SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual Report Pursuant to Section 13 or 15(d)of The Securities Exchange
Act of 1934
For the fiscal year ended October 2, 1999. Commission file number 0-8936.
DATAMARINE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2454559
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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-KSB or any
amendment to this Form 10-KSB. X
---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of December 17, 1999 was approximately $1,692,000.
The number of shares of the Registrant's common stock outstanding as of
December 17, 1999 was 1,700,529 shares.
PART I
ITEM 1. BUSINESS
The following discussion may contain trend information and other forward-
looking statements that involve a number of risks and uncertainties. The
Company's actual results could differ materially from the Company's
historical results of operations and those discussed in forward-looking
statements.
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
revenues from 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 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
the recently auctioned Phase II licenses to increase demand for our higher
margin 220 MHz base station products.
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 has only limited
operations, revenues and associated cash expenses have been immaterial since
inception.
In connection with the preparation of its Consolidated Financial Statements
for 1999, the Company implemented a recently issued accounting standard
which calls for information regarding the Company's operations to be
reported by segments. The Company is organized into three primary operating
segments according to its primary product categories: "Land Mobile
Communications", "Marine Communications" and "Marine Instrumentation", and a
less significant but separately identifiable segment referred to as
"Narrowband Operations." Information regarding net sales, operating profit
and identifiable assets for each segment can be found under the heading
"Results of Operations" in Item 7 -"Management's Discussion and Analysis of
Financial Condition and Results of Operations", and in the "Notes to
Consolidated Financial Statements." Certain reclassifications have been made
to the prior years' financial statements in order to conform to the 1999
presentation, with no impact on previously reported net loss or stockholders'
equity.
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
$6,000. The Datamarine products include depth sounders, knotmeters and water
temperature instruments, wind speed and direction instruments, integrated
instruments, and electronic chart plotters.
International Sales
Foreign sales accounted for approximately 17% of our sales in fiscal 1999
and 5% of our sales in fiscal 1998. The increase in foreign sales resulted
from two factors. Prior to 1999, narrowband products were sold only
domestically so foreign sales represented only marine revenues. During 1999
the Company made its first sales of land mobile products in Mexico and we
expect to continue selling land mobile products in Mexico. Foreign revenues
from marine products were unusually high because many of the Company's GMDSS
products were sold outside the United States. We do not expect export sales
of GMDSS products to continue at the 1999 rate.
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 $1,900,000 at October 2, 1999, compared to
$963,000 at October 3, 1998. Of the total October 2, 1999 backlog, land
mobile products represented $1,429,000, marine communications products
represented $421,000 and marine instrumentation products represented
$50,000.
Orders for the Company's land mobile repeater systems represented
approximately 82% of the land mobile product backlog. Deliveries of
repeater systems can occur over an extended time period and are subject to
some uncertainty, thus the Company does not consider the repeater backlog to
be firm.
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
Products are sold with either a one-year or two-year parts and labor limited
warranty.
Research and Development
We are committed to a continuing program of designing new products and
improving the product designs presently in production. During fiscal 1999
we spent approximately $1,438,000 on research and development compared to
$1,415,000 in 1998. The Company has 15 full-time employees engaged in
research and development 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 89 full-time employees on October 2, 1999.
This compares to 104 on October 3, 1998. 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 group of buildings totaling 39,000 square-feet in Mountlake
Terrace, Washington, pursuant to a lease which expires in December 2002.
During fiscal 1998 we relocated our marine instrumentation service facility
to a 2,400 square foot building within the same city of Pocasset,
Massachusetts. The facility is comprised of two buildings, one of which is
owned and one of which is leased under a one year agreement expiring in May
2000. The sales and warehousing operation of a majority-owned subsidiary,
Datamarine International Australia, PTY, LTD., is located in a leased 2,500
square-foot building in Chatsworth, New South Wales, Australia.
ITEM 3. LEGAL PROCEEDINGS
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 additional debt, nor was it payment related. ASDP
III with respect to the additional debt 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 seeks damages in the amount of
$2,827,863 plus interest and reasonable attorneys' fees and costs. The
Company filed its answer and counterclaims on April 2, 1999 and intends to
vigorously defend itself in this matter. The case is currently in the
discovery phase and no trial date has been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended October 2, 1999, 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 OTCBB under the symbol "DMAR". As
of December 17, 1999, there were approximately 900 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 1999: High 4 4 1/8 3 2 3/8
Low 1 1/8 2 2 1/8 1 1/16
Fiscal 1998: High 5 6 3/4 5 5/8 5 1/4
Low 3 2 7/8 4 3 1/4
</TABLE>
No dividends have been declared or paid by the Company. The Company
currently intends to retain any earnings to fund the development and growth
of its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data relating to the Company should be read
in conjunction with the Company's consolidated financial statements and the
related notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the other financial information
included elsewhere in the report. 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 October 2, October 3, September 27, September 28, September 30,
the Year Ended 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net sales $12,117,259 $12,382,551 $12,090,678 $16,590,002 $14,786,658
Cost of products sold 7,849,831 8,077,225 8,243,556 9,555,599 9,128,693
Operating expenses, excluding
restructuring charge 5,381,823 5,659,482 5,370,323 5,627,499 5,584,954
Restructuring charge - - - - 686,458
-------------------------------------------------------------------------------
Operating income (loss) (1,114,395) (1,354,156) (1,523,201) 1,406,904 (613,447)
-------------------------------------------------------------------------------
Interest expense 753,979 836,812 563,617 380,564 193,037
Other (income), net (31,596) (48,995) (56,396) (112,724) (39,719)
Income tax expense (benefit) - - 737,909 388,083 (1,083,640)
-------------------------------------------------------------------------------
Net income (loss) $(1,836,778) $(2,141,973) $(2,768,331) $ 750,981 $ 316,875
===============================================================================
Basic income (loss) per share $ (1.19) $ (1.60) $ (2.11) $ .58 $ .25
Diluted income (loss) per share $ (1.19) $ (1.60) $ (2.11) $ .49 $ .23
<CAPTION>
October 2, October 3, September27, September 28, September 30,
Balance Sheet Data 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Total assets $7,597,760 $9,534,099 $10,139,922 $12,649,846 $ 9,323,581
Notes payable to bank 1,097,312 1,418,665 1,367,561 1,750,000 1,325,353
Notes payable to related
parties and others 452,000 744,697 850,887 - 30,000
Long-term obligations, including
current portion 2,126,608 2,041,728 1,948,979 2,022,978 642,800
Stockholders' equity 863,890 2,208,991 3,898,836 6,536,934 5,198,391
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C> <C> <C>
Net Sales:
Land mobile communications $ 1,566,585 13% $ 3,032,939 24%
Marine communications 8,142,812 67% 7,005,466 57%
Marine instrumentation 2,399,012 20% 2,332,352 19%
Narrowband operations 8,850 - 11,794 -
------------------------------------------------
Consolidated net sales $12,117,259 100% $12,382,551 100%
================================================
Operating income (loss):
Land mobile communications $(1,545,502) (1,498,680)
Marine communications 868,437 517,738
Marine instrumentation 81,420 116,446
Narrowband operations (309,505) (263,185)
All other (217,370) (226,475)
--------------------------------------
Consolidated operating loss (1,114,395) (1,354,156)
Net loss (1,836,778) (2,141,973)
Basic loss per share (1.19) (1.60)
</TABLE>
Financial information for "All other" reflects headquarters operating
expenses which are not attributable to specific business segments.
