SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended September 27, 1997. Commission file number 0-8936.
DATAMARINE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2454559
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7030 220th S.W., Mountlake Terrace, Washington 98043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 771-2182
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, with par value of $.01
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of January 6, 1998 was approximately $3,408,000.
The number of shares of the Registrant's common stock outstanding as of
January 6, 1998 was 1,329,912 shares.
The total number of pages in this Form 10-K is 62.
See Index to Exhibits on page 40
PART I
ITEM 1. BUSINESS
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 and manufacturing
facilities are 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.
Sales to the land mobile radio market were 38% of consolidated sales in
fiscal 1997 compared to 58% in 1996 and 45% in 1995.
On October 19,1992, the Federal Communications Commission ("FCC") conducted
a lottery which has 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 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 is greatly reduced. The FCC has announced that
an auction for new 220 MHz 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 accounted for approximately 5% of the Company's consolidated
sales in fiscal 1997, 6% in fiscal 1996 and 8% in fiscal 1995. In recent
years, foreign sales have represented a smaller percentage of total sales
because narrowband products are only sold domestically.
Products and Marketing
The composition of the Company's sales by product line was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Land mobile communications $ 4,603,161 38% $ 9,531,816 58% $ 6,642,984 45%
Marine communications 5,118,578 42% 5,011,520 30% 5,296,945 36%
Marine instrumentation 2,368,939 20% 2,046,666 12% 2,846,729 19%
-------------------------------------------------------
Total $12,090,678 100% $16,590,002 100% $14,786,658 100%
=======================================================
</TABLE>
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 the narrowband technology, 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 ocean-
going yachts. 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.
Competition and Markets
Datamarine and its subsidiary, SEA, are generally considered to be leading
suppliers of marine instruments and radio communication products to the
marine markets. Approximately 20 electronics manufacturers have competing
models in their product lines and are considered competitors.
SEA has at this time one competitor supplying narrowband equipment for the
220 MHz radio service. Approximately 25 competitors offer alternative FM
land mobile products for use in other radio services and could become
competitive suppliers of equipment in the 220 MHz radio service market.
Several of the Company's competitors in the various markets have
substantially greater financial, technical and marketing resources.
The Company's business does not depend on any single customer, the loss of
whom would have a materially adverse impact on the Company's business. No
portion of the Company's business is subject to renegotiation of profits or
termination of contracts or sub-contracts at the election of the government.
The markets for the Company's products are generally not considered to be
seasonal.
Sales order backlogs stood at $985,000 at September 27, 1997, compared to
$5,412,000 at September 28, 1996. Of the total September 27, 1997 backlog,
marine products represented $770,000 and land mobile products represented
$215,000. The land mobile backlog related to base station equipment
declined substantially when the FCC mandated September 30, 1996 build-out
deadline expired. The Company's land mobile backlog at September 27, 1997
was comprised of items not subject to any FCC deadline.
Suppliers
Certain components in the Company's products, such as printed circuits and
injection molded plastic parts, are provided by local vendors using tooling
and designs owned by the Company. The Company believes that adequate
alternative sources of supply are available for these purchased components
along with other supplies and raw materials. The Company and its
subsidiaries maintain sufficient inventory to continue production for a
reasonable period if new material sources are required.
Warranty
Depending upon the product, they are sold with either a one-year or two-year
parts and labor limited warranty.
Research and Development
The Company is committed to a continuing program of designing new products
and improving the product designs presently in production. During fiscal
1997, fiscal 1996 and fiscal 1995 the Company spent approximately $1,301,000,
$1,235,000 and $1,420,000, respectively, on Company-sponsored research and
development for continuing operations and had approximately 16 full-time
employees engaged in such activities.
Patents
The Company has two United States patents related to its radio products.
The Company views its patents as valuable assets, but believes that its
position in the market is not dependent upon the protection offered thereby.
Employees
The Company had approximately 106 full-time employees on September 27, 1997.
This compares to 110 on September 28, 1996 and 100 on September 30, 1995.
The Company has no collective bargaining agreements and believes relations
with its employees are good.
Environmental
The Company knows of no statutory requirements with respect to environmental
quality which can be expected to have a material effect upon the Company's
capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
The manufacturing and general administrative offices of the Company are
located in a 32,500 square-foot building in Mountlake Terrace, Washington,
pursuant to a lease which expires in June 1998. During fiscal 1997 the Company
renegotiated its lease at the Pocasset, Massachusetts facility through June,
1999 where the service facility for the marine instrumentation product line
now occupies 3,800 square-feet. The sales and warehousing operation of a
majority-owned subsidiary, Datamarine International Australia, PTY, LTD., is
located in a leased 2,500 square-foot masonry steel building in Artarmon,
New South Wales, Australia. A subsidiary, Nautical Realty A/S, owned a
20,000 square-foot steel and concrete industrial building located in Sorup,
Denmark, which was sold to an unaffiliated tenant in December 1996.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended September 27, 1997, no
matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq(tm) Stock Market under the
symbol "DMAR". As of January 6, 1998, there were approximately 850
stockholders of record.
The accompanying table shows the range of trading prices for the past two
years by fiscal quarter:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Fiscal 1997: High 9 3/4 9 3/4 8 1/4 7
Low 4 3/4 5 1/2 5 3/4 4 3/8
Fiscal 1996: High 11 1/4 11 1/4 13 3/4 11 3/4
Low 5 7/8 7 7/8 9 1/4 9
</TABLE>
No dividends have been declared or paid by the Company. The Company
currently intends to retain its earnings to fund the development and growth
of its business.
ITEM 6. SELECTED FINANCIAL DATA
All of the historical selected financial data set forth below has been
derived from audited financial statements of the Company.
<TABLE>
<CAPTION>
Income Statement Data for September 27, September 8, September 30, October 1, October 2,
the Year Ended 1997 1996 1995 1994 1993
------------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $12,090,678 $16,590,002 $14,786,658 $11,829,437 $ 7,948,840
Cost of products sold 8,243,556 9,555,599 9,128,693 7,049,898 5,252,053
Operating expenses, excluding
restructuring charge 5,284,103 5,627,499 5,584,954 5,159,848 4,697,510
Restructuring charge -- -- 686,458 -- --
--------------------------------------------------------------------
Operating income (loss) (1,436,981) 1,406,904 (613,447) (380,309) (2,000,723)
--------------------------------------------------------------------
Interest expense 563,617 380,564 193,037 62,258 13,174
Other (income) expense 29,824 (112,724) (39,719) (46,619) 19,008
Income tax expense (benefit) 737,909 388,083 (1,083,640) -- (132,506)
--------------------------------------------------------------------
Income (loss) from continuing
operations (2,768,331) 750,981 316,875 (395,948) (1,900,399)
Discontinued operations:
Net income -- -- -- -- 129,026
Net gain on sale -- -- -- -- 239,553
--------------------------------------------------------------------
Net income (loss) $(2,768,331) $ 750,981 $ 316,875 $ (395,948) $(1,531,820)
====================================================================
Income (loss) Per Share:
Continuing operations $ (2.11) $ .49 $ .23 $ (0.33) $ (1.59)
Discontinued operation -- -- -- -- .31
--------------------------------------------------------------------
Net income (loss) $ (2.11) $ .49 $ .23 $ (0.33) $ (1.28)
====================================================================
</TABLE>
<TABLE>
<CAPTION>
September 27, September 28, September 30, October 1, October 2,
Balance Sheet Data 1997 1996 1995 1994 1993
------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $10,139,922 $12,649,846 $ 9,323,581 $ 7,862,611 $ 6,359,826
Notes payable to bank 1,367,561 1,750,000 1,325,353 795,353 400,000
Notes payable to related
parties and others 850,887 -- 30,000 -- --
Long-term debt, including
current portion 1,948,979 2,022,978 642,800 439,819 274,337
Stockholders' equity 3,898,836 6,536,934 5,198,391 4,331,293 4,624,006
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following tables set forth certain items (expressed as a percentage of
net sales) included in Selected Financial Data and should be read in
connection with the Consolidated Financial Statements of the Company
including the Notes to such Statements, presented elsewhere in this report.
<TABLE>
<CAPTION>
Income and Expense Items Percentage
As a Percentage of Net Sales Increase (Decrease)
- ---------------------------- -------------------
1996 1995
to to
1997 1996 1995 1997 1996
<S> <C> <C> <C> <C> <C>
100% 100% 100% Net sales (27)% 12%
68 58 62 Cost of products sold (14) 5
32 42 38 Gross profit (45) 24
11 7 10 Research and development 5 (13)
21 16 16 Selling (5) 9
12 11 12 General and administrative (16) 1
-- -- 4 Restructuring charge -- n.m.
44 34 42 Operating expenses (6) (10)
(12) 9 (4) Operating income (loss) n.m. n.m.
5 2 1 Interest expense 48 97
-- -- -- Other (income) expense, net n.m. 183
(17) 7 (5) Income (loss) before income taxes n.m. n.m.
6 2 (7) Income tax expense (benefit) 90 n.m.
(23)% 5% 2% Net income (loss) n.m. 137
</TABLE>
Fiscal 1997 compared to 1996
Net sales decreased by $4,499,324 or 27%, to $12,090,678 for 1997 from
$16,590,002 in 1996. Net sales of the Company's narrowband products
decreased by $4,928,655, or 52%, to $4,603,161 for 1997 from $9,531,816 in
1996. Net sales of the Company's marine radio systems increased by
$107,058, or 2%, to $5,118,578 for 1997 from $5,011,520 in 1996. Net sales
of the Company's recreational marine instrumentation systems increased by
$322,273, or 16%, to $2,368,939 for 1997 from $2,046,666 in 1996.
Sales of narrowband products are greatly influenced by the regulatory
environment, principally license and operating rules issued by the FCC.
Sales of narrowband base station equipment declined sharply after the FCC
build-out deadline of September 30, 1996. Although the Company cannot
control, nor reliably predict which rules the FCC will issue and the
effective dates thereof, the FCC has announced that the auction of new 220
MHz licenses will commence May 19, 1998. Management expects that the FCC's
issuance of new licenses will provide an opportunity for significant revenue
growth in the narrowband product line. Management anticipates that persons
obtaining licenses in the auction will purchase the base station repeater
equipment needed to operate the radio service, followed by the purchase of
mobile radios used by subscribers to the service. Sales of marine radio
systems are expected to increase as the Company continues to introduce new
products and obtains regulatory type acceptance of its marine radio products
in the United States and foreign countries. Sales of marine instrumentation
systems increased, reversing a four year decline. Marine instrumentation
sales are expected to continue improving as the Company introduces new
products and begins shipping higher volumes of products introduced in 1997.
Gross profit for 1997 was $3,847,122 (32% of net sales), as compared to
$7,034,403 (42% of net sales) in 1996, a decrease of $3,187,281 or 45%. The
gross profit on narrowband products for 1997 was $715,515 (16% of such
sales), as compared to $3,718,826 (39% of such sales) in 1996, a decrease of
$3,003,311 or 81%. Margins on narrowband products fluctuate based on
product mix, and are generally much higher on base station products than on
mobile radios. The FCC build-out deadline caused base station revenues to
decline sharply, so the majority of land mobile revenue came from the sale
of lower margin mobile radios. Until such time as new 220 MHz licenses are
available, narrowband sales will continue to be comprised of a greater
proportion of mobile radios rather than base stations, and thus will achieve
a lower overall percentage margin than was acheived for 1996. The gross
profit on marine radio systems for 1997 was $2,233,710 (44% of such sales),
as compared to $2,221,079 (44% of such sales), an increase of $12,631 or 1%.
The overall gross margin percentage on marine communications products was
similar in 1997 and 1996. Slight declines in margins on established products
were offset by continued sales growth in newer, higher margin, Global
Maritime Distress and Safety System (GMDSS) products. The gross profit on
marine instrumentation systems for 1997 was $897,897 (38% of such sales), as
compared to $1,094,498 (53% of such sales), a decrease of $196,601 or 18%.
Although sales of marine instrumentation products increased from 1996, gross
margin was lower due to manufacturing costs increasing faster than selling
prices, and a greater portion of sales coming from lower margin products.
Operating expenses were $5,284,103 (44% of net sales) in 1997, as compared
to $5,627,499 (34% of net sales) in 1996, a decrease of $343,396 or 6%.
Selling expenses decreased $131,801 or 5%. Sales commissions declined
approximately 32% due to decreased sales, while sales related salaries
increased approximately 14%. Other selling expenses including warranty and
promotional expenses also declined from 1996. Administrative expenses
decreased $278,036 or 16%. Administrative salaries declined approximately
24% due to the elimination of profit sharing, and business tax expense
decreased 68% due to a refund of previously paid taxes and new state tax
credits. Research and development expenses increased $66,441 or 5%.
Engineering related salaries increased approximately 12%, engineering
consulting fees increased 47%, while consumable supplies and other engineering
expenses declined approximately 39%.
Interest expense for 1997 was $563,617 as compared to $380,564 for 1996.
Interest expense increased primarily as a result of higher loan balances on
bank borrowings, increases in bank borrowing rates, and interest, amortization
of discount and issuance costs related to the convertible debenture. Other
income and expense was a net expense of $29,824 in 1997 compared to a net
income of $112,724 in 1996. Other expense increased due to NNS site rental
expenses and a loss on the sale of the building by Nautical Realty A/S.
Income tax expense for 1997 was $737,909 compared to $388,083 in 1996. The
entire 1997 income tax expense was attributable to an increase in the deferred
tax asset valuation allowance.
Net loss for 1997 was $2,768,331 compared to 1996 net income of $750,981.
Fiscal 1996 compared to 1995
Net sales increased by $1,803,344 or 12%, to $16,590,002 for 1996 from
$14,786,658 in 1995. Net sales of the Company's narrowband products
increased by $2,888,832, or 43%, to $9,531,816 for 1996 from $6,642,984 in
1995. Net sales of the Company's marine radio systems decreased by
$285,425, or 5%, to $5,011,520 for 1996 from $5,296,945 in 1995. Net sales
of the Company's recreational marine instrumentation systems declined by
$800,063, or 28%, to $2,046,666 for 1996 from $2,846,729 in 1995.
