UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001 Commission File Number 0-8936
DATAMARINE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Washington 04-2454559
(State of Incorporation) (I.R.S. Employer Identification Number)
7030 220th SW, Mountlake Terrace, Washington 98043
(Address of principal executive offices)
(425)771-2182
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 2001
Common Stock, $.01 Par Value 5,781,071
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
------------------------ --------------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
---------- ---------- ----------- -----------
Net sales $1,122,389 $1,841,600 $ 2,197,970 $ 3,844,680
Cost of products sold 822,318 1,320,600 1,606,264 2,615,163
------------------------------------------------------
Gross profit 300,071 521,000 591,706 1,229,517
Operating expenses:
Research and development 313,809 358,005 673,522 695,976
Selling 360,553 533,837 830,233 1,078,730
General and administrative 287,436 283,633 604,602 573,642
Narrowband operations 71,595 71,162 142,249 148,404
------------------------------------------------------
Operating expenses 1,033,393 1,246,637 2,250,606 2,496,752
------------------------------------------------------
Operating loss (733,322) (725,637) (1,658,900) (1,267,235)
Interest expense 92,159 153,241 166,747 275,996
Other (income), net (109,999) (11,618) (118,547) (39,072)
------------------------------------------------------
Loss before income taxes (715,482) (867,260) (1,707,100) (1,504,159)
Income taxes - - - -
------------------------------------------------------
Net loss $ (715,482) $ (867,260) $(1,707,100) $(1,504,159)
======================================================
Net loss per share, basic $ (0.12) $ (0.51) $ (0.31) $ (0.89)
Net loss per share, diluted $ (0.12) $ (0.51) $ (0.31) $ (0.89)
Average shares outstanding,
basic and diluted 5,757,514 1,702,310 5,497,656 1,698,072
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, September 30,
2001 2000
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,734 $ 209,813
Accounts receivable, net of allowance of $186,425 and
$175,471, respectively 398,749 475,880
Inventories 3,479,337 3,557,410
Prepaid expenses and other current assets 37,586 119,264
----------------------------
Total current assets 3,933,406 4,362,367
Property, plant and equipment 4,994,541 4,994,541
Less accumulated depreciation 4,134,665 4,016,850
----------------------------
Property, plant and equipment, net 859,876 977,691
Other assets, net 387,863 386,190
----------------------------
Total assets $ 5,181,145 $ 5,726,248
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 249,384 $ -
Notes payable to related parties and others 951,947 912,000
Accounts payable 1,771,278 1,892,344
Accrued expenses 1,142,151 1,148,939
Current maturities of long-term debt and capital lease obligations 34,981 33,598
----------------------------
Total current liabilities 4,149,741 3,986,881
Long-term debt and capital lease obligations, less current maturities 92,958 111,555
----------------------------
Total liabilities 4,242,699 4,098,436
----------------------------
Redeemable preferred stock, $1 par value; none issued - -
Stockholders' equity:
Convertible preferred stock, $1 par value,
Authorized 5,000,000 shares;
including redeemable preferred stock; none issued - -
Common stock, $.01 par value,
Authorized 20,000,000 shares; 5,781,071 and 1,808,213
shares issued and outstanding, respectively 57,811 18,082
Capital in excess of par value 8,317,172 4,897,915
Common stock subscribed, $0.8547 per share 33,373 2,477,000
Unearned compensation (7,604) (9,979)
Accumulated deficit (7,462,306) (5,755,206)
----------------------------
Total stockholders' equity 938,446 1,627,812
----------------------------
Total liabilities and stockholders' equity $ 5,181,145 $ 5,726,248
============================
The accompanying notes are an integral part of these financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
---------------------------
March 31, April 1,
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net loss $(1,707,100) $(1,504,159)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 138,243 177,410
Gain on asset dispositions - (10,790)
Warrants issued for financing 72,091 62,315
Provision for losses on accounts receivable 10,974 20,912
Employee investment plan expense 34,419 28,440
Amortization of unearned compensation 6,745 8,562
Changes in operating assets and liabilities:
Accounts and notes receivable 50,407 79,056
Inventories, prepaid expenses and other current assets 159,751 390,305
Accounts payable and accrued expenses (127,854) 861,754
---------------------------
Net cash provided by (used in) operating activities (1,362,324) 113,805
INVESTING ACTIVITIES
Purchases of property, plant and equipment, including
self-constructed equipment - (5,462)
Disposition of property, plant and equipment - 12,015
Other (7,000) (15,932)
---------------------------
Net cash used in investing activities (7,000) (9,379)
FINANCING ACTIVITIES
Proceeds from sale of common stock 871,754 2,602
Proceeds (repayment) on bank borrowings, net 249,384 (43,394)
Proceeds from common stock subscribed 33,374 -
