SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended September 30, 2000. Commission file number 0-8936. DATAMARINE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Washington 04-2454559 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7030 220th S.W., Mountlake Terrace, Washington 98043 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (425) 771-2182 Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, with par value of $.01 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of December 18, 2000 was approximately $1,078,000. The number of shares of the Registrant's common stock outstanding as of December 18, 2000 was 1,809,911 shares. DOCUMENTS INCORPORATED BY REFERENCE The Information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the Registrant's definitive proxy statement relating to the annual meeting of stockholders to be held March 2001, which definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates. 1 The total number of pages in this Form 10-KSB is 40. See Index to Exhibits on page 35 2 PART I ITEM 1. BUSINESS Statements in this report that relate to future results and events are based on the Company's current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. Introduction Datamarine International, Inc. and its subsidiaries ("we" or the "Company") manufacture radio communications and navigation instrumentation products. The Company is organized into three primary operating segments according to its primary product categories: "Land Mobile Communications", "Marine Communications" and "Marine Instrumentation." The Company also owns and manages specialized mobile radio ("SMR") licenses in the 220 MHz radio service, although revenues from such operations to date have been immaterial. These operations are included in a segment referred to as "Narrowband Operations." Datamarine International, Inc. was incorporated in Massachusetts on April 23, 1969 and, effective April 11, 2000, changed its state of domicile to Washington. All of the Company's product development and manufacturing facilities are at its Mountlake Terrace, Washington location. The Company has sales and service facilities on the east and west coasts of the United States and in Chatswood, NSW, Australia. Marine communication products, branded SEA, and marine instrumentation products, branded Datamarine, are sold worldwide through approximately 500 dealers in the United States and approximately 20 foreign countries. Sales of narrowband communications products for the land mobile radio market are made through the Company's wholly-owned subsidiary, SEA, Inc. ("SEA"), to business users in the United States and Mexico. SEA has developed and marketed narrowband radio equipment since 1984 and began selling its narrowband equipment for use in the 220 MHz band in 1993. On October 19,1992, the Federal Communications Commission ("FCC") conducted a lottery which led to the issuance of approximately 3,500 Phase I licenses for a new land mobile service in the 220-222 MHz band. The FCC adopted challenging technical parameters for the equipment to be used in the 220 MHz radio service. By establishing these parameters the FCC intended to encourage the development of new spectrum-efficient technologies for land mobile applications. This service is mandated to use narrowband technologies which will result in a fivefold increase in the number of communications channels as compared to conventional technologies. SEA was the first manufacturer to receive FCC type acceptance for 220 MHz radio equipment. SEA shipped its first 220 MHz radios in 1993. As of September 30, 1996 ownership of Phase I licenses for locations which had not met regulatory build-out requirements reverted to the Federal government. The Federal Communications Commission ("FCC") conducted an auction of Phase II licenses which commenced in September 1998 and concluded in October 1998. The auction was for licenses covering "Economic Areas", "Regions" and "Nationwide" areas as defined by the FCC. We expect the build-out of Phase II licenses to increase demand for our higher margin 220 MHz base station products. 3 During fiscal 1995 Narrowband Network Systems, Inc. ("NNS") was incorporated in the state of Washington as a subsidiary of SEA, and SEA owns 97.5% of NNS's outstanding stock. NNS was formed to participate in the business of providing SMR services. NNS has entered into both "Management Agreements" and "Operator Agreements" with the holders of 220 MHz licenses granted by the FCC related to SMR services in approximately 47 market areas across the United States. Management Agreements require NNS to construct, develop and operate SMR systems in certain markets. Operator Agreements require NNS to provide licenses, system facilities and "SMR Operators" in certain markets. The Management Agreements typically allow NNS to acquire the license holder's interest in exchange for a percentage of gross receipts from the system and a percentage of any profit realized by NNS upon the system's ultimate disposition. The Operator Agreements typically give NNS a contractual percentage of system revenue based on the level of support provided to each system. The Company has met all regulatory build-out requirements related to its licenses. Because NNS has only limited operations, revenues and associated cash expenses currently account for only a small part of the Company's overall business. Information regarding net sales, operating profit and identifiable assets for each segment can be found under the heading "Results of Operations" in Item 7 -"Management's Discussion and Analysis of Financial Condition and Results of Operations", and in the "Notes to Consolidated Financial Statements." Products and Marketing Land Mobile Communications - The Company's narrowband land mobile radio system products have been type accepted by the FCC for use in the 220 MHz radio service. These products consist of hand held, mobile and base station components, utilizing the narrowband technology, an enhanced form of single sideband that is ideal for the 5 KHz channel width used in the 220 MHz radio service, and were developed for sale to business users of private land mobile radio services. The narrowband technology helps solve the problem of frequency congestion by allowing five narrowband channels to be operated within the same spectrum as would presently be utilized by one 25 KHz FM channel. Marine Communications - The SEA marine communications products are high performance radios used on commercial vessels, fishing vessels and ocean- going yachts. The product line currently consists of 28 products with suggested list prices between $765 and $40,000. The SEA products include HF/SSB and VHF/FM radios, Satcom C, Weather fax, Emergency distress radio beacons (EPIRBS), Search and rescue transponders (SARTS) and Global Maritime Distress and Safety Systems (GMDSS). Marine Instrumentation - Marine instrumentation products are sold primarily to the recreational boating market. The products are well established in the marketplace with up-to-date instruments for each type of pleasure craft: small boats and yachts; sail and power; inshore and offshore. The Datamarine product line currently consists of 28 products sold under the DART, LINK, Corinthian and ChartLINK names, with suggested list prices between $400 and $6,000. The Datamarine products include depth sounders, knotmeters and water temperature instruments, wind speed and direction instruments, integrated instruments, and electronic chart plotters. International Sales Foreign sales accounted for approximately 11% of our sales in fiscal 2000 and 17% of our sales in fiscal 1999. The decrease in foreign sales resulted from two factors. During 1999 the Company made its first sales of land mobile products in Mexico. We expect to continue selling land mobile products in Mexico, 4 but did not do so in fiscal 2000. Foreign revenues from marine products were unusually high in fiscal 1999 because many of the Company's GMDSS "A3" products were sold outside the United States. We did not expect fiscal 2000 export sales of GMDSS "A3" products to continue at the 1999 rate. Competition and Markets Datamarine and its subsidiary, SEA, are generally considered to be leading suppliers of marine instruments and radio communication products to the marine markets. Approximately 20 electronics manufacturers have competing models in their product lines and are considered competitors. SEA has at this time one competitor supplying narrowband equipment for the 220 MHz radio service. Approximately 25 competitors offer alternative FM land mobile products for use in other radio services and could become competitive suppliers of equipment in the 220 MHz radio service market. Several of the Company's competitors in the various markets have substantially greater financial, technical and marketing resources. The Company's business does not depend on any single customer, the loss of whom would have a materially adverse impact on the Company's business. No portion of the Company's business is subject to renegotiation of profits or termination of contracts or sub-contracts at the election of the government. The markets for the Company's products are generally not considered to be seasonal. Sales order backlogs stood at $3,310,000 at September 30, 2000, compared to $1,900,000 at October 2, 1999. Of the total September 30, 2000 backlog, land mobile products represented $2,500,000, marine communications products represented $656,000 and marine instrumentation products represented $154,000. Orders for the Company's land mobile repeater systems represented approximately 47% of the land mobile product backlog. Deliveries of repeater systems can occur over an extended time period and are subject to some uncertainty, thus the Company does not consider the repeater backlog to be firm. Orders for the Company's model 604 mobile radio represented approximately 52% of the land mobile product backlog. Due to production lead times, fulfillment of the mobile radio backlog is expected to occur throughout fiscal 2001. Suppliers Certain components in the Company's products, such as printed circuits and injection molded plastic parts, are provided by local vendors using tooling and designs owned by the Company. The Company believes that adequate alternative sources of supply are available for these purchased components along with other supplies and raw materials. The Company and its subsidiaries maintain sufficient inventory to continue production for a reasonable period if new material sources are required. Warranty Products are sold with either a one-year or two-year parts and labor limited warranty. Research and Development We are committed to a continuing program of designing new products and improving the product designs 5 presently in production. During fiscal 2000 we spent approximately $1,338,000 on research and development compared to $1,438,000 in 1999. The Company has 15 full-time employees engaged in research and development activities. Patents The Company has two United States patents related to its radio products. The Company views its patents as valuable assets, but believes that its position in the market is not dependent upon the protection offered thereby. Employees