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 Consolidated Financial Statements, presented elsewhere
in this report.
<TABLE>
<CAPTION>
Income and Percentage
Expense Items Increase (Decrease)
As a Percentage of
Net Sales
- ----------------------------------------------------------------------------
1999 1998 1998 to 1997
1999 to 1998
<S> <C> <C> <C> <C>
100% 100% Net sales (2)% 2%
65 65 Cost of products sold (3) (2)
35 35 Gross profit (1) 12
12 11 Research and development 2 9
19 21 Selling (9) 1
11 12 General and administrative (8) 13
2 2 Narrowband operations 13 (1)
44 46 Operating expenses (5) 5
(9) (11) Operating income (loss) (18) (11)
- --------------------------------------------------------------------------
6 7 Interest expense (10) 48
- - Other (income), net (36) (13)
(15) (17) Income (loss) before income taxes (14) 5
- - Income tax expense (benefit) - (100)
(15)% (17)% Net income (loss) (14)% (23)%
</TABLE>
Fiscal 1999 compared to 1998
Net sales decreased by $265,292 or 2%, to $12,117,259 for 1999 from
$12,382,551 in 1998. Net sales of the Company's narrowband products
decreased by $1,466,354, or 48%, to $1,566,585 for 1999 from $3,032,939 in
1998. Net sales of the Company's marine radio systems increased by
$1,137,346, or 16%, to $8,142,812 for 1999 from $7,005,466 in 1998. Net
sales of the Company's recreational marine instrumentation systems increased
by $66,660, or 3%, to $2,399,012 for 1999 from $2,332,352 in 1998.
Land mobile revenues continue to be comprised mostly of mobile radio
products and will continue to be so until new license 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 originally forecast for 1999. 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
the new Model 604 mobile radio during the year. The 604 started shipping in
September 1999, but we do not expect the radio to ship in significant
quantity until the third quarter of fiscal 2000. Management expects that the
FCC's issuance of new licenses will provide an opportunity for significant
revenue growth in the narrowband product line. In September 1999, the
Company did make its first sale of land mobile repeaters, mobile and portable
radios in Mexico. Management expects that the recent auction of 220 MHz
licenses in Mexico will provide additional selling opportunities for the
Company.
Sales of marine communications products showed a significant increase over
the prior year and exceeded management's projections. Sales of GMDSS
products contributed to strong revenue growth, though GMDSS revenue is
slowing as customers satisfy regulatory requirements. The Company plans to
replace slowing GMDSS sales with new products which should start shipping
during the third quarter of fiscal 2000.
Sales of marine instrumentation systems increased slightly, due in part to
shipments of the Company's new chart plotter starting in June 1999.
Marine instrumentation sales are expected to improve again in 2000 as
plotter shipments increase, though this category continues to be extremely
competitive.
Gross profit for 1999 was $4,267,428 (35% of net sales), as compared to
$4,305,326 (35% of net sales) in 1998, a decrease of $37,898 or 1%. The
gross profit on narrowband products for 1999 was $46,971 (3% of such sales),
as compared to $462,857 (15% of such sales) in 1998, a decrease of $415,886
or 90%. 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 in both 1999 and 1998 came from the
sale of lower margin mobile radios. Price reductions on some radios also
caused gross margin to decline. 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 gross profit on marine radio systems for 1999 was $3,227,328 (40% of
such sales), as compared to $2,845,604 (41% of such sales), an increase of
$381,724 or 13%. The overall gross margin percentage on marine
communications products was comparable to last year. Strong sales of Global
Maritime Distress and Safety System (GMDSS) products accounted for much of
the total increase in gross margin.
The gross profit on marine instrumentation systems for 1999 was $985,004
(41% of such sales), as compared to $986,065 (42% of such sales), a decrease
of $1,061. Product mix and gross margin in this sector were comparable to
the prior year. Management expects that increased sales of the Company's
new chart plotter will improve margin in the instrumentation product line.
Operating expenses were $5,381,823 (44% of net sales) in 1999, as compared
to $5,659,482 (46% of net sales), a decrease of $277,659 or 5%. Total
selling expenses decreased $219,490 or 9%. Advertising expenses decreased
approximately $80,000 or 26%. The Company decreased its co-op advertising
accrual rate because claims experience has been less than estimated.
Commission expense declined $149,000 or 22% because a large portion of
marine communications sales came from products not subject to sales
commissions. Royalty expense declined $54,000 from the prior year because
the remaining balance of a prepaid royalty agreement was written off in
1998.
Administrative expenses decreased $116,672 or 8%. Administrative salary
expense was $77,000 higher than the prior year because 1998 included the
elimination of profit sharing. Professional fees were $136,000 less than
the prior year due to higher than normal costs associated with litigation
settled in 1998, and legal and accounting fees in connection with
negotiations related to the terms of the Subordinated Convertible Debenture.
Research and development expenses increased $22,983 or 2%. Engineering
consumables decreased $78,000 from the prior year due to those expenses being
incurred in the early phases of projects started in 1998. Outside
engineering services and consultants increased $97,000 or 46%. The
increases were due to new product development in marine communications and
cost sharing of engineering expenses related to the new electronic chart
plotter.
Narrowband operating expenses were $309,505 compared to $273,985 the prior
year. Increases in rental expense for the Company's 220 MHz sites accounted
for $32,000 of the increase.
Interest expense for 1999 was $753,979 as compared to $836,812 for 1998.
Decreases in interest expense as a result of the amortization of debt
discount being completed in February 1999 were partially offset by increases
due to warrants issued to the bank and other note holders in connection with
loan extensions. The increased interest rate on bank borrowings was offset
by lower average loan balances. Other income, net of $31,596 in 1999 was
comparable to other income of $48,995 in 1998.
Income tax expense for 1999 and 1998 was $0. The Company has established a
valuation allowance equal to 100% of the deferred tax asset.
The net loss for 1999 was $1,836,778 compared to a net loss of $2,141,973 in
1998, a decrease of 14%.
Fiscal 1998 compared to 1997
Net sales increased by $291,873 or 2%, to $12,382,551 for 1998 from
$12,090,678 in 1997. Net sales of the Company's narrowband products
decreased by $1,560,287, or 34%, to $3,032,939 for 1998 from $4,593,226 in
1997. Net sales of the Company's marine radio systems increased by
$1,886,888, or 37%, to $7,005,466 for 1998 from $5,118,578 in 1997. Net
sales of the Company's recreational marine instrumentation systems decreased
by $36,587, or 2%, to $2,332,352 for 1998 from $2,368,939 in 1997.
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 conducted an auction of Phase II licenses
in September 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 decreased slightly, due mostly to intense competition in the
electronic chart products category. Marine instrumentation sales are
expected to improve significantly in 1999 with the introduction of our
newest color chart product.
