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 January 1, 2000 Commission File Number 0-8936
DATAMARINE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2454559
(State of Incorporation) (I.R.S. Employer Identification Number)
7030 220th SW, Mountlake Terrace, Washington 98043
(Address of principal executive offices)
(425)771-2182
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 1, 2000
Common Stock, $.01 Par Value 1,700,529
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
January 1, January 2,
2000 1999
---------- ----------
<S> <C> <C>
Net sales $2,003,080 $3,019,302
Cost of products sold 1,294,563 1,923,569
-------------------------
Gross profit 708,517 1,095,733
Operating expenses:
Research and development 337,971 337,644
Selling 544,893 664,575
General and administrative 290,009 307,317
Narrowband operations 77,242 71,430
-------------------------
Operating expenses 1,250,115 1,380,966
-------------------------
Operating loss (541,598) (285,233)
Interest expense 122,755 236,181
Other income, net (27,454) (33,832)
-------------------------
Loss before income taxes (636,899) (487,582)
Income taxes - -
-------------------------
Net loss $ (636,899) $ (487,582)
=========================
Loss per share, basic $ (0.38) $ (0.33)
Loss per share, diluted $ (0.38) $ (0.33)
Average shares outstanding,
basic and diluted 1,693,834 1,494,169
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
January 1, October 2,
2000 1999
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 159,872 $ 39,189
Accounts receivable, net of allowance of $163,562 and
$153,743, respectively 1,247,109 1,274,907
Inventories 4,228,093 4,487,190
Prepaid expenses and other current assets 170,309 133,982
---------------------------
Total current assets 5,805,383 5,935,268
Property, plant and equipment 5,118,777 5,138,802
Less accumulated depreciation 3,882,834 3,814,391
---------------------------
Property, plant and equipment, net 1,235,943 1,324,411
Other assets, net 334,482 338,081
---------------------------
Total assets $ 7,375,808 $ 7,597,760
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 1,119,950 $ 1,097,312
Notes payable to related parties and others 451,372 452,000
Accounts payable 1,652,483 1,268,558
Accrued expenses 1,774,758 1,789,392
Current maturities of long-term debt and capital lease obligations 2,046,964 2,060,892
---------------------------
Total current liabilities 7,045,527 6,668,154
Long-term debt and capital lease obligations, less current maturities 60,994 65,716
---------------------------
Total liabilities 7,106,521 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 3,000,000 shares; 1,700,529 and 1,689,742
shares issued and outstanding, respectively 17,005 16,897
Capital in excess of par value 4,760,185 4,717,736
Unearned compensation (15,521) (15,260)
Accumulated deficit (4,492,382) (3,855,483)
---------------------------
Total stockholders' equity 269,287 863,890
---------------------------
Total liabilities and stockholders' equity $ 7,375,808 $ 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>
Three Months Ended
-------------------------
January 1, January 2,
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(636,899) $(487,582)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 87,788 103,014
Gain on asset dispositions (5,395) (5,395)
Amortization of debt discount and issue costs 14,301 108,047
Provision for losses on accounts receivable 9,819 15,110
Employee investment plan expense 19,998 18,294
Amortization of unearned compensation 5,395 6,219
Changes in operating assets and liabilities:
Accounts receivable 17,979 (47,594)
Inventories, prepaid expenses and other current assets 222,770 453,497
Accounts payable and accrued expenses 374,686 (249,380)
------------------------
Net cash provided by (used in) operating activities 110,442 (85,770)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, including self-
constructed equipment - (54,200)
Disposition of property, plant and equipment 12,015 -
Other (7,736) (15,174)
------------------------
Net cash provided by (used in) investing activities 4,279 (69,374)
FINANCING ACTIVITIES
Proceeds from sale of common stock 2,602 1,297
Proceeds from bank and other borrowings 22,638 -
Principal payments on note payable to bank, capital lease
obligations and long-term debt (19,278) (14,615)
------------------------
Net cash provided by (used in) financing activities 5,962 (13,318)
Increase (decrease) in cash and cash equivalents during period 120,683 (168,462)
Cash and cash equivalents at beginning of period 39,189 393,161
------------------------
Cash and cash equivalents at end of period $ 159,872 $ 224,699
========================
Supplementary Cash Flow Information
Interest paid $ 36,469 $ 43,951
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 $636,899 for the three months ended January 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. 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. The first sale
of such equipment occurred in December 1999 and since that time the Company
has received additional offers to purchase licenses and associated base
station equipment.
We do not have a commitment from our bank to extend the term of our
variable bank line of credit. Since November 1, 1999 the line has been
renewed on a month-to-month basis. 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 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 the new
bank financing has been postponed.
