ITEM 1. BUSINESS
Introduction
Datamarine International, Inc. and its subsidiaries (collectively the "Company") manufacture radio communications and navigation instrumentation products. Presently, the Company's primary operations are in a single industry segment, namely electronics. The Company also owns and manages specialized mobile radio ("SMR") licenses in the 220 MHz radio service, although such operations to date have been negligible.
Datamarine International, Inc. was incorporated in Massachusetts on April 23, 1969. All of the Company's product development and manufacturing facilities are at its Mountlake Terrace, Washington location. It has sales and service facilities on the East and West coasts of the United States and in Sydney, Australia. Sales of marine communication products, branded SEA, and marine instrumentation products, branded Datamarine, are made worldwide through approximately 300 dealers in the United States and dealers in 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 nationwide. SEA has developed and marketed narrowband radio equipment since 1984 and began selling its newest line of narrowband equipment for use in the 220 MHz band in the fourth quarter of FY1993. Sales to the land mobile radio market were 58% of consolidated sales in FY1996 compared to 45% in 1995 and 36% in 1994.
On October 19,1992, the Federal Communications Commission ("FCC") conducted a lottery which has led to the issuance of approximately 3,500 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 July 1993.
As of September 30, 1996 ownership of licenses for locations which had not met regulatory build-out requirements reverted to the Federal government. The FCC intends to conduct an auction for new licenses, but specific rules and timing for the auction have not been set. No new licenses will be issued until the auction is completed. Until such time as new licenses are issued, demand for the Company's higher margin base station products will be lower than in previous years.
During FY1995 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 45 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 commenced only limited operations at the end of 1995, revenues and associated expenses were negligible during the years ended September 28, 1996 and September 30, 1995.
Foreign sales accounted for approximately 6% of the Company's consolidated sales in FY1996, 8% in FY1995 and 14% in FY1994. Foreign sales are declining as a percentage of total sales because narrowband products are only sold domestically.
Products and Marketing
The composition of the Company's sales by product line was as follows:
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 of between $765 and $5,505. 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 Marine Distress and Safety Radio 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 15 products sold under the DART, LINK, Corinthian and ChartLINK names, with suggested list prices of between $400 and $3900. The Datamarine products include depth sounders, knotmeters and water temperature instruments, wind speed and direction instruments, integrated instruments, and video chart displays.
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 $5,412,000 at September 28, 1996, compared to $9,794,000 at September 30, 1995. Of the total September 28, 1996 backlog, land mobile products represented $5,208,000. Land mobile orders are subject to cancellation under certain conditions and the Company does not consider the land mobile backlog to be firm. Sales expected to be realized by filling orders comprising the land mobile backlog are highly dependent upon FCC actions as described above.
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
Depending upon the product, they are sold with either a one-year or two-year parts and labor limited warranty.
Research and Development
The Company is committed to a continuing program of designing new products and improving the product designs presently in production. During FY 1996, FY1995 and FY1994 the Company spent approximately $1,235,000, $1,420,000 and $1,414,000, respectively, on Company-sponsored research and development for continuing operations and had approximately 16 full-time employees engaged in such 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 110 full-time employees on September 28, 1996. This compares to 100 on September 30, 1995 and 135 on October 1, 1994. 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.
ITEM 2. PROPERTIES
The manufacturing and general administrative offices of the Company are located in a 28,500 square-foot building in Mountlake Terrace, Washington, pursuant to a lease which expires in June 1998. During FY1995 the Company renegotiated its lease at the Pocasset, Massachusetts facility through June 1997 where the service facility for the marine instrumentation product line now occupies 5000 square-feet. The sales and warehousing operation of a majority-owned subsidiary, Datamarine International Australia, PTY, LTD., is located in a leased 2,500 square-foot masonry steel building in Artarmon, New South Wales, Australia. A subsidiary, Nautical Realty A/S, owns a 20,000 square-foot steel and concrete industrial building, subject to mortgage, located in Sorup, Denmark, which is leased under a twelve-year contract, including extensions, expiring in 1998 to an unaffiliated tenant. All of the above-mentioned facilities are well maintained and suitable and adequate for the present activities therein.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On December 12, 1996 the Company filed a collection action against one of its customers for accounts totaling approximately $132,000 at September 28, 1996. On December 23, 1996 the same customer filed suit against the Company alleging breach of certain express and implied warranty and contractual obligations, and negligent representation with respect to sales of the Company's narrowband products. The suit seeks $6,000,000 - $9,000,000 in damages and unspecified amounts for interest and other costs. The ultimate outcome of the litigation cannot presently be determined. The Company is not aware of any other legal proceedings or claims.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended September 28, 1996, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded Over-The-Counter and is quoted on the NASDAQ National Market System under the ticker symbol "DMAR". As of December 20, 1996, there were approximately 1000 stockholders of record.
