UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2000 Commission File Number 0-8936
DATAMARINE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Washington 04-2454559
(State of Incorporation) (I.R.S. Employer Identification Number)
7030 220th SW, Mountlake Terrace, Washington 98043
(Address of principal executive offices)
(425)771-2182
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 1, 2000
Common Stock, $.01 Par Value 1,724,437
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-----------------------------------------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,853,095 $3,213,234 $ 5,697,775 $ 9,746,267
Cost of products sold 1,263,181 2,077,899 3,878,344 6,143,672
-----------------------------------------------------------
Gross profit 589,914 1,135,335 1,819,431 3,602,595
Operating expenses:
Research and development 326,234 416,884 1,022,210 1,097,680
Selling 430,188 533,781 1,508,918 1,811,542
General and administrative 263,805 355,496 837,447 996,875
Narrowband operations 70,163 79,209 218,567 223,134
-----------------------------------------------------------
Operating expenses 1,090,390 1,385,370 3,587,142 4,129,231
-----------------------------------------------------------
Operating loss (500,476) (250,035) (1,767,711) (526,636)
Interest expense 143,672 167,851 419,668 616,236
Other income, net (35,891) (1,844) (74,963) (17,949)
-----------------------------------------------------------
Loss before income taxes (608,257) (416,042) (2,112,416) (1,124,923)
Income taxes - - - -
-----------------------------------------------------------
Net loss $ (608,257) $ (416,042) $(2,112,416) $(1,124,923)
===========================================================
Net loss per share, basic $ (0.36) $ (0.27) $ (1.24) $ (0.74)
Net loss per share, diluted $ (0.36) $ (0.27) $ (1.24) $ (0.74)
Average shares outstanding,
basic and diluted 1,712,291 1,545,391 1,702,811 1,524,299
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
July 1, October 2,
ASSETS 2000 1999
--------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,849 $ 39,189
Accounts receivable, net of allowance
of $181,523 and $153,743, respectively 1,012,355 1,274,907
Inventories 3,820,619 4,487,190
Prepaid expenses and other current assets 120,126 133,982
--------------------------
Total current assets 4,990,949 5,935,268
Property, plant and equipment 5,217,741 5,138,802
Less accumulated depreciation 4,044,202 3,814,391
--------------------------
Property, plant and equipment, net 1,173,539 1,324,411
Other assets, net 429,008 338,081
--------------------------
Total assets $ 6,593,496 $ 7,597,760
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 757,778 $ 1,097,312
Notes payable to related parties and others 449,700 452,000
Accounts payable 2,004,489 1,268,558
Accrued expenses 2,347,441 1,789,392
Current maturities of long-term debt
and capital lease obligations 2,036,052 2,060,892
--------------------------
Total current liabilities 7,595,460 6,668,154
Long-term debt and capital lease
obligations, less current maturities 119,538 65,716
--------------------------
Total liabilities 7,714,998 6,733,870
--------------------------
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
20,000,000 shares; 1,724,437 and
1,689,742 shares issued and outstanding,
respectively 17,244 16,897
Capital in excess of par value 4,840,320 4,717,736
Unearned compensation (11,167) (15,260)
Accumulated deficit (5,967,899) (3,855,483)
--------------------------
Total stockholders' equity (1,121,502) 863,890
--------------------------
Total liabilities and
stockholders' equity $ 6,593,496 $ 7,597,760
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
July 1, July 3,
2000 1999
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,112,416) $(1,124,923)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 270,266 316,895
Gain on asset dispositions (16,186) (16,186)
Amortization of debt discount and issue costs 98,717 250,185
Provision for losses on accounts receivable 31,114 43,381
Employee investment plan expense 42,421 43,134
Amortization of unearned compensation 9,749 18,297
Changes in operating assets and liabilities:
Accounts receivable 231,438 209,623
Inventories, prepaid expenses and other
current assets 680,427 307,629
Other assets (132,092) -
Accounts payable and accrued expenses 1,310,166 (213,213)
------------------------------
Net cash provided by (used in)
operating activities 413,604 (165,178)
INVESTING ACTIVITIES
Purchases of property, plant and
equipment, including self-constructed
equipment (5,462) (55,275)
Disposition of property, plant and equipment 12,015 -
Other (19,047) (23,107)
------------------------------
Net cash used in investing activities (12,494) (78,382)
FINANCING ACTIVITIES
Proceeds from sale of common stock 3,903 10,097
Proceeds from bank and other borrowings - -
Principal payments on note payable to bank,
capital lease Obligations and long-term debt (406,353) (152,763)
------------------------------
Net cash used in financing activities (402,450) (142,666)
Decrease in cash and cash equivalents during period (1,340) (386,226)
Cash and cash equivalents at beginning of period 39,189 393,161
