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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 29, 1995
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-8567
DATAMETRICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3545701
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
21135 ERWIN STREET 91367
WOODLAND HILLS, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 598-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common Stock, .01 par value REGISTERED
American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 period 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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing price of such stock as reported by the
American Stock Exchange on January 19, 1996) was approximately $83,789,000.
The number of shares outstanding of the Registrant's Common Stock, as of the
latest practicable date:
12,159,826 Shares of Common Stock as of January 19, 1996.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Datametrics Corporation definitive Proxy Statement to be
filed with the Securities and Exchange Commission within 120 days after the
close of the fiscal year ended October 29, 1995 are incorporated by reference
into Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Datametrics Corporation (The "Company") designs, develops, manufactures and
sells high-speed color printers, high-resolution non-impact printer/plotters
and ruggedized computers, printers and workstations. The Company is focused on
the development of high-speed color digital printers which utilize its
proprietary Concurrent Transfer Imaging ("CTI") technology and has sold a
limited number of such printers to niche commercial users. The Company intends
to market its CYMax(R) series of high-speed color digital printers, based on
CTI technology, to mass commercial markets including, among others, on-demand
short-run production printing of documents, signs, overhead -presentations and
transfer sheets for garments. The Company's high-speed color digital printers
have demonstrated the ability to print full-color, high-quality images on 8
1/20 x 110 pages in less than 3 seconds, or 20 color pages per minute. The
Company believes that no comparably priced digital color printer currently
available prints full-color, high-quality images at speeds equal to the
Company's CYMax series of high-speed color digital printers.
The Company believes that its proprietary CTI technology has numerous
potential applications in the production color printing market, ranging from
high-volume document printing to vertical market applications. The Company has
targeted the short-run production printer market for its initial entry into
mass commercial markets. The short-run production printer market is
characterized by printers whose typical print run is 2,000 documents or less
and includes franchise and independent quick print shops, in-plant printing
departments, sign printers, copy shops, service bureaus and commercial
printers. In March 1995, the Company signed a multi-year strategic
distribution agreement with A.B.Dick for the worldwide distribution of the
CYMax series of high-speed color digital printers. The Company has placed beta
test units for field evaluation by select customers and anticipates that
production deliveries will commence in January 1996.
The Company was incorporated in California in October 1962 and was
reincorporated in Delaware in April 1987. The Company's principal executive
offices are located at 21135 Erwin Street, Woodland Hills, California 91367,
and its telephone number is (818) 598-6200.
COMPANY BACKGROUND
The Company pioneered the development of high-speed, non-impact printers for
tactical military applications. At present, ruggedized printers remain the
Company's core product line, and the U.S. military remains its largest source
of revenue. Building from this base, the Company has developed and
manufactured other high-performance, high-reliability electronics
communications equipment for aerospace, defense, industrial and commercial
markets. The Company's current product line includes printers,
printer/plotters and ruggedized computers and workstations with diverse
capabilities ranging from stringent military specifications to varying
commercial standards.
Over the past several fiscal years, the Company has been significantly
impacted by market changes in the United States Department of Defense (DoD).
DoD budget forecasts indicate that overall funding will continue to decrease
for the foreseeable future. The Company's primary response to these adverse
defense market conditions has been to develop and aggressively pursue
opportunities for its CYMax series of high-speed color digital printers.
HIGH-SPEED COLOR DIGITAL PRINTER
The Company has designated its third generation high-speed color printers
targeted at commercial markets as the CYMax series of high-speed color digital
printers. The CYMax series of high-speed color digital printers, as well as
the Company's earlier generations of high-speed color printers, incorporates
the Company's proprietary color printer technology utilizing a CTI technology.
CTI technology utilizes a unique high-speed,
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high-resolution electronic print mechanism, proprietary image enhancement
software algorithms, precise paper alignment and control, and thermal energy
management systems. The CTI printing process utilized by the Company's high-
speed technology has fewer moving parts than most competing technologies and,
as such, is expected to be more reliable and easier to maintain. The Company
has demonstrated that products based on CTI technology can print a full-color,
high-quality image on an 8 1/2" x 11" page in less than three seconds, or 20
color pages printed per minute. The Company believes that its CYMax series of
high-speed color digital printers will print full-color, high-quality images
at a faster speed than any comparably priced digital color printer now on the
market.
The Company developed its first color printer in 1988 and shipped its first
product in 1989. In 1990, the Company initiated research and development on
high-speed thermal transfer printer technology. Beginning in 1991, under a
contract with Halliburton Oil Logging Services ("Halliburton") the Company
customized its technology to manufacture a high-speed, high-resolution color
printer for oil exploration. Halliburton utilizes the printers to plot seismic
sensor data on a continuous basis. Output plots can be up to 400 feet long and
are printed at speeds of three inches per second. In September 1993 the
Company signed an OEM agreement with AZON Corporation of Johnson City, New
York for development of a configuration of a high-speed color printer for
printing specialty vehicle license plates. This printer is currently being
used in a system for the State of New York to print these license plates.
In fiscal 1994, the Company began an intensive program to develop a high-
speed color digital printer for the short-run production printer market. On
May 5, 1995, A.B.Dick announced the first CYMax high-speed color digital
printer to be marketed as the A.B. Dick Color Star(TM) at the Drupa exhibition
in Dusseldorf, Germany, one of the largest printing shows in the world. Held
every five years, the Company believes that Drupa was attended by over 1,500
exhibiting manufacturers of printing related equipment. The Company has placed
beta test units for field evaluation by select customers and anticipates that
production deliveries will commence in January 1996.
The Company's commercial color printer product strategy is based on
providing products that offer the best combination of image quality, speed and
price (including acquisition price and operating costs) to certain target
markets, including the short-run production printer market. The Company
believes that no product or technology to date has offered all three of these
characteristics at satisfactory levels in a single product to such target
markets. The Company believes that its initial CYMax product offering,
printing at a speed of 20 pages per minute, is the fastest digital color
printer in the world in its price category. Based on industry data, the
Company believes that the acquisition price for the initial CYMax product will
be about one-half the price of competitive products that print at lower speeds
than the CYMax product. The Company expects that the total operating costs of
the CYMax product series will be very competitive, primarily due to the very
low maintenance costs resulting from the simplicity of the CYMax design. Since
CYMax will be sold into print-for-profit environments, the Company will
continue to make significant research and development investments in areas
that will reduce the CYMax product's operating costs, such as development of
ribbon conservation techniques. The Company also plans to make significant
ongoing research and development investment to enhance its image quality and
to increase print speed.
In March 1995, the Company signed a multi-year strategic distribution
agreement with A.B. Dick of Niles, Illinois, for the worldwide distribution of
the CYMax series high-speed color digital printers. This agreement provides
A.B. Dick with exclusive rights to sell the CYMax products into the quick
printer and commercial printer segments of the short-run production printer
market, comprising about one-third of the total addressable market in
potential revenues, subject to certain conditions. The A.B. Dick agreement
also provides non-exclusive rights to A.B. Dick to market and sell the CYMax
products into other print-for-profit market segments and also to in-plant
printing facilities. A.B. Dick has a significant marketing and service
presence through its direct sales force and distribution network in over 80
countries in North America, Europe, and the Pacific Rim. The Company has
received an initial purchase order from A.B. Dick in excess of $2 million
subject to the Company's ability to meet certain product specifications and
other customary contractual requirements. Other than the initial
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purchase order, A.B. Dick is not obligated to make any further purchases under
the distribution agreement, and there can be no assurance that it will do so.
Recently, the Company signed several distribution agreements with
distributors in the United States and Europe. To service its European
distributors, the Company opened a sales office in Luxembourg in January 1996.
The Company has also executed an OEM agreement with Elexon, Ltd., headquartered
in Illinois, who plans to market and sell the Datametrics CYMax printer under
its Color Fast 100(TM) name into the screen printing market.
In May 1995, the Company entered into an agreement with IBM Corporation
pursuant to which IBM Corporation will provide field service for the CYMax
series printers under maintenance contracts between the Company and its
customers. The Company believes this alliance will enhance its competitive
positioning by providing its customers with the assurance that their printers
will be properly maintained by an established field service organization.
HIGH-SPEED COLOR DIGITAL PRINTER MARKETS
Market Overview. Industry sources estimate that in 1994 the short-run
production market for color printers was $519 million and is expected to grow
to $740 million in 1996. In addition, the total short-run production market,
including color digital printers, consumables such as ribbons ad ink, and
printer service and maintenance, is estimated to have been $1.2 billion in 1994
and is estimated to increase to $2.0 billion in 1996.
Currently, the U.S. color printer market is dominated by traditional offset
presses. Traditional offset presses require very long set-up times and are
cost-effective only for very large print volumes, generally in excess of 5,000
document print runs. The color printer market is changing dramatically,
however, with the introduction of computer-driven electronic printers.
Electronic printers allow each printed page in a print run to be unique and do
not have lengthy set-up procedures like traditional offset presses, allowing
for color printing on demand. As a result of technological advances, the cost
of printing small runs of color documents on demand is being reduced
substantially. Electronic color printers currently can print short runs of
2,000 documents or less on a cost-effective basis. Based on industry data, the
Company believes that print runs of 2,000 documents or less currently account
for over 50% of the total number of U.S. color print runs annually. As the cost
of printing small runs of color documents on demand continues to decline, the
demand by consumers for short-run color printing services, and accordingly, the
demand for short-run production printers, is expected to grow substantially.
Short-Run Production Printer Market. Potential customers in this market
include franchise quick-print shops, independent quick-print shops, in-plant
printing departments, sign printers, copy shops, service bureaus, commercial
printers and institutions. The Company believes that its CTI technology has
numerous applications in the short-run production printer market. The two
segments of this market that the Company has initially targeted are the print-
for-profit and in-plant market segments. The Company believes that a print
speed of between 15-20 color pages per minute is required in order for a
printer to be effectively utilized in these two market segments. The Company
believes that no printer currently being sold into these two market segments
can achieve the price/performance of the Company's color printers, with the
highest priced electrophotographic printers coming closest with an average
print speed of up to 15 pages per minute. As such, the 20 color page per minute
speed achieved by printers using the Company's CTI technology would represent a
print speed advantage compared with electrophotographic printers now being sold
into such market segments. Other printer products now sold into the short-run
production printer market, primarily digital presses, are generally
characterized by their high print speed (over 30 pages per minute) and their
high acquisition cost (over $200,000 per printer). Printers based on the
Company's CTI technology now have a print speed of 20 color pages per minute,
but are expected to have an acquisition cost (approximately $39,900)
significantly below other printers now sold into this market. The Company
believes that 20 color pages per minute is sufficiently fast to operate
effectively in the short-run production printer market and that this market
offers an attractive opportunity for its printers on the basis of a
significantly lower acquisition price alternative.
