SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the fiscal year ended September 30, 2000.
Commission file number 0-8936.
DATAMARINE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Washington 04-2454559
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7030 220th S.W., Mountlake Terrace, Washington 98043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 771-2182
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, with par value of $.01
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of December 18, 2000 was approximately $1,078,000.
The number of shares of the Registrant's common stock outstanding as of
December 18, 2000 was 1,809,911 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Information required by Part III of this Report, to the extent not set
forth herein, is incorporated by reference from the Registrant's definitive
proxy statement relating to the annual meeting of stockholders to be held
March 2001, which definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the
fiscal year to which this report relates.
<PAGE> 1
The total number of pages in this Form 10-KSB is 40. See Index to Exhibits
on page 35
<PAGE> 2
PART I
ITEM 1. BUSINESS
Statements in this report that relate to future results and events are based
on the Company's current expectations. Actual results in future periods may
differ materially from those currently expected or desired because of a
number of risks and uncertainties.
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.
<PAGE> 3
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.
Information regarding net sales, operating profit and identifiable assets
for each segment can be found under the heading "Results of Operations" in
Item 7 -"Management's Discussion and Analysis of Financial Condition and
Results of Operations", and in the "Notes to Consolidated Financial
Statements."
Products and Marketing
Land Mobile Communications - The Company's narrowband land mobile radio
system products have been type accepted by the FCC for use in the 220 MHz
radio service. These products consist of hand held, mobile and base station
components, utilizing the narrowband technology, an enhanced form of single
sideband that is ideal for the 5 KHz channel width used in the 220 MHz radio
service, and were developed for sale to business users of private land
mobile radio services. The narrowband technology helps solve the problem of
frequency congestion by allowing five narrowband channels to be operated
within the same spectrum as would presently be utilized by one 25 KHz FM
channel.
Marine Communications - The SEA marine communications products are high
performance radios used on commercial vessels, fishing vessels and ocean-
going yachts. The product line currently consists of 28 products with
suggested list prices between $765 and $40,000. The SEA products include
HF/SSB and VHF/FM radios, Satcom C, Weather fax, Emergency distress radio
beacons (EPIRBS), Search and rescue transponders (SARTS) and Global Maritime
Distress and Safety Systems (GMDSS).
Marine Instrumentation - Marine instrumentation products are sold primarily
to the recreational boating market. The products are well established in
the marketplace with up-to-date instruments for each type of pleasure craft:
small boats and yachts; sail and power; inshore and offshore. The Datamarine
product line currently consists of 28 products sold under the DART, LINK,
Corinthian and ChartLINK names, with suggested list prices between $400 and
$6,000. The Datamarine products include depth sounders, knotmeters and water
temperature instruments, wind speed and direction instruments, integrated
instruments, and electronic chart plotters.
International Sales
Foreign sales accounted for approximately 11% of our sales in fiscal 2000
and 17% of our sales in fiscal 1999. The decrease in foreign sales resulted
from two factors. During 1999 the Company made its first sales of land
mobile products in Mexico. We expect to continue selling land mobile
products in Mexico,
<PAGE> 4
but did not do so in fiscal 2000. Foreign revenues from marine products
were unusually high in fiscal 1999 because many of the Company's GMDSS "A3"
products were sold outside the United States. We did not expect fiscal 2000
export sales of GMDSS "A3" products to continue at the 1999 rate.
Competition and Markets
Datamarine and its subsidiary, SEA, are generally considered to be leading
suppliers of marine instruments and radio communication products to the
marine markets. Approximately 20 electronics manufacturers have competing
models in their product lines and are considered competitors. SEA has at
this time one competitor supplying narrowband equipment for the 220 MHz
radio service. Approximately 25 competitors offer alternative FM land
mobile products for use in other radio services and could become competitive
suppliers of equipment in the 220 MHz radio service market.
Several of the Company's competitors in the various markets have
substantially greater financial, technical and marketing resources.
The Company's business does not depend on any single customer, the loss of
whom would have a materially adverse impact on the Company's business. No
portion of the Company's business is subject to renegotiation of profits or
termination of contracts or sub-contracts at the election of the government.
The markets for the Company's products are generally not considered to be
seasonal.
Sales order backlogs stood at $3,310,000 at September 30, 2000, compared to
$1,900,000 at October 2, 1999. Of the total September 30, 2000 backlog,
land mobile products represented $2,500,000, marine communications products
represented $656,000 and marine instrumentation products represented
$154,000.
Orders for the Company's land mobile repeater systems represented
approximately 47% of the land mobile product backlog. Deliveries of
repeater systems can occur over an extended time period and are subject to
some uncertainty, thus the Company does not consider the repeater backlog to
be firm. Orders for the Company's model 604 mobile radio represented
approximately 52% of the land mobile product backlog. Due to production
lead times, fulfillment of the mobile radio backlog is expected to occur
throughout fiscal 2001.
Suppliers
Certain components in the Company's products, such as printed circuits and
injection molded plastic parts, are provided by local vendors using tooling
and designs owned by the Company. The Company believes that adequate
alternative sources of supply are available for these purchased components
along with other supplies and raw materials. The Company and its
subsidiaries maintain sufficient inventory to continue production for a
reasonable period if new material sources are required.
Warranty
Products are sold with either a one-year or two-year parts and labor limited
warranty.
Research and Development
We are committed to a continuing program of designing new products and
improving the product designs
<PAGE> 5
presently in production. During fiscal 2000 we spent approximately
$1,338,000 on research and development compared to $1,438,000 in 1999. The
Company has 15 full-time employees engaged in research and development
activities.
Patents
The Company has two United States patents related to its radio products.
The Company views its patents as valuable assets, but believes that its
position in the market is not dependent upon the protection offered thereby.
Employees
The Company had approximately 74 full-time employees on September 30, 2000.
This compares to 89 on October 2, 1999. The Company has no collective
bargaining agreements and believes relations with its employees are good.
Environmental
The Company knows of no statutory requirements with respect to environmental
quality which can be expected to have a material effect upon the Company's
capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
The manufacturing and general administrative offices of the Company are
located in a group of buildings totaling 39,000 square-feet in Mountlake
Terrace, Washington, pursuant to a lease which expires in December 2002.
Our marine instrumentation service facility is located in a 2,400 square
foot building in Pocasset, Massachusetts. The facility is comprised of two
buildings, one of which is owned and one of which is leased under a one year
agreement expiring in May 2001. The sales and warehousing operation of a
majority-owned subsidiary, Datamarine International Australia, PTY, LTD., is
located in a leased 2,500 square-foot building in Chatsworth, New South
Wales, Australia.
ITEM 3. LEGAL PROCEEDINGS
On December 19, 1995 the Company completed a private placement issuance of
$2,000,000 in Subordinated Convertible Debentures (the "Debentures") with
Alta Subordinated Debt Partners III ("ASDP III"), originally due December
19, 2000.
On November 24, 1997 the Company received notice from ASDP III of an alleged
violation of certain covenants related to the Debenture Purchase Agreement
dated December 19, 1995. 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.
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 gave the Company or
its designee the option to redeem the Debentures for $2,200,000 by September
30, 2000. On September 27, 2000 the Company exercised its option to
purchase the Debentures and accrued
<PAGE> 6
and unpaid interest of $1,111,375 for $2,200,000. Datamarine's repurchase
of the Debentures caused all claims and counterclaims in the matter of Alta
Subordinated Debt Partners III, L.P. v. Datamarine International, Inc. to be
dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended September 30, 2000, no
matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Price of and Dividends on the Registrants Common Equity
The Company's Common Stock trades on the OTCBB under the symbol "DMAR". As
of December 18, 2000, there were approximately 900 stockholders of record.
The accompanying table shows the range of trading prices for the past two
years by fiscal quarter:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Fiscal 2000: High 3 5/8 1 3/8 1 5/16 3 1/8
Low 7/8 3/4 5/8 7/16
Fiscal 1999: High 4 4 1/8 3 2 3/8
Low 1 1/8 2 2 1/8 1 1/16
</TABLE>
No dividends have been declared or paid by the Company. The Company
currently intends to retain any earnings to fund the development and growth
of its business.
Recent Sales of Unregistered Securities
During September 2000, under Section 4(2) of the Securities Act, the Company
commenced a private placement offering for up to 4,387,500 shares of $0.01
common stock at a price of $0.8547 per share. As of September 30 and December
31, 2000 the Company had sold $2,477,000 and $3,332,470 of the offering,
respectively. The offering is expected to continue through January 2001.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data relating to the Company should be read
in conjunction with the Company's consolidated financial statements and the
related notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the other financial information
included elsewhere in this report. All of the historical selected financial
data set forth below has been derived from audited financial statements of
the Company.
