UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 2, 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 January 2, 1999
Common Stock, $.01 Par Value 1,531,820
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Net sales $3,019,302 $3,091,724
Cost of products sold 1,923,569 2,140,087
--------------------------
Gross profit 1,095,733 951,637
Operating expenses:
Research and development 337,644 369,871
Selling 664,575 676,572
General and administrative 307,317 310,142
Narrowband operations 71,430 68,458
--------------------------
Operating expenses 1,380,966 1,425,043
--------------------------
Operating loss (285,233) (473,406)
Interest expense 236,181 157,810
Other (income), net (33,832) (9,711)
--------------------------
Loss before income taxes (487,582) (621,505)
Income tax expense (benefit) - -
--------------------------
Net loss $ (487,582) $ (621,505)
==========================
Loss per share, basic $ (0.33) $ (0.47)
Loss per share, diluted $ (0.33) $ (0.47)
Average shares outstanding, basic and
diluted 1,494,169 1,321,661
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
January 2, October 3,
1999 1998
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 224,699 $ 393,161
Accounts receivable, net of allowance of
$133,328 and $118,218, respectively 1,811,221 1,778,737
Inventories 4,704,226 5,094,890
Prepaid expenses and other current assets 121,626 184,459
--------------------------
Total current assets 6,861,772 7,451,247
Property, plant and equipment 5,140,343 5,086,143
Less accumulated depreciation 3,543,363 3,451,165
--------------------------
Property, plant and equipment, net 1,596,980 1,634,978
Other assets, net 420,734 447,874
--------------------------
Total assets $8,879,486 $9,534,099
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable to bank $1,418,665 $1,418,665
Notes payable to related parties and
others 544,697 744,697
Accounts payable 1,150,933 1,319,375
Accrued expenses 1,697,282 1,800,643
Current maturities of long-term debt and
capital lease obligations 2,010,249 1,932,026
--------------------------
Total current liabilities 6,821,826 7,215,406
Long-term debt and capital lease
obligations, less current maturities 93,413 109,702
--------------------------
Total liabilities 6,915,239 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; 1,531,820
and 1,435,056 shares issued and
outstanding, respectively 15,318 14,351
Capital in excess of par value 4,477,174 4,241,522
Unearned compensation (21,958) (28,177)
Retained earnings (accumulated deficit) (2,506,287) (2,018,705)
--------------------------
Total stockholders' equity 1,964,247 2,208,991
--------------------------
Total liabilities and stockholders'
equity $8,879,486 $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>
Three Months Ended
--------------------------
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(487,582) $(621,505)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 103,014 109,609
Gain on asset dispositions (5,395) (5,395)
Amortization of debenture discount and
issue costs 108,047 53,429
Provision for losses on accounts
receivable 15,110 16,392
Employee investment plan expense 18,294 10,092
Amortization of unearned compensation 6,219 5,407
Changes in operating assets and liabilities:
Accounts receivable (47,594) 64,459
Inventories, prepaid expenses and other
current assets 453,497 (52,550)
Accounts payable and accrued expenses (249,380) 320,906
-------------------------
Net cash used in operating activities (85,770) (99,156)
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
including self-constructed equipment (54,200) (1,225)
Other (15,174) (3,783)
-------------------------
Net cash used in investing activities (69,374) (5,008)
FINANCING ACTIVITIES
Proceeds from sale of common stock 1,297 4,614
Proceeds from notes payable to related
parties and others - 100,000
Principal payments on note payable to
bank, capital lease obligations and
long-term debt (14,615) (191,437)
-------------------------
Net cash used in financing activities (13,318) (86,823)
Decrease in cash and cash equivalents
during period (168,462) (190,987)
Cash and cash equivalents at beginning
of period 393,161 532,896
-------------------------
Cash and cash equivalents at end of period $ 224,699 $ 341,909
=========================
Supplementary Cash Flow Information
Interest paid $ 43,951 $ 66,858
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 $487,582 for the quarter ended January 2, 1999, and incurred
losses for fiscal 1998 and 1997 as well. The Company is in violation of
certain covenants of its senior bank loan and has subordinated debt
obligations due in February and March 1999. These factors, as described
below, raise doubt about the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern is
contingent upon its ability to raise additional capital and operate at a
profit.