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Niche Markets. In parallel with its pursuit of distribution alliances to
enter mass commercial markets, the Company intends to leverage its current CTI
technology into other niche OEM markets and applications, such as seismic data
plotting, sign making, label and form printing and specialty vehicle license
plate printing. These niche markets are application driven and will generally
require a unique configuration of the printer. As such, customer-funded non-
recurring engineering may be sought to customize the product. The Company
believes that it has the financial resources and technical capabilities to
manufacture printers for these niche markets itself without the assistance of
strategic alliances. The Company pursues these niche markets through trade
show presentations, advertising and its contacts in the commercial printer
industry.
DEFENSE PRODUCTS
The Company currently designs, develops, manufactures and sells mil-spec and
ruggedized printers and ruggedized computers and workstations for use in U.S.
DoD applications. Products sold by the Company into the DoD markets can be
categorized into two basic groups: military printers and ruggedized computers.
For the year ended October 29, 1995, approximately 79% of the Company's
revenues were derived from DoD business and included contractors with U.S.
government contracts as well as the DoD itself.
Mil-spec products are designed specifically for military requirements and
must meet stringent requirements for operation in adverse environments, such
as shock, vibration, extreme temperatures and nuclear radiation. As such,
these products are more reliable and significantly more expensive than
ruggedized or commercial products. At the other end of the spectrum,
commercial products, as the name implies, are designed principally for
commercial applications, but in some cases are suitable for military use.
These products are generally significantly less expensive than mil-spec
products. In a broad intermediate category are ruggedized products, which
generally have been configured to operate in adverse environments but do not
meet full mil-spec requirements.
Military Printers. The Company manufactures a broad range of printers which
are categorized as either mil-spec or ruggedized. These printers utilize
thermal printing or impact printing technologies. The Company's printers are
purchased and utilized by companies and organizations which manufacture, sell
or use data processing or data communications systems that require "hard copy"
printouts and into which the Company's products are incorporated. The
Company's military printers have greater reliability than conventional
commercial printers and are designed for use in severe environmental
applications. The design and component selection allow the Company's printers
to withstand dirt and grime, corrosion, droppage, bullets, moisture, extremes
in hot and cold temperature, and in some cases, nuclear radiation. In
connection with U.S. Government military peripheral standardization programs,
the DoD has approved and assigned nomenclature (military identification) to
standard computer peripherals for its defense systems. Several of the
Company's mil-spec printers have been included in this standardization program
enabling the armed services to select the Company's printers for new systems
without incurring the expense of developing new printer documentation for each
system. The Company believes that the inclusion of the Company's mil-spec
printers in this standardization program influenced the selection of the
Company's printers for several defense programs.
The Company's high-resolution thermal printers utilize a thermal direct
imaging method of printing. In the past, printers utilizing the thermal
printing process generally could not meet the specifications required in
certain rigorous environments. Due to technological improvements, thermal
printers can now be built to meet the specifications required for more adverse
environments while providing inherent quiet, reliable printing operation. The
Company has also developed a low-cost impact printer, targeted at the low end
of the environmentally severe market. This low-cost "ruggedized" product
utilizes industrial (high-reliability, military rated) components, encased in
a rugged case to withstand moderately severe environments.
The Company's highest sales volume thermal printer is the DmC 1600 military
printer/plotter. The DmC(R) 1600's are used for the U.S. Navy's Tactical Flag
Command Center ("TFCC"). The TFCC System provides the hard copy data utilized
by the Fleet Commander when tactical decisions are required during crisis
situations. The TFCC system is presently proposed for most of the Navy's
nuclear super aircraft carriers, battleships and
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cruisers. In addition, DmC 1600's are used for the U.S. Navy standard display
consoles that are utilized on virtually every fighting ship in the fleet. The
DmC 1600 is qualified for the Navy's rigorous environmental standards. Special
versions of the DmC 1600 thermal printer have been selected for the U.S. Army
REGENCY NET secure communications systems, the U.S. Navy's on-board anti-
submarine warfare training program, and the MILSTAR Communication Satellite
Program, the DoD's global communications system.
The Company has completed initial deliveries of a number of high-resolution
color printer/plotters, the DmC Series 1900, to the U.S. Navy. This product
line utilizes the thermal transfer process to produce high-resolution, full
color images on plain paper. The thermal transfer technology used with respect
to the DmC Series 1900 differs from the direct imaging thermal process in that
it uses plain paper and a multi-colored ribbon instead of direct imaging
paper. These products provide between 40,000 and 90,000 pixels (picture
elements) per square inch and up to 16,000,000 colors, shades or tones. This
printer has been selected by the U.S. Navy for utilization within a number of
Aegis subsystems. The military color printer market has been slow to develop,
however, due to cost considerations. The Company believes that the demand for
military color printers will increase if acquisition and operation costs are
reduced.
Ruggedized Computers. In August 1993, the Company consummated the
acquisition of Rugged Digital Systems. See Note 2 of Notes to Financial
Statements. The Rugged Digital business is now operated as a part of the
Defense Business Unit of the Company. The Rugged Digital division combines
environmental and mechanical engineering technology with computer technology
to produce products that perform identically to commercial counterparts, but
are able to operate in adverse environments. Rugged Digital offers ruggedized
versions of computer devices and peripherals encased in shock, vibration and
temperature resistant housing, for products of equipment manufacturers such as
Digital Equipment Corporation, Hewlett-Packard Company, Silicon Graphics Inc.,
Sun Microsystems Inc. and Cray Research. This process often requires the
Rugged Digital division to design and manufacture cases, controls, backplanes
and power supplies. Rugged Digital's products require much shorter development
and testing periods than mil-spec products. As such, Rugged Digital's products
allow the military to deploy rapidly state-of-the-art computer technology at a
price greatly reduced from full mil-spec systems. These timing and price
factors are responsive to current U.S. military procurement trends.
A substantial portion of Rugged Digital's total revenue for the past three
years has been derived from an ongoing contractual effort with Lockheed
Corporation to provide several suites of superminicomputers and workstations
for the MILSTAR Program.
In addition, the Company's Rugged Digital division has been bidding
ruggedized workstations to the international marketplace. To date, the Rugged
Digital division has sold workstations to Kawasaki Heavy Industries of Japan
for the Japanese P-3 maritime patrol aircraft and to Thomson CSF of France.
Other significant bids have been made to potential customers in Italy
(Alenia), Israel (Elbit) and Korea (Goldstar). Results of these bidding
efforts should be known in 1996. There can be no assurance, however, that the
Rugged Digital division will receive any such additional orders.
International Military. The Company believes that international markets
offer promising growth opportunities for the Company's high-end monochrome and
color printers and ruggedized computers and workstations. While the U.S.
military has been experiencing decreased funding over the past several years,
certain other countries, principally in the Pacific Rim, have been increasing
their participation in and spending for their own defense. In order to address
this market, the Company has contracted with sales representatives for
numerous foreign markets, including Italy, the United Kingdom, Israel, Spain,
France, Australia, New Zealand, South Korea, Taiwan, Sweden and Norway. The
Company also actively seeks selected opportunities to present its products at
international military trade shows in order to increase its general
international presence and to allow potential customers to formulate new
program requirements based on the Company's products.
Distribution and Sales. The Company distributes its defense products
directly through both domestic and international sales forces. The Company
employs its own direct sales force selling within North America, which is
supported in certain regions by independent, commission-only sales
representatives. The Company's
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international sales efforts are coordinated by its director of international
sales, who supervises 12 independent, commission-only sales representatives in
various countries throughout the world, each covering specified territories.
In addition, the Company has sought to distribute its defense products
through teaming agreements with other companies. The Company has arranged with
Cray Research for Cray's sales personnel to sell the Company's ruggedized Cray
computers, and has participated as a sub-contractor to GTE (the prime
contractor) in the U.S. Army's Omnibus Common Hardware Systems-II Program, a
multi-year program for computer peripheral hardware.
SIGNIFICANT CUSTOMERS AND MATTERS CONCERNING DOD BUSINESS
Most of the customers for the Company's DoD products are prime contractors
under programs funded by the U.S. DoD and the DoD itself. For the fiscal years
ended October 29, 1995, October 30, 1994, and October 31, 1993, direct and
indirect DoD business represented approximately 79%, 85% and 69% respectively,
of the Company's revenues. Since the Company's products are intended to
function as subsystems, they are sold to customers which manufacture, sell or
use data processing or data communication systems which involve a processing,
printing, recording or data entry function for which the Company's products
are suited. While the Company may be a subcontractor on a government program
with an aggregate budget of billions of dollars extending over as much as a
ten-year period, the Company's share of the budget for any major program is
relatively small.
In the fiscal year ended October 29, 1995, the Company's five largest
customers in sales, DoD (14.3%), Computing Devices Canada (11.5%), Rockwell
International (8.8%), Martin Marrieta (8.7%) and E-Systems (8.4%) , accounted
for an aggregate of 51.7% of total Company sales. The loss of any one of these
customers could have a material adverse impact on the results of operations
and financial condition of the Company.
In the fiscal year ended October 30, 1994, the Company's five largest
customers in sales, Lockheed (21.5%), Raytheon Company (13.5%), Rockwell
International (10.7%), Martin Marietta (10.2%) and the DoD (6.8%), accounted
for an aggregate of 62.7% of total Company sales.
In the fiscal year ended October 31, 1993, the Company's five largest
customers in sales, Lockheed (18.4%), Loral (14.0%), McDonnell Douglas
(11.6%), the DoD (11.0%) and Martin Marietta (8.6%), accounted for an
aggregate of 63.6% of total Company sales.
Companies which are engaged primarily in supplying equipment and services,
directly or indirectly, to the United States Government, are subject to
special risks including dependence on government appropriations, termination
without cause, contract renegotiation and competition for the available DoD
business. Over the past several years, the Company has been significantly
impacted by market changes in the DoD. DoD budget forecasts indicate that
overall funding will continue to decrease for the foreseeable future, and the
Company anticipates that the results of its military business operations will
continue to be adversely affected by such decreases.
The Company's DoD-related contracts provide for the right to audit the
Company's cost records and are subject to regulations providing for contract
price reductions if defective cost or pricing information was provided by the
company. Management does not believe that it has any material exposure of this
sort on any such contracts. Accordingly, no provisions have been made in the
Company's accounts in connection with defective pricing regulation.