The accompanying table shows the range of trading prices for the past two years by fiscal quarter:
No dividends have been declared or paid by the Company. The Company currently intends to retain its earnings to fund the development and growth of its business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
All of the historical selected financial data set forth below has been derived from audited financial statements of the Company.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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 such Statements, presented elsewhere in this report.
Fiscal 1996 compared to 1995
Net sales increased by $1,803,344 or 12%, to $16,590,002 for 1996 from $14,786,658 in 1995. Net sales of the Company's narrowband products increased by $2,888,832, or 43%, to $9,531,816 for 1996 from $6,642,984 in 1995. Net sales of the Company's marine radio systems decreased by $285,425, or 5%, to $5,011,520 for 1996 from $5,296,945 in 1995. Net sales of the Company's recreational marine instrumentation systems declined by $800,063, or 28%, to $2,046,666 for 1996 from $2,846,729 in 1995.
Sales of narrowband products are greatly influenced by the regulatory environment, principally license and operating rules issued by the FCC. The Company cannot control, nor reliably predict which rules the FCC will issue and the effective dates thereof, although management expects future revenue growth from this product line. Sales of marine radio systems and are expected to improve slightly in the upcoming year due to higher sales of existing products and sales of new products. Sales of marine instrumentation systems have declined over the last four years and are expected to improve as the Company introduces new products in 1997.
Gross profit for 1996 was $7,034,403 (42% of net sales), as compared to $5,657,965 (38% of net sales) in 1995, an increase of $1,376,438 or 24%. The gross profit on narrowband products for 1996 was $3,718,826 (39% of such sales), as compared to $3,003,527 (45% of such sales) in 1995, an increase of $715,299 or 24%. Margins on narrowband products fluctuate based on product mix, and generally are higher on base station products than on mobile radios. In the coming years, narrowband sales will likely be comprised of a greater proportion of mobile radios rather than base stations, and thus will likely achieve a lower overall percentage margin than was achieved for 1996. The gross profit on marine radio systems for 1996 was $2,221,079 (44% of such sales), as compared to $2,156,023 (41% of such sales), an increase of $65,056 or 3%. Margins on marine communications products were slightly higher in 1996 due to sales of the new GMDSS products. The gross profit on marine instrumentation systems for 1996 was $1,094,978 (53% of such sales), as compared to $498,415 (18% of such sales), an increase of $596,083 or 120%. Margins on marine instrumentation products were higher due to lower production costs realized by the move of marine instrumentation production to the Mountlake Terrace, Washington facility.
Operating expenses were $5,627,499 (34% of net sales) in 1996, as compared to $6,271,412 (42% of net sales) in 1995, a decrease of $643,913 or 10%. 1995 operating expenses included a restructuring charge of $686,458. Comparable operating expenses excluding the 1995 restructuring charge increased $42,545. Selling expenses increased $218,336, due mainly to sales commissions on higher sales volume. Administrative expenses increased $9,099. Lower professional fees and savings from the consolidation of administrative operations in Mountlake Terrace were offset by depreciation expense in NNS.
During 1995 the Company established a special charge of $686,458 in connection with a restructuring program designed to improve productivity and permanently reduce costs. The Company moved corporate administrative functions and production of its Datamarine product line to its facility in Mountlake Terrace, Washington. Costs associated with the restructuring included the write down of leasehold improvements, product tooling and equipment to net realizable values, the phase out of certain products, employee termination benefits, and the costs to settle the long-term lease of the Massachusetts facility.
The restructuring was announced effective January 1995 and was substantially completed by December 31, 1995. The program resulted in the permanent reduction of approximately 30 employees and 35,000 square feet of manufacturing and office space.