The Company had approximately 74 full-time employees on September 30, 2000. This compares to 89 on October 2, 1999. The Company has no collective bargaining agreements and believes relations with its employees are good. Environmental The Company knows of no statutory requirements with respect to environmental quality which can be expected to have a material effect upon the Company's capital expenditures, earnings or competitive position. ITEM 2. PROPERTIES The manufacturing and general administrative offices of the Company are located in a group of buildings totaling 39,000 square-feet in Mountlake Terrace, Washington, pursuant to a lease which expires in December 2002. Our marine instrumentation service facility is located in a 2,400 square foot building in Pocasset, Massachusetts. The facility is comprised of two buildings, one of which is owned and one of which is leased under a one year agreement expiring in May 2001. The sales and warehousing operation of a majority-owned subsidiary, Datamarine International Australia, PTY, LTD., is located in a leased 2,500 square-foot building in Chatsworth, New South Wales, Australia. ITEM 3. LEGAL PROCEEDINGS On December 19, 1995 the Company completed a private placement issuance of $2,000,000 in Subordinated Convertible Debentures (the "Debentures") with Alta Subordinated Debt Partners III ("ASDP III"), originally due December 19, 2000. On November 24, 1997 the Company received notice from ASDP III of an alleged violation of certain covenants related to the Debenture Purchase Agreement dated December 19, 1995. On February 25, 1999 ASDP III filed suit in the Superior Court of the Commonwealth of Massachusetts claiming a breach of the December 19, 1995 Debenture agreement. The complaint sought damages in the amount of $2,827,863 plus interest and reasonable attorneys' fees and costs. Prior to the trial the Company and ASDP III reached an agreement regarding the due date of the Debentures. Under the terms of the agreement, ASDP III agreed to discontinue its suit against the Company in exchange for the Company agreeing not to challenge either the full amount due or the Debenture due date of December 19, 2000. The agreement gave the Company or its designee the option to redeem the Debentures for $2,200,000 by September 30, 2000. On September 27, 2000 the Company exercised its option to purchase the Debentures and accrued 6 and unpaid interest of $1,111,375 for $2,200,000. Datamarine's repurchase of the Debentures caused all claims and counterclaims in the matter of Alta Subordinated Debt Partners III, L.P. v. Datamarine International, Inc. to be dismissed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended September 30, 2000, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Price of and Dividends on the Registrants Common Equity The Company's Common Stock trades on the OTCBB under the symbol "DMAR". As of December 18, 2000, there were approximately 900 stockholders of record. The accompanying table shows the range of trading prices for the past two years by fiscal quarter: 1st 2nd 3rd 4th Fiscal 2000: High 3 5/8 1 3/8 1 5/16 3 1/8 Low 7/8 3/4 5/8 7/16 Fiscal 1999: High 4 4 1/8 3 2 3/8 Low 1 1/8 2 2 1/8 1 1/16 No dividends have been declared or paid by the Company. The Company currently intends to retain any earnings to fund the development and growth of its business. Recent Sales of Unregistered Securities During September 2000, under Section 4(2) of the Securities Act, the Company commenced a private placement offering for up to 4,387,500 shares of $0.01 common stock at a price of $0.8547 per share. As of September 30 and December 31, 2000 the Company had sold $2,477,000 and $3,332,470 of the offering, respectively. The offering is expected to continue through January 2001. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data relating to the Company should be read in conjunction with the Company's consolidated financial statements and the related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included elsewhere in this report. All of the historical selected financial data set forth below has been derived from audited financial statements of the Company. 7 Income Statement Data for September 30, October 2, October 3, September 27, September 28, the Year Ended 2000 1999 1998 1997 1996 Net sales $ 6,766,248 $ 12,117,259 $ 12,382,551 $ 12,090,678 $ 16,590,002 Cost of products sold 4,666,527 7,849,831 8,077,225 8,243,556 9,555,599 Operating expenses 4,717,399 5,381,823 5,659,482 5,370,323 5,627,499 -------------------------------------------------------------------------------- Operating income (loss) (2,617,678) (1,114,395) (1,354,156) (1,523,201) 1,406,904 -------------------------------------------------------------------------------- Interest expense 570,067 753,979 836,812 563,617 380,564 Other income, net (376,647) (31,596) (48,995) (56,396) (112,724) Extraordinary gain (911,375) - - - - Income tax expense - - - 737,909 388,083 -------------------------------------------------------------------------------- Net income (loss) $ (1,899,723) $ (1,836,778) $ (2,141,973) $ (2,768,331) $ 750,981 ================================================================================ Basic income (loss) per share $ (1.09) $ (1.19) $ (1.60) $ (2.11) $ .58 Diluted income (loss) per share $ (1.09) $ (1.19) $ (1.60) $ (2.11) $ .49 September 30, October 2, October 3, September 27, September 28, Balance Sheet Data 2000 1999 1998 1997 1996 Total assets $ 5,726,248 $ 7,597,760 $ 9,534,099 $ 10,139,922 $ 12,649,846 Note payable to bank - 1,097,312 1,418,665 1,367,561 1,750,000 Notes payable to related parties and others 912,000 452,000 744,697 850,887 - Long-term obligations, including current portion 145,153 2,126,608 2,041,728 1,948,979 2,022,978 Stockholders' equity 1,627,812 863,890 2,208,991 3,898,836 6,536,934 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 2000 1999 Net Sales: Land mobile communications $ 1,477,166 22% $ 1,566,585 13% Marine communications 3,350,632 50% 8,142,812 67% Marine instrumentation 1,840,111 27% 2,399,012 20% Narrowband operations 98,339 1% 8,850 - ----------------------------------------------- Consolidated net sales $ 6,766,248 100% $12,117,259 100% =============================================== Operating income (loss): Land mobile communications $ (1,344,361) $ (1,545,502) Marine communications (817,760) 868,437 Marine instrumentation (24,298) 81,420 Narrowband operations (195,700) (301,380) All other (235,559) (217,370) ------------ ------------ Consolidated operating loss (2,617,678) (1,114,395) Net loss (1,899,723) (1,836,778) Basic loss per share (1.09) (1.19) Financial information for "All other" reflects headquarters operating expenses which are not attributable to specific business segments. 8 The following tables set forth certain items (expressed as a percentage of net sales) included in Selected Financial Data and should be read in connection with the Consolidated Financial Statements of the Company including the Notes to Consolidated Financial Statements, presented elsewhere in this report. Income and Expense Items Percentage As a Percentage of Net Sales Increase (Decrease) ---------------------------- ------------------- 1999 1998 to to 2000 1999 2000 1999 100% 100% Net sales (44)% (2)% 69 65 Cost of products sold (41) (3) 31 35 Gross profit (51) (1) 20 12 Research and development (7) 2 28 19 Selling (17) (9) 17 11 General and administrative (13) (8) 4 2 Narrowband operations (100) 13 70 44 Operating expenses (12) (5) (39) (9) Operating loss 135 (18) 8 6 Interest expense (24) (10) (19) - Other income, net (36) (36) (28) (15) Loss before income taxes 3 (14) - - Income tax expense - - (28)% (15)% Net loss 3% (14)% Fiscal 2000 compared to 1999 Net sales decreased by $5,351,011 or 44%, to $6,766,248 for 2000 from $12,117,259 in 1999. Net sales of the Company's narrowband products decreased by $89,419, or 6%, to $1,477,166 for 2000 from $1,566,585 in 1999. Net sales of the Company's marine radio systems decreased by $4,792,180, or 59%, to $3,350,632 for 2000 from $8,142,812 in 1999. Net sales of the Company's recreational marine instrumentation systems decreased by $558,901, or 23%, to $1,840,011 for 2000 from $2,399,012 in 1999. Land mobile revenues during the year included both repeaters and mobile radio products, with mobile radios accounting for most of the revenue. Management expects that land mobile revenues will be comprised mostly of mobile radios sales until Phase II license holders begin to take delivery of repeater systems. Although the Company's land mobile order backlog continues to grow, customers have been slow to take delivery of new repeater systems. Management expects that until such time as mobile radios can be shipped in quantity, demand for repeaters will be low. Orders for the model 604 mobile radio are very strong, and the radio started shipping in September 1999, but we do not expect the radio to ship in quantity until the first quarter of fiscal 2001. Sales of the 604 have been delayed due to the failure of the Company's supplier to deliver finished products as scheduled. Management continues to believe that the FCC's issuance of new licenses and the Company's introduction of new products will provide an opportunity for significant revenue growth in the narrowband product line. Sales of marine communications products were significantly lower compared to the prior year and did not meet management's projections. Much of the decrease was due to a decline in sales of GMDSS "A3" systems as many customers satisfied regulatory requirements during 1999. Working capital constraints contributed to product shortages and delays in the introduction of new products which were expected to 9 replace declining GMDSS sales. New VHF radio products expected to start shipping in the fourth quarter of fiscal 2000 were delayed into fiscal 2001. Marine instrumentation sales decreased compared to the prior year and continued to be below management's projections. Sales of the Company's chart plotter continue to be lower than expected, and working capital constraints caused product shortages and reductions in advertising and sales promotion. Revenues from narrowband operations were $98,339 compared to $8,850 for the prior year. Narrowband revenues are derived from the Company's share of SMR operations on those sites where the Company owns, or has an ownership interest in, the license and/or base station equipment. Prior to the first quarter of fiscal 2000, revenues were insignificant or collection was uncertain so revenue recognition was deferred. During the first quarter, management determined that certain revenues attributable to operations from early 1997 through part of 1999 were due and collectible so they were billed and recognized. Ongoing revenues of this type are currently accruing at about $8,000 per quarter and will be recognized at such time as the amounts and collectibility can be reasonably estimated. Gross profit for 2000 was $2,099,721 (31% of net sales), as compared to $4,267,428 (35% of net sales) in 1999, a decrease of $2,167,707 or 51%. The gross profit on narrowband products for 2000 was $127,181 (9% of such sales), as compared to $46,971 (3% of such sales) in 1999, an increase