwill ........................................ $17,481,272 $11,633,203
Less accumulated amortization ............... 1,457,792 441,070
----------- -----------
$16,023,480 $11,192,133
----------- -----------
Patent .......................................... $18,000,000 $18,000,000
Less accumulated amortization .............. 1,665,865 540,865
----------- -----------
$16,334,135 $17,459,135
----------- -----------
Accrued expenses:
Taxes payable .............................. $ 482,649 $ 176,611
Other accrued expenses .................... 1,108,605 888,382
----------- -----------
$ 1,591,254 $ 1,064,993
----------- -----------
Depreciation expense was $327,960, $216,967 and $62,768 for the years
ended December 31, 1999, 1998 and 1997, respectively. Amortization expense
was $2,141,722, $966,429 and $14,083 for the years ended December 31,
1999, 1998 and 1997, respectively.
4. LEASES
Facility Leases - The Company has various lease agreements for offices and
manufacturing facilities. The Company's leases generally have rent
escalation terms based on the Consumer Price Index, which will affect
future minimum lease payments. The Company leases its corporate office
space under a non-cancelable operating lease that expires December 2002.
Enerdyne leases a 9,800 square foot facility in Santee, California which
expires in November, 2000. Gulfport leases a 2,500 square foot facility in
Gulfport, Mississippi which expired in December 1999, and is
"month-to-month" while a new lease is negotiated. Boatracs (Europe) B.V.
leases a facility in Leiden, The Netherlands pursuant to a lease which
expires in December 2001. ICTI leases a 10,300 square foot facility in
Gaithersburg, Maryland which expires in 2004. Total rent expense was
$348,640, $217,157 and $57,894 for the years ended December 31, 1999, 1998
and 1997, respectively.
Future minimum lease payments at December 31, 1999 are summarized as
follows:
Year Ending December 31,
2000 $ 462,000
2001 384,000
2002 335,000
2003 148,000
200 147,000
Total $1,476,000
==========
5. NOTES PAYABLE
In connection with the acquisition of Enerdyne (see Note 2), the Company
issued two notes payable aggregating $10,000,000 to or on behalf of the
previous owners. Notes totaling $8,000,000 were senior promissory notes
originally payable on July 7, 1999 and bear interest at 8.5% per annum.
The balance of the notes, bearing interest at 8.5% per annum, are
subordinated to the senior promissory notes and have specified minimum
annual payments with any remaining amounts payable June 30, 2002.
On December 29, 1998, the Company entered into a five-year loan agreement
with a bank for $4,250,000 at a variable interest rate equal to the
lender's prime rate. The initial rate at December 29, 1998 was 7.75% and
was 8.5% at December 31, 1999. The proceeds were used to pay a portion of
the $8,000,000 loan to the previous Enerdyne owners. The terms on the
remaining balance were amended so that it expires on January 1, 2004. The
Company has pledged all of its assets as collateral for the bank loan.
On December 29, 1998, the Company entered into a line of credit agreement
with the bank to borrow up to $750,000 at a variable interest rate equal
to the lender's prime rate, which was 8.5% on December 31, 1999. At
December 31, 1999, $750,000 was outstanding under this loan. The line of
credit includes certain restrictive financial and operating covenants.
Subsequent to December 31, 1999, the line was increased to $1,750,000 and
the maturity date extended to December 29, 2001 from December 29, 2000
(see Note 13).
In connection with the acquisition of ICTI, the Company issued promissory
notes to ICTI's former shareholders totaling $600,000 which accrue
interest at 7.5% per annum. Five hundred thousand dollars was originally
due in full on or before January 31, 2000. The maturity date has been
extended and the interest rate has been adjusted to 12%. The remaining
balance of $100,000 is to be paid in semi annual installments of principal
and accrued interest of $20,000 commencing March 28, 2000. An unrecorded
promissory note in the amount of $400,000 was also signed with the former
shareholders. Payment will be made based on certain revenue targets if and
when the targets are met.
A summary of notes payable follows:
Balance at Balance at
December 31,1999 December 31, 1998
---------- ----------
Promissory note payable to bank ..................$3,400,000 $4,250,000
Senior promissory notes ...........................3,027,776 3,575,177
Subordinated promissory notes ................... 1,667,000 2,000,000
ICTI promissory notes .............................. 600,000
Line of credit ..................................... 750,000
---------- ----------
9,444,776 9,825,177
Current portion .................................. 3,254,688 1,730,399
---------- ----------
Long term portion ............................... $6,190,088 $8,094,778
---------- ----------
Future minimum debt payments are summarized as follows:
Year ending December 31,
2000 $3,254,688
2001 2,194,937
2002 2,237,248
2003 1,685,066
2004 72,837
---------------------
Total $9,444,776
---------------------
Future minimum debt payments are subject to acceleration under certain
conditions. The value of notes payable at December 31, 1999 approximates fair
value.
