UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1998 Commission File Number 0-8936
DATAMARINE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2454559
(State of Incorporation) (I.R.S. Employer Identification Number)
7030 220th SW, Mountlake Terrace, Washington 98043
(Address of principal executive offices)
(425)771-2182
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to filing requirements for the
past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 4, 1998
Common Stock, .01 Par Value 1,332,768
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,067,707 $ 2,981,853 $ 9,163,898 $ 9,191,009
Cost of products sold 2,035,863 1,941,525 6,159,445 6,154,471
--------------------------------------------------------
Gross profit 1,031,844 1,040,328 3,004,453 3,036,538
Operating expenses:
Research and development 347,641 339,138 1,060,304 979,878
Selling 637,452 603,406 1,899,433 1,882,512
General and administrative 388,006 280,871 1,137,928 904,766
Narrowband operations 68,242 69,749 207,130 197,217
--------------------------------------------------------
Operating expenses 1,441,341 1,293,164 4,304,795 3,964,373
--------------------------------------------------------
Operating loss (409,497) (252,836) (1,300,342) (927,835)
Interest expense (241,991) (134,944) (591,795) (393,088)
Other income, net 11,676 37,217 32,697 65,158
--------------------------------------------------------
Loss before income taxes (639,812) (350,563) (1,859,440) (1,255,765)
Benefit for income taxes -- (119,199) -- (424,441)
--------------------------------------------------------
Net loss $ (639,812) $ (231,364) $(1,859,440) $ (831,324)
========================================================
Net loss per share, basic $ (0.48) $ (0.18) $ (1.40) $ (0.63)
Net loss per share, diluted $ (0.48) $ (0.18) $ (1.40) $ (0.63)
Average shares outstanding, basic and diluted 1,330,671 1,314,790 1,327,271 1,311,427
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
July 4, September 27,
1998 1997
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 275,787 $ 532,896
Accounts receivable, net of allowance of $96,976 and
$234,973, respectively 1,741,622 2,030,641
Inventories 5,197,480 4,867,708
Prepaid expenses and other current assets 157,211 243,081
----------------------------
Total current assets 7,372,100 7,674,326
Property, plant and equipment 5,069,989 5,032,823
Less accumulated depreciation 3,355,882 3,062,703
----------------------------
Property, plant and equipment, net 1,714,107 1,970,120
Other assets, net 499,899 495,476
----------------------------
Total assets $ 9,586,106 $ 10,139,922
============================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable to bank $ 1,424,561 $ 1,367,561
Notes payable to related parties and others 994,697 850,887
Accounts payable 1,276,737 556,416
Accrued expenses 1,721,947 1,517,243
Current maturities of long-term debt and capital lease
obligations 1,858,447 133,286
----------------------------
Total current liabilities 7,276,389 4,425,393
Long-term debt and capital lease obligations, less current
maturities 125,869 1,815,693
----------------------------
Total liabilities 7,402,258 6,241,086
----------------------------
Redeemable preferred stock, $1 par value; none issued -- --
Stockholders' equity:
Convertible preferred stock, $1 par value, Authorized
1,000,000 shares; including redeemable preferred stock;
none issued -- --
Common stock, $.01 par value, Authorized 3,000,000 shares;
1,332,768 and 1,320,473 shares issued and outstanding,
respectively 13,328 13,205
Capital in excess of par value 3,941,087 3,815,415
Unearned compensation (34,395) (53,052)
Retained earnings (accumulated deficit) (1,736,172) 123,268
----------------------------
Total stockholders' equity 2,183,848 3,898,836
----------------------------
Total liabilities and stockholders' equity $ 9,586,106 $ 10,139,922
============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
July 4, June 28,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,859,440) $ (831,324)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 323,273 324,845
Gain on asset dispositions (16,185) --
Amortization of debenture discount and issue costs 223,140 88,127
Provision for losses on accounts receivable 47,944 48,111
Employee investment plan expense 21,071 36,287
Amortization of unearned compensation 18,657 11,990
Benefit of deferred income taxes -- (424,441)
Changes in operating assets and liabilities:
Accounts receivable 241,075 704,957
Inventories, prepaid expenses and other current assets (243,902) 246,984
Accounts payable and accrued expenses 941,210 (233,047)
-----------------------------
Net cash used in operating activities (303,157) (27,511)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, including self-
constructed equipment (1,225) (135,524)
Other 10,704 (31,463)
-----------------------------
Net cash provided by (used in) investing activities 9,479 (166,987)
