UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1999
Commission File Number 0-8936
DATAMARINE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2454559
(State of Incorporation) (I.R.S. Employer Identification Number)
7030 220th SW, Mountlake Terrace, Washington 98043
(Address of principal executive offices)
(425)771-2182
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 3, 1999
Common Stock, $.01 Par Value 1,548,615
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 3,213,234 $ 3,067,707 $ 9,746,267 $ 9,163,898
Cost of products sold 2,077,899 2,035,863 6,143,672 6,159,445
Gross profit 1,135,335 1,031,844 3,602,595 3,004,453
Operating expenses:
Research and development 416,884 347,641 1,097,680 1,060,304
Selling 533,781 637,452 1,811,542 1,899,433
General and administrative 355,496 388,006 996,875 1,137,928
Narrowband operations 79,209 68,242 223,134 207,130
-----------------------------------------------------------
Operating expenses 1,385,370 1,441,341 4,129,231 4,304,795
-----------------------------------------------------------
Operating loss (250,035) (409,497) (526,636) (1,300,342)
Interest expense (167,851) (241,991) (616,236) (591,795)
Other income, net 1,844 11,676 17,949 32,697
-----------------------------------------------------------
Loss before income taxes (416,042) (639,812) (1,124,923) (1,859,440)
Benefit for income taxes - - - -
-----------------------------------------------------------
Net loss $ (416,042) $ (639,812) $(1,124,923) $(1,859,440)
===========================================================
Net loss per share, basic $ (0.27) $ (0.48) $ (0.74) $ (1.40)
Net loss per share, diluted $ (0.27) $ (0.48) $ (0.74) $ (1.40)
Average shares outstanding,
basic and diluted 1,545,391 1,330,671 1,524,299 1,327,271
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
July 3, October 3,
1999 1998
ASSETS ----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,935 $ 393,161
Accounts receivable, net of allowance of
$157,723 and $118,218, respectively 1,525,733 1,778,737
Inventories 4,777,172 5,094,890
Prepaid expenses and other current assets 194,548 184,459
---------------------------
Total current assets 6,504,388 7,451,247
Property, plant and equipment 5,121,405 5,086,143
Less accumulated depreciation 3,718,338 3,451,165
---------------------------
Property, plant and equipment, net 1,403,067 1,634,978
Other assets, net 367,555 447,874
---------------------------
Total assets $ 8,275,010 $ 9,534,099
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable to bank $ 1,311,958 $ 1,418,665
Notes payable to related parties and
others 544,697 744,697
Accounts payable 1,064,569 1,319,375
Accrued expenses 1,809,022 1,800,643
Current maturities of long-term debt and
capital lease obligations 2,067,412 1,932,026
---------------------------
Total current liabilities 6,797,658 7,215,406
Long-term debt and capital lease
obligations, less current maturities 58,563 109,702
---------------------------
Total liabilities 6,856,221 7,325,108
---------------------------
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; 1,548,615 and 1,435,056
shares issued and outstanding, respectively 15,486 14,351
Capital in excess of par value 4,556,811 4,241,522
Unearned compensation (9,880) (28,177)
Retained earnings (accumulated deficit) (3,143,628) (2,018,705)
---------------------------
Total stockholders' equity 1,418,789 2,208,991
---------------------------
Total liabilities and stockholders' equity $ 8,275,010 $ 9,534,099
===========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
July 3, July 4,
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,124,923) $(1,859,440)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 316,895 323,273
Gain on asset dispositions (16,186) (16,185)
Amortization of debenture discount and issue costs 250,185 223,140
Provision for losses on accounts receivable 43,381 47,944
Employee investment plan expense 43,134 21,071
Amortization of unearned compensation 18,297 18,657
Changes in operating assets and liabilities:
Accounts receivable 209,623 241,075
Inventories, prepaid expenses and other current assets 307,629 (243,902)
Accounts payable and accrued expenses (213,213) 941,210
---------------------------
Net cash used in operating activities (165,178) (303,157)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, including
self-constructed equipment (55,275) (1,225)
Other (23,107) 10,704
---------------------------
Net cash provided by (used in) investing activities (78,382) 9,479
FINANCING ACTIVITIES
Proceeds from sale of common stock 10,097 7,224
Proceeds from notes payable to related parties and others - 100,000
Proceeds from bank and other borrowings - 200,000
Principal payments on note payable to bank, capital lease
obligations and long-term debt (152,763) (270,655)
---------------------------
Net cash provided by (used in) financing activities (142,666) 36,569
Decrease in cash and cash equivalents during period (386,226) (257,109)
Cash and cash equivalents at beginning of period 393,161 532,896
---------------------------
Cash and cash equivalents at end of period $ 6,935 $ 275,787
===========================
Supplementary Cash Flow Information
Interest paid $ 118,770 $ 128,880
Capital lease obligations incurred to acquire equipment - 35,941
Conversion of subordinated note and accrued interest 217,028 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited, consolidated, condensed quarterly financial
statements have been prepared in accordance with instructions to Form 10-Q
and, therefore, do not include all information and footnotes normally
included in financial statements prepared in conformity with Generally
Accepted Accounting Principles ("GAAP"). The information furnished reflects
all adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for the fair statement of financial
position, results of operations and cash flows for the interim period. In
the opinion of management, they fairly represent the operating results of
the Company for the periods presented. The year-end condensed balance sheet
was derived from audited financial statements, but does not include all
disclosures required by GAAP. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year. Accounting policies used in fiscal 1999 are consistent with those
used in fiscal 1998. These financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
annual report on Form 10-K for the year ended October 3, 1998.