CERTAIN MARKET CONSIDERATIONS
The markets served by the Company, particularly the commercial color printer
market, are characterized by rapid technological advances, downward price
pressure in the marketplace as technologies mature, changes in customer
requirements and frequent new product introductions and enhancements. The
Company's business
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requires substantial ongoing research and development efforts and
expenditures, and its future success will depend on its ability to enhance its
current products, reduce product costs and develop and introduce new products
that keep pace with technological developments in response to evolving
customer requirements. The Company's failure to anticipate or respond
adequately to technological development or introduction could result in a loss
of anticipated future revenues and impair the Company's competitiveness.
SERVICE
In the commercial business area, the Company's strategy is to use third
parties to provide field service and support. On May 11, 1995, the Company
entered into an exclusive agreement with IBM Corporation to provide field
service for the CYMax series high-speed color digital printers under
maintenance contracts between the Company and its non-OEM or reseller
customers. The agreement contains customary termination and renewal
provisions. In addition, A.B.Dick has the right under its agreement with the
Company to provide service and support for high-speed color digital printers
sold under its label. The Company currently anticipates that A.B.Dick will
offer to provide field service and support to A.B.Dick's customers. Likewise,
a number of Datametrics' distributors and OEMs may elect to provide field
service and support to their customers.
Pursuant to maintenance agreements, repair orders or warranty provisions,
the Company generally services its military printers with its own employees at
its facilities. In-house, non-warranty repairs and maintenance service
provided 5.7% of the Company's sales in fiscal 1995. For both military and
commercial products, the Company's standard warranty period is 90 days,
although longer warranty periods are available at customer request for an
additional charge.
Sales of spare parts for the Company's products amounted to 16.1% of fiscal
1995 revenue. The Company also sells documentation, such as handbooks,
operational manuals, schematics and other technical data to assist its
customers in maintaining their own equipment.
BACKLOG
The Company's backlog of funded orders not yet recognized as revenue at
October 31, 1993, October 30, 1994, and October 29, 1995 was approximately
$7,793,000, $10,400,000 and $9,190,000 respectively. Approximately 90% of the
October 29, 1995 backlog is expected to be delivered during the fiscal year
ending October 27, 1996.
Approximately 75% of the Company's backlog consists of orders which are
subject to termination at the convenience of the customer at any time. In the
event of such a termination, the Company is entitled to receive reimbursement
for its costs and, as long as the contract would have been profitable,
negotiated profit. Other than a contract with McDonnell Douglas for NASA's
Space Station Freedom, in recent years the Company has experienced no
significant terminations prior to completion of orders.
SOURCES OF SUPPLY
The Company currently relies to a substantial extent on sole suppliers to
manufacture several key components for use in the CYMax series of high-speed
color digital printers, including controllers, print heads and color printer
ribbons. The Company is currently engaged in negotiations with other
manufacturers for alternate sources of supply of printheads and color printer
ribbons. There can be no assurance, however, that any agreements with such
alternate supply sources will be signed or, if so, when. The Company's
reliance on sole suppliers for key components involves several risks,
including a potential inability to obtain an alternate supply of required
components and supplies, and reduced control over pricing and the timing of
delivery of the CYMax series high-speed color digital printers. Because the
manufacture of certain of these components, including controllers, print heads
and color printer ribbons, is specialized and requires long lead times, there
can be no assurance that delays in the ability to timely complete production
orders will not be caused by vendors. Any inability to obtain adequate
deliveries, or any other circumstance that would require the Company to seek
alternative sources of supply or to manufacture such components internally,
could delay shipment of the Company's products, increase its cost of goods
sold and have a material adverse effect on the Company's business, financial
condition and results of operations.
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In the military business area, the Company is generally not dependent upon
any one supplier for any raw material or component which it purchases, and
there are available alternative sources for such raw materials and components.
The Company is currently dependent, however, on certain OEM suppliers for
components used in its rugged computer devices and peripherals. The Company
has year to year renewable supply agreements with suppliers which have been
renewed in prior years. In the event any of these contracts are not renewed,
however, the Company's business would be materially and adversely impacted
because the Company would have to purchase similar components upon
substantially less favorable terms and conditions.
COMPETITION
The Company competes in each of its target markets against other companies,
many of which have substantially greater name recognition and financial,
technical, marketing, distribution and other resources than the Company. The
principal competitive factors in the commercial markets in which the Company
participates are image quality, product performance and price.
Competition in color printing markets is intense, based on product
performance (principally image quality and print speed) and price. The market
is addressed by numerous companies with various technologies, each with
certain advantages and disadvantages in terms of image quality, print speed
and price. The Company believes that its CTI technology currently has a print
speed advantage over competitive products and, therefore, is well-suited to
high-volume color printing/plotting. The color printing market is
characterized, however, by rapid technological advances and downward price
pressure as competing technologies mature. The Company's principal competitors
in the commercial markets include Canon, Xerox, Minolta, Ricoh, Xeikon and
Indigo. Most of the Company's competitors have substantially greater financial
and technical resources than the Company. In addition, competitors in the
commercial color printer market are rapidly improving the quality and price of
their current printers. If one or more of the Company's competitors were to
introduce a printer with a significantly enhanced combination of image
quality, speed and price characteristics before the Company introduced its
printer, such introduction could have a material adverse effect on the
Company's ability to market a printer into such markets. If such a
competitor's product introduction occurred after the Company had a printer on
the market, such product introduction could also have a material adverse
effect on the success of the Company's printer in such markets.
In domestic and international defense markets, the Company's principal
competitors are North Atlantic Industries, Inc. and Aydin. In addition, many
airborne electronic data processing and communications prime contractors have
the capability of manufacturing military and airborne products, and several
such companies do presently manufacture products performing functions similar
to the Company's products. In almost all cases, these companies have
substantially greater financial and technological resources than the Company.
In certain applications, the Company's printers are higher in price than those
of its competitors, and many of its competitors have more experience in the
markets for lower-cost military printers than the Company. Management
believes, however, that the Company's printers usually perform at higher speed
and with greater reliability in extreme environments.
INTELLECTUAL PROPERTY RIGHTS
It is the Company's policy to obtain appropriate proprietary rights
protection for any potentially significant new technology acquired or
developed by the Company. The Company has trademark registrations covering its
"DmC(R)" logo, LAURA(R) (the designation for the Company's high-speed color
printer/plotter) and CYMax(R) (the designation for the Company's latest
generation high-speed color digital printer targeted at the short-run
production printing market). The Company has been granted two U.S. patents and
has over 23 U.S. patent applications pending relating to its high-speed color
digital printer. These two patents plus the additional patent applications
also have been filed in certain targeted countries covered under the Patent
Cooperation Treaty and in Israel. There can be no assurance, however, that any
patents will be granted pursuant to these various applications in the U.S. and
abroad.
9
<PAGE>
In addition, the Company relies on copyright and trade secret laws to
protect its proprietary rights. The Company attempts to protect its trade
secrets and other proprietary information through agreements with customers
and suppliers, proprietary information agreements with the Company's employees
and consultants and other similar measures. Despite these precautions, it may
be possible for unauthorized third parties to copy certain portions of the
Company's products or to "reverse engineer" or otherwise obtain and use to the
Company's detriment information that the Company regards as proprietary.
Moreover, the laws of some foreign countries do not afford the same protection
to the Company's proprietary rights as do U.S. laws. There can be no
assurance, therefore, that any of these protections will be adequate or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies.
While management believes that the Company's trademarks, patents, patent
applications, and other proprietary know-how have significant value, changing
technology makes the Company's future success dependent principally upon its
employees' technical competence and creative skills for continuing innovation.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company is involved in both Company-sponsored and customer-sponsored
research and development. In the latter case, customers contract directly for
such activities. The customer-sponsored research and development primarily
consists of non-recurring engineering costs relating to production contracts.
In addition to design technology, this non-recurring engineering includes
development of maintenance and operator manuals, drawings, reliability and
maintainability analysis, technical design audits and data required to support
field repairs. Such costs do not qualify as research and development costs as
defined by Financial Accounting Standards Board Statement No. 2, and
accordingly, have not been disclosed as such in the Company's financial
statements.
The Company expended approximately $1,951,000, $2,297,000 and $6,151,000 on
research and development during the fiscal years ended October 31, 1993,
October 30, 1994 and October 29, 1995, respectively. The research and
development expenses incurred in fiscal 1993 through fiscal 1995 related to
product development for a high-speed color digital printer and a low-cost
rugged black and white printer, as well as enhancements to existing products.
Research and development expenses relating to the Company's high-speed color
digital printer were primarily for the development of the CYMax printer and
ongoing image quality improvements.
EMPLOYEES
As of October 29, 1995, the Company employed approximately 176 persons on a
full-time basis. None of the Company's employees is represented by a union or
is subject to a collective bargaining agreement. The Company believes that its
relations with its employees are excellent.
OTHER MATTERS
The business of the Company is not seasonal.
The Company's manufacturing operations are subject to various federal, state
and local laws, including those restricting or regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment. The Company is not involved in any pending or threatened
proceedings which would require curtailment of, or otherwise restrict, its
operations because of such regulations, and compliance with applicable
environmental laws has not had a material effect upon the capital
expenditures, financial condition or results of operations of the Company.
Certain information concerning the Company's business is included under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," set forth in Item 5 of this Report, which information is
incorporated herein by reference.
10
<PAGE>
ITEM 2. PROPERTIES.
The majority of the Company's operations are conducted from a 65,000 square
foot facility in Woodland Hills, California. The facility lease provides for a
ten-year term through July 2004, with options for the Company to terminate the
lease after eight years and to extend the lease for an additional five years.
An additional 10,000 square foot facility, also located in Woodland Hills,
California, is being used for the assembly and final test of the Company's
CYMax printers. This facility lease expires on August 31, 1996 but provides
for four three-month lease extensions, through August 31, 1997. Management
believes that these facilities are suitable and adequate for the Company's
current needs.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the executive
officers of the Company as of December 15, 1995.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<C> <C> <S>
Garland S. White 67 Chairman of the Board of Directors since March 10,
1986; Director for more than the last five years. Mr.
White is also the President of GW Products Management,
a sole proprietorship founded in 1990.
Sidney E. Wing 64 President, Chief Executive Officer and Director since
September 6, 1988.
John J. Van Buren 51 Senior Vice President, Chief Financial Officer and
Treasurer since April 10, 1989.
Gerald A. Horowitz 60 Senior Vice President since August 20, 1990; Vice
President of Business Development from March 27, 1990
to August 19, 1990; and Division Vice President, System
Integration Division at Ultrasystem Space and Defense
for more than three years prior to that time.