6. INCOME TAXES
The tax effects of significant temporary differences that comprise deferred
tax balances are as follows:
December 31, December 31,
1999 1998
----------- -----------
Deferred liabilities
Net operating loss carryforward ............ $ 543,000 $ 568,000
Income tax credits .............................. 91,000 105,000
Allowance for uncollectible account ...............35,000 28,000
Deferred income ...................................52,000 8,000
State taxes ..................................... (10,000) 5,000
Patent ....................................... (6,534,000) (6,984,000)
Other ........................................... 71,000 18,000
----------- -----------
Net deferred liabilities ......................(5,752,000) (6,252,000)
Valuation allowance ............................ (497,000) (388,000)
----------- -----------
Total deferred tax ........................... (6,249,000) (6,640,000)
Less deferred tax asset - current ............. (615,000) 0
----------- -----------
$(6,864,000) $(6,640,000)
----------- -----------
The provision for income taxes consists of the following:
Income/(expense)
Fiscal 1999 Fiscal 1998
--------- ---------
Current:
Federal .................................$ 322,479 $ 173,939
State .....................................134,831 3,497
--------- ---------
Total current ........................... 457,310 177,436
--------- ---------
Deferred:
Federal ............................ (251,017) 127,726
State .................................. (139,715) 117,048
--------- ---------
Total deferred .......................... (390,732) 244,774
--------- ---------
Total provision .........................$ 66,578 $ 422,210
--------- ---------
At December 31, 1999, the Company had unused net operating loss
carryforwards of approximately $615,000 for state income tax purposes
which expire at various dates from 2000 to 2002.
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax is as follows:
Fiscal Fiscal Fiscal
1999 1998 1997
------ ---- ----
Statutory federal rate ........................(34%) (34%) (34%)
State income taxes
Net of federal income tax benefit .4% (245%)
Change in valuation allowance ..................12.8% (1293%) 36%
R&D credit ................................... (13.2%) (82%) (6%)
Goodwill .......................................36.7% 321%
Other ......................................... 5.0% 28% 4%
------ ---- ----
Effective tax rates ........................... 7.7% (1305%) 0%
====== ==== ====
Due to a valuation allowance provided for deferred income tax assets for
the year ended December 31, 1997 there was no income tax expense or benefit
and the Company's effective income tax rate was 0%.
7. STOCKHOLDERS' EQUITY
Common stock issued - In April 1999 the Company entered into an asset
purchase agreement to purchase a communications components business. The
Company paid $50,000 in cash and issued 75,000 restricted common shares
valued at $2.03 per share, a ten percent discount from the then fair
market value.
Common stock issued under terms of an employment agreement - In September
and December 1999 the Company issued a total of 16,921 shares of common
stock under the terms of an employment agreement effective November 1997.
The shares were valued in accordance with this agreement at $3.34 per
share (9,568 shares) and $2.04 per share (7,353 shares).
Common stock issued for accounts payable - In May 1999, the Company issued
60,000 restricted shares of common stock to QUALCOMM, a major supplier to
the Company, as full payment on $153,600 of certain accounts payable.
Their shares were issued at fair market value of $2.56 per share.
Convertible preferred series A stock issued - In June 1999, the Company
entered into a preferred stock purchase agreement with a private company.
Pursuant to this agreement, the Company issued 300 restricted shares of
convertible preferred series A stock for an aggregate purchase price of
$3,000,000. The holder of the preferred stock is entitled to receive, when
and if declared by the Company's board of directors, cumulative cash
dividends in preference and priority to dividends on any junior stock at
9% per annum. Each share of the preferred stock is valued at $10,000 and
is convertible into common stock at a conversion price of $4.00 per common
share and may be adjusted for certain recapitalization events.
Note receivable issued for common stock - In March 1995, the Company
issued 1,112,265 shares of common stock to QUALCOMM for $737,000. The
purchase price of the shares was 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 a license
and distribution agreement (see Note 9). The transaction was recorded as a
note receivable for common stock issued which was reduced as discounts
were earned. Through December 31, 1998, a total of $737,000 in discounts
had been earned and the balance of the note receivable eliminated.
