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 April 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 April 4, 1998
Common Stock, .01 Par Value 1,329,912
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ------------------------
April 4, March 29, April 4, March 29,
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $3,004,467 $3,386,079 $ 6,096,191 $6,209,156
Cost of products sold 1,983,495 2,413,345 4,123,582 4,212,946
---------------------------------------------------
Gross profit 1,020,972 972,734 1,972,609 1,996,210
Operating expenses:
Research and development 342,792 335,962 712,663 640,740
Selling 585,409 617,464 1,313,279 1,279,106
General and administrative 439,780 350,403 698,624 623,895
Narrowband operations 70,430 63,330 138,888 127,468
---------------------------------------------------
Operating expenses 1,438,411 1,367,159 2,863,454 2,671,209
---------------------------------------------------
Operating loss (417,439) (394,425) (890,845) (674,999)
Interest expense (191,994) (135,268) (349,804) (258,144)
Other income, net 11,310 7,869 21,021 27,941
---------------------------------------------------
Loss before income taxes (598,123) (521,824) (1,219,628) (905,202)
Benefit for income taxes - (176,703) - (305,242)
---------------------------------------------------
Net loss $ (598,123) $ (345,121) $(1,219,628) $ (599,960)
===================================================
Net loss per share, basic $ (0.45) $ (0.26) $ (0.92) $ (0.46)
Net loss per share, diluted $ (0.45) $ (0.26) $ (0.92) $ (0.46)
Average shares outstanding,
basic and diluted 1,329,912 1,309,800 1,325,634 1,309,746
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
April 4, September 27,
1998 1997
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 281,839 $ 532,896
Accounts receivable, net of allowance of $92,870 and
$234,973, respectively 2,011,756 2,030,641
Inventories 5,071,149 4,867,708
Prepaid expenses and other current assets 123,335 243,081
---------------------------
Total current assets 7,488,079 7,674,326
Property, plant and equipment 5,069,989 5,032,823
Less accumulated depreciation 3,257,190 3,062,703
---------------------------
Property, plant and equipment, net 1,812,799 1,970,120
Other assets, net 457,885 495,476
---------------------------
Total assets $ 9,758,763 $10,139,922
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable to bank $ 1,224,561 $ 1,367,561
Notes payable to related parties and others 994,697 850,887
Accounts payable 1,226,372 556,416
Accrued expenses 1,660,931 1,517,243
Current maturities of long-term debt and capital lease obligations 1,805,934 133,286
---------------------------
Total current liabilities 6,912,495 4,425,393
Long-term debt and capital lease obligations, less current maturities 141,947 1,815,693
---------------------------
Total liabilities 7,054,442 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; 1,329,912 and 1,320,473
shares issued and outstanding, respectively 13,299 13,205
Capital in excess of par value 3,830,027 3,815,415
Unearned compensation (42,645) (53,052)
Retained earnings (accumulated deficit) (1,096,360) 123,268
---------------------------
Total stockholders' equity 2,704,321 3,898,836
---------------------------
Total liabilities and stockholders' equity $ 9,758,763 $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>
Six Months Ended
-------------------------
April 4, March 29,
1998 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,219,628) $(599,960)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 214,483 216,707
Gain on asset dispositions (10,790) -
Amortization of debenture discount and issue costs 127,777 67,750
Provision for losses on accounts receivable 32,008 32,797
Employee investment plan expense 10,092 12,832
Amortization of unearned compensation 10,407 5,771
Benefit of deferred income taxes - (305,242)
Changes in operating assets and liabilities:
Accounts receivable (13,123) 375,610
Inventories, prepaid expenses and other current assets (83,695) 155,363
Accounts payable and accrued expenses 824,434 (86,799)
-------------------------
Net cash used in operating activities (108,035) (125,171)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, including self-
constructed equipment (1,225) (88,665)
Other (6,883) (14,161)
-------------------------
Net cash used in investing activities (8,108) (102,826)
FINANCING ACTIVITIES
Proceeds from sale of common stock 4,614 3,199
Proceeds from notes payable to related parties and others 100,000 -
Principal payments on note payable to bank, capital lease
obligations and long-term debt (239,528) (89,988)
-------------------------
Net cash used in financing activities (134,914) (86,789)
Decrease in cash and cash equivalents during period (251,057) (314,786)
Cash and cash equivalents at beginning of period 532,896 330,076
-------------------------
Cash and cash equivalents at end of period $ 281,839 $ 15,290
=========================
Supplementary Cash Flow Information
Interest paid $ 89,152 $ 54,579
Capital lease obligations incurred to acquire equipment 35,941 -
</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 April 4, 1998 the Company had total revenue of
$3,004,467 which was less than the $3,100,000 minimum required by the
financial covenants of the Company's bank loan agreement. The Company has
requested a waiver of the minimum revenue requirement for the quarter, and
based on discussions with representatives of the bank, expects to receive a
waiver of the minimum revenue requirement for the quarter ended April 4,
1998. However, until any such waiver is obtained there can be no assurance
that such a waiver will be received. In the absence of a waiver, 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 same loan agreement requires minimum revenue of $4,000,000 for the
quarter ending July 4, 1998, a requirement that the Company does not expect
to meet. The Company and the bank are currently involved in discussions to
modify this and other terms of the loan agreement.