------------------------------
Cash and cash equivalents at end of period $ 37,849 $ 6,935
==============================
Supplementary Cash Flow Information
Interest paid $ 109,830 $ 118,770
Proceeds of leases used to acquire assets 93,501 -
Conversion of subordinated note and accrued interest - 217,028
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited, consolidated, condensed quarterly financial
statements have been prepared in accordance with instructions to Form 10-QSB
and, therefore, do not include all information and footnotes normally
included in financial statements prepared in conformity with Generally
Accepted Accounting Principles ("GAAP"). The information furnished reflects
all adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for the fair statement of financial
position, results of operations and cash flows for the interim period. In
the opinion of management, they fairly represent the operating results of
the Company for the periods presented. The year-end condensed balance sheet
was derived from audited financial statements, but does not include all
disclosures required by GAAP. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for
the full year. Accounting policies used in fiscal 2000 are consistent with
those used in fiscal 1999. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the Company's annual report on Form 10-KSB for the year ended October 2,
1999.
2. Going Concern
As shown in the consolidated financial statements, the Company incurred a
net loss of $2,112,416 for the nine months ended July 1, 2000, and incurred
losses for fiscal 1999 and 1998 as well. In addition, the Company has a
significant subordinated debt obligation due in December 2000. 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 contingent 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 recent years 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. Increased demand is reflected in
the Company's land mobile order backlog which has increased from $1,429,000
at October 2, 1999 to $2,592,000 at July 1, 2000. The recovery of land
mobile revenues is currently being hindered by product shortages due to
failures by one of the Company's suppliers to deliver products as scheduled.
The Company has addressed the problem and believes they have been resolved.
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 elect to raise capital by selling 220 MHz licenses and
repeater equipment owned by its subsidiary, Narrowband Network Systems, Inc.
The first sale of such equipment occurred in December 1999. During the
quarter ended April 1, 2000 the Company entered into agreements to sell
additional equipment and licenses for an aggregate selling price of $475,000
and those sales closed in July 2000. An additional sale of equipment and
license for an aggregate selling price of $60,000 is expected to close in
August 2000.
Effective March 30, 2000 our variable bank line of credit was converted to
an accounts receivable factoring agreement which expired July 31, 2000. The
bank elected not to extend the factoring agreement and on August 4, 2000 the
President of the Company repaid the bank's loan for the then outstanding
balance of approximately $285,000. Terms on the resulting loan from the
President will be the same as they were with the bank.
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 bank loan agreement Alta
Subordinated Debt Partners III ("ASDP III"), the holder of the Subordinated
Convertible Debentures (see Note 6) 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 any new bank financing has been
postponed.
As described in Note 6, we have subordinated debt obligations due in
December 2000. In order to redeem its obligations as scheduled and meet its
operating and capital requirements in the next year, the Company will
require additional funding. The Company is currently in negotiations with
two potential acquirers and has entered into a stand-still agreement with
one of those parties. While subject to several conditions precedent, the
agreement contains terms that, if consummated, would result in additional
equity funding and the acquisition of a controlling interest in the Company.
No such funding is committed at this time, and there is no assurance that
the Company will be able to obtain additional financing on acceptable terms.
3. Inventory Components:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
July 1, 2000 October 2, 1999
-------------------------------
<S> <C> <C>
Finished Goods $1,123,887 $1,583,442
Work-In-Process 139,228 174,019
Raw Material 2,557,504 2,729,729
---------------------------
$3,820,619 $4,487,190
===========================
</TABLE>
4. Income Taxes:
Management has considered recent losses, the inability to predict with
certainty what land mobile sales will be in the post FCC auction period, and
uncertainties surrounding the Company's status as a going concern. Based on
the information available, management believes that a valuation allowance
equal to 100% of the deferred tax asset should continue to be established.
Until such time as future taxable income is more likely than not the Company
will continue to reserve an appropriate portion of its deferred tax asset.