2. Going Concern
As shown in the consolidated financial statements the Company incurred a net
loss of $1,124,923 for the nine months ended July 3, 1999, and incurred
losses for fiscal 1998 and 1997 as well. During the quarter the Company and
the bank reached an agreement whereby the revolving loan was renewed and the
maturity date extended to August 31, 1999. The Company has subordinated
notes and accrued interest of approximately $226,000 which were due in March
1999. During the quarter the notes were extended to September 1999. There
can be no assurance that additional extensions can be obtained on either the
senior bank line or the subordinated notes. These factors make the
Company's ability to continue as a going concern contingent upon its ability
to raise additional capital and operate at a profit.
The holder of the Company's $2,000,000 Subordinated Convertible Debentures
filed suit on February 17, 1999 demanding payment of the Debenture principal
and all accrued interest (see Note 7).
In order to redeem its debt obligations and meet its operating and capital
requirements in 1999 and 2000, the Company will require additional funding.
The Company has engaged an investment banker to raise approximately
$3,500,000 in subordinated debt, the proceeds of which would be used to
redeem existing subordinated debt and provide additional working capital.
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.
If additional funds cannot be raised management believes that the Company's
debts and operating expenses can be restructured to allow continued
operations.
We are currently negotiating a new senior bank loan agreement with a
different lender which would replace our current bank loan. The new
agreement would give us additional borrowing capacity. In order to complete
the new bank loan agreement, the holder of the Subordinated Convertible
Debentures must agree to subordinate their debt to the new senior lender
(see Note 7).
3. Inventory Components:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
July 3, 1999 October 3, 1998
------------ ---------------
<S> <C> <C>
Finished Goods $1,684,137 $1,855,862
Work-In-Process 203,608 436,443
Raw Material 3,160,495 3,044,834
Allowance (271,068) (242,249)
---------------------------
$4,777,172 $5,094,890
---------------------------
</TABLE>
4. Income Taxes:
Management has considered recent losses, the inability to predict with
certainty what land mobile sales will be in the post FCC auction period, and
uncertainties surrounding the Company's status as a going concern. Based on
the information available, management believes that a valuation allowance
equal to 100% of the deferred tax asset should continue to be established.
Until such time as future taxable income is more likely than not the Company
will continue to reserve an appropriate portion of its deferred tax asset.
5. Earnings Per Share:
Basic net income or loss per common share is based on the weighted average
number of common shares outstanding during the year. Diluted earnings per
share is based on the weighted average number of common shares and common
stock equivalents outstanding. Common stock equivalents include shares
which would be issued upon exercise of stock options, warrants or conversion
of debentures. Common stock equivalents are excluded from the calculation
when they are anti-dilutive.
Stock options for 193,812 shares, preferred stock convertible into 184,000
shares, subordinated notes convertible into 141,692 shares and warrants for
77,319 common shares were not included in the loss per share calculation for
the quarter ended July 3, 1999 because they would be anti-dilutive.
6. New Accounting Standards:
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.
In June 1998 the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The statement
will be effective for fiscal years beginning after June 15, 1999. Since the
Company does not use derivative instruments management does not expect the
statement to have any effect on its consolidated financial position or
results of operations.