<PAGE> 7
<TABLE>
<CAPTION>
Income Statement Data for September 30, October 2, October 3, September 27, September 28,
the Year Ended 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Net sales $ 6,766,248 $ 12,117,259 $ 12,382,551 $ 12,090,678 $ 16,590,002
Cost of products sold 4,666,527 7,849,831 8,077,225 8,243,556 9,555,599
Operating expenses 4,717,399 5,381,823 5,659,482 5,370,323 5,627,499
--------------------------------------------------------------------------------
Operating income (loss) (2,617,678) (1,114,395) (1,354,156) (1,523,201) 1,406,904
--------------------------------------------------------------------------------
Interest expense 570,067 753,979 836,812 563,617 380,564
Other income, net (376,647) (31,596) (48,995) (56,396) (112,724)
Extraordinary gain (911,375) - - - -
Income tax expense - - - 737,909 388,083
--------------------------------------------------------------------------------
Net income (loss) $ (1,899,723) $ (1,836,778) $ (2,141,973) $ (2,768,331) $ 750,981
================================================================================
Basic income (loss) per share $ (1.09) $ (1.19) $ (1.60) $ (2.11) $ .58
Diluted income (loss) per share $ (1.09) $ (1.19) $ (1.60) $ (2.11) $ .49
<CAPTION>
September 30, October 2, October 3, September 27, September 28,
Balance Sheet Data 2000 1999 1998 1997 1996
Total assets $ 5,726,248 $ 7,597,760 $ 9,534,099 $ 10,139,922 $ 12,649,846
Note payable to bank - 1,097,312 1,418,665 1,367,561 1,750,000
Notes payable to related
parties and others 912,000 452,000 744,697 850,887 -
Long-term obligations,
including current portion 145,153 2,126,608 2,041,728 1,948,979 2,022,978
Stockholders' equity 1,627,812 863,890 2,208,991 3,898,836 6,536,934
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C> <C> <C>
Net Sales:
Land mobile communications $ 1,477,166 22% $ 1,566,585 13%
Marine communications 3,350,632 50% 8,142,812 67%
Marine instrumentation 1,840,111 27% 2,399,012 20%
Narrowband operations 98,339 1% 8,850 -
-----------------------------------------------
Consolidated net sales $ 6,766,248 100% $12,117,259 100%
===============================================
Operating income (loss):
Land mobile communications $ (1,344,361) $ (1,545,502)
Marine communications (817,760) 868,437
Marine instrumentation (24,298) 81,420
Narrowband operations (195,700) (301,380)
All other (235,559) (217,370)
------------ ------------
Consolidated operating loss (2,617,678) (1,114,395)
Net loss (1,899,723) (1,836,778)
Basic loss per share (1.09) (1.19)
</TABLE>
Financial information for "All other" reflects headquarters operating
expenses which are not attributable to specific business segments.
<PAGE> 8
The following tables set forth certain items (expressed as a percentage of
net sales) included in Selected Financial Data and should be read in
connection with the Consolidated Financial Statements of the Company
including the Notes to Consolidated Financial Statements, presented
elsewhere in this report.
<TABLE>
<CAPTION>
Income and Expense Items Percentage
As a Percentage of Net Sales Increase (Decrease)
---------------------------- -------------------
1999 1998
to to
2000 1999 2000 1999
<C> <C> <S> <C> <C>
100% 100% Net sales (44)% (2)%
69 65 Cost of products sold (41) (3)
31 35 Gross profit (51) (1)
20 12 Research and development (7) 2
28 19 Selling (17) (9)
17 11 General and administrative (13) (8)
4 2 Narrowband operations (100) 13
70 44 Operating expenses (12) (5)
(39) (9) Operating loss 135 (18)
8 6 Interest expense (24) (10)
(19) - Other income, net (36) (36)
(28) (15) Loss before income taxes 3 (14)
- - Income tax expense - -
(28)% (15)% Net loss 3% (14)%
</TABLE>
Fiscal 2000 compared to 1999
Net sales decreased by $5,351,011 or 44%, to $6,766,248 for 2000 from
$12,117,259 in 1999. Net sales of the Company's narrowband products
decreased by $89,419, or 6%, to $1,477,166 for 2000 from $1,566,585 in 1999.
Net sales of the Company's marine radio systems decreased by $4,792,180, or
59%, to $3,350,632 for 2000 from $8,142,812 in 1999. Net sales of the
Company's recreational marine instrumentation systems decreased by $558,901,
or 23%, to $1,840,011 for 2000 from $2,399,012 in 1999.
Land mobile revenues during the year included both repeaters and mobile
radio products, with mobile radios accounting for most of the revenue.
Management expects that land mobile revenues will be comprised mostly of
mobile radios sales until Phase II license holders begin to take delivery of
repeater systems. Although the Company's land mobile order backlog
continues to grow, customers have been slow to take delivery of new repeater
systems. Management expects that until such time as mobile radios can be
shipped in quantity, demand for repeaters will be low. Orders for the model
604 mobile radio 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 continues to believe 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 and did not meet management's projections. Much of the
decrease was due to a decline in sales of GMDSS "A3" systems as many
customers satisfied regulatory requirements during 1999. Working capital
constraints contributed to product shortages and delays in the introduction
of new products which were expected to
<PAGE> 9
replace declining GMDSS sales. New VHF radio products expected to start
shipping in the fourth quarter of fiscal 2000 were delayed into fiscal 2001.
Marine instrumentation sales decreased compared to the prior year and
continued to be below management's projections. Sales of the Company's
chart plotter continue to be lower than expected, and working capital
constraints caused product shortages and reductions in advertising and sales
promotion.
Revenues from narrowband operations were $98,339 compared to $8,850 for the
prior year. 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 for 2000 was $2,099,721 (31% of net sales), as compared to
$4,267,428 (35% of net sales) in 1999, a decrease of $2,167,707 or 51%. The
gross profit on narrowband products for 2000 was $127,181 (9% of such
sales), as compared to $46,971 (3% of such sales) in 1999, an increase of
$80,210 or 171%. Margins on narrowband products fluctuate based on product
mix, and are generally much higher on base station products than on mobile
radios. Land mobile gross profit improved as a result of a favorable
product mix including the sales of repeaters. The market for communications
products is very competitive and pressure on selling prices for mobile
radios is expected to keep margins low. We project that land mobile margins
will improve when shipments of base station products resume as a result of
Phase II licensees constructing new operating sites.
The gross profit on marine radio systems for 2000 was $1,149,911 (34% of
such sales), as compared to $3,227,328 (40% of such sales), a decrease of
$2,077,417 or 64%. 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 year 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 for 2000 was $724,290
(39% of such sales), as compared to $985,004 (41% of such sales), a decrease
of $260,714 or 26%. The product mix was similar to the prior year but sales
volume was lower due to product shortages. Gross profit rates were also
negatively affected by higher manufacturing costs attributable to lower
production rates.
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 to 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 $4,717,399 (70% of net sales) in 2000, as compared
to $5,381,823 (44% of net sales), a decrease of $664,424 or 12%. Operating
expenses were lower than last year, but constituted a larger percentage of
lower net sales. Total selling expenses decreased $380,275 or 17%.
Expenses such as commissions and warranty provisions which are tied closely
to sales declined with the overall decrease in revenues. Commission expense
declined $234,000 or 44% and warranty provisions declined $50,000 or 43%.
<PAGE> 10
Administrative expenses decreased $168,778 or 13%. State taxes tied to
revenue, employee benefits and bank charges were lower than the prior year.
The provision for doubtful accounts declined due to lower sales.
Depreciation expense declined as assets reached the end of their depreciable
lives.
Research and development expenses decreased $99,905 or 7%, with most of the
decrease in consumable parts and engineering related to the development of
the chart plotter. Depreciation expense declined $26,000 as assets reached
the end of their depreciable lives. Outside engineering services of $240,000
were comparable to the prior year.
Narrowband operating expenses were $294,039 compared to $309,505 the prior
year, with all of the decline due to lower depreciation expense. Site
rental expenses of $112,000 were comparable to the prior year.
Interest expense for 2000 was $570,067 as compared to $753,979 for 1999.