5. Earnings Per Share:
Basic net income or loss per common share is based on the weighted average
number of common shares outstanding during the year. Diluted earnings per
share is based on the weighted average number of common shares and common
stock equivalents outstanding. Common stock equivalents include shares which
would be issued upon exercise of stock options, warrants or conversion of
debentures. Common stock equivalents are excluded from the calculation when
they are anti-dilutive.
Stock options for 172,318 shares, preferred stock convertible into 200,000
shares, subordinated notes convertible into 187,133 shares and warrants for
145,208 common shares were not included in the loss per share calculation
for the quarter ended July 1, 2000 because they would be anti-dilutive.
6. Long Term Debt:
On December 19, 1995 the Company completed a private placement issuance of
$2,000,000 in Subordinated Convertible Debentures (the "Debentures") with
Alta Subordinated Debt Partners III ("ASDP III"), originally due December
19, 2000.
On November 24, 1997 the Company received notice from ASDP III of an alleged
violation of certain covenants related to the Debenture Purchase Agreement
dated December 19, 1995. The alleged default was based on a breach of
financial covenants concerning additional debt and was not payment related.
ASDP III claimed that an event of default had occurred and that the
Debentures were immediately due and payable. Management of the Company did
not agree with the claims made by ASDP III.
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.
On February 25, 1999 ASDP III filed suit in the Superior Court of the
Commonwealth of Massachusetts claiming a breach of the December 19, 1995
Debenture agreement. The complaint sought damages in the amount of
$2,827,863 plus interest and reasonable attorneys' fees and costs. The
matter was scheduled for trial on June 19, 2000. Prior to the trial the
Company and ASDP III reached an agreement regarding the due date of the
Debentures. Under the terms of the agreement, ASDP III agreed to discontinue
its suit against the Company in exchange for the Company agreeing not to
challenge either the full amount due or the Debenture due date of December
19, 2000. The agreement also grants ASDP III a security interest in the
Company's assets. The agreement gives the Company or its designee the option
to redeem the Debentures for $2,200,000 by September 30, 2000.
Accrued and unpaid interest on the Debentures as of July 1, 2000 was
approximately $1,038,875.
7. Operating Segment Information:
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------------
Net sales July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
<S> <C> <C> <C> <C>
Land mobile communications $ 446,302 $ 328,137 $1,240,960 $1,110,122
Marine communications 927,203 2,067,086 2,828,596 6,790,319
Marine instrumentation 461,550 814,671 1,537,117 1,842,486
Narrowband operations 18,040 3,340 91,102 3,340
----------------------------------------------------------
Total consolidated net sales $1,853,095 $3,213,234 $5,697,775 $9,746,267
==========================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------------
Operating income (loss) July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
<S> <C> <C> <C> <C>
Land mobile communications $(273,227) $(452,368) $ (952,339) $(1,128,947)
Marine communications (150,390) 271,671 (515,708) 926,288
Marine instrumentation 20,105 62,953 (1,841) 71,716
Narrowband operations (52,123) (79,209) (127,465) (220,519)
All other (44,841) (53,082) (170,358) (175,174)
----------------------------------------------------------
Total consolidated operating loss (500,476) (250,035) (1,767,711) (526,636)
Interest expense 143,672 167,851 419,668 616,236
Other income, net (35,891) (1,844) (74,963) (17,949)
----------------------------------------------------------
Total consolidated net loss $(608,257) $(416,042) $(2,112,416) $(1,124,923)
==========================================================
</TABLE>
Certain reclassifications have been made to the prior year financial
statements in order to conform to the current year's presentation, with no
impact on previously reported net loss or stockholders' equity.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Statements included in this report which are not historical in nature are
forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, and as such may
involve risks and uncertainties. This Quarterly Report on Form 10-QSB and
the Annual Report on Form 10-KSB contain certain detailed factors that could
cause the Company's actual results to materially differ from forward-looking
statements made by the Company.
Introduction
Datamarine International, Inc. and its subsidiaries ("we" or the "Company")
manufacture radio communications and navigation instrumentation products.
The Company is organized into three primary operating segments according to
its primary product categories: "Land Mobile Communications", "Marine
Communications" and "Marine Instrumentation." 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. These operations are included in a segment referred to as
"Narrowband Operations."