Gross profit for 1996 was $7,034,403 (42% of net sales), as compared to
$5,657,965 (38% of net sales) in 1995, an increase of $1,376,438 or 24%.
The gross profit on narrowband products for 1996 was $3,718,826 (39% of such
sales), as compared to $3,003,527 (45% of such sales) in 1995, an increase
of $715,299 or 24%. Margins on narrowband products fluctuate based on
product mix, and generally are higher on base station products than on
mobile radios. The gross profit on marine radio systems for 1996 was
$2,221,079 (44% of such sales), as compared to $2,156,023 (41% of such
sales), an increase of $65,056 or 3%. Margins on marine communications
products were slightly higher in 1996 due to sales of the new GMDSS
products. The gross profit on marine instrumentation systems for 1996 was
$1,094,498 (53% of such sales), as compared to $498,415 (18% of such sales),
an increase of $596,083 or 120%. Margins on marine instrumentation products
were higher due to lower production costs realized by the move of marine
instrumentation production to the Mountlake Terrace, Washington facility.
Operating expenses were $5,627,499 (34% of net sales) in 1996, as compared
to $6,271,412 (42% of net sales) in 1995, a decrease of $643,913 or 10%.
1995 operating expenses included a restructuring charge of $686,458.
Comparable operating expenses excluding the 1995 restructuring charge
increased $42,545. Selling expenses increased $218,336, due mainly to sales
commissions on higher sales volume. Administrative expenses increased
$9,099. Lower professional fees and savings from the consolidation of
administrative operations in Mountlake Terrace were offset by depreciation
expense in NNS.
During 1995 the Company established a special charge of $686,458 in
connection with a restructuring program designed to improve productivity and
permanently reduce costs. The Company moved corporate administrative
functions and production of its Datamarine product line to its facility in
Mountlake Terrace, Washington. Costs associated with the restructuring
included the write down of leasehold improvements, product tooling and
equipment to net realizable values, the phase out of certain products,
employee termination benefits, and the costs to settle the long-term lease
of the Massachusetts facility.
The restructuring was announced in January 1995 and was substantially
completed by December 31, 1995. The program resulted in the permanent
reduction of approximately 30 employees and 35,000 square feet of
manufacturing and office space.
The restructuring charges were comprised of $346,524 in write downs of
production equipment and leasehold improvements, $94,630 in write downs of
inventory related to discontinued products, $147,748 in employee termination
benefits, and $97,556 in lease settlement costs.
Interest expense for 1996 was $380,564 as compared to $193,037 for 1995.
Interest expense increased primarily as a result of interest, amortization
of discount and issuance costs related to the convertible debenture. Other
income, net, increased due to revenue from non-recurring equipment design
project.
Income tax expense for 1996 was $388,083 compared to an income tax benefit
of $1,083,640 in 1995. The 1995 income tax benefit included a $702,000
reduction in the valuation allowance.
Net income for 1996 was $750,981 compared to $316,875 in 1995.
Capital Expenditures
Capital expenditures were $395,000 (including capital lease additions of
$217,000), $959,000 and $699,000 in fiscal years 1997, 1996 and 1995,
respectively. Planned capital expenditures in fiscal year 1998 are
$275,000, primarily for production and engineering equipment. Higher levels
of capital spending in 1996 and 1995 are attributable to build-out of NNS
licenses.
Liquidity and Capital Resources
Net cash used in operating activities for 1997 decreased by $769,994 to
$101,155 from net cash used in operating activities of $871,149 in 1996. The
reduction was due mostly to decreases in inventories and accounts receivable.
At the end of 1997 the sales order backlogs stood at $985,000, compared to
$5,412,000 at September 28, 1996. Of the total September 27, 1997 backlog,
marine products represented $770,000 and land mobile products represented
$215,000. During 1997 the Company issued $550,000 in short-term subordinated
notes, originally due in March 1998, the proceeds of which were available for
working capital requirements. The maximum amount available on the Company's
bank line was decreased from $2,500,000 to $2,000,000 in June 1997. The amount
available to the Company under the line is based upon a formula that considers
the Company's trade receivables and finished goods inventory. The Company's
1997 borrowings under the line did not exceed $1,750,000. At September 27, 1997
the amount outstanding on the line was $1,367,561 which was the maximum amount
supported by the borrowing base at that time. The line of credit is subject to
debt covenants which allow the Company to have maximum quarterly losses of
$350,000, and require the Company to maintain a tangible net worth as defined
by the bank of $5,500,000, a minimum current ratio of 1.50 and a maximum debt
to net worth ratio of 1.25. The Company also has a $400,000 line of credit in
the form of a subordinated loan from an officer of the Company, expiring July
1998. At September 27, 1997 the amount outstanding on the loan was $344,697,
leaving $55,303 available.
Subsequent to year end, the Company renegotiated the terms of its Subordinated
Convertible Debentures (the "Debentures") and subordinated short term notes
(the "Notes"). As a result of those modifications, originally scheduled
interest payments on the Debentures were extended to February 1999, and the
originally scheduled $2,000,000 principal payment on the Debentures was changed
from December 2000 to February 1999. The originally scheduled principal and
interest payments on the Notes were extended to March 1999.
In connection with modifying the terms of the Debentures and the Notes, and in
order to manage the Company's working capital requirements through fiscal 1998,
the Company and the bank agreed to extend the maturity date of the variable
bank line from June 1998 to February 1999.
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.
Other Matters
Accounting Pronouncements
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
will be effective for interim and annual reporting periods ending after
December 15, 1997. This statement will replace "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 will require the dual
presentation of basic and diluted EPS on the face of the consolidated
statements of operations. The impact is expected to result in an increase to
primary earnings per share for the years ended September 28, 1996 and September
30, 1995 of $.09 and $.02 respectively. Diluted EPS computed pursuant to this
statement is not expected to be materially different from the historical net
income (loss) per share previously presented.
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.
Year 2000
The Company has implemented a program to identify and resolve the effect of
Year 2000 software issues on the integrity and reliability of its financial
and operational systems. In addition, the Company is also communicating with
its principal customers, suppliers and service providers to ensure Year 2000
issues will not have an adverse impact on the Company. The costs of
achieving Year 2000 compliance are not expected to have a material impact on
the Company's business, operations or financial condition.
Impact of Inflation
The Company's results are affected by the impact of inflation on
manufacturing and operating costs. Historically, the Company has used
selling price adjustments, cost containment programs and improved operating
efficiencies to offset the negative impact of inflation on its operations.
Forward-looking Statements
This report contains forward-looking statements that involve risks and
uncertainties. Statements included in this report which are not historical
in nature are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, including without limitation
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. This Annual Report on Form 10-K and Quarterly Reports
on Form 10-Q contain certain detailed factors that could cause the Company's
actual results to materially differ from forward-looking statements made
by the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Financial Statements
September 27, 1997
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Accountants 14
Consolidated Balance Sheets, September 27, 1997 and
September 28, 1996 15
Consolidated Statements of Operations for the years
ended September 27, 1997, September 28, 1996
and September 30, 1995 16
Consolidated Statements of Stockholders' Equity for
the years ended September 27, 1997, September 28, 1996
and September 30, 1995 17
Consolidated Statements of Cash Flows for the years
ended September 27, 1997, September 28, 1996 and
September 30, 1995 18
Notes to Consolidated Financial Statements 19 - 35
</TABLE>
Report of Independent Accountants
To the Stockholders and Board of Directors of
Datamarine International, Inc.
We have audited the accompanying consolidated balance sheets of Datamarine
International, Inc. and Subsidiaries as of September 27, 1997 and September
28, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended September 27, 1997,
September 28, 1996 and September 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Datamarine
International, Inc. and Subsidiaries as of September 27, 1997 and September
28, 1996, and the consolidated results of their operations and their cash
flows for the years ended September 27, 1997, September 28, 1996 and
September 30, 1995 in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Seattle, Washington
December 11, 1997, except for the fourth and fifth paragraphs of Note 1, the
last sentence in the first paragraph of Note 6, the last sentence of Note 7,
the last sentence in the third paragraph of Note 8, and Note 14 to the
financial statements as to which the date is March 2, 1998.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS September 27, September 28,
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 532,896 $ 330,076
Accounts receivable, less allowance for doubtful
accounts of $234,973 and $171,990, respectively 2,030,641 3,335,052
Inventories 4,867,708 5,230,705
Prepaid expenses and other current assets 243,081 202,067
Deferred income taxes, current -- 332,825
---------------------------
Total current assets 7,674,326 9,430,725
Property, plant and equipment 5,032,823 5,169,121
Less accumulated depreciation 3,062,703 2,889,267
---------------------------
Property, plant and equipment, net 1,970,120 2,279,854
Deferred income taxes, non-current -- 405,084
Other assets, net 495,476 534,183
---------------------------
Total assets $10,139,922 $12,649,846
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 1,367,561 $ 1,750,000
Notes payable to related parties and others 850,887 --
Current maturities of capital lease obligations 88,480 48,439
Current maturities of long-term debt 44,806 124,854
Accounts payable 556,416 718,240
Accrued expenses 1,517,243 1,621,694
---------------------------
Total current liabilities 4,425,393 4,263,227
Capital lease obligations, less current maturities 83,992 --
Long-term debt, less current maturities 1,731,701 1,849,685
---------------------------
Total liabilities 6,241,086 6,112,912
---------------------------
Commitments and contingencies
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;
1,320,473 and 1,309,411 shares issued and
outstanding, respectively 13,205 13,094
Capital in excess of par value 3,815,415 3,644,662
Unearned compensation (53,052) (12,421)
Retained earnings 123,268 2,891,599
---------------------------
Total stockholders' equity 3,898,836 6,536,934
---------------------------
Total liabilities and stockholders' equity $10,139,922 $12,649,846
===========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements Of Operations
for the years ended September 27, 1997, September 28, 1996
and September 30, 1995
<TABLE>
<CAPTION>
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $12,090,678 $16,590,002 $14,786,658
Cost of products sold 8,243,556 9,555,599 9,128,693
-------------------------------------------
Gross profit 3,847,122 7,034,403 5,657,965
Operating expenses:
Research and development 1,301,455 1,235,014 1,419,904
Selling 2,505,621 2,637,422 2,419,086
General and administrative 1,477,027 1,755,063 1,745,964
Restructuring charge -- -- 686,458
-------------------------------------------
Operating expenses 5,284,103 5,627,499 6,271,412
-------------------------------------------
Operating income (loss) (1,436,981) 1,406,904 (613,447)
Interest expense 563,617 380,564 193,037
Other (income) expense, net 29,824 (112,724) (39,719)
-------------------------------------------
Income (loss) before income taxes (2,030,422) 1,139,064 (766,765)
Income tax expense (benefit) 737,909 388,083 (1,083,640)
-------------------------------------------
Net income (loss) $(2,768,331) $ 750,981 $ 316,875
===========================================
Net income (loss) per share:
Primary $ (2.11) $ .49 $ 0.23
Fully diluted $ (2.11) $ .49 $ 0.23
Weighted average number of common shares:
Primary 1,313,520 1,519,985 1,358,099
Fully diluted 1,313,520 1,525,590 1,358,099
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements Of Stockholders' Equity
for the years ended September 27, 1997, September 28, 1996
and September 30, 1995
<TABLE>
<CAPTION>
Common Stock Capital in Total
------------------- Excess of Unearned Retained Stockholders'
Shares Amount Par Value Compensation Earnings Equity
------------------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994 1,219,893 $12,199 $2,550,615 $ (55,264) $ 1,823,743 $ 4,331,293
Net income for 1995 -- -- -- -- 316,875 316,875
Issuance of shares under
Employee Investment Plan and
Employee Stock Purchase Plan 5,871 59 50,159 -- -- 50,218
Issuance of shares under lease
settlement agreement 22,000 220 179,780 -- -- 180,000
Exercise of stock options 48,920 489 235,776 -- -- 236,265
Compensation element of stock
options granted -- -- 19,500 (19,500) -- --
Tax benefit of options exercised -- -- 42,352 -- -- 42,352
Amortization of unearned
compensation -- -- -- 41,388 -- 41,388
----------------------------------------------------------------------------
Balance at September 30, 1995 1,296,684 12,967 3,078,182 (33,376) 2,140,618 5,198,391
Net income for 1996 -- -- -- -- 750,981 750,981
Issuance of shares under
Employee Investment Plan and
Employee Stock Purchase Plan 4,577 46 42,776 -- -- 42,822
Finalization of shares under
lease settlement agreement (2,000) (20) 20 -- -- --
Exercise of stock options 10,150 101 43,684 -- -- 43,785
Proceeds of convertible debt
attributable to conversion rights -- -- 480,000 -- -- 480,000
Amortization of unearned
compensation -- -- -- 20,955 -- 20,955
----------------------------------------------------------------------------
Balance at September 28, 1996 1,309,411 13,094 3,644,662 (12,421) 2,891,599 6,536,934
Net loss for 1997 -- -- -- -- (2,768,331) (2,768,331)
Issuance of shares under
Employee Investment Plan and
Employee Stock Purchase Plan 5,430 54 42,816 -- -- 42,870
Unamortized compensation
on forfeited stock options -- -- (1,161) 1,161 -- --
Exercise of stock options 5,632 57 25,288 -- -- 25,345
Compensation element of stock
options granted -- -- 60,000 (60,000) -- --
Proceeds of notes payable to related
parties and others attributable to
stock warrants -- -- 43,810 -- -- 43,810
Amortization of unearned
compensation -- -- -- 18,208 -- 18,208
----------------------------------------------------------------------------
Balance at September 27, 1997 1,320,473 $13,205 $3,815,415 $ (53,052) $ 123,268 $ 3,898,836
============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
for the years ended September 27, 1997, September 28, 1996
and September 30, 1995
<TABLE>
<CAPTION>
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $(2,768,331) $ 750,981 $ 316,875
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 445,623 441,467 406,831
Loss on asset dispositions 12,848 -- --
Non-cash portion of loss from restructuring charge -- -- 441,154
Amortization of debenture discount and issue costs 119,128 93,624 --
Provision for losses on accounts receivable 89,691 81,615 59,725
Employee investment plan expense 36,287 36,937 42,216
Amortization of unearned compensation 18,208 20,955 41,388
Provision for (benefit of) deferred income taxes 737,909 388,083 (1,083,640)
Changes in operating assets and liabilities:
Accounts receivable 1,214,720 (1,079,060) (78,967)
Inventories, prepaid expenses and other
current assets 321,983 (1,818,648) (246,730)
Accounts payable and accrued expenses (329,221) 212,897 10,893
-------------------------------------------
Net cash used in operating activities (101,155) (871,149) (90,255)
-------------------------------------------
Investing activities:
Net proceeds from asset dispositions 346,862 -- --
Purchases of property, plant and equipment,
including self-constructed equipment (177,585) (959,036) (699,125)
Other (31,287) (135,569) (145,951)
-------------------------------------------
Net cash provided by (used in) investing activities 137,990 (1,094,605) (845,076)
-------------------------------------------
Financing activities:
Proceeds from sale of common stock 31,928 49,670 244,267
Proceeds from notes payable to related parties
and others 894,697 -- 30,000
Proceeds from bank and other borrowings -- 3,750,000 1,054,843
Deferred financing costs -- (197,508) --
Principal payments on note payable to bank, capital
lease obligations and long-term debt (760,640) (1,559,175) (321,862)
-------------------------------------------
Net cash provided by financing activities 165,985 2,042,987 1,007,248
-------------------------------------------
Increase in cash and equivalents during year 202,820 77,233 71,917
Cash and equivalents at beginning of year 330,076 252,843 180,926
-------------------------------------------
Cash and equivalents at end of year $ 532,896 $ 330,076 $ 252,843
===========================================
Supplementary Cash Flow Information
Interest paid $ 278,400 $ 110,500 $ 207,000
Capital lease obligations incurred to acquire
equipment 217,472 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
1. Business Activities:
Datamarine International, Inc. and subsidiaries (the "Company")
manufactures and markets electronics including radio/telephone systems
for land and marine applications and marine depth sounders and related
instrumentation. Narrowband products consist of hand held, mobile and
base station components for use in the 220 MHz radio service, and are
sold primarily to business users of private radio services. Marine
communications products are high performance radios used on commercial
vessels, fishing vessels and ocean-going yachts. Marine
instrumentation products are up-to-date instruments for pleasure
craft; small boats and yachts; sail and power; inshore and offshore.