FINANCING ACTIVITIES
Proceeds from sale of common stock 7,224 18,247
Proceeds from notes payable to related parties and others 100,000 --
Proceeds from bank and other borrowings 200,000 --
Principal payments on note payable to bank, capital lease
obligations and long-term debt (270,655) (135,446)
-----------------------------
Net cash provided by (used in) financing activities 36,569 (117,019)
Decrease in cash and cash equivalents during period (257,109) (311,517)
Cash and cash equivalents at beginning of period 532,896 330,076
-----------------------------
Cash and cash equivalents at end of period $ 275,787 $ 18,559
=============================
Supplementary Cash Flow Information
Interest paid $ 128,880 $ 67,843
Capital lease obligations incurred to acquire equipment 35,941 26,271
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited, consolidated, condensed quarterly financial
statements have been prepared in accordance with instructions to Form 10-Q and,
therefore, do not include all information and footnotes normally included in
financial statements prepared in conformity with Generally Accepted Accounting
Principles ("GAAP"). The information furnished reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for the fair statement of financial position, results of
operations and cash flows for the interim period. In the opinion of management,
they fairly represent the operating results of the Company for the periods
presented. The year-end condensed balance sheet was derived from audited
financial statements, but does not include all disclosures required by GAAP.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. Accounting policies
used in fiscal 1998 are consistent with those used in fiscal 1997. These
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's annual report on
Form 10-K for the year ended September 27, 1997.
For the quarter ended July 4, 1998 the Company had total revenue of $3,067,707
which was less than the $4,000,000 minimum required by the financial covenants
of the Company's bank loan agreement. In addition, as of July 4, 1998 the
Company had overdrawn its bank line by approximately $135,000. The bank has not
waived either the covenant violations or the over advance. Based on discussions
with the bank the Company must bring the loan into compliance by eliminating
the over advance and modifying the collateral reporting requirements by August
31, 1998. The Company expects that it will meet the banks requirements but
there can be no assurance that it will do so. In the absence of a waiver, or if
the Company fails to meet the August 31st requirements, the bank could declare
the note immediately due and payable which would severely limit the Company's
cash and working capital, and likely prevent the Company from being able to
fund current operating expenses. The Company does not currently have available
funds to repay the note if payment is demanded. The Company is currently
negotiating a new bank loan agreement with a different lender in order to
obtain additional working capital.
2. Inventory Components:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
July 4, 1998 September 27, 1997
------------ ------------------
<S> <C> <C>
Finished Goods $2,007,297 $1,797,292
Work-In-Process 172,591 178,948
Raw Material 3,017,592 2,891,468
------------------------------
$5,197,480 $4,867,708
------------------------------
</TABLE>
3. Income Taxes:
Based on the loss incurred in fiscal 1997 and management's expectation that the
Company will incur a loss for fiscal 1998, a valuation allowance equal to 100%
of the Company's net deferred tax asset has been established as of July 4, 1998
and September 27, 1997.
4. Earnings Per Share:
Earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects
adjustments for the assumed exercise of outstanding stock options and other
potential issuances to the extent these have a dilutive effect on the
computation.
5. Reclassifications:
Certain reclassifications have been made to the prior quarters' financial
statements in order to conform to the fiscal 1998 presentation, with no impact
on previously reported net loss, stockholders' equity, or cash flow.
6. New Accounting Standards:
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This
statement specifies the computation, presentation and disclosure requirements
for earnings per share ("EPS"), to simplify the existing computational
guidelines and increase comparability on an international basis. The statement
is effective for interim and annual reporting periods ending after December 15,
1997. This statement replaces "primary" EPS with "basic" EPS, the principal
difference being the exclusion of common stock equivalents in the computation
of basic EPS. In addition, this statement requires the dual presentation of
basic and diluted EPS on the face of the consolidated statements of operations.