Proceeds from notes payable to related parties and others 47,000
Repayment on notes payable to related parties and others (7,053) (2,017)
Principal payments on capital lease
obligations and long-term debt (17,214) (40,923)
---------------------------
Net cash provided by (used in) financing activities 1,177,245 (83,732)
Increase (decrease) in cash and cash equivalents during period (192,079) 20,694
Cash and cash equivalents at beginning of period 209,813 39,189
---------------------------
Cash and cash equivalents at end of period $ 17,734 $ 59,883
===========================
Supplementary Cash Flow Information
Interest paid $ 47,686 $ 67,485
Proceeds of leases used to acquire assets - 93,501
The accompanying notes are an integral part of these financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited, consolidated, condensed quarterly financial
statements have been prepared in accordance with instructions to Form 10-QSB
and, therefore, do not include all information and footnotes normally
included in financial statements prepared in conformity with Generally
Accepted Accounting Principles ("GAAP"). The information furnished reflects
all adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for the fair statement of financial
position, results of operations and cash flows for the interim period. In
the opinion of management, they fairly represent the operating results of
the Company for the periods presented. The year-end condensed balance sheet
was derived from audited financial statements, but does not include all
disclosures required by GAAP. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for
the full year. Accounting policies used in fiscal 2001 are consistent with
those used in fiscal 2000. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the Company's annual report on Form 10-KSB for the year ended September 30,
2000.
2. Going Concern
As shown in the consolidated financial statements, the Company incurred a
net loss of $715,482 for the quarter compared to a loss of $867,260 in the
comparable quarter last year. 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 $2,883,000 at April 1, 2000 to $3,517,000 at March 31, 2001. The
recovery of land mobile revenues is currently being hindered by product
shortages due to the Company's working capital constraints.
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., and is currently negotiating the sale of one 220 MHz license and
related equipment. 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 April 2001 the Company made workforce reductions and instituted
employee wage concessions that are expected to reduce payroll and related
expenses by approximately $100,000 per month.
Losses have 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 during
fiscal 2000. During November 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 stock offering. That offering was concluded in March 2001 with
proceeds of $3,371,000. In April 2001 the Company announced the commencement
of a $1,000,000 private placement common stock offering. There can be no
assurance that the Company will sell all of the securities offered or raise
the total estimated proceeds.
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. The Company is
currently evaluating market conditions with respect to raising an additional
$2,500,000 in debt and/or equity financing. 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. Management is also considering
merging with another entity.
3. Inventory Components:
Inventories consisted of the following at:
March 31, 2001 September 30, 2000
-------------- ------------------
Finished Goods $ 836,102 $ 963,784
Work-In-Process 194,316 128,508
Raw Material 2,448,919 2,465,118
------------------------------
$3,479,337 $3,557,410
==============================
4. Income Taxes:
Management has considered recent losses, the inability to predict with
certainty what land mobile sales will be in the post FCC auction period, and
uncertainties surrounding the Company's status as a going concern. Based on
the information available, management believes that a valuation allowance
equal to 100% of the deferred tax asset should continue to be established.
Until such time as future taxable income is more likely than not, the
Company will continue to reserve an appropriate portion of its deferred tax
asset.
5. Loss Per Share:
Basic net loss per common share is based on the weighted average number of
common shares outstanding during the year. For the quarter ended March 31,
2001 basic and diluted loss per share was calculated on the basis of
5,781,071 common shares outstanding and 39,047 common shares subscribed.
Diluted loss per share is based on the weighted average number of common
shares and common stock equivalents outstanding. Common stock equivalents
include shares which would be issued upon exercise of stock options,
warrants or conversion of debt. Common stock equivalents are excluded
from the calculation when they are anti-dilutive.
Stock options for 274,824 shares, subordinated notes convertible into
162,766 shares and warrants for 169,301 common shares were not included in
the loss per share calculation for the quarter ended March 31, 2001 because
they would be anti-dilutive.