As described in Note 6, 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.
3. Inventory Components:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
January 1, 2000 October 2, 1999
--------------- ---------------
<S> <C> <C>
Finished Goods $1,541,358 $1,583,442
Work-In-Process 121,273 174,019
Raw Material 2,565,462 2,729,729
------------------------------
$4,228,093 $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 171,100 shares, preferred stock convertible into 197,150
shares, subordinated notes convertible into 125,660 shares and warrants for
99,407 common shares were not included in the loss per share calculation
for the quarter ended January 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 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.
Accrued and unpaid interest on the Debentures as of January 1, 2000 was
approximately $888,875.
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 deterined based on the nature
of its operations and products offered to customers.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
Net sales January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
Land mobile communications $ 524,556 $ 450,927
Marine communications 930,543 2,093,544
Marine instrumentation 474,919 472,543
Narrowband operations 73,062 2,288
------------------------------
Total consolidated net sales $2,003,080 $3,019,302
==============================
<CAPTION>
Three Months Ended
-----------------------------------
Operating income (loss) January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
Land mobile communications $ (274,625) $ (293,707)
Marine communications (162,748) 178,717
Marine instrumentation (37,180) (39,553)
Narrowband operations (4,180) (69,661)
All other (62,865) (61,029)
------------------------------
Total consolidated operating loss (541,598) (285,233)
Interest expense 122,755 236,181
Other income, net (27,454) (33,832)
------------------------------
Total consolidated net loss $ (636,899) $ (487,582)
==============================
</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. 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 January 1, 2000 and the comparable
quarter in the prior fiscal year.
<TABLE>
<CAPTION>
Sales Gross Profit
- ------------------------- -------------------------
January 1, January 2, January 1, January 2,
2000 1999 2000 1999
- --------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
$ 524,556 $ 450,927 Land Mobile Communications $ 82,905 $ 97,835
930,543 2,093,544 Marine Communications 379,551 807,783
474,919 472,543 Marine Instrumentation 172,999 188,346
73,062 2,288 Narrowband Operations 73,062 1,769
- --------------------------------------------------------------------------------------
$2,003,080 $3,019,302 Total $708,517 $1,095,733
======================================================================================
</TABLE>
Sales order backlogs at January 1, 2000 were as follows: Land Mobile
Communications $2,151,000, Marine Communications $341,000 and Marine
Instrumentation $47,000.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.
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
January 1, January 2, to to
2000 1999 2000 1999
------------------------------------------------------------------------
<C> <C> <S> <C> <C>
100% 100% Net sales (34%) (2%)
65 64 Cost of products sold (33) (10)
35 36 Gross profit (35) 15
62 46 Operating expenses (9) (3)
(27) (9) Operating loss 90 (40)
(6) (8) Interest expense (48) 50
(32) (16) Loss before taxes 31 (22)
(32%) (16%) Net loss 31% (22%)
</TABLE>
Net sales decreased by $1,016,222 or 34% compared to the same quarter in
the prior fiscal year. Net sales of the Company's land mobile products
increased by $73,629 or 16% compared to the same quarter in the prior
fiscal year. Net sales of the Company's marine communications systems
decreased by $1,163,001 or 56%. Net sales of the Company's marine
instrumentation systems were comparable to the same quarter in the prior
fiscal year.
Land mobile revenues continue to be comprised mostly of mobile radio
products and will continue to be so until new licenses holders begin to
take delivery of repeater systems. 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 increased over the same quarter last year as a result of
the new model 604 starting to ship in September 1999. Orders for the 604
are very strong, but we do not expect the radio to ship in 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 were significantly lower compared
to the prior year. The decrease was due almost entirely to a decline in
sales of GMDSS "A3" systems as many customers satisfied regulatory
requirements during 1999. The Company plans to replace lower GMDSS sales
with new radio products which are expected to start shipping in the third
quarter of fiscal 2000.
Marine instrumentation sales were comparable to the prior year but were
below management's projections for the quarter. Sales of the Company's new
chart product continue to increase but at a slower rate than originally
forecast.
Revenue from narrowband operations was $73,062. 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 current quarter, revenues were
insignificant or collection was uncertain so revenue recognition was
deferred. During the current 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.
Gross profit was $708,517 (35% of net sales), as compared to $1,095,733
(36% of net sales) in the prior year, a decrease of $387,216 or 35%. The
gross profit on land mobile products was $82,905 (16% of such sales), as
compared to $97,835 (22% of such sales) in the prior year, a decrease of
$14,930. Land mobile gross profit declined due to price reductions on some
models in anticipation of the introduction of the new model 604 mobile
radio.