The Company adopted the provisions of this statement for the current fiscal
year. However, because there was a net loss the statement did not effect EPS
disclosure.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." This statement requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The statement will be
effective for fiscal years beginning after December 15, 1997. Reclassification
for earlier periods is required for comparative purposes. The Company does not
expect the statement to have a material impact on its consolidated financial
position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information."
This statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly, and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for fiscal years beginning after December 15, 1997.
Reclassification for earlier periods is required, unless impracticable, for
comparative purposes. Management has not yet determined the effects, if any, of
SFAS 131 on the consolidated financial statements.
In June 1998 the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The statement will be effective
for fiscal years beginning after June 15, 1999. Since the Company does not use
derivative instruments management does not expect the statement to have any
effect on its consolidated financial position or results of operations.
7. Prior Period Adjustment:
Amounts reported herein for the quarter and nine month period ended June 28,
1997 are after restatement to correct an error in the value of work-in-process
inventory as originally reported. The effect of such restatement was to
increase net loss and decrease retained earnings by $72,660 or $.06 per share
for the quarter ended June 28, 1997 and $224,063 or $.17 per share for the nine
months ended June 28, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Statements included in this report which are not historical in nature are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, and as such may involve risks
and uncertainties. This Quarterly Report on Form 10-Q and the Annual Report on
Form 10-K contain certain detailed factors that could cause the Company's
actual results to materially differ from forward-looking statements made by the
Company.
Introduction
Datamarine International, Inc. and its subsidiaries (collectively the
"Company") manufacture radio communications and navigation instrumentation
products. Presently, the Company's primary operations are in a single industry
segment, namely electronics. The Company also owns and manages specialized
mobile radio ("SMR") licenses in the 220 MHz radio service, although such
operations to date have been immaterial.
Datamarine International, Inc. was incorporated in Massachusetts on April 23,
1969. All of the Company's product development, manufacturing facilities and
marketing activities are based at its Mountlake Terrace, Washington location.
The Company has sales and service facilities on the East and West coasts of the
United States and in Sydney, Australia. Marine communication products, branded
SEA, and marine instrumentation products, branded Datamarine, are sold
worldwide through approximately 500 dealers in the United States and
approximately 20 foreign countries.
Sales of narrowband communications products for the land mobile radio market
are made through the Company's wholly-owned subsidiary, SEA, Inc. ("SEA"), to
business users nationwide. SEA has developed and marketed narrowband radio
equipment since 1984 and began selling its current line of narrowband equipment
for use in the 220 MHz band in the fourth quarter of fiscal 1993.
On October 19,1992, the Federal Communications Commission ("FCC") conducted a
lottery which led to the issuance of approximately 3,500 licenses for a new
land mobile service in the 220-222 MHz band. The FCC adopted challenging
technical parameters for the equipment to be used in the 220 MHz radio service.
By establishing these parameters the FCC intended to encourage the development
of new spectrum-efficient technologies for land mobile applications. This
service is mandated to use narrowband technologies which will result in a
fivefold increase in the number of communications channels as compared to
conventional 25 KHz technologies. SEA was the first manufacturer to receive FCC
type acceptance for 220 MHz radio equipment. SEA shipped its first 220 MHz
radios in July 1993.
As of September 30, 1996 ownership of licenses for locations which had not met
regulatory build-out requirements reverted to the Federal government. Until
such time as new licenses are issued, demand for the Company's higher margin
base station products will be minimal. The FCC has announced that an auction of
the remaining 220 MHz spectrum licenses will commence September 15, 1998. The
auction will be for licenses covering "Economic Areas", "Regions" and
"Nationwide" areas as defined by the FCC.
During fiscal 1995 Narrowband Network Systems, Inc. ("NNS") was incorporated in
the state of Washington as a subsidiary of SEA, and SEA owns 97.5% of NNS's
outstanding stock. NNS was formed to participate in the business of providing
SMR services. NNS has entered into both "Management Agreements" and "Operator
Agreements" with the holders of 220 MHz licenses granted by the FCC related to
SMR services in approximately 47 market areas across the United States.
