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 January 3, 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 January 3, 1998
Common Stock, .01 Par Value 1,329,912
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
January 3, December 28,
1998 1996
---------- ------------
<S> <C> <C>
Net sales $3,091,724 $2,823,077
Cost of products sold 2,140,087 1,799,601
-------------------------
Gross profit 951,637 1,023,476
Operating expenses:
Research and development 369,871 304,778
Selling 676,572 661,642
General and administrative 310,142 273,492
Narrowband operations 68,458 64,138
-------------------------
Operating expenses 1,425,043 1,304,050
-------------------------
Operating loss (473,406) (280,574)
Interest expense (157,810) (122,876)
Other income, net 9,711 20,072
-------------------------
Loss before income taxes (621,505) (383,378)
Benefit for income taxes -- (128,539)
-------------------------
Net loss $ (621,505) $ (254,839)
=========================
Loss per share, basic $ (0.47) $ (0.19)
Loss per share, fully diluted $ (0.47) $ (0.19)
Average shares outstanding, basic and
fully diluted 1,321,661 1,309,691
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 3, September 27, December 28,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 341,909 $ 532,896 $ 46,087
Accounts receivable, net of allowance of $248,428 $234,973 and
$186,799, respectively 1,949,790 2,030,641 3,174,550
Inventories 5,012,237 4,867,708 5,232,393
Prepaid expenses and other current assets 151,102 243,081 166,126
Deferred income taxes, current -- -- 332,825
------------------------------------------
Total current assets 7,455,038 7,674,326 8,951,981
Property, plant and equipment 5,069,989 5,032,823 5,227,596
Less accumulated depreciation 3,162,346 3,062,703 2,984,758
------------------------------------------
Property, plant and equipment, net 1,907,643 1,970,120 2,242,838
Deferred income taxes, noncurrent -- -- 533,623
Other assets, net 479,993 495,476 521,294
------------------------------------------
Total assets $9,842,674 $10,139,922 $12,249,736
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable to bank $1,224,561 $ 1,367,561 $ 1,750,000
Notes payable to related parties and others 972,415 850,887 --
Accounts payable 856,824 556,416 726,778
Accrued expenses 1,532,346 1,517,243 1,484,217
Current maturities of long-term debt and capital lease
obligations 108,458 133,286 147,758
------------------------------------------
Total current liabilities 4,694,604 4,425,393 4,108,753
Long-term debt and capital lease obligations, less current
maturities 1,850,626 1,815,693 1,854,471
------------------------------------------
Total liabilities 6,545,230 6,241,086 5,963,224
------------------------------------------
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;
1,329,912, 1,320,473 and 1,309,786 shares issued and
outstanding, respectively 13,299 13,205 13,098
Capital in excess of par value 3,830,027 3,815,415 3,647,856
Unearned compensation (47,645) (53,052) (11,202)
Retained earnings (498,237) 123,268 2,636,760
------------------------------------------
Total stockholders' equity 3,297,444 3,898,836 6,286,512
------------------------------------------
Total liabilities and stockholders' equity $9,842,674 $10,139,922 $12,249,736
==========================================
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
January 3, December 28,
1998 1996
---------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(621,505) $(254,839)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 109,609 104,588
Gain on asset dispositions (5,395) --
Amortization of debenture discount and issue costs 53,429 33,875
Provision for losses on accounts receivable 16,392 15,463
Employee investment plan expense 10,092 --
Amortization of unearned compensation 5,407 1,219
Benefit of deferred income taxes -- (128,539)
Changes in operating assets and liabilities:
Accounts receivable 64,459 145,039
Inventories, prepaid expenses and other current assets (52,550) 34,253
Accounts payable and accrued expenses 320,906 (128,939)
------------------------
Net cash used in operating activities (99,156) (177,880)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, including self-
constructed equipment (1,225) (58,475)
Other (3,783) (6,083)
------------------------
Net cash used in investing activities (5,008) (64,558)
FINANCING ACTIVITIES
Proceeds from sale of common stock 4,614 3,198
Proceeds from other borrowings 100,000 --
Principal payments on other borrowings -- --
Principal payments on revolving line of credit and long-term
debt (191,437) (44,749)
------------------------
Net cash used in financing activities (86,823) (41,551)
Decrease in cash and equivalents during period (190,987) (283,989)
Cash and equivalents at beginning of period 532,896 330,076
------------------------
Cash and equivalents at end of period $ 341,909 $ 46,087
========================
Supplementary Cash Flow Information
Interest paid $ 66,858 $ 38,358
Capital lease obligations incurred to acquire equipment 35,941 --
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
NOTES TO 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.
