Datamarine seeks $3.5 million investment; plus, an interview with David Thompson

Datamarine International, Mountlake Terrace, WA, may yet receive the money it needs to fill back orders and continue product development. Last month, it appeared as though a potential $6 million investment in Datamarine from High Desert Partners, Denver, CO, was unraveling, although hope remained as late as Aug. 10. David Thompson, Datamarine’s president, explained at the time that HDP’s purchase of preferred shares and common shares and the grant of a bridge loan were “delayed” by other transactions that HDP had pending. “While we are still hopeful that the HDP deal can proceed to closing, we and our placement agent, William Fritts of WPF Company, are also actively pursuing other potential investors in order to address our immediate working capital and long-term funding needs,” Thompson said on Aug. 10. By Sept. 7, Datamarine’s gaze had left HDP and had fallen on Santa Fe Capital Group, Santa Fe, NM. Datamarine announced that it had signed an agreement with Santa Fe Capital to raise $3.5 million through the sale of convertible preferred stock with warrants. Thompson commented: “Santa Fe Capital has a long record of raising funds for companies with similar size funding needs. During a period of 28 years, Santa Fe has raised more than $600 million.” David Silver, president of Santa Fe Capital, said that he knows Datamarine’s marine products because his father used them on his boats. He said that Santa Fe Capital had not previously helped to fund marine equipment manufacturers, so there was no conflict of interest. He added that Datamarine has “a hell of good product line, and their people are impeccably honest and hard-working.” He said that the convertible preferred stock will be priced above the market price but subject to events 12 to 18 months from now. He said that warrants could be added if certain conditions aren’t met. “That’s what you do when the market has beaten down a stock,” Silver said. Datamarine’s Thompson said that he has confidence in the company he has headed for 20 years, counting his service with SEA, which merged with Datamarine in 1985. “The proceeds will be used to restore our marine and land mobile businesses to profitable levels. Our strong order backlog indicates we’re poised to resume our position as a premier provider of marine electronics.” Thompson said the company also is the only manufacturer of 220MHz LMR equipment. Securicor Wireless, New York, uses Datamarine as its OEM supplier. Datamarine contracts with Seoul, Korea-based Maxon contracts to makes its 220MHz mobile unit. All of its other 220MHz equipment is made by SEA in the United States. “We want to take advantage of the 220MHz market’s expansion. Once we restore the financial health of the company, we expect to revisit our plan to expand the 220MHz SMR spectrum and service provision segment of our business. Our lack of working capital has kept us from pursuing the spectrum ownership and operating portion of the business. We first acquired spectrum in 1993 and continue to believe opportunities exist in acquiring licenses and consolidating existing operators,” Thompson said. INTERVIEW WITH DAVID THOMPSON On June 27, MRT’s editorial director, Don Bishop, interviewed Thompson at the Datamarine headquarters. At the time, the $6 million investment from HDP was pending, and references to financing refer to that funding. MRT: There was a time when narrowband 220MHz seemed to be advancing faster than it is now. Why should system operators and users want to use SEA’s 5kHz-wide 220MHz-band amplitude companded single-sideband (ACSSB) instead of FM? Thompson: Our 5 kHz equipment works superbly. The audio is good, and although the mobile data rate is slower than some other technologies, how much throughput does a plumbing repairman need? The central issue to me is an increasing awareness for low-cost voice and data to fill the needs of several million users of private mobile radio at a modest cost. In the federal government’s spectrum planning, they ignored people with lower economic capability for having mobile communications. The average Nextel bill is $70, which they crow about. They have special, smaller deals, but it still is expensive. That’s fine for people who want a wide variety of services, but the FCC’s responsibility is to fill the needs of all the public, not just to be auctioning things off. The FCC allowed an 800MHz band that was populated by people paying $15 to $20 a month per mobile for airtime to be swept away, so now the average 800MHz subscriber pays $70. I don’t think there’s anything wrong with redoing things, but the FCC has a responsibility for spectrum for people who can’t afford that. The FCC’s Private Radio Bureau has been missed. We’ve spent 15 years pioneering this technology. The FCC spent money at Stanford University saying they want 5kHz technology if someone could make it work. I have confidence, now that we’ve raised this money, because some cities do a nice job with 220MHz.It requires fewer base station repeaters than the higher frequency bands. And the key to economical mobile communications is lower-cost backbones. MRT: What does this money mean to Datamarine? Thompson: For anyone following our 10Qs and 10Ks for the last year-and-a-half, they understood that our losses were substantial because of a lack of working capital in marine and land mobile. We had orders, but lacked the capital to make everything that was on back order. We refused to reduce engineering, new product development and marketing. We made a bet—and it was risky—but it would appear as though the bet was the right one: to support our marine and land mobile customers. The $6 million means we can move ahead with products that are tested and in the field; products that are viable. MRT: What does the future hold for SEA’s 220MHz network operating subsidiary, Narrowband Network Systems? Thompson: It won’t receive any of this exact funding. We need a strategic plan as a service provider. Our new investors think big enough to understand that being a service provider is as interesting as being a hardware provider. MRT: If your eye is on expansion, why did you sell some systems earlier this year? Thompson: We sold some because we needed cash. When we later bought other licenses, we paid