Carl C. Stella 57 Senior Vice President since August 20, 1990; Vice
President from October 26, 1987 to August 19, 1990.
Ronald N. Iversen 47 Vice President of Commercial Products Unit since August
1993; founder and President of Nugen Distribution
International from April 1991 to August 1993; and from
February 1984 to March 1991, a number of different
positions at Dataproducts Corporation, including Vice
President, Marketing and Vice President, General
Manager of the Laser Printer Division.
Kenneth S. Polak 40 Secretary since December 11, 1990; Controller since
July 1, 1990; Director of Financial Analysis since May
8, 1989.
</TABLE>
No family relationship exists between any of the individuals named above.
There were no arrangements or understandings between any officer and any other
person pursuant to which he was selected an officer.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
Datametrics Corporation's common stock has been listed on the American Stock
Exchange (Symbol DC) since July 26, 1988. Certain high and low transaction
prices for the Company's common stock as reported by the American Stock
Exchange are set forth in the following table.
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW
----------- --------- --------
<S> <C> <C>
1st quarter............................................ $ 6 3/8 $3 3/4
2nd quarter............................................ 9 1/4 5 1/8
3rd quarter............................................ 10 5/8 7 13/16
4th quarter............................................ 11 3/4 7 1/8
<CAPTION>
FISCAL 1994 HIGH LOW
----------- --------- --------
<S> <C> <C>
1st quarter............................................ $ 4 1/8 $2 9/16
2nd quarter............................................ 3 1/4 2 3/8
3rd quarter............................................ 3 13/16 2 9/16
4th quarter............................................ 5 1/4 3 7/16
</TABLE>
There were approximately 831 stockholders of record as of October 29, 1995.
No cash dividends have been paid to common stockholders since the Company
was founded.
ITEM 6. SELECTED FINANCIAL DATA.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 31, OCTOBER 25, OCTOBER 27,
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Sales................. $18,956 $25,211 $23,984 $22,358 $21,017
Income (loss) before
cumulative effect of
change in accounting
principle............ (9,213) 31 545 1,337 675
Net income (loss)..... (9,213) 31 1,483 1,337 675
Net income (loss) per
share:
Primary............. (0.84) -- 0.26 0.30 0.13
Fully diluted....... (0.84) -- 0.23 0.22 0.12
Weighted average
number of shares
outstanding:
Primary............. 11,020 9,067 5,458 3,769 3,664
Fully diluted....... 11,020 9,067 6,404 5,946 5,864
Other data:
Total assets.......... 27,471 19,886 16,460 9,626 11,502
Long-term obligations
due after one year... 919 1,134 1,433 457 731
Stockholders' equity.. $21,939 $13,661 $ 8,470 $ 5,725 $ 4,561
</TABLE>
The Company paid cash dividends to preferred stockholders in 1993, 1992 and
1991. The Company recorded a one-time cumulative benefit of $938,000 related
to the adoption of SFAS No. 109 for the year ended October 31, 1993.
During March and April 1994, the Company sold 2,300,000 shares of common
stock in a public offering. The net proceeds were approximately $5,138,000.
During June 1995 the Company sold 2,300,000 shares of common stock in a public
offering. The net proceeds were approximately $16,555,000.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
DATAMETRICS CORPORATION
RESULTS OF OPERATIONS
Fiscal Year 1995 Compared With Fiscal Year 1994
Sales for the year ended October 29, 1995 were $18,956,000, a decrease of
$6,255,000, or 24.8%, compared with sales of $25,211,000 in the prior year.
Sales from printer and workstation contracts relating to the MILSTAR program,
which was completed during fiscal 1995, declined $8,320,000 while other
defense-related workstation sales increased $1,868,000, other defense-related
printer sales increased $156,000 and sales to other customers increased
$41,000.
Gross profit for fiscal 1995 was $2,628,000 (13.9% of sales), a decrease of
$5,678,000, or 68.4%, compared with $8,306,000 (32.9% of sales) for the prior
year. Gross profit as a percentage of sales was impacted by the Company's
product mix shifting to lower-margin ruggedized products from higher margin
full mil-spec products and start-up expenses related to the commercial
business unit.
Research and development ("R&D") expenses were $6,151,000 for fiscal year
1995, an increase of $3,854,000, or 167.8%, compared with $2,297,000 for
fiscal 1994. Approximately 80% of the fiscal 1995 R&D expenditures related to
the development of the Company's high-speed color digital printer.
Selling, general and administrative expenses for fiscal 1995 were $6,068,000
(32% of sales) compared with $6,254,000 (24.8% of sales) for the prior year.
The decrease was due to lower military sales and marketing expenses,
consisting primarily of reduced commissions and payroll, partially offset by
increased expenses associated with marketing the Company's high-speed color
digital printer.
Net interest income amounted to $96,000 for the year ended October 29, 1995
compared with net interest income of $2,000 for fiscal 1994. This change in
interest income is due to increased investment income on the proceeds of the
Company's June 1995 common stock offering.
Net loss for the year ended October 29, 1995 amounted to $9,213,000 compared
with net income of $31,000 for the prior year. This decrease of $9,244,000 was
attributable to a decrease in gross profit of $5,678,000, an increase in R&D
expenses of $3,854,000, a decrease in selling, general and administrative
costs of $186,000, an increase in net interest income of $94,000, an increase
of $11,000 of amortization of excess of acquired net assets over cost, and an
increase in taxes of $3,000.
Management has determined that, based on the Company's expected future
earnings from recurring operations, the Company will more likely than not
recognize the $282,000 of net deferred tax assets at October 29, 1995.
Ultimate recognition of these tax assets is dependent, to some extent, on
future revenue levels and margins. It is the intention of management to assess
the appropriate level for the valuation allowance each quarter.
The contract process in which products are offered for sale is generally set
before costs are incurred, and prices are based on estimates of the costs,
which include the anticipated impact of inflation.
The Company's backlog of funded orders not recognized as sales decreased
from $10,459,000 at October 30, 1994 to $9,190,000 at October 29, 1995.
RESULTS OF OPERATIONS
Fiscal Year 1994 Compared With Fiscal Year 1993
Sales for the year ended October 30, 1994 were $25,211,000, an increase of
$1,227,000, or 5%, compared with sales of $23,984,000 in the prior year. In
fiscal 1994, decreases in non-military-related sales of $1,163,000
13
<PAGE>
and international military printer sales of $1,363,000 were offset by
increases in printer and keyboard sales related to the U.S. Department of
Defense of $341,000 and ruggedized computer and computer workstation sales of
$6,618,000, reflecting twelve months' results of such sales compared to only
three months in 1993. In addition, in fiscal 1994, the Company only recognized
$233,000 in sales (0.9% of total Company sales) compared to $2,780,000 (11.6%
of Company sales) in fiscal 1993 from contracts for printers and keyboards for
NASA's Space Station Freedom. In November 1993, the Company's contract was
terminated for convenience by McDonnell Douglas Corporation for reasons
totally unrelated to the Company's product.
Gross profit for fiscal 1994 was $8,306,000 (32.9% of sales), a decrease of
$55,000, or 0.7%, compared with $8,361,000 (34.9% of sales) for the prior
year. Gross profit as a percent of sales decreased 0.8 percentage points in
fiscal 1994 due to a change in product mix. The remaining 1.2 percentage point
gross profit decrease was due to a cost overrun on a contract for a new black-
and-white military printer.
Research and development expenses were $2,297,000 for fiscal year 1994
compared with $1,951,000 for the prior year. This increase was due to an
accelerated development schedule for the Company's high-speed color printer
technology in order to shorten time-to-market. The research and development
expenses incurred in 1994 related to development of a high-speed commercial
color printer technology and product enhancements, lower-cost black-and-white
printers and ruggedization of newer-model workstations. The research and
development expenses incurred in fiscal 1993 related to development of a high-
speed commercial color printer technology, product enhancements and lower-cost
black-and-white printers.
Selling, general and administrative expenses for fiscal 1994 were $6,254,000
(24.8% of sales) compared with $5,547,000 (23.1% of sales) for the prior year.
The increase was due to increased expenses associated with marketing the
Company's color printer technology.
Net interest income amounted to $2,000 for the year ended October 30, 1994
compared with net interest expense of $65,000 for fiscal 1993. This change in
interest expense was due to decreased borrowings and investment income on the
proceeds of the Company's common stock offering in 1994.
Net income for the fiscal year ended October 30, 1994 amounted to $31,000
compared with $1,483,000 for the prior year. This decrease of $1,452,000 was
attributable to a decrease in gross profit of $55,000, an increase in research
and development costs of $346,000, an increase in selling, general and
administrative costs of $707,000, and a change in accounting principle in
fiscal 1993 resulting in a $938,000 gain. These amounts were partially offset
by a decrease in interest expense of $67,000, an increase in amortization of
excess of acquired net assets over cost of $205,000, and a decrease in income
tax expense of $322,000.
LIQUIDITY AND CAPITAL RESOURCES
In June 1995 the Company received $535,000 from the exercise of 170,000
warrants by Cruttenden Roth Inc. and net proceeds of $16,555,000 from a public
offering of 2,300,000 shares of common stock. The Company is using the net
proceeds for the continued development, manufacture and marketing of products
based upon its high-speed color printer technology.
The Company has a revolving line of credit agreement (the "Credit
Agreement") with a bank. The advance rate is eighty percent (80%) of eligible
accounts receivable, plus eighty percent (80%) of eligible progress billings
receivable, to a maximum of the progress billings receivable sublimit, which
will not exceed the lesser of ten percent (10%) of eligible receivables or
$500,000. The lending facility is capped at $7,000,000 and expires on March 4,
1996. The interest rate is prime plus .25%. The loan is secured by
substantially all the Company's assets. There was no outstanding balance at
October 29, 1995.
The Credit Agreement requires the Company to maintain certain financial
ratios and restricts or limits the Company's ability to (i) create certain
liens, (ii) convey, transfer or sell assets out of the ordinary course of
business, (iii) make capital expenditures, (iv) incur additional indebtedness,
(v) redeem or repurchase any class
14
<PAGE>
of stock, and (vi) pay dividends on its preferred or common stock. The Company
is in compliance with all the provisions.
The Company's working capital and current ratios at the end of fiscal years
1995, 1994 and 1993 were $19,252,000, $12,361,000 and $8,708,000 and 5.4, 3.7
and 2.6, respectively. The improvement in financial position over these
periods is the result of the Company's public offerings during 1994 and 1995.