Lower average loan balances offset the increased interest rate on bank
borrowings. Amortization of debt discount related to the Subordinated
Convertible Dentures was completed during fiscal 1999. The Company
typically issues common stock warrants in connection with the extension of
the senior and subordinated debt. The fair value of common stock warrants
is charged to interest expense over the term of the loan extension. During
fiscal 2000 and fiscal 1999 the Company recognized $94,230 and $65,971 of
such warrant related expense, respectively.
Other income, net was $376,647 in 2000 compared to $31,596 in 1999. Other
income in 2000 was comprised of non-recurring engineering revenues and
approximately $316,000 of gains from the sales of 220 MHz licenses and
related equipment by the Narrowband Network Systems. Fiscal 1999 other
income, net was comprised mostly of non-recurring engineering revenues.
During 2000 the Company recognized an extraordinary gain of $911,375 on the
early redemption of its Subordinated Convertible Debentures. A payment of
$2,200,000 was made to fully redeem principal of $2,000,000 plus accrued
interest of $1,111,375.
Income tax expense for 2000 and 1999 was $0. The Company has established a
valuation allowance equal to 100% of the deferred tax asset.
The net loss for 2000 was $1,899,723 compared to a net loss of $1,836,778 in
1999, an increase of 3%.
Fiscal 1999 compared to 1998
Net sales decreased by $265,292 or 2%, to $12,117,259 for 1999 from
$12,382,551 in 1998. Net sales of the Company's narrowband products
decreased by $1,466,354, or 48%, to $1,566,585 for 1999 from $3,032,939 in
1998. Net sales of the Company's marine radio systems increased by
$1,137,346, or 16%, to $8,142,812 for 1999 from $7,005,466 in 1998. Net
sales of the Company's recreational marine instrumentation systems increased
by $66,660, or 3%, to $2,399,012 for 1999 from $2,332,352 in 1998.
Land mobile revenues continue to be comprised mostly of mobile radio
products and will continue to be so until new license holders begin to take
delivery of repeater systems. Although the auction of Phase II licenses
concluded in October 1998, successful bidders did not receive their licenses
until March 1999. Our land mobile revenue projections assumed that licenses
would be issued sooner, therefore current year
<PAGE> 11
land mobile sales have been less than originally forecast for 1999.
Although the Company's land mobile order backlog continues to grow,
customers have been slow to take delivery of new systems. In addition,
sales were lower because the selling price of certain mobile radios was
reduced in anticipation of the Company introducing the new Model 604 mobile
radio during the year. The 604 started shipping in September 1999, but we
do not expect the radio to ship in significant quantity until the third
quarter of fiscal 2000. Management expects that the FCC's issuance of new
licenses will provide an opportunity for significant revenue growth in the
narrowband product line. In September 1999, the Company did make its first
sale of land mobile repeaters, mobile and portable radios in Mexico.
Management expects that the recent auction of 220 MHz licenses in Mexico
will provide additional selling opportunities for the Company.
Sales of marine communications products showed a significant increase over
the prior year and exceeded management's projections. Sales of GMDSS
products contributed to strong revenue growth, though GMDSS revenue is
slowing as customers satisfy regulatory requirements. The Company plans to
replace slowing GMDSS sales with new products which should start shipping
during the third quarter of fiscal 2000.
Sales of marine instrumentation systems increased slightly, due in part to
shipments of the Company's new chart plotter starting in June 1999. Marine
instrumentation sales are expected to improve again in 2000 as plotter
shipments increase, though this category continues to be extremely
competitive.
Gross profit for 1999 was $4,267,428 (35% of net sales), as compared to
$4,305,326 (35% of net sales) in 1998, a decrease of $37,898 or 1%. The
gross profit on narrowband products for 1999 was $46,971 (3% of such sales),
as compared to $462,857 (15% of such sales) in 1998, a decrease of $415,886
or 90%. Margins on narrowband products fluctuate based on product mix, and
are generally much higher on base station products than on mobile radios.
The FCC build-out deadline caused base station revenues to decline sharply,
so the majority of land mobile revenue in both 1999 and 1998 came from the
sale of lower margin mobile radios. Price reductions on some radios also
caused gross margin to decline. The market for communications products is
very competitive and pressure on selling prices for mobile radios is
expected to continue. We expect that land mobile gross margin will improve
when shipments of base station products resume as a result of Phase II
licensees constructing new operating sites.
The gross profit on marine radio systems for 1999 was $3,227,328 (40% of
such sales), as compared to $2,845,604 (41% of such sales), an increase of
$381,724 or 13%. The overall gross margin percentage on marine
communications products was comparable to last year. Strong sales of Global
Maritime Distress and Safety System (GMDSS) products accounted for much of
the total increase in gross margin.
The gross profit on marine instrumentation systems for 1999 was $985,004
(41% of such sales), as compared to $986,065 (42% of such sales), a decrease
of $1,061. Product mix and gross margin in this sector were comparable to
the prior year. Management expects that increased sales of the Company's
new chart plotter will improve margin in the instrumentation product line.
Operating expenses were $5,381,823 (44% of net sales) in 1999, as compared
to $5,659,482 (46% of net sales), a decrease of $277,659 or 5%. Total
selling expenses decreased $219,490 or 9%. Advertising expenses decreased
approximately $80,000 or 26%. The Company decreased its co-op advertising
accrual rate because claims experience has been less than estimated.
Commission expense declined $149,000 or 22% because a large portion of
marine communications sales came from products not subject to sales
commissions. Royalty expense declined $54,000 from the prior year because
the remaining balance of a prepaid royalty agreement was written off in
1998.
<PAGE> 12
Administrative expenses decreased $116,672 or 8%. Administrative salary
expense was $77,000 higher than the prior year because 1998 included the
elimination of profit sharing. Professional fees were $136,000 less than
the prior year due to higher than normal costs associated with litigation
settled in 1998, and legal and accounting fees in connection with
negotiations related to the terms of the Subordinated Convertible Debenture.
Research and development expenses increased $22,983 or 2%. Engineering
consumables decreased $78,000 from the prior year due to those expenses
being incurred in the early phases of projects started in 1998. Outside
engineering services and consultants increased $97,000 or 46%. The
increases were due to new product development in marine communications and
cost sharing of engineering expenses related to the new electronic chart
plotter.
Narrowband operating expenses were $309,505 compared to $273,985 the prior
year. Increases in rental expense for the Company's 220 MHz sites accounted
for $32,000 of the increase.
Interest expense for 1999 was $753,979 as compared to $836,812 for 1998.
Decreases in interest expense as a result of the amortization of debt
discount being completed in February 1999 were partially offset by increases
due to warrants issued to the bank and other note holders in connection with
loan extensions. The increased interest rate on bank borrowings was offset
by lower average loan balances.
Other income, net of $31,596 in 1999 was comparable to other income of
$48,995 in 1998.
Income tax expense for 1999 and 1998 was $0. The Company has established a
valuation allowance equal to 100% of the deferred tax asset.
The net loss for 1999 was $1,836,778 compared to a net loss of $2,141,973 in
1998, a decrease of 14%.
Capital Expenditures
Capital expenditures in 2000 were $99,000 (all of which were capital leases)
and $73,000 (including capital lease additions of $17,000) in 1999. Planned
capital expenditures in fiscal 2001 are $100,000, primarily for production
and engineering equipment.
Liquidity and Capital Resources
On September 30, 2000 the Company's principal sources of liquidity consisted
of approximately $210,000 in cash and equivalents. Net cash used in
operating activities was $67,018 for 2000, a $164,011 decrease from $96,993
net cash provided by operating activities last year. Cash was provided by
decreases in accounts receivable and inventories, as well as increases in
accounts payable and accrued expenses. At the end of September 30, 2000 the
sales order backlog stood at $3,310,000 compared to $1,900,000 at October 2,
1999. Of the total September 30, 2000 backlog, land mobile products
represented $2,500,000, marine communications products represented $656,000
and marine instrumentation products represented $154,000.
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 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
<PAGE> 13
outstanding balance of approximately $285,000. As of September 30, 2000 the
Company did not have a revolving credit facility with a senior lender.
Subsequent to year end the Company entered into a revolving credit agreement
with an asset based lender. The terms of the agreement provide for a
$1,000,000 maximum loan, based on 80% of eligible accounts receivable.
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 $2,500,000 at September 30, 2000. The recovery of
land mobile revenues is currently being hindered by product shortages due to
the Company's working capital constraints and failures by one of the
Company's suppliers to deliver products as scheduled. 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 year
ended September 30, 2000 the Company entered into agreements to sell
additional equipment and licenses for an aggregate selling price of
$568,000.