Management Agreements require NNS to construct, develop and operate SMR systems
in certain markets. Operator Agreements require NNS to provide licenses, system
facilities and "SMR Operators" in certain markets. The Management Agreements
typically allow NNS to acquire the license holder's interest in exchange for a
percentage of gross receipts from the system and a percentage of any profit
realized by NNS upon the system's ultimate disposition. The Operator Agreements
typically give NNS a contractual percentage of system revenue based on the
level of support provided to each system. The Company has met all regulatory
build-out requirements related to its licenses. Because NNS commenced only
limited operations at the end of 1995, revenues have been immaterial since
inception.
Foreign sales typically account for approximately 6% of the Company's
consolidated sales. In recent years, foreign sales have represented a smaller
percentage of total sales because narrowband products are only sold
domestically.
Products and Marketing
Land Mobile Communications -- The Company's narrowband land mobile radio system
products have been type accepted by the FCC for use in the 220 MHz radio
service. These products consist of hand held, mobile and base station
components, utilizing narrowband technology in an enhanced form of single
sideband that is ideal for the 5 KHz channel width used in the 220 MHz radio
service, and were developed for sale to business users of private land mobile
radio services. The narrowband technology helps solve the problem of frequency
congestion by allowing five narrowband channels to be operated within the same
spectrum as would presently be utilized by one 25 KHz FM channel.
Marine Communications -- The SEA marine communications products are high
performance radios used on commercial vessels, fishing vessels and yachts over
40 feet in length. The product line currently consists of 28 products with
suggested list prices between $765 and $40,000. The SEA products include HF/SSB
and VHF/FM radios, Satcom C, Weather fax, Search and rescue transponders
(SARTS) and Global Maritime Distress and Safety Systems (GMDSS).
Marine Instrumentation -- Marine instrumentation products are sold primarily to
the recreational boating market. The products are well established in the
marketplace with up-to-date instruments for each type of pleasure craft: small
boats and yachts; sail and power; inshore and offshore. The Datamarine product
line currently consists of 15 products sold under the DART, LINK, Corinthian
and ChartLINK names, with suggested list prices between $400 and $3,900. The
Datamarine products include depth sounders, knotmeters and water temperature
instruments, wind speed and direction instruments, integrated instruments, and
electronic chart plotters.
Results of Operations
The following table sets forth the components of sales and gross profit by
product line for the Quarter Ended July 4, 1998 and the comparable quarter in
the prior fiscal year.
<TABLE>
<CAPTION>
Sales Gross Profit
------------------------ -------------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<C> <C> <S> <C> <C>
$ 695,731 $ 863,072 Land Mobile Communications $ 64,017 $ 160,387
1,699,754 1,402,041 Marine Communications 689,985 650,507
672,222 716,740 Marine Instrumentation 277,842 229,434
------------------------ -------------------------
$3,067,707 $2,981,853 Total $1,031,844 $1,040,328
------------------------ -------------------------
</TABLE>
Sales order backlogs at July 4, 1998 were as follows: Land Mobile
Communications $217,000, Marine Communications $511,000 and Marine
Instrumentation $25,000.
The following table sets forth income and expense items as a percentage of net
sales for the quarter, and the percentage change in those items from the
comparable quarter in the previous two years.
<TABLE>
<CAPTION>
Income and Expense Items as Percentage
a Percentage of Net Sales Increase (Decrease)
- --------------------------- -------------------
1997 1996
July 4, June 28, to to
1998 1997 1998 1997
------- -------- ----- -----
<C> <C> <S> <C> <C>
100% 100% Net sales 3 (32)
66 65 Cost of products sold 5 (26)
34 35 Gross profit (1) (41)
47 43 Operating expenses 11 (7)
(13) (8) Operating loss 62 (167)
(8) (5) Interest expense 79 19
(21) (12) Loss before taxes 83 (216)
-- (4) Benefit for income taxes (100) (201)
(21%) (8%) Net loss 177 (226)
</TABLE>
Net sales increased by $85,854 or 3% compared to the same quarter in the prior
fiscal year. Net sales of the Company's land mobile products decreased by
$167,341 or 19% compared to the same quarter in the prior fiscal year. Net
sales of the Company's marine communications systems increased by $297,713 or
21%. Net sales of the Company's marine instrumentation systems decreased by
$44,518 or 6% compared to the same quarter in the prior fiscal year.