2. Inventory Components:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
April 4, 1998 September 27, 1997
-----------------------------------
<S> <C> <C>
Finished Goods $1,779,359 $1,797,292
Work-In-Process 268,043 178,948
Raw Material 3,023,747 2,891,468
------------------------------
$5,071,149 $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
September 27, 1997 and April 4, 1998.
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 quarter. 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.
7. Prior Period Adjustment:
Amounts reported herein for the quarter and six month period ended March 29,
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 $88,942, or $.06
per share for the quarter ended March 29, 1997 and $151,403 or $.12 per
share for the six months ended March 29, 1997.
8. 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. The suit was settled in
April 1998 with both parties agreeing to drop their claims. The total cost
of the settlement was accrued in the quarter ended April 4, 1998 as a charge
to administrative expense.
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 recently announced a
delay of the previously announced May 19, 1998 auction for the remaining 220
MHz spectrum licenses, and no new auction date has been set. The auction
will be for licenses covering "Economic Areas", "Regions" and "Nationwide"
areas as defined by the FCC and no new auction date has been set. The delay
in auctioning spectrum licenses negatively impacts the Company's land mobile
sales, total gross profit and cash flow.
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 April 4, 1998 and the comparable quarter
in the prior fiscal year.
<TABLE>
<CAPTION>
Sales Gross Profit
- ------------------------ -----------------------
April 4, March 29, April 4, March 29,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
$ 724,144 $1,479,378 Land Mobile Communications $ 80,885 $244,740
1,678,165 1,292,250 Marine Communications 686,993 532,008
602,158 614,451 Marine Instrumentation 253,094 195,986
- ----------------------------------------------------------------------------------
$3,004,467 $3,386,079 Total $1,020,972 $972,734
- ----------------------------------------------------------------------------------
</TABLE>
Sales order backlogs at April 4, 1998 were as follows: Land Mobile
Communications $149,000, Marine Communications $410,000 and Marine
Instrumentation $27,000.
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 prior year.
<TABLE>
<CAPTION>
Income and Expense Items Percentage
as a Percentage of Net Sales Increase (Decrease)
- ---------------------------- -------------------
1997 1996
April 4, March 29, to to
1998 1997 1998 1997
- --------------------------------------------------------------------------
<C> <C> <S> <C> <C>
100% 100% Net sales (11) (15)
66 71 Cost of products sold (18) 3
34 29 Gross profit 5 (40)
48 40 Operating expenses 5 (2)
(14) (11) Operating loss 6 (250)
(6) (4) Interest expense 42 187
(20) (15) Loss before taxes 15 (442)
- (5) Benefit for income taxes (100) (402)
(20%) (10%) Net loss 73 (468)
</TABLE>
Net sales decreased by $381,612 or 11% compared to the same quarter in the
prior fiscal year. Net sales of the Company's land mobile products
decreased by $755,234 or 51% compared to the same quarter in the prior
fiscal year. Net sales of the Company's marine communications systems
increased by $385,915 or 30%. Net sales of the Company's marine
instrumentation systems decreased by $12,293 or 2% 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. 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 would commence on May 19,
1998, then later delayed the auction until a still to be announced date.