During September 2000 the Company commenced a $3,750,000 private placement
common equity offering. As of September 30, 2000 the Company had received
proceeds of $2,477,000 and used $2,200,000 of the proceeds to redeem the
Subordinated Convertible Debentures.
In order to operate at a profit the Company will need to increase sales
revenues. Additional funding will be needed to increase inventory and
production to sustainable levels. The Company will also require additional
funding in order to redeem its obligations as scheduled and meet its
operating and capital requirements in 2001. 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.
Impact of Inflation
The Company's results are influenced by the impact of inflation on
manufacturing and operating costs. Historically, the Company has used
selling price adjustments, cost containment programs and improved operating
efficiencies to offset the negative impact of inflation on its operations.
For the fiscal years 2000 and 1999 the influence of inflation has been
immaterial to the Company.
Forward-looking Statements
This report contains forward-looking statements that involve risks and
uncertainties. Statements included in this report which are not historical
in nature are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, including without limitation
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. This Annual Report on Form 10-KSB and Quarterly
<PAGE> 14
Reports on Form 10-QSB contain certain detailed factors that could cause the
Company's actual results to differ materially from forward-looking
statements made by the Company.
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 2000
INDEX
Page(s)
-------
Report of Independent Certified Public Accountants 15
Consolidated Balance Sheets, September 30, 2000 and
October 2, 1999 16
Consolidated Statements of Operations for the years
ended September 30, 2000 and October 2, 1999 17
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 2000 and October 2, 1999 18
Consolidated Statements of Cash Flows for the years
ended September 30, 2000 and October 2, 1999 19
Notes to Consolidated Financial Statements 20-34
<PAGE> 16
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors of
Datamarine International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Datamarine
International, Inc. and Subsidiaries as of September 30, 2000 and October 2,
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Datamarine
International, Inc. and Subsidiaries as of September 30, 2000 and October 2,
1999, and the consolidated results of their operations and their
consolidated cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements, the Company incurred a net loss of $1,899,723 during
the year ended September 30, 2000. These factors, among others, as discussed
in Note 3 to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ GRANT THORNTON LLP
Seattle, Washington
November 22, 2000
<PAGE> 17
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, October 2,
2000 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 209,813 $ 39,189
Accounts receivable, less allowance for doubtful
accounts of $175,471 and $153,743, respectively 475,880 1,274,907
Inventories 3,557,410 4,487,190
Prepaid expenses and other current assets 119,264 133,982
----------------------------
Total current assets 4,362,367 5,935,268
Property, plant and equipment 4,994,541 5,138,802
Less accumulated depreciation 4,016,850 3,814,391
----------------------------
Property, plant and equipment, net 977,691 1,324,411
Other assets, net 386,190 338,081
----------------------------
Total assets $ 5,726,248 $ 7,597,760
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ - $ 1,097,312
Notes payable to related parties and others 912,000 452,000
Current maturities of capital lease obligations 28,644 56,431
Current maturities of long-term debt 4,954 2,004,461
Accounts payable 1,892,344 1,268,558
Accrued expenses 1,148,939 1,789,392
----------------------------
Total current liabilities 3,986,881 6,668,154
Capital lease obligations, less current maturities 63,349 12,688
Long-term debt, less current maturities 48,206 53,028
----------------------------
Total liabilities 4,098,436 6,733,870
----------------------------
Commitments and contingencies - -
Redeemable preferred stock, $1 par value; none issued - -
Stockholders' equity:
Convertible preferred stock, $1 par value - authorized
1,000,000 shares, including redeemable preferred stock;
none issued - -
Common stock, $.01 par value - authorized 20,000,000
shares; 1,808,213 and 1,689,742 shares issued and
outstanding, respectively 18,082 16,897
Capital in excess of par value 4,897,915 4,717,736
Common stock subscribed 2,477,000 -
Unearned compensation (9,979) (15,260)
Accumulated deficit (5,755,206) (3,855,483)
----------------------------
Total stockholders' equity 1,627,812 863,890
----------------------------
Total liabilities and stockholders' equity $ 5,726,248 $ 7,597,760
============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 18
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended September 30, 2000 and October 2, 1999
<TABLE>
<CAPTION>
September 30, October 2,
2000 1999
<S> <C> <C>
Net sales $ 6,766,248 $12,117,259
Cost of products sold 4,666,527 7,849,831
----------------------------
Gross profit 2,099,721 4,267,428
Operating expenses:
Research and development 1,337,652 1,437,557
Selling 1,920,523 2,300,798
General and administrative 1,165,185 1,333,963
Narrowband operations 294,039 309,505
----------------------------
Operating expenses 4,717,399 5,381,823
----------------------------
Operating loss (2,617,678) (1,114,395)
Interest expense 570,067 753,979
Other income, net (376,647) (31,596)
----------------------------
Loss before extraordinary item (2,811,098) (1,836,778)
Gain on early extinguishment of debt 911,375 -
----------------------------
Loss before income taxes (1,899,723) (1,836,778)
Income taxes - -
----------------------------
Net loss $(1,899,723) $(1,836,778)
============================
Net loss per common share-basic and diluted:
Loss per share
Loss before extraordinary item $ (1.61) $ (1.19)
Extraordinary item .52 -
----------------------------
Net loss $ (1.09) $ (1.19)
============================
Weighted average number of common
shares-basic and diluted:
Basic 1,747,277 1,542,183
Diluted 1,747,277 1,542,183
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 19
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 2000 and October 2, 1999
<TABLE>
<CAPTION>
Common Stock Capital in Common Unearned Total
-------------------- Excess of Stock Comp- (Accumulated Stockholders'
Shares Amount Par Value Subscribed ensation Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 3, 1998 1,435,056 $14,351 $4,241,522 - $(28,177) $(2,018,705) $ 2,208,991
Net loss for 1999 - - - - - (1,836,778) (1,836,778)
Exercise of stock options 8,000 80 11,920 - - - 12,000
Compensation element of stock
options granted - - 10,313 - (10,313) - -
Issuance of shares under
Employee Investment Plan and
Employee Stock Purchase Plan 22,313 222 59,021 - - - 59,243
Conversion of notes payable to
related parties and others
into common stock 224,373 2,244 328,989 - - - 331,233
Value of common stock warrants
issued to bank and holders of
subordinated notes - - 65,971 - - - 65,971
Amortization of unearned
Compensation - - - - 23,230 - 23,230
---------------------------------------------------------------------------------------------
Balance at October 2, 1999 1,689,742 16,897 4,717,736 - (15,260) (3,855,483) 863,890
Net loss for 2000 - - - - - (1,899,723) (1,899,723)
Exercise of stock warrants 28,068 281 2,526 - 2,807
Common stock subscribed-2,898,090
shares at $0.8547 per share - - - 2,477,000 - - 2,477,000
Compensation element of stock
options granted, net of forfeits - - 5,656 - (5,656) - -
Issuance of shares under
Employee Investment Plan and
Employee Stock Purchase Plan 44,844 448 54,732 - - - 55,180
Conversion of notes payable to
related parties and others
into common stock 45,559 456 23,035 - - - 23,491
Value of common stock warrants
issued to bank and holders of
subordinated notes - - 94,230 - - - 94,230
Amortization of unearned
Compensation - - - - 10,937 - 10,937
---------------------------------------------------------------------------------------------
Balance at September 30, 2000 1,808,213 $18,082 $4,897,915 $2,477,000 $ (9,979) $(5,755,206) $ 1,627,812
============================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 20
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended September 30, 2000 and October 2, 1999
<TABLE>
<CAPTION>
September 30, October 2,
2000 1999
<S> <C> <C>
Operating activities:
Net loss $ (1,899,723) $ (1,836,778)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 345,488 424,083
Gain on asset dispositions (335,587) (21,580)
Amortization of debenture discount and debt issue costs 28,320 237,670
Warrants issued for financing 94,230 65,971
Provision for losses on accounts receivable 37,355 64,111
Employee investment plan expense 51,277 56,645
Amortization of unearned compensation 10,937 23,230
Gain on debt extinguishments (911,375) -
Changes in operating assets and liabilities:
Accounts and notes receivable 629,580 439,719
Inventories, prepaid expenses and other current assets 944,498 658,177
Accounts payable and accrued expenses 937,982 (9,255)
-------------------------------
Net cash provided by (used in) operating activities (67,018) 96,993
-------------------------------
Investing activities:
Proceeds from asset dispositions 496,784 3,264
Purchases of property, plant and equipment,
including self-constructed equipment (5,462) (55,872)
Other (25,122) (36,682)
-------------------------------
Net cash provided by (used in) investing activities 466,200 (89,290)
-------------------------------
Financing activities:
Proceeds from sale of common stock 6,710 14,598
Proceeds from notes payable to related parties and others 462,865 7,303
Proceeds from common stock subscribed 2,477,000 -
Repayment on note payable to bank (1,097,312) (321,353)
Principal payments on capital lease
obligations and long-term debt (2,077,821) (62,223)
-------------------------------
Net cash used in financing activities (228,558) (361,675)
-------------------------------
Increase (decrease) in cash and equivalents during year 170,624 (353,972)
Cash and equivalents at beginning of year 39,189 393,161
-------------------------------
Cash and equivalents at end of year $ 209,813 $ 39,189
===============================
Supplementary Cash Flow Information
Interest paid $ 167,488 $ 184,194
Conversion of notes payable and accrued interest to equity 23,491 331,233
Capital lease obligations incurred to acquire equipment 93,501 16,800
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 21
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
1. Business Activities:
Datamarine International, Inc. and subsidiaries ("we" or the "Company")
manufactures and markets electronics including radiotelephone systems for
land and marine applications and marine depth sounders and related
instrumentation. Narrowband products consist of hand held, mobile and base
station components for use in the 220 MHz radio service, and are sold
primarily to business users of private radio services. Marine
communications products are high performance radios used on commercial
vessels, fishing vessels and ocean-going yachts. Marine instrumentation
products are up-to-date instruments for pleasure craft; small boats and
yachts; sail and power; inshore and offshore. Marine communication and
marine instrumentation products are sold worldwide through approximately 500
dealers.