Gross profit for 1998 was $4,305,326 (35% of net sales), as compared to
$3,847,122 (32% of net sales) in 1997, an increase of $458,204 or 12%. The
gross profit on narrowband products for 1998 was $462,857 (15% of such
sales), as compared to $705,244 (15% of such sales) in 1997, a decrease of
$242,387 or 34%. 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 in both 1998 and 1997 came
from the sale of lower margin mobile radios. We expect that the recently
completed auction of new 220 MHz licenses will increase demand for repeater
systems. Increased demand for repeaters will increase land mobile sales and
gross margin percentages. The gross profit on marine radio systems for 1998
was $2,845,604 (41% of such sales), as compared to $2,233,710 (44% of such
sales), an increase of $611,894 or 27%. The overall gross margin percentage
on marine communications products was slightly lower than the prior year due
mostly to small changes in product mix and slightly lower prices on some
models. Continued sales growth in newer Global Maritime Distress and Safety
System (GMDSS) products and the Company's new all digital SEA model 235
radio product accounted for much of the total increase in gross margin. The
gross profit on marine instrumentation systems for 1998 was $986,065 (42% of
such sales), as compared to $897,897 (38% of such sales), an increase of
$88,168 or 10%. Although sales of marine instrumentation products decreased
slightly from 1997, gross margin increased due to a more favorable mix of
products sold.
Operating expenses were $5,659,482 (46% of net sales) in 1998, as compared
to $5,370,323 (44% of net sales), an increase of $289,159 or 5%. Total
selling expenses increased $14,667 or 1%. Advertising expenses decreased
approximately $124,000 or 25%, while commission and warranty expenses
increased approximately $88,000 or 13%. The remaining balance of a prepaid
royalty agreement was written off in 1998, increasing royalty expense by
$37,000. Administrative expenses increased $164,385 or 13%. Administrative
salary expense declined approximately 20% due to the elimination of profit
sharing. Professional fees increased $85,000 or 37% compared to 1997.
Legal fees were higher due to costs associated with litigation settled
during the year. The Company also incurred legal and accounting fees in
connection with modifying the terms of the Subordinated Convertible
Debenture. Corporate expenses increased 31%, primarily due to higher
premiums from increased limits on directors and officers insurance.
Research and development expenses increased $113,119 or 9%. Engineering
salaries, including outside engineering services and consultants, increased
$85,000 or 10%. A majority of the outside engineering services related to
co-development of a new electronic charting product introduced in 1998.
Narrowband operating expenses of $273,985 were similar to the prior year.
Interest expense for 1998 was $836,812 as compared to $563,617 for 1997.
Interest expense increased primarily as a result of higher loan balances on
bank borrowings, additional subordinated debt, amortization of discount and
issuance costs related to the convertible debenture and the amortization
expenses connected to warrants granted in connection with the subordinated
notes. Other income, net of $48,995 in 1998 was comparable to other income
of $56,396 in 1997.
Income tax expense for 1998 was $0 compared to $737,909 in 1997. The entire
1997 income tax expense was attributable to an increase in the deferred tax
valuation allowance.
The net loss for 1998 was $2,141,973 compared to a net loss of $2,768,331 in
1997. The net loss before income taxes was approximately 5% higher in 1998
than 1997.
Capital Expenditures
Capital expenditures for 1999 were $73,000 (including capital lease
additions of $17,000) and $53,000 (including capital lease additions of
$36,000) in 1998. Planned capital expenditures in fiscal year 2000 are
$242,000, primarily for production and engineering equipment.
Liquidity and Capital Resources
Net cash provided by operating activities was $96,993 for 1999, a $209,376
increase from $112,383 net cash used in operating activities last year.
Decreases in cash provided by increases in accounts payable and accrued
expenses were offset by decreases in accounts receivable and inventories.
At the end of 1999 the sales order backlogs stood at $1,900,000, compared to
$963,000 at October 3, 1998. Of the total October 2, 1999 backlog, land
mobile products represented $1,429,000, marine communications products
represented $421,000 and marine instrumentation products represented
$50,000. The Company has a bank line with a maximum borrowing limit of
$1,418,665. The amount available under the line is based upon a formula
that considers the Company's trade receivables and finished goods inventory.
At October 2, 1999 the amount outstanding on the line was $1,097,312 which
was the maximum borrowing supported by the collateral at that date.
The loan agreement contains covenants which require the Company to maintain
a tangible net worth as defined by the bank of $2,050,000, a minimum current
ratio of 1.0 and a maximum debt to net worth ratio of 3.4. The Company is
in compliance with these loan covenants. We do not have a commitment from
our bank to extend the term of our variable bank line of credit. Although
the bank has been willing to extend the loan for a short period there can be
no assurance that the bank will elect to renew the line at maturity under
the current or any other terms. If the bank were to demand immediate
repayment of the loan the Company would not have sufficient resources to do
so. Any action the bank might take to pursue immediate collection of the
loan would have severe consequences for the Company.
Losses incurred by the Company in 1999 and 1998 are primarily attributable
to maintaining land mobile engineering, manufacturing and marketing
capabilities despite significantly reduced revenues in this product line.
We believe that additional sales of land mobile products will result from
the March 1999 issuance of Phase II licenses by the FCC, and the Company's
introduction of new land mobile products. In the event that land mobile
revenues do not meet expectations, management has a plan for significantly
reducing land mobile related operating expenses. The Company may also elect
to raise capital by selling 220 MHz licenses and repeater hardware owned by
its subsidiary, Narrowband Network Systems, Inc.
In the last year the Company has had discussions with a number of senior
lenders and management believes the Company could obtain new senior debt on
reasonable terms. However, in order to complete a new senior loan agreement
Alta Subordinated Debt Partners III ("ASDP III"), the holder of the
Subordinated Convertible Debentures (see Note 9), must agree to subordinate
their debt to the new senior lender. We have not been able to obtain a
subordination agreement from ASDP III so further action on the new bank
financing has been postponed.
As described in Note 9, we have subordinated debt obligations due in
December 2000 and the debt is the subject of litigation. In order to redeem
its obligations as scheduled and meet its operating and capital requirements
in 2000, the Company will require additional funding. 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 the
subordinated debt cannot be redeemed as scheduled the lenders may take
action against the Company to pursue their rights under the agreements.
Since the rights of the subordinated debt holders are junior to those of the
bank, any action taken by the subordinated debt holders would likely be
subject to, and delayed by, actions taken by the bank. Nevertheless, any
such action could have severe consequences for the Company.
Other Matters
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 October 2, 1999 were
$35,000 and do not foresee any significant additional costs of compliance.
Impact of Inflation
The Company's results are influenced 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.
For the fiscal years 1999 and 1998 the influence of inflation has been
immaterial to the Company.