6. Operating Segment Information:
The Company is organized into three primary operating segments according to
its primary product categories: "Land Mobile Communications", "Marine
Communications" and "Marine Instrumentation", and a less significant but
separately identifiable segment referred to as "Narrowband Operations." The
Company's reportable segments have been determined based on the nature of
its operations and products offered to customers.
Three Months Ended Six Months Ended
------------------------------- -------------------------------
Net sales March 31, 2001 April 1, 2000 March 31, 2001 April 1, 2000
-------------- ------------- -------------- -------------
Land mobile communications $ 261,229 $ 270,102 $ 662,074 $ 794,658
Marine communications 650,577 970,850 1,067,045 1,901,393
Marine instrumentation 203,994 600,648 462,262 1,075,567
Narrowband operations 6,589 - 6,589 73,062
---------------------------------------------------------------
Total consolidated net sales $1,122,389 $1,841,600 $ 2,197,970 $ 3,844,680
===============================================================
Three Months Ended Six Months Ended
------------------------------- -------------------------------
Operating income (loss) March 31, 2001 April 1, 2000 March 31, 2001 April 1, 2000
-------------- ------------- -------------- -------------
Land mobile communications $ (312,738) $ (404,487) $ (635,080) $ (679,112)
Marine communications (240,743) (202,570) (607,844) (365,318)
Marine instrumentation (35,178) 15,234 (102,946) (21,946)
Narrowband operations (65,006) (71,162) (135,660) (75,342)
All other (79,657) (62,652) (177,370) (125,517)
---------------------------------------------------------------
Total consolidated operating loss (733,322) (725,637) (1,658,900) (1,267,235)
Interest expense 92,159 153,241 166,747 275,996
Other (income), net (109,999) (11,618) (118,547) (39,072)
---------------------------------------------------------------
Total consolidated net loss $ (715,482) $ (867,260) $(1,707,100) $(1,504,159)
===============================================================
Certain reclassifications have been made to the prior year financial
statements in order to conform to the current year's presentation, with no
impact on previously reported net loss or stockholders' equity.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Statements included in this report which are not historical in nature are
forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, and as such may
involve risks and uncertainties. This Quarterly Report on Form 10-QSB and
the Annual Report on Form 10-KSB contain certain detailed factors that could
cause the Company's actual results to materially differ from forward-looking
statements made by the Company.
Introduction
Datamarine International, Inc. and its subsidiaries ("we" or the "Company")
manufacture radio communications and navigation instrumentation products.
The Company is organized into three primary operating segments according to
its primary product categories: "Land Mobile Communications", "Marine
Communications" and "Marine Instrumentation." The Company also owns and
manages specialized mobile radio ("SMR") licenses in the 220 MHz radio
service, although revenues from such operations to date have been
immaterial. These operations are included in a segment referred to as
"Narrowband Operations."
Datamarine International, Inc. was incorporated in Massachusetts on April
23, 1969 and, effective April 11, 2000, changed its state of domicile to
Washington. All of the Company's product development and manufacturing
facilities are at its Mountlake Terrace, Washington location. The Company
has sales and service facilities on the east and west coasts of the United
States and in Chatswood, NSW, Australia. Marine communication products,
branded SEA, and marine instrumentation products, branded Datamarine, are
sold worldwide through approximately 500 dealers in the United States and
approximately 20 foreign countries.
Sales of narrowband communications products for the land mobile radio market
are made through the Company's wholly-owned subsidiary, SEA, Inc. ("SEA"),
to business users in the United States and Mexico. SEA has developed and
marketed narrowband radio equipment since 1984 and began selling its
narrowband equipment for use in the 220 MHz band in 1993.
On October 19,1992, the Federal Communications Commission ("FCC") conducted
a lottery which led to the issuance of approximately 3,500 Phase I licenses
for a new land mobile service in the 220-222 MHz band. The FCC adopted
challenging technical parameters for the equipment to be used in the 220 MHz
radio service. By establishing these parameters the FCC intended to
encourage the development of new spectrum-efficient technologies for land
mobile applications. This service is mandated to use narrowband technologies
which will result in a fivefold increase in the number of communications
channels as compared to conventional technologies. SEA was the first
manufacturer to receive FCC type acceptance for 220 MHz radio equipment. SEA
shipped its first 220 MHz radios in 1993.