Management believes that the Company must purchase approximately $1,800,000
of capital equipment (including capitalized leases) during fiscal 1996. The
Company's other principal commitments for fiscal 1996 are lease obligations
for the Company's facility, payment for untendered Series B Preferred Stock,
equipment lease and loan payments, and interest due on bank borrowings.
Due to the Company's significant level of research and development costs and
reduced sales and margins in its military business, the Company has
experienced negative cash flow from operations of $7,532,000 during fiscal
1995. This negative cash flow from operations is expected to continue for the
first half of fiscal 1996. Negative cash flow from operations is also expected
in the second half of fiscal 1996 due to increased working capital needs
resulting from planned growth in the Company's commercial business.
Management expects to finance the capital expenditure requirements and other
commitments from the bank line of credit, capital leases, capital loans and
from working capital.
BUSINESS ENVIRONMENT
As part of its diversification strategy, the Company has continued to invest
substantial resources in developing its commercial business. Results for the
first half of 1996 are expected to be impacted by continued heavy investment
in the Company's CYMax commercial color printer program, during which time the
Company expects to ramp up production.
Companies engaged in supplying equipment and services to U.S. government
defense programs are subject to special risks including dependence on
government appropriations, contract termination without cause, contract
renegotiation, and the intense competition for the available defense business.
Over the past several years, the Company has been significantly impacted by
market changes in the DoD. DoD budget forecasts indicate that overall funding
will continue to decrease for the foreseeable future, and the Company
anticipates that the results of its military business operations will continue
to be adversely affected by such decreases.
Because of the foregoing, as well as other factors affecting the Company's
operating results, past financial performance should not be considered a
reliable indicator of future performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and Supplementary Data filed as part of this Report are
included on pages F2--F15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
15
<PAGE>
PART III
The information required to be set forth herein, 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," except for a list of the
Executive Officers which is provided in Part I of this Report, will be
included in a definitive Proxy Statement pursuant to Regulation 14A, which is
incorporated herein by reference. It is anticipated that copies of such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year ended October 29, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The Financial Statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedule on page F-1 hereof are filed as
part of this Report.
2. Financial Statement Schedules
The Financial Statement Schedule listed in the accompanying Index to
Financial Statements and Financial Statement Schedule on page F-1 hereof is
filed as part of this Report.
3. Exhibits
The Exhibits listed in the accompanying Exhibit Index on pages E-1
through E-2 hereof are filed as part of this Report.
(b) Reports on Form 8-K:
None.
16
<PAGE>
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 in the City of
Woodland Hills, State of California, on the 22nd day of January, 1996.
Datametrics Corporation
(Registrant)
/s/ Sidney E. Wing
-------------------------
Sidney E. Wing, President,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Garland S. White
- ------------------------------------ January 22, 1996
Garland S. White Chairman of the Board
/s/ Sidney E. Wing
- ------------------------------------ January 22, 1996
Sidney E. Wing President and Chief
Executive Officer; Director
(Principal Executive
Officer)
/s/ John J. Van Buren
- ------------------------------------ January 22, 1996
John J. Van Buren Senior Vice President, Chief
Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
/s/ Dann V. Angeloff
- ------------------------------------ January 22, 1996
Dann V. Angeloff Director
/s/ Richard A. Foster
- ------------------------------------ January 22, 1996
Richard A. Foster Director
/s/ Burton L. Kaplan
- ------------------------------------ January 22, 1996
Burton L. Kaplan Director
/s/ Richard W. Muchmore
- ------------------------------------ January 22, 1996
Richard W. Muchmore Director
/s/ Kenneth K. Zeiger
- ------------------------------------ January 22, 1996
Kenneth K. Zeiger Director
</TABLE>
17
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
FORM 10-K
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................. F-2
Balance Sheets as of October 29, 1995 and October 30, 1994......... F-3
Statements of Operations for the years ended October 29, 1995,
October 30, 1994
and October 31, 1993.............................................. F-4
Statements of Stockholders' Equity for the years ended October 29,
1995,
October 30, 1994, October 31, 1993, and October 25, 1992.......... F-5
Statements of Cash Flows for the years ended October 29, 1995,
October 30, 1994,
and October 31, 1993.............................................. F-6
Notes to Financial Statements...................................... F-7-F-14
FINANCIAL STATEMENT SCHEDULE
II -- Valuation and Qualifying Accounts............................ F-15
</TABLE>
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Financial Statements and
related notes.
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Datametrics Corporation
We have audited the accompanying balance sheets of Datametrics Corporation
as of October 29, 1995 and October 30, 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three fiscal
years in the period ended October 29, 1995. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating 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 financial position of Datametrics Corporation at
October 29, 1995 and October 30, 1994 and the results of its operations and
its cash flows for each of the three fiscal years in the period ended October
29, 1995, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 5 to the financial statements, effective October 26,
1992, the Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
Enrst & Young LLP
Woodland Hills, California
December 8, 1995
F-2
<PAGE>
DATAMETRICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 30,
1995 1994
----------- -----------
(IN THOUSANDS, EXCEPT
FOR SHARE DATA)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 9,601 $ 988
Accounts receivable.................................. 6,578 8,730
Inventory............................................ 6,647 6,038
Income taxes receivable.............................. 145 325
Prepaid expenses..................................... 442 267
Deferred tax asset................................... 223 571
-------- -------
Total current assets............................... 23,636 16,919
-------- -------
Property and Equipment, at Cost:
Machinery and equipment.............................. 4,160 3,710
Furniture, fixtures & computer equipment............. 2,549 2,172
Leasehold improvements............................... 449 363
-------- -------
7,158 6,245
Accumulated depreciation and amortization............ (4,205) (3,970)
-------- -------
Net property and equipment......................... 2,953 2,275
Deferred Tax Asset..................................... 59 --
Other Assets........................................... 823 692
-------- -------
$ 27,471 $19,886
======== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable..................................... $ 2,111 $ 1,917
Note payable to bank................................. -- 600
Accrued commissions and payroll...................... 817 845
Accrued warranty..................................... 125 182
Other accrued liabilities............................ 335 368
Advance payments and progress payments on contracts.. 14 538
Redeemed Series B Preferred Stock Payable............ 470 --
Current portion of capital lease obligations and
long-term debt...................................... 512 108
-------- -------
Total current liabilities.......................... 4,384 4,558
Capital Lease Obligations.............................. 79 32
Long-term Debt......................................... 609 --
Other Long-term Liabilities............................ 231 150
Deferred Tax Liability................................. -- 12
Excess of Acquired Net Assets Over Cost................ 229 533
Series B Redeemable Preferred Stock
613,110 shares authorized, 0 shares issued and
outstanding in 1995 (564,556 in 1994) (liquidation
preference and redemption price $0 in 1995 and $988
in 1994 )........................................... -- 940
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value--15,000,000 shares
authorized,
12,031,582 shares issued and outstanding in 1995
(9,258,452 in 1994)................................. 120 93
Additional paid-in capital........................... 32,120 14,608
Accumulated deficit.................................. (10,301) (1,040)
-------- -------
Total stockholders' equity......................... 21,939 13,661
-------- -------
$ 27,471 $19,886
======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
DATAMETRICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 31,
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Sales...................................... $18,956 $25,211 $23,984
Cost of sales............................ 16,328 16,905 15,623
------- ------- -------
Gross profit............................. 2,628 8,306 8,361
Operating Expenses
Research & development................... 6,151 2,297 1,951
Selling, general & administrative........ 6,068 6,254 5,547
------- ------- -------
12,219 8,551 7,498
------- ------- -------
Income (loss) from operations.............. (9,591) (245) 863
Interest income (expense), net............. 96 2 (65)
Amortization of excess of acquired net
assets over cost.......................... 304 293 88
------- ------- -------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting principle.................... (9,191) 50 886
Provision for Income Taxes................. 22 19 341
------- ------- -------
Income (loss) before cumulative effect of
change in accounting principle.......... (9,213) 31 545
Cumulative effect of change in accounting
principle............................... -- -- 938
------- ------- -------
Net Income (Loss).......................... (9,213) 31 1,483
Preferred stock dividends and accretion.. (48) (60) (66)
------- ------- -------
Net income (loss) applicable to
common stockholders................. $(9,261) $ (29) $ 1,417
======= ======= =======
Earnings per share of Common Stock:
Primary:
Income (loss) before cumulative effect
of change in accounting principle..... $ (0.84) $ -- $ 0.09
Cumulative effect of change in
accounting principle.................. -- -- 0.17
------- ------- -------
Net Income (Loss).................... $ (0.84) $ -- $ 0.26
======= ======= =======
Fully diluted:
Income (loss) before cumulative effect
of change in accounting principle..... $ (0.84) $ -- $ 0.08
Cumulative effect of change in
accounting principle.................. -- -- 0.15
------- ------- -------
Net Income (Loss).................... $ (0.84) $ -- $ 0.23
======= ======= =======
Weighted Average Number of Shares
Outstanding
Primary.................................. 11,020 9,067 5,458
Fully diluted............................ 11,020 9,067 6,404
</TABLE>
See accompanying notes.