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-KSB and Quarterly Reports
on Form 10-Q contain certain detailed factors that could cause the Company's
actual results to differ materially from forward-looking statements made by
the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Financial Statements
October 2, 1999
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Accountants 16
Consolidated Balance Sheets, October 2, 1999 and
October 3, 1998 17
Consolidated Statements of Operations for the years
ended October 2, 1999 and October 3, 1998 18
Consolidated Statements of Stockholders' Equity for
the years ended October 2, 1999 and October 3, 1998 19
Consolidated Statements of Cash Flows for the years
ended October 2, 1999 and October 3, 1998 20
Notes to Consolidated Financial Statements 21-37
</TABLE>
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors of
Datamarine International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Datamarine
International, Inc. and Subsidiaries as of October 2, 1999 and October 3,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. 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 October 2, 1999 and October 3,
1998, and the consolidated results of their operations and their
consolidated cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements, the Company incurred a net loss of $1,836,778 during
the year ended October 2, 1999, and, as of that date, the Company's senior
bank loan agreement has not been renewed. These factors, among others, as
discussed in Note 3 to the financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Seattle, Washington
November 24, 1999
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS October 2, October 3,
1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,189 $ 393,161
Accounts receivable, less allowance for doubtful
accounts of $153,743 and $118,218, respectively 1,274,907 1,778,737
Inventories 4,487,190 5,094,890
Prepaid expenses and other current assets 133,982 184,459
----------------------------
Total current assets 5,935,268 7,451,247
Property, plant and equipment 5,138,802 5,086,143
Less accumulated depreciation 3,814,391 3,451,165
----------------------------
Property, plant and equipment, net 1,324,411 1,634,978
Other assets, net 338,081 447,874
----------------------------
Total assets $ 7,597,760 $ 9,534,099
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 1,097,312 $ 1,418,665
Notes payable to related parties and others 452,000 744,697
Current maturities of capital lease obligations 56,431 58,285
Current maturities of long-term debt 2,004,461 1,873,741
Accounts payable 1,268,558 1,319,375
Accrued expenses 1,789,392 1,800,643
----------------------------
Total current liabilities 6,668,154 7,215,406
Capital lease obligations, less current maturities 12,688 52,640
Long-term debt, less current maturities 53,028 57,062
----------------------------
Total liabilities 6,733,870 7,325,108
----------------------------
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;
1,689,742 and 1,435,056 shares issued and outstanding, respectively 16,897 14,351
Capital in excess of par value 4,717,736 4,241,522
Unearned compensation (15,260) (28,177)
Accumulated deficit (3,855,483) (2,018,705)
----------------------------
Total stockholders' equity 863,890 2,208,991
----------------------------
Total liabilities and stockholders' equity $ 7,597,760 $ 9,534,099
============================
</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 October 2, 1999 and October 3, 1998
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
<S> <C> <C>
Net sales $12,117,259 $12,382,551
Cost of products sold 7,849,831 8,077,225
----------------------------
Gross profit 4,267,428 4,305,326
Operating expenses:
Research and development 1,437,557 1,414,574
Selling 2,300,798 2,520,288
General and administrative 1,333,963 1,450,635
Narrowband operations 309,505 273,985
----------------------------
Operating expenses 5,381,823 5,659,482
----------------------------
Operating loss (1,114,395) (1,354,156)
Interest expense 753,979 836,812
Other income, net (31,596) (48,995)
----------------------------
Loss before income taxes (1,836,778) (2,141,973)
Income taxes - -
----------------------------
Net loss $(1,836,778) $(2,141,973)
============================
Net loss per share:
Basic $ (1.19) $ (1.60)
Diluted $ (1.19) $ (1.60)
Weighted average number of common shares:
Basic 1,542,183 1,336,361
Diluted 1,542,183 1,336,361
</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 October 2, 1999 and October 3, 1998
<TABLE>
<CAPTION>
Retained
Common Stock Capital in Earnings Total
------------------- Excess of Unearned (Accumulated Stockholders'
Shares Amount Par Value Compensation Deficit) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at September 27, 1997 1,320,473 $13,205 $3,815,415 $(53,052) $ 123,268 $ 3,898,836
Net loss for 1998 - - - - (2,141,973) (2,141,973)
Issuance of shares under
Employee Investment Plan and
Employee Stock Purchase Plan 20,150 202 62,306 - - 62,508
Conversion of notes payable to
related parties and others
into common stock 94,433 944 266,301 - 267,245
Value of common stock warrants
issued to holders of subordinated
notes - - 97,500 - - 97,500
Amortization of unearned
compensation - - - 24,875 - 24,875
---------------------------------------------------------------------------------
Balance at October 3, 1998 1,435,056 14,351 4,241,522 (28,177) (2,018,705) 2,208,991
Net loss for 1999 - - - - (1,836,778) (1,836,778)
Exercise of stock options 8,000 80 11,920 - - 12,000
Compensation element of stock
options granted - - 10,313 (10,313) - -
Issuance of shares under
Employee Investment Plan and
Employee Stock Purchase Plan 22,313 222 59,021 - - 59,243
Conversion of notes payable to
related parties and others
into common stock 224,373 2,244 328,989 - - 331,233
Value of common stock warrants
issued to bank and holders of
subordinated notes - - 65,971 - - 65,971
Amortization of unearned
compensation - - - 23,230 - 23,230
---------------------------------------------------------------------------------
Balance at October 2, 1999 1,689,742 $16,897 $4,717,736 $(15,260) $(3,855,483) $ 863,890
=================================================================================
</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 October 2, 1999 and October 3, 1998
<TABLE>
<CAPTION>
October 2, 1999 October 3, 1998
<S> <C> <C>
Operating activities:
Net loss $(1,836,778) $(2,141,973)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 424,083 429,086
Gain on asset dispositions (21,580) (21,580)
Amortization of debenture discount and debt issue costs 298,641 373,397
Provision for losses on accounts receivable 64,111 95,327
Employee investment plan expense 56,645 55,284
Amortization of unearned compensation 23,230 24,875
Provision for deferred income taxes - -
Changes in operating assets and liabilities:
Accounts receivable 439,719 156,577
Inventories, prepaid expenses and other current assets 658,177 (168,560)
Accounts payable and accrued expenses (9,255) 1,085,184
------------------------------
Net cash provided by (used in) operating activities 96,993 (112,383)
------------------------------
Investing activities:
Net proceeds from asset dispositions 3,264 -
Purchases of property, plant and equipment,
including self-constructed equipment (55,872) (17,379)
Other (36,682) (26,142)
------------------------------
Net cash used in investing activities (89,290) (43,521)
------------------------------
Financing activities:
Proceeds from sale of common stock 14,598 7,224
Proceeds from notes payable to related parties and others 7,303 100,000
Proceeds from bank and other borrowings - 200,000
Principal payments on note payable to bank, capital lease
obligations and long-term debt (383,576) (291,055)
------------------------------
Net cash provided by (used in) financing activities (361,675) 16,169
------------------------------
Decrease in cash and equivalents during year (353,972) (139,735)
Cash and equivalents at beginning of year 393,161 532,896
------------------------------
Cash and equivalents at end of year $ 39,189 $ 393,161
==============================
Supplementary Cash Flow Information
Interest paid $ 184,194 $ 207,444
Conversion of notes payable and accrued interest to equity 331,233 267,245
Capital lease obligations incurred to acquire equipment 16,800 35,941
</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 ("we" or the "Company")
manufactures and markets electronics including radiotelephone 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 500
dealers.
We introduced our 220 MHz land mobile product line in 1993. We also have
agreements covering the construction and operation of narrowband land mobile
systems (see Note 11).
2. Significant Accounting Policies:
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, SEA, Inc. ("SEA"), and its 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 us to make estimates and assumptions
that affect the reported amounts of assets and liabilities. We are also
required to make estimates and assumptions that affect 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 estimates.
Fiscal Year
The Company's fiscal year consists of 52 weeks ending 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
We consider 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
our 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. We sell to customers throughout the
world with a majority of the sales in the United States. Except for our
Australian subsidiary we do not have foreign operations. Our export sales
were approximately $1,832,000 in 1999 and $632,000 in 1998. We perform
periodic credit evaluations of our customers, usually sell on open account
and do not require collateral. All sales are denominated in US dollars so
we do not have foreign currency exposure.
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 5). 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, developing and maintaining 220 MHz licenses
are amortized on a straight-line basis over ten years and are included in
other assets.
Deferred Financing Costs
No deferred financing costs remained at October 2, 1999. Deferred financing
costs, included in other assets, of $102,367 at October 3, 1998 represent the
unamortized portion of the direct costs of issuing the convertible
debentures and the value of warrants attached to the subordinated notes.