Datamarine International, Inc. was incorporated in Massachusetts on April
23, 1969 and, effective April 11, 2000, changed its state of domicile to
Washington. 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 in the United States and Mexico. SEA has developed and
marketed narrowband radio equipment since 1984 and began selling its
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 build-
out of 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 currently account for only
a small part of the Company's overall business.
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 typically account for approximately 5% of our sales. In 1999
foreign sales were higher than usual due to 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 "A3" products were sold outside the
United States. We do not expect fiscal 2000 export sales of GMDSS "A3"
products to continue at the 1999 rate.
Results of Operations
The following table sets forth the components of sales and gross profit by
product line for the Quarter Ended July 1, 2000 and the comparable quarter
in the prior fiscal year.
<TABLE>
<CAPTION>
Sales Gross Profit
-------------------------- --------------------------
July 1,2000 July 3,1999 July 1,2000 July 3,1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
$ 446,302 $ 328,137 Land Mobile Communications $ 79,449 $ (30,872)
927,203 2,067,086 Marine Communications 308,685 835,222
461,550 814,671 Marine Instrumentation 183,740 328,370
18,040 3,340 Narrowband Operations 18,040 2,615
--------------------------------------------------------------------------------------
$1,853,095 $3,213,234 Total $589,914 $1,135,335
--------------------------------------------------------------------------------------
</TABLE>
Sales order backlogs at July 1, 2000 were as follows: Land Mobile
Communications $2,592,000, Marine Communications $582,000 and Marine
Instrumentation $106,000. The land mobile backlog includes orders for
repeater systems and new mobile radio products, deliveries of which are
expected to take place over an extended period of time. Approximately
$1,308,000 of the land mobile backlog represents orders for the Company's
new model 604 mobile radio.
The following table sets forth income and expense items as a percentage of
net sales for the quarter, and the percentage change in those items from the
comparable quarter in the previous two years.
<TABLE>
<CAPTION>
Income and Expense Items Percentage
as a Percentage of Net Sales Increase (Decrease)
---------------------------- ------------------
1999 1998
July 1, July 3, to to
2,000 1999 2000 1999
-------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
100 % 100 % Net sales (42)% 5
68 65 Cost of products sold (39) 2
32 35 Gross profit (48) 10
59 43 Operating expenses (21) (4)
(27) (8) Operating income (loss) (100) (39)
(8) (5) Interest expense (14) (31)
(33) (13) Loss before taxes 46 (35)
(33)% (13)% Net loss 46 % (35)%
</TABLE>
Net sales decreased by $1,360,139 or 42% compared to the same quarter in the
prior fiscal year. Net sales of the Company's land mobile products increased
by $118,165 or 36%. Net sales of the Company's marine communications systems
decreased by $1,139,883 or 55%. Net sales of the Company's marine
instrumentation systems decreased by $353,121 or 43%. Working capital
constraints have caused raw material shortages throughout the Company's
product lines and contributed significantly to the decline in sales.
Land mobile revenues during the quarter included both repeaters and mobile
radio products. Management expects that land mobile revenues will be
comprised mostly of mobile radios until Phase II license holders begin to
take delivery of repeater systems. The auction of Phase II licenses
concluded in October 1998 and successful bidders received their licenses in
March 1999. Although the Company's land mobile order backlog continues to
grow, customers have been slow to take delivery of new repeater systems.
Mobile radio sales decreased compared to the same quarter last year as
customers awaited deliveries of the model 604. Orders for the 604 are very
strong, and the radio started shipping in September 1999, but we do not
expect the radio to ship in quantity until the first quarter of fiscal 2001.
Sales of the 604 have been delayed due to the failure of the Company's
supplier to deliver finished products as scheduled. Management expects
that the FCC's issuance of new licenses and the Company's introduction of
new products will provide an opportunity for significant revenue growth in
the narrowband product line.
Sales of marine communications products were significantly lower compared to
the prior year. Much of the decrease was due to a decline in sales of
GMDSS "A3" systems as many customers satisfied regulatory requirements
during 1999. The Company plans to replace lower GMDSS "A3" sales with new
VHF radio products which are expected to start shipping in the fourth
quarter of fiscal 2000.
Marine instrumentation sales decreased compared to the prior year and
continued to be below management's projections. Sales of the Company's chart
plotter have been lower than projected, and working capital constraints have
reduced advertising and sales promotion.
