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 April 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 April 1, 2000
Common Stock, $.01 Par Value 1,707,282
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $1,841,600 $3,513,731 $ 3,844,680 $6,533,033
Cost of products sold 1,320,600 2,142,204 2,615,163 4,065,773
--------------------------------------------------------
Gross profit 521,000 1,371,527 1,229,517 2,467,260
Operating expenses:
Research and development 358,005 343,152 695,976 680,796
Selling 533,837 613,186 1,078,730 1,277,761
General and administrative 283,633 334,062 573,642 641,379
Narrowband operations 71,162 72,495 148,404 143,925
--------------------------------------------------------
Operating expenses 1,246,637 1,362,895 2,496,752 2,743,861
--------------------------------------------------------
Operating income (loss) (725,637) 8,632 (1,267,235) (276,601)
Interest expense 153,241 212,204 275,996 448,385
Other (income) expense, net (11,618) 17,727 (39,072) (16,105)
--------------------------------------------------------
Loss before income taxes (867,260) (221,299) (1,504,159) (708,881)
Income taxes - - - -
--------------------------------------------------------
Net loss $ (867,260) $ (221,299) $(1,504,159) $ (708,881)
========================================================
Net loss per share, basic $ (0.51) $ (0.14) $ (0.89) $ (0.47)
Net loss per share, diluted $ (0.51) $ (0.14) $ (0.89) $ (0.47)
Average shares outstanding,
basic and diluted 1,702,310 1,533,336 1,698,072 1,513,753
</TABLE>
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
April 1, October 2,
2000 1999
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,883 $ 39,189
Accounts receivable, net of allowance of $173,298 and
$153,743, respectively 1,174,939 1,274,907
Inventories 4,053,155 4,487,190
Prepaid expenses and other current assets 177,712 133,982
---------------------------
Total current assets 5,465,689 5,935,268
Property, plant and equipment 5,217,741 5,138,802
Less accumulated depreciation 3,961,842 3,814,391
---------------------------
Property, plant and equipment, net 1,255,899 1,324,411
Other assets, net 316,519 338,081
---------------------------
Total assets $ 7,038,107 $ 7,597,760
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 1,053,918 $ 1,097,312
Notes payable to related parties and others 449,983 452,000
Accounts payable 1,622,675 1,268,558
Accrued expenses 2,286,239 1,789,392
Current maturities of long-term debt and capital lease obligations 2,050,623 2,060,892
---------------------------
Total current liabilities 7,463,438 6,668,154
Long-term debt and capital lease obligations, less current maturities 128,563 65,716
---------------------------
Total liabilities 7,592,001 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; 1,707,282 and 1,689,742
shares issued and outstanding, respectively 17,073 16,897
Capital in excess of par value 4,801,029 4,717,736
Unearned compensation (12,354) (15,260)
Accumulated deficit (5,359,642) (3,855,483)
---------------------------
Total stockholders' equity (553,894) 863,890
---------------------------
Total liabilities and stockholders' equity $ 7,038,107 $ 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>
Six Months Ended
---------------------------
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,504,159) $(708,881)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 177,410 211,599
Gain on asset dispositions (10,790) (10,790)
Amortization of debt discount and issue costs 62,315 183,920
Provision for losses on accounts receivable 20,912 30,807
Employee investment plan expense 28,440 26,916
Amortization of unearned compensation 8,562 12,438
Changes in operating assets and liabilities:
Accounts receivable 79,056 74,440
Inventories, prepaid expenses and other current assets 390,305 254,341
Accounts payable and accrued expenses 861,754 (103,890)
--------------------------
Net cash provided by (used in) operating activities 113,805 (29,100)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, including self-
constructed equipment (5,462) (54,200)
Disposition of property, plant and equipment 12,015 -
Other (15,932) (10,642)
--------------------------
Net cash used in investing activities (9,379) (64,842)
FINANCING ACTIVITIES
Proceeds from sale of common stock 2,602 8,797
Proceeds from bank and other borrowings - -
Principal payments on note payable to bank, capital lease
obligations and long-term debt (86,334) (29,941)
--------------------------
Net cash provided by (used in) financing activities (83,732) (21,144)
Increase (decrease) in cash and cash equivalents during period 20,694 (115,086)
Cash and cash equivalents at beginning of period 39,189 393,161
--------------------------
Cash and cash equivalents at end of period $ 59,883 $ 278,075
==========================
Supplementary Cash Flow Information
Interest paid $ 67,485 $ 74,162
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 $1,504,159 for the six months ended April 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. The Company's order backlog for
land mobile products increased from $2,151,000 at January 1, 2000 to
$2,883,000 at April 1, 2000. 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 equipment owned by its
subsidiary, Narrowband Network Systems, Inc. The first sale of such
equipment occurred in December 1999. During the current quarter the
Company entered into agreements to sell additional equipment and licenses
for an aggregate selling price of $475,000.