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.
Advertising
Expenditures for advertising are charged to expense as incurred.
Advertising expense was $226,843 in 1999, and $305,688 in 1998.
Warranty Costs
We estimate and charge to current expense the amount which will be needed to
cover future warranty obligations for products sold during the year.
Income Taxes
We account for income taxes using the liability method. 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
We apply APB Opinion No. 25, Accounting for Stock Issued to Employees and
related Interpretations in measuring compensation cost for our stock option
plans. We also disclose 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
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 and warrants or
conversion of debentures. Common stock equivalents are excluded from the
calculation when they are anti-dilutive.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the 1999 presentation, with no impact on
previously reported net loss or stockholders' equity.
3. Going Concern:
As shown in the consolidated financial statements, the Company incurred a
net loss of $1,836,778 in 1999 and $2,141,973 in 1998. In addition, the
Company has a significant subordinated debt obligation due in December 2000
(see Note 9). These factors, as described below, raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern is dependent upon its ability to
raise additional capital and operate at a profit. Our plans with respect to
these matters are described below.
Losses incurred by the Company in 1999 and 1998 are primarily attributable
to maintaining land mobile engineering, manufacturing and marketing
capabilities despite significantly reduced revenues in this product line.
We believe that additional sales of land mobile products will result from
the March 1999 issuance of Phase II licenses by the FCC, and the Company's
introduction of new land mobile products. In the event that land mobile
revenues do not meet expectations, management has a plan for significantly
reducing land mobile related operating expenses. The Company may also elect
to raise capital by selling 220 MHz licenses and repeater hardware owned by
its subsidiary, Narrowband Network Systems, Inc.
As described in Note 7, we do not have a commitment from our bank to extend
the term of our variable bank line of credit. The Company is in compliance
with the terms of the loan however, should the bank choose not to renew the
loan and instead demand immediate repayment we would not have sufficient
resources to do so. Any action the bank might take to pursue immediate
collection of the loan would have severe consequences for the Company.
In the last year the Company has had discussions with a number of senior
lenders and management believes the Company could obtain new senior debt on
reasonable terms. However, in order to complete the new bank loan agreement
Alta Subordinated Debt Partners III ("ASDP III"), the holder of the
Subordinated Convertible Debentures (see Note 9), must agree to subordinate
their debt to the new senior lender. We have not been able to obtain a
subordination agreement from ASDP III so further action on the new bank
financing has been postponed.
As described in Note 9, we have subordinated debt obligations due in
December 2000 and the debt is the subject of litigation. In order to redeem
its obligations as scheduled and meet its operating and capital requirements
in 2000, the Company will require additional funding. 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 the
subordinated debt cannot be redeemed as scheduled the lenders may take
action against the Company to pursue their rights under the agreements.
Since the rights of the subordinated debt holders are junior to those of the
bank, any action taken by the subordinated debt holders would likely be
subject to, and delayed by, actions taken by the bank. Nevertheless, any
such action could have severe consequences for the Company.
4. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Finished goods and subassemblies $1,583,442 $1,855,862
Work-in-process 174,019 436,443
Purchased parts and materials 2,729,729 2,802,585
--------------------------
$4,487,190 $5,094,890
==========================
</TABLE>
5. Property, Plant and Equipment:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
1999 1998 Useful Lives
<S> <C> <C> <C>
Design, test and manufacturing equipment $2,801,437 $2,747,237 5 years
Narrowband network equipment 1,541,840 1,541,840 10 years
Office furniture and general equipment 550,700 552,241 3 - 5 years
Buildings and improvements 136,247 136,247 10 - 25 years
Leasehold improvements 101,178 101,178 3 - 10 years
Delivery vehicles 7,400 7,400 5 years
------------------------
$5,138,802 $5,086,143
========================
</TABLE>
Design, test and manufacturing equipment includes equipment under capital
leases with an original cost of $295,836 and accumulated depreciation of
$170,282 as of October 2, 1999.
6. Accrued Expenses:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Accrued payroll and related fringe benefits $ 422,849 $ 523,661
Accrued warranty costs 122,703 137,328
Accrued co-op advertising 212,252 251,665
Accrued interest 834,181 594,270
Other accrued expenses 197,407 293,719
--------------------------
$1,789,392 $1,800,643
==========================
</TABLE>
7. Note Payable to Bank:
The Company has a variable bank line of credit for up to $1,418,665 with
interest payable monthly at 1.75% over prime (10.0% at October 2, 1999).
The amount we can borrow under the line is based upon a formula that
considers trade accounts receivable and finished goods inventory. At
October 2, 1999 the amount outstanding on the line was $1,097,312. The line
was renewed for six months effective February 28, 1999 on the condition any
over-advance be reduced by $50,000 per month beginning with the month ending
May 31, 1999. The Company has been able to comply with the terms of the
renewal and was not over-advanced at October 2, 1999. As a condition of the
February 28, 1999 renewal the bank received warrants to purchase 1,000
shares of common stock for each month any portion of the loan was outstanding
through May 31, 1999. After May 31, 1999 the bank receives warrants to
purchase 2,000 shares of common stock for each month any portion of the loan
is outstanding. On August 31, 1999 the loan was renewed for a period of two
months on the same terms as the previous renewal. The exercise price of the
warrants is $2.625 per share and the bank had received 11,000 warrants as of
October 2, 1999. At October 3, 1998 the amount owed on the line was
$1,418,665 with interest payable at .5% over prime (8.75% at October 3,
1998). Starting November 1, 1999 the line has been renewed on a
month-to-month basis. The line of credit is collateralized by essentially
all of the Company's assets.
The loan agreement contains covenants which require the Company to maintain
a tangible net worth as defined by the bank of $2,050,000, a minimum current
ratio of 1.0 and a maximum debt to net worth ratio of 3.4. The Company is
in compliance with these loan covenants. Although the bank has been willing
to extend the loan for a short period there can be no assurance that the
bank will elect to renew the line at maturity under the current or any other
terms. If the bank were to demand immediate repayment of the loan the
Company would not have sufficient resources to do so.
The weighted-average interest rate on short-term borrowings was 9.2% for
fiscal 1999 and 9.5% for fiscal 1998.
8. Notes Payable to Related Parties and Others:
Notes payable to related parties and others at October 2, 1999 consists of a
$352,000 subordinated loan from the Company's President and a $100,000
subordinated short-term note payable to an unrelated party. The balance on
the subordinated loan payable at October 3, 1998 was $344,697 with interest
only payable monthly at 1.0% over prime (9.25% at October 3, 1998). During
the year the loan was refinanced. Monthly payments on the current loan are
1% of the outstanding balance including interest at 2.25% over prime (10.5%
at October 2, 1999) and the loan is due on September 7, 2014.
The terms of the subordinated short-term notes were amended during 1998 to
extend the due date for principal and interest to March 1999. During 1999
the maturity date of the notes was again extended to March 2000. For each
six month extension the note holder receives 1,680 common stock warrants
(exercisable for $0.10 per share) per $100,000 principal outstanding. Note
holders also have an option to convert the notes and any accrued interest to
common stock. The estimated fair value of the additional warrants is
amortized to expense over the term of the maturity extension. At October 3,
1998 the outstanding principal on the notes was $400,000. During 1999 two
of the short-term note holders, one of whom is an officer of the Company,
converted a total of $331,233 in principal and accrued interest to common
stock.
9. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Subordinated Convertible Debentures, principal and interest
due December 2000 $2,000,000 $2,000,000
Less discount, net of accumulated amortization of $480,000
and $349,697 respectively, related to allocation of debt
proceeds to stock conversion rights - (130,303)
------------------------
2,000,000 1,869,697
Mortgage note, monthly payments of $851, including interest
at 10.25% adjustable annually, due February 2008,
collateralized by the underlying building 57,489 61,106
------------------------
2,057,489 1,930,803
Less current maturities 2,004,461 1,873,741
------------------------
$ 53,028 $ 57,062
========================
Maturities of long-term debt are as follows:
Fiscal
2000 $2,004,461
2001 5,073
2002 5,548
2003 6,145
2003 6,805
Thereafter 29,457
</TABLE>
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 additional debt, 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 seeks damages in the amount of
$2,827,863 plus interest and reasonable attorneys' fees and costs. The
Company filed its answer and counterclaims on April 2, 1999 and intends to
vigorously defend itself in this matter. The case is currently in the
discovery phase and no trial date has been set.
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
classify the $2,000,000 Debenture as currently payable. Accrued and unpaid
interest on the Debentures as of October 2, 1999 was approximately $818,875.
The Company does not currently have the resources to pay either the
principal or accrued interest on the Debentures.
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. Under the terms of the Debenture Agreement the lender has
the option of exchanging the convertible preferred stock for common shares
(196,422 shares at October 2, 1999). These common shares are the same
shares issuable to the lender on the maturity of the Debentures described
above. The Company may convert at its option after December 19, 1997. The
original $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 shares of common stock
obtainable upon conversion. The related discount of $480,000 on the
Debentures is amortized to expense 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 October 2, 1999, management believes that the fair
value of the debt component of the Debentures (carrying value of $2,000,000
as of October 2, 1999) has not changed materially from the date of issuance.
The estimated fair value of the note payable to bank, notes payable to
related parties and others, and long-term debt at October 2, 1999
approximates the carrying value of such debt in the financial statements,
based on current interest rates for similar obligations with like
maturities.
10. Commitments and Contingencies:
The Company is the lessee of equipment under capital leases expiring in the
fiscal year 2001. 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 $231,000 in 1999 and $209,000 in
1998.
Approximate future minimum lease payments, by year and in the aggregate,
under capital and noncancelable operating leases, were as follows at October
2, 1999:
<TABLE>
<CAPTION>
Capital Operating
<S> <C> <C>
2000 $61,317 $231,352
2001 8,386 224,952
2002 6,563 224,952
2002 - 56,238
---------------------
Total future minimum lease payments 76,266 $737,494
========
Less amounts representing interest (7,147)
-----
Present value of future minimum lease payments 69,119
Current portion 56,431
-------
Non current $12,688
=======
</TABLE>
11. 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. Disposition
of these systems is solely at the Company's discretion.
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 October 2, 1999 and October 3, 1998 fixed assets include $1,541,840 (less
accumulated depreciation of $552,105 and $397,920 respectively) of
facilities related to the SMR systems and other assets include $448,600 and
$427,364 (less accumulated amortization of $146,072 and $101,963)
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
October 2, 1999. Management does anticipate that revenues will increase
beginning in fiscal 2000.
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. We estimate that the carrying value of our investment
in these assets will be recovered 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.
12. 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 and exercisable at September 27, 1997
October 3, 1998 and October 2, 1999 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>
Outstanding and exercisable at September 27, 1997 12,000 8.00
Granted in fiscal 1998 4,000 5.06
Forfeited in fiscal 1998 (8,000) 8.00
------------------
Outstanding and exercisable at October 3, 1998 8,000 $6.53
Granted in fiscal 1999 4,000 2.375
------------------
Outstanding and exercisable at October 2, 1999 12,000 $5.15
==================
Weighted average fair value of options granted
during the year ended October 2, 1999 $1.22
</TABLE>
The 1991 Stock Option Plan authorized grants of incentive and nonqualified
stock options for 350,000 common shares. 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"). 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 October 2, 1999 commenced five year
vesting on September 9, 1994 and are fully vested as of October 2, 1999.
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 September 27, 1997 87,024 5.63 56,500 1.85 22,000 4.50
Granted 6,500 4.38 - - - -
-------------------------------------------------------------
Outstanding at October 3, 1998 93,524 5.55 56,500 1.85 22,000 4.50
Granted 12,000 2.88 7,500 1.00
Exercised - - (8,000) 1.50 (4,000) 4.50
Canceled (20,424) 5.45 (7,500) 1.00 - -
-------------------------------------------------------------
Outstanding at October 2, 1999 85,100 5.19 48,500 1.91 18,000 4.50
=============================================================
Exercisable at October 2, 1999 71,725 5.53 46,000 1.96 18,000 4.50
Available for grant at October 2, 1999 86,073 - 27,125 - 31,250 -
Exercisable at October 3, 1998 80,149 5.35 50,125 1.82 22,000 4.50
Exercisable at September 27, 1997 74,524 5.07 46,250 1.74 17,600 4.50
Weighted average fair value of options
granted during the year ended
October 2, 1999:
Exercise price equal to market at grant (12,000 options) $ 1.82
Exercise price less than market at grant (7,500 options) $ 1.93
</TABLE>
The following is a summary of stock options outstanding under the 1991, 1992
and 1995 plans at October 2, 1999:
<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
<S> <C> <C> <C> <C> <C>
$1.00-2.50 50,000 .30 $1.53 44,500 $1.49
$3.00-6.00 95,600 .32 $4.49 85,225 $4.59
$7.00-9.00 22,500 - $8.80 22,500 $8.80
</TABLE>
The total compensation cost recognized in income for stock-based
compensation was $23,230 in 1999 and $28,177 in 1998. Had the compensation
cost for the Company's option plans been determined consistent with FAS 123,
the Company's pro forma net loss and net loss per share would have been as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net income (loss):
As reported $(1,836,778) $(2,141,973)
Pro forma (1,840,080) (2,158,314)
Basic net income (loss) per share:
As reported $ (1.19) $ (1.60)
Pro forma (1.19) (1.62)
Diluted net income (loss) per share:
As reported $ (1.19) $ (1.60)
Pro forma (1.19) (1.62)
</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>
1999 1998
<S> <C> <C>
Dividend yield 0% 0%
Volatility 62.3-73.4 64.7-69.4
Risk free interest rate 5.00% 5.60%-5.83%
Expected option term (years) 3-6 3-6
</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 908 shares in
1999 and 1,653 shares in 1998 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 21,405 shares in 1999 and 18,497
shares in 1998 under the Employee Investment Plan.
Shares Reserved for Future Issue
At October 2, 1999, the Company had reserved the following shares of its
common stock for future issue:
<TABLE>
<S> <C>
Employee Stock Purchase Plan 3,429
1991 Stock Option Plan:
Qualified Options 171,173
Nonqualified Options 75,625
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 196,422
Bank Loan Agreement 21,000
Subordinated Notes 144,006
-------
713,405
=======
</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
88 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.
13. Net Loss Per Share:
Stock options for 168,100 shares, preferred stock convertible into 196,422
shares, subordinated notes convertible into 73,666 shares and warrants for
91,340 shares were not included in fiscal 1999 because they would be anti-
dilutive. Stock options for 184,524 shares, preferred stock convertible
into 175,639 shares, subordinated notes convertible into 123,172 shares and
warrants for 53,420 common shares were not included in fiscal 1998 because
they would be anti-dilutive.