The restructuring charges were comprised of $346,524 in write downs of production equipment and leasehold improvements, $94,630 in write downs of inventory related to discontinued products, $147,748 in employee termination benefits, and $97,556 in lease settlement costs.
Interest expense for 1996 was $316,564 as compared to $193,037 for 1995. Interest expense increased primarily as a result of interest and issuance costs related to the convertible debenture. Other income, net, was approximately the same in 1996 and 1995.
Income tax expense for 1996 was $388,083 compared to an income tax benefit of $1,083,640 in 1995. The 1995 income tax benefit included a $702,000 reduction in the valuation allowance.
Net income for 1996 was $750,981 compared to $316,875 in 1995.
Fiscal 1995 compared to 1994
Net sales for 1995 increased by $2,957,221 or 25%, to $14,786,658 from $11,829,437 in 1994. Increased sales of narrowband and marine communication products were partially offset by lower sales in marine instrumentation.
Gross profit for 1995 was $5,657,965 (38% of net sales), as compared to $4,779,539 (40% of net sales) in 1994, an increase of $878,426 or 18%. Increased sales of higher margin narrowband products, and improved margins on marine communications products accounted for most of the increase.
Operating expenses were $6,271,412 (42% of net sales) in 1995, as compared to $5,159,848 (43% of net sales) in 1994, an increase of $1,111,564 or 22%. The increase in operating expenses included $686,458 of restructuring charges, increased selling expenses due to commissions on higher sales, and increased administrative expenses, primarily professional fees, insurance, rent and taxes other than income.
Interest expense for 1995 was $193,037, as compared to $62,258 in 1994. The increase was due to increased prime based lending rates and larger balances outstanding.
The Company adopted FAS 109, "Accounting for Income Taxes" effective October 3, 1993. Upon adoption and at October 1, 1994, full valuation allowances were recorded with respect to the Company's deferred tax asset balances due to uncertainty of future taxable income estimates. During fiscal 1995, the valuation allowance was reduced by $702,000 to reflect management's assessment of the amount of deferred tax assets which were more likely realizable than not. This assessment was based upon management's estimates of future taxable income and reflected the substantial growth realized in sales of and order backlog for narrowband land mobile products, as well as the administrative cost reductions and manufacturing efficiencies achieved as a result of the 1995 restructuring activities. Based upon this assessment, the Company recognized a deferred federal income tax benefit of $1,083,640 in the year ended September 30, 1995.
Net income for 1995 was $316,875 compared to a loss of $395,948 in 1994.
Capital Expenditures
Capital expenditures were $959,000, $699,000 and $538,000 in fiscal years 1996, 1995 and 1994, respectively. Planned capital expenditures in fiscal year 1997 are $286,000, primarily for production and engineering equipment.
Liquidity and Capital Resources
Net cash used in operating activities for 1996 increased by $780,984 to $871,149 from net cash used in operating activities of $90,255 in 1995. The increase was due mostly to build-up of land mobile inventories and accounts receivable. At the end of 1996, the sales order backlog for the Company's narrowband products stood at $5,208,000 (although not considered firm) and the total backlog was $5,412,000. During 1996 one of the Company's bank lines was increased from $2,000,000 to $2,500,000. A second $1,000,000 line related specifically to NNS was not renewed and the balance of $166,526 outstanding at that time was converted to a term loan. The Company's line of credit is subject to debt covenants which require the Company to be profitable, maintain a tangible net worth of $5,400,000, a minimum current ratio of 1.50, a maximum debt to net worth ratio of 1.25 and a minimum debt service ratio of 1.50.
During 1996 the Company issued $2,000,000 in private placement Convertible Debentures due December 19, 2000, bearing interest at increasing rates from 10-15% per annum. The proceeds have been used for normal working capital requirements, and to develop NNS.
The Company believes its cash flow from operations, available bank lines of credit and other financing sources are sufficient to meet its working capital and other capital requirements for at least the next two years.
Other Matters
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). FAS 121 requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment has occurred, an impairment loss must be recognized. Implementation of FAS 121 is required in fiscal year 1997. The impact of the adoption of this standard is not expected to be material to the financial position, results of operations, or liquidity of the Company.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", which will be effective for the Company's fiscal year 1997. The Company has not decided which of the alternatives provided under that statement will be applied and, therefore, its impact on the Company's future financial statements cannot be currently determined.