of $80,210 or 171%. Margins on narrowband products fluctuate based on product mix, and are generally much higher on base station products than on mobile radios. Land mobile gross profit improved as a result of a favorable product mix including the sales of repeaters. The market for communications products is very competitive and pressure on selling prices for mobile radios is expected to keep margins low. We project that land mobile margins will improve when shipments of base station products resume as a result of Phase II licensees constructing new operating sites. The gross profit on marine radio systems for 2000 was $1,149,911 (34% of such sales), as compared to $3,227,328 (40% of such sales), a decrease of $2,077,417 or 64%. Strong sales of GMDSS "A3" products contributed to the prior year's results and were not expected to continue into fiscal 2000. Gross profit rates in the current year were lower due to the mix of products sold, the sale of some discontinued products at reduced prices, and to higher manufacturing costs attributable to lower production rates. The gross profit on marine instrumentation systems for 2000 was $724,290 (39% of such sales), as compared to $985,004 (41% of such sales), a decrease of $260,714 or 26%. The product mix was similar to the prior year but sales volume was lower due to product shortages. Gross profit rates were also negatively affected by higher manufacturing costs attributable to lower production rates. The gross profit on narrowband operations is approximately the same as revenues because the payments are essentially royalties. In some instances, the Company is obligated to pay a portion of its revenues to another party but such payments are a small percentage of the Company's share. Any such payments are accounted for as cost of revenue in the narrowband segment. Operating expenses were $4,717,399 (70% of net sales) in 2000, as compared to $5,381,823 (44% of net sales), a decrease of $664,424 or 12%. Operating expenses were lower than last year, but constituted a larger percentage of lower net sales. Total selling expenses decreased $380,275 or 17%. Expenses such as commissions and warranty provisions which are tied closely to sales declined with the overall decrease in revenues. Commission expense declined $234,000 or 44% and warranty provisions declined $50,000 or 43%. 10 Administrative expenses decreased $168,778 or 13%. State taxes tied to revenue, employee benefits and bank charges were lower than the prior year. The provision for doubtful accounts declined due to lower sales. Depreciation expense declined as assets reached the end of their depreciable lives. Research and development expenses decreased $99,905 or 7%, with most of the decrease in consumable parts and engineering related to the development of the chart plotter. Depreciation expense declined $26,000 as assets reached the end of their depreciable lives. Outside engineering services of $240,000 were comparable to the prior year. Narrowband operating expenses were $294,039 compared to $309,505 the prior year, with all of the decline due to lower depreciation expense. Site rental expenses of $112,000 were comparable to the prior year. Interest expense for 2000 was $570,067 as compared to $753,979 for 1999. Lower average loan balances offset the increased interest rate on bank borrowings. Amortization of debt discount related to the Subordinated Convertible Dentures was completed during fiscal 1999. The Company typically issues common stock warrants in connection with the extension of the senior and subordinated debt. The fair value of common stock warrants is charged to interest expense over the term of the loan extension. During fiscal 2000 and fiscal 1999 the Company recognized $94,230 and $65,971 of such warrant related expense, respectively. Other income, net was $376,647 in 2000 compared to $31,596 in 1999. Other income in 2000 was comprised of non-recurring engineering revenues and approximately $316,000 of gains from the sales of 220 MHz licenses and related equipment by the Narrowband Network Systems. Fiscal 1999 other income, net was comprised mostly of non-recurring engineering revenues. During 2000 the Company recognized an extraordinary gain of $911,375 on the early redemption of its Subordinated Convertible Debentures. A payment of $2,200,000 was made to fully redeem principal of $2,000,000 plus accrued interest of $1,111,375. Income tax expense for 2000 and 1999 was $0. The Company has established a valuation allowance equal to 100% of the deferred tax asset. The net loss for 2000 was $1,899,723 compared to a net loss of $1,836,778 in 1999, an increase of 3%. Fiscal 1999 compared to 1998 Net sales decreased by $265,292 or 2%, to $12,117,259 for 1999 from $12,382,551 in 1998. Net sales of the Company's narrowband products decreased by $1,466,354, or 48%, to $1,566,585 for 1999 from $3,032,939 in 1998. Net sales of the Company's marine radio systems increased by $1,137,346, or 16%, to $8,142,812 for 1999 from $7,005,466 in 1998. Net sales of the Company's recreational marine instrumentation systems increased by $66,660, or 3%, to $2,399,012 for 1999 from $2,332,352 in 1998. Land mobile revenues continue to be comprised mostly of mobile radio products and will continue to be so until new license holders begin to take delivery of repeater systems. Although the auction of Phase II licenses concluded in October 1998, successful bidders did not receive their licenses until March 1999. Our land mobile revenue projections assumed that licenses would be issued sooner, therefore current year 11 land mobile sales have been less than originally forecast for 1999. Although the Company's land mobile order backlog continues to grow, customers have been slow to take delivery of new systems. In addition, sales were lower because the selling price of certain mobile radios was reduced in anticipation of the Company introducing the new Model 604 mobile radio during the year. The 604 started shipping in September 1999, but we do not expect the radio to ship in significant quantity until the third quarter of fiscal 2000. Management expects that the FCC's issuance of new licenses will provide an opportunity for significant revenue growth in the narrowband product line. In September 1999, the Company did make its first sale of land mobile repeaters, mobile and portable radios in Mexico. Management expects that the recent auction of 220 MHz licenses in Mexico will provide additional selling opportunities for the Company. Sales of marine communications products showed a significant increase over the prior year and exceeded management's projections. Sales of GMDSS products contributed to strong revenue growth, though GMDSS revenue is slowing as customers satisfy regulatory requirements. The Company plans to replace slowing GMDSS sales with new products which should start shipping during the third quarter of fiscal 2000. Sales of marine instrumentation systems increased slightly, due in part to shipments of the Company's new chart plotter starting in June 1999. Marine instrumentation sales are expected to improve again in 2000 as plotter shipments increase, though this category continues to be extremely competitive. Gross profit for 1999 was $4,267,428 (35% of net sales), as compared to $4,305,326 (35% of net sales) in 1998, a decrease of $37,898 or 1%. The gross profit on narrowband products for 1999 was $46,971 (3% of such sales), as compared to $462,857 (15% of such sales) in 1998, a decrease of $415,886 or 90%. Margins on narrowband products fluctuate based on product mix, and are generally much higher on base station products than on mobile radios. The FCC build-out deadline caused base station revenues to decline sharply, so the majority of land mobile revenue in both 1999 and 1998 came from the sale of lower margin mobile radios. Price reductions on some radios also caused gross margin to decline. The market for communications products is very competitive and pressure on selling prices for mobile radios is expected to continue. We expect that land mobile gross margin will improve when shipments of base station products resume as a result of Phase II licensees constructing new operating sites. The gross profit on marine radio systems for 1999 was $3,227,328 (40% of such sales), as compared to $2,845,604 (41% of such sales), an increase of $381,724 or 13%. The overall gross margin percentage on marine communications products was comparable to last year. Strong sales of Global Maritime Distress and Safety System (GMDSS) products accounted for much of the total increase in gross margin. The gross profit on marine instrumentation systems for 1999 was $985,004 (41% of such sales), as compared to $986,065 (42% of such sales), a decrease of $1,061. Product mix and gross margin in this sector were comparable to the prior year. Management expects that increased sales of the Company's new chart plotter will improve margin in the instrumentation product line. Operating expenses were $5,381,823 (44% of net sales) in 1999, as compared to $5,659,482 (46% of net sales), a decrease of $277,659 or 5%. Total selling expenses decreased $219,490 or 9%. Advertising expenses decreased approximately $80,000 or 26%. The Company decreased its co-op advertising accrual rate because claims experience has been less than estimated. Commission expense declined $149,000 or 22% because a large portion of marine communications sales came from products not subject to sales commissions. Royalty expense declined $54,000 from the prior year because the remaining balance of a prepaid royalty agreement was written off in 1998. 