As of September 30, 1996 ownership of Phase I licenses for locations which
had not met regulatory build-out requirements reverted to the Federal
government. The Federal Communications Commission ("FCC") conducted an
auction of Phase II licenses which commenced in September 1998 and concluded
in October 1998. The auction was for licenses covering "Economic Areas",
"Regions" and "Nationwide" areas as defined by the FCC. We expect the build-
out of Phase II licenses to increase demand for our higher margin 220 MHz
base station products.
During fiscal 1995 Narrowband Network Systems, Inc. ("NNS") was incorporated
in the state of Washington as a subsidiary of SEA, and SEA owns 97.5% of
NNS's outstanding stock. NNS was formed to participate in the business of
providing SMR services. NNS has entered into both "Management Agreements"
and "Operator Agreements" with the holders of 220 MHz licenses granted by
the FCC related to SMR services in approximately 47 market areas across the
United States. Management Agreements require NNS to construct, develop and
operate SMR systems in certain markets. Operator Agreements require NNS to
provide licenses, system facilities and "SMR Operators" in certain markets.
The Management Agreements typically allow NNS to acquire the license
holder's interest in exchange for a percentage of gross receipts from the
system and a percentage of any profit realized by NNS upon the system's
ultimate disposition. The Operator Agreements typically give NNS a
contractual percentage of system revenue based on the level of support
provided to each system. The Company has met all regulatory build-out
requirements related to its licenses. Because NNS has only limited
operations, revenues and associated cash expenses currently account for only
a small part of the Company's overall business.
Products and Marketing
Land Mobile Communications - The Company's narrowband land mobile radio
system products have been type accepted by the FCC for use in the 220 MHz
radio service. These products consist of hand held, mobile and base station
components, utilizing the narrowband technology, an enhanced form of single
sideband that is ideal for the 5 KHz channel width used in the 220 MHz radio
service, and were developed for sale to business users of private land
mobile radio services. The narrowband technology helps solve the problem of
frequency congestion by allowing five narrowband channels to be operated
within the same spectrum as would presently be utilized by one 25 KHz FM
channel.
Marine Communications - The SEA marine communications products are high
performance radios used on commercial vessels, fishing vessels and ocean-
going yachts. The product line currently consists of 28 products with
suggested list prices between $765 and $40,000. The SEA products include
HF/SSB and VHF/FM radios, Satcom C, Weather fax, Emergency distress radio
beacons (EPIRBS), Search and rescue transponders (SARTS) and Global Maritime
Distress and Safety Systems (GMDSS).
Marine Instrumentation - Marine instrumentation products are sold primarily
to the recreational boating market. The products are well established in the
marketplace with up-to-date instruments for each type of pleasure craft:
small boats and yachts; sail and power; inshore and offshore. The Datamarine
product line currently consists of 28 products sold under the DART, LINK,
Corinthian and ChartLINK names, with suggested list prices between $400 and
$6,000. The Datamarine products include depth sounders, knotmeters and water
temperature instruments, wind speed and direction instruments, integrated
instruments, and electronic chart plotters.
International Sales
Foreign sales account for approximately 10% of our revenue. Marine
communications revenues account for much of the foreign activity because
many of the Company's GMDSS products are sold outside the United States.
Sales of land mobile products are generally within the United States with
some sales to Mexico.
Results of Operations
The following table sets forth the components of sales and gross profit by
product line for the quarter ended March 31, 2001 and the comparable quarter
in the prior fiscal year.
Sales Gross Profit
------------------------ ---------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
------------------------ ---------------------
$ 261,229 $ 270,102 Land Mobile Communications $(25,632) $(28,812)
650,577 970,850 Marine Communications 214,185 319,292
203,994 600,648 Marine Instrumentation 104,929 230,520
6,589 - Narrowband Operations 6,589 -
------------------------ ---------------------
$1,122,389 $1,841,600 Total $300,071 $521,000
======================== =====================
Sales order backlogs at March 31, 2001 were as follows: Land Mobile
Communications $3,517,000, Marine Communications $709,000 and Marine
Instrumentation $171,000. The land mobile backlog includes orders for
repeater systems and new mobile radio products, deliveries of which are
expected to take place over an extended period of time. Approximately
$2,336,000 of the land mobile backlog represents orders for the Company's
model 604 mobile radio, deliveries of which are expected to take place
throughout the year.
The following table sets forth income and expense items as a percentage of
net sales for the quarter, and the percentage change in those items from the
comparable quarter in the previous two years.