Marine communication and marine instrumentation products are sold
worldwide through approximately 300 dealers.
In July 1993, the Company launched its current land mobile
product line which represents 38%, 58% and 45% of net sales in fiscal
1997, 1996 and 1995, respectively. In addition, the Company has
entered into agreements for the construction and operation of
narrowband land mobile systems (see Note 10).
As of September 30, 1996 ownership of licenses for locations
which had not met regulatory build-out requirements reverted to the
Federal government. The Federal Communications Commission ("FCC") has
announced that an auction for new 220 MHz 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.
Until such time as new licenses are issued, demand for the Company's
higher margin base station products is greatly reduced.
Subsequent to year end, the Company renegotiated the terms of its
Subordinated Convertible Debentures (the "Debentures") and subordinated
short term notes (the "Notes") (see Note 14). As a result of those
modifications, originally scheduled interest payments on the Debentures
were extended to February 1999, and the originally scheduled $2,000,000
principal payment on the Debentures was changed from December 2000 to
February 1999. The originally scheduled principal and interest payments
on the Notes were extended to March 1999. In connection with modifying
the terms of the Debentures and the Notes, and in order to manage the
Company's working capital requirements through fiscal 1998, the Company
and the bank agreed to extend the maturity date of the variable bank line
from June 1998 to February 1999.
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. In the event that the Company fails to
obtain such financing when required, such failure could result in the
delay or modification of some or all of the Company's debt redemption,
development and expansion plans, which in turn could have a material
adverse effect on the Company.
2. Significant Accounting Policies:
Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, SEA, Inc. ("SEA"), and
Nautical Realty A/S; the Company's 97.5% owned subsidiary, Narrowband
Network Systems, Inc. ("NNS") and its 60% owned subsidiary, Datamarine
International Australia PTY, LTD. The Company has recognized the
losses attributable to the minority owner's interest in Datamarine
International Australia PTY, LTD. in excess of the minority owner's
investment. Upon consolidation, all intercompany accounts,
transactions and profits have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest September 30.
Revenue Recognition
Revenue from the sale of products and services is recognized in
the consolidated statements of operations as services are rendered or
deliveries made.
Cash and Cash Equivalents
The Company considers all highly liquid investments, with an
original maturity of three months or less when purchased, to be cash
equivalents.
Concentration of Credit Risk
The concentration of credit risk with respect to trade
receivables is, in management's opinion, considered minimal due to the
Company's diverse customer base. The customers for the marine
products are primarily distributors and dealers who resell to both
recreational and commercial boaters. The customers for the land
mobile communication products consist primarily of industrial users of
private land mobile radio services. The Company sells to customers
located throughout the United States as well as in Australia and other
countries. The Company had no significant foreign operations but had
export sales of approximately $618,000 in 1997, $975,000 in 1996, and
$1,161,000 in 1995. Credit evaluations of its customers' financial
condition are performed periodically, and the Company generally does
not require collateral from its customers. Land mobile customers
account for approximately 47% of the accounts receivable balance as of
September 27, 1997, compared to 67% at September 28, 1996.
Inventories
Inventories are stated at the lower of cost based on the first-
in, first-out method, or market.
Property, Plant and Equipment
Property, plant and equipment, including self constructed
assets, are stated at cost. Depreciation is based on the straight-
line method over the useful lives of the assets (see Note 4). Upon
disposition of property, plant and equipment, the cost and related
depreciation are removed from the accounts, and any gain or loss is
reflected in the consolidated statement of operations.
FCC License Costs
Costs associated with acquiring and developing 220 MHz licenses
are amortized on a straight-line basis over ten years and are included
in other assets.
Deferred Financing Costs
Deferred financing costs of $135,487 at September 27, 1997
represent the direct costs of issuing the convertible debentures and
are included in other assets. These costs are amortized by the
effective interest method over the term of the related debt.
Research and Development
Expenditures for research and development are charged to expense
as incurred.
Warranty Costs
The Company provides, by a current charge to income, an amount
it estimates will be needed to cover future warranty obligations for
products sold during the year.
Income Taxes
The Company uses the liability method of accounting for income
taxes whereby deferred tax balances are recognized at the currently
enacted tax rates for all temporary differences between the book and
tax bases of assets and liabilities, net of a valuation allowance as
appropriate.
Stock Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock
Issued to Employees and related Interpretations in measuring
compensation cost for its stock option plans. The Company discloses
pro forma net income (loss) and net income (loss) per share as if
compensation cost had been determined consistent with Statement of
Financial Accounting Standards (FAS) No. 123, Accounting for Stock
Based Compensation.
Earnings Per Share
Net income (loss) per common share is based on the weighted
average number of common shares and common stock equivalents
outstanding. Common stock equivalents include shares issuable upon
exercise of the Company's stock options and the Company's convertible
preferred stock. Fully diluted earnings per share is computed based
on the weighted average number of shares of common stock and common
stock equivalents outstanding during the period taking into
consideration maximum potential dilution. Common stock equivalents
are excluded from the calculation when they are antidilutive.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the 1997 presentation, with no
impact on previously reported net income (loss) or stockholders'
equity.
Future Effects of 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 will be effective for interim and
annual reporting periods ending after December 15, 1997. This statement
will replace "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 will require the dual presentation
of basic and diluted EPS on the face of the consolidated statements of
operations. The impact is expected to result in an increase to primary
earnings per share for the years ended September 28, 1996 and September
30, 1995 of $.09 and $.02 respectively. Diluted EPS computed pursuant to
this statement is not expected to be materially different from the
historical net income (loss) per share previously presented.
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.
3. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Finished goods and subassemblies $1,797,292 $1,603,671
Work-in-process 178,948 96,887
Purchased parts and materials 2,891,468 3,530,147
------------------------
$4,867,708 $5,230,705
========================
</TABLE>
As of September 27, 1997, inventories include approximately
$397,000 related to land mobile base station equipment. The timing of
sales of such equipment is largely dependent upon the issuance of
additional licenses pursuant to an auction to be held by the FCC (see
Note 1). Management does not anticipate any loss on the ultimate
disposition of this equipment.
4. Property, Plant and Equipment:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
1997 1996 Useful Lives
---------- ---------- ------------
<S> <C> <C> <C>
Design, test and manufacturing equipment $2,710,071 $2,606,559 5 years
Narrowband network equipment 1,541,840 1,500,024 10 years
Office furniture and general equipment 536,087 503,854 3 - 5 years
Buildings and improvements 136,247 450,106 10 - 25 years
Leasehold improvements 101,178 101,178 3 - 10 years
Delivery vehicles 7,400 7,400 5 years
-----------------------
$5,032,823 $5,169,121
=======================
</TABLE>
Design, test and manufacturing equipment includes equipment
under capital leases with an original cost of $241,273 and accumulated
depreciation of $25,421 as of September 27, 1997.
5. Accrued Expenses:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued payroll and related fringe benefits $ 544,268 $ 711,249
Accrued warranty costs 140,463 235,497
Accrued co-op advertising 258,293 222,752
Accrued interest 355,546 189,421
Other accrued expenses 218,673 262,775
-----------------------
$1,517,243 $1,621,694
=======================
</TABLE>
6. Note Payable to Bank:
The Company has a variable bank line of credit for up to
$2,000,000 with interest payable monthly at 1.5% over prime (10.0% at
September 27, 1997). The amount available to the Company under the
line is based upon a formula that considers the Company's trade
receivables and finished goods inventory. At September 27, 1997 the
amount outstanding on the line was $1,367,561 which was the maximum
amount supported by the borrowing base at that time. The line was
renewed in June 1997 and matures in June 1998. As a condition of the
June 1997 renewal the Company was required to raise a minimum of
$350,000 in additional equity or subordinated debt by July 15, 1997.
The Company raised the required amount in the form of a subordinated
bank loan made to an officer of the Company, the proceeds of which
were used to reduce the amount outstanding on the Company's bank line
(see Note 7). At September 28, 1996 the outstanding balance on the
line was $1,750,000 with interest payable monthly at .75% over prime
(9.0% at September 28, 1996). The line of credit is collateralized by
essentially all of the assets of the Company. The line of credit is
also subject to debt covenants which allow the Company to have maximum
quarterly losses of $350,000, and require the Company to maintain a
tangible net worth as defined by the bank of $5,500,000, a minimum
current ratio of 1.50 and a maximum debt to net worth ratio of 1.25.
The terms of the bank line were modified subsequent to year end (see
Note 14).
The weighted-average interest rate on short-term borrowings was 9.4%
and 9.2% for fiscal years 1997 and 1996, respectively.
7. Notes Payable to Related Parties and Others:
Notes payable to related parties and others at September 27,
1997 consists of a subordinated loan from an officer (see Note 6) and
subordinated short term notes payable to individuals including a
director and an officer of the Company. At September 27, 1997 the
amount due on the subordinated loan from an officer was $344,697.
Interest on the loan is payable monthly at 1.0% over prime (9.5% at
September 27, 1997) and the loan is due on July 15, 1998. The
subordinated short term notes are for a six month term due March 1998,
with a six month renewal option by the Company. Of the $550,000
principal value, $250,000 is payable to directors and officers of the
Company. Interest is payable quarterly at 10% per annum. The notes
include detachable warrants to purchase 9,240 shares of common stock,
exercisable for $0.10 per share. The proceeds from the borrowing were
allocated to the carrying value of the notes and additional paid in
capital based on the relative fair values of the notes and the common
stock warrants. The related discount of $43,810 on the notes is
accreted by periodic charges to earnings over the initial six month term
of the notes. The terms of the subordinated short term notes were
modified subsequent to year end (see Note 14).
8. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Subordinated Convertible Debentures, principal and
interest due February 1999 (see Note 14) $2,000,000 $2,000,000
Less discount, net of accumulated amortization of
$150,730 and $64,000 respectively, related to
allocation of debt proceeds to stock conversion rights. (329,270) (416,000)
-----------------------
1,670,730 1,584,000
Foreign denominated mortgage notes payable (DKK 1,017,424
at September 28, 1996) -- 173,775
Mortgage note, monthly payments of $866, including
interest at 10.75% adjustable annually, due
July 2003, collateralized by the underlying
building 64,605 70,082
Collateralized equipment loan, monthly payments of $4,168,
plus interest at prime plus 1.25%, due October 1997 4,167 54,167
Collateralized equipment loan, monthly payments of $4,626,
plus interest at prime plus 1.25%, due April 1998. 37,005 92,515
-----------------------
1,776,507 1,974,539
Less current maturities 44,806 124,854
-----------------------
$1,731,701 $1,849,685
=======================
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Fiscal
1998 $ 44,806
1999 2,004,044
2000 4,501
2001 5,010
2002 5,575
Thereafter 41,841
</TABLE>
On December 19, 1995 the Company completed a private placement
issuance of $2,000,000 in Subordinated Convertible Debentures (the
"Debentures"), orginally due December 19, 2000. The Debentures bear
interest at increasing rates from 10-15% per annum, and may be prepaid
at any time, subject to the lender's rights of conversion. On May 8,
1997 the lender agreed to extend the due date of interest payments to
February 28, 1998, with regularly scheduled quarterly payments
resuming in March 1998. Accrued interest payable on the Debentures
was $321,575 at September 27, 1997. The lender may convert the
Debentures after December 19, 1998 into 2,000 shares of redeemable
preferred stock and 2,000 shares of convertible preferred stock. The
Company may convert at its option after December 19, 1997. The
$2,000,000 proceeds from the Debentures were allocated to the
Debentures' carrying value and additional paid in capital based on the
relative fair values of the Debentures and the 163,967 shares of
common stock obtainable upon conversion. The related discount of
$480,000 on the Debentures is accreted by periodic charges to earnings
over the life of the issue.