F-4
<PAGE>
DATAMETRICS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
PARTICIPATING
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------- ----------------- ADDITIONAL TOTAL
NUMBER PAID-IN ACCUMULATED STOCKHOLDERS'
AMOUNT OF SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------------- ---------- ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balances at October 25,
1992................... $ 2,489 3,700,576 $ 37 $ 5,627 $ (2,428) $ 5,725
Preferred stock
dividends.............. -- -- -- -- (66) (66)
Conversion of preferred
stock.................. (2,489) 2,129,000 21 2,468 -- --
Issuance of common
stock.................. -- 1,067,346 11 1,317 -- 1,328
Net income.............. -- -- -- -- 1,483 1,483
------- ---------- ---- ------- --------- -------
Balances at October 31,
1993................... -- 6,896,922 69 9,412 (1,011) 8,470
Preferred stock
accretion.............. -- -- -- -- (60) (60)
Issuance of common
stock.................. -- 2,361,530 24 5,196 -- 5,220
Net income.............. -- -- -- -- 31 31
------- ---------- ---- ------- --------- -------
Balances at October 30,
1994................... -- 9,258,452 93 14,608 (1,040) 13,661
Preferred stock
accretion.............. -- -- -- -- (48) (48)
Issuance of common
stock.................. -- 2,773,130 27 17,512 -- 17,539
Net loss................ -- -- -- -- (9,213) (9,213)
------- ---------- ---- ------- --------- -------
Balances at October 29,
1995................... $ -- 12,031,582 $120 $32,120 $(10,301) $21,939
======= ========== ==== ======= ========= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
DATAMETRICS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (BRACKETS DENOTE CASH OUTFLOWS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)........................ $(9,213) $ 31 $ 1,483
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Cumulative effect of change in
accounting principle.................. -- -- (938)
Amortization of excess of acquired net
assets over cost...................... (304) (293) (88)
Depreciation and amortization.......... 970 552 680
Loss (gain) on disposal of assets...... 206 (6) 16
Changes in assets and liabilities, net of
effects from acquisition of Rugged
Digital Systems, Inc. (RDS):
Accounts receivable...................... 2,152 (239) (1,586)
Inventory................................ (609) (995) 189
Prepaid expenses......................... (175) (214) 174
Accounts payable......................... 194 (751) 1,436
Accrued commissions and payroll.......... (28) (234) (143)
Advance and progress payments from
customers............................... (524) 527 (216)
Other accrued expenses................... (33) 65 (152)
Income taxes............................. 457 (325) (291)
Accrued warranty......................... (57) (90) (50)
Other.................................... (98) 180 (202)
------- ------- -------
Net cash provided by (used in) operating
activities................................ (7,062) (1,792) 312
Cash Flows from Investing Activities
Capital expenditures for property and
equipment............................... (1,655) (1,882) (428)
Cash received from acquisition of RDS,
net..................................... -- -- 533
------- ------- -------
Net cash provided by (used in) investing
activities................................ (1,655) (1,882) 105
Cash flows from Financing Activities
Borrowings on notes payable.............. 1,950 4,100 8,150
Payments on notes payable................ (2,550) (4,650) (7,460)
Proceeds from the issuance of common
stock................................... 17,539 5,220 100
Borrowings on long-term debt............. 1,841 -- --
Payments on long-term debt............... (817) (85) (889)
Payments on capital lease obligations.... (163) (122) (77)
Redemption of Series B Preferred Stock... (470) -- --
Cash dividends on preferred stock........ -- -- (114)
------- ------- -------
Net cash provided by (used in) financing
activities................................ 17,330 4,463 (290)
Net increase in cash and cash equivalents.. 8,613 789 127
Cash and cash equivalents at beginning of
the year.................................. 988 199 72
------- ------- -------
Cash and Cash Equivalents at end of the
year...................................... $ 9,601 $ 988 $ 199
======= ======= =======
Cash paid (received) during the year for:
Interest, net............................ $ 39 $ (1) $ 53
Income taxes............................. (435) (186) 359
Noncash investing and financing activities:
Accretion on preferred stock............. 48 60 15
Conversion of preferred stock to common
stock................................... -- -- 2,489
Issuance of capital lease obligations.... 199 -- 266
Issuance of 982,000 shares for
acquisition of RDS...................... -- -- 1,228
Exchange of Series B Preferred Stock for
subordinated debt of RDS................ -- -- 950
Series B Preferred Stock escrow
settlement.............................. (33) (85) --
</TABLE>
See accompanying notes.
F-6
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT POLICIES
Business
Datametrics Corporation, a Delaware corporation ("the Company"), designs,
develops, manufactures and sells high-speed, high-resolution, non-impact
printer/plotters, and ruggedized computers, printers and workstations. The
Company's fiscal year ends on the last Sunday of each October.
On October 30, 1995, the Company formed two wholly-owned subsidiaries,
Datametrics Technology Systems Corporation, consisting of the Company's
defense business unit, and Datametrics Service Corporation, consisting of the
maintenance business relating to the CYMax high-speed digital color printer.
Basis of Presentation
Certain prior year amounts have been reclassified to conform with the 1995
presentation.
Revenue Recognition
Revenues include both product sales and revenues applicable to long-term
design and production contracts. A majority of revenues from product sales and
long-term contracts are recorded as units are shipped. Revenues applicable to
certain fixed-price, long-term contracts (principally design and development
contracts) are recognized on the percentage-of-completion (cost-to-cost)
method, whereby revenue is measured by relating costs incurred to total
estimated costs. Sales under cost-reimbursement type contracts are recorded as
costs are incurred. Applicable estimated profits are included in sales in the
proportion that incurred costs bear to total estimated costs. Any anticipated
losses on contracts are charged to income when identified.
The Company provides an accrual for future warranty costs at the time of
revenue recognition based upon the relationship of prior year sales to actual
warranty costs. The warranty for the Company's products generally covers
defects in material and workmanship. The current accrual represents the
average outstanding warranty of approximately nine months.
Major Customers
Approximately 79%, 85% and 69% of the Company's sales during fiscal years
1995, 1994 and 1993, respectively, were to various U.S. government
agencies/Department of Defense under prime contracts or to prime contractors
having sales to such agencies. Export sales to foreign customers amounted to
$3,347,000 ($2,245,000 to Canada, $867,000 to Europe and $235,000 to the
Pacific Rim) or 18% of total sales in fiscal year 1995.
Cash and Cash Equivalents
The Company considers securities purchased within three months of their date
of maturity to be cash equivalents. Due to the short maturity of these
instruments, carrying value on the Company's balance sheet approximates fair
value.
Inventory
Stockroom inventory is stated at the lower of cost (first-in, first-out) or
market. The Company evaluates at least annually its stockroom inventory for
potential obsolescence or excessive levels based upon backlog and forecasted
usage. Contract inventory costs include purchased materials, direct labor and
manufacturing overhead. General and administrative costs are expensed in the
period incurred.
F-7
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Depreciation and amortization of property and equipment are provided, using
the straight-line method, over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment 2 to 5 years
Furniture, fixtures and computer equipment 2 to 8 years
Leasehold improvements Shorter of the remaining term of the
lease or the life of the asset
</TABLE>
Net Income (Loss) Per Share
Primary net income (loss) per share is based on the weighted average number
of shares of common stock outstanding and common stock equivalents after
reducing net income (loss) by preferred stock dividends. Fully diluted net
income (loss) per share additionally assumes the conversion of the outstanding
convertible preferred stock and the elimination of the related dividend.
NOTE 2. ACQUISITION
On August 10, 1993, the Company acquired Rugged Digital Systems, Inc.
(Rugged Digital), a developer of ruggedized computers and computer
workstations used primarily by the military. The acquisition was accounted for
as a purchase and, accordingly, the purchase price and direct costs of the
acquisition have been allocated to the respective assets and liabilities of
Rugged Digital based upon their estimated fair values at the date of the
acquisition. The excess of the fair value of the net assets acquired over the
total purchase price was first allocated to reduce Rugged Digital noncurrent
assets to zero. The remaining excess value is being amortized on a straight-
line basis over three years, which represents management's estimate of the
period of benefit. Accumulated amortization of the excess of fair value was
$610,000 at October 29, 1995 and $381,000 at October 30, 1994.
The purchase price, for accounting purposes, consisted of 982,000 shares of
common stock at $1.25 a share ($1,228,000) and $432,000 of capitalized merger
costs for a total price of $1,660,000.
The operating results of Rugged Digital are included in the Company's
results of operations from the date of acquisition. The following unaudited
pro forma data presents the results of operations as if the acquisition had
occurred at the beginning of fiscal 1993 and does not purport to be indicative
of what would have occurred had the acquisition been made as of that date:
<TABLE>
<CAPTION>
(IN THOUSANDS
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C>
Sales......................................................... $33,067
Income before cumulative effect of change in accounting
principle.................................................... 453
Net income.................................................... 1,391
Earnings per share of common stock:
Primary:
Income before cumulative effect of change in accounting
principle.................................................. .06
Net income.................................................. .21
Fully diluted:
Income before cumulative effect of change in accounting
principle.................................................. .06
Net income.................................................. .19
Weighted average number of shares outstanding:
Primary..................................................... 6,195
Fully diluted............................................... 7,141
</TABLE>
F-8
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
U.S. government or its prime contractors:
Amounts billed............................................. $ 4,369 $ 3,931
Recoverable costs and accrued profits on progress
completed, not billed..................................... 1,156 2,935
------- -------
5,525 6,866
Foreign, commercial and other................................ 1,075 2,132
------- -------
6,600 8,998
Less billed but uncollected progress payments................ (22) (268)
------- -------
$ 6,578 $ 8,730
======= =======
</TABLE>
NOTE 4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Stockroom inventory...................................... $ 5,628 $ 4,133
Contracts in process..................................... 1,019 2,616
------- -------
6,647 6,749
Less progress payments received on contracts............. -- (711)
------- -------
$ 6,647 $ 6,038
======= =======
</TABLE>
NOTE 5. INCOME TAXES
Effective October 26, 1992, the Company changed its method of accounting for
income taxes from the deferred method to the liability method of accounting
for deferred income taxes with the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
The cumulative effect of adopting SFAS No. 109 was a one-time benefit to
income of $938,000, or $0.17 per share on a primary basis, in the year ended
October 31, 1993.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The primary components
of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards.............................. $ 4,509 $ 1,258
Inventory accounting methods.................................. 973 629
General business credit carryforwards......................... 724 895
Deferred compensation accounting methods...................... 322 98
Product warranty accruals..................................... 54 79
Book over tax depreciation.................................... 29 --
Other......................................................... -- 52
------- -------
Total deferred tax assets..................................... 6,611 3,011
Tax over book depreciation.................................... -- (76)
Other......................................................... (123) --
------- -------
Total deferred tax liabilities................................ (123) (76)
------- -------
6,488 2,935
Valuation allowance for deferred tax assets................... (6,206) (2,376)
------- -------
Net deferred tax assets....................................... $ 282 $ 559
======= =======
</TABLE>
F-9
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Management has determined, based on the Company's expected future earnings,
that the Company will more likely than not recognize these net deferred tax
assets.
Net operating loss and tax credit carryforwards of $12,193,000 and $698,000,
respectively, for federal income tax purposes will expire at various times
between 1998 and 2006. The acquisition of Rugged Digital constituted an
ownership change of Rugged Digital for federal income tax purposes. As a
result of this ownership change, the amount of Rugged Digital's net operating
loss carryforward generated prior to the ownership change that may be utilized
against the Company's future taxable income will be limited to approximately
$170,000 annually and will result in a portion of the net operating loss
carryforward expiring prior to utilization.