Impact of Inflation
The Company's results are affected 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.
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. This Annual Report on Form 10-K and Quarterly Reports on Form 10-Q contain certain detailed factors that could cause the Company's actual results to materially differ from forward-looking statements made by the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Financial Statements September 28, 1996
INDEX
Report of Independent Accountants
To the Stockholders and Board of Directors of Datamarine International, Inc.
We have audited the accompanying consolidated balance sheets of Datamarine International, Inc. and subsidiaries as of September 28, 1996 and September 30, 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended September 28, 1996, September 30, 1995 and October 1, 1994. 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 generally accepted auditing standards. 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 28, 1996 and September 30, 1995, and the consolidated results of their operations and their cash flows for the years ended September 28, 1996, September 30, 1995 and October 1, 1994 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Seattle, Washington December 20, 1996, except for Note 13 to the financial statements as to which the date is January 8, 1997.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
The accompanying notes are an integral part of the consolidated financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements Of Operations for the years ended September 28, 1996, September 30, 1995 and October 1, 1994
The accompanying notes are an integral part of the consolidated financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements Of Stockholders' Equity for the years ended September 28, 1996, September 30, 1995 and October 1, 1994
The accompanying notes are an integral part of the consolidated financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements Of Cash Flows for the years ended September 28, 1996, September 30, 1995 and October 1, 1994
The accompanying notes are an integral part of the consolidated financial statements.
DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
1. Business Activities:
Datamarine International, Inc. and subsidiaries (the "Company") manufactures and markets electronics including radio/telephone 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 320 dealers.
In July 1993, the Company launched its newest land mobile product line which represents 58%, 45% and 36% of net sales in fiscal 1996, 1995 and 1994, respectively. In addition, the Company has entered into agreements for the construction and operation of narrowband land mobile systems (see Note 9). As of September 28, 1996, the Company had a significant backlog related to these narrowband products, although such orders are not considered firm, and management expects continued growth of the product line in fiscal 1997.
The Federal Communications Commission ("FCC") intends to conduct an auction for new 220 MHz licenses, but specific rules and timing for the auction have not been set. No new 220 MHz licenses will be issued until the auction is completed. Until such time as new licenses are issued, demand for the Company's higher margin base station products will be lower than in previous years.
2. Significant Accounting Policies:
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, SEA, Inc. ("SEA"), and Nautical Realty A/S; the Company's 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 management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 those estimates.
Fiscal Year
The Company's fiscal year ends 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 deliveries made.
Cash and Cash Equivalents
The Company considers all highly liquid investments, with an original maturity of three months or less when purchased, to be cash equivalents.
Concentration of Credit Risk
The concentration of credit risk with respect to trade receivables is, in management's 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. The Company sells to customers located throughout the United States as well as in Australia and other countries. The Company had no significant foreign operations but had export sales of approximately $975,000 in 1996, $1,161,000 in 1995, and $1,068,000 in 1994. Credit evaluations of its customers' financial condition are performed periodically, and the Company generally does not require collateral from its customers. Land mobile customers account for approximately 67% of the accounts receivable balance as of September 28, 1996.
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 4). 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 and developing 220 MHz licenses are amortized on a straight-line basis over ten years.
Deferred Financing Costs
Deferred financing costs of $167,884 at September 28, 1996 represent the direct costs of issuing the convertible debentures and are included in other assets. These costs are amortized by the effective interest method over the five year term of the related debt.
Research and Development
Expenditures for research and development are charged to expense as incurred.
Warranty Costs
The Company provides, by a current charge to income, an amount it estimates will be needed to cover future warranty obligations for products sold during the year.
Income Taxes
The Company uses the liability method of accounting for income taxes whereby 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.
Earnings Per Share
Net income (loss) per common share is based on the weighted average number of common shares and common stock equivalents outstanding. Common stock equivalents include shares issuable upon exercise of the Company's stock options and the Company's convertible preferred stock. Fully diluted earnings per share is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period taking into consideration maximum potential dilution.