12 Administrative expenses decreased $116,672 or 8%. Administrative salary expense was $77,000 higher than the prior year because 1998 included the elimination of profit sharing. Professional fees were $136,000 less than the prior year due to higher than normal costs associated with litigation settled in 1998, and legal and accounting fees in connection with negotiations related to the terms of the Subordinated Convertible Debenture. Research and development expenses increased $22,983 or 2%. Engineering consumables decreased $78,000 from the prior year due to those expenses being incurred in the early phases of projects started in 1998. Outside engineering services and consultants increased $97,000 or 46%. The increases were due to new product development in marine communications and cost sharing of engineering expenses related to the new electronic chart plotter. Narrowband operating expenses were $309,505 compared to $273,985 the prior year. Increases in rental expense for the Company's 220 MHz sites accounted for $32,000 of the increase. Interest expense for 1999 was $753,979 as compared to $836,812 for 1998. Decreases in interest expense as a result of the amortization of debt discount being completed in February 1999 were partially offset by increases due to warrants issued to the bank and other note holders in connection with loan extensions. The increased interest rate on bank borrowings was offset by lower average loan balances. Other income, net of $31,596 in 1999 was comparable to other income of $48,995 in 1998. Income tax expense for 1999 and 1998 was $0. The Company has established a valuation allowance equal to 100% of the deferred tax asset. The net loss for 1999 was $1,836,778 compared to a net loss of $2,141,973 in 1998, a decrease of 14%. Capital Expenditures Capital expenditures in 2000 were $99,000 (all of which were capital leases) and $73,000 (including capital lease additions of $17,000) in 1999. Planned capital expenditures in fiscal 2001 are $100,000, primarily for production and engineering equipment. Liquidity and Capital Resources On September 30, 2000 the Company's principal sources of liquidity consisted of approximately $210,000 in cash and equivalents. Net cash used in operating activities was $67,018 for 2000, a $164,011 decrease from $96,993 net cash provided by operating activities last year. Cash was provided by decreases in accounts receivable and inventories, as well as increases in accounts payable and accrued expenses. At the end of September 30, 2000 the sales order backlog stood at $3,310,000 compared to $1,900,000 at October 2, 1999. Of the total September 30, 2000 backlog, land mobile products represented $2,500,000, marine communications products represented $656,000 and marine instrumentation products represented $154,000. Effective March 30, 2000 the Company's variable bank line of credit was converted to an accounts receivable factoring agreement expiring July 31, 2000. The bank elected not to extend the factoring agreement and on August 4, 2000 the President of the Company repaid the bank's loan for the then 13 outstanding balance of approximately $285,000. As of September 30, 2000 the Company did not have a revolving credit facility with a senior lender. Subsequent to year end the Company entered into a revolving credit agreement with an asset based lender. The terms of the agreement provide for a $1,000,000 maximum loan, based on 80% of eligible accounts receivable. Losses incurred by the Company in recent years are primarily attributable to maintaining land mobile engineering, manufacturing and marketing capabilities despite significantly reduced revenues in this product line. We believe that additional sales of land mobile products will result from the March 1999 issuance of Phase II licenses by the FCC, and the Company's introduction of new land mobile products. Increased demand is reflected in the Company's land mobile order backlog which has increased from $1,429,000 at October 2, 1999 to $2,500,000 at September 30, 2000. The recovery of land mobile revenues is currently being hindered by product shortages due to the Company's working capital constraints and failures by one of the Company's suppliers to deliver products as scheduled. In the event that land mobile revenues do not meet expectations, management has a plan for significantly reducing land mobile related operating expenses. The Company may elect to raise capital by selling 220 MHz licenses and repeater equipment owned by its subsidiary, Narrowband Network Systems, Inc. The first sale of such equipment occurred in December 1999. During the year ended September 30, 2000 the Company entered into agreements to sell additional equipment and licenses for an aggregate selling price of $568,000. During September 2000 the Company commenced a $3,750,000 private placement common equity offering. As of September 30, 2000 the Company had received proceeds of $2,477,000 and used $2,200,000 of the proceeds to redeem the Subordinated Convertible Debentures. In order to operate at a profit the Company will need to increase sales revenues. Additional funding will be needed to increase inventory and production to sustainable levels. The Company will also require additional funding in order to redeem its obligations as scheduled and meet its operating and capital requirements in 2001. No such funding is committed at this time, and there is no assurance that the Company will be able to obtain additional financing on acceptable terms. Impact of Inflation The Company's results are influenced by the impact of inflation on manufacturing and operating costs. Historically, the Company has used selling price adjustments, cost containment programs and improved operating efficiencies to offset the negative impact of inflation on its operations. For the fiscal years 2000 and 1999 the influence of inflation has been immaterial to the Company. Forward-looking Statements This report contains forward-looking statements that involve risks and uncertainties. Statements included in this report which are not historical in nature are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward- looking statements. This Annual Report on Form 10-KSB and Quarterly 14 Reports on Form 10-QSB contain certain detailed factors that could cause the Company's actual results to differ materially from forward-looking statements made by the Company. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Financial Statements September 30, 2000 INDEX Page(s) ------- Report of Independent Certified Public Accountants 15 Consolidated Balance Sheets, September 30, 2000 and October 2, 1999 16 Consolidated Statements of Operations for the years ended September 30, 2000 and October 2, 1999 17 Consolidated Statements of Stockholders' Equity for the years ended September 30, 2000 and October 2, 1999 18 Consolidated Statements of Cash Flows for the years ended September 30, 2000 and October 2, 1999 19 Notes to Consolidated Financial Statements 20-34 16 Report of Independent Certified Public Accountants To the Stockholders and Board of Directors of Datamarine International, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Datamarine International, Inc. and Subsidiaries as of September 30, 2000 and October 2, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Datamarine International, Inc. and Subsidiaries as of September 30, 2000 and October 2, 1999, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company incurred a net loss of $1,899,723 during the year ended September 30, 2000. These factors, among others, as discussed in Note 3 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ GRANT THORNTON LLP Seattle, Washington November 22, 2000 17 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, October 2, 2000 1999 ASSETS Current assets: Cash and cash equivalents $ 209,813 $ 39,189 Accounts receivable, less allowance for doubtful accounts of $175,471 and $153,743, respectively 475,880 1,274,907 Inventories 3,557,410 4,487,190 Prepaid expenses and other current assets 119,264 133,982 ---------------------------- Total current assets 4,362,367 5,935,268 Property, plant and equipment 4,994,541 5,138,802 Less accumulated depreciation 4,016,850 3,814,391 ---------------------------- Property, plant and equipment, net 977,691 1,324,411 Other assets, net 386,190 338,081 ---------------------------- Total assets $ 5,726,248 $ 7,597,760 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to bank $ - $ 1,097,312 Notes payable to related parties and others 912,000 452,000 Current maturities of capital lease obligations 28,644 56,431 Current maturities of long-term debt 4,954 2,004,461 Accounts payable 1,892,344 1,268,558 Accrued expenses 1,148,939 1,789,392 ---------------------------- Total current liabilities 3,986,881 6,668,154 Capital lease obligations, less current maturities 63,349 12,688 Long-term debt, less current maturities 48,206 53,028 ---------------------------- Total liabilities 4,098,436 6,733,870 ---------------------------- Commitments and contingencies - - Redeemable preferred stock, $1 par value; none issued - - Stockholders' equity: Convertible preferred stock, $1 par value - authorized 1,000,000 shares, including redeemable preferred stock; none issued - - Common stock, $.01 par value - authorized 20,000,000 shares; 1,808,213 and 1,689,742 shares issued and outstanding, respectively 18,082 16,897 Capital in excess of par value 4,897,915 4,717,736 Common stock subscribed 2,477,000 - Unearned compensation (9,979) (15,260) Accumulated deficit (5,755,206) (3,855,483) ---------------------------- Total stockholders' equity 1,627,812 863,890 ---------------------------- Total liabilities and stockholders' equity $ 5,726,248 $ 7,597,760 ============================ The accompanying notes are an integral part of the consolidated financial statements. 18 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the years ended September 30, 2000 and October 2, 1999 September 30, October 2, 2000 1999 Net sales $ 6,766,248 $12,117,259 Cost of products sold 4,666,527 7,849,831 ---------------------------- Gross profit 2,099,721 4,267,428 Operating expenses: Research and development 1,337,652 1,437,557 Selling 1,920,523 2,300,798 General and administrative 1,165,185 1,333,963 Narrowband operations 294,039 309,505 ---------------------------- Operating expenses 4,717,399 5,381,823 ---------------------------- Operating loss (2,617,678) (1,114,395) Interest expense 570,067 753,979 Other income, net (376,647) (31,596) ---------------------------- Loss before extraordinary item (2,811,098) (1,836,778) Gain on early extinguishment of debt 911,375 - ---------------------------- Loss before income taxes (1,899,723) (1,836,778) Income taxes - - ---------------------------- Net loss $(1,899,723) $(1,836,778) ============================ Net loss per common share-basic and diluted: Loss per share Loss before extraordinary item $ (1.61) $ (1.19) Extraordinary item .52 - ---------------------------- Net loss $ (1.09) $ (1.19) ============================ Weighted average number of common shares-basic and diluted: Basic 1,747,277 1,542,183 Diluted 1,747,277 1,542,183 The accompanying notes are an integral part of the consolidated financial statements. 19 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity for the years ended September 30, 2000 and October 2, 1999 Common Stock Capital in Common Unearned Total -------------------- Excess of Stock Comp- (Accumulated Stockholders' Shares Amount Par Value Subscribed ensation Deficit) Equity Balance at October 3, 1998 1,435,056 $14,351 $4,241,522 - $(28,177) $(2,018,705) $ 2,208,991 Net loss for 1999 - - - - - (1,836,778) (1,836,778) Exercise of stock options 8,000 80 11,920 - - - 12,000 Compensation element of stock options granted - - 10,313 - (10,313) - - Issuance of shares under Employee Investment Plan and Employee Stock Purchase Plan 22,313 222 59,021 - - - 59,243 Conversion of notes payable to related parties and others into common stock 224,373 2,244 328,989 - - - 331,233 Value of common stock warrants issued to bank and holders of subordinated notes - - 65,971 - - - 65,971 Amortization of unearned Compensation - - - - 23,230 - 23,230 --------------------------------------------------------------------------------------------- Balance at October 2, 1999 1,689,742 16,897 4,717,736 - (15,260) (3,855,483) 863,890 Net loss for 2000 - - - - - (1,899,723) (1,899,723) Exercise of stock warrants 28,068 281 2,526 - 2,807 Common stock subscribed-2,898,090 shares at $0.8547 per share - - - 2,477,000 - - 2,477,000 Compensation element of stock options granted, net of forfeits - - 5,656 - (5,656) - - Issuance of shares under Employee Investment Plan and Employee Stock Purchase Plan 44,844 448 54,732 - - - 55,180 Conversion of notes payable to related parties and others into common stock 45,559 456 23,035 - - - 23,491 Value of common stock warrants issued to bank and holders of subordinated notes - - 94,230 - - - 94,230 Amortization of unearned Compensation - - - - 10,937 - 10,937 --------------------------------------------------------------------------------------------- Balance at September 30, 2000 1,808,213 $18,082 $4,897,915 $2,477,000 $ (9,979) $(5,755,206) $ 1,627,812 ============================================================================================ The accompanying notes are an integral part of the consolidated financial statements. 