Sales of marine communications and marine instrumentation products continued to
contribute to the Company's performance and are profitable on a product line
basis. Marine communications sales outperformed management's estimates and
marine instrument sales were lower than management's estimates. Overall, the
marine segment continued to improve. Land mobile revenues were comprised almost
entirely of mobile radio products and will continue to be so until new licenses
are auctioned by the FCC. The FCC announced that the auction will commence on
September 15, 1998 after which time the Company expects sales of land mobile
products to increase.
Gross profit was $1,031,844 (34% of net sales), as compared to $1,040,328 (35%
of net sales) in the prior year, a decrease of $8,484 or 1%. The gross profit
on land mobile products was $64,017 (9% of such sales), as compared to $160,387
(19% of such sales) in the prior year, a decrease of $96,370 or 60%. The gross
profit on marine communications systems was $689,985 (41% of such sales), as
compared to $650,507 (46% of such sales) in the prior year, an increase of
$39,478 or 6%. The gross profit on marine instrumentation systems was $277,842
(41% of such sales), as compared to $229,434 (32% of such sales) in the prior
year, an increase of $48,408 or 21%. The overall gross profit margin was
similar to the prior quarter as a result of gains in marine product margins
being offset by lower margins in land mobile products. Land mobile margins vary
depending upon the sales mix across the product line, and mobile radio products
typically have substantially lower gross margins than base station equipment.
The market for communications products is very competitive and downward
pressure on selling prices for mobile radios is expected to continue.
Management anticipates that land mobile gross margin will improve when
shipments of base station products resume upon the completion of the upcoming
FCC spectrum auction. The profit margins on marine communication and marine
instrumentation products vary according to product sales mix. Margins for
marine communications products are expected to remain about the same or improve
slightly as the Company continues to ship GMDSS systems. Marine instrumentation
margins are expected to remain about the same as the current quarter.
Operating expenses were $1,441,341 (47% of net sales), as compared to
$1,293,164 (43% of net sales) last year, an increase of $148,177 or 11%.
Engineering expenses were comparable to the prior year as a result of increased
consumable supplies being offset by lower engineering consulting services.
Total selling expenses increased 6%. Salaries, commissions and other direct
selling expenses increased slightly while advertising expenses declined.
Administrative expenses increased $107,135 or 38%. State tax expense was higher
because last year's expense was reduced by a refund of previously paid taxes.
Professional fees increased in connection with the litigation settled in the
previous quarter and corporate insurance expense increased due to higher
liability limits. Narrowband operating expenses were comparable to the same
quarter in the prior fiscal year.
Interest expense increased $107,047 as a result of new borrowings during 1997
and the first quarter of 1998 in the form of Subordinated Short Term Notes, and
the higher effective cost of both the Short Term Notes and the Subordinated
Convertible Debentures. The maturity date of the Subordinated Convertible
Debentures was changed from December 2000 to February 1999 which resulted in
increased amortization of the related discount and debt issuance costs. During
April 1998 the Company issued additional warrants to the holders of the
Subordinated Short Term Notes in connection with extending the maturity date of
those notes. The $97,500 value of the warrants is amortized to expense over the
one year term of the extension.
Other income was lower than the comparable quarter because the Company received
a refund from a vendor dispute in the prior year.
Income taxes were zero for the quarter as compared to a benefit of $119,199 in
the prior year. Based on the loss incurred in fiscal 1997 and management's
expectation that the Company will incur a loss for fiscal 1998, a valuation
allowance equal to 100% of the Company's net deferred tax asset has been
established as of July 4, 1998 and September 27, 1997.