Reclassifications
Certain reclassifications have been made to the prior years' financial statements in order to conform to the 1996 presentation, with no impact on previously reported net income (loss) or stockholders' equity.
Future Effects of New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). FAS 121 requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment has occurred, an impairment loss must be recognized. Implementation of FAS 121 is required in fiscal year 1997. The impact of the adoption of this standard is not expected to be material to the financial position, results of operations, or liquidity of the Company.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", which will be effective for the Company's fiscal year ending September 27, 1997. The Company has not decided which of the alternatives provided under that statement will be applied and, therefore, its impact on the Company's future financial statements cannot be currently determined.
3. Inventories:
Inventories consist of the following:
As of September 28, 1996, inventories include approximately $486,000 related to land mobile base station equipment. The timing of sales of such equipment is largely dependent upon the issuance of additional licenses pursuant to an auction yet to be scheduled by the FCC (See Note 1). Management does not anticipate any loss on the ultimate disposition of this equipment.
4. Property, Plant and Equipment:
Property, plant and equipment consist of the following:
Design, test and manufacturing equipment includes equipment under capital leases with an original cost of $178,000 and accumulated depreciation of $73,000 as of September 28, 1996.
5. Accrued Expenses:
Accrued expenses consist of the following:
6. Notes Payable to Banks:
The Company has a bank line of credit of $2,500,000 with interest payable monthly at .75% over prime (9.0% and 9.5% at September 28, 1996 and September 30, 1995 respectively). The outstanding balance on this line was $1,750,000 at September 28, 1996, and $1,325,353 at September 30, 1995. The line of credit is collateralized by essentially all of the assets of the Company. The line of credit is also subject to debt covenants which require the Company to be profitable, maintain a tangible net worth of $5,400,000, a minimum current ratio of 1.50, a maximum debt to net worth ratio of 1.25 and a minimum debt service ratio of 1.50.
A second $1,000,000 line of credit related specifically to NNS was not renewed and the outstanding balance of $166,526 at the time was converted to a collateralized equipment term loan due April 30, 1998.
The weighted-average interest rate on short-term borrowings was 9.2% and 9.8% for fiscal years 1996 and 1995, respectively.
7. Long-Term Debt:
Long-term debt consists of the following:
Maturities of long-term debt are as follows:
On December 19, 1995 the Company completed a private placement issuance of $2,000,000 in Subordinated Convertible Debentures (the "Debentures") due December 19, 2000. The Debentures bear interest at increasing rates from 10-15% per annum, and may be prepaid at any time, subject to the lender's rights of conversion. The lender may convert the Debentures after December 19, 1998 into 2,000 shares of redeemable preferred stock and 2,000 shares of convertible preferred stock. The Company may convert at its option after December 19, 1997. The $2,000,000 proceeds from the Debentures were allocated to the Debentures' carrying value and additional paid in capital based on the relative fair values of the Debentures and the 163,967 shares of common stock obtainable upon conversion. The related discount of $480,000 on the Debentures is accreted by periodic charges to earnings over the five year life of the issue.
Due to the unique terms and conditions of the Debentures, there are no quoted market prices for similar instruments. At the date of issuance, the Company estimated the fair value of the debt component of the Debentures to be approximately $2,185,000 based upon then current interest rates for straight bonds of companies with similar creditworthiness. Based upon interest rates through September 28, 1996, management believes that the fair value of the debt component of the Debentures (carrying value of $1,584,000 as of September 28,1996) has not changed materially from the date of issuance.
The estimated fair value of notes payable to banks and other long-term debt at September 28, 1996 approximates the carrying value of such debt in the financial statements, based on current interest rates for similar obligations with like maturities.
8. Commitments and Contingencies:
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 $196,000 in 1996, $207,000 in 1995, and $260,000 in 1994. During 1995, the Company renegotiated the terms of its Pocasset, Massachusetts facility lease. The expenses of settlement were included in the restructuring charge (see Note 12).
Approximate future minimum lease payments, by year and in the aggregate, under capital and noncancelable operating leases, were as follows at September 28, 1996:
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate results of such matters cannot be determined, management does not expect that they will have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.
9. 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 Federal Communications Commission ("FCC") in approximately 45 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, NNS has guaranteed a minimum dollar amount to be remitted to the license holder upon system disposition.