Due to the unique terms and conditions of the Debentures, there
are no quoted market prices for similar instruments. At the date of
issuance, the Company estimated the fair value of the debt component
of the Debentures to be approximately $2,185,000 based upon then
current interest rates for straight bonds of companies with similar
creditworthiness. Based upon interest rates through September 27,
1997, management believes that the fair value of the debt component of
the Debentures (carrying value of $ 1,670,730 as of September 27,1997)
has not changed materially from the date of issuance.
On November 24, 1997, the lenders notified the Company that it
had violated certain covenants in the form of actions taken by the
Company, specifically related to incurring additional debt. The
alleged covenant violations relate to financial and reporting
covenants and are not payment related defaults. The Company and the
lenders have resolved the matter by agreeing to modify the terms of
the original Debenture Agreement (see Note 14).
The estimated fair value of the note payable to bank, notes payable to
related parties and others, and long-term debt at September 27, 1997
approximates the carrying value of such debt in the financial
statements, based on current interest rates for similar obligations
with like maturities.
9. Commitments and Contingencies:
The Company is the lessee of equipment under capital leases
expiring in the year 2000. At the time of acquisition, the assets and
liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the
assets. The Company leases manufacturing, warehouse and office
facilities under various operating leases. Rental expense for these
leases, excluding real estate taxes paid by the Company for a leased
building, was $207,000 in 1997, $196,000 in 1996, and $207,000 in
1995. During 1995, the Company renegotiated the terms of its
Pocasset, Massachusetts facility lease. The expenses of settlement
were included in the restructuring charge (see Note 13).
Approximate future minimum lease payments, by year and in the
aggregate, under capital and noncancelable operating leases, were as
follows at September 27, 1997:
<TABLE>
<CAPTION>
Capital Operating
-------- ---------
<S> <C> <C>
1998 $103,186 $137,702
1999 52,863 17,293
2000 39,454 --
-------------------
Total future minimum lease payments 195,503 $154,995
========
Less amounts representing interest (23,031)
---------
Present value of future minimum lease payments 172,472
Current portion 88,480
---------
Non current 83,992
=========
</TABLE>
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.
10. Narrowband Network Systems, Inc. ("NNS"):
On November 18, 1994, NNS was incorporated in the State of
Washington as a subsidiary of SEA to participate in the business of
providing specialized mobile radio ("SMR") services.
NNS has entered into management agreements ("Management
Agreements") with the holders of 220 MHz licenses granted by the FCC
in approximately 47 markets across the United States (the "Managed
Markets"). Under the Management Agreements, NNS is required to
construct and develop the SMR systems in the Managed Markets. NNS
retains the revenues generated by the systems, after remitting a fixed
percentage to the license holders.
Under each of the Management Agreements, NNS has an option after
construction to acquire the license holder's interest in their
respective SMR system in exchange for (i) a fixed percentage of the
gross receipts from the system for as long as it continues to be
operated by NNS and (ii) a fixed percentage of any profit realized by
NNS upon the system's ultimate disposition. In certain cases, NNS has
guaranteed a minimum dollar amount to be remitted to the license
holder upon system disposition.
In April 1995, NNS entered into an agreement with Incom
Communications Corporation ("ICC") for the operation of the SMR
systems in certain of the Managed Markets. Under the terms of this
agreement, NNS is obligated to provide the licenses and certain
backbone equipment for each system and ICC is required to provide
either all or partial operational support. Revenues from system
operations are split between NNS and ICC using contractual percentages
based upon the level of support provided by each.
In addition, the Company has contracted with other third parties
("SMR Operators") for operation of the systems in certain of the
Managed Markets. Under the terms of these agreements, NNS is to
provide the system facilities and the SMR Operators agree to provide
essentially all other operational support in exchange for a fixed
percentage of the gross revenues from each system and an equity
interest in the systems, including the related licenses.
At September 27, 1997 and September 28, 1996 respectively,
fixed assets include $1,541,840 and $1,500,024 (less accumulated
depreciation of $243,800 and $90,619) of facilities related to the SMR
systems and other assets include $396,716 and $360,760 (less
accumulated amortization of $61,339 and $23,743) representing legal
and other costs associated with the acquisition of license interests
in the Managed Markets. Because only limited operations have
commenced, revenues from NNS's operations were immaterial through
September 27, 1997.
The recoverability of narrowband network equipment and related
capitalized legal and acquisition costs of FCC licenses is dependent
upon the successful development of systems in each of the respective
markets, or through the sale of such assets. Management estimates
that it will recover the carrying amounts of those assets from cash
flow generated by the systems once they have been developed. However,
it is possible that such estimates could change as a result of
technological, regulatory or other changes.
11. Stockholders' Equity:
Stock Option Plans
The 1992 Stock Option Plan for Non-Employee Directors provides
for annual grants of nonqualified options to purchase 1,500 common
shares to each non-employee Director. The exercise price for options
granted is equal to the fair market value at the date of grant.
Options granted under this Plan are immediately vested and exercisable
for a period of ten years from the date of grant so long as the holder
remains a Director. The Plan was terminated by the Board of Directors
on December 12, 1995 and no new awards will be made under the 1992
Plan.
Information regarding activity in the 1992 Stock Option Plan for Non-
Employee Directors is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------ --------
<S> <C> <C>
Outstanding at October 1, 1994 6,000 $4.56
Granted 3,000 8.62
-----------------
Outstanding at September 30, 1995 9,000 5.91
Exercised (4,500) 5.91
-----------------
Outstanding and exercisable at September 28, 1996
and September 27, 1997 4,500 $5.91
=================
</TABLE>
The 1995 Stock Option Plan for Non-Employee Directors was
approved by the stockholders at the special meeting held in 1996. The
Plan provides for annual grants of nonqualified options to purchase
2,000 common shares to each non-employee Director. The exercise price
for options granted is equal to the fair market value at the date of
grant. Options granted under this Plan are immediately vested and
exercisable for a period of ten years from the date of grant so long
as the holder remains a Director.
Information regarding activity in the 1995 Stock Option Plan for
Non-Employee Directors is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------ --------
<S> <C> <C>
Granted in fiscal 1996 8,000 $9.00
-----------------
Outstanding and exercisable at September 28, 1996 8,000 9.00
Granted in fiscal 1997 6,000 7.00
Forfeited in fiscal 1997 (2,000) 9.00
-----------------
Outstanding and exercisable at September 27, 1997 12,000 $8.00
=================
Weighted average fair value of options granted
during the year ended September 27, 1997 $3.59
</TABLE>
The 1991 Stock Option Plan authorized grants of incentive and
nonqualified stock options for 350,000 common shares, of which 200,000
shares are reserved for issuance of options at an exercise price equal
to the fair market value at the date of grant and vest equally over
time, generally four years (the "Qualified Options"), 100,000 shares
are reserved for issuance of options which vest equally over time but
do not meet the requirements of the Qualified Options (the
"Nonqualified Options"), and 50,000 shares are reserved for issuance
of options which also do not meet such requirements, but are subject
to an accelerated vesting schedule (the "Piggy-Back Options").
Qualified Options and Nonqualified Options expire not more than
ten years from the date of grant and Piggy-Back Options expire twenty
years and six months from the date of grant. The Piggy-Back Options
are to be granted in conjunction with the grant of Nonqualified
Options. The Piggy-Back Options shall not be exercised prior to
twenty years from the date of the grant, except that if, within five
years from the date of grant, the trading price exceeds a specified
price, such Piggy-Back Options shall become subject to a five-year
vesting schedule with respect to the number of shares equal to 50% of
the unexercised portion of Nonqualified Options granted to the
employee. All Piggy-Back Options outstanding at September 27, 1997
commenced five year vesting on September 9, 1994.
Proceeds received from the exercise of options are credited
to the capital accounts. Compensation cost is recorded based upon the
difference between market prices and exercise prices at the date of
grant and amortized to expense over the vesting period pursuant to APB
Opinion No. 25, Accounting for Stock Issued to Employees.
Information regarding activity in the 1991 Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Qualified Options Nonqualified Options Piggy-Back Options
------------------ -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at October 1, 1994 93,508 $4.47 51,500 $1.50 25,750 $4.50
Exercised (20,670) 4.46 (7,500) 1.50 (750) 4.50
Granted 21,500 9.00 6,500 6.00 -- --
Canceled -- -- -- -- (3,000) 4.50
-------------------------------------------------------------
Outstanding at September 30, 1995 94,338 5.50 50,500 2.08 22,000 4.50
Exercised (2,525) 4.72 (3,125) 1.68 -- --
Canceled (875) 9.00 (375) 6.00 -- --
-------------------------------------------------------------
Outstanding at September 28, 1996 90,938 5.49 47,000 2.07 22,000 4.50
Granted 2,500 9.00 10,000 1.00 -- --
Exercised (5,632) 4.50 -- -- -- --
Canceled (782) 7.38 (500) 6.00 -- --
-------------------------------------------------------------
Outstanding at September 27, 1997 87,024 5.63 56,500 1.85 22,000 4.50
Exercisable at September 27, 1997 74,524 5.07 46,250 1.74 17,600 4.50
Available for grant at September 27, 1997 84,149 -- 27,125 -- 27,250 --
Exercisable at September 28, 1996 75,563 4.77 42,500 1.66 13,200 4.50
Exercisable at September 30, 1995 72,838 4.47 44,000 1.50 8,800 4.50
Weighted average fair value of options
granted during the year ended
September 27, 1997:
Exercise price equal to market at grant (2,500 options) $5.39
Exercise price less than market at grant (10,000 options) $6.32
</TABLE>
The following is a summary of stock options outstanding under
the 1991, 1992 and 1995 plans at September 27, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Range of Weighted Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------- ----------- ---------------- -------------- ----------- --------------
<C> <C> <C> <C> <C> <C>
$1.00-1.50 51,000 .46 $1.40 43,500 $1.47
$4.00-6.00 95,024 .32 $4.56 87,874 $4.52
$7.00-9.00 36,000 1.08 $8.65 23,500 $8.47
</TABLE>
The total compensation cost recognized in income for stock-based
compensation was $18,208 in 1997 and $20,995 in 1996. Had the
compensation cost for the Company's option plans been determined
consistent with FAS 123, the Company's pro forma net income (loss) and
net income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
------------ --------
<S> <C> <C>
Net income (loss):
As reported $(2,768,331) $750,981
Pro forma (2,811,304) 713,701
Net income (loss) per share:
As reported $ (2.11) $ .49
Pro forma (2.14) .47
</TABLE>
The fair value of each option grant has been estimated on the
date of the grant using the Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1997 1996
------------ ----
<S> <C> <C>
Dividend yield 0% 0%
Volatility 70.4 - 71.8 73.9
Risk free interest rate 5.54% - 6.36% 5.29%
Expected option term (years) 3 - 6 3
</TABLE>
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for full-time
employees who have attained certain length-of-service requirements and
who do not own 5% or more of the Company's outstanding stock. Under
the terms of the plan, eligible employees are granted the right on a
semiannual basis to purchase shares of the Company's common stock.
The purchase price is equal to 90% of the fair market value of the
Company's common stock during certain predetermined periods, and
employees may purchase shares having an aggregate value of up to 10%
of basic compensation. The Company issued 838 shares in 1997, 843
shares in 1996 and 1,272 shares in 1995 in connection with the
Employee Stock Purchase Plan.
Employee Investment Plan
The Company maintains the Datamarine Employee Investment Plan (a
401(k) Plan). All full-time employees who have reached age 21 and
have one year of service are eligible for participation. Employees
can contribute up to 15% of their base salary with the Company
matching 50% of the first 6% of base salary contributed. The Company
issued 4,592 shares in 1997, 3,734 in 1996 and 4,599 shares in 1995
under the Employee Investment Plan.
Shares Reserved for Future Issue
At September 27, 1997, the Company had reserved the following
shares of its common stock for future issue:
<TABLE>
<S> <C>
Employee Stock Purchase Plan 5,990
1991 Stock Option Plan:
Qualified Options 171,173
Nonqualified Options 83,625
Piggy-Back Options 49,250
1992 Stock Option Plan for Non-employee Directors 4,500
1995 Stock Option Plan for Non-employee Directors 48,000
Convertible Debentures 163,967
Subordinated Notes 9,240
-------
535,745
=======
</TABLE>
Preferred Stock
In connection with the issuance of the Subordinated Convertible
Debentures in fiscal 1996, the Company also authorized 1,000,000 shares
of preferred stock, $1 par. Under certain conditions, the Debentures
are convertible into 2,000 shares of redeemable preferred stock and
2,000 shares of convertible preferred stock.
Each $1,000 principal value of the Debentures is convertible
into one share of redeemable preferred stock. The redeemable
preferred stock is entitled to dividends in an amount equal to the
interest that would otherwise be payable on the Debentures, and is
subject to mandatory redemption in December 2000. The redeemable
preferred stock has no voting rights. The Company has the option any
time after December 19, 1997 of redeeming all, but not less than all,
of the redeemable preferred stock then outstanding at a price of
$1,000 per share.
Each share of convertible preferred stock is convertible into
approximately 82 shares of the Company's common stock. Convertible
preferred shares have voting rights equal to common shares, and are
entitled to such number of votes per share as equals the number of
shares of common stock into which each share of convertible preferred
is then convertible. The Company has the option any time after
December 19, 2000 of converting the convertible preferred stock to
common stock, or redeeming the shares at fair value. In accordance
with the Debenture Agreement, the Company has reserved for future
issue 4,000 shares of preferred stock.