The provision for income taxes on income is composed of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $ (145) $(469) $ 60
State................................................... 22 11 107
Deferred:
Federal................................................. (3,400) 369 204
State................................................... (285) 108 (30)
Valuation allowance..................................... 3,830 -- --
------- ----- ----
$ 22 $ 19 $341
======= ===== ====
</TABLE>
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory tax rate on income before income taxes and cumulative effect of
change in accounting principle:
<TABLE>
<CAPTION>
1995 1994 1993
------- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense (benefit) computed at statutory
rate..................................................... $(3,125) $ 17 $301
State income tax expense (benefit), net of federal
benefits................................................. (564) 3 51
Goodwill amortization..................................... (118) -- --
Change in valuation allowance............................. 3,830 -- --
Other, net................................................ (1) (1) (11)
------- ---- ----
$ 22 $ 19 $341
======= ==== ====
</TABLE>
NOTE 6. DEBT
The Company currently has a revolving line of credit agreement (the Credit
Agreement) with a bank, collateralized by substantially all the Company's
assets, which allows the Company to borrow up to $7,000,000 at the bank's
reference rate plus .25% (8.75% reference rate at October 29, 1995 and 7.75%
reference rate at October 30, 1994). The advance rate is eighty percent (80%)
of eligible accounts receivable, plus eighty percent (80%) of eligible
progress billings receivable, to a maximum progress billing receivables
sublimit, which will not exceed the lesser of ten percent (10%) of eligible
accounts receivables or $500,000. The facility expires on March 4, 1996. There
was no balance outstanding at October 29, 1995.
The Credit Agreement requires the Company to maintain certain financial
ratios and restricts or limits the Company's ability to (i) create certain
liens; (ii) convey, transfer or sell assets out of the ordinary course of
business; (iii) make capital expenditures; (iv) incur additional indebtedness;
(v) redeem or repurchase any class of its stock; and (vi) pay dividends on its
preferred or common stock. The Company is in compliance with all its
covenants.
During the year, the Company borrowed approximately $1,311,000 at interest
rates of 10.03%-10.80%, payable in monthly installments of approximately
$42,000, including interest, over a three-year period. The
F-10
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
borrowings are collateralized by furniture, fixtures and equipment with a net
book value of $1,039,000 at October 29, 1995.
NOTE 7. LEASES
The Company currently leases its building under an operating lease and leases
various equipment under operating and capital leases. The building lease
expires in fiscal 2004. Minimum future rental commitments under non-cancelable
operating leases having remaining terms of one year or longer and capital
leases for the twelve-month periods subsequent to October 29, 1995 are as
follows:
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
(IN THOUSANDS)
<S> <C> <C>
1996..................................... $ 606 $109
1997..................................... 614 76
1998..................................... 637 6
1999..................................... 645 --
2000..................................... 669 --
Thereafter............................... 2,446 --
------ ----
$5,617 191
======
Less imputed interest.................... (15)
----
Present value of minimum capital lease
payments................................ $176
====
</TABLE>
Property and equipment under capital leases have a cost of $509,000 and
$318,000 and an accumulated depreciation of $267,000 and $190,000 at October
29, 1995 and October 30, 1994, respectively.
Rental expenses charged to operations were $716,000, $653,000 and $704,000
for the fiscal years 1995, 1994 and 1993, respectively.
NOTE 8. PREFERRED STOCK
An aggregate of 5,000,000 shares are currently authorized, and the Board of
Directors is authorized, without further action by the stockholders, to issue
shares of preferred stock in one or more classes or series and to fix the
designations, voting rights, liquidation preferences, dividend rights,
conversion rights, rights and terms of redemption (including sinking fund
provisions) and certain other rights and preferences of the preferred stock.
The holders of Series A Preferred Stock were entitled to receive cumulative
quarterly cash dividends at an annual rate of $0.0875 (7%) per share paid
quarterly. During fiscal 1993, all shares outstanding were converted to common
stock on a one-for-one-basis.
During fiscal 1993, the Company issued 613,110 shares of Series B Redeemable
Preferred Stock with a liquidation preference and redemption price of $1.75 per
share in connection with its acquisition of Rugged Digital. The holders are not
entitled to dividends. Certain of the Series B Redeemable Preferred
Stockholders (the "Escrow Participants") placed 285,715 shares in escrow to
cover certain indemnification claims, up to an amount of $500,000, that the
Company might have arising out of the acquisition. On August 9, 1994, the
Company submitted indemnification claims to the Escrow Participants for
approximately $720,000. The Escrow Participants have rejected a majority of the
indemnification claims, and the Company is pursuing its rights under the Rugged
Digital acquisition agreement. The Escrow Participants have accepted
approximately $118,000 of the claims, and 67,163 shares were released from
escrow and returned to the Company. The balance of the shares continue to be
held in escrow pending resolution of the remaining claims.
The original holders of the Series B Redeemable Preferred Stock had a
contractual right to receive warrants to purchase Datametrics Common Stock in
the event that the Series B Redeemable Preferred Stock remained outstanding on
August 10, 1995. The Company redeemed all of the Series B Redeemable Preferred
Stock before
F-11
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the right to receive warrants became effective. To date 277,395 shares of
Series B Redeemable Preferred Stock have been tendered for redemption. Shares
totalling 268,552 have not yet been tendered for redemption, including 218,552
shares which are still held in escrow. These untendered shares are no longer
outstanding and only represent the right to receive the redemption price of
$1.75 per share from the Company.
NOTE 9. STOCK OPTION PLANS AND WARRANTS
At October 29, 1995, the Company has reserved 1,277,794 shares of its common
stock for issuance pursuant to the exercise of options issued primarily under
its incentive stock option plans.
The Company has three incentive stock option plans and one non-qualified plan
(1993 Directors' Stock Option Plan) described as follows:
1982 Plan--This plan was adopted in 1982 and provided for the issuance of
200,000 shares of the Company's common stock.
1986 Plan--This plan, as amended, was adopted in 1986 and provides for the
issuance of 700,000 shares of the Company's common stock.
1993 Plan--This plan was adopted by the Board of Directors in 1993 and
provides for the issuance of 500,000 shares of the Company's common stock.
1993 Directors' Stock Option Plan--This plan was adopted in 1994 and
provides for the issuance of 400,000 shares of the Company's common stock.
Both the 1982 and 1986 plans have similar terms. The plans were established
for the granting of options to key employees at an exercise price not less than
the fair market value on the date of the grant, as determined by the Board of
Directors. The options become exercisable equally over 16 quarters from the
date of grant and expire 10 years from the date of grant. The Company may grant
the options during a 10-year period beginning on the date the plan originated.
The 1993 Plan differs from the earlier plans in that the options expire five
years from the date of grant. The 1993 Directors' Stock Option Plan is similar
to the 1993 Plan, but provides for the issuance of options to members of the
Board of Directors.
The following table summarizes the options exercisable and available for
grant at October 29, 1995:
<TABLE>
<CAPTION>
EXERCISABLE
--------------------- AVAILABLE
NUMBER PRICE RANGE FOR GRANT
------- ------------- ---------
<S> <C> <C> <C> <C>
1982 Plan....................................... 20,000 $ 1.00 --
1986 Plan....................................... 338,751 $ .75 -5.75 --
1993 Plan....................................... 134,560 $2.6875 -5.75 1,000
1993 Directors' Plan............................ 64,825 $2.875 -5.75 205,000
</TABLE>
Information on options under the Company's plans is as follows at October 29,
1995:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
UNDER OPTION RANGE
------------ -------------
<S> <C> <C> <C>
Outstanding at October 30, 1994...................... 1,233,874 $ .75 -4.3125
Granted.............................................. 166,300 5.75 -8.25
Terminated........................................... (25,250) 1.75 -2.6875
Exercised............................................ (303,130) .75 -5.75
--------- -------------
Outstanding at October 29, 1995...................... 1,071,794 $ .75 -8.25
========= =============
</TABLE>
F-12
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the options exercisable and available for
grant at October 30, 1994:
<TABLE>
<CAPTION>
EXERCISABLE
----------------------- AVAILABLE
NUMBER PRICE RANGE FOR GRANT
------- --------------- ---------
<S> <C> <C> <C> <C>
1982 Plan..................................... 91,550 $ .75 -2.375 --
1986 Plan..................................... 499,462 $ .75 -4.3125 27,800
1993 Plan..................................... 63,025 $2.6875 -3.25 103,000
1993 Directors' Plan.......................... 30,939 $ 2.875 235,000
</TABLE>
Information on options under the Company's plans is as follows at October
30, 1994:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
UNDER OPTION RANGE
------------ ---------------
<S> <C> <C> <C>
Outstanding at October 31, 1993.................... 810,404 $ .25 -3.25
Granted............................................ 537,000 2.6875 -4.3125
Terminated......................................... (52,000) .25 -2.875
Exercised.......................................... (61,530) .25 -2.6875
--------- ---------------
Outstanding at October 30, 1994.................... 1,233,874 $ .75 -4.3125
========= ===============
</TABLE>
There are 200,000 shares of common stock reserved for issuance upon exercise
of warrants sold for $0.001 per warrant to the underwriters of the Company's
June 21, 1995 offering of common stock. The warrants are exercisable for a
period of five years beginning June 21, 1996 and have a per-share exercise
price equal to $9.60 (120% of the initial public offering price of $8.00).
NOTE 10. CONTINGENCIES
The Company is, from time to time, the subject of claims and suits arising
out of matters occurring during the operation of the Company's business. In
the opinion of management, the liability, if any, under such current claims
and suits would not materially affect the financial position or the results of
the operations of the Company.
NOTE 11. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) plan, as amended,
covering a majority of its employees. The plan allows eligible employees to
contribute up to 17% of their gross salary. Company contributions are
voluntary and at the discretion of the Board of Directors. There were no
Company contributions in fiscal years 1995 and 1994 respectively. Company
contributions amounted to $94,000 for fiscal year 1993. Employees vest in
Company contributions based upon their years of vesting service, as defined.
In October 1989, the Company entered into agreements with two officers to
provide deferred compensation benefits upon their retirement. The Company has
accrued $176,000 and $229,000 at October 29, 1995 and October 30, 1994,
respectively, representing the net present value of the future benefits to be
paid, of which $125,000 and $148,000, respectively, have been classified as
long-term.
During November 1994, the Company established a Supplemental Employee
Retirement Plan (SERP), a defined benefit pension plan covering certain
officers to whom the plan is offered. Normal retirement age is 65, but
provision is made for earlier retirement. Benefits under the plan are
generally payable for up to fifteen years after a participant's retirement.
However, the participant may elect a lump-sum payment equal to 90% of the net
present value of the benefit amount at the participant's retirement date. The
Company accrued $106,000 in expense during fiscal 1995 for the SERP; however,
no contributions have been made as of fiscal 1995.