The lack of an auction date continues to make it extremely difficult for the
Company to plan and promote its land mobile products.
Gross profit was $1,020,972 (34% of net sales), as compared to $972,734 (29%
of net sales) in the prior year, an increase of $48,238 or 5%. The gross
profit on land mobile products was $80,885 (11% of such sales), as compared
to $244,740 (17% of such sales) in the prior year, a decrease of $163,855 or
67%. The gross profit on marine communications systems was $686,993 (41% of
such sales), as compared to $532,008 (41% of such sales) in the prior year,
an increase of $154,985 or 29%. The gross profit on marine instrumentation
systems was $253,094 (42% of such sales), as compared to $195,986 (32% of
such sales) in the prior year, an increase of $57,108 or 29%. The increase
in overall gross profit margin was due to a greater portion of the Company's
revenues coming from marine products as compared to lower margin 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 downward 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
improvement in gross margin on instrumentation products was due to slightly
higher selling prices for some products. The Company expects marine
products sales will continue the growth started in fiscal 1997.
Operating expenses were $1,438,411 (48% of net sales), as compared to
$1,367,159 (40% of net sales) last year, an increase of $71,252 or 5%.
Engineering expenses were comparable to the prior year as a result of
increased consulting expenses being offset by lower salary and consumable
supplies. Total selling expenses decreased due to a reduction in
advertising expense as a result claims for co-op advertising being lower
than previously estimated. The lower advertising expense was partially
offset by higher commission expense and fees related to type acceptance
certifications of marine products. Commission expense was higher in 1998
because commission rates on certain products were temporarily lowered during
part of fiscal 1997. Administrative expenses were higher as a result of
increased professional fees and the settlement costs incurred in connection
with the matter discussed in Note 8. These increases were partially offset
by a reduction in previously accrued profit sharing because the Company
failed to meet the required performance criteria. Narrowband operating
expenses increased due to higher site rental costs.
Interest expense increased $56,726 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 carrying value on 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.
Other income, net was approximately the same as the comparable quarter in
fiscal 1997.
Income taxes were zero for the quarter as compared to a benefit of $176,703
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 September 27, 1997 and April 4, 1998.
Liquidity and Capital Resources
On April 4, 1998, the Company's principal sources of liquidity consisted of
approximately $282,000 in cash and equivalents, $775,000 in the unused
portion of bank working capital credit line (of which only an additional
$289,000 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. 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 April 4, 1998 the Company had total revenue of
$3,004,467 which was less than the $3,100,000 minimum required by the
financial covenants of the Company's bank loan agreement. The Company has
requested a waiver of the minimum revenue requirement for the quarter, and
based on discussions with representatives of the bank, expects to receive a
waiver of the minimum revenue requirement for the quarter ended April 4,
1998. However, until any such waiver is obtained there can be no assurance
that such a waiver will be received. In the absence of a waiver, 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 same loan agreement requires minimum revenue of $4,000,000 for the
quarter ending July 4, 1998, a requirement that the Company does not expect
to meet. The Company and the bank are currently involved in discussions to
modify this and other terms of the loan agreement.
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.
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. The suit was settled in
April 1998 with both parties agreeing to drop their claims. The total cost
of the settlement was accrued in the quarter ended April 4, 1998 as a charge
to administrative expense.
Items 2, 3 and 4
There were no reportable events or matters under these captions during the
quarter ended April 4, 1998.
Item 5. Other Information
The Company's common stock is currently listed on the Nasdaq SmallCap Market
via an exception from the net tangible assets requirement. The exception
was granted through June 30, 1998 by which time the Company is required to
evidence a minimum of $4,500,000 in net tangible assets. The Company is
pursuing sources of additional equity in order to meet the requirements,
however, there can be no assurance that it will do so. If at some future
date the Company's securities should cease to be listed on the Nasdaq
SmallCap Market, they may continue to be listed on the OTC-Bulletin Board.
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
April 4, 1998.
Form 8-K dated January 15, 1998. Delayed filing of 10-K and
issues related to Subordinated Convertible Debenture.
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: May 11, 1998 /s/ JAN KALLSHIAN
------------ -----------------------------
Jan Kallshian
Chief Financial Officer
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