In October 1997, the Company issued 2,900,000 shares of common stock to an
individual who subsequently became an officer and director of the company,
at a discounted value of $0.80 per share pursuant to the terms of a
restricted stock purchase agreement (see Note 8). In connection with the
shares, the Company received a promissory note in the amount of $1,930,915
bearing interest at 5.8% per annum. The note required 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 had been recorded as a reduction
of equity on the balance sheet. In 1998, the note and accrued interest
were sold to an outside party at a discount of $44,274, which was recorded
as a reduction of the common stock originally issued.
In July 1998, the Company issued 3,000,000 shares of common stock to the
selling shareholders of Enerdyne and their investment bankers (see Note
2), valued at $3.17 per share.
Stock Warrants - In 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 per share. In 1998, the warrants
were exercised.
In April 1998, the Company issued 30,000 warrants to a consultant, at an
exercise price of $1.50 per share. The warrants expired in July 1999 and
were not exercised.
In June 1998, the Company issued warrants to purchase 25,000 shares of
common stock at $4.44 per share to a third party in connection with his
purchase of a promissory note from a director and officer of the Company.
The warrants expire on October 15, 2000.
In July 1998, the Company issued warrants to purchase 500,000 shares of
common stock at $2.00 per share to the selling shareholders of Enerdyne
and their investment bankers (see Note 2).
Stock Options - In January 1996, the Company entered into a
non-circumvention agreement with a financial consultant. The agreement
included a grant of 50,000 stock options with an exercise price of $1.50
per share. There is no expiration date on the options, however the
agreement may be terminated by the Company at will.
In December 1998, pursuant to an amendment of an agreement, the Company
issued 1,327,000 options at $2.65 per
share to the selling shareholders of ENERDYNE.
Registration statements with the Securities and Exchange Commission - In
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 this
transaction.
On May 11, 1999 a registration statement on Form SB-2 was declared
effective, providing for the registration of 10,154,865 shares of common
stock on behalf of certain selling stockholders. The Company did not
receive any proceeds from this transaction.
Stock Option Plan - Under the Company's amended 1996 Stock Option Plan
("the Plan"), the Company may grant incentive and non-qualified options to
purchase up to 4,000,000 shares of common stock to employees, directors
and consultants at prices that are not less than 100% (85% for
non-qualified options) of fair market value on the date the options are
granted. Options issued under the Plan expire between five and 10 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 of Shares Price per Share
Outstanding, January 1, 1997 .............. 709,500 $ 1.00- $ 1.81
Granted .....................................167,500 $ 1.19- $ 1.25
Cancelled ..................................(208,934) $ 1.00- $ 1.18
Exercised ....................................(4,667) $ 1.00- $ 1.13
-----
Outstanding, December 31, 1997 ............ 663,399 $ 1.00- $ 1.81
Granted ................................... 767,300 $ 2.00- $ 4.63
Cancelled .................................. (87,669) $ 1.13- $ 3.75
Exercised ................................. (57,531) $ 1.00- $ 2.38
-----
Outstanding, December 31, 1998 ........... 1,285,499 $ 1.00- $ 4.63
Granted .................................. 2,183,500 $ 1.81- $ 3.00
Cancelled ................................. (129,953) $ 1.25- $ 4.19
Exercised ..................................(134,046) $ 1.00- $ 2.25
-----
Outstanding, December 31, 1999 .............3,205,000 $ 1.00- $ 4.63
-----
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for stock-based compensation. 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 SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss for the
year ended December 31, 1999 would have increased by approximately
$1,487,000 and the Company's net income for the year ended December 31,
1998 would have decreased by $541,000. For the year ended December 31,
1997 the Company's net loss would have increased by $73,000.
Under SFAS No. 123, the fair value of the options granted during 1999 is
estimated at approximately $5,099,000 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no
dividend yield, expected volatility of 211%, risk-free interest rate of
5.3%, and expected average life of 5.6 years. At December 31, 1999 there
were 352,276 exercisable options. In 1998, the value was estimated at
approximately $2,258,000 on the date of grant assuming no dividend yield,
expected volatility of 236%, risk-free interest rate of 5.1% and expective
average life of 6.7 years. In 1997, the value was estimated at
approximately $208,000 on the date of grant assuming no dividend yield,
expected volatility of 277%, risk-free interest rate of 5.5% and expected
average life of 5.5 years.