Liquidity and Capital Resources
On July 4, 1998, the Company's principal sources of liquidity consisted of
approximately $276,000 in cash and equivalents. The Company had drawn
$1,424,561 on its $2,000,000 working capital bank line and there was no
additional availability because the line was over advanced by $135,000. The
Company continues to have operating losses and negative cash flow from
operating activities. The Company's current operating plans include a strategy
for reducing expenses and certain cash payments in order to decrease the net
cash used. Based on these operating plans, the Company believes its cash flow
from operations, available bank lines of credit and other committed financing
sources are sufficient to meet its working capital and other capital
requirements at least through October 3, 1998. In order to redeem its
obligations as scheduled in 1999, and meet its operating and capital
requirements into fiscal 1999, the Company will require additional funding. The
Company is considering various sources of funding including additional private
or publicly placed debt or equity, mergers, or the sale of assets. No such
funding is committed at this time, and there is no assurance that the Company
will be able to obtain additional financing on acceptable terms.
For the quarter ended July 4, 1998 the Company had total revenue of $3,067,707
which was less than the $4,000,000 minimum required by the financial covenants
of the Company's bank loan agreement. In addition, as of July 4, 1998 the
Company had overdrawn its bank line by approximately $135,000. The bank has not
waived either the covenant violations or the over advance. Based on discussions
with the bank the Company must bring the loan into compliance by eliminating
the over advance and modifying the collateral reporting requirements by August
31, 1998. The Company expects that it will meet the bank's requirements but
there can be no assurance that it will do so. In the absence of a waiver, or if
the Company fails to meet the August 31st requirements, the bank could declare
the note immediately due and payable which would severely limit the Company's
cash and working capital, and likely prevent the Company from being able to
fund current operating expenses. The Company does not currently have available
funds to repay the note if payment is demanded. The Company is currently
negotiating a new bank loan agreement with a different lender in order to
obtain additional working capital.
Other
In April 1998 the Company announced it has agreed in principle to merge its NNS
subsidiary into a new entity with three other unrelated mobile communications
companies. The merger is subject to, among other things, documentation, due
diligence, funding of the new entity, and approval by the Company's Board of
Directors and lenders. Any gain or loss that may be recognized on the
transaction cannot be determined until an agreement is finalized.
In June 1998 the Company announced that it had engaged the investment banking
firm of Wedbush Morgan Securities in connection with the private placement of
not less than $5,000,000 in equity. Proceeds of the placement will be used to
retire the Company's subordinated debentures and increase working capital. The
ultimate proceeds of such efforts, if any, and the closing date of such a
transaction cannot be determined at this time.
PART II - OTHER INFORMATION
Items 1, 2, 3 and 4
There were no reportable events or matters under these captions during the
quarter ended July 4, 1998.
Item 5. Other Information
The Company's common stock had been listed on the Nasdaq SmallCap Market via an
exception from the net tangible assets requirement. Such exception expired June
30, 1998 and on July 8, 1998 the Company's shares began trading on the
OTC-Bulletin Board under the symbol "DMAR".
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 Debenture Purchase Agreement with exhibits, incorporated by reference to
Annual Report on Form10-K for the Fiscal Year Ended September 30, 1995.
4.1 Subordinated Notes Agreement with exhibits, incorporated by reference to
Annual Report on Form10-K for the Fiscal Year Ended September 27, 1997.
4.2 Terms for Amendment of December 19, 1995 Debenture Agreement,
incorporated by reference to Annual Report on Form10-K for the Fiscal
Year Ended September 27, 1997.
10.1 Datamarine International, Inc. 1991 Stock Option Plan, incorporated by
reference to Registration Statement 33-48532 on Form S-8.
10.2 1992 Stock Option Plan for Non-employee Directors, incorporated by
reference to Annual Report on Form 10-K for the Fiscal Year Ended October
1, 1994.
10.3 Debenture Purchase Agreement with exhibits, same as 4 above.
10.4 1995 Stock Option Plan for Non-employee Directors, incorporated by
reference to Annual Report on Form10-K for the Fiscal Year Ended
September 28, 1996.
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
July 4, 1998. Form 8-K dated June 19, 1998. Engagement of Wedbush Morgan
Securities in connection with equity private placement.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datamarine International, Inc.
(Registrant)
Date: August 18, 1998 /s/ JAN KALLSHIAN
------------------- -------------------------------------
Jan Kallshian
Chief Financial Officer
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