20 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the years ended September 30, 2000 and October 2, 1999 September 30, October 2, 2000 1999 Operating activities: Net loss $ (1,899,723) $ (1,836,778) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 345,488 424,083 Gain on asset dispositions (335,587) (21,580) Amortization of debenture discount and debt issue costs 28,320 237,670 Warrants issued for financing 94,230 65,971 Provision for losses on accounts receivable 37,355 64,111 Employee investment plan expense 51,277 56,645 Amortization of unearned compensation 10,937 23,230 Gain on debt extinguishments (911,375) - Changes in operating assets and liabilities: Accounts and notes receivable 629,580 439,719 Inventories, prepaid expenses and other current assets 944,498 658,177 Accounts payable and accrued expenses 937,982 (9,255) ------------------------------- Net cash provided by (used in) operating activities (67,018) 96,993 ------------------------------- Investing activities: Proceeds from asset dispositions 496,784 3,264 Purchases of property, plant and equipment, including self-constructed equipment (5,462) (55,872) Other (25,122) (36,682) ------------------------------- Net cash provided by (used in) investing activities 466,200 (89,290) ------------------------------- Financing activities: Proceeds from sale of common stock 6,710 14,598 Proceeds from notes payable to related parties and others 462,865 7,303 Proceeds from common stock subscribed 2,477,000 - Repayment on note payable to bank (1,097,312) (321,353) Principal payments on capital lease obligations and long-term debt (2,077,821) (62,223) ------------------------------- Net cash used in financing activities (228,558) (361,675) ------------------------------- Increase (decrease) in cash and equivalents during year 170,624 (353,972) Cash and equivalents at beginning of year 39,189 393,161 ------------------------------- Cash and equivalents at end of year $ 209,813 $ 39,189 =============================== Supplementary Cash Flow Information Interest paid $ 167,488 $ 184,194 Conversion of notes payable and accrued interest to equity 23,491 331,233 Capital lease obligations incurred to acquire equipment 93,501 16,800 The accompanying notes are an integral part of the consolidated financial statements. 21 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements 1. Business Activities: Datamarine International, Inc. and subsidiaries ("we" or the "Company") manufactures and markets electronics including radiotelephone systems for land and marine applications and marine depth sounders and related instrumentation. Narrowband products consist of hand held, mobile and base station components for use in the 220 MHz radio service, and are sold primarily to business users of private radio services. Marine communications products are high performance radios used on commercial vessels, fishing vessels and ocean-going yachts. Marine instrumentation products are up-to-date instruments for pleasure craft; small boats and yachts; sail and power; inshore and offshore. Marine communication and marine instrumentation products are sold worldwide through approximately 500 dealers. We introduced our 220 MHz land mobile product line in 1993. We also have agreements covering the construction and operation of narrowband land mobile systems (see Note 11). 2. Significant Accounting Policies: Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, SEA, Inc. ("SEA"), its 97.5% owned subsidiary, Narrowband Network Systems, Inc. ("NNS") and its 60% owned subsidiary, Datamarine International Australia PTY, LTD. The Company has recognized the losses attributable to the minority owner's interest in Datamarine International Australia PTY, LTD. in excess of the minority owner's investment. Upon consolidation, all intercompany accounts, transactions and profits have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities. We are also required to make estimates and assumptions that affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. Fiscal Year The Company's fiscal year consists of 52 weeks ending on the Saturday nearest September 30. Revenue Recognition Revenue from the sale of products and services is recognized in the consolidated statements of operations as services are rendered or upon shipment. Cash and Cash Equivalents We consider all highly liquid investments, with an original maturity of three months or less when purchased, to be cash equivalents. 22 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 2. Significant Accounting Policies, Continued: Concentration of Credit Risk The concentration of credit risk with respect to trade receivables is, in our opinion, considered minimal due to the Company's diverse customer base. The customers for the marine products are primarily distributors and dealers who resell to both recreational and commercial boaters. The customers for the land mobile communication products consist primarily of industrial users of private land mobile radio services. We sell to customers throughout the world with a majority of the sales in the United States. Except for our Australian subsidiary we do not have foreign operations. Our export sales were approximately $755,000 in 2000 and $2,028,000 in 1999. We perform periodic credit evaluations of our customers, usually sell on open account and do not require collateral. All sales are denominated in US dollars so we do not have foreign currency exposure. Inventories Inventories are stated at the lower of cost (based on the first-in, first- out method) or market. Property, Plant and Equipment Property, plant and equipment, including self constructed assets, are stated at cost. Depreciation is based on the straight-line method over the useful lives of the assets (see Note 5). Upon disposition of property, plant and equipment, the cost and related depreciation are removed from the accounts, and any gain or loss is reflected in the consolidated statement of operations. FCC License Costs Costs associated with acquiring, developing and maintaining 220 MHz licenses are amortized on a straight-line basis over ten years and are included in other assets. Research and Development Expenditures for research and development are charged to expense as incurred. Advertising Expenditures for advertising are charged to expense as incurred. Advertising expense was $233,272 in 2000 and $226,843 in 1999. Warranty Costs We estimate and charge to current expense the amount which will be needed to cover future warranty obligations for products sold during the year. Income Taxes We account for income taxes using the liability method. Deferred tax balances are recognized at the currently enacted tax rates for all temporary differences between the book and tax bases of assets and liabilities, net of a valuation allowance as appropriate. 23 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 2. Significant Accounting Policies, Continued: Stock Based Compensation We apply APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations in measuring compensation cost for our stock option plans. We also disclose pro forma net income (loss) and net income (loss) per share as if compensation cost had been determined consistent with Statement of Financial Accounting Standards (FAS) No. 123, Accounting for Stock Based Compensation. Earnings Per Share Basic net income or loss per common share is based on the weighted average number of common shares outstanding during the year. Diluted earnings per share is based on the weighted average number of common shares and common stock equivalents outstanding. Common stock equivalents include shares which would be issued upon exercise of stock options and warrants or conversion of debentures. Common stock equivalents are excluded from the calculation when they are anti-dilutive. Reclassifications Certain reclassifications have been made to the prior years' financial statements in order to conform to the 2000 presentation, with no impact on previously reported net loss or stockholders' equity. 3. Going Concern: As shown in the consolidated financial statements, the Company incurred a net loss of $1,899,723 in 2000 and $1,836,778 in 1999. The Company's ability to continue as a going concern is dependant upon its ability to raise additional capital and operate at a profit. Our plans with respect to these matters are described below. Losses incurred by the Company in recent years are primarily attributable to maintaining land mobile engineering, manufacturing and marketing capabilities despite significantly reduced revenues in this product line. We believe that the FCC's 1999 issuance of Phase II licenses will result in increased demand for the Company's land mobile products. Increased demand is reflected in the Company's land mobile order backlog which has increased from $1,429,000 at October 2, 1999 to $2,500,000 at September 30, 2000. The recovery of land mobile revenues is currently being hindered by product shortages due to the Company's working capital constraints and failures by one of the Company's suppliers to deliver products as scheduled. In the event that land mobile revenues do not meet expectations, management has a plan for significantly reducing land mobile related operating expenses. The Company may elect to raise capital by selling 220 MHz licenses and repeater equipment owned by its subsidiary, Narrowband Network Systems, Inc. The first sale of such equipment occurred in December 1999. During the year ended September 30, 2000 the Company entered into agreements to sell additional equipment and licenses for an aggregate selling price of $568,000. Losses during 2000 increased as a result of significantly reduced revenues due to inventory shortages. Inventory shortages were caused by working capital constraints, primarily due to reductions in bank credit facilities. Effective March 30, 2000 our variable bank line of credit was converted to an accounts receivable factoring agreement which expired July 31, 2000. The bank elected not to 24 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 3. Going Concern, Continued: extend the factoring agreement and on August 4, 2000 the President of the Company repaid the bank's loan for the then outstanding balance of approximately $285,000. Terms on the resulting loan from the President are the same as they were with the bank. During October 2000 the Company entered into a new senior revolving credit agreement with an asset based lender. During September 2000 the Company commenced a $3,750,000 private placement common equity offering. As of September 30,2000 the Company had received proceeds of $2,477,000 and used $2,200,000 of the proceeds to redeem the Subordinated Convertible Debentures (see Note 9). In order to operate at a profit the Company will need to increase sales revenues. The Company must raise additional funding to be used to increase inventory and production levels to sustainable levels. No such funding is committed at this time, and there is no assurance that the Company will be able to obtain additional financing on acceptable terms. 