The following table summarizes information as of December 31, 1999
concerning currently outstanding and exercisable options:
Options Outstanding Options Exercisable
Weighted Average Weighted Number
Range of Average Number Remaining Number Average
Exercise Prices Outstanding Contractual Exercise
Life Exercise Price Exercisable Price
- ------------------------------------------------- ----------------- ---
$1.00-$2.50 ..... 2,618,900 5.0 $ 2.07 280,975 $ 1.36
$2.51-$4.63 ....... 586,100 4.8 $ 3.22 71,301 $ 3.56
8. RELATED PARTY TRANSACTIONS
In October 1997, the Company received a promissory note from an individual
who subsequently became an officer, director and shareholder of the
Company in the amount of $1,930,915 bearing interest of 5.8% per annum.
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 common stock (see Note 7). The shares were issued at a
discounted value of $0.80 per share based on the restrictions of this
agreement. The note called for semi-annual installments with the final
payment due on April 15, 2000. In June 1998, the note and accrued interest
were sold to an outside party at a discount of $44,274, which was recorded
as a reduction of the common stock originally issued.
In May 1999, the Company issued 60,000 restricted common shares to
QUALCOMM, a major supplier to the Company and a minority shareholder, as
full payment on $153,600 of certain accounts payable. Their shares were
issued at fair market value of $2.56.
In March 1995, the Company issued 1,112,265 shares of common stock to
QUALCOMM for $737,000. The purchase price of the shares was 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 a license and distribution agreement (see Note 9). The
transaction was recorded as a note receivable for common stock issued
which was reduced as discounts were earned. Through December 31, 1998, a
total of $737,000 in discounts had been earned and the balance of the note
receivable eliminated.
9. LICENSE AND DISTRIBUTION AGREEMENT
In 1990, the Company entered into a license and distribution agreement
(the "Distribution Agreement"), as amended through June 29, 1999, with
QUALCOMM. Pursuant to the Distribution Agreement, the Company was
appointed QUALCOMM's exclusive and non-exclusive distributor, in defined
territories, of the OmniTRACS(R) 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 messaging 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 Distribution Agreement the Company is also required to purchase
a certain number of units annually. The minimum purchase requirement for
each calendar year is 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% per year. The minimum purchase were not met for
the year ended December 31 1999, but were met for the years ended December
1998 and 1997. Because the Company did not meet the required 1999 minimum
purchase requirement, the Company may be subject to a reduction of
discounts in pricing. As of March 2000, the Company had not been advised
by QUALCOMM that it will be subject to a decrease in pricing discounts and
management believes that such reduction will not occur.
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. The Distribution Agreement provides that
QUALCOMM shall take such steps which are reasonable and necessary to
enable the Company to continue to provide the messaging services to its
existing end users.
The Agreement expires in 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. The Company has exercised its option to extend the
Distribution Agreement for the next additional five-year period.
10. 401(k) PLAN
In April 1999, the Company implemented a 401(k) plan allowing eligible
employees to contribute up to 10% of their salary, not to exceed $10,000
annually. The Company matches 25% of an employee's contribution with a
three year vesting schedule. During 1999 the Company contributed $44,587
to the plan.
Previously, the Company had a Salary Reduction Simplified Employer Plan
(SAR-SEP) allowing eligible employees to contribute savings on a pretax
basis. Employees were able to contribute up to 15% of their salary, not to
exceed $9,500 annually. A discretionary contribution was determined each
year by the Company. In 1998 and 1997 the Company did not elect to
contribute to the Plan, which was terminated in 1998.
11. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates three reportable business segments: communications,
video compression and satellite transmission technology. The Company's
reportable segments are strategic business units that offer different
products and services. They are managed separately based on fundamental
differences in their operations.
The communications segment consists of the operations of BOATRACS,
Gulfport, BOATRACS Europe and OceanTrac. The communications segment has
exclusive distribution rights in the United States for marine application
of the OmniTRACS(R) system of satellite-based communication and tracking
systems manufactured by QUALCOMM. In addition, the Company's wholly owned
subsidiaries, Europe and OceanTrac have agreements with QUALCOMM's
authorized service providers in Europe and Canada for marine distribution
of OmniTRACS in parts of Europe and Canada. Gulfport is a provider of
software applications and service solutions to the commercial work boat
and petroleum industries, including customers of BOATRACS.