2. Inventory Components:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
January 3, 1998 September 27, 1997 December 28, 1996
--------------- ------------------ -----------------
<S> <C> <C> <C>
Finished Goods $ 1,762,826 $ 1,797,292 $ 1,189,296
Work-In-Process 218,080 178,948 324,620
Raw Material 3,031,331 2,891,468 3,718,477
-----------------------------------------------------
$ 5,012,237 $ 4,867,708 $ 5,232,393
-----------------------------------------------------
</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 deferred tax asset has been established.
4. Earnings Per Share:
Earnings per share is computed using the weighted average number of common
shares outstanding during the period, adjusted to reflect the assumed
exercise of outstanding stock options to the extent these have a dilutive
effect on the computation. Common stock equivalents are excluded from the
calculation when they are antidilutive.
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 quarter. However, because
there was a net loss the statement did not effect EPS disclosure.
7. Prior Period Adjustment
Amounts reported herein for the quarter ended December 28, 1996 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 $62,461, or $.04 per share.
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 300
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 for the remaining 220 MHz spectrum licenses will
commence on May 19, 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 and associated expenses 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,
Emergency distress radio beacons (EPIRBS), 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 January 3, 1998 and the comparable
quarter in the prior fiscal year.
<TABLE>
<CAPTION>
Sales Gross Profit
- --------------------------- --------------------------
January 3, December 28, January 3, December 28,
1998 1996 1998 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 715,840 $ 1,192,317 Land Mobile Communications $ (55,324) $ 308,932
1,859,875 1,301,465 Marine Communications 779,266 556,463
516,009 329,295 Marine Instrumentation 227,695 158,081
- --------------------------------------------------------------------------------------
$ 3,091,724 $ 2,823,077 Total $ 951,637 $ 1,023,476
- --------------------------------------------------------------------------------------
</TABLE>
Sales order backlogs at January 3, 1998 were as follows: Land Mobile
Communications $154,000, Marine Communications $481,000 and Marine
Instrumentation $11,000.
<TABLE>
<CAPTION>
Income and Expense Items Percentage
as a Percentage of Net Sales Increase (Decrease)
- ---------------------------- -------------------
1997 1996
January 3, December 28, to to
1998 1996 1998 1997
---------- ------------ ----------------------------- ----- -----
<S> <C> <C> <C> <C>
100% 100% Net sales 10 (29)
69 64 Cost of products sold 19 (16)
31 36 Gross profit (7) (45)
46 46 Operating expenses 9 (6)
(15) (10) Operating income (loss) 69 (153)
(5) (4) Other expense 44 877
(20) (14) Income (loss) before taxes 62 (180)
-- (5) Provision (benefit) for taxes (100) (177)
(20%) (9%) Net income (loss) 144 (182)
</TABLE>
Net sales increased by $268,647 or 10% compared to the same quarter in the
prior fiscal year. Net sales of the Company's land mobile products
decreased by $476,477 or 40% compared to the same quarter in the prior
fiscal year. Net sales of the Company's marine communications systems
increased by $558,410 or 43%. Net sales of the Company's marine
instrumentation systems increased by $186,714 or 57% 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 overall performance and were
consistent with management's expectations. Land mobile revenues are
comprised almost entirely of mobile radio products and will continue to be
so until new licenses are auctioned by the FCC. The FCC has announced
that the auction will commence on May 19, 1998.