We introduced our 220 MHz land mobile product line in 1993. We also have
agreements covering the construction and operation of narrowband land mobile
systems (see Note 11).
2. Significant Accounting Policies:
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, SEA, Inc. ("SEA"), its 97.5% owned
subsidiary, Narrowband Network Systems, Inc. ("NNS") and its 60% owned
subsidiary, Datamarine International Australia PTY, LTD. The Company has
recognized the losses attributable to the minority owner's interest in
Datamarine International Australia PTY, LTD. in excess of the minority
owner's investment. Upon consolidation, all intercompany accounts,
transactions and profits have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities. We are also
required to make estimates and assumptions that affect disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from estimates.
Fiscal Year
The Company's fiscal year consists of 52 weeks ending on the Saturday
nearest September 30.
Revenue Recognition
Revenue from the sale of products and services is recognized in the
consolidated statements of operations as services are rendered or upon
shipment.
Cash and Cash Equivalents
We consider all highly liquid investments, with an original maturity of
three months or less when purchased, to be cash equivalents.
<PAGE> 22
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
2. Significant Accounting Policies, Continued:
Concentration of Credit Risk
The concentration of credit risk with respect to trade receivables is, in
our opinion, considered minimal due to the Company's diverse customer base.
The customers for the marine products are primarily distributors and dealers
who resell to both recreational and commercial boaters. The customers for
the land mobile communication products consist primarily of industrial users
of private land mobile radio services. We sell to customers throughout the
world with a majority of the sales in the United States. Except for our
Australian subsidiary we do not have foreign operations. Our export sales
were approximately $755,000 in 2000 and $2,028,000 in 1999. We perform
periodic credit evaluations of our customers, usually sell on open account
and do not require collateral. All sales are denominated in US dollars so
we do not have foreign currency exposure.
Inventories
Inventories are stated at the lower of cost (based on the first-in, first-
out method) or market.
Property, Plant and Equipment
Property, plant and equipment, including self constructed assets, are stated
at cost. Depreciation is based on the straight-line method over the useful
lives of the assets (see Note 5). Upon disposition of property, plant and
equipment, the cost and related depreciation are removed from the accounts,
and any gain or loss is reflected in the consolidated statement of
operations.
FCC License Costs
Costs associated with acquiring, developing and maintaining 220 MHz licenses
are amortized on a straight-line basis over ten years and are included in
other assets.
Research and Development
Expenditures for research and development are charged to expense as
incurred.
Advertising
Expenditures for advertising are charged to expense as incurred.
Advertising expense was $233,272 in 2000 and $226,843 in 1999.
Warranty Costs
We estimate and charge to current expense the amount which will be needed to
cover future warranty obligations for products sold during the year.
Income Taxes
We account for income taxes using the liability method. Deferred tax
balances are recognized at the currently enacted tax rates for all temporary
differences between the book and tax bases of assets and liabilities, net of
a valuation allowance as appropriate.
<PAGE> 23
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
2. Significant Accounting Policies, Continued:
Stock Based Compensation
We apply APB Opinion No. 25, Accounting for Stock Issued to Employees and
related Interpretations in measuring compensation cost for our stock option
plans. We also disclose pro forma net income (loss) and net income (loss)
per share as if compensation cost had been determined consistent with
Statement of Financial Accounting Standards (FAS) No. 123, Accounting for
Stock Based Compensation.
Earnings Per Share
Basic net income or loss per common share is based on the weighted average
number of common shares outstanding during the year. Diluted earnings per
share is based on the weighted average number of common shares and common
stock equivalents outstanding. Common stock equivalents include shares
which would be issued upon exercise of stock options and warrants or
conversion of debentures. Common stock equivalents are excluded from the
calculation when they are anti-dilutive.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the 2000 presentation, with no impact on
previously reported net loss or stockholders' equity.
3. Going Concern:
As shown in the consolidated financial statements, the Company incurred a
net loss of $1,899,723 in 2000 and $1,836,778 in 1999. The Company's
ability to continue as a going concern is dependant 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 the FCC's 1999 issuance of Phase II licenses will result in
increased demand for the Company's 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 $2,500,000 at September 30, 2000. The
recovery of land mobile revenues is currently being hindered by product
shortages due to the Company's working capital constraints and failures by
one of the Company's suppliers to deliver products as scheduled. 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 year
ended September 30, 2000 the Company entered into agreements to sell
additional equipment and licenses for an aggregate selling price of
$568,000.
Losses during 2000 increased as a result of significantly reduced revenues
due to inventory shortages. Inventory shortages were caused by working
capital constraints, primarily due to reductions in bank credit facilities.
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
<PAGE> 24
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
3. Going Concern, Continued:
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 are
the same as they were with the bank. During October 2000 the Company
entered into a new senior revolving credit agreement with an asset based
lender.
During September 2000 the Company commenced a $3,750,000 private placement
common equity offering. As of September 30,2000 the Company had received
proceeds of $2,477,000 and used $2,200,000 of the proceeds to redeem the
Subordinated Convertible Debentures (see Note 9).
In order to operate at a profit the Company will need to increase sales
revenues. The Company must raise additional funding to be used to increase
inventory and production levels to sustainable levels. 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.
4. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Finished goods and subassemblies $ 963,784 $1,583,442
Work-in-process 128,508 174,019
Purchased parts and materials 2,465,118 2,729,729
--------------------------
$3,557,410 $4,487,190
==========================
</TABLE>
5. Property, Plant and Equipment:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
2000 1999 Useful Lives
<S> <C> <C> <C>
Design, test and manufacturing equipment $2,899,392 $2,801,437 5 years
Narrowband network equipment 1,298,616 1,541,840 10 years
Office furniture and general equipment 551,708 550,700 3 - 5 years
Buildings and improvements 136,247 136,247 10 - 25 years
Leasehold improvements 101,178 101,178 3 - 10 years
Vehicles 7,400 7,400 5 years
--------------------------
$4,994,541 $5,138,802
==========================
</TABLE>
Design, test and manufacturing equipment includes equipment under capital
leases with an original cost of $153,526 and accumulated depreciation of
$38,333 as of September 30, 2000.
<PAGE> 25
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
6. Accrued Expenses:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Payroll and related fringe benefits $ 314,309 $ 295,801
Commissions 112,910 127,048
Warranty costs 93,253 122,703
Co-op advertising 213,080 212,252
Interest 7,665 834,181
Deposits and deferred revenue 190,000 -
Other 217,722 197,407
--------------------------
$1,148,939 $1,789,392
==========================
</TABLE>
7. Note Payable to Bank:
Amounts due to banks as of September 30, 2000 and October 2, 1999 were $0
and $1,097,312 respectively. As of October 2, 1999 the Company had a
variable bank line of credit for up to $1,418,665 with interest payable
monthly at 1.75% over prime (10.0% at October 2, 1999). Effective March 30,
2000 the 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 are the same as they were with the bank (see Note 8). As a
condition of loan extensions during the year the bank received warrants to
purchase 51,000 shares of common stock. The exercise price of the warrants
is $0.01 per share.