The video compression segment consists of the operations of Enerdyne,
which the Company acquired in July 1998 (see Note 2). Enerdyne is a
provider of versatile, high performance, digital video compression
products to the government and commercial markets.
The satellite transmission technology segment consists of the operations
of ICTI, which the Company acquired effective August 1999 (see Note 2).
ICTI is engaged in designing and implementing bandwidth efficient
multimedia satellite networks and develops customized software solutions
to manage and allocate available satellite power/bandwidth resources to
optimize a satellite system's lifecycle costs.
In 1998 there were two segments, communications and video compression. In
1997 there was only one segment, communications. Corporate overhead
expenses have been allocated based on revenue percentages of each segment
to total revenues.
Information by business segment for the year ended December 31, 1999 is
set forth below.
Commun- Video Satellite
ication Compression Technology Consolidated
------------ ------------ ------------- -----------
Revenues $6,889,171 $ 4,056,674 $3,349,609 $14,295,454
Income (loss) from $1,096,865 $(1,582,091) $337,500 $(147,726)
operations
Interest income $39,918 $5,497 $19,850 $65,265
Interest expense $15,642 $761,200 $407 $777,249
Depreciation and $301,615 $1,922,000 $246,067 $2,469,682
amortization
Total assets $3,628,160 $29,002,875 $7,579,347 $40,210,382
Information by industry segment for the year ended December 31, 1998 is
set forth below.
Video
Communications Compression Consolidated
------------- ------------ ------------
Revenues $ 7,914,508 $ 2,258,812 $ 10,173,320
Income from operations $186,233 $146,560 $332,793
Interest revenue $43,040 $4,383 $47,423
Interest expense $413,335 $413,335
Depreciation and amortization $272,816 $910,580 $1,183,396
Total assets $ 3,844,938 $29,225,548 $33,070,486
The Company has two foreign subsidiaries: Boatracs (Europe) B.V. and
OceanTrac. Boatracs (Europe) B.V. is located in The Netherlands and provides
communication services to the European market.OceanTrac provides communication
services in Eastern Canada. In addition, Enerdyne and ICTI have foreign
sales. The following table presents revenues and long lived assets
(excluding goodwill) for each of the geographical areas in which the Company
operates
1999 1998 1997
------------------- ------------------- ------------------
Long- Long- Long-
Lived Lived Lived
Revenues Assets Revenues Assets Revenues Assets
----------------- ------------------ -----------------
United
States $10,560,880 $16,979,213 $9,503,838 $18,087,961 $4,358,430 $159,934
Interna
tional 3,734,574 60,004 669,482 109,511 845,486 63,929
---------- --------- -------- --------- -------- --------
Total $14,295,454 $17,039,21 $10,173,32 $18,197,472 $5,203,916 $223,863
---------- --------- --------- --------- -------- ---------
12. COMMITMENTS
At December 31, 1999, the Company had outstanding letters of credit
totaling $50,352, which serve as performance bonds under contracts with the
Mexican Secretary of National Defense. The letters of credit are
collaterized by a certificate of deposit in the amount of $16,300 and a
money market account in the amount of $34,052.
13. SUBSEQUENT EVENTS
On February 28, 2000 the Company signed a Change in Terms Agreement with a
bank increasing the line of credit to $1,750,000 and extending the expiry
date to December 29, 2001 (see Note 5.)
EXHIBIT 21
Wholly owned subsidiaries of the Registrant
BOATRACS (Europe) B.V., a Netherlands corporation
Enerdyne Technologies, Inc., a California corporation
Innovative Communications Technologies, Inc., a Delaware corporation
OceanTrac, Inc., a Canadian corporation
EXHIBIT 23.1
DELOITTE & TOUCHE, LLP LETTERHEAD
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
numbered 333-53141, 333-01817 and 333-80765 of Advanced Remote Communication
Solutions, Inc. on FORM S-8 on our report dated March 16, 2000, appearing in
this Annual Report on Form 10-KSB of Advanced Remote Communication Solutions,
Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE, LLP
/S/ DELOITTE & TOUCHE, LLP
San Diego, California
March 29, 2000
First National Bank*
CHANGE IN TERMS AGREEMENT
Borrower: Advanced Remote Communications Solutions, Inc.
a California corporation fka Boatracs, Inc.,
California corporation
Enerdyne Technologies, Inc., a California
corporation
10675 Sorrento Valley Road, #200
San Diego, CA 92121
Lender:
First National Bank
401 West A Street
P.O. Box a5625
San Diego, CA 92101
Principal Amount: $1,750,000.00 Initial Rate: 8.750% Date of Agreement:
February 28, 2000
DESCRIPTION OF EXISTING INDEBTEDNESS. The Promissory Note dated December 29,
1998 in the original amount of $750,000.00, originally maturing December 29,
2000 as modified by a Change In Terms
Agreement dated February 4, 2000.