Revenues from narrowband operations were $18,040 during the current
quarter. Narrowband revenues are derived from the Company's share of SMR
operations on those sites where the Company owns or has an ownership
interest in the license and/or base station equipment. Prior to the first
quarter of fiscal 2000, revenues were insignificant or collection was
uncertain so revenue recognition was deferred. During the first quarter,
management determined that certain revenues attributable to operations from
early 1997 through part of 1999 were due and collectible so they were billed
and recognized. Ongoing revenues of this type are currently accruing at
about $8,000 per quarter and will be recognized at such time as the amounts
and collectibility can be reasonably estimated.
Gross profit was $589,914 (32% of net sales), as compared to $1,135,335 (35%
of net sales) in the prior year, a decrease of $545,421 or 48%. The gross
profit on land mobile products was $79,449 (18% of such sales), as compared
to $(30,872) in the prior year, an increase of $110,321. Land mobile gross
profit increased due to a favorable product mix including the sales of
repeaters.
The gross profit on marine communications systems was $308,685 (33% of such
sales), as compared to $835,222 (40% of such sales) in the prior year, a
decrease of $526,537 or 63%. Strong sales of GMDSS "A3" products contributed
to the prior year's results and were not expected to continue into fiscal
2000. Gross profit rates in the current quarter were lower due to the mix of
products sold, the sale of some discontinued products at reduced prices, and
to higher manufacturing costs attributable to lower production rates.
The gross profit on marine instrumentation systems was $183,740 (40% of such
sales), as compared to $328,370 (40% of such sales) in the prior year, a
decrease of $144,630 or 44%. The product mix was similar to the prior year
but sales volume was lower due to product shortages.
The gross profit on narrowband operations is approximately the same as
revenues because the payments are essentially royalties. In some instances,
the Company is obligated pay a portion of its revenues to another party but
such payments are a small percentage of the Company's share. Any such
payments are accounted for as cost of revenue in the narrowband segment.
Operating expenses were $1,090,390 (59% of net sales), as compared to
$1,385,370 (43% of net sales) last year, a decrease of $294,980 or 21%.
Operating expenses were lower than last year, but constituted a larger
percentage of lower net sales. Engineering expenses decreased 22%, with most
of the decrease in consumable parts and engineering related to the
development of the chart plotter. Total selling expenses declined $103,593
or 19%. Expenses such as advertising and commissions which are tied closely
to sales declined with the overall decrease in revenues. Administrative
expenses declined $91,691 or 26%. Professional fees, state taxes tied to
revenue, employee benefits and bank charges were lower than the prior year.
Narrowband expenses are comprised primarily of site rental and depreciation,
both of which were slightly lower than the same quarter last year.
Interest expense decreased $24,179 or 14% from the prior year. Lower average
loan balances offset the increased interest rate on bank borrowings. Common
stock warrants are issued in connection with the extension of the Company's
senior and subordinated debt. The fair value of common stock warrants is
charged to interest expense over the term of the extension.
Other income for the current quarter was $35,891 compared to $1,844 in the
comparable quarter last year. The current quarter included revenue from non-
recurring engineering services.
Income taxes were zero for 2000 and 1999 because the Company fully reserves
its deferred tax asset.
Liquidity and Capital Resources
On July 1, 2000, the Company's principal sources of liquidity consisted of
approximately $38,000 in cash and equivalents. Net cash provided by
operating activities for the nine months ended July 1, 2000 was $413,604, a
$578,782 increase from net cash used in operating activities for the same
period in the prior year. Cash was provided by decreases in inventories and
increases in accounts payable and accrued expenses. At the end of quarter
the sales order backlogs stood at $3,280,000. Of the total July 1, 2000
backlog, land mobile products represented $2,592,000, marine communications
products represented $582,000 and marine instrumentation products
represented $106,000.
Effective March 30, 2000 the Company's variable bank line of credit was
converted to an accounts receivable factoring agreement expiring July 31,
2000. The maximum amount of factored invoices outstanding at any time is
limited to $1,375,000. Advance rates are 92% for April, 86% for May, and 80%
thereafter. The Company pays a fee of 0.5% on factored items and interest on
the outstanding balance at 1.75% over prime. The bank elected not to extend
the factoring agreement and on August 4, 2000 the President of the Company
repaid the bank's loan for the then outstanding balance of approximately
$285,000.
