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 June 30, 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 June 30, 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 Nine Months Ended
-------------------------- ----------------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
Net sales $ 556,264 $ 1,853,095 $ 2,754,234 $ 5,697,775
Cost of products sold 483,691 1,263,181 2,089,955 3,878,344
------------------------------------------------------------
Gross profit 72,573 589,914 664,279 1,819,431
Operating expenses:
Research and development 253,656 326,234 927,178 1,022,210
Selling 267,109 430,188 1,097,342 1,508,918
General and administrative 361,501 263,805 966,103 837,447
Narrowband operations 73,862 70,163 216,111 218,567
------------------------------------------------------------
Operating expenses 956,128 1,090,390 3,206,734 3,587,142
------------------------------------------------------------
Operating loss (883,555) (500,476) (2,542,455) (1,767,711)
Interest expense 70,938 143,672 237,685 419,668
Other (income), net (300,017) (35,891) (418,564) (74,963)
------------------------------------------------------------
Loss before income taxes (654,476) (608,257) (2,361,576) (2,112,416)
Income taxes - - - -
------------------------------------------------------------
Net loss $(654,476) $ (608,257) $(2,361,576) $(2,112,416)
============================================================
Net loss per share, basic $ (0.11) $ (0.36) $ (0.42) $ (1.24)
Net loss per share, diluted $ (0.11) $ (0.36) $ (0.42) $ (1.24)
Average shares outstanding,
basic and diluted 5,838,410 1,712,291 5,611,241 1,702,811
The accompanying notes are an integral part of these financial statements.
2
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, September 30,
2001 2000
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,535 $ 209,813
Accounts receivable, net of allowance of $189,082 and
$175,471, respectively 199,149 475,880
Inventories 3,329,328 3,557,410
Prepaid expenses and other current assets 86,067 119,264
----------------------------
Total current assets 3,933,406 4,362,367
Property, plant and equipment 4,994,541 4,994,541
Less accumulated depreciation 4,193,572 4,016,850
----------------------------
Property, plant and equipment, net 800,969 977,691
Other assets, net 378,431 386,190
----------------------------
Total assets $ 4,800,479 $ 5,726,248
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 83,185 $ -
Notes payable to related parties and others 1,046,025 912,000
Accounts payable 1,504,170 1,892,344
Accrued expenses 1,558,408 1,148,939
Current maturities of long-term debt and capital
lease obligations 36,259 33,598
----------------------------
Total current liabilities 4,228,047 3,986,881
Long-term debt and capital lease obligations, less
current maturities 83,468 111,555
----------------------------
Total liabilities 4,311,515 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 8,477,928 4,897,915
Common stock subscribed, $0.8547 per share 76,424 2,477,000
Unearned compensation (6,417) (9,979)
Accumulated deficit (8,116,782) (5,755,206)
----------------------------
Total stockholders' equity 488,964 1,627,812
----------------------------
Total liabilities and stockholders' equity $ 4,800,479 $ 5,726,248
============================
The accompanying notes are an integral part of these financial statements.
3
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
------------------------------
June 30, July 1,
2001 2000
-------- -------
OPERATING ACTIVITIES
Net loss $(2,361,576) $(2,112,416)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 207,364 270,266
Gain on asset dispositions - (16,186)
Warrants issued for financing 93,940 98,717
Provision for losses on accounts receivable 13,774 31,114
Employee investment plan expense 33,120 42,421
Amortization of unearned compensation 146,058 9,749
Changes in operating assets and liabilities:
Accounts and notes receivable 183,876 231,438
Inventories, prepaid expenses and other current
assets 261,279 680,427
Other assets (15,750) (132,092)
Accounts payable and accrued expenses 130,376 1,310,166
-----------------------------
Net cash provided by provided by (used in) operating
activities (1,307,539) 413,604
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) (19,047)
-----------------------------
Net cash used in investing activities (7,000) (12,494)
FINANCING ACTIVITIES
Proceeds from sale of common stock 873,053 3,903
Proceeds (repayment) on bank borrowings, net 83,185 (339,534)
Proceeds from common stock subscribed 76,424 -
Proceeds from notes payable to related parties and others 112,221 -
Repayment on notes payable to related parties and others (8,196) (2,300)
Principal payments on capital lease obligations and
long-term debt (25,426) (64,519)
-----------------------------
Net cash provided by (used in) financing activities 1,111,261 (402,450)
Decrease in cash and cash equivalents during period (203,278) (1,340)
Cash and cash equivalents at beginning of period 209,813 39,189
-----------------------------
Cash and cash equivalents at end of period $ 6,535 $ 37,849
=============================
Supplementary Cash Flow Information
Interest paid $ 68,810 $ 109,830
Proceeds of leases used to acquire assets - 93,501
The accompanying notes are an integral part of these financial statements.