Income and Expense Items Percentage
as a Percentage of Net Sales Increase (Decrease)
---------------------------- -------------------
2000 1999
March 31, April 1, to to
2001 2000 2001 2000
---------------------------- -------------------
100% 100% Net sales (39)% (48)%
73 72 Cost of products sold (38) (38)
27 28 Gross profit (42) (62)
92 68 Operating expenses (17) (9)
(65) (39) Operating loss 1 n.m.
(8) (8) Interest expense (40) (28)
(64) (47) Loss before taxes (18) 292
(64)% (47)% Net loss (18)% 292%
Net sales decreased by $719,211 or 39% compared to the same quarter in the
prior fiscal year. Net sales of the Company's land mobile products decreased
by $8,873 or 3%. Net sales of the Company's marine communications systems
decreased by $320,273 or 33%. Net sales of the Company's marine
instrumentation systems decreased by $396,654 or 66%. Working capital
constraints have caused raw material shortages throughout the Company's
product lines and contributed significantly to the decline in sales.
Land mobile revenues during the quarter were comprised primarily of mobile
radios and management expects that trend will continue until Phase II
license holders begin to take delivery of repeater systems. The auction of
Phase II licenses concluded in October 1998 and successful bidders received
their licenses in March 1999. Although the Company's land mobile order
backlog continues to grow, customers have been slow to take delivery of new
repeater systems. Orders for the model 604 radio are very strong, and
management expects the current backlog of approximately 6000 units to be
delivered over the next year, commencing in the third quarter of fiscal
2001. Management continues to believe that the build-out of Phase II
licenses will provide an opportunity for significant revenue growth in the
narrowband product line.
Sales of marine communications products were significantly lower compared to
the comparable quarter in the prior year. Raw material shortages were the
primary reason for the decline in sales. Shipments of the new SEA157 VHF
radio and SEA857 Loudhailer have commenced and are expected to be very
strong if production requirements can be met.
Marine instrumentation sales decreased compared to the comparable quarter in
the prior year, due primarily to working capital constraints and reduced
advertising and sales promotion.
Revenues from narrowband operations were $6,589 during the current quarter.
Narrowband revenues are derived from the Company's share of SMR operations
at 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 of fiscal 2000,
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 will be recognized at such
time as the amounts and collectibility can be reasonably estimated.
Gross profit was $300,071 (27% of net sales), as compared to $521,000 (28%
of net sales) in the same quarter last year, a decrease of $220,929 or 42%.
The gross profit on land mobile products was $(25,632) (-10% of such sales),
as compared to $(28,812) (-11% of such sales) in the same quarter last year,
an increase of $3,180. Land mobile gross profit margin was low because
sales were comprised primarily of mobile radios. Margins should
improve as higher volume shipments decrease unit costs on products
manufactured offshore. 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 communications systems was $214,185 (33% of such
sales), as compared to $319,292 (33% of such sales) in the same quarter last
year, a decrease of $105,107 or 33%. Product mix was comparable to the prior
year and margins continue to be lower than normal as a result of higher costs
attributable to lower production rates.
The gross profit on marine instrumentation systems was $104,929 (51% of such
sales), as compared to $230,520 (38% of such sales) in the same quarter last
year, a decrease of $125,591 or 54%. Improvement in gross margin rates was
due to a more favorable product mix.
Operating expenses were $1,033,393 (92% of net sales), as compared to
$1,246,637 (68% of net sales) in the same quarter last year, a decrease of
$213,244 or 17%. Operating expenses were lower than last year, but
constituted a larger percentage of significantly lower net sales.
Engineering expenses decreased 12%. Engineering wage expense, consumable
supplies and engineering services related to new product development were
all lower. Total selling expenses declined $173,284 or 32%. Expenses such as
commissions and warranty provisions which are tied closely to sales declined
with the overall decrease in revenues. Marketing department wages,
advertising and product royalty expense also declined. Administrative
expenses of $287,436 were comparable to the previous year. Narrowband
expenses are comprised primarily of site rental and depreciation. A small
increase in site rental expense was offset by lower depreciation as a result
of asset disposals during the prior year.
Interest expense decreased $61,082 or 40% from the same quarter last year.