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.
As of September 30, 1996 ownership of licenses for locations which had not met regulatory build-out requirements reverted to the Federal government. The Company has met all regulatory build-out requirements related to its licenses.
At September 28, 1996 and September 30, 1995, fixed assets include $1,500,024 and $615,013 (less accumulated depreciation of $90,619 and $0) respectively, of facilities related to the SMR systems. Other assets include $360,760 and $235,695 (less accumulated amortization of $23,743 and $0) respectively, representing legal and other costs associated with the acquisition of license interests in the Managed Markets. Because only limited operations have commenced, revenues from NNS's operations were negligible through September 28, 1996.
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. Management estimates that it will recover the carrying amounts of those assets 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.
10. Stockholders' Equity:
1992 Stock Option Plan for Non-Employee Directors
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.
1995 Stock Option Plan for Non-Employee Directors
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.
1991 Stock Option Plan
The 1991 Stock Option Plan authorized grants of incentive and nonqualified stock options for 350,000 common shares, of which 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"), and 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").
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 28, 1996, commenced five year vesting on September 9, 1994.
Proceeds received from the exercise of options are credited to the capital accounts. 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.
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 843 shares in 1996, 1,272 shares in 1995 and 1847 shares in 1994 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 12% of their base salary with the Company matching 50% of the first 6% of base salary contributed. The Company issued 3,734 shares in 1996, 4,599 in 1995 and 12,112 shares in 1994 under the Employee Investment Plan.
Shares Reserved for Future Issue
At September 28, 1996, the Company had reserved the following shares of its common stock for future issue:
Preferred Stock
In connection with the issuance of the Debentures in fiscal 1996, the Company also authorized 1,000,000 shares of preferred stock, $1 par. Under certain conditions, the Debentures are convertible into 2,000 shares of redeemable preferred stock and 2,000 shares of convertible preferred stock.
Each $1,000 principal value of the Debentures is convertible into one share of redeemable preferred stock. The redeemable preferred stock is entitled to dividends in an amount equal to the interest that would otherwise be payable on the Debentures, and is subject to mandatory redemption in December 2000. The redeemable preferred stock has no voting rights. The Company has the option any time after December 19, 1997 of redeeming all, but not less than all, of the redeemable preferred stock then outstanding at a price of $1,000 per share.
Each share of convertible preferred stock is convertible into approximately 82 shares of the Company's common stock. Convertible preferred shares have voting rights equal to common shares, and are entitled to such number of votes per share as equals the number of shares of common stock into which each share of convertible preferred is then convertible. The Company has the option any time after December 19, 2000 of converting the convertible preferred stock to common stock, or redeeming the shares at fair value. In accordance with the Debenture Agreement, the Company has reserved for future issue 4,000 shares of preferred stock.
11. Income Taxes:
The components of income tax expense (benefit) consists of the following:
The tax effects of temporary differences that give rise to deferred tax assets are as follows:
At October 1, 1994, a valuation allowance was recorded equal to the Company's deferred tax asset balance of $1,142,000 due to the uncertainty of future taxable income estimates. During fiscal 1995, the valuation allowance was reduced by $702,000 to reflect management's then current assessment of the amount of deferred federal tax assets which were more likely realizable than not. The valuation allowance balance at September 28, 1996 and September 30, 1995 relates primarily to deferred state tax benefits of net operating loss carryforwards and future deductible temporary differences which are not expected to be realized on a separate company return basis.
The Company has recorded a net deferred tax asset of $738,000 including the benefit of loss carryforwards, which expire in varying amounts between fiscal 2008 and 2010. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
The reconciliation of income taxes at the federal statutory rate of 34% to the income tax provision (benefit) presented in the consolidated statement of operations is presented below:
As of September 28, 1996, the Company has net operating loss carryforwards of $811,000 which are available to reduce future federal taxable income ($71,000 of which expire in fiscal 2008, $513,000 in fiscal 2009 and the remainder in 2010). The Company also has general business tax credit carryforwards of $128,000.