Gross profit was $951,637 (31% of net sales), as compared to $1,023,476
(36% of net sales) in the prior year, a decrease of $71,839 or 7%. The
gross profit on land mobile products was ($55,324) (-8% of such sales), as
compared to $308,932 (26% of such sales) in the prior year, a decrease of
$364,256 or 118%. The gross profit on marine communications systems was
$779,266 (42% of such sales), as compared to $556,463 (43% of such sales)
in the prior year, an increase of $222,803 or 40%. The gross profit on
marine instrumentation systems was $227,695 (44% of such sales), as
compared to $158,081 (48% of such sales) in the prior year, an increase of
$69,614 or 44%. The decrease in overall gross profit margin was due to
low margin on the Company's land mobile radio 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 pressure on selling prices for mobile radios is
expected to continue. Profit margins on marine communication and marine
instrumentation products vary according to product sales mix and are
mostly comparable to the prior year. The Company continues to introduce
new marine products and expects that sales will continue the growth
started in fiscal 1997.
Operating expenses were $1,425,043 (46% of net sales), as compared to
$1,304,050 (46% of net sales) last year, an increase of $120,993 or 9%.
Engineering expenses increased as a result of higher wage expenses and the
increased use of engineering consultants. Administrative expenses were
higher as a result of increased wage expenses and professional fees.
Interest expense increased as a result of new borrowings in the form of
Subordinated Short Term Notes, and the annual interest rate increase on
the Subordinated Convertible Debentures.
Other income, net, was higher in fiscal 1997 because of gain on the sale of
assets.
On January 3, 1998, the Company's principal sources of liquidity consisted
of $341,909 in cash and equivalents, $775,000 in the unused portion of
bank working capital credit line (of which only an additional $91,000 was
available with the current accounts receivable and inventory borrowing
base), and $55,000 available under a subordinated bank line from an
officer of the Company. Based on its current 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 12, 1996 the Company filed a collection action against one of
its customers for accounts totaling approximately $132,000. On December
23, 1996 the same customer filed suit against the Company alleging breach
of certain express and implied warranty and contractual obligations, and
negligent representation with respect to sales of the Company's narrowband
products. The suit originally sought $6,000,000 - $9,000,000 in damages
and unspecified amounts for interest and other costs. Discovery is
ongoing and the claims of both parties have been consolidated into one
case. The ultimate outcome of the litigation cannot presently be
determined, accordingly no provision for any liability that may result
upon adjudication has been made in the accompanying financial statements.
Items 2,3,4 and 5
There were no reportable events or matters under these captions during the
quarter ended January 3, 1998.
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 January 3, 1998.
Form 8-K dated December 11, 1997. Resignation of a director.
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: February 20, 1998 /s/ JAN KALLSHIAN
----------------- ---------------------------------
Jan Kallshian
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 341,909
<SECURITIES> 0
<RECEIVABLES> 2,198,218
<ALLOWANCES> 248,428
<INVENTORY> 5,012,237
<CURRENT-ASSETS> 7,455,038
<PP&E> 5,069,989
<DEPRECIATION> 3,162,346
<TOTAL-ASSETS> 9,842,674
<CURRENT-LIABILITIES> 4,694,604
<BONDS> 1,850,626
0
0
<COMMON> 13,299
<OTHER-SE> 3,284,145
<TOTAL-LIABILITY-AND-EQUITY> 9,842,674
<SALES> 3,091,724
<TOTAL-REVENUES> 3,091,724
<CGS> 2,140,087
<TOTAL-COSTS> 2,140,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16,392
<INTEREST-EXPENSE> 157,810
<INCOME-PRETAX> (621,505)
<INCOME-TAX> 0
<INCOME-CONTINUING> (621,505)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (621,505)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