12. Income Taxes:
The components of income tax expense (benefit) consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- -----------
<S> <C> <C> <C>
Deferred (benefit) provision - Federal $737,909 $388,083 $(1,083,640)
====================================
</TABLE>
The tax effects of temporary differences that give rise to deferred
tax assets are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net federal and state operating loss carryforwards $1,331,000 $ 622,000
Accrued expenses not currently deductible for tax purposes 185,000 206,000
General business tax credit carryforwards 128,000 128,000
Property and equipment (9,000) 12,000
Allowance for doubtful accounts 75,000 58,000
Inventory, principally due to valuation differences and
overhead application 148,000 148,000
Other, individually less than 5% of deferred tax asset 7,775 909
------------------------
1,865,775 1,174,909
Less valuation allowance (1,865,775) (437,000)
------------------------
Net deferred tax assets $ -- $ 737,909
========================
</TABLE>
At October 1, 1994, a valuation allowance was recorded equal to the
Company's deferred tax asset balance of $1,142,000 due to the uncertainty
of future taxable income. During fiscal 1995, the valuation allowance was
reduced by $702,000 to reflect management's then current assessment of
the amount of deferred federal tax assets which were more likely
realizable than not. The valuation allowance balance at September 28,
1996 relates primarily to deferred state tax benefits of net operating
loss carryforwards and future deductible temporary differences which are
not expected to be realized on a separate company return basis. Although
the Company had losses for each of the first three quarters of fiscal
1997, the Company continued to recognize a deferred tax benefit because
management believed is was more likely than not that that all of the
federal deferred tax asset would be realized from taxable income in
future years. Management's assumptions were based in part upon
information from industry sources and the FCC indicating that the auction
of new 220 MHz licenses could take place in November 1997, in which case
the Company projected it would have taxable income in fiscal 1998.
Subsequent to year end the FCC announced that the auction of 220 MHz
licenses would commence May 19, 1998, later than management had
originally anticipated. In addition, expenses related to the amortization
of the deferred financing costs and discount on the Subordinated
Convertible Debentures will increase due to the revised earlier maturity
date (see Note 14). Based on these factors, management expects the
Company will incur operating losses in fiscal 1998. Generally Accepted
Accounting Principles ("GAAP") provide guidance as to when a deferred tax
valuation allowance may be required. Management considered the fiscal
1997 loss, the expected fiscal 1998 loss, and the inability to predict
with certainty what land mobile sales will be in the post FCC auction
period. Based on the information available, management concluded that a
valuation allowance equal to 100% of the deferred tax asset should be
established at year end.
The reconciliation of income taxes at the federal statutory rate
of 34% to the income tax provision (benefit) presented in the
consolidated statement of operations is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- -------- ------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ (690,000) $387,000 $ (261,000)
State income taxes, net of federal tax benefit (6,000) 4,000 (99,000)
Other 5,134 83 (21,640)
Change in valuation allowance 1,428,775 (3,000) (702,000)
-----------------------------------
Income tax expense (benefit) $ 737,909 $388,083 $(1,083,640)
===================================
</TABLE>
As of September 27, 1997, the Company has net federal operating loss
carryforwards of $2,880,000 which are available to reduce future
federal taxable income ($71,000 of which expire in fiscal 2008,
$513,000 in fiscal 2009, $225,000 in fiscal 2010 and the remainder in
2012). The Company also has general business tax credit carryforwards
of $128,000, of which $54,000 expire between 2006 and 2111, and the
balance of $74,000 can be carried forward indefinitely.
13. Restructuring Charge:
During fiscal 1995, the Company recognized a special charge of
$686,458 in connection with a restructuring program designed to
improve productivity and permanently reduce costs. The Company moved
its corporate administrative functions and production of its
instrumentation product line from Pocasset, Massachusetts to its
facility in Mountlake Terrace, Washington. The restructuring was
announced in January 1995 and was substantially completed by
December 31, 1995. The program resulted in the permanent reduction of
approximately 30 employees and 35,000 square feet of manufacturing and
office space. The restructuring charge was comprised of $346,524 in
writedowns of production equipment and leasehold improvements, $94,630
in writedowns of inventory related to discontinued products, $147,748
in employee termination benefits, and $97,556 in lease settlement
costs. The lease was settled for $210,000, including $112,444
related to past due rental amounts, comprised of $30,000 in cash and
the issuance of 22,000 shares of the Company's common stock having a
fair market value of $180,000. Upon final pricing 2,000 of the
settlement shares were returned to the Company.
14. Subsequent Events:
On February 24, 1998 the Company and Alta Subordinated Debt Partners III,
L.P. ("ASDP III") agreed to modify certain provisions of the Subordinated
Convertible Debentures (the "Debentures"). The agreement was reached in
order to resolve ASDP III's claim that the Company had violated certain
financial and reporting covenants. Significant terms of the revised
agreement are:
1) Changing the maturity date of the Debentures from December 19, 2000
to February 19, 1999.
2) Deferral of all interest payments on the Debentures until February
19, 1999.
3) Issuing the common shares of the Company which are attached to the
Debentures (approximately 164,000) on February 19, 1999.
4) Release of collateral and subordination of rights by the holders of
the subordinated short term notes. Deferral of principal and
interest payments on the subordinated short term notes until the
Debentures are paid in full.
5) Payment by the Company of expenses related to the modification.
In connection with modifying the terms of the Debentures as described
above, the Company and holders of the subordinated short term notes
agreed to modify the terms of those notes. Significant terms of the
revised notes are:
1) Release of collateral and subordination of rights by the holders of
the subordinated short term notes.
2) Deferral of principal and interest payments on the subordinated
short term notes until the Debentures are paid in full.
3) Granting the Company an option to extend the due date one year
(to March 1999). Upon the Company's exercise of the option the
holders will receive warrants to purchase a total of 32,500 shares
of common stock, exercisable for $0.10 per share.
In connection with modifying the terms of the Debentures and the
subordinated short term notes, and in order to manage the Company's
working capital requirements through fiscal 1998, the Company renewed
its variable bank line on essentially the same terms, except for the
following:
1) The due date of the line is February 28, 1999.
2) The maximum quarterly loss provision was replaced with a minimum
quarterly revenue requirement.
3) The minimum tangible net worth as defined by the bank is
$3,800,000.
4) The interest rate has been increased to prime plus 2%. However, the
Company has the option to decrease the interest rate to prime plus
.5% if, by March 10, 1998, the Company agrees to issue to the bank
10,000 warrants to purchase common stock at market (at the time of
issuance).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information as of Janaury 6, 1998 regarding the nominee and each
director is set forth below, including such individual's age and principal
occupation, a brief account of business experience during at least the last
five years, and directorships held at other publicly-held companies.
Nominated for a term ending in 2001:
<TABLE>
<CAPTION>
Director Position with Company or Principal
Name Age Since Occupation During the Past Five Years
- -------------------- --- -------- ---------------------------------------------
<S> <C> <C> <C>
David C. Thompson 68 1987 President and CEO of the Company since
October 1997. Secretary and Treasurer of the
Company since March 1996. Principal
Financial and Accounting Officer of the
Company from 1995 to October 1997. President
and CEO of SEA Inc., a wholly owned
subsidiary of the Company. Previously
President and CEO of Stephens Engineering
Associates, Inc., which was acquired by the
Company in 1986.
</TABLE>
Serving for a term ending in 2000:
<TABLE>
<CAPTION>
Director Position with Company or Principal
Name Age Since Occupation During the Past Five Years
- -------------------- --- -------- ---------------------------------------------
<S> <C> <C> <C>
Peter D. Brown 50 1991 President and CEO of the Company from
September 1991 through October 1997.
Chairman of the Board of the Company since
December 1995. CEO of the South Beach
Company, a management company, since 1990.
Currently, Vice President and Treasurer of
Gordon & Ferguson, a manufacturer of men's
and boy's outerwear. From 1974 through 1990,
CEO of Heather Hill Sportswear Co., an
apparel company.
</TABLE>
Serving for a term ending in 1999:
<TABLE>
<CAPTION>
Director Position with Company or Principal
Name Age Since Occupation During the Past Five Years
- -------------------- --- -------- ---------------------------------------------
<S> <C> <C> <C>
Stephen W. Frankel 51 1997 Since 1996, self employed private investor.
From 1988 through 1995, served in various
capacities including President, COO,
Chairman and CEO of RETIX, a manufacturer of
networking products.
</TABLE>
The names of the executive officers of the Company, their positions and offices
with the Company, and their ages are set forth below.
<TABLE>
<CAPTION>
Name Age Office
<S> <C> <C>
David C. Thompson 68 President and Chief Executive Officer
(Since October 1997)
Peter D. Brown 50 Chairman of the Board (President and
CEO to October 1997)
Jan Kallshian 43 Chief Financial Officer
</TABLE>
David C. Thompson was named President and CEO of the Company in October 1997.
Mr. Thompson has been Secretary and Treasurer of the Company since March 1996,
and served as the Company's Principal Financial and Accounting Officer from
1995 to October 1997. Mr. Thompson is also President and CEO of SEA Inc., a
wholly owned subsidiary of the Company. Mr. Thompson was previously President
and CEO of Stephens Engineering Associates, Inc., which was acquired by the
Company in 1986.
Peter D. Brown served as President and CEO of the Company from September 1991
through October 1997, and has served as Chairman of the Board of the Company
since December 1995.
Jan Kallshian was named Chief Financial Officer of the Company in October 1997.
Since April 1995 Mr. Kallshian has served as a consultant to the Company which
included performing the duties of the Chief Financial Officer. Mr. Kallshian
has over 15 years experience in the high technology manufacturing industry and
has held positions in finance and general management. Mr. Kallshian is a CPA
and was previously with the accounting firm of Coopers & Lybrand.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid
to the Company's Chief Executive Officer and each of the Company's executive
officers (other than the Chief Executive Officer) who served during the most
recent fiscal year (the "Named Executive Officers") for all services rendered
in all capacities to the Company and its subsidiaries for the Company's fiscal
years ended September 27, 1997, September 28, 1996 and September 30, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------------------ ------------
Other Annual Stock All Other
Name and Principal Position(s) Year Salary($) Bonus($) Compensation($)(1) Options(#) Compensation($)
- ------------------------------ ---- --------- -------- ------------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter D. Brown 1997 $ -- $ -- $ 4,000(2) 2,000 $ --
President/CEO Chairman 1996 -- -- 4,300(2) 2,000 --
of the Board 1995 -- -- 2,800(2) 1,500 --
David C. Thompson 1997 113,329 -- -- -- 3,283(3)
President/CEO of SEA, Inc. 1996 102,935 -- -- -- 828(3)
1995 92,657 -- -- 7,000 --
<FN>
- -------------------
<F1> In accordance with rules of the SEC the Company is not required to report
the value of personal benefits for any year unless the aggregate dollar
value exceeds the lesser of ten percent of the executive officer's salary
and bonus or $50,000.
<F2> Consists of directors fees.
<F3> Represents amounts contributed by the Company under its 401(k) Plan.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding the grants of
stock options to each of the Named Executive Officers during the fiscal year
ended September 27, 1997.
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted Market Price
Options to Employees in Exercise or at Date of Expiration
Name Granted(#) Fiscal Year Base Price($/Sh) Grant Date
- -------------- ---------- ---------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Peter D. Brown 2,000 (1) 13.5% $ 7.00 $ 7.00 2/4/2007
<FN>
- -------------------
<F1> Options granted under the 1995 Stock Option Plan for Non-employee
Directors
</FN>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information on option exercises by the Named
Executive Officers during the fiscal year ended September 27, 1997, and the
value of unexercised options held by the Named Executive Officers on
September 27, 1997.
<TABLE>
<CAPTION>
Number of Shares Underlying
Unexercised Options at Value of Unexercised Options
September 27, 1997 (#) at September 27, 1997($)(1)
Shares Acquired Value --------------------------- ----------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------ --------------- --------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Peter D. Brown None None 8,500 -- $ 1,215 $ --
David C. Thompson None None 40,132 4,500 43,856 310
<FN>
- -------------------
<F1> Value of unexercised options represents the difference between the
exercise prices of the stock options and the closing price ($4.81 per
share) of the Company's common stock on September 25, 1997, the last
trading day of the Company's fiscal year. Only in-the-money options
are considered in the calculation.
</FN>
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership
(determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended) of the Company's common stock as of January 6, 1998 (unless
otherwise indicated) by (a) each person known by the Company to beneficially
own more than five percent of the outstanding shares of common stock, (b) each
director of the Company who beneficially owns any shares,(c) each Named Officer
(see "Executive Compensation"), and (d) all directors and officers as a group:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership(1) of Class
- -------------- ------------------------------------ ----------------------- --------
<S> <C> <C> <C>
Common Stock Peter D. Brown 278,323(2) 20.8%
545 Cedar Lane
Teaneck NJ 07666
Common Stock David C. Thompson 146,925(3) 10.7%
SEA Inc.
7030 - 220th Street S.W.
Mountlake Terrace WA 98043
Common Stock Steven T. Newby 130,000(4) 9.8%
6116 Executive Blvd., Ste. 701
Rockville MD 20852
Common Stock Stephen W. Frankel 66,820(5) 5.0%
7030 - 220th Street S.W.
Mountlake Terrace WA 98043
Common Stock Jan Kallshian 2,180(6) *
7030 - 220th Street S.W.
Mountlake Terrace WA 98043
Common Stock All Directors and Executive Officers 442,576 32.0%
as a group (4 persons)
<FN>
- -------------------
<F*> Less than 1%
<F1> Includes common shares which may be acquired upon exercise of options to
purchase shares from the Company exercisable on or within 60 days of
January 6, 1998.
<F2> Represents 169,937 shares held of record, 8,500 shares subject to
presently exercisable stock options, 21,050 shares held in trust for Mr.
Brown's minor child, 27,164 shares held by a Retirement Plan Trust for
Mr. Brown, and 51,672 shares held in trust for the Company's Employee
Investment Plan for which Mr. Brown serves as a co-trustee. Mr. Brown
disclaims beneficial ownership of the 27,164 shares held by his
Retirement Plan Trust.
<F3> Represents 55,121 shares held of record, 40,132 shares subject to
presently exercisable stock options, and 51,672 shares held in trust for
the Company's Employee Investment Plan for which Mr. Thompson serves as a
co-trustee.
<F4> Based upon the Schedule 13D filed with the SEC by the beneficial owner on
March 25, 1997 and subsequent communication with the beneficial owner as
of December 14, 1997.