The weighted-average interest rate on short-term borrowings was 10.7% for
fiscal 2000 and 9.2% for fiscal 1999.
8. Notes Payable to Related Parties and Others:
Notes payable to related parties and others at September 30, 2000 consists
of $812,000 in subordinated loans payable to the Company's President and a
$100,000 subordinated short-term note payable to an unrelated party. The
$812,000 payable to the Company's President is comprised of loans of
$312,000 and $500,000. The $312,000 loan includes amounts used to repay the
senior bank line in August 2000 and bears interest at prime plus 1.75%
(11.25% at September 30, 2000), plus 5,000 $0.01 common stock warrants per
month during the life of the loan. These are the same terms as the Company
had with the senior lender. The Company has been making monthly payments of
interest only. The $500,000 loan includes the August 2000 refinancing of a
$352,000 loan from the Company's President. Monthly payments of 1% of the
outstanding balance including interest at 5.875% plus approximately 980
$0.10 common stock warrants per month, declining as the loan is repaid.
Effective November 28, 2000 the interest rate changes to prime plus 4.25%.
During fiscal 2000 the Company's President received a total of 18,834 common
stock warrants in connection with loan agreements. Interest expense of
$26,415 was calculated using the Black-Scholes model. The balance on the
subordinated loan payable at October 2, 1999 was $352,000 with monthly
payments of 1% of the outstanding balance including interest at 2.25% over
prime (10.5% at October 2, 1999).
<PAGE> 26
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
8. Notes Payable to Related Parties and Others, Continued:
The terms of the subordinated short-term notes were amended during 1998 to
extend the due date for principal and interest to March 1999. During 1999
the maturity date of the notes was again extended to March 2000 and
subsequently extended to March 2001. For each six month extension the note
holder receives 1,680 common stock warrants (exercisable for $0.10 per
share) per $100,000 principal outstanding. The estimated fair value of the
additional warrants is amortized to expense over the term of the maturity
extension. Note holders also have an option to convert any portion of the
notes or accrued interest to common stock. During 2000 the short-term note
holder converted a total of $23,491 in accrued interest to common stock.
9. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Subordinated Convertible Debentures, due December 2000 $ - $ 2,000,000
Mortgage note, monthly payments of $881, including interest
at 11.25% adjustable annually, due February 2008,
collateralized by the underlying building 53,160 57,489
------------------------
53,160 2,057,489
Less current maturities (4,954) (2,004,461)
------------------------
$48,206 $ 53,028
========================
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Fiscal Year
2001 $ 4,954
2002 5,410
2003 6,051
2004 6,769
2005 7,571
Thereafter 22,405
</TABLE>
On December 19, 1995 the Company completed a private placement issuance of
$2,000,000 in Subordinated Convertible Debentures (the "Debentures") with
Alta Subordinated Debt Partners III ("ASDP III"), originally due December
19, 2000.
On November 24, 1997 the Company received notice from ASDP III of an alleged
violation of certain covenants related to the Debenture Purchase Agreement
dated December 19, 1995. 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. 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 gave the
Company or
<PAGE> 27
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
9. Long-Term Debt, Continued:
its designee the option to redeem the Debentures for $2,200,000 by September
30, 2000. On September 27, 2000 the Company exercised its option to
purchase the Debentures and accrued and unpaid interest of $1,111,375 for
$2,200,000, resulting in a gain of $911,375, which was accounted for as an
extraordinary gain in the accompanying financial statements. The Company also
canceled the common stock rights associated with the Debentures.
The estimated fair value of the notes payable to related parties and others,
and long-term debt at September 30, 2000 approximates the carrying value of
such debt in the financial statements, based on current interest rates for
similar obligations with like maturities.
10. Commitments and Contingencies:
The Company is the lessee of equipment under capital leases expiring in the
fiscal year 2004. At the time of acquisition, the assets and liabilities
under capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair value of the assets. The Company leases
manufacturing, warehouse and office facilities under various operating
leases. Rental expense for these leases, excluding real estate taxes paid
by the Company for a leased building, was $249,000 in 2000 and $231,000 in
1999.
Approximate future minimum lease payments, by year and in the aggregate,
under capital and noncancelable operating leases, were as follows at
September 30, 2000:
<TABLE>
<CAPTION>
Capital Operating
<S> <C> <C>
2001 $ 41,160 $245,592
2002 38,840 238,392
2003 32,774 59,598
2004 2,756 -
----------------------
Total future minimum lease payments 115,530 $543,582
Less amounts representing interest (23,537) ========
--------
Present value of future minimum lease payments 91,993
Current portion 28,644
--------
Non current $ 63,349
========
</TABLE>
Periodically, the Company is subject to various legal proceedings and claims
arising in the ordinary course of business. The Company's management does not
expect that the outcome in any of these proceedings will have a material
adverse effect on the financial position of the Company.
11. Narrowband Network Systems, Inc. ("NNS"):
On November 18, 1994, NNS was incorporated in the State of Washington as a
subsidiary of SEA to participate in the business of providing specialized
mobile radio ("SMR") services.
NNS has entered into management agreements ("Management Agreements") with
the holders of 220 MHz licenses granted by the FCC in approximately 47
markets across the United States (the "Managed Markets"). Under the
Management Agreements, NNS is required to construct and develop the SMR
systems in the Managed Markets. NNS retains the revenues generated by the
systems, after remitting a fixed percentage to the license holders.
Under each of the Management Agreements, NNS has an option after
construction to acquire the license holder's interest in their respective
SMR system in exchange for (i) a fixed percentage of the gross receipts from
the system for as long as it continues to be operated by NNS and (ii) a
fixed percentage of any profit realized by NNS upon the system's ultimate
disposition. In certain cases,
<PAGE> 28
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
11. Narrowband Network Systems, Inc. ("NNS"), Continued:
NNS has guaranteed a minimum dollar amount to be remitted to the license
holder upon system disposition. Disposition of these systems is solely at
the Company's discretion.
In April 1995, NNS entered into an agreement with Incom Communications
Corporation ("ICC") for the operation of the SMR systems in certain of the
Managed Markets. Under the terms of this agreement, NNS is obligated to
provide the licenses and certain backbone equipment for each system and ICC
is required to provide either all or partial operational support. Revenues
from system operations are split between NNS and ICC using contractual
percentages based upon the level of support provided by each.
In addition, the Company has contracted with other third parties ("SMR
Operators") for operation of the systems in certain of the Managed Markets.
Under the terms of these agreements, NNS is to provide the system facilities
and the SMR Operators agree to provide essentially all other operational
support in exchange for a fixed percentage of the gross revenues from each
system and an equity interest in the systems, including the related
licenses.
At September 30, 2000 and October 2, 1999 fixed assets include $1,298,616
and $1,541,840 (less accumulated depreciation of $590,822 and $552,105)
respectively of facilities costs related to the SMR systems and other assets
include $408,547 and $448,600 (less accumulated amortization of $161,128 and
$146,072) representing legal and other costs associated with the acquisition
of license interests in the Managed Markets. 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.
The recoverability of narrowband network equipment and related capitalized
legal and acquisition costs of FCC licenses is dependent upon the successful
development of systems in each of the respective markets, or through the
sale of such assets. The first sale of such equipment occurred in December
1999. During the year ended September 30, 2000 the Company entered into
agreements to sell additional equipment and licenses for an aggregate
selling price of $568,000. We estimate that the carrying value of our
investment in these assets will be recovered from cash flow generated by the
systems once they have been developed. However, it is possible that such
estimates could change as a result of technological, regulatory or other
changes.
12. Stockholders' Equity:
Stock Option Plans
The 1992 Stock Option Plan for Non-Employee Directors provides for annual
grants of nonqualified options to purchase 1,500 common shares to each non-
employee Director. The exercise price for options granted is equal to the
fair market value at the date of grant. Options granted under this Plan are
immediately vested and exercisable for a period of ten years from the date
of grant so long as the holder remains a Director. The Plan was terminated
by the Board of Directors on December 12, 1995 and no new awards will be
made under the 1992 Plan.