for them in stock. MRT: Where are the 220MHz systems operated by Narrowband Network Systems? Thompson: We have one or two 5-channel licenses in each of the following cities: New York; Philadelphia; Washington; Atlanta: Miami, Tampa and Jacksonville, FL; Chicago: Dallas Houston; Seattle; Portland, OR; San Francisco, San Diego, Los Angeles, Denver, CO; and Salt Lake City. All of these are Phase I licenses. We had plans during Phase I of expanding our spectrum holdings, but our working capital position didn’t allow us to participate in the auction. MRT: What products will the new funding support? Thompson: Our HF SSB marine radio, our VHF marine radio, our LoudHailer and Global Marine Distress and Safety Systems. And it will allow us to move more aggressively in providing our 220MHz mobiles and 220MHz repeaters. We have back orders for both. Datamarine has 25 years in marine communications and 15 years in land mobile communications. Everyone knows we make good products, and the investors were impressed with the back orders. MRT: Not long ago, Securicor Wireless contracted with Datamarine to manufacture its 220MHz radio equipment after E. F. Johnson Company exited the OEM business. How has that arrangement worked out? Thompson: Securicor Wireless did buy some LTR operating system radios. MRT: Does the fact that Datamarine makes 220MHz equipment using its own technology and brand make it difficult to serve Securicor Wireless as a supplier while competing with it as a manufacturer and system operator? Thompson: We didn’t lose sales to MPT 1327 linear modulation, which is Securicor Wireless’s trunking protocol and modulation technology. Datamarine uses LTR trunking with its ACSSB equipment. LTR is the trunking standard for business mobile communications in the United States. Securicor Wireless had a hard job to try to introduce MPT 1327. MRT: Where do you see Datamarine in the future? Thompson: We want to get 220MHz going and broaden the application. We know that the product line needs to be broadened. We’ve understood that being in land mobile only at 220MHz was a strategic weakness. We knew we couldn’t be important with only 220MHz products. But the freeze on issuing licenses really hurt us. On Sept. 30, 1996, the FCC announced a licensing freeze while it prepared to change from site licensing to auctions. That was at the end of a fiscal year in which our sales were $17 million. The freeze came, and we had two choices: Get out of land mobile or take the responsibility of sticking with it. That 30-month freeze tore our balance sheet to shreds. That’s what happened. With that taking place, we haven’t had the chance to broaden our offerings at other frequencies. MRT: What do you have in mind? Thompson: We need to look at the frequencies still available and what’s going to happen with refarming. MRT: Will you be concentrating in business and industrial product? Thompson: I think so, unless we became involved with someone with an APCO 25 license. I think APCO 25 will be substantial market in terms of dollars. MRT: What do you say to people who ask, “Why don’t you just use cellular? What do you need two-way radio for?” To say that cellular and PCS can replace two-way radio clearly is an oversimplification. Railroads; utilities; oil production companies; public safety agencies at the federal, state and local levels—the need for mobile communications that does what we used to call private mobile radio absolutely will be continue, and it grows all the time. Just imagine how big mobile communications is for business and industrial users now, compared to a decade ago. And cellular has been there all that time. I haven’t notice highway departments, police departments and railroads giving cellular phones to all of their employees for internal communications, let alone data. I think the roles change, but one of my favorite sayings is that there’s never been a radio service that didn’t fill up. It may well be that 800MHz SMR may have filled up with a next-generation service known as Nextel, but it did fill, and there’s more demand for wireless communications. I don’t think just because the demand for consumer wireless growing, the demand for business wireless necessarily is going to go away or go down. There will be some transition where people will conduct business on consumer items. Under no conditions would I intimate that the way business and industrial users make use of mobile communications isn’t changing, but they just want more. I’ve never seen an industry in the business and industrial area that doesn’t want more communications, and more specialized, and faster. MRT: What are they asking you for? Thompson: As I speak with substantial authority on 220MHz, I can say that individuals with limited financial resources know that they have to have some kind of wireless business communications. If it’s a guy with four plumbing trucks or 23 cement trucks, he needs to keep track of his vehicles geographically and via voice as inexpensively as possible and as simply as possible. MRT: How do they buy? Thompson: End-users buy from dealers. We have quite a few that have had success with 220MHz. And the dealers buy from manufacturers reps. We’ve had good reps because no one else has 220MHz. We have a lot of Kenwood and Icom reps. I’m a big believer in reps. MRT: What do they do for you? These are the kind of reps who are competent businessmen with 10 and 20 years of experience running a company or as part-owners. They are stable, and they have a lot at stake when they take on your line because their reputation in the territory is important. For smaller manufacturing companies with less than $50 million in sales, they represent no fixed cost because they only get commission on what they sell. The cost of having regional sales managers who are customer employees is expensive, and they tend to leave. Reps don’t pack up their organization and move six states away. An individual salesman might, but the rep, if he’s running the business well, keeps things together. Our reps are far above average in their understanding of systems needs for mobile communications. MRT: Let’s take a look at David Thompson. How did you come to join Datamarine? Thompson: I was with SEA when it merged with Datamarine in 1985. I had joined SEA in 1980. I helped the fellows who started SEA to get