7. Long Term Debt:
On December 19, 1995 the Company completed a private placement issuance of
$2,000,000 in Subordinated Convertible Debentures (the "Debentures") with
Alta Subordinated Debt Partners III ("ASDP III"), originally due December
19, 2000.
On November 24, 1997 the Company received notice from ASDP III of an alleged
violation of certain covenants related to the Debenture Purchase Agreement
dated December 19, 1995. The alleged default was based on a breach of
financial covenants concerning additional debt, and was not based on the
particular terms of the Notes, nor was it payment related. ASDP III claimed
that an event of default had occurred, that the default had remained uncured
for more than thirty days, and that the Debentures were immediately due and
payable. Management of the Company believed that it had obtained the consent
of ASDP III and did not agree with the claims made by ASDP III.
On February 24, 1998 the Company and ASDP III reached a tentative agreement
to modify certain provisions of the Debentures, which was memorialized in a
term sheet. That agreement was reached in order to resolve ASDP III's
November 24, 1997 claims. The new terms changed the maturity date of the
Debentures from December 19, 2000 to February 19, 1999, deferred all
interest payments on the Debentures until February 19, 1999 and required the
Company to issue to ASDP III on February 19, 1999 approximately 175,600
common shares of the Company. These common shares are the shares that ASDP
III is otherwise entitled to receive upon conversion of the convertible
preferred stock component of the Debentures.
The February 24, 1998 modifications set forth in the term sheet were
executed by both parties, and were subject to satisfaction of certain
conditions including the execution of final documents at a later date. On
July 10, 1998 the Company executed final documents prepared by ASDP III's
counsel (the "Amendments"). The Company believed that it had complied with
the terms of the Amendments demanded by ASDP III and that an agreement had
been reached between the parties.
On December 14, 1998 the Company received notice from ASDP III's counsel
that ASDP III had not executed the Amendments, did not intend to do so at
that time and that it demanded numerous additional conditions placed upon
its acceptance of the Amendments. Until receipt of this notice, the Company
had not been aware that this was ASDP III's position with respect to the
Amendments. After considering carefully its options and bearing in mind the
best interests of the Company, the Company notified ASDP III on January 22,
1999 that the Company revoked the offer to amend that had been manifested by
its own execution of the Amendment.
On February 17, 1999 the Company received a letter from the ASDP III's
counsel demanding payment of the Debenture principal and all accrued
interest by February 22, 1999. Under the terms of the Company's senior bank
loan no such payment on the Debentures is allowed and no payment was made.
The Company has received notice that on February 25, 1999 ASDP III filed
suit in the Superior Court of the Commonwealth of Massachusetts claiming a
breach of the December 19, 1995 Debenture agreement based on the alleged
events described above. The complaint asks for payment of the entire
principal balance, accrued interest, default interest, costs and expenses.
The Company filed its answer and counterclaims on April 2, 1999. ASDP III
has not filed any response to the Company's answer and counterclaims.
During July 1999 representatives of the Company and ASDP III met to discuss
a new proposal for resolving the dispute. Preliminary terms have been
discussed and ASDP III has agreed to resume negotiations when the Company
has secured a new senior lending commitment. At this time no agreement to
modify the Debenture terms has been executed with ASDP III.
Due to uncertainties regarding the Debenture terms, and without waiving its
right to take a different position in the future, the Company has elected to
reflect the earlier February 19, 1999 maturity date in the financial
statements. Accrued and unpaid interest on the Debentures as of July 3,
1999 was approximately $748,875. The Company does not currently have the
resources to pay either the principal or accrued interest on the Debentures.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Statements included in this report which are not historical in nature are
forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, and as such may
involve risks and uncertainties. This Quarterly Report on Form 10-Q and the
Annual Report on Form 10-K contain certain detailed factors that could cause
the Company's actual results to materially differ from forward-looking
statements made by the Company.
Introduction
Datamarine International, Inc. and its subsidiaries ("we" or 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 minimal.
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 Chatswood, NSW, Australia. Marine communication products,
branded SEA, and marine instrumentation products, branded Datamarine, are
sold worldwide through approximately 500 dealers in the United States and
approximately 20 foreign countries.
Sales of narrowband communications products for the land mobile radio market
are made through the Company's wholly-owned subsidiary, SEA, Inc. ("SEA"),
to business users nationwide. SEA has developed and marketed narrowband
radio equipment since 1984 and began selling its current line of narrowband
equipment for use in the 220 MHz band in 1993.