Losses incurred by the Company in recent years 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. Increased demand is reflected in
the Company's land mobile order backlog which has increased from $1,429,000
at October 2, 1999 to $2,592,000 at July 1, 2000. The recovery of land
mobile revenues is currently being hindered by product shortages due to
delivery failures by one of the Company's suppliers. The Company has addressed
the problem and believes they have been resolved. 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 elect to raise capital by selling 220 MHz licenses and repeater equipment
owned by its subsidiary, Narrowband Network Systems, Inc. The first sale of
such equipment occurred in December 1999. During the quarter ended April 1,
2000 the Company entered into agreements to sell additional equipment and
licenses for an aggregate selling price of $475,000 and those sales closed
in July 2000. An additional sale of equipment and license for an aggregate
selling price of $60,000 is expected to close in August 2000. The Company
typically receives a deposit at the time a sales agreement is made, but no
revenue is recognized until title passes to the purchaser.
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 bank loan agreement Alta
Subordinated Debt Partners III ("ASDP III"), the holder of the Subordinated
Convertible Debentures must agree to subordinate their debt to the new
senior lender. We have not been able to obtain a subordination agreement
from ASDP III so further action on any new bank financing has been
postponed.
The Company has subordinated debt obligations due in December 2000. In order
to redeem its obligations as scheduled and meet its operating and capital
requirements in the next year, the Company will require additional funding.
The Company is currently in negotiations with two potential acquirers and
has entered into a stand-still agreement with one of those parties. While
subject to several conditions precedent, the agreement contains terms that,
if consummated, would result in additional equity funding and the
acquisition of a controlling interest in the Company. 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.
PART II - OTHER INFORMATION
Item 1. 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 February 25, 1999 ASDP III filed suit in the Superior Court of
the Commonwealth of Massachusetts claiming a breach of the December 19, 1995
Debenture agreement. The matter was scheduled for trial on June 19, 2000.
Prior to the trial the Company and ASDP III reached an agreement regarding
the due date of the Debentures. Under the terms of the agreement, ASDP III
agreed to discontinue its suit against the Company in exchange for the
Company agreeing not to challenge either the full amount due or the
Debenture due date of December 19, 2000. The agreement also grants ASDP III
a security interest in the Company's assets. The agreement gives the Company
or its designee the option to redeem the Debentures for $2,200,000 by
September 30, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on June 6, 2000 in
Seattle, Washington. All matters submitted to a vote of the Company's
shareholders were described in the Company's proxy statement dated May 2,
2000.
(b) Matters submitted to a vote of the shareholders included:
(1) A proposal to approve the adoption of the Datamarine
International, Inc. 2000 Employee Stock Purchase Plan. The proposal
was approved by the following vote:
For 822,398
Against 105,075
Abstain 1,946
Non-vote 489,580
(2) A proposal to ratify the selection of Grant Thornton LLP as the
Company's independent auditors for 2000. The proposal was approved
by the following vote:
For 1,409,603
Against 5,050
Abstain 2,346
Non-vote 2,000
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed as a part of, or
incorporated by reference into, this report on Form 10-QSB.
3.1 Articles of Incorporation
3.2 Bylaws
4 Debenture Purchase Agreement with exhibits, incorporated by reference
to Annual Report on Form 10-K for the Fiscal Year Ended September 30,
1995.
4.1 Subordinated Notes Agreement with exhibits, incorporated by reference
to Annual Report on Form 10-K for the Fiscal Year Ended September 27,
1997.
4.2 Terms for Amendment of December 19, 1995 Debenture Agreement,
incorporated by reference to Annual Report on Form 10-K for the Fiscal
Year Ended September 27, 1997.
10.1 Datamarine International, Inc. 1991 Stock Option Plan, incorporated by
reference to Registration Statement 33-48532 on Form S-8.
10.2 1992 Stock Option Plan for Non-employee Directors, incorporated by
reference to Annual Report on Form 10-K for the Fiscal Year Ended
October 1, 1994.
10.3 Debenture Purchase Agreement with exhibits, same as 4 above.
10.4 1995 Stock Option Plan for Non-employee Directors, incorporated by
reference to Annual Report on Form 10-K for the Fiscal Year Ended
September 28, 1996.
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
July 1, 2000. None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datamarine International, Inc.
(Registrant)
Date: August 17, 2000 /s/ JAN KALLSHIAN
--------------- -----------------
Jan Kallshian
Chief Financial Officer