DESCRIPTION OF COLLATERAL. Commercial Security Agreement dated December 29,
1998, granting Lender a security interest in all business assets, patents and
trademarks granted by Enerdyne Technologies, Inc. as perfected by UCC-1
Financing Statement filed on January 7, 1999 with the California Secretary of
Sate as file no. 9901160899 and a LICC-1 Financing Statement filed on January
12, 1999 with the Mississippi Secretary of State as file no. 01284984.
Commercial Security Agreement dated December 29, 1998, granting Lender a
security interest in all business assets and stock granted by Boatracs, Inc. as
perfected by LICC-1 Financing Statement filed on January 7, 1999 with the
California Secretary of State as file no. 9901160891 and a UCC-1 Financing
Statement filed on January 12, 1999 with the Mississippi Secretary of State as
file no. 01284982.
Commercial Security Agreement dated December 29, 1998 granting a security
interest in all business assets granted by Boatracs (Europe) B.V. and Oceantrac
Incorporated as perfected by LICC-1 Financing Statement filed on January 28,
1999 with the California Secretary of State as file no. 9902960298 and a UCC-1
Financing Statement filed on January 19, 1999 with the Mississippi Secretary of
State as file no. 01286380.
Commercial Security Agreement dated February 4, 2000 granting a security
Interest in all business assets and stock granted by Innovative Communications
Technologies, Inc. as perfected by UCC-1 Financing Statement to be filed
concurrently with the execution of this agreement.
DESCRIPTION OF CHANGE IN TERMS. 1) Increase line of credit amount from
$750,000.00 to 1,750,000.00.
2) Extension of maturity date to December 29, 2001
3) Borrower shall cause Innovative Communications Technologies, Inc. to
deliver to Lender a fully executed Landlord's Consent for the lease at 9201
Gaither Road, Gaithersberg, Maryland
4) Debt to EBITDA ratio increased from 3.0 to 3.50
5) Amend and restate Borrowing Bass as follows: The words "Borrowing Base"
shall mean as determined by Lender from time to time, the lesser of (a)
$1,750,000.00; or (b) the sum of (i) up to 80% of Eligible Accounts, plus (it)
the lesser of (1) $300,000.00 or (2) up to 50% of the aggregate amount of
Eligible Inventory less related trade accounts payable. In determining the
amount of the Borrowing Bass, all Eligible Accounts and Eligible Inventory of
all Borrowers shall be included.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms
of the original obligation or obligations, including all agreements evidenced
or securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lencler's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a
satisfaction of the obligation(s). It is the intention of Lender to retain as
liable parties all makers and endorsers of the original obligation(s),
including accommodation parties, unless a party is expressly released by Lender
in writing. Any maker or endorser, including accommodation makers, will not be
released by virtue of this Agreement. If any person who signed the original
obligation does not sign this Agreemprit below, then all persons signing below
acknowledge that this Agreement is given conditionally, based on the
representation to Lender that the non-signing party consents to the changes and
provisions of this Agreement or otherwise will not be released by it. This
waiver applies not only to any initial extension, Modification or release, but
also to all such subsequent actions.
CHANGE IN TERMS AGREEMENT
(Continued)
Page 2
BORROWER:
ADVANCED REMOTE COMMUNICATIONS SOLUTIONS, INC. A CALIFORNIA CORPORATION
FKA BOATRACS, INC., A
CALIFORNIA
CORPORATION
By:/S/ MICHAEL SILVERMAN
MichaeL Silverman, Chairman of the Board/CEO of
Advanced Remote Communication Solutions, Inc.
a California corporation fka Boatracs, Inc., a
California corporation
ENERDYNE TECHNOLOGIES INC., A CALIFORNIA CORPORATION
By:/s/ Michael Silverman
Michael Silverman, Chairman of the Board/CEO of
Enerdyne Technologies, Inc., a California
corporation
Jon Gilbert
/s/ Jon Gilbert