Lower average loan and subordinated debt balances offset the increased
interest rate on bank borrowings. Common stock warrants are typically issued
in connection with the extension of the Company's senior and subordinated
debt. The fair value of common stock warrants is charged to interest expense
over the term of the extension.
Other income, net, for the current quarter was $109,999 compared to $11,618
in the comparable quarter last year. Other income in both the current and
previous year's quarter is comprised of revenue from non-recurring
engineering services.
Income taxes were zero for 2001 and 2000 because the Company fully reserves
its deferred tax asset.
Liquidity and Capital Resources
On March 31, 2001, the Company's principal sources of liquidity consisted of
approximately $18,000 in cash and equivalents. Net cash used in operating
activities for the six months ended March 31, 2001 was $1,362,324, an
increase of $1,476,129 from net cash provided by operating activities for
the same period in the prior year. Net cash provided by financing activities
was $1,177,245, the source of which was new bank borrowings and sales of
common stock. At March 31, 2001 the sales order backlog stood at $4,397,000.
Of the total March 31, 2001 backlog, land mobile products represented
$3,517,000, marine communications products represented $709,000 and marine
instrumentation products represented $171,000.
On November 1, 2000 the Company entered into an agreement for a variable
line of credit for up to $1,000,000 with interest payable monthly at 9.0%
over prime (17% at March 31, 2001). The agreement provides for advances
based on accounts receivable balances. At March 31, 2001 the balance
outstanding on the line was $249,384, the maximum amount available at that
time. The line is collateralized by all of the Company's assets.
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 $2,883,000 at April 1, 2000 to $3,517,000 at March 31, 2001. The
recovery of land mobile revenues is currently being hindered by product
shortages due to the Company's working capital constraints.
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., and is currently negotiating the sale of one 220 MHz license and
related equipment. 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 April 2001 the Company made workforce reductions and instituted
employee wage concessions that are expected to reduce payroll and related
expenses by approximately $100,000 per month.
Losses have 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 during
fiscal 2000. During November 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 stock offering. That offering was concluded in March 2001 with
proceeds of $3,371,000. In April 2001 the Company announced the commencement
of a $1,000,000 private placement common stock offering. There can be no
assurance that the Company will sell all of the securities offered or raise
the total estimated proceeds.
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. The Company is
currently evaluating market conditions with respect to raising an additional
$2,500,000 in debt and/or equity financing. 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. Management is also considering
merging with another entity.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders was held March 21, 2001 at the
Company's offices in Mountlake Terrace, Washington. All matters
submitted to a vote of the Company's shareholders were described in
the Company's proxy statement dated February 26, 2001.
(b) Matters submitted to a vote of the shareholders included:
(1) The election of Directors. Each of Gerald E. Setka, Arthur P. Stasik,
Joseph L. Stephens and David C. Thompson were elected.
(2) A proposal to adopt the Datamarine International, Inc. 2001 Stock
Incentive Plan. The proposal was approved by the following vote.
For 3,439,992
Against 92,421
Abstain 10,125
Broker non-vote 677,207
(3) A proposal to amend the Company's Articles of Incorporation to
increase the number of authorized shares of Preferred Stock from
1,000,000 shares to 5,000,000 shares. The proposal was approved by the
following vote.
For 3,484,991
Against 49,195
Abstain 8,352
Broker non-vote 677,207
(4) A proposal to amend the Company's Articles of Incorporation giving the
Board of Directors authority to issue and set the rights and
preferences for one or more series of Preferred Stock. The proposal
was approved by the following vote.
For 3,483,361
Against 48,944
Abstain 10,233
Broker non-vote 677,207
(5) Ratification of the selection by the Board of Directors of Grant
Thornton LLP as the Company's independent auditors for 2001. The
proposal was approved by the following vote.
For 4,210,630
Against 4,837
Abstain 4,278
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed as a part of, or
incorporated by reference into, this report on Form 10-QSB.
3.1 Articles of Incorporation, 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.
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.
10.4 Datamarine International, Inc. 2000 Employee Stock Purchase Plan. +
10.5 Datamarine International, Inc. 2001 Stock Incentive Plan. +
[FN]
+ Filed herewith.
(b) The following reports on Form 8-K were filed during the quarter ended
March 31, 2001. Form 8-K dated February 27, 2001. Resignation of a
Director.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datamarine International, Inc.
(Registrant)
Date: May 18, 2001 /s/ JAN KALLSHIAN
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Jan Kallshian
Chief Financial Officer