4
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 $654,476 for the quarter compared to a loss of $608,257 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 $2,592,000 at July 1, 2000 to $3,458,000 at June 30, 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. During the year ended September 30, 2000 the Company entered
into agreements to sell 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 reduced cash payroll and related expenses by
approximately $100,000 per month. As part of the plan, employees were
asked to make wage concessions for a ten-week period, in exchange for
future compensation payable in both cash and Company stock options. The
estimated cost of the cash and stock incentives as of June 30, 2001 is
$184,000 and $138,000, respectively, and was expensed during the quarter.
The cash portion of the incentive is payable when the Company has the
ability to do so.
5
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. The
$1,000,000 private placement was canceled when the Company signed a letter
of intent to sell $6,000,000 in equity to High Desert Partners LLP ("HDP")
in June 2001. HDP failed to meet the extended funding commitment date of
July 31, 2001 and there can be no assurance that the Company will sell 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 additional
capital through 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:
June 30, 2001 September 30, 2000
------------- ------------------
Finished Goods $ 809,077 $ 963,784
Work-In-Process 193,859 128,508
Raw Material 2,326,392 2,465,118
------------------------------
$3,329,328 $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 June 30,
2001 basic and diluted loss per share was calculated on the basis of
5,781,071 common shares outstanding and 89,416 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.
6
In-the-money stock options for 10,000 shares, subordinated notes convertible
into 205,286 shares and warrants for 189,454 common shares were not included
in the loss per share calculation for the quarter ended June 30, 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 Nine Months Ended
------------------------------ ------------------------------
Net sales June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
------------- ------------ ------------- ------------
Land mobile communications $ 140,312 $ 446,302 $ 802,386 $ 1,240,960
Marine communications 262,324 927,203 1,329,369 2,828,596
Marine instrumentation 147,277 461,550 609,539 1,537,117
Narrowband operations 6,351 18,040 12,940 91,102
--------------------------------------------------------------
Total consolidated net sales $ 556,264 $ 1,853,095 $ 2,754,234 $ 5,697,775
==============================================================
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
Operating income (loss) June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
------------- ------------ ------------- ------------
Land mobile communications $(300,463) $ (273,227) $ (935,543) $ (952,339)
Marine communications (362,507) (150,390) (970,351) (515,708)
Marine instrumentation (98,685) 20,105 (201,631) (1,841)
Narrowband operations (67,511) (52,123) (203,171) (127,465)
All other (54,389) (44,841) (231,759) (170,358)
--------------------------------------------------------------
Total consolidated operating
loss (883,555) (500,476) (2,542,455) (1,767,711)
Interest expense 70,938 143,672 237,685 419,668
Other (income), net (300,017) (35,891) (418,564) (74,963)
--------------------------------------------------------------
Total consolidated net loss $(654,476) $ (608,257) $(2,361,576) $(2,112,416)
==============================================================
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.
7. Australia Sales Office:
During the quarter management decided to close the small sales and service
office the Company maintains through its 60% owned subsidiary located in
New South Wales, Australia. The Company has accrued the estimated employee
severance and corporate dissolution expenses of $30,000.
7
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
8
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
9
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 June 30, 2001 and the comparable quarter
in the prior fiscal year.
Sales Gross Profit
------------------------ -----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- ------- -------- -------
$140,312 $ 446,302 Land Mobile Communications $(71,270) $ 79,449
236,324 927,203 Marine Communications 56,163 308,685
147,277 461,550 Marine Instrumentation 81,329 183,740
6,351 18,040 Narrowband Operations 6,351 18,040
------------------------ -----------------------
$556,264 $1,853,095 Total $ 72,573 $589,914
======================== =======================
Sales order backlogs at June 30, 2001 were as follows: Land Mobile
Communications $3,458,000, Marine Communications $868,000 and Marine
Instrumentation $147,000. 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
$2,276,000 of the land mobile backlog represents orders for the Company's
model 604 mobile radio, deliveries of which are expected to take place over
the next twelve months. Deliveries are currently hindered by inventory
shortages as a result of the Company's working capital position.
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 as Percentage
a Percentage of Net Sales Increase (Decrease)
--------------------------- -------------------
2000 1999
June 30, July 1, to to
2001 2000 2001 2000
-------- ------- ---- ----
100% 100% Net sales (70)% (42)%
87 68 Cost of products sold (62) (39)
13 32 Gross profit (88) (48)
172 59 Operating expenses (12) (21)
(159) (27) Operating loss 77 (100)
(13) (8) Interest expense (51) (14)
(118) (33) Loss before taxes 8 46
(118)% (33)% Net loss 8% 46%
Net sales decreased by $1,296,831 or 70% compared to the same quarter in
the prior fiscal year. Net sales of the Company's land mobile products
decreased by $305,990 or 69%. Net sales of the Company's marine
communications systems decreased by $664,869 or 72%. Net sales of the
Company's marine instrumentation systems decreased by $314,273 or 68%.