<F5> Represents 64,300 shares held of record and 2,520 shares subject to
presently exercisable common stock warrants.
<F6> Represents 500 shares held of record and 1,680 shares subject to
presently exercisable common stock warrants. Mr. Kallshian was named
Chief Financial Officer of the Company in October 1997.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1997, Mr. Thompson made a subordinated loan to the Company in the
amount of $344,697.
During fiscal 1997, Mr. Frankel made a subordinated short term loan to the
Company in the amount of $150,000.
During fiscal 1997, Mr. Kallshian and members of his family (as defined by SEC
rules) made subordinated short term loans to the Company in the amount of
$300,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
The financial statements as set forth under Item 8 are filed as part
of this report.
Schedule II - Valuation and Qualifying Accounts
Report of Independent Accountants on above listed financial statement
schedule.
Schedules not listed above have been omitted since they are either not
required, not applicable, or the information is included in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended
September 27, 1997:
Form 8-K dated July 24, 1997. Resignation of a director.
Form 8-K dated September 22, 1997. Issuance of short-term
subordinated notes.
(c) List of Exhibits. The following exhibits are filed as a part of, or
incorporated by reference into, this report on Form 10-K.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Organization, as amended, incorporated by reference
to Annual Report on Form 10-K for the Fiscal Year Ended September 30,
1995.
3.2 Bylaws, incorporated by reference to Registration Statement 0-8936 on
Form 10.
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.
4.2 Terms for Amendment of December 19, 1995 Debenture Agreement
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.
11 Computation of Earnings Per Share
21 Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DATAMARINE INTERNATIONAL, INC.
By:/s/ DAVID C. THOMPSON
-----------------
David C. Thompson
President, Chief Executive Officer and Director
By:/s/ JAN KALLSHIAN
-------------
Jan Kallshian
Chief Financial Officer
Date: March 2, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:/s/ PETER D. BROWN
--------------
Peter D. Brown, Chairman of the Board
March 2, 1998
By:/s/ STEPHEN W. FRANKEL
------------------
Stephen W. Frankel, Director
March 2, 1998
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ----------- ------------ -------------------------- ---------- -------------
Additions
Balance at -------------------------
Beginning of Charged to Charged to Deductions Balance at
DESCRIPTION Period Expenses Other (describe) End of Period
- ----------- ------------ ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended September 27, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 171,990 89,691 26,708(1) $ 234,973
Allowance for slow moving inventory 187,129 48,384 12,335(2) 223,178
Valuation allowance for deferred tax asset 437,000 1,428,775(4) 1,865,775
-------------------------------------------------------------------
Totals $ 796,119 138,075 1,428,775 39,043 $2,323,926
===================================================================
Product warranty liability $ 235,497 75,496 170,530(3) $ 140,463
===================================================================
Year ended September 28, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 158,193 81,615 67,818(1) $ 171,990
Allowance for slow moving inventory 273,624 58,056 144,551(2) 187,129
Valuation allowance for deferred tax asset 440,000 3,000(4) 437,000
-------------------------------------------------------------------
Totals $ 871,817 139,671 215,369 $ 796,119
===================================================================
Product warranty liability $ 237,469 117,608 119,580(3) $ 235,497
===================================================================
Year ended September 30, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 142,292 59,725 43,824(1) $ 158,193
Allowance for slow moving inventory 183,502 104,417 14,295(2) 273,624
Valuation allowance for deferred tax asset 1,142,000 702,000(4) 440,000
-------------------------------------------------------------------
Totals $1,467,794 164,142 760,119 $ 871,817
===================================================================
Product warranty liability $ 197,524 120,819 80,874(3) $ 237,469
===================================================================
<FN>
- --------------------
<F1> Uncollectible accounts written off, net of recoveries.
<F2> Obsolete material written off.
<F3> Warranty claims honored during the year.
<F4> Change in deferred tax asset valuation account, charged or credited to
income tax expense.
</FN>
</TABLE>
Report Of Independent Accountants
To the Stockholders and Board of Directors of
Datamarine International, Inc.
Our report on the consolidated financial statements of Datamarine
International, Inc. and Subsidiaries as of September 27, 1997 and September
28, 1996 and for the years ended September 27, 1997, September 28, 1996 and
September 30, 1995 is included in this Annual Report on Form 10-K. In
connection with our audits of such financial statements, we have also
audited the related consolidated financial statement schedule for the years
ended September 27, 1997, September 28, 1996 and September 30, 1995, listed
in Item 14(a) of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information
required to be included therein.
/s/:COOPERS & LYBRAND L.L.P
Seattle, Washington
December 11, 1997, except for the fourth and fifth paragraphs of Note 1, the
last sentence in the first paragraph of Note 6, the last sentence of Note 7,
the last sentence in the third paragraph of Note 8, and Note 14 to the
financial statements as to which the date is March 2, 1998.
EXHIBIT 4.1
SUBORDINATED NOTES
THIS NOTE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "'33 ACT") OR ANY STATE SECURITIES LAWS,
AND HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW
TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. THIS
NOTE MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED UNLESS REGISTERED OR
QUALIFIED UNDER THE `33 ACT AND APPLICABLE STATE SECURITIES LAWS,
UNLESS SUCH RESALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH LAWS.
PROMISSORY NOTE
$100,000.00 September ___, 1997
Seattle, Washington
FOR VALUE RECEIVED, Datamarine International Inc., a Massachusetts
corporation ("Maker"), with its principal offices at 7030 220th S.W.,
Mountlake Terrace, Washington 98043, promises to pay to ______________ or
order ("Holder"), at _____________________________
_______________________________________________, or such other address as
Holder may designate from time to time, the sum of One Hundred Thousand
Dollars and No Cents ($100,000.00) plus interest thereon as set forth below.
1. Interest. Interest on the outstanding principal balance of this
note shall accrue at the rate of ten percent (10%) per annum.
2. Warrant Coverage. In consideration of Holder making the loan
evidenced by this note, Maker shall issue and deliver to Holder a Common
Stock Purchase Warrant in the form of Exhibit A attached hereto for 1,680
shares of Common Stock of Maker. In addition, as a condition to Maker's
exercise of the Extension Option (as defined in Section 3 below), Maker
shall issue and deliver to Holder an additional Common Stock Purchase
Warrant in the form of Exhibit A attached hereto for 1,680 shares of Common
Stock of Maker (the "Extension Warrant").
3. Payment. Interest only shall be payable in arrears on a
quarterly basis commencing December ___, 1997. Subject to Section 4(b), the
entire principal sum and all accrued but unpaid interest and any other sums
payable hereunder shall be due and payable in full on March ___, 1998
("Maturity Date"); provided, that unless the note is in default, the Maker
may at its option extend the Maturity Date until September ___, 1998 by
written notice to Holder delivered, together with the Extension Warrant, at
any time prior to March ___, 1998 (the "Extension Option").
4. Prepayment.
(a) Optional. Upon ten (10) days prior written notice to
Holder, this note may be prepaid and redeemed in whole or in part at any
time, without penalty or premium, at a redemption price equal to (i) in the
case of a redemption in whole, the outstanding principal balance of this
note together with all accrued but unpaid interest and any other sums
payable hereunder or (ii) in the case of a redemption in part, a
proportionate amount of such outstanding principal balance, accrued but
unpaid interest and other sums, in each case as the date of redemption.
(b) Mandatory. This note shall be prepaid and redeemed in full
within ten (10) days of the consummation of a Qualified Financing (as
defined below), at a redemption price equal to the then-outstanding
principal balance of this note together with all accrued interest and any
other sums payable hereunder. For these purposes, "Qualified Financing"
means a convertible debt or equity financing resulting in gross proceeds to
Maker of at least $1,250,000.
5. Security. This note is secured by a security interest in
inventory, general intangibles and accounts receivable of Maker (the
"Collateral") pursuant to a Security Agreement in the form of Exhibit B
attached hereto. Holder acknowledges certain Collateral is subject to
existing security interests of Silicon Valley Bank and that Holder's
security interest with respect to such Collateral is subordinate to the
security interests of Silicon Valley Bank.
6. Subordination. The indebtedness evidenced by this note is hereby
expressly subordinated, to the extent and manner provided herein, to the
Senior Bank Loan (as hereinafter defined). As used herein, Senior Bank Loan
means all amounts (including without limitation all interest and principal,
late charges, collection costs and sums paid for the purpose of protecting
any security for the Senior Debt) owing to Silicon Valley Bank (the "Bank"),
its successors and assigns, in respect of a revolving line of credit from
Bank to Maker pursuant to that certain Loan Modification Agreement between
Bank and Maker (together with all amendments and modifications thereof
hereafter entered into) and any future advances under the Senior Bank Loan
or extensions, replacements, renewals or refinancings of the Senior Bank
Loan. No payment on account of principal or interest on this note shall be
made if, at the time of such payment or immediately after giving effect
thereto, there shall exist a default on the Senior Bank Loan and such
default shall not have been waived in writing by the Bank. The Bank may
not, however, restrict in any manner the payment of principal or interest
due the Holder provided that an event of default, as defined in the
financing agreements between Maker and Bank, has not occurred and is not
continuing and would not exist immediately after such payment. Furthermore,
the Bank may not in any manner restrict the Holder's right to convert the
note into shares of Datamarine International, Inc. common stock as provided
for in Section 8.
7. Event of Default. Except as provided in Section 8 below, Holder
may declare this note in default, and this note shall become due and payable
in full at the option of Holder without further notice or demand, in any of
the following circumstances (an "Event of Default"): (i) if any of the
indebtedness, including but not limited to the principal, the interest, or
any other obligation arising hereunder, is not paid when due, whether by
acceleration or otherwise, (ii) if Maker breaches any other covenant or
agreement under this note, (iii) if Maker files a petition seeking relief
under the bankruptcy or similar law of the United States or any state or
other competent jurisdiction, or is the subject of an involuntary petition
under any such laws which is not dismissed within ninety (90) days after the
filing thereof, or seeks or consents to the appointment of a receiver or
trustee for itself or any part of its property, or makes a general
assignment for the benefit of creditors, or admits in writing its inability
to pay its debts as they become due, (iv) if Maker's Senior Bank Loan is in
default, or (v) if at any time the outstanding principal balance of this
note exceeds 90% of the aggregate of amount inventory (valued at cost) and
accounts receivable of Maker less the total amount of the Senior Bank Loan
then outstanding. Maker shall promptly notify Holder in writing of the
occurrence of any Event of Default.
8. Conversion on Default. Upon an Event of Default, in lieu of
declaring the note due and payable as provided in Section 7 above, Holder
shall have the right to convert the note into shares of Datamarine
International, Inc. common stock. The conversion rate shall be equal to T /
(A*.75), where:
T = The sum of unpaid principal and interest due at the time of the default.
A = The average of the closing prices of the Maker's common stock as
reported on NASDAQ on the five trading days prior to the default.
Holder has 60 days following an event of default to exercise the right to
convert the note into shares. Holder has the right to request and Maker
agrees to immediately commence the filing of a registration statement
covering any such shares and to complete such registration within 60 days.
Holder has the option of commencing such registration and incurring on
behalf of the Maker up to $10,000 in expenses if the Maker cannot otherwise
complete the registration of such shares.
9. Priority of Notes. This note is issued as one of a series of
notes of like tenor (the "Capital Notes") issued by Maker. Each such
Capital Note is pari passu with the other Capital Notes. Maker covenants,
and Holder acknowledges, that any payments made with respect to any Capital
Note (whether at maturity, in prepayment, on acceleration or otherwise)
shall be made pro rata to the holders of the Capital Notes according to the
amount of unpaid principal and interest due on each Capital Note as compared
to the total unpaid principal and interest due on all Capital Notes.
10. Miscellaneous.
(a) Waivers. Maker and any endorser or guarantor of this note
severally waive presentment, demand for payment, notice of dishonor, protest
and all other demands and notices (except as required in Section 5).
(b) Costs. Maker hereby agrees to pay Holder's reasonable legal
fees and costs incurred in connection with the making of the loan evidenced
by this note. In any effort or action brought to collect under this note or
to enforce its terms, whether legal action is actually filed, litigated or
prosecuted to judgment of award, Maker agrees to pay all costs and expenses
incurred, including without limitation, reasonable attorneys' fees.
(c) Senior Bank Loan. Maker warrants that as of the execution
date of the note it is not in default on the Senior Bank Loan.
(d) Governing Law. This note shall be governed by Washington
law.
DATAMARINE INTERNATIONAL INC.,
a Massachusetts corporation
By
---------------------------
David Thompson
Its___________
EXHIBIT A
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES ACT (COLLECTIVELY, THE "SECURITIES LAWS"). THEY
MAY NOT BE SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED EXCEPT IN
COMPLIANCE WITH SECTION 7 OF THIS WARRANT AND UNLESS THE SECURITIES
(I) ARE REGISTERED UNDER THE SECURITIES LAWS OR (II) ARE EXEMPT FROM
REGISTRATION UNDER THE SECURITIES LAWS AND THE COMPANY IS PROVIDED AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
No. ___ WARRANT TO PURCHASE UP TO
ISSUED: September ___, 1997 1,680 SHARES OF COMMON STOCK
DATAMARINE INTERNATIONAL, INC.
COMMON STOCK PURCHASE WARRANT
THIS IS TO CERTIFY that, for value received, and subject to the terms
and conditions of this Warrant, _______________, the registered holder
hereof (the "Holder"), is entitled, at any time and from time to time during
the period commencing on the date hereof and ending on the date of the
termination of this Warrant as provided in Section 4 (the "Exercise
Period"), to subscribe for and purchase, upon exercise of this Warrant, up
to One Thousand Six Hundred and Eighty (1,680) fully paid and nonassessable
shares of Common Stock (the "Warrant Stock") of Datamarine International,
Inc., a Massachusetts corporation (the "Company"), at a price of $.10 per
share (the "Warrant Price").