The bank has not taken any specific action with respect to the covenant
violation, but has not waived the violation. Absent a waiver, we continue
to be out of compliance with the minimum quarterly revenue covenant. Since
April 10, 1998 the bank has chosen not to extend additional advances
against the line until the terms of the loan are renegotiated. At this
time we have elected not to make changes in the loan agreement but the bank
may require us to do so in the future. If the bank were to demand
immediate repayment of the loan we would not have sufficient resources to
do so.
In order to redeem its obligations as scheduled in February and March 1999,
and meet its operating and capital requirements in 1999, 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.
3. Inventory Components:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
January 2, 1999 October 3, 1998
--------------- ---------------
<S> <C> <C>
Finished Goods $1,808,001 $1,855,862
Work-In-Process 170,676 436,443
Raw Material 2,725,549 2,802,585
-------------------------------
$4,704,226 $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 194,524 shares, preferred stock convertible into 175,639
shares, subordinated notes convertible into 133,333 shares and warrants for
53,420 common shares were not included in the loss per share calculation
for the quarter ended January 2, 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. Management has not yet determined the effects, if any, of SFAS
131 on the consolidated financial statements.
In June 1998 the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The statement will be effective for fiscal years beginning after June 15,
1999. Since the Company does not use derivative instruments management
does not expect the statement to have any effect on its consolidated
financial position or results of operations.
7. Long Term Debt:
On December 19, 1995 Datamarine International, Inc. (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.
However, the Company recently 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. Because the Amendments
are not effective the original terms of the Debenture Agreement are in
effect, in which case the Company faces an alleged and unresolved default
under the Debenture Agreement dating back to November 24, 1997. 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 January 2,
1999 was approximately $617,890.
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. We expect
that once the recently auctioned Phase II licenses are granted, demand for
our higher margin 220 MHz base station products will increase.
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.
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 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 28 products sold under the
DART, LINK, Corinthian and ChartLINK names, with suggested list prices
between $400 and $3,900. The Datamarine products include depth sounders,
knotmeters and water temperature instruments, wind speed and direction
instruments, integrated instruments, and electronic chart plotters.
Results of Operations
The following table sets forth the components of sales and gross profit by
product line for the Quarter Ended January 2, 1999 and the comparable
quarter in the prior fiscal year.
<TABLE>
<CAPTION>
Sales Gross Profit
- ----------------------- -----------------------
January 2, January 3, January 2, January 3,
1999 1998 1999 1998
- ------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
$ 453,215 $ 715,840 Land Mobile Communications $ 99,604 $(55,324)
2,093,544 1,859,875 Marine Communications 807,783 779,266
472,543 516,009 Marine Instrumentation 188,346 227,695
- -----------------------------------------------------------------------------
$3,019,302 $3,091,724 Total $1,095,733 $951,637
- -----------------------------------------------------------------------------
</TABLE>
Sales order backlogs at January 2, 1999 were as follows: Land Mobile
Communications $228,000, Marine Communications $865,000 and Marine
Instrumentation $128,000.
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
January 2, January 3, to to
1999 1998 1999 1998
- -------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
100% 100% Net sales (2) 10
64 69 Cost of products sold (10) 19
36 31 Gross profit 15 (7)
46 46 Operating expenses (3) 9
(9) (15) Operating loss (40) 69
(8) (5) Interest expense 50 28
(16) (20) Loss before taxes (22) 62
- - Benefit for income taxes - (100)
(16%) (20%) Net loss (22) 144
</TABLE>
Net sales decreased by $72,422 or 2% compared to the same quarter in the
prior fiscal year. Net sales of the Company's land mobile products
decreased by $262,625 or 37% compared to the same quarter in the prior
fiscal year. Net sales of the Company's marine communications systems
increased by $233,669 or 13%. Net sales of the Company's marine
instrumentation systems decreased by $43,466 or 8% 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 are granted by the
FCC. Although the auction of Phase II licenses concluded in October 1998,
successful bidders are expected to receive their licenses in February 1999.
Our land mobile revenue projections assumed that licenses would be issued
Sooner, therefore so land mobile sales for the first quarter were below our
expectations. Sales of marine communications and marine instrumentation
products continued to contribute to the Company's performance. Marine
communications sales were ahead of the same quarter last year and slightly
below management's projections. Sales of GMDSS products were strong as
expected though shortages of some products caused delays in shipments
projected for the first quarter. Marine instrumentation sales were
slightly less than the same quarter in the prior year and below
management's projections. Instrumentation sales in the first quarter of
last year were unusually strong and marine instrument revenues are expected
to increase when the Company's new chart product starts shipping later this
fiscal year.