On October 19,1992, the Federal Communications Commission ("FCC") conducted
a lottery which led to the issuance of approximately 3,500 Phase I 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 1993.
As of September 30, 1996 ownership of Phase I licenses for locations which
had not met regulatory build-out requirements reverted to the Federal
government. The Federal Communications Commission ("FCC") conducted an
auction of Phase II licenses which commenced in September 1998 and concluded
in October 1998. The auction was for licenses covering "Economic Areas",
"Regions" and "Nationwide" areas as defined by the FCC. Phase II licenses
were granted in March 1999. Since license holders represent new potential
customers for the Company's 220 MHz base stations, we expect demand for
these higher margin products to increase in the future.
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 cash expenses have
been immaterial since inception.
Foreign sales typically account for about 5% of our sales. In past years,
narrowband products have only been sold domestically so foreign sales
represent only marine revenues. With the recently completed auction of 220
MHz licenses in Mexico, narrowband products may begin to be sold outside the
United States. The Company's Global Maritime Distress and Safety Systems
are often sold outside the United States, which has recently increased the
percentage of sales derived from foreign customers.
Products and Marketing
Land Mobile Communications - The Company's narrowband land mobile radio
system products have been type accepted by the FCC for use in the 220 MHz
radio service. These products consist of hand held, mobile and base station
components, utilizing narrowband technology, 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 $30,000. 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 28 products sold under the DART, LINK,
Corinthian and ChartLINK names, with suggested list prices between $400 and
$6,000. The Datamarine products include depth sounders, knotmeters and water
temperature instruments, wind speed and direction instruments, integrated
instruments, and electronic chart plotters.
Results of Operations
The following table sets forth the components of sales and gross profit by
product line for the Quarter Ended July 3, 1999 and the comparable quarter
in the prior fiscal year.
<TABLE>
<CAPTION>
Sales Gross Profit
- ------------------------ -------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 331,447 $ 695,731 Land Mobile Communications $ (28,257) $ 64,017
2,067,086 1,699,754 Marine Communications 835,222 689,985
814,671 672,222 Marine Instrumentation 328,370 277,842
- -----------------------------------------------------------------------------------
$3,213,234 $3,067,707 Total $1,135,335 $1,031,844
===================================================================================
</TABLE>
Sales order backlogs at July 3, 1999 were as follows: Land Mobile
Communications $1,695,000, Marine Communications $716,000 and Marine
Instrumentation $90,000.
The following table sets forth income and expense items as a percentage of
net sales for the quarter, and the percentage change in those items from the
comparable quarter in the previous two years.
<TABLE>
<CAPTION>
Income and Expense Items Percentage
as a Percentage of Net Sales Increase (Decrease)
- ---------------------------- -------------------
1998 1997
July 3, July 4, to to
1999 1998 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
100% 100% Net sales 5 3
65 66 Cost of products sold 2 5
35 34 Gross profit 10 (1)
43 47 Operating expenses (4) 11
(8) (13) Operating loss (39) 62
(5) (8) Interest expense (31) 79
(13) (21) Loss before taxes (35) 83
- - Benefit for income taxes - (100)
(13%) (21%) Net loss (35) 177
</TABLE>
Net sales increased by $145,527 or 5% compared to the same quarter in the
prior fiscal year. Net sales of the Company's land mobile products
decreased by $364,254 or 52% compared to the same quarter in the prior
fiscal year. Net sales of the Company's marine communications systems
increased by $367,332 or 22%. Net sales of the Company's marine
instrumentation systems increased by $142,449 or 21% compared to the same
quarter in the prior fiscal year.
Land mobile revenues continue to be comprised mostly of mobile radio
products and will continue to be so until new licenses holders begin to take
delivery of repeater systems. Although the auction of Phase II licenses
concluded in October 1998, successful bidders did not receive their licenses
until March 1999. Our land mobile revenue projections assumed that licenses
would be issued sooner, therefore current year land mobile sales have been
less than management's forecast. Although the Company's land mobile order
backlog continues to grow, customers have been slow to take delivery of new
systems. In addition, sales were lower because the selling price of certain
mobile radios was reduced in anticipation of the Company introducing a new
mobile radio later this year. Sales of marine communications and marine
instrumentation products continued to show significant improvement over the
prior year. Marine communications sales increased significantly over the
same quarter last year and exceeded management's projections. Sales of
GMDSS products continued to be strong as forecast, though GMDSS revenue is
slowing as customers satisfy regulatory requirements. Marine
instrumentation sales increased due in part to shipments of the Company's
new chart plotter starting in June.