4. Inventories: Inventories consist of the following: 2000 1999 Finished goods and subassemblies $ 963,784 $1,583,442 Work-in-process 128,508 174,019 Purchased parts and materials 2,465,118 2,729,729 -------------------------- $3,557,410 $4,487,190 ========================== 5. Property, Plant and Equipment: Property, plant and equipment consist of the following: Estimated 2000 1999 Useful Lives Design, test and manufacturing equipment $2,899,392 $2,801,437 5 years Narrowband network equipment 1,298,616 1,541,840 10 years Office furniture and general equipment 551,708 550,700 3 - 5 years Buildings and improvements 136,247 136,247 10 - 25 years Leasehold improvements 101,178 101,178 3 - 10 years Vehicles 7,400 7,400 5 years -------------------------- $4,994,541 $5,138,802 ========================== Design, test and manufacturing equipment includes equipment under capital leases with an original cost of $153,526 and accumulated depreciation of $38,333 as of September 30, 2000. 25 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 6. Accrued Expenses: Accrued expenses consist of the following: 2000 1999 Payroll and related fringe benefits $ 314,309 $ 295,801 Commissions 112,910 127,048 Warranty costs 93,253 122,703 Co-op advertising 213,080 212,252 Interest 7,665 834,181 Deposits and deferred revenue 190,000 - Other 217,722 197,407 -------------------------- $1,148,939 $1,789,392 ========================== 7. Note Payable to Bank: Amounts due to banks as of September 30, 2000 and October 2, 1999 were $0 and $1,097,312 respectively. As of October 2, 1999 the Company had a variable bank line of credit for up to $1,418,665 with interest payable monthly at 1.75% over prime (10.0% at October 2, 1999). Effective March 30, 2000 the variable bank line of credit was converted to an accounts receivable factoring agreement which expired July 31, 2000. The bank elected not to extend the factoring agreement and on August 4, 2000 the President of the Company repaid the bank's loan for the then outstanding balance of approximately $285,000. Terms on the resulting loan from the President are the same as they were with the bank (see Note 8). As a condition of loan extensions during the year the bank received warrants to purchase 51,000 shares of common stock. The exercise price of the warrants is $0.01 per share. The weighted-average interest rate on short-term borrowings was 10.7% for fiscal 2000 and 9.2% for fiscal 1999. 8. Notes Payable to Related Parties and Others: Notes payable to related parties and others at September 30, 2000 consists of $812,000 in subordinated loans payable to the Company's President and a $100,000 subordinated short-term note payable to an unrelated party. The $812,000 payable to the Company's President is comprised of loans of $312,000 and $500,000. The $312,000 loan includes amounts used to repay the senior bank line in August 2000 and bears interest at prime plus 1.75% (11.25% at September 30, 2000), plus 5,000 $0.01 common stock warrants per month during the life of the loan. These are the same terms as the Company had with the senior lender. The Company has been making monthly payments of interest only. The $500,000 loan includes the August 2000 refinancing of a $352,000 loan from the Company's President. Monthly payments of 1% of the outstanding balance including interest at 5.875% plus approximately 980 $0.10 common stock warrants per month, declining as the loan is repaid. Effective November 28, 2000 the interest rate changes to prime plus 4.25%. During fiscal 2000 the Company's President received a total of 18,834 common stock warrants in connection with loan agreements. Interest expense of $26,415 was calculated using the Black-Scholes model. The balance on the subordinated loan payable at October 2, 1999 was $352,000 with monthly payments of 1% of the outstanding balance including interest at 2.25% over prime (10.5% at October 2, 1999). 26 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 8. Notes Payable to Related Parties and Others, Continued: The terms of the subordinated short-term notes were amended during 1998 to extend the due date for principal and interest to March 1999. During 1999 the maturity date of the notes was again extended to March 2000 and subsequently extended to March 2001. For each six month extension the note holder receives 1,680 common stock warrants (exercisable for $0.10 per share) per $100,000 principal outstanding. The estimated fair value of the additional warrants is amortized to expense over the term of the maturity extension. Note holders also have an option to convert any portion of the notes or accrued interest to common stock. During 2000 the short-term note holder converted a total of $23,491 in accrued interest to common stock. 9. Long-Term Debt: Long-term debt consists of the following: 2000 1999 Subordinated Convertible Debentures, due December 2000 $ - $ 2,000,000 Mortgage note, monthly payments of $881, including interest at 11.25% adjustable annually, due February 2008, collateralized by the underlying building 53,160 57,489 ------------------------ 53,160 2,057,489 Less current maturities (4,954) (2,004,461) ------------------------ $48,206 $ 53,028 ======================== Maturities of long-term debt are as follows: Fiscal Year 2001 $ 4,954 2002 5,410 2003 6,051 2004 6,769 2005 7,571 Thereafter 22,405 On December 19, 1995 the Company completed a private placement issuance of $2,000,000 in Subordinated Convertible Debentures (the "Debentures") with Alta Subordinated Debt Partners III ("ASDP III"), originally due December 19, 2000. On November 24, 1997 the Company received notice from ASDP III of an alleged violation of certain covenants related to the Debenture Purchase Agreement dated December 19, 1995. On February 17, 1999 the Company received a letter from the ASDP III's counsel demanding payment of the Debenture principal and all accrued interest by February 22, 1999. On February 25, 1999 ASDP III filed suit in the Superior Court of the Commonwealth of Massachusetts claiming a breach of the December 19, 1995 Debenture agreement. The complaint sought damages in the amount of $2,827,863 plus interest and reasonable attorneys' fees and costs. The matter was scheduled for trial on June 19, 2000. Prior to the trial the Company and ASDP III reached an agreement regarding the due date of the Debentures. Under the terms of the agreement, ASDP III agreed to discontinue its suit against the Company in exchange for the Company agreeing not to challenge either the full amount due or the Debenture due date of December 19, 2000. The agreement gave the Company or 27 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 9. Long-Term Debt, Continued: its designee the option to redeem the Debentures for $2,200,000 by September 30, 2000. On September 27, 2000 the Company exercised its option to purchase the Debentures and accrued and unpaid interest of $1,111,375 for $2,200,000, resulting in a gain of $911,375, which was accounted for as an extraordinary gain in the accompanying financial statements. The Company also canceled the common stock rights associated with the Debentures. The estimated fair value of the notes payable to related parties and others, and long-term debt at September 30, 2000 approximates the carrying value of such debt in the financial statements, based on current interest rates for similar obligations with like maturities. 10. Commitments and Contingencies: The Company is the lessee of equipment under capital leases expiring in the fiscal year 2004. At the time of acquisition, the assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The Company leases manufacturing, warehouse and office facilities under various operating leases. Rental expense for these leases, excluding real estate taxes paid by the Company for a leased building, was $249,000 in 2000 and $231,000 in 1999. Approximate future minimum lease payments, by year and in the aggregate, under capital and noncancelable operating leases, were as follows at September 30, 2000: Capital Operating 2001 $ 41,160 $245,592 2002 38,840 238,392 2003 32,774 59,598 2004 2,756 - ---------------------- Total future minimum lease payments 115,530 $543,582 Less amounts representing interest (23,537) ======== -------- Present value of future minimum lease payments 91,993 Current portion 28,644 -------- Non current $ 63,349 ======== Periodically, the Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company's management does not expect that the outcome in any of these proceedings will have a material adverse effect on the financial position of the Company. 11. Narrowband Network Systems, Inc. ("NNS"): On November 18, 1994, NNS was incorporated in the State of Washington as a subsidiary of SEA to participate in the business of providing specialized mobile radio ("SMR") services. NNS has entered into management agreements ("Management Agreements") with the holders of 220 MHz licenses granted by the FCC in approximately 47 markets across the United States (the "Managed Markets"). Under the Management Agreements, NNS is required to construct and develop the SMR systems in the Managed Markets. NNS retains the revenues generated by the systems, after remitting a fixed percentage to the license holders. Under each of the Management Agreements, NNS has an option after construction to acquire the license holder's interest in their respective SMR system in exchange for (i) a fixed percentage of the gross receipts from the system for as long as it continues to be operated by NNS and (ii) a fixed percentage of any profit realized by NNS upon the system's ultimate disposition. In certain cases, 28 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 11. Narrowband Network Systems, Inc. ("NNS"), Continued: NNS has guaranteed a minimum dollar amount to be remitted to the license holder upon system disposition. Disposition of these systems is solely at the Company's discretion. In April 1995, NNS entered into an agreement with Incom Communications Corporation ("ICC") for the operation of the SMR systems in certain of the Managed Markets. Under the terms of this agreement, NNS is obligated to provide the licenses and certain backbone equipment for each system and ICC is required to provide either all or partial operational support. Revenues from system operations are split between NNS and ICC using contractual percentages based upon the level of support provided by each. In addition, the Company has contracted with other third parties ("SMR Operators") for operation of the systems in certain of the Managed Markets. Under the terms of these agreements, NNS is to provide the system facilities and the SMR Operators agree to provide essentially all other operational support in exchange for a fixed percentage of the gross revenues from each system and an equity interest in the