14. Income Taxes:
The components of income tax expense consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current and Deferred provision - Federal $ 0 $ 0
===========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net federal and state operating loss carryforwards $ 2,761,000 $ 2,184,000
Accrued expenses not currently deductible for tax purposes 158,000 177,000
General business tax credit carryforwards 128,000 128,000
Property and equipment (102,000) (103,000)
Allowance for doubtful accounts 49,000 37,000
Inventory, principally due to valuation differences and
overhead application 192,000 153,000
Other, individually less than 5% of deferred tax asset - 19,775
--------------------------
3,186,000 2,595,775
Less valuation allowance (3,186,000) (2,595,775)
--------------------------
Net deferred tax assets $ - $ -
==========================
</TABLE>
The Company provided a valuation allowance equal to its deferred tax asset
in 1999 and 1998. Management considered the losses incurred in 1998 and
1999, the inability to predict land mobile sales 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 at year end and increased the deferred tax valuation
allowance by $590,225 during fiscal 1999 and $730,000 during fiscal 1998.
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.
The reconciliation of income taxes at the federal statutory rate of 34% to
the income tax provision presented in the consolidated statement of
operations is presented below:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Income tax expense (benefit) at statutory rate $(625,000) $(728,000)
State income taxes (benefit),
net of federal tax effects (5,000) (8,000)
Other 39,775 6,000
Change in valuation allowance 590,225 730,000
-------------------------
Income tax expense $ - $ -
=========================
</TABLE>
As of October 2, 1999, the Company has net federal operating loss
carryforwards of $7,044,000 which are available to reduce future federal
taxable income ($71,000 of which expire in fiscal 2008, $513,000 in fiscal
2009, $227,000 in fiscal 2010, $2,068,000 in 2012, 2,486,000 in 2013 and the
remainder in 2019). 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.
15. Operating Segment Information:
The Company adopted SFAS 131 "Disclosures about Segments of an Enterprise
and Related Information" in 1999. The Company is organized into three
primary operating segments according to its primary product categories:
"Land Mobile Communications", "Marine Communications" and "Marine
Instrumentation", and a less significant but separately identifiable segment
referred to as "Narrowband Operations." The Company's reportable segments
have been determined based on the nature of its operations and products
offered to customers.
The accounting policies of the segments are the same as those described in
Note 2, "Significant Accounting Policies." Segment results are measured
based on operating income (loss). Segment assets consist of assets that are
identified to reportable segments and reviewed by the chief operating
decision makers. Included in segment assets are accounts receivable,
inventory, prepaid expenses, other assets and property, plant and equipment.
<TABLE>
<CAPTION>
Net sales 1999 1998
<S> <C> <C>
Land mobile communications $ 1,566,585 $ 3,032,939
Marine communications 8,142,812 7,005,466
Marine instrumentation 2,399,012 2,332,352
Narrowband operations 8,850 11,794
----------------------------
Total consolidated net sales $12,117,259 $12,382,551
============================
<CAPTION>
Operating income (loss) 1999 1998
Land mobile communications $(1,545,502) $(1,498,680)
Marine communications 868,437 517,738
Marine instrumentation 81,420 116,446
Narrowband operations (301,380) (263,185)
All other (217,370) (226,475)
----------------------------
Total consolidated operating loss $(1,114,395) $(1,354,156)
============================
<CAPTION>
Segment assets 1999 1998
Land mobile communications $ 2,248,497 $ 2,754,620
Marine communications 2,677,641 3,078,333
Marine instrumentation 1,198,299 1,122,411
Narrowband operations 1,292,265 1,469,321
All other 181,058 1,109,414
----------------------------
Total consolidated assets $ 7,597,760 $ 9,534,099
============================
<CAPTION>
Capital expenditures 1999 1998
Land mobile communications $ 54,200 $ 31,223
Marine communications 537 6,718
Marine instrumentation 538 10,106
Narrowband operations - -
All other 17,397 5,273
----------------------------
Total consolidated capital expenditures $ 72,672 $ 53,320
============================
<CAPTION>
Depreciation and amortization expense 1999 1998
Land mobile communications $ 86,563 $ 89,375
Marine communications 44,482 49,770
Marine instrumentation 17,674 14,290
Narrowband operations 198,293 194,745
All other 77,071 80,906
----------------------------
Total consolidated depreciation and
amortization expense $ 424,083 $ 429,086
============================
<CAPTION>
Geographic area net sales 1999 1998
United States $10,089,734 $11,750,577
Foreign 2,027,525 631,974
----------------------------
Total consolidated net sales $12,117,259 $12,382,551
============================
</TABLE>
No customer individually accounted for 10% or more of the Company's total
net sales in 1999 or 1998.
The Company does not have any significant property, plant and equipment
outside the United States.
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 December 17, 1999 regarding 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.
<TABLE>
<CAPTION>
Serving for a term ending in 2002:
Director Position with Company or Principal
Name Age Since Occupation During the Past Five Years
<S> <C> <C> <C>
Stephen W. Frankel 53 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.
<CAPTION>
Serving for a term ending in 2000:
Director Position with Company or Principal
Name Age Since Occupation During the Past Five Years
Peter D. Brown 51 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.
<CAPTION>
Serving for a term ending in 2001:
Director Position with Company or Principal
Name Age Since Occupation During the Past Five Years
David C. Thompson 70 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>
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 70 President and Chief Executive Officer
Jan Kallshian 45 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.
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 October 2, 1999, October 3, 1998 and
September 27, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compen-
sation
Annual Compensation Awards
--------------------------------------------- -----------
Other All
Annual Other
Compen- Compen-
Name and Principal sation Stock sation
Position(s) Year Salary ($) Bonus ($) ($) (1) Options (#) ($)
<S> <C> <C> <C> <C> <C> <C>
David C. Thompson 1999 116,991 - - - 9,943 (2)
President and Chief 1998 115,608 - - - 3,408 (2)
Executive Officer 1997 113,329 - - - 3,283 (2)
Jan Kallshian, Chief 1999 110,923 - - - -
Financial Officer 1998 109,070 - - - -
1997 78,790 - - - -
___________________
<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 $50,000.
<F2> Represents amounts contributed by the Company under its 401(k) Plan.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding the grants of
stock options to each of the Named Executive Officers during the fiscal year
ended October 2, 1999.
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or Market
Options Granted Employees in Base Price Price at Date Expiration
Name (#) Fiscal Year ($/Sh) of Grant Date
<S> <C> <C> <C> <C> <C>
None
</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 October 2, 1999, and the
value of unexercised options held by the Named Executive Officers on October
2, 1999.
<TABLE>
<CAPTION>
Number of Shares Underlying
Unexercised Options at Value of Unexercised Options
October 2, 1999 (#) at October 3, 1999 ($) (1)
---------------------------- ----------------------------
Shares
Acquired
On Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
David C. Thompson None None 44,632 - 6,870 -
___________________
<FN>
<F1> Value of unexercised options represents the difference between the
exercise prices of the stock options and the closing price ($2.187 per
share) of the Company's Common Stock in the over-the-counter market on
October 1, 1999, 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
December 17, 1999 (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, (c) each named
executive officer, and (d) all directors and executive 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, Director 307,386 (2) 17.9%
PO Box 2692
Palm Beach FL 33480
Common Stock Ogdoad LLC 194,894 (3) 11.4%
PO Box 1429
Pauma Valley CA 92061
Common Stock David C. Thompson, President 213,696 (4) 12.1%
and Director
7030 - 220th Street S.W.