Gross profit was $1,135,335 (35% of net sales), as compared to $1,031,844
(34% of net sales) in the prior year, an increase of $103,491 or 10%. The
gross profit on land mobile products was ($28,257), as compared to $64,017
(9% of such sales) in the prior year, a decrease of $92,274. Land mobile
gross profit declined due to the lack of base station sales and selling
price reductions on certain mobile radio products. The gross profit on
marine communications systems was $835,222 (40% of such sales), as compared
to $689,985 (41% of such sales) in the prior year, an increase of $145,237
or 21%. The gross profit on marine instrumentation systems was $328,370
(40% of such sales), as compared to $277,842 (41% of such sales) in the
prior year, an increase of $50,258 or 18%. Improvements in gross profit
margin as a result of a higher percentage of sales coming from marine
products were offset by the negative margin in the land mobile product line.
Gross profit percentages for marine products are typically higher than those
for land mobile radios. Land mobile margins vary depending upon the sales
mix across the product line, and mobile radio products typically have
substantially lower gross margins than base station equipment. The market
for communications products is very competitive and pressure on selling
prices for mobile radios is expected to continue. We expect that land
mobile gross margin will improve when shipments of base station products
resume as a result of Phase II licensees constructing new operating sites.
The margin on land mobile radios is expected to improve when the Company
starts shipping its new mobile radio later this year. The profit margins on
marine communication and marine instrumentation products vary according to
product sales mix. Margins for marine communications and marine
instrumentation products are expected to remain in the range of 40% to 45%.
Operating expenses were $1,385,370 (43% of net sales), as compared to
$1,441,341 (47% of net sales) last year, a decrease of $55,971 or 4%.
Engineering expenses increased $69,243 due to the increased use of
engineering consultants related to new marine communications and chart
plotter products. Total selling expenses decreased $103,671 or 16%. The
Company reduced its co-op advertising accrual rate because claims experience
has been less than estimated. Commission expense declined because a larger
percentage of marine communications sales came from products not subject to
sales commissions. Administrative expenses declined $32,510 or 8%.
Decreases in professional fees and corporate expenses were partially offset
by increased recruiting expenses and costs associated with efforts to obtain
a new senior bank loan. Narrowband operating expenses increased $10,967 or
16% due to higher site rental expenses.
Interest expense decreased $74,140 or 31% from the prior year. The change
in maturity date of the Subordinated Convertible Debentures from December
2000 to February 1999 resulted in increased amortization of the related
discount and debt issuance costs last year. Interest expense on bank
borrowings was approximately the same as the previous year since the effect
of a higher interest rate was partially offset by lower average borrowing
balances.
Other income, net, decreased approximately $10,000. The prior year included
non-recurring engineering revenue and income from rental real estate.
Income taxes were zero for 1999 and 1998 because the Company fully reserves
its deferred tax asset.
Liquidity and Capital Resources
On July 3, 1999, the Company's principal sources of liquidity consisted of
approximately $7,000 in cash and equivalents. During the quarter the
Company and the bank reached an agreement whereby the line was renewed
through August 31, 1999. The new terms increased the interest rate from
prime plus .5% to prime plus 1.75% and requires the Company to grant the
bank up to 9,000 common stock warrants at an exercise price of $2.625 per
share. The new loan agreement also requires that any overadvances be
reduced by $50,000 per month commencing May 31, 1999. As of July 3, 1999
the Company had drawn $1,311,958 on its revolving line which has a borrowing
limit of $1,418,665.
The Company has continued its operating plan for increasing revenues while
reducing expenses and certain cash payments in order to decrease the net cash
used.
We are currently negotiating a new senior bank loan agreement with a different
lender which would replace our current bank loan. The new agreement would
give us additional borrowing capacity. In order to complete the new bank loan
agreement, ASDP III, the holder of the Subordinated Convertible Debentures
must agree to subordinate their debt to the new senior lender. Preliminary
terms have been discussed and ASDP III has agreed to resume negotiations when
the Company has secured a new senior lending commitment. At this time no
agreement to modify the Debenture terms has been executed with ASDP III.
The Company has subordinated notes and accrued interest of approximately
$226,000 which were due in March 1999. The note holders have agreed to
extend the maturity date to September 1999 in exchange for an additional
3,360 $0.10 common stock warrants.