Gross profit was $1,095,733 (36% of net sales), as compared to $951,637
(31% of net sales) in the prior year, an increase of $144,096 or 15%. The
gross profit on land mobile products was $99,604 (22% of such sales), as
compared to $(55,324) (-8% of such sales) in the prior year, an increase of
$154,928. Land mobile gross profit improved due to better margin on mobile
radio products and the sale of some higher margin repeater systems. The
gross profit on marine communications systems was $807,783 (39% of such
sales), as compared to $779,266 (42% of such sales) in the prior year, an
increase of $28,517 or 4%. The gross profit on marine instrumentation
systems was $188,346 (40% of such sales), as compared to $227,695 (44% of
such sales) in the prior year, a decrease of $39,349 or 17%. The overall
gross profit margin improved compared to the prior year due to higher
margins on land mobile products. Land mobile margins vary depending upon
the sales mix across the product line, and mobile radio products typically
have substantially lower gross margins than base station equipment. The
market for communications products is very competitive and downward
pressure on selling prices for mobile radios is expected to continue. We
expect that land mobile gross margin will improve when shipments of base
station products can resume as a result of Phase II licenses being granted.
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
about the same as the current quarter.
Operating expenses were $1,380,966 (46% of net sales), as compared to
$1,425,043 (46% of net sales) last year, a decrease of $44,077 or 3%.
Engineering expenses were about 9% less than the prior year. Engineering
salaries, consulting and consumable supplies expense comprised most of the
reductions. Total selling expenses declined about 2%. Salary and royalty
expenses declined while marketing expenses related specifically to the new
chart product increased. Administrative expenses were comparable in total
to the prior year. Narrowband operating expenses increased slightly due to
higher site rental expenses.
Interest expense increased $78,371 or 50% over the prior year. The
maturity date of the Subordinated Convertible Debentures was changed from
December 2000 to February 1999 which resulted in increased amortization of
the related discount and debt issuance costs. During April 1998 the
Company issued additional warrants to the holders of the Subordinated Short
Term Notes in connection with extending the maturity date of those notes.
The $97,500 value of the warrants is amortized to expense over the one year
term of the extension.
Other income increased because the Company was reimbursed for some non-
recurring land mobile engineering services.
Income taxes were zero for 1999 and 1998 because the Company fully reserves
its deferred tax asset.
Liquidity and Capital Resources
On January 2, 1999, the Company's principal sources of liquidity consisted
of approximately $225,000 in cash and equivalents. The Company had drawn
$1,418,665 on its $2,000,000 working capital bank line and there was no
additional availability because the bank is not making any new advances and
the line was overadvanced by $55,000. The maturity date of the bank line
is February 28, 1999. Whether the line will be renewed and the terms of
any such renewal cannot be determined at this time. The Company continues
to have operating losses and negative cash flow from operating activities.
The Company's current operating plans include a strategy for reducing
expenses and certain cash payments in order to decrease the net cash used.
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. We have not been able to obtain a subordination agreement
at this time so further action on the new bank loan agreement has been
postponed.
The Company also has subordinated debt obligations due in February and
March 1999. In order to redeem its obligations as scheduled in February
and March 1999, and meet its operating and capital requirements in 1999,
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.
Year 2000
The Year 2000 ("Y2K") issue is expected to cause some problems in computer
programs which are not able to properly recognize dates beyond the year
1999. In order to address possible Y2K problems we have a 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
Year 2000 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 Year 2000 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 area and determined that our primary
systems are Y2K compliant. One commercially available sales software
product is not Y2K compliant but a compliant version is currently available
and the Company expects to replace that software by July 1999. 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 have not completed our contingency plan for those areas which are most
susceptible to disruption but plan to do so by July 1999. 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 January 2, 1999
were $22,000 and that the remaining costs to be incurred will be
approximately $12,000.
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5
There were no reportable events or matters under these captions during the
quarter ended January 2, 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 Form10-K for the Fiscal Year Ended
September 27, 1997.
4.2 Terms for Amendment of December 19, 1995 Debenture Agreement,
incorporated by reference to Annual Report on 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. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datamarine International, Inc.
(Registrant)
Date: February 9, 1999 /s/ JAN KALLSHIAN
---------------- -----------------
Jan Kallshian
Chief Financial Officer
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