Working capital
10
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 5500 units to be
delivered over the next twelve months year. 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 $6,351 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 $72,573 (13% of net sales), as compared to $589,914 (32%
of net sales) in the same quarter last year, a decrease of $573,341 or 88%.
The gross profit on land mobile products was $(71,270) (-51% of such
sales), as compared to $79,449 (18% of such sales) in the same quarter last
year, a decrease of $150,719. Land mobile gross profit margin was low
because sales were comprised primarily of mobile radios as compared to more
profitable repeaters. 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 $56,163 (21% of such
sales), as compared to $308,685 (33% of such sales) in the same quarter
last year, a decrease of $252,522 or 82%. Gross margin percentages were
lower due to a less favorable product mix and higher costs attributable to
lower production rates.
The gross profit on marine instrumentation systems was $81,329 (55% of such
sales), as compared to $183,740 (40% of such sales) in the same quarter
last year, a decrease of $102,411 or 56%. Improvement in gross margin
rates was due to a more favorable product mix.
11
Operating expenses were $956,128 (172% of net sales), as compared to
$1,090,390 (59% of net sales) in the same quarter last year, a decrease of
$134,262 or 12%. Operating expenses were lower than last year, but
constituted a larger percentage of significantly lower net sales.
Engineering expenses decreased $72,578 or 22%. Engineering wage expense
and outside engineering services related to new product development were
lower. Total selling expenses declined $163,079 or 38%. Expenses such as
commissions and warranty provisions which are tied closely to sales
declined with the overall decrease in revenues. Marketing department
wages, outside consulting and product royalty expense also declined.
Administrative expenses increased $97,696 or 37%. Administrative expense
for the quarter includes approximately $138,000 in stock incentive
compensation (related to the April 2001 wage concessions), otherwise
administrative expenses declined approximately $38,000. Narrowband
expenses are comprised primarily of site rental and depreciation and were
comparable to the same period last year.
Interest expense decreased $72,734 or 51% from the same quarter last year,
due primarily to lower average senior and subordinated debt balances.
Common stock warrants are typically issued in connection with the extension
of the Company's 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 $300,017 compared to $35,891
in the comparable quarter last year. Other income increased significantly
as a result of an account adjustment made by one of the Company's trade
suppliers. Both the current and previous year's quarter also included
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 June 30, 2001, the Company's principal sources of liquidity consisted of
approximately $6,000 in cash and equivalents. Net cash used in operating
activities for the nine months ended June 30, 2001 was $1,307,539, an
increase of $1,721,143 from net cash provided by operating activities for
the same period in the prior year. Net cash provided by financing
activities was $1,111,261, the source of which was new borrowings and sales
of common stock. At June 30, 2001 the sales order backlog stood at
$4,473,000. Of the total June 30, 2001 backlog, land mobile products
represented $3,458,000, marine communications products represented $868,000
and marine instrumentation products represented $147,000.
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 (15.75% at June 30, 2001). The agreement provides for advances
based on accounts receivable balances. At June 30, 2001 the balance
outstanding on the line was $83,185, 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 $2,592,000 at
12
July 1, 2000 to $3,458,000 at June 30, 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. During the year ended September 30, 2000 the Company entered
into agreements to sell 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 reduced cash payroll and related expenses by
approximately $100,000 per month. As part of the plan, employees were
asked to make wage concessions for a ten-week period, in exchange for
future compensation payable in both cash and Company stock options. The
estimated cost of the cash and stock incentives as of June 30, 2001 is
$184,000 and $138,000, respectively, and was expensed during the quarter.
The cash portion of the incentive is payable when the Company has the
ability to do so.
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. The
$1,000,000 private placement was canceled when the Company signed a letter
of intent to sell $6,000,000 in equity to High Desert Partners LLP ("HDP")
in June 2001. HDP failed to meet the extended funding commitment date of
July 31, 2001 and there can be no assurance that the Company will sell 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 additional
capital through 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.
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PART II - OTHER INFORMATION
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,
incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 2001.
10.5 Datamarine International, Inc. 2001 Stock Incentive Plan,
incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 2001.
(b) The following reports on Form 8-K were filed during the quarter ended
June 30, 2001. Form 8-K dated April 10, 2001. Letter of intent to acquire
220 MHz systems.
Form 8-K dated June 21, 2001. Letter of intent to make equity
private placement.
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: August 20, 2001 /s/ JAN KALLSHIAN
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Jan Kallshian
Chief Financial Officer