<PAGE> 29
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
12. Stockholders' Equity, Continued:
Stock Option Plans, Continued:
Information regarding activity in the 1992 Stock Option Plan for Non-
Employee Directors is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <C> <C>
Outstanding and exercisable at October 3, 1998
and October 2, 1999 4,500 $5.91
Canceled in fiscal 2000 (4,500) 5.91
-----------------
Outstanding and exercisable at September 30,2000 - -
=================
</TABLE>
The 1995 Stock Option Plan for Non-Employee Directors was approved by the
stockholders at the special meeting held in 1996. The Plan provides for
annual grants of nonqualified options to purchase 2,000 common shares to
each non-employee director. The exercise price for options granted is equal
to the fair market value at the date of grant. Options granted under this
Plan are immediately vested and exercisable for a period of ten years from
the date of grant so long as the holder remains a director.
Information regarding activity in the 1995 Stock Option Plan for Non-
Employee Directors is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <C> <C>
Outstanding and exercisable at October 3, 1998 8,000 $6.53
Granted in fiscal 1999 4,000 2.375
------------------
Outstanding and exercisable at October 2, 1999 12,000 5.15
Granted in fiscal 2000 2,000 .75
Canceled in fiscal 2000 (8,000) 5.86
-----------------
Outstanding and exercisable at September 30, 2000 6,000 $2.73
=================
Weighted average fair value of options granted
during the year ended September 30, 2000 $0.40
</TABLE>
The 1991 Stock Option Plan authorized grants of incentive and nonqualified
stock options for 350,000 common shares. 200,000 shares are reserved for
issuance of options at an exercise price equal to the fair market value at
the date of grant and vest equally over time, generally four years (the
"Qualified Options"). 100,000 shares are reserved for issuance of options
which vest equally over time but do not meet the requirements of the
Qualified Options (the "Nonqualified Options"). 50,000 shares are reserved
for issuance of options which also do not meet such requirements, but are
subject to an accelerated vesting schedule (the "Piggy-Back Options").
<PAGE> 30
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
12. Stockholders' Equity, Continued:
Stock Option Plans, Continued:
Qualified Options and Nonqualified Options expire not more than ten years
from the date of grant and Piggy-Back Options expire twenty years and six
months from the date of grant. The Piggy-Back Options are to be granted in
conjunction with the grant of Nonqualified Options. The Piggy-Back Options
shall not be exercised prior to twenty years from the date of the grant,
except that if, within five years from the date of grant, the trading price
exceeds a specified price, such Piggy-Back Options shall become subject to a
five-year vesting schedule with respect to the number of shares equal to 50%
of the unexercised portion of Nonqualified Options granted to the employee.
All Piggy-Back Options outstanding at September 30, 2000 commenced five year
vesting on September 9, 1994 and are fully vested as of September 30, 2000.
Proceeds received from the exercise of options are credited to stockholders'
equity. Compensation cost is recorded based upon the difference between
market prices and exercise prices at the date of grant and amortized to
expense over the vesting period pursuant to APB Opinion No. 25, Accounting
for Stock Issued to Employees.
Information regarding activity in the 1991 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Qualified Options Nonqualified Options Piggy-Back Options
------------------ -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at October 3, 1998 93,524 5.55 56,500 1.85 22,000 4.50
Granted 12,000 2.88 7,500 1.00
Exercised - - (8,000) 1.50 (4,000) 4.50
Canceled (20,424) 5.45 (7,500) 1.00 - -
-------------------------------------------------------------
Outstanding at October 2, 1999 85,100 5.19 48,500 1.91 18,000 4.50
Granted 88,818 .75 13,000 1.00 - -
Canceled (7,282) 4.09 (1,500) 3.00 (500) 4.50
-------------------------------------------------------------
Outstanding at September 30, 2000 166,636 2.87 60,000 1.68 17,500 4.50
=============================================================
Exercisable at September 30, 2000 147,386 3.02 47,000 1.87 17,500 4.50
Available for grant at September 30, 2000 4,537 - 15,625 - 31,750 -
Exercisable at October 2, 1999 71,725 5.53 46,000 1.96 18,000 4.50
Weighted average fair value of options
granted during the year ended
September 30, 2000:
Exercise price equal to market at grant
(88,818 options) $ 0.53
Exercise price less than market at grant
(13,000 options) $ 0.37
</TABLE>
<PAGE> 31
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
12. Stockholders' Equity, Continued:
Stock Option Plans, Continued:
The following is a summary of stock options outstanding under the 1991 and
1995 plans at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------- ------------------------------
Range of Weighted Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 0.75-2.50 147,818 7.44 $0.98 122,193 $0.99
$ 3.00-6.00 86,318 4.34 $4.48 76,693 $4.55
$ 9.00 16,000 4.55 $9.00 16,000 $9.00
</TABLE>
The total compensation cost recognized in income for stock-based
compensation was $10,937 in 2000 and $23,230 in 1999. Had the compensation
cost for the Company's option plans been determined consistent with FAS 123,
the Company's pro forma net loss and net loss per share would have been as
follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net loss:
As reported $(1,899,723) $(1,836,778)
Pro forma (1,954,334) (1,840,080)
Basic and diluted net loss
per share:
As reported $ (1.09) $ (1.19)
Pro forma (1.12) (1.19)
</TABLE>
The effects of applying FAS 123 on pro forma disclosures of net loss and
loss per share for fiscal 2000 and 1999 are not likely to be representative
of the pro forma effects in future years.
The fair value of each option grant has been estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Dividend yield 0% 0%
Volatility 73.9 - 76.4% 62.3 - 73.4%
Risk free interest rate 6.40% 5.00%
Expected option term (years) 3 - 6 3 - 6
</TABLE>
<PAGE> 32
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
12. Stockholders' Equity, Continued:
Stock Option Plans, Continued:
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for full-time employees who
have attained certain length-of-service requirements and who do not own 5%
or more of the Company's outstanding stock. Under the terms of the plan,
eligible employees are granted the right on a semiannual basis to purchase
shares of the Company's common stock. The purchase price is equal to 90% of
the fair market value of the Company's common stock during certain
predetermined periods, and employees may purchase shares having an aggregate
value of up to 10% of basic compensation. The Company issued 3,056 shares
in 2000 and 908 shares in 1999 in connection with the Employee Stock
Purchase Plan.
Employee Investment Plan
The Company maintains the Datamarine Employee Investment Plan, a 401(k)
Plan. All full-time employees who have reached age 21 and have one year of
service are eligible for participation. Employees can contribute up to 15%
of their base salary with the Company matching 50% of the first 6% of base
salary contributed. The Company issued 41,788 shares in 2000 and 21,405
shares in 1999 under the Employee Investment Plan.
Shares Reserved for Future Issue
At September 30, 2000 the Company had reserved the following shares of its
common stock for future issue:
<TABLE>
<S> <C>
Employee Stock Purchase Plan 373
1991 Stock Option Plan:
Qualified Options 171,173
Nonqualified Options 75,625
Piggy-Back Options 49,250
1995 Directors Stock Option Plan 48,000
Bank Loan Agreement 72,000
Subordinated Notes and related warrants 120,160
-------
536,581
=======
</TABLE>
Preferred Stock
The Company has the authority to issue one million shares of preferred
stock, $1.00 par value per share. At September 30, 2000 and October 2,
1999, no shares of preferred stock were issued or outstanding.
Private Placement Offering of Common Stock
During September 2000, under Section 4(2) of the Securities Act, the Company
commenced a private placement offering for up to 4,387,500 shares of $0.01
common stock at a price of $0.8547 per share. As of September 30, 2000 the
Company had sold $2,477,000 of the offering and expected to continue the
offering through January 2001.
<PAGE> 33
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
13. Net Loss Per Share:
Stock options for 250,136 shares, subordinated notes convertible into 55,694
shares and warrants for 136,466 shares were not included in fiscal 2000
because they would be anti-dilutive. Stock options for 168,100 shares,
preferred stock convertible into 196,422 shares, subordinated notes
convertible into 73,666 shares and warrants for 91,340 shares were not
included in fiscal 1999 because they would be anti-dilutive.
14. Income Taxes:
The components of income tax expense consists of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Current and deferred provision - Federal $0 $0
============
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net federal and state operating loss carryforwards $ 3,344,000 $ 2,761,000
Accrued expenses not currently deductible for tax purposes 147,000 158,000
General business tax credit carryforwards 128,000 128,000
Property and equipment (69,000) (102,000)
Allowance for doubtful accounts 56,000 49,000
Inventory, principally due to valuation differences and
overhead application 217,000 192,000
----------------------------
3,823,000 3,186,000
Less valuation allowance (3,823,000) (3,186,000)
----------------------------
Net deferred tax assets $ - $ -
============================
</TABLE>
The Company provided a valuation allowance equal to its deferred tax asset
in 2000 and 1999. Management considered the losses incurred in 1999 and
2000, the inability to predict land mobile sales in the post FCC auction
period, and uncertainties surrounding the Company's status as a going
concern. Based on the information available, management believes that a
valuation allowance equal to 100% of the deferred tax asset should continue
to be established at year end and increased the deferred tax valuation
allowance by $637,000 during fiscal 2000 and $590,225 during fiscal 1999.