This Warrant is subject to the following additional terms and
conditions:
1. Method of Exercise. This Warrant may be exercised in whole at
any time or from time to time in part, but not as to a fractional share of
Common Stock, by delivering to the Company, during the Exercise Period: (i)
the attached form of Election to Purchase, duly completed and executed by
the Holder, (ii) this Warrant, and (iii) payment of the Warrant Price in
cash or by check, for each share purchased; provided, however, that in lieu
of exercising this Warrant by payment of the aggregate Warrant Price in
cash, at the Holder's option this Warrant may be exercised in whole or in
part from time to time by a "net exercise" as follows: upon written notice
to the Company that the holder intends to exercise this Warrant in whole or
in part, the Holder shall be entitled to receive the number of shares of
Warrant Stock equal to the quotient obtained by dividing [(A - B) (C)] by A,
where:
A = The fair market value of one share of Warrant Stock
B = The Warrant Price
C = The number of shares of Warrant Stock issuable upon such
exercise if the Warrants had been exercised with a cash
payment.
The fair market value of one share of Warrant Stock shall be the average of
the closing prices of the Company's Common Stock as reported on NASDAQ on
the five trading days prior to the date of exercise. If the Company's
Common Stock is not then quoted on NASDAQ, the fair market value shall be
determined in good faith by the Board of Directors of the Company.
2. Delivery of Stock Certificates. Within twenty (20) days after
the exercise of this Warrant (in full or in part), the Company, at its
expense, shall issue in the name of and deliver to the Holder (a) a
certificate or certificates for the number of fully paid and nonassessable
shares of Warrant Stock to which the Holder shall be entitled upon such
exercise and (b) unless this Warrant has expired, a new Warrant representing
the number of shares (except a remaining fractional share) of Warrant Stock,
if any, with respect to which this Warrant shall not have been exercised.
The Holder shall for all purposes be deemed to have become the holder of
record of such shares of Warrant Stock on the date on which this Warrant is
surrendered and payment on the Warrant Price is made, irrespective of the
date of delivery of the certificate or certificates representing the Warrant
Stock; provided that, if the date of such surrender and payment is a date
when the stock transfer books of the Company are closed, such person shall
be deemed to have become the holder of record of such shares of Warrant
Stock at the close of business on the next succeeding date on which the
stock transfer books are open.
3. Covenants as to Warrant Stock. The Company covenants and agrees
that all shares of Warrant Stock issued pursuant to the terms of this
Warrant will, upon their issuance, be validly issued and outstanding, fully
paid and nonassessable. The Company further covenants and agrees that the
Company will at all times have authorized and reserved a sufficient number
of shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant. At any time after one year from the date of
exercise of this Warrant, the Company shall, upon written request of the
Holder and at the Company's expense (other than underwriting discounts, if
applicable), use its best efforts to effect such registration of the Warrant
Stock under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations thereunder as would permit or facilitate the
public sale and distribution by the Holder of the Warrant Stock; provided,
however, that the Company shall have no obligation to effect a registration
of the Warrant Stock if the Holder may sell the Warrant Stock to the public
pursuant to Rule 144 under the Securities Act without the lapse of any
further time. The Company covenants and agrees that if it otherwise files a
registration statement under the Securities Act, and such registration
statement could include the Warrant Stock, such Warrant Stock will be
included in the registration statement. If such registration is in
connection with an underwritten public offering the Holder of the Warrant
Stock must enter into the underwriting agreement.
4. Termination.
(a) Upon a merger, consolidation, acquisition of all or
substantially all of the property or stock, reorganization or liquidation of
the Company (collectively, a "Reorganization"), as a result of which the
shareholders of the Company receive cash, stock or other property in
exchange for their shares of Common Stock, this Warrant shall be canceled
and all rights granted hereunder shall terminate; provided, however, that
the Company shall have delivered to the Holder notice of the Reorganization,
and the Holder shall have acknowledged receipt of such notice, no less than
30 business days before the date scheduled for the Reorganization and that
the Holder shall have the right immediately prior to the Reorganization to
exercise this Warrant.
(b) If not sooner canceled pursuant to the provisions of Section
4(a), this Warrant shall be canceled and the rights granted hereunder shall
terminate at the close of business on the fifth anniversary of the issuance
of the Warrant.
(c) The date of termination of this Warrant as provided in
Sections 4(a) and 4(b) shall be referred to herein as the "Termination
Date."
5. Adjustments Affecting Common Stock.
(a) Reclassification. In the case of any reclassification or
change of the Common Stock issuable upon exercise of this Warrant, the
Company shall execute a new Warrant, providing that the Holder of this
Warrant shall have the right to exercise such new Warrant, in substantially
the form hereof, and upon such exercise to receive, in lieu of each share of
Common Stock theretofore issuable upon exercise of this Warrant, the number
and kind of shares of stock, other securities, money or property receivable
upon such reclassification or change by a holder of shares of the Common
Stock. Such new Warrant shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in
this Section 5.
(b) Split, Subdivision or Combination of Shares. If at any time
while this Warrant remains outstanding and unexpired the Company shall
split, subdivide or combine its Common Stock, the number of shares of
Warrant Stock issuable upon exercise hereof shall be proportionately
increased and the Warrant Price shall be proportionately decreased, in the
case of a split or subdivision, or the number of shares of Warrant Stock
issuable upon exercise hereof shall be proportionately decreased and the
Warrant Price shall be proportionately increased, in the case of a
combination.
6. Fractional Shares. No fractional shares shall be issued upon the
exercise of this Warrant. In lieu of fractional shares, the Company shall
pay the Holder a sum in cash equal to the fair market value of the
fractional shares (as determined by the Company's Board of Directors) on the
date of exercise.
7. Restrictions on Transfer. This Warrant may not be transferred
unless (a) the Warrant is registered under the Securities Act of 1933, as
amended (the "Securities Act"), and any applicable state securities or blue
sky laws, (b) the Company has received a legal opinion reasonably
satisfactory to the Company to the effect that the transfer is exempt from
the prospectus delivery and registration requirements of the Securities Act
and any applicable state securities or blue sky laws, or (c) the Company
otherwise satisfies itself that such transfer is exempt from registration.
8. Legend. A legend setting forth or referring to the above
restrictions shall be placed on this Warrant, any replacement hereof and any
certificate representing a security issued pursuant to the exercise hereof
and a stop transfer restriction or order may be placed on the books of the
Company and with any transfer agent until such securities may be legally
sold or otherwise transferred.
9. Holder as Owner. The Company may deem and treat the Holder as
the absolute owner of this Warrant for all purposes regardless of any notice
to the contrary.
10. No Rights as Shareholder. This Warrant shall not entitle the
Holder to any voting rights or any other rights as a shareholder of the
Company or to any other rights whatsoever except the rights stated herein;
and no cash or stock dividend or interest shall be payable or shall accrue
in respect of this Warrant or the Warrant Stock purchasable hereunder
unless, until and to the extent that this Warrant shall be exercised.
11. Construction. The validity and interpretation of the terms and
provisions of this Warrant shall be governed by the laws of the State of
Washington. The descriptive headings of the several Sections of this
Warrant are inserted for convenience only and shall not control or affect
the meaning or construction of any of the provisions thereof.
12. Expiration. This Warrant shall be void and all rights
represented thereby shall cease unless exercised on or before the
Termination Date. All restrictions set forth herein on the shares of Common
Stock issued upon exercise of any rights hereunder shall survive such
exercise and expiration of the rights granted hereunder.
13. Lost Warrant Certificate. If this Warrant is lost, stolen,
mutilated or destroyed, the Company shall issue a new Warrant of like
denomination, tenor and date as this Warrant, subject to the Company's right
to require the Holder to give the Company a bond or other satisfactory
security sufficient to indemnify the Company against any claim that may be
made against it (including any expense or liability) on account of the
alleged loss, theft, mutilation or destruction of this Warrant or the
issuance of such new Warrant.
14. Waivers and Amendments. This Warrant or any provision hereof may
be changed, waived, discharged or terminated only by a statement in writing
signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
15. Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered in person or
mailed by United States mail, first-class postage prepaid, or by registered
or certified mail with return receipt requested, addressed as follows:
If to the Holder:
To the address last furnished in writing to the Company by the
Holder.
If to the Company:
Datamarine International Inc.
7030 220th S.W.
Mountlake Terrace, WA 98043
Attention: President
Each of the parties shall be entitled to specify a different address by
giving 5 days' advance written notice to the other party.
16. Investment Intent. By accepting this Warrant, the Holder
represents that he is acquiring it for investment and not with a view to, or
for sale in connection with, any distribution thereof.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the
date first above written.
DATAMARINE INTERNATIONAL INC.,
a Massachusetts corporation
By________________________________
David Thompson
Its____________
ELECTION TO PURCHASE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of the attached Warrant irrevocably
exercises Warrant for ____________________ shares of Common Stock of
DATAMARINE INTERNATIONAL, INC., on the terms and conditions specified in the
Warrant, and requests that a certificate for the shares of Common Stock
hereby purchased (and any securities or other property issuable upon such
exercise) be issued in the name of and delivered to
_____________________________, whose address is ___________________
_____________________________________, and, if such shares of Common Stock
shall not include all of the shares of Common Stock into which the Warrant
is exercisable, that a new Warrant of like tenor and date for the balance of
the shares of Common Stock issuable thereunder be delivered to the
undersigned.
Dated:
___________________________________
(Signature)
___________________________________
(Street Address)
___________________________________
(City) (State) (Zip Code)
EXHIBIT B
SECURITY AGREEMENT
This Security Agreement (this "Agreement") is entered into as of
September ___, 1997, by Datamarine International, Inc., a Massachusetts
corporation (the "Grantor"), in favor of ______________, as Agent for all
Holders under the Intercreditor Agreement dated September ___, 1997,
("Agent").
RECITALS
A. Holders have agreed to loan Grantor the aggregate sum of $650,000
(the "Loans"), which loans will be evidenced by certain Promissory Notes in
the original aggregate principal amount of $650,000 (the "Notes").
B. This Agreement is a condition precedent to Holders' obligations
to make the Loans.
C. This Agreement is further subject to the Intercreditor Agreement
in the form of Exhibit C attached hereto.
NOW, THEREFORE, in order to induce Holders to make the Loans, and for
other good and valuable consideration, receipt of which is hereby
acknowledged, Grantor agrees as follows:
AGREEMENT
1. Grant of Security. Grantor hereby assigns and pledges to
Holders, and hereby grants to Holders, a security interest in all of
Grantors' right, title and interest, now or hereafter acquired, in the
following (the "Collateral"):
1.1 Inventory. All stock in trade and other inventory in all of
its forms, wherever located, now or hereafter existing, including, but not
limited to, all finished goods and materials produced by Grantor, and all
documents therefor (the "Inventory");
1.2 Accounts Receivable and Other Rights of Payment. All
Grantor's rights now or hereafter acquired of whatever nature and however
evidenced, to receive the payment of money or other consideration, including
all such rights that arise from the sale, lease, exchange or other
disposition of Inventory, and including without limitation (i) all accounts,
including, but not limited to, subscriber or customer contracts and
accounts, (ii) all contract rights, (iii) all chattel paper, (iv) all
documents, documents of title, drafts, checks, acceptances, bonds, notes or
other negotiable and non-negotiable instruments, bills of exchange,
securities, deposits, certificates of deposit, insurance policies and any
other writings evidencing a monetary obligation or security interest in or a
lease of personal property; (v) all such rights arising by virtue of
advances made, other considerations given, or under or arising out of any
present or future license, lease, contract or agreement; (vi) all judgments,
choses in action, and general intangibles which represent the right to
receive the payment of money or other considerations; and (vii) all
guaranties and other personal properties securing the payment or performance
of any of the foregoing (the foregoing items shall collectively be referred
to herein as "Accounts");
1.3 General Intangibles. All Grantor's general intangibles
including, but not limited to, goodwill, names, trade names, trademarks and
the goodwill of the business symbolized thereby, trademark applications,
trade secrets, drawings, blueprints, customer lists, patents, patent
applications, copyrights, copyright applications, all rights as a licensor
or licensee of any kind, all royalties, licenses, proprietary information
and all other rights, privileges and franchises of every kind.
1.4 Proceeds. All proceeds of any and all of the foregoing
Collateral and, to the extent not otherwise included, all payments under
insurance, or any indemnity, warranty or guaranty, payable by reason of
loss, damage, or otherwise, with respect to any of the foregoing Collateral.
2. Obligations. This Agreement secures the following (the
"Obligations"):
2.1 All amounts owing by Grantor to Holders, now or hereafter
existing, whether for principal, interest, fees, expenses or otherwise and
as the same may be amended, assigned, assumed, renewed, restated,
supplemented or otherwise modified from time to time pursuant to the Note.
2.2 All costs reasonably incurred by Agent to obtain, preserve,
and enforce this Agreement, and maintain and preserve the hereinafter
described Collateral, including specifically, but without limitation, all
taxes, assessments, reasonable attorneys' fees and legal expenses and
expenses of sale.
3. Grantor Remain Liable. Anything herein to the contrary
notwithstanding, (a) Grantor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to
perform all of its duties and obligations thereunder to the same extent as
if this Agreement had not been executed, (b) the exercise by Agent of any of
the rights hereunder shall not release Grantor from any of its duties or
obligations under the contracts and agreements included in the Collateral,
and (c) Agent shall have not have any obligation or liability under the
contracts and agreements included in the Collateral by reason of this
Agreement, nor shall Agent be obligated to perform any of the obligations or
duties of Grantor thereunder or to take any action to collect or enforce any
claim for payment assigned hereunder.
4. Representations and Warranties. Grantor represents and warrants
as follows:
4.1 All the Inventory is located within the State of Washington
or the State of Massachusetts, except at such times as Inventory is being
shipped. The chief place of business and chief executive office of the
Grantor and the office where Grantor keeps its records concerning the
Accounts is located at its address at 7030 220th S.W., Mountlake Terrace,
Washington 98043.
4.2 Grantor is the legal and beneficial owner of the Collateral.
4.3 Excepting security interests in favor of Silicon Valley
Bank, this Agreement creates a valid and perfected first priority security
interest in the Collateral, securing the payment of amounts owing by Grantor
to Holders, and all filings and other actions necessary or desirable to
perfect and protect such security interest have been duly taken.