Since November 1, 1999 our variable bank line of credit has been renewed on
a month-to-month basis and matured on March 31, 2000. Effective March 30,
2000 the line was converted to an accounts receivable factoring agreement
which expires July 31, 2000. We do not have a commitment from our bank to
extend the factoring agreement beyond July 31, 2000. Should the bank
choose not to extend the agreement and the Company not be able to otherwise
refinance the debt, the lack of a loan facility would have severe
consequences for the Company.
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 and the debt is the subject of litigation. 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.
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:
[CAPTION]
<TABLE>
April 1, 2000 October 2, 1999
------------- ---------------
<S> <C> <C>
Finished Goods $1,326,645 $1,583,442
Work-In-Process 152,186 174,019
Raw Material 2,574,324 2,729,729
-----------------------------
$4,053,155 $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 162,600 shares, preferred stock convertible into 197,150
shares, subordinated notes convertible into 213,877 shares and warrants for
126,470 common shares were not included in the loss per share calculation
for the quarter ended April 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 with a scheduled trial date of June 19, 2000.
Accrued and unpaid interest on the Debentures as of April 1, 2000 was
approximately $963,875.
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 Six Months Ended
------------------------------- -------------------------------
Net sales April 1, 2000 April 3, 1999 April 1, 2000 April 3, 1999
<S> <C> <C> <C> <C>
Land mobile communications $ 270,102 $ 327,718 $ 794,658 $ 778,645
Marine communications 970,850 2,629,689 1,901,393 4,723,233
Marine instrumentation 600,648 555,272 1,075,567 1,027,815
Narrowband operations - 1,052 73,062 3,340
---------------------------- ----------------------------
Total consolidated net sales $1,841,600 $3,513,731 $ 3,844,680 $6,533,033
============================ ============================
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
Operating income (loss) April 1, 2000 April 3, 1999 April 1, 2000 April 3, 1999
<S> <C> <C> <C> <C>
Land mobile communications $ (404,487) $ (382,872) $ (679,112) $ (676,579)
Marine communications (202,570) 475,900 (365,318) 654,617
Marine instrumentation 15,234 48,316 (21,946) 8,763
Narrowband operations (71,162) (71,649) (75,342) (141,310)
All other (62,652) (61,063) (125,517) (122,092)
---------------------------- ----------------------------
Total consolidated operating loss (725,637) 8,632 (1,267,235) (276,601)
Interest expense 153,241 212,204 275,996 448,385
Other (income) expense, net (11,618) 17,727 (39,072) (16,105)
---------------------------- ----------------------------
Total consolidated net loss $ (867,260) $ (221,299) $(1,504,159) $ (708,881)
============================ ============================
</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 21, 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 April 1, 2000 and the comparable quarter
in the prior fiscal year.
<TABLE>
<CAPTION>
Sales Gross Profit
- ------------------------- -------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
- --------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
$ 270,102 $ 327,718 Land Mobile Communications $(28,812) $ (1,207)
970,850 2,629,689 Marine Communications 319,292 1,119,777
600,648 555,272 Marine Instrumentation 230,520 252,111
- 1,052 Narrowband Operations - 846
- --------------------------------------------------------------------------------------
$1,841,600 $3,513,731 Total $521,000 $1,371,527
- --------------------------------------------------------------------------------------
</TABLE>
Sales order backlogs at April 1, 2000 were as follows: Land Mobile
Communications $2,883,000, Marine Communications $390,000 and Marine
Instrumentation $51,000. 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
April 1, April 3, to to
2000 1999 2000 1999
- --------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
100% 100% Net sales (48)% 17
72 61 Cost of products sold (38) 8
28 39 Gross profit (62) 34
68 39 Operating expenses (9) (5)
(39) - Operating income (loss) n.m. (102)
(8) (6) Interest expense (28) 11
(33) (6) Loss before taxes 173 (63)
(33)% (6)% Net loss 173% (63)%
</TABLE>
Net sales decreased by $1,672,131 or 48% compared to the same quarter in
the prior fiscal year. Net sales of the Company's land mobile products
decreased by $57,616 or 18% compared to the same quarter in the prior
fiscal year. Net sales of the Company's marine communications systems
decreased by $1,658,839 or 63%. Net sales of the Company's marine
instrumentation systems increased by $45,376 or 8%.