systems, including the related licenses. At September 30, 2000 and October 2, 1999 fixed assets include $1,298,616 and $1,541,840 (less accumulated depreciation of $590,822 and $552,105) respectively of facilities costs related to the SMR systems and other assets include $408,547 and $448,600 (less accumulated amortization of $161,128 and $146,072) representing legal and other costs associated with the acquisition of license interests in the Managed Markets. Prior to the first quarter of fiscal 2000, revenues were insignificant or collection was uncertain so revenue recognition was deferred. During the first quarter, management determined that certain revenues attributable to operations from early 1997 through part of 1999 were due and collectible so they were billed and recognized. Ongoing revenues of this type are currently accruing at about $8,000 per quarter and will be recognized at such time as the amounts and collectibility can be reasonably estimated. The recoverability of narrowband network equipment and related capitalized legal and acquisition costs of FCC licenses is dependent upon the successful development of systems in each of the respective markets, or through the sale of such assets. The first sale of such equipment occurred in December 1999. During the year ended September 30, 2000 the Company entered into agreements to sell additional equipment and licenses for an aggregate selling price of $568,000. We estimate that the carrying value of our investment in these assets will be recovered from cash flow generated by the systems once they have been developed. However, it is possible that such estimates could change as a result of technological, regulatory or other changes. 12. Stockholders' Equity: Stock Option Plans The 1992 Stock Option Plan for Non-Employee Directors provides for annual grants of nonqualified options to purchase 1,500 common shares to each non- employee Director. The exercise price for options granted is equal to the fair market value at the date of grant. Options granted under this Plan are immediately vested and exercisable for a period of ten years from the date of grant so long as the holder remains a Director. The Plan was terminated by the Board of Directors on December 12, 1995 and no new awards will be made under the 1992 Plan. 29 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 12. Stockholders' Equity, Continued: Stock Option Plans, Continued: Information regarding activity in the 1992 Stock Option Plan for Non- Employee Directors is as follows: Weighted Average Exercise Shares Price Outstanding and exercisable at October 3, 1998 and October 2, 1999 4,500 $5.91 Canceled in fiscal 2000 (4,500) 5.91 ----------------- Outstanding and exercisable at September 30,2000 - - ================= The 1995 Stock Option Plan for Non-Employee Directors was approved by the stockholders at the special meeting held in 1996. The Plan provides for annual grants of nonqualified options to purchase 2,000 common shares to each non-employee director. The exercise price for options granted is equal to the fair market value at the date of grant. Options granted under this Plan are immediately vested and exercisable for a period of ten years from the date of grant so long as the holder remains a director. Information regarding activity in the 1995 Stock Option Plan for Non- Employee Directors is as follows: Weighted Average Exercise Shares Price Outstanding and exercisable at October 3, 1998 8,000 $6.53 Granted in fiscal 1999 4,000 2.375 ------------------ Outstanding and exercisable at October 2, 1999 12,000 5.15 Granted in fiscal 2000 2,000 .75 Canceled in fiscal 2000 (8,000) 5.86 ----------------- Outstanding and exercisable at September 30, 2000 6,000 $2.73 ================= Weighted average fair value of options granted during the year ended September 30, 2000 $0.40 The 1991 Stock Option Plan authorized grants of incentive and nonqualified stock options for 350,000 common shares. 200,000 shares are reserved for issuance of options at an exercise price equal to the fair market value at the date of grant and vest equally over time, generally four years (the "Qualified Options"). 100,000 shares are reserved for issuance of options which vest equally over time but do not meet the requirements of the Qualified Options (the "Nonqualified Options"). 50,000 shares are reserved for issuance of options which also do not meet such requirements, but are subject to an accelerated vesting schedule (the "Piggy-Back Options"). 30 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 12. Stockholders' Equity, Continued: Stock Option Plans, Continued: Qualified Options and Nonqualified Options expire not more than ten years from the date of grant and Piggy-Back Options expire twenty years and six months from the date of grant. The Piggy-Back Options are to be granted in conjunction with the grant of Nonqualified Options. The Piggy-Back Options shall not be exercised prior to twenty years from the date of the grant, except that if, within five years from the date of grant, the trading price exceeds a specified price, such Piggy-Back Options shall become subject to a five-year vesting schedule with respect to the number of shares equal to 50% of the unexercised portion of Nonqualified Options granted to the employee. All Piggy-Back Options outstanding at September 30, 2000 commenced five year vesting on September 9, 1994 and are fully vested as of September 30, 2000. Proceeds received from the exercise of options are credited to stockholders' equity. Compensation cost is recorded based upon the difference between market prices and exercise prices at the date of grant and amortized to expense over the vesting period pursuant to APB Opinion No. 25, Accounting for Stock Issued to Employees. Information regarding activity in the 1991 Stock Option Plan is as follows: Qualified Options Nonqualified Options Piggy-Back Options ------------------ -------------------- ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at October 3, 1998 93,524 5.55 56,500 1.85 22,000 4.50 Granted 12,000 2.88 7,500 1.00 Exercised - - (8,000) 1.50 (4,000) 4.50 Canceled (20,424) 5.45 (7,500) 1.00 - - ------------------------------------------------------------- Outstanding at October 2, 1999 85,100 5.19 48,500 1.91 18,000 4.50 Granted 88,818 .75 13,000 1.00 - - Canceled (7,282) 4.09 (1,500) 3.00 (500) 4.50 ------------------------------------------------------------- Outstanding at September 30, 2000 166,636 2.87 60,000 1.68 17,500 4.50 ============================================================= Exercisable at September 30, 2000 147,386 3.02 47,000 1.87 17,500 4.50 Available for grant at September 30, 2000 4,537 - 15,625 - 31,750 - Exercisable at October 2, 1999 71,725 5.53 46,000 1.96 18,000 4.50 Weighted average fair value of options granted during the year ended September 30, 2000: Exercise price equal to market at grant (88,818 options) $ 0.53 Exercise price less than market at grant (13,000 options) $ 0.37 31 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 12. Stockholders' Equity, Continued: Stock Option Plans, Continued: The following is a summary of stock options outstanding under the 1991 and 1995 plans at September 30, 2000: Options Outstanding Options Exercisable ---------------------------------------------------------------- ------------------------------ Range of Weighted Average Weighted Weighted Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price $ 0.75-2.50 147,818 7.44 $0.98 122,193 $0.99 $ 3.00-6.00 86,318 4.34 $4.48 76,693 $4.55 $ 9.00 16,000 4.55 $9.00 16,000 $9.00 The total compensation cost recognized in income for stock-based compensation was $10,937 in 2000 and $23,230 in 1999. Had the compensation cost for the Company's option plans been determined consistent with FAS 123, the Company's pro forma net loss and net loss per share would have been as follows: 2000 1999 Net loss: As reported $(1,899,723) $(1,836,778) Pro forma (1,954,334) (1,840,080) Basic and diluted net loss per share: As reported $ (1.09) $ (1.19) Pro forma (1.12) (1.19) The effects of applying FAS 123 on pro forma disclosures of net loss and loss per share for fiscal 2000 and 1999 are not likely to be representative of the pro forma effects in future years. The fair value of each option grant has been estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: 2000 1999 Dividend yield 0% 0% Volatility 73.9 - 76.4% 62.3 - 73.4% Risk free interest rate 6.40% 5.00% Expected option term (years) 3 - 6 3 - 6 32 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 12. Stockholders' Equity, Continued: Stock Option Plans, Continued: Employee Stock Purchase Plan The Company has an employee stock purchase plan for full-time employees who have attained certain length-of-service requirements and who do not own 5% or more of the Company's outstanding stock. Under the terms of the plan, eligible employees are granted the right on a semiannual basis to purchase shares of the Company's common stock. The purchase price is equal to 90% of the fair market value of the Company's common stock during certain predetermined periods, and employees may purchase shares having an aggregate value of up to 10% of basic compensation. The Company issued 3,056 shares in 2000 and 908 shares in 1999 in connection with the Employee Stock Purchase Plan. Employee Investment Plan The Company maintains the Datamarine Employee Investment Plan, a 401(k) Plan. All full-time employees who have reached age 21 and have one year of service are eligible for participation. Employees can contribute up to 15% of their base salary with the Company matching 50% of the first 6% of base salary contributed. The Company issued 41,788 shares in 2000 and 21,405 shares in 1999 under the Employee Investment Plan. Shares Reserved for Future Issue At September 30, 2000 the Company had reserved the following shares of its common stock for future issue: Employee Stock Purchase Plan 373 1991 Stock Option Plan: Qualified Options 171,173 Nonqualified Options 75,625 Piggy-Back Options 49,250 1995 Directors Stock Option Plan 48,000 Bank Loan Agreement 72,000 Subordinated Notes and related warrants 120,160 ------- 536,581 ======= Preferred Stock The Company has the authority to issue one million shares of preferred stock, $1.00 par value per share. At September 30, 2000 and October 2, 1999, no shares of preferred stock were issued or outstanding. Private Placement Offering of Common Stock During September 2000, under Section 4(2) of the Securities Act, the Company commenced a private placement offering for up to 4,387,500 shares of $0.01 common stock at a price of $0.8547 per share. As of September 30, 2000 the Company had sold $2,477,000 of the offering and expected to continue the offering through January 2001. 33 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 13. Net Loss Per Share: Stock options for 250,136 shares, subordinated notes convertible into 55,694 shares and warrants for 136,466 shares were not included in fiscal 2000 because they would be anti-dilutive. Stock options for 168,100 shares, preferred stock convertible into 196,422 shares, subordinated notes convertible into 73,666 shares and warrants for 91,340 shares were not included in fiscal 1999 because they would be anti-dilutive. 