Mountlake Terrace WA 98043
Common Stock Alta Subordinated Debt Partners III 196,785 (5) 10.4%
One Post Office Square, Suite 3800
Boston MA 02109
Common Stock Stephen W. Frankel, Director 135,096 (6) 7.9%
909 Via Mirada
Palos Verdes Estates CA 90274
Common Stock Steven T. Newby 85,500 (7) 5.0%
6116 Executive Blvd., Suite 701
Rockville MD 20852
Common Stock Jan Kallshian, Chief Financial 53,249 (8) 3.1%
Officer
7030 - 220th Street S.W.
Mountlake Terrace WA 98043
Common Stock All Directors and Executive 624,092 34.7%
Officers as a group (4 persons)
___________________
<FN>
<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 December 17, 1999.
<F2> Represents 169,937 shares held of record, 12,500 shares subject to
presently exercisable stock options, 21,050 shares held in trust for
Mr. Brown's minor child, 18,564 shares held by a Retirement Plan Trust
for Mr. Brown, and 85,335 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 18,564 shares held by
his Retirement Plan Trust.
<F3> Represents 179,854 shares held of record and 15,040 shares subject to
presently exercisable Common Stock warrants. Based on communication
with beneficial owner as of August 31, 1999. The General Manager of
Ogdoad LLC is the father-in-law of Mr. Kallshian, the Company's Chief
Financial Officer. Mr. Kallshian disclaims beneficial ownership of
all such shares.
<F4> Represents 60,471 shares held of record, 44,632 shares subject to
presently exercisable stock options, 23,258 shares subject to
presently exercisable Common Stock warrants, and 85,335 shares held in
trust for the Company's Employee Investment Plan for which Mr.
Thompson serves as a co-trustee.
<F5> Represents common shares obtainable upon conversion of a subordinated
convertible debenture into Preferred Stock which in turn is
convertible into Common Stock.
<F6> Represents 121,076 shares held of record, 4,000 shares subject to
presently exercisable stock options and 10,020 shares subject to
presently exercisable Common Stock warrants.
<F7> Based upon the Schedule 13G filed with the SEC by the beneficial owner
on January 31, 1999 and subsequent communication with the beneficial
owner as of August 31, 1999.
<F8> Represents 46,569 shares held of record and 6,680 shares subject to
presently exercisable Common Stock warrants.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1999, the Company paid interest of $36,901 on a subordinated
loan of $344,697 made by Mr. Thompson to the Company. In connection with
the same loan, Mr. Thompson was also granted warrants to purchase 21,880
shares of the Company's Common Stock.
During fiscal 1999, the Company paid interest of $2,500 to members of Mr.
Kallshian's family (as defined by SEC rules) on a subordinated loan of
$200,000. Warrants to purchase 1,680 shares of the Company's Common Stock
were granted in return for extending the maturity date. During 1999 the
note holder exercised their right to convert the loan balance and accrued
interest into 178,381 shares of the Company's Common Stock.
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
October 2, 1999:
None
(c) List of Exhibits. The following exhibits are filed as a part of, or
incorporated by reference into, this report on Form 10-KSB.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
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.
11 Computation of Earnings Per Share
21 Subsidiaries
23.1 Consent of Independent Accountants
23.2 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
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: January 3, 2000
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/ STEPHEN W. FRANKEL
------------------
Stephen W. Frankel, Chairman of the Board
January 3, 2000
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- --------------------------------------------- ------------- ------------------------ ---------- -------------
Additions
DESCRIPTION Balance at ------------------------
Beginning of Charged to Charged to Deductions Balance at
Period Expenses Other (describe) End of Period
<S> <C> <C> <C> <C> <C>
Year ended October 2, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 118,218 64,111 28,586(1) $ 153,743
Allowance for slow moving inventory 242,249 69,781 21,948(2) 290,082
Valuation allowance for deferred tax asset 2,595,775 590,225 3,186,000
--------------------------------------------------------------------
Totals $2,956,242 133,892 590,225(4) 50,534 $3,629,825
====================================================================
Product warranty liability $ 137,328 119,733 134,358(3) $ 122,703
====================================================================
Year ended October 3, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 234,973 95,327 212,082(1) $ 118,218
Allowance for slow moving inventory 223,178 51,980 32,909(2) 242,249
Valuation allowance for deferred tax asset 1,865,775 730,000 2,595,775
--------------------------------------------------------------------
Totals $2,323,926 147,307 730,000(4) 244,991 $2,956,242
====================================================================
Product warranty liability $ 140,463 109,337 112,472(3) $ 137,328
====================================================================
<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 Certified Public Accountants on Schedules
To the Stockholders and Board of Directors of
Datamarine International, Inc. and Subsidiaries
In connection with our audit of the consolidated financial statements of
Datamarine International, Inc. and Subsidiaries referred to in our report
dated November 24, 1999, which is included in the Annual Report on Form
10-KSB, we have also audited Schedule II for the years ended October 2, 1999
and October 3, 1998. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein. Our
report on the consolidated financial statements referred to above includes an
explanatory paragraph which discusses the consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
/s/ GRANT THORNTON LLP
------------------
Seattle, Washington
November 24, 1999
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Basic
- -----
Weighted Average Shares Outstanding 1,542,183 1,336,361
Diluted
- -------
Weighted Average Shares Outstanding 1,542,183 1,336,361
Dilutive Effect of Potential Common Shares - -
-----------------------
Weighted Average Common and Equivalent Shares Outstanding 1,542,183 1,336,361
=======================
</TABLE>
EXHIBIT 21
SUBSIDIARIES
The Registrant has one wholly-owned subsidiary: SEA, Inc., a Delaware
Corporation.
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 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
Consent of Independent Certified Public Accountants
We have issued our reports dated November 24, 1999, accompanying the
consolidated financial statements and schedule included in the Annual Report
of Datamarine International, Inc. and Subsidiaries on Form 10-KSB for the year
ended October 2, 1999. We hereby consent to the incorporation by reference
of said reports in the Registration Statements of Datamarine International,
Inc. and Subsidiaries on Forms S-8 (File No. 2-68937) pertaining to the
Employee Stock Purchase Plan, on Form S-8 (File No. 33-45832) 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.
/s/ GRANT THORNTON LLP
Seattle, Washington
January 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> OCT-02-1999
<CASH> 39,189
<SECURITIES> 0
<RECEIVABLES> 1,428,650
<ALLOWANCES> 153,743
<INVENTORY> 4,487,190
<CURRENT-ASSETS> 5,935,268
<PP&E> 5,138,802
<DEPRECIATION> 3,814,391
<TOTAL-ASSETS> 7,597,760
<CURRENT-LIABILITIES> 6,668,154
<BONDS> 65,716
0
0
<COMMON> 16,897
<OTHER-SE> 846,993
<TOTAL-LIABILITY-AND-EQUITY> 7,597,760
<SALES> 12,117,259
<TOTAL-REVENUES> 12,117,259
<CGS> 7,849,831
<TOTAL-COSTS> 7,849,831
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 64,111
<INTEREST-EXPENSE> 753,979
<INCOME-PRETAX> (1,836,778)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,836,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,836,778)
<EPS-BASIC> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