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 decreased compared to the same quarter last year as
customers deferred the purchase of radios while awaiting the introduction
of the new 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 last 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 "A3"
sales with new VHF radio products which are expected to start shipping in
the fourth quarter of fiscal 2000.
Marine instrumentation sales increased over the prior year but continued to
be below management's projections. The increase was due to sales of the
Company's new chart plotter, which continue to grow but at rate which is
lower than originally forecast.
There were no revenues recognized from narrowband operations 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 $521,000 (28% of net sales), as compared to $1,371,527
(39% of net sales) in the prior year, a decrease of $850,527 or 62%. The
gross profit on land mobile products was $(28,812) (-11% of such sales), as
compared to $(1,207) in the prior year, a decrease of $27,605. 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 $319,292 (33% of such
sales), as compared to $1,119,777 (43% of such sales) in the prior year, a
decrease of $800,485 or 71%. 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, and to slightly higher manufacturing costs
attributable to lower production rates.
The gross profit on marine instrumentation systems was $230,520 (38% of
such sales), as compared to $252,111 (45% of such sales) in the prior year,
a decrease of $21,591 or 9%. Changes in product mix and slightly higher
production costs on some items accounted for the lower gross profit
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 $1,246,637 (68% of net sales), as compared to
$1,362,895 (39% of net sales) last year, a decrease of $116,258 or 9%.
Operating expenses were lower than last year, but constituted a larger
percentage of lower net sales. Engineering expenses increased 4% with most
of the increase in consumable parts and contract engineering. Total
selling expenses declined $79,349 or 13%. Expenses such as advertising and
commissions which are tied closely to sales declined with the overall
decrease in revenues. Administrative expenses declined $50,249 or 15%.
Lower professional fees and local taxes comprised most of the reduction.
Narrowband operating expenses were comparable to the prior year.
Interest expense decreased $58,963 or 28% from the prior year. Lower
average loan balances offset the increased interest rate on bank
borrowings. 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 fair
value of common stock warrants issued to extend the term of the Company's
senior or subordinated debt is charged to expense over the term of the
extension.
Other income for the current quarter was $11,618 compared to other expense
of $17,727 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 April 1, 2000, the Company's principal sources of liquidity consisted of
approximately $60,000 in cash and equivalents. Net cash provided by operating
activities for the quarter was $113,805, a $142,905 increase from 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
$3,324,000. Of the total April 1, 2000 backlog, land mobile products
represented $2,883,000, marine communications products represented $390,000
and marine instrumentation products represented $51,000.
Since November 1, 1999 our variable bank line of credit has been renewed on
a month-to-month basis and matured on March 31, 2000. Effective March 30,
2000 the line was converted to an accounts receivable factoring agreement
which expires 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.
We do not have a commitment from our bank to extend the factoring agreement
beyond July 31, 2000. Should the bank choose not to extend the agreement and
the Company not be able to otherwise refinance the debt, the lack of a loan
facility 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. The Company's order backlog for
land mobile products increased from $2,151,000 at January 1, 2000 to
$2,883,000 at April 1, 2000. 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 equipment owned by its
subsidiary, Narrowband Network Systems, Inc. The first sale of such
equipment occurred in December 1999. During the current quarter the
Company entered into agreements to sell additional equipment and licenses
for an aggregate selling price of $475,000. 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.
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. The case is currently
in the discovery phase with a scheduled trial date of June 19, 2000.
Additional information is available in the Company's Annual Report on Form
10-KSB for the year ended October 2, 1999.
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) The following reports on Form 8-K were filed during the quarter ended
April 1, 2000. Form 8-K dated January 26, 2000. Resignation of a
Director.
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: May 11, 2000 /s/ JAN KALLSHIAN
------------ -----------------------
Jan Kallshian
Chief Financial Officer
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