14. Income Taxes: The components of income tax expense consists of the following: 2000 1999 Current and deferred provision - Federal $0 $0 ============ The tax effects of temporary differences that give rise to deferred tax assets are as follows: 2000 1999 Net federal and state operating loss carryforwards $ 3,344,000 $ 2,761,000 Accrued expenses not currently deductible for tax purposes 147,000 158,000 General business tax credit carryforwards 128,000 128,000 Property and equipment (69,000) (102,000) Allowance for doubtful accounts 56,000 49,000 Inventory, principally due to valuation differences and overhead application 217,000 192,000 ---------------------------- 3,823,000 3,186,000 Less valuation allowance (3,823,000) (3,186,000) ---------------------------- Net deferred tax assets $ - $ - ============================ The Company provided a valuation allowance equal to its deferred tax asset in 2000 and 1999. Management considered the losses incurred in 1999 and 2000, the inability to predict land mobile sales in the post FCC auction period, and uncertainties surrounding the Company's status as a going concern. Based on the information available, management believes that a valuation allowance equal to 100% of the deferred tax asset should continue to be established at year end and increased the deferred tax valuation allowance by $637,000 during fiscal 2000 and $590,225 during fiscal 1999. Until such time as future taxable income is more likely than not the Company will continue to reserve an appropriate portion of its deferred tax asset. The reconciliation of income taxes at the federal statutory rate of 34% to the income tax provision presented in the consolidated statement of operations is presented below: 2000 1999 Income tax expense (benefit) at statutory rate $(646,000) $(625,000) State income taxes (benefit), net of federal tax effects (6,000) (5,000) Other 15,000 39,775 Change in valuation allowance 637,000 590,225 ------------------------- Income tax expense $ - $ - ========================= 34 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 14. Income Taxes, Continued: As of September 30, 2000, the Company has net federal operating loss carryforwards of $8,740,000 which are available to reduce future federal taxable income ($71,000 of which expire in fiscal 2008, $513,000 in fiscal 2009, $227,000 in fiscal 2010, $2,068,000 in 2012, $2,486,000 in 2013, $1,679,000 in 2019 and the remainder in 2020). The Company also has general business tax credit carryforwards of $54,000 which expire between 2006 and 2111, and alternative minimum tax credits of $74,000 that can be carried forward indefinitely. 15. Operating Segment Information: The Company adopted SFAS 131 "Disclosures about Segments of an Enterprise and Related Information" in 1999. The Company is organized into three primary operating segments according to its primary product categories: "Land Mobile Communications", "Marine Communications" and "Marine Instrumentation", and a less significant but separately identifiable segment referred to as "Narrowband Operations." The Company's reportable segments have been determined based on the nature of its operations and products offered to customers. The accounting policies of the segments are the same as those described in Note 2, "Significant Accounting Policies." Segment results are measured based on operating income (loss). Segment assets consist of assets that are identified to reportable segments and reviewed by the chief operating decision makers. Included in segment assets are accounts receivable, inventory, prepaid expenses, other assets and property, plant and equipment. Net sales 2000 1999 Land mobile communications $ 1,477,166 $ 1,566,585 Marine communications 3,350,632 8,142,812 Marine instrumentation 1,840,111 2,399,012 Narrowband operations 98,339 8,850 ---------------------------- Total consolidated net sales $ 6,766,248 $12,117,259 ============================ Operating income (loss) 2000 1999 Land mobile communications $(1,344,361) $(1,545,502) Marine communications (817,760) 868,437 Marine instrumentation (24,298) 81,420 Narrowband operations (195,700) (301,380) All other (235,559) (217,370) ---------------------------- Total consolidated operating loss $(2,617,678) $(1,114,395) ============================ Segment assets 2000 1999 Land mobile communications $ 2,022,765 $ 2,248,497 Marine communications 1,629,452 2,677,641 Marine instrumentation 773,916 1,198,299 Narrowband operations 1,087,305 1,292,265 All other 212,810 181,058 ---------------------------- Total consolidated assets $ 5,726,248 $ 7,597,760 ============================ 35 DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements, Continued 15. Operating Segment Information, Continued: Capital expenditures 2000 1999 Land mobile communications $ - $ 54,200 Marine communications - 537 Marine instrumentation - 538 Narrowband operations - - All other 98,963 17,397 ---------------------------- Total consolidated capital expenditures $ 98,963 $ 72,672 ============================ Depreciation and amortization expense 2000 1999 Land mobile communications $ 51,230 $ 86,563 Marine communications 33,190 44,482 Marine instrumentation 11,143 17,674 Narrowband operations 181,746 198,293 All other 68,179 77,071 ---------------------------- Total consolidated depreciation and amortization expense $ 345,488 $ 424,083 ============================ Geographic area net sales 2000 1999 United States $ 6,011,613 $10,089,734 Foreign 754,635 2,027,525 ---------------------------- Total consolidated net sales $ 6,766,248 $12,117,259 ============================ No customer individually accounted for 10% or more of the Company's total net sales in 2000 or 1999. The Company does not have any significant property, plant and equipment outside the United States. 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III The Information called for by Part III of Form 10-KSB (consisting of Item 10 - Directors and Executive Officers of the Registrant, Item 11 - Executive Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and Management and Item 13 - Certain Relationships and Related Transactions) is incorporated by reference from the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules The financial statements as set forth under Item 8 are filed as part of this report. Schedule II - Valuation and Qualifying Accounts Report of Independent Certified Public Accountants on above listed financial statement schedule. Schedules not listed above have been omitted since they are either not required, not applicable, or the information is included in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K. The following reports on Form 8-K were filed during the quarter ended September 30, 2000: July 25, 2000 - Standstill Agreement. (c) List of Exhibits. The following exhibits are filed as a part of, or incorporated by reference into, this report on Form 10-KSB. Exhibit Number Description 3.1 Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended July 1, 2000, Commission File No. 0-8936. 3.2 Bylaws, incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-QSB for the quarter ended July 1, 2000, Commission File No. 0-8936. 37 4 Subordinated Notes Agreement with exhibits, incorporated by reference to Annual Report on Form 10-K for the Fiscal Year Ended September 27, 1997. 10.1 Datamarine International, Inc. 1991 Stock Option Plan, incorporated by reference to Registration Statement 33-48532 on Form S-8. 10.2 1992 Stock Option Plan for Non-employee Directors, incorporated by reference to Annual Report on Form 10-K for the Fiscal Year Ended October 1, 1994. 10.3 1995 Stock Option Plan for Non-employee Directors, incorporated by reference to Annual Report on Form 10-K for the Fiscal Year Ended September 28, 1996. 21 Subsidiaries 23 Consent of Independent Certified Public Accountants 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATAMARINE INTERNATIONAL, INC. By:/s/ DAVID C. THOMPSON ------------------------------ David C. Thompson President, Chief Executive Officer and Director By:/s/ JAN KALLSHIAN ------------------------------ Jan Kallshian Chief Financial Officer Date: January 5, 2001 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By:/s/ STEPHEN W. FRANKEL ------------------------------ Stephen W. Frankel, Chairman of the Board January 5, 2001 By:/s/ ARTHUR STASIK ------------------------------ Arthur Stasik, Director January 5, 2001 By:/s/ JOSEPH STEPHENS ------------------------------ Joseph Stephens, Director January 5, 2001 39 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS DATAMARINE INTERNATIONAL, INC. AND SUBSIDIARIES COL. A COL. B COL. C COL. D COL. E ---------------------------------------------------------------------------------------------------------------------------- Additions Balance at ------------------------ Beginning of Charged to Charged to Deductions Balance at DESCRIPTION Period Expenses Other (describe) End of Period Year ended September 30, 2000 Deducted from asset accounts: Allowance for doubtful accounts $ 153,743 37,355 15,647 (1) $ 175,451 Allowance for slow moving inventory 290,082 76,259 23,741 (2) 342,600 Valuation allowance for deferred tax asset 3,186,000 637,000 3,823,000 ------------------------------------------------------------------------ Totals $3,629,825 113,614 637,000 (4) 39,388 $4,341,051 ======================================================================== Product warranty liability $ 122,703 69,970 99,420 (3) $ 93,253 ======================================================================== Year ended October 2, 1999 Deducted from asset accounts: Allowance for doubtful accounts $ 118,218 64,111 28,586 (1) $ 153,743 Allowance for slow moving inventory 242,249 69,781 21,948 (2) 290,082 Valuation allowance for deferred tax asset 2,595,775 590,225 3,186,000 ------------------------------------------------------------------------ Totals $2,956,242 133,892 590,225 (4) 50,534 $3,629,825 ======================================================================== Product warranty liability $ 137,328 119,733 134,358 (3) $ 122,703 ========================================================================40 Report of Independent Certified Public Accountants on Schedules To the Stockholders and Board of Directors of Datamarine International, Inc. and Subsidiaries In connection with our audit of the consolidated financial statements of Datamarine International, Inc. and Subsidiaries referred to in our report dated November 22, 2000, which is included in the Annual Report on Form 10- KSB, we have also audited Schedule II for the years ended September 30, 2000 and October 2, 1999. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Our report on the consolidated financial statements referred to above includes an explanatory paragraph which discusses the consolidated financial statements have been prepared assuming that the Company will continue as a going concern. /s/ GRANT THORNTON LLP Seattle, Washington November 22, 2000 Uncollectible accounts written off, net of recoveries. Obsolete material written off. Warranty claims honored during the year. Change in deferred tax asset valuation account charged or credited to income tax expense.