it going in 1975. I later had an advisory role for a year or so, and then I became the president. Datamarine had been founded in 1969. Prior to my work with SEA, I was president of SBE. MRT: The amateur radio equipment manufacturing company started by Don Stoner? Thompson: Yes. But not while he owned it. Stoner and his associates had sold SBE to Raytheon. I was marketing manager at Raytheon for their land mobile communications products, including ham gear and CB radios. I was in CB eight years before it was “discovered.” I had big faith in the average guy having mobile communications. It turned out to be that way. The CB boom was the beginning of the land mobile boom. Another individual and I bought the SBE brand and product line from Raytheon when it was closing its San Francisco facility. I was president of SBE for about 10 years. One of the three founders of SEA had worked for me at SBE. He was a bright guy. I helped them do some of their early financial planning. They were all engineers. The one who worked for me at SBE was the president of SEA. He realized that he didn’t want to be the president. He liked designing radios. They asked me if I would run the company. I did some of the advising and helping while running SBE, and at some point I left SBE and became more available. I spent more time here. MRT: SEA previously was named Stephens Engineering Associates after Richard Stephens, as I recall. Thompson: Yes. Dick Stephens did the original design work on the 220MHz products. We went into 220MHz because I understood land mobile. And I thought we needed a strategic balance against our marine business. We had a substantial share of a small market. The FCC had funded the initial work on amplitude compandored sideband at Stanford University, so this looked like an interesting opportunity to be a tiny frog in a giant pond. There were two critical elements to the decision. First, the marine HF radios that we manufactured use SSB, and marine radios have a 3.5kHz channel width. Second, we had Dick, who was a smart guy. We had a lot of confidence, whereas Motorola, Johnson, Kenwood and Yaesu said it couldn’t be done. “Who will make sideband work? It still will sound like Donald Duck,” people said. But we had a predisposition that it could be done. A couple of people tried it, but Dick did the early work on the radios, and when digital signal processing came along, that really made it much better. One interesting thing about technology is, if you’re going to be a leader, you have to start something when you don’t have all the answers. We were willing, just the way Motorola started IDEN without all the answers. If you’ve been around it long enough, you know a solution always appears. Basically the challenge with a 5kHz channel was to get good audio that would compare with FM. That was the standard of excellence. It required a low noise level and good voice recognition. There were some things we needed that didn’t exist when we started. But by the time we got there, some of them existed, and then a few more came along, and that’s what happens when you work on something for six or eight years. We had more understanding of this form of AM than anybody else who started. MRT: What has led you personally to stay with this for so long? Thompson: The biggest thing—for which we can’t take credit—is that we had no way out. I mentioned that earlier that once the radio service was frozen, we had all this backbone constructed for customers worth millions of dollars that operated on our 220MHz LTR system, and if we stopped, that would be really irresponsible. That’s No. 1. No. 2, there never was any doubt in my mind that the service would fill up, and there still would be a need for business and industrial radio communications. As we saw SMR get wiped away at different frequencies, it became obvious that the 100 channels of trunked SMR at 220MHz would be important. When we started, no one thought that 800 MHz wouldn’t be the way it was forever. And then there was 900MHz. For more than a decade, there have been increasing indications that this 220MHz service has a lot more potential than it’s been given credit for from a technical standpoint and a user standpoint. It’s really the only SMR service available now. That’s an oversimplification. The 450MHz band has been kluged together to take the 800 MHz refugees, but still, there’s a hundred channels of well-thought-through spectrum sitting there at 220MHz. MRT: Much of it controlled by Securicor Wireless and the National Rural Telecommunications Cooperative? Thompson: About 40%–45%. MRT: So there’s quite a bit available from other licensed operators? Thompson: In the auction, I calculated all the people who bought spectrum who were using the SEA LTR operating system, and I assumed that they would continue with LTR and SEA. At the time, there were virtually no Securicor Wireless MPT 1327 linear modulation systems built, so you could just find out what the bidders bought. Then there were people who bought licenses at auction who had constructed systems. MRT: What will happen once you fill the back orders? Thompson: The infusion of $6 million in a 220MHz manufacturing and system operating company will help the image of 220MHz. Our financial strength has been bantered around the industry for the better part of a couple of years, and it didn’t help. This will give us credibility. We knew we weren’t going away, but I’m not sure everyone else believed that. One thing that was obvious here, and encouraging: Both our dealers and our suppliers have been very supportive during the last two years. There’s no question that longevity is important in this business. So the people we’ve been selling radios to and have been having us service them, and the people who have been selling us sheet metal, boards, switches and semiconductors, we’ve been doing business with them for 25 years and have been paying bills promptly 90% of the time. That made them go the extra mile for us, especially during the last year. You have to live through it to understand it. It certainly was positive to see how much good will you build up in a business in channels of distribution and on the supply side. http://www.maxon.co.kr http://www.sea-dmi.com http://www.securicorwireless.com http://www.sfcapital.com http://www.smradvisory.com http://www.nrtc.org