The gross profit on marine communications systems was $379,551 (41% of such
sales), as compared to $807,783 (39% of such sales) in the prior year, a
decrease of $428,232 or 53%. Strong sales of GMDSS "A3" products contributed
to the prior year's results and were not expected to continue into fiscal
2000.
The gross profit on marine instrumentation systems was $172,999 (36% of
such sales), as compared to $188,346 (40% of such sales) in the prior year,
a decrease of $15,347 or 8%. Changes in product mix and slightly higher
production costs on some items accounted for the lower gross margin
percentage.
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 $1,250,115 (62% of net sales), as compared to
$1,380,966 (46% of net sales) last year, a decrease of $130,851 or 9%.
Engineering expenses were comparable to the prior year. Total selling
expenses declined $119,682 or about 18%. Expenses such as advertising and
commissions which are tied closely to sales declined with the overall
decrease in revenues. Administrative expenses were comparable in total to
the prior year. Narrowband operating expenses increased slightly due to
higher site rental expenses at those sites which are the Company's
responsibility.
Interest expense decreased $113,426 or 48% over the prior year.
Amortization of debt discount and issuance costs related to the
Subordinated Convertible Debentures was completed in February 1999 and
there was no comparable expense in the current quarter. The conversion of
certain Subordinated Short Term Notes to equity also resulted in fewer
warrants being issued in order to extend the maturity dates. The increased
interest rate on bank borrowings was offset by lower average loan balances.
Other income was comparable in amount to the prior year and the current
quarter included the gain on sale of narrowband base station equipment at
two sites.
Income taxes were zero for 2000 and 1999 because the Company fully reserves
its deferred tax asset.
Liquidity and Capital Resources
On January 1, 2000, the Company's principal sources of liquidity consisted
of approximately $160,000 in cash and equivalents. Net cash provided by
operating activities for the quarter was $110,442, a $196,212 increase from
$85,770 net cash used in operating activities 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
$2,539,000. Of the total January 1, 2000 backlog, land mobile products
represented $2,151,000, marine communications products represented $341,000
and marine instrumentation products represented $47,000.
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 January
1, 2000 the amount outstanding on the line was $1,119,950 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 bank line of credit. Since November 1,
1999 the line has been renewed on a month-to-month basis. 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.
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. 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. The first sale
of such equipment occurred in December 1999 and since that time the Company
has received additional offers to purchase licenses and associated base
station equipment.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. There were no
material developments in the proceedings during the quarter. Additional
information is available in the Company's Annual Report on Form 10-KSB for
the year ended October 2, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
(a) A special meeting of shareholders was held October 21, 1999 at the
Company's offices in Mountlake Terrace, Washington. All matters submitted
to a vote of the Company's shareholders were described in the Company's
proxy statement dated September 15, 1999.
(b) Matters submitted to a vote of the shareholders included:
(1) A proposal to amend the Company's Articles of Organization to increase
the authorized common stock from 3,000,000 shares to 20,000,000 shares.
The proposal was approved by the following vote.
For 1,521,673
Against 62,135
Abstain 100
(2) A proposal to change the Company's state of incorporation from
Massachusetts to Washington. The proposal was approved by the following
vote.
For 1,269,083
Against 1,205
Broker non-vote 313,620
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 Organization, as amended, incorporated by reference to
Annual Report on Form 10-K for the Fiscal Year Ended September 30,
1995.
3.2 Bylaws, incorporated by reference to Registration Statement 0-8936 on
Form 10.
4 Debenture Purchase Agreement with exhibits, incorporated by reference
to Annual Report on Form 10-K for the Fiscal Year Ended September 30,
1995.
4.1 Subordinated Notes Agreement with exhibits, incorporated by reference
to Annual Report on Form 10-K for the Fiscal Year Ended September 27,
1997.
4.2 Terms for Amendment of December 19, 1995 Debenture Agreement,
incorporated by reference to Annual Report on Form 10-K for the
Fiscal Year Ended September 27, 1997.
10.1 Datamarine International, Inc. 1991 Stock Option Plan, incorporated
by reference to Registration Statement 33-48532 on Form S-8.
10.2 1992 Stock Option Plan for Non-employee Directors, incorporated by
reference to Annual Report on Form 10-K for the Fiscal Year Ended
October 1, 1994.
10.3 Debenture Purchase Agreement with exhibits, same as 4 above.
10.4 1995 Stock Option Plan for Non-employee Directors, incorporated by
reference to Annual Report on Form 10-K for the Fiscal Year Ended
September 28, 1996.
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datamarine International, Inc.
(Registrant)
Date: February 11, 2000 /s/ JAN KALLSHIAN
----------------- -----------------
Jan Kallshian
Chief Financial Officer
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