ASDP III, the holder of the Company's $2,000,000 Subordinated Convertible
Debentures, filed suit on February 17, 1999 demanding payment of the
Debenture principal and all accrued interest by February 22, 1999. The
terms of the Debentures are the subject of litigation, the outcome of which
cannot be determined at this time. The Debenture holder is party to a
subordination agreement with the bank. Counsel for the bank has notified
the Company and the Debenture holder that until such time as the bank has
been repaid in full, the Debenture holder may not receive any payment,
distribution, security or proceeds with respect to its subordinated debt.
In order to redeem its debt obligations and meet its operating and capital
requirements in 1999 and 2000, the Company will require additional funding.
The Company has engaged an investment banker to raise approximately
$3,500,000 in subordinated debt, the proceeds of which would be used to
redeem existing subordinated debt and provide additional working capital.
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.
If additional funds cannot be raised management believes that the Company's
debts and operating expenses can be restructured to allow continued
operations.
Year 2000
We have a Year 2000 ("Y2K") compliance group which includes persons from
engineering, manufacturing, sales and administration to oversee Y2K
readiness, coordinate Y2K communications and report regularly to senior
management.
The Company has implemented a program to identify and resolve the effect of
Y2K software issues on the integrity and reliability of its products,
financial and operational systems. In addition, the Company is also
communicating with its principal customers, suppliers and service providers
to assess whether Y2K issues will have an adverse impact on the Company.
We have completed a review of all of our products and have not identified
any Y2K compliance problems. A majority of our products do not have date
related functions and those that do are either Y2K compliant or do not use
date information in critical functions. We have completed a review of our
financial and information system areas and determined that our primary
systems are Y2K compliant. With regard to manufactured products, we have
contacted a majority of our major suppliers. Of the suppliers which have
responded to date, most have stated that they are Y2K compliant or intend to
be so by the year 2000. Some of our suppliers have indicated that they are
not responding to detailed Y2K inquiries, but that they do not foresee any
Y2K compliance problems. Of course, there is no way to be certain that the
supply of products from third parties will not be affected by Y2K problems,
which could result in a disruption of the Company's normal production and
sales operation.
We believe that our contingency plan for those areas which are most
susceptible to disruption is complete. Due to the wide range of
uncertainties surrounding Y2K issues we cannot be sure that our contingency
plans will prevent all forms of disruptions. We estimate that the total
costs incurred for Y2K compliance efforts through July 3, 1999 were $35,000
and do not foresee any significant additional costs of compliance.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 17, 1999 the Company received a letter from the ASDP III's
counsel demanding payment of the Subordinated Convertible Debenture
principal and all accrued interest by February 22, 1999. Under the terms of
the Company's senior bank loan no such payment on the Debentures is allowed
and no payment was made. The Company has received notice that on February
25, 1999 ASDP III filed suit in the Superior Court of the Commonwealth of
Massachusetts claiming a breach of the December 19, 1995 Debenture
agreement. The complaint asks for payment of the entire principal balance,
accrued interest, default interest, costs and expenses. The Company filed
its answer and counterclaims on April 2, 1999. The Company has not received
any response to either its answer or its counterclaims. The Company is not
aware of any change in the legal status of this matter since April 2, 1999.
Items 2, 3, 4 and 5
There were no reportable events under these captions for the quarter ended
July 3, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 Form 10-K for the Fiscal Year Ended September 30,
1995.
4.1 Subordinated Notes Agreement with exhibits, incorporated by reference
to Annual Report on Form 10-K for the Fiscal Year Ended September 27,
1997.
4.2 Terms for Amendment of December 19, 1995 Debenture Agreement,
incorporated by reference to Annual Report on Form 10-K for the
Fiscal Year Ended September 27, 1997.
10.1 Datamarine International, Inc. 1991 Stock Option Plan, incorporated
by reference to Registration Statement 33-48532 on Form S-8.
10.2 1992 Stock Option Plan for Non-employee Directors, incorporated by
reference to Annual Report on Form 10-K for the Fiscal Year Ended
October 1, 1994.
10.3 Debenture Purchase Agreement with exhibits, same as 4 above.
10.4 1995 Stock Option Plan for Non-employee Directors, incorporated by
reference to Annual Report on Form 10-K for the Fiscal Year Ended
September 28, 1996.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
July 3, 1999.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datamarine International, Inc.
(Registrant)
Date: August 13, 1999 /s/ JAN KALLSHIAN
--------------- -----------------
Jan Kallshian
Chief Financial Officer
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