4.4 No consent of any other person or entity and no
authorization, approval or other action by, and no notice to or filing with,
any governmental authority is required (i) for the grant by Grantor of the
security interest granted hereby or for the execution, delivery or
performance of this Agreement by Grantor, (ii) for the perfection or
maintenance of the security interest created hereby or (iii) to Grantor's
knowledge, for the exercise by Agent of his rights, powers, privileges, and
remedies hereunder or in connection herewith.
4.5 The Accounts arise in bona fide transactions in the ordinary
course of business.
4.6 Grantor has or will file UCC financing statements in the
State of Washington and Massachusetts, and will provide Agent a conformed
copy of same.
5. Events of Default. If any of the following events shall occur
and be continuing, it shall constitute an event of default hereunder:
5.1 Failure by the Grantor to comply with any covenant or
agreement contained in this Agreement or the Note; or
5.2 Any representation or warranty made by the Grantor herein
shall prove to have been false or misleading when made.
6. General Remedies. If an event of default shall occur, Agent
shall have all remedies provided by law and, without limiting the generality
of the foregoing or the remedies provided in any other paragraph hereof,
shall have the following remedies:
6.1 The remedies of Agent under the Uniform Commercial Code.
6.2 The right to sell all or part of the Collateral and make
application of all proceeds or sums due in respect of the Collateral in
whole or partial satisfaction of the Obligations as Agent may determine in
his sole discretion.
6.3 The right to enforce and collect the Collateral in such
manner as shall be commercially reasonable deducting from the proceeds
thereof its reasonable expenses of collection.
6.4 All other remedies which may be available in law or equity.
7. Agent Appointed Attorney-in-Fact. To the extent permitted by
law, Grantor hereby irrevocably appoints Agent Grantor's attorney-in-fact,
with full authority in the place and stead of Grantor and in the name of
Grantor or otherwise, upon the occurrence and during the continuance of an
event of default, from time to time in Agent's discretion, to take any
action and to execute any instrument which Agent may deem necessary or
advisable to accomplish the purposes of this Agreement, including, without
limitation:
7.1 To ask, demand, collect, sue for, recover, compound, receive
and give acquittance and receipts for moneys due and to become due under or
in respect of any of the Collateral.
7.2 To receive, endorse and collect any drafts or other
instruments, documents and chattel paper in connection with Section 7.1
above.
7.3 To file any claims or take any action or institute any
proceedings which Agent may deem necessary or desirable for the collection
of any of the Collateral or otherwise to enforce the rights of Holders' with
respect to any of the Collateral.
To the extent that notice of sale shall be required by law to be
given, Grantor agrees that a period of ten (10) days from the time the
notice is sent shall be a reasonable period of notification of a sale or
other disposition of the Collateral by Agent, and that any notice or other
communication from Agent to Grantor pursuant to this Agreement or required
by any statute may be given to Grantor at the address set forth under its
signature hereto or at such other address as Grantor may hereafter designate
to Agent in a writing delivered to Agent.
So long as any Obligation remains unpaid, Grantor does hereby
designate and appoint Agent its true and lawful attorney with power
irrevocable, for it and in its name, place and stead, following the
occurrence of an event of default to ask, demand, receive, receipt and give
acquittance for any and all amounts which may be or become due or payable to
Grantor with respect to the Collateral, and in Agent's sole discretion to
file any claim or take any action or proceeding, or either, in its own name
or in the name of Grantor, or otherwise, which Agent deems necessary or
desirable in order to collect or enforce payment of any and all amounts
which may become due or owing with respect to the Collateral. The
acceptance of this appointment by Agent shall not obligate him to perform
any duty, covenant or obligation required to be performed by Grantor under
or by virtue of the Collateral or to take any action in connection
therewith.
Grantor agrees to pay on demand the amount of all reasonable expenses
incurred by Agent in protecting and realizing on the Collateral and Grantor
further agrees that if this Agreement or any Obligation is referred to an
attorney for protecting or defending the priority of Holders' interest in
the Collateral or for collecting or realizing thereon, Grantor shall pay all
of Agent's reasonable expenses, including without limitation attorneys' fees
and costs and all court costs and costs of public officials. Grantor agrees
to pay any deficiency owing under this Agreement after collection or
realization by Holders on the Collateral and the application of the proceeds
thereof as provided herein.
8. Severability. In case any one or more of the provisions
contained in this Agreement is invalid, illegal or unenforceable in any
respect in any jurisdiction, the validity, legality and enforceability of
such provision or provisions will not in any way be affected or impaired
thereby in any other jurisdiction; and the validity, legality and
enforceability of the remaining provisions contained herein will not in any
way be affected or impaired thereby.
9. Waivers. This Agreement shall not be qualified or supplemented
by course of dealing. No waiver or modification by Agent of any of the
terms and conditions hereof shall be effective unless in writing signed by
Agent. No waiver nor indulgence by Agent as to any required performance by
Grantor shall constitute a waiver as to any required performance or other
obligations of Grantor hereunder.
11. Governing Law. This Agreement shall be construed and enforced in
accordance with the internal laws of the State of Washington.
12. Successors; Assignment. This Agreement shall bind the successors
and assigns of Grantor and Agent. Grantor may not assign their rights and
obligations hereunder without the prior written consent of Agent.
13. Notices. Notices by Agent to Grantor may be sent or delivered to
Grantor at the address set forth under its name on the signature page
hereof, or at such other address as shall be designated by Grantor in a
written notice to Agent.
IN WITNESS WHEREOF, Grantor has executed this Agreement as of the date
and year first above written.
DATAMARINE INTERNATIONAL, INC.
7030 220TH S.W.
MOUNTLAKE TERRACE, WA 98043
Tel: 425-771-2182
Fax: 425-771-2650
By: __________________________
David C. Thompson
Its:__________________________
EXHIBIT C
INTERCREDITOR AGREEMENT
This intercreditor agreement (hereinafter "Agreement") is entered into and
is effective September ___, 1997, by and between
___________________________________ (hereinafter the "Holders") and
Datamarine International, Inc. ("Maker").
RECITALS
A. Holders may provide or are providing financing in the form of
loans to Datamarine International, Inc. ("Maker") and in connection
therewith Maker has granted or may grant Holders a security interest in some
or all of Makers property or interests in property (hereinafter
"Collateral") pursuant to a Security Agreement in the form of Exhibit B
attached hereto (the "Security Agreement").
B. Holders desire to agree upon the priority of certain security
interests in certain of the Collateral.
C. Holders desire to appoint an agent to act on their behalf with
respect to the Security Agreement.
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged
by each of the parties hereto, the parties agree as follows:
1. Agent. Holders agree that ____________ (the "Agent") shall act
as agent for and on behalf of all Holders with respect to this agreement.
2. Priority. Holders agree that the priority of each of their
interests in the Collateral shall be equal and that the exercise of any of
the rights granted by the Security Agreement shall simultaneously be deemed
to be taken on behalf of all Holders.
3. Proceeds. Holders agree that their individual interest in the
proceeds of any and all of the Collateral shall be allocated pro-rata
according to the amount of unpaid principal and interest due each Holder as
compared to the total unpaid principal and interest due all Holders.
4. Severability. In case any one or more of the provisions
contained in this Agreement is invalid, illegal or unenforceable in any
respect in any jurisdiction, the validity, legality and enforceability of
such provision or provisions will not in any way be affected or impaired
thereby in any other jurisdiction; and the validity, legality and
enforceability of the remaining provisions contained herein will not in any
way be affected or impaired thereby.
5. Governing Law. This Agreement shall be construed and enforced in
accordance with the internal laws of the State of Washington.
6. Successors; Assignment. This Agreement shall bind the successors
and assigns of Holders.
7. Notices. Notices by Holders to Agent may be sent or delivered to
the address set forth under its name on the signature page hereof, or at
such other address as shall be designated by Agent.
IN WITNESS WHEREOF, Holders have executed this Agreement as of the
date and year first above written.
_______________________ __________ ________________________________
________________, Agent Date Address
_______________________ __________ ________________________________
_______________, Holder Date Address
Datamarine International, Inc.
_______________________ __________ ________________________________
By David C. Thompson Date Address
Its ____________________
EXHIBIT 4.2
TERMS FOR AMENDMENT OF DECEMBER 19, 1995 DEBENTURE AGREEMENT
1. ASDP III agrees to extend the payment date of all interest and
principal on the Debentures until February 19, 1999.
2. Datamarine agrees to, within 30 days, either (a) execute an
agreement for judgment (and all necessary pleadings and documents
related thereto in form and substance satisfactory to ASDP III) to
be held in escrow by the court or party satisfactory to ASDP III or
(b) enter into a binding and irrevocable agreement to merge NNS and
ICC on the basis of an exchange of stock or on the basis of an
exchange of stock for assets.
3. Concurrent with the payment of the interest and principal on or
before February 19, 1999, Datamarine agrees to issue the full number
of common shares adjusted to the anti-dilution provisions of the
Agreement, except that no anti-dilution will be calculated as a
result of new money raised with debt or equity offerings undertaken
to redeem in their entirety the Debentures and all accrued interest
thereon due ASDP III on or before February 19, 1999. ASDP III
reserves its rights to approve such new debt or equity offerings.
4. Datamarine and "Frankel" agree to within 30 days (i) release all
collateral (ii) subordinate the Frankel Debt to ASDP III and (iii)
that no payment shall be made on the Frankel Debt; provided that up
to a maximum of $300,000 of the Frankel Debt may be assigned to
third parties subject to the foregoing subordination provisions, and
provided that such assignees become party to the subordination
agreement with ASDP III. Datamarine reaffirms ASDP III's anti-
dilution rights with respect to warrants issued in connection with
the "Frankel Debt" or any other issue of indebtedness or equity
except as provided under #3 above.
5. Datamarine reaffirms all ASDP III rights under the Debenture
Agreement of December 19, 1995 except as provided under the
provisions of this term sheet under #3 above.
6. Datamarine agrees within 30 days to execute and provide a release of
claims for ASDP III.
7. Datamarine agrees to pay its own and the legal fees and expenses of
ASDP III.
8. Datamarine agrees documents amending the Agreement of December 19,
1995 shall be in form and substance satisfactory to ASDP III as it
pertains to the points of this term sheet. Datamarine further agrees
to ASDP III's interpretation of terms arising from an amendment of
the Agreement of December 19, 1995 pursuant to this term sheet.
9. Datamarine and ASDP III agree that final documentation of the
revised December 19, 1995 Agreement will occur on or before March
31, 1998.
Datamarine International, Inc.
By ___________________________________________
David C. Thompson CEO
ALTA SUBORDINATION DEBT PARTNERS III, L.P. Dated: February 24, 1998
By: Alta Subordinated Debt Management III, L.P.
Its General Partner
By ____________________________________________
Robert F. Benbow, General Partner
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Primary
Weighted Average Shares Outstanding 1,313,520 1,299,446 1,252,983
Dilutive Effect of Stock Options -- 220,539 105,116
---------------------------------
Weighted Average Common and Equivalent Shares Outstanding 1,313,520 1,519,985 1,358,099
=================================
Fully Diluted
Weighted Average Shares Outstanding 1,313,520 1,299,446 1,252,983
Dilutive Effect of Stock Options -- 226,144 105,116
---------------------------------
Weighted Average Common and Equivalent Shares Outstanding 1,313,520 1,525,590 1,358,099
=================================
</TABLE>
EXHIBIT 21
SUBSIDIARIES
The Registrant has two wholly-owned subsidiaries: SEA, Inc. - A Delaware
Corporation, and Nautical Realty A/S - A Danish Corporation. The primary
asset of Nautical Realty A/S was sold during the year and the dissolution of
Nautical Realty A/S commenced October 1, 1997.
The Registrant has a 97.5% owned subsidiary - Narrowband Network Systems,
Inc. - A Washington Corporation, and a 60% owned subsidiary - Datamarine
International Australia PTY, LTD. - A New South Wales, Australia
Corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statements of
Datamarine International, Inc. and Subsidiaries on Form S-8 (File No. 2-68937)
pertaining to the Employee Stock Purchase Plan, on Form S-8 (File No. 33-48532)
pertaining to the 1991 Stock Option Plan, and on Form S-8 (File No. 333-06927)
pertaining to the 1995 Stock Option Plan for Non-employee Directors of our
reports dated December 11, 1997, except for the fourth and fifth paragraphs of
Note 1, the last sentence in the first paragraph of Note 6, the last sentence
of Note 7, the last sentence in the third paragraph of Note 8, and Note 14 to
the financial statements as to which the date is March 2, 1998, on our audits
of the consolidated financial statements and financial statement schedule of
Datamarine International, Inc. and Subsidiaries as of September 27, 1997 and
September 28, 1996, and for the years ended September 27, 1997, September 28,
1996 and September 30, 1995 which reports are included in this Annual Report
on Form 10-K.
/s/:COOPERS & LYBRAND L.L.P
Seattle, Washington
March 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 532,896
<SECURITIES> 0
<RECEIVABLES> 2,265,614
<ALLOWANCES> 234,973
<INVENTORY> 4,867,708
<CURRENT-ASSETS> 7,674,326
<PP&E> 5,032,823
<DEPRECIATION> 3,062,703
<TOTAL-ASSETS> 10,139,922
<CURRENT-LIABILITIES> 4,425,393
<BONDS> 1,815,693
0
0
<COMMON> 13,205
<OTHER-SE> 3,885,631
<TOTAL-LIABILITY-AND-EQUITY> 10,139,922
<SALES> 12,090,678
<TOTAL-REVENUES> 12,090,678
<CGS> 8,243,556
<TOTAL-COSTS> 8,243,556
<OTHER-EXPENSES> 29,824
<LOSS-PROVISION> 89,691
<INTEREST-EXPENSE> 563,617
<INCOME-PRETAX> (2,030,422)
<INCOME-TAX> 737,909
<INCOME-CONTINUING> (2,768,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,768,331)
<EPS-PRIMARY> (2.11)
<EPS-DILUTED> (2.11)
</TABLE>