12. Restructuring Charge:
During fiscal 1995, the Company recognized a special charge of $686,458 in connection with a restructuring program designed to improve productivity and permanently reduce costs. The Company moved its corporate administrative functions and production of its instrumentation product line from Pocasset, Massachusetts to its facility in Mountlake Terrace, Washington. The restructuring was announced effective January 1995 and was substantially completed by December 31, 1995. The program resulted in the permanent reduction of approximately 30 employees and 35,000 square feet of manufacturing and office space. The restructuring charge was comprised of $346,524 in writedowns of production equipment and leasehold improvements, $94,630 in writedowns of inventory related to discontinued products, $147,748 in employee termination benefits, and $97,556 in lease settlement costs. The lease was settled for $210,000, including $112,444 related to past due rental amounts, comprised of $30,000 in cash and the issuance of 22,000 shares of the Company's common stock having a fair market value of $180,000. Upon final pricing 2,000 of the settlement shares were returned to the Company.
13. Subsequent Event:
On December 12, 1996 the Company filed a collection action against one of its customers for accounts totaling approximately $132,000 at September 28, 1996. On December 23, 1996 the same customer filed suit against the Company alleging breach of certain express and implied warranty and contractual obligations, and negligent representation with respect to sales of the Company's narrowband products. The suit seeks $6,000,000 - $9,000,000 in damages and unspecified amounts for interest and other costs. The ultimate outcome of the litigation cannot presently be determined, accordingly no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and offices of all executive officers of the Registrant are as follows:
The term of office of the executive officers of the Registrant is as set forth in the Registrant's bylaws, namely: "until the next annual election to the office which he holds and until his successor is chosen and qualified or until he sooner dies, resigns, is removed or becomes disqualified." There is no family relationship between the executive officers.
Mr. Brown was elected President of the Registrant in September 1991. Mr. Brown is CEO of The South Beach Company, a management company, and Vice President and Treasurer of Gordon & Ferguson, a manufacturer of mens' and boys' outerwear. From 1974 through 1990, Mr. Brown was CEO of Heather Hill Sportswear Co., an apparel company.
Mr. Thompson served as Acting Chief Executive Officer of the Registrant from June 1990 until January 1991. Mr. Thompson served as Executive Vice President and Chief Operating Officer of the Registrant from October 1989 until February 1992. Mr. Thompson has served as President and Chief Executive Officer of SEA, Inc., a wholly-owned subsidiary of the Registrant, since its acquisition by the Registrant in 1986. He had held the same position with SEA before the merger since 1980. In 1996, he was named Treasurer and Secretary of the Registrant. Mr. Thompson was previously President, Chief Executive Officer and a Director of SBE, Inc., a public corporation involved in the manufacture of CB radios, land mobile and marine VHF communication products.
ITEMS 10, 11, 12 and 13.
The information called for by Items 10, 11, 12 and 13 is hereby incorporated by reference from the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A for the 1997 Annual Meeting of Stockholders.
PART IV
ITEM 14.
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 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. None.
(c) List of Exhibits
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/ PETER D. BROWN - ------------------------------------------- Peter D. Brown, President Chief Executive Officer
By:/s/ DAVID C. THOMPSON - ------------------------------------------- David C. Thompson Principal Financial and Accounting Officer
Date: December 23, 1996
Pursuant to the requirements 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/ PETER D. BROWN - ------------------------------------------- Peter D. Brown, Chairman of the Board December 23, 1996
By:/s/ DAVID C. THOMPSON - ------------------------------------------- David C. Thompson, Director December 23, 1996
By:/s/ DALE N. HATFIELD - ------------------------------------------- Dale N. Hatfield, Director December 23, 1996
By:/s/ ROBERT BENBOW - ------------------------------------------- Robert Benbow, Director December 23, 1996
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES
Report Of Independent Accountants
To the Stockholders and Board of Directors of Datamarine International, Inc.
Our report on the consolidated financial statements of Datamarine International, Inc. and subsidiaries as of September 28, 1996 and September 30, 1995 and for the years ended September 28, 1996, September 30, 1995 and October 1, 1994 is included in this Annual Report on Form 10-K. In connection with our audits of such financial statements, we have also audited the related consolidated financial statement schedule for the years ended September 28, 1996, September 30, 1995 and October 1, 1994, listed in Item 14(a) of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
/s/:COOPERS & LYBRAND L.L.P
Seattle, Washington December 20, 1996