Until such time as future taxable income is more likely than not the Company
will continue to reserve an appropriate portion of its deferred tax asset.
The reconciliation of income taxes at the federal statutory rate of 34% to
the income tax provision presented in the consolidated statement of
operations is presented below:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Income tax expense (benefit) at statutory rate $(646,000) $(625,000)
State income taxes (benefit),
net of federal tax effects (6,000) (5,000)
Other 15,000 39,775
Change in valuation allowance 637,000 590,225
-------------------------
Income tax expense $ - $ -
=========================
</TABLE>
<PAGE> 34
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
14. Income Taxes, Continued:
As of September 30, 2000, the Company has net federal operating loss
carryforwards of $8,740,000 which are available to reduce future federal
taxable income ($71,000 of which expire in fiscal 2008, $513,000 in fiscal
2009, $227,000 in fiscal 2010, $2,068,000 in 2012, $2,486,000 in 2013,
$1,679,000 in 2019 and the remainder in 2020). The Company also has general
business tax credit carryforwards of $54,000 which expire between 2006 and
2111, and alternative minimum tax credits of $74,000 that can be carried
forward indefinitely.
15. Operating Segment Information:
The Company adopted SFAS 131 "Disclosures about Segments of an Enterprise
and Related Information" in 1999. The Company is organized into three
primary operating segments according to its primary product categories:
"Land Mobile Communications", "Marine Communications" and "Marine
Instrumentation", and a less significant but separately identifiable segment
referred to as "Narrowband Operations." The Company's reportable segments
have been determined based on the nature of its operations and products
offered to customers.
The accounting policies of the segments are the same as those described in
Note 2, "Significant Accounting Policies." Segment results are measured
based on operating income (loss). Segment assets consist of assets that are
identified to reportable segments and reviewed by the chief operating
decision makers. Included in segment assets are accounts receivable,
inventory, prepaid expenses, other assets and property, plant and equipment.
<TABLE>
<CAPTION>
Net sales 2000 1999
<S> <C> <C>
Land mobile communications $ 1,477,166 $ 1,566,585
Marine communications 3,350,632 8,142,812
Marine instrumentation 1,840,111 2,399,012
Narrowband operations 98,339 8,850
----------------------------
Total consolidated net sales $ 6,766,248 $12,117,259
============================
<CAPTION>
Operating income (loss) 2000 1999
Land mobile communications $(1,344,361) $(1,545,502)
Marine communications (817,760) 868,437
Marine instrumentation (24,298) 81,420
Narrowband operations (195,700) (301,380)
All other (235,559) (217,370)
----------------------------
Total consolidated operating loss $(2,617,678) $(1,114,395)
============================
<CAPTION>
Segment assets 2000 1999
Land mobile communications $ 2,022,765 $ 2,248,497
Marine communications 1,629,452 2,677,641
Marine instrumentation 773,916 1,198,299
Narrowband operations 1,087,305 1,292,265
All other 212,810 181,058
----------------------------
Total consolidated assets $ 5,726,248 $ 7,597,760
============================
</TABLE>
<PAGE> 35
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
15. Operating Segment Information, Continued:
<TABLE>
<CAPTION>
Capital expenditures 2000 1999
<S> <C> <C>
Land mobile communications $ - $ 54,200
Marine communications - 537
Marine instrumentation - 538
Narrowband operations - -
All other 98,963 17,397
----------------------------
Total consolidated capital expenditures $ 98,963 $ 72,672
============================
<CAPTION>
Depreciation and amortization expense 2000 1999
Land mobile communications $ 51,230 $ 86,563
Marine communications 33,190 44,482
Marine instrumentation 11,143 17,674
Narrowband operations 181,746 198,293
All other 68,179 77,071
----------------------------
Total consolidated depreciation and
amortization expense $ 345,488 $ 424,083
============================
<CAPTION>
Geographic area net sales 2000 1999
United States $ 6,011,613 $10,089,734
Foreign 754,635 2,027,525
----------------------------
Total consolidated net sales $ 6,766,248 $12,117,259
============================
</TABLE>
No customer individually accounted for 10% or more of the Company's total
net sales in 2000 or 1999.
The Company does not have any significant property, plant and equipment
outside the United States.
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
The Information called for by Part III of Form 10-KSB (consisting of Item 10
- Directors and Executive Officers of the Registrant, Item 11 - Executive
Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Item 13 - Certain Relationships and Related Transactions) is
incorporated by reference from the Company's definitive proxy statement,
which will be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year to which this Report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and Financial Statement Schedules
The financial statements as set forth under Item 8 are filed as part
of this report.
Schedule II - Valuation and Qualifying Accounts
Report of Independent Certified Public Accountants on above listed
financial statement schedule.
Schedules not listed above have been omitted since they are either not
required, not applicable, or the information is included in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended
September 30, 2000:
July 25, 2000 - Standstill Agreement.
(c) List of Exhibits. The following exhibits are filed as a part of, or
incorporated by reference into, this report on Form 10-KSB.
Exhibit
Number Description
3.1 Articles of Incorporation, incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
July 1, 2000, Commission File No. 0-8936.
3.2 Bylaws, incorporated by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended July 1, 2000,
Commission File No. 0-8936.
<PAGE> 37
4 Subordinated Notes Agreement with exhibits, 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 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.
21 Subsidiaries
23 Consent of Independent Certified Public Accountants
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DATAMARINE INTERNATIONAL, INC.
By:/s/ DAVID C. THOMPSON
------------------------------
David C. Thompson
President, Chief Executive Officer and Director
By:/s/ JAN KALLSHIAN
------------------------------
Jan Kallshian
Chief Financial Officer
Date: January 5, 2001
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
By:/s/ STEPHEN W. FRANKEL
------------------------------
Stephen W. Frankel, Chairman of the Board
January 5, 2001
By:/s/ ARTHUR STASIK
------------------------------
Arthur Stasik, Director
January 5, 2001
By:/s/ JOSEPH STEPHENS
------------------------------
Joseph Stephens, Director
January 5, 2001
<PAGE> 39
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
----------------------------------------------------------------------------------------------------------------------------
Additions
Balance at ------------------------
Beginning of Charged to Charged to Deductions Balance at
DESCRIPTION Period Expenses Other (describe) End of Period
<S> <C> <C> <C> <C> <C>
Year ended September 30, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 153,743 37,355 15,647 (1) $ 175,451
Allowance for slow moving inventory 290,082 76,259 23,741 (2) 342,600
Valuation allowance for deferred tax asset 3,186,000 637,000 3,823,000
------------------------------------------------------------------------
Totals $3,629,825 113,614 637,000 (4) 39,388 $4,341,051
========================================================================
Product warranty liability $ 122,703 69,970 99,420 (3) $ 93,253
========================================================================
Year ended October 2, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 118,218 64,111 28,586 (1) $ 153,743
Allowance for slow moving inventory 242,249 69,781 21,948 (2) 290,082
Valuation allowance for deferred tax asset 2,595,775 590,225 3,186,000
------------------------------------------------------------------------
Totals $2,956,242 133,892 590,225 (4) 50,534 $3,629,825
========================================================================
Product warranty liability $ 137,328 119,733 134,358 (3) $ 122,703
========================================================================
<FN>
<F1> Uncollectible accounts written off, net of recoveries.
<F2> Obsolete material written off.
<F3> Warranty claims honored during the year.
<F4> Change in deferred tax asset valuation account charged or credited to
income tax expense.
</FN>
</TABLE>
<PAGE> 40
Report of Independent Certified Public Accountants on Schedules
To the Stockholders and Board of Directors of
Datamarine International, Inc. and Subsidiaries
In connection with our audit of the consolidated financial statements of
Datamarine International, Inc. and Subsidiaries referred to in our report
dated November 22, 2000, which is included in the Annual Report on Form 10-
KSB, we have also audited Schedule II for the years ended September 30, 2000
and October 2, 1999. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein. Our
report on the consolidated financial statements referred to above includes
an explanatory paragraph which discusses the consolidated financial
statements have been prepared assuming that the Company will continue as a
going concern.
/s/ GRANT THORNTON LLP
Seattle, Washington
November 22, 2000