F-13
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONCLUED)
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1995 (IN THOUSANDS, EXCEPT PER SHARE ----------------------------------------
DATA) JANUARY 29 APRIL 30 JULY 30 OCTOBER 29
------------------------------------ ---------- -------- ------- ----------
<S> <C> <C> <C> <C>
Sales.................................. $ 3,451 $ 3,897 $ 4,790 $ 6,818
Gross profit........................... 748 543 914 423
Net loss............................... (1,575) (2,475) (2,166) (2,997)
Loss per common share:
Primary and fully diluted............ (0.16) (0.24) (0.20) (0.23)
Weighted average number of common
shares outstanding:
Primary and fully diluted............ 10,118 10,223 11,137 12,765
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
1994 (IN THOUSANDS, EXCEPT PER SHARE DATA) JANUARY 31 MAY 2 JULY 31 OCTOBER 30
------------------------------------------ ---------- ------ ------- ----------
<S> <C> <C> <C> <C>
Sales...................................... $5,634 $6,733 $5,873 $6,971
Gross profit............................... 1,685 2,392 1,926 2,303
Net income (loss).......................... (242) 29 27 217
Income (loss) per common share:
Primary and fully diluted................ (0.03) -- -- 0.02
Weighted average number of common shares
outstanding:
Primary and fully diluted................ 7,762 7,985 9,720 10,045
</TABLE>
Per share data may not always add to the total for the year because each
figure is independently calculated.
F-14
<PAGE>
DIAMETRICS CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED OCTOBER 29, 1995
<TABLE>
<CAPTION>
CLASSIFICATION 1995 1994 1993
-------------- ---------- ---------- ----------
<S> <C> <C> <C>
Reserve for doubtful accounts:
Balance at beginning of period.............. $ 6,030 $ 5,833 $ 22,400
Add--provision charged to operations........ 41,769 2,872 --
Less--reserve applied during the year....... 1,052 2,675 16,567
---------- ---------- ----------
Balance at end of period.................... $ 46,747 $ 6,030 $ 5,833
========== ========== ==========
Reserve for warranty:
Balance at beginning of period.............. $ 184,093 $ 374,775 $ 342,201
Reserve acquired with purchase of Rugged
Digital Systems, Inc....................... -- -- 100,000
Add--provision charged to operations........ 200,831 150,391 186,416
Less--reserve applied during the year....... 260,424 341,073 253,842
---------- ---------- ----------
Balance at end of period.................... $ 124,500 $ 184,093 $ 374,775
========== ========== ==========
Reserve for inventory obsolescence:
Balance at beginning of period.............. $ 576,124 $ 309,458 $ 384,523
Add--provision charged to operations........ 295,142 295,613 296,388
Less--reserve applied during the year....... -- 28,947 371,453
---------- ---------- ----------
Balance at end of period.................... $ 871,266 $ 576,124 $ 309,458
========== ========== ==========
Reserve for prepaid royalties:
Balance at beginning of period.............. $ 750,591 $ 752,309 $ 752,309
Add--provision charged to operations........ -- -- --
Less--reserve applied during the year....... -- 1,718 --
---------- ---------- ----------
Balance at end of period.................... $ 750,591 $ 750,591 $ 752,309
========== ========== ==========
Valuation allowance for deferred tax assets:
Balance at beginning of period.............. $2,376,000 $2,376,000 --
Allowance established with purchase of
Rugged Digital
Systems, Inc............................... -- -- $2,176,000
Add--provision charged to operations........ 3,830,000 -- 200,000
Less--reserve applied during the year....... -- -- --
---------- ---------- ----------
Balance at end of period.................... $6,206,000 $2,376,000 $2,376,000
========== ========== ==========
</TABLE>
F-15
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K
or are incorporated herein by reference.
<TABLE>
<C> <S>
DESCRIPTION OF EXHIBIT
3.1 Restated Certificate of Incorporation of Registrant, as currently in
effect (incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K
dated April 15, 1987).
3.2 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Series B Preferred Stock and
Qualifications, Limitations and Restrictions Thereof dated August 10, 1993
(incorporated by reference to Exhibit 4.1 to Registrant's Form 8-K dated
August 10, 1993).
3.3 Bylaws of Registrant, as currently in effect (incorporated by reference to
Exhibit 3.2 to Registrant's Form 10-K for the year ended October 28,
1990).
10.1 Lease for Woodland Hills facility between the Company and Manufacturers
Life Insurance Company dated as of December 19, 1993, as amended on August
31, 1994 (incorporated by reference to Exhibit 10.2 to Registrant's Form
10-K for the year ended October 30, 1994).
10.2 Agreement between the Company and Sidney E. Wing dated March 17, 1989
(incorporated by reference to Exhibit 10.4 to Registrant's Form 10-K for
the year ended October 29, 1989).
10.3 Deferred Compensation Agreement between the Company and Garland S. White
dated October 18, 1989, (incorporated by reference to Exhibit 10.5 to
Registrant's Form 10-K for the year ended October 29, 1989).
10.4 Amended and Restated Agreement and Plan of Merger dated as of May 12, 1993
between Registrant and Rugged Digital Systems, Inc. ("Rugged Digital")
(incorporated by reference to Exhibit 2 to Registrant's Form 8-K dated May
12, 1993).
10.5 Escrow Agreement dated August 10, 1993 among the Registrant and others
relating to the acquisition of Rugged Digital (incorporated by reference
to Exhibit 4.3 to Registrant's Form 8-K dated August 10, 1993).
10.6 Debt Exchange Agreement dated August 10, 1993 among Registrant and
debtholders of Rugged Digital (incorporated by reference to Exhibit 4.2 to
Registrant's Form 8-K dated August 10, 1993).
10.7 Security and Loan Agreement between Registrant and Imperial Bank executed
March 21, 1995, as amended May 15, 1995 (incorporated by reference to
Exhibit 10.1 to Registrant's Form 10-Q for the period ended April 30,
1995).
10.71 Second Amendment to Addendum to Security and Loan Agreement, dated
December 5, 1995. (1)
10.8 Agreement between the Company and The Angeloff Company dated February 15,
1995 (incorporated by reference to Exhibit 10.2 to Registrant's Form 10-Q
for the period ended April 30, 1995).
21 List of Subsidiaries (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (1)
27 Financial Data Schedule (1)
99.1 The Datametrics Employee Savings Plan And The Trust Agreement Pursuant To
The Datametrics Employee Savings Plan (incorporated herein by reference to
Exhibit 28 to Registrant's Registration Statement on Form S-8 filed on
November 12, 1985. (SEC File No. 33-1469)).
</TABLE>
E-1
<PAGE>
<TABLE>
<C> <S> <C>
99.2 The Amended and Restated 1993 Stock Option Plan of Datametrics Corporation
(incorporated herein by reference to Exhibit 28.2 to Registrant's Form 10-
K for the year ended October 31, 1993).
99.3 The 1986 Stock Option Plan of Datametrics Corporation, as amended
(incorporated herein by reference to Exhibit 28.1 to Registrant's
Registration Statement on Form S-8 filed on June 10, 1987 (SEC File No.
33-14969) and Exhibit 28.5 to Registrant's Form 10-K for the year ended
October 29, 1988).
99.4 The 1982 Stock Option Plan of Datametrics Corporation, as amended
(incorporated herein by reference to Exhibit 28.2 to Registrant's
Registration Statement on Form S-8 filed on June 10, 1987 (SEC File No.
33-14969)).
99.5 The 1993 Directors' Option Plan of Datametrics Corporation (incorporated
by reference to Exhibit 28.5 to Registrant's Form 10-K for the year ended
October 31, 1993).
99.6 Datametrics Corporation Supplemental Executive Retirement Plan and Master
Trust Agreement (incorporated herein by reference to Exhibit 28.6 to
Registrant's Form 10-K for the year ended October 30, 1994).
</TABLE>
- --------
(1) Filed herewith.
E-2
<PAGE>
EXHIBIT 10.71
SECOND AMENDMENT TO ADDENDUM TO SECURITY AND LOAN AGREEMENT
("SECURITY AND LOAN AGREEMENT")
BETWEEN DATAMETRICS CORPORATION AND IMPERIAL BANK
DATED: MARCH 21, 1995
The Security and Loan Agreement between Datametrics Corporation ("Borrower")
and Imperial Bank ("Bank"), dated March 21, 1995, is amended as follows:
Borrower agrees that it will not:
1.) Make or incur obligations for capital expenditures in excess of $1,900,000
during the 1995 fiscal year or in excess of $1,900,000 during any one
fiscal year thereafter.
All other terms and conditions of Bank's loan to Borrower remain unchanged.
Agreed: December 5, 1995
Datametrics Corporation
Imperial Bank
By: /s/ John J. Van Buren By: /s/ Roger Kratz
- ------------------------------- -------------------------------
Title: C.F.O. Title: Vice President
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
---------- ---------------
<S> <C>
1. Datametrics Technology Systems Corporation Delaware
2. Datametrics Service Corporation Delaware
3. Datametrics Limited Barbados
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-
K) of Datametrics Corporation of our report dated December 8, 1995, included
in the 1995 Annual Report to Shareholders of Datametrics Corporation.
Our audits also included the financial statement schedule of Datametrics
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects, the information set forth
therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-1469) pertaining to the Datametrics Employee
Savings Plan, the Registration Statement (Form S-8 No. 33-14969) pertaining to
the 1982 Stock Option Plan of Datametrics Corporation, the Registration
Statement (Form S-8 No. 33-14969) pertaining to the 1986 Stock Option Plan of
Datametrics Corporation, and in the Registration Statement (Form S-8 No. 33-
78128) pertaining to the 1993 Directors' Option Plan and the Amended and
Restated 1993 Stock Option Plan of Datametrics Corporation of our report dated
December 8, 1995 with respect to the financial statements of Datametrics
Corporation incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included
in this Annual Report (Form 10-K) of Datametrics Corporation.
Ernst & Young LLP
Woodland Hills, California
January 25, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DATAMETRICS
CORPORATION AS OF AND FOR THE TWELVE MONTH PERIOD ENDING OCTOBER 29, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-29-1995
<PERIOD-END> OCT-29-1995
<CASH> 9,601
<SECURITIES> 0
<RECEIVABLES> 6,625
<ALLOWANCES> 47
<INVENTORY> 6,647
<CURRENT-ASSETS> 23,636
<PP&E> 7,158
<DEPRECIATION> 4,205
<TOTAL-ASSETS> 27,471
<CURRENT-LIABILITIES> 4,384
<BONDS> 0
0
0
<COMMON> 120
<OTHER-SE> 32,120
<TOTAL-LIABILITY-AND-EQUITY> 27,471
<SALES> 18,956
<TOTAL-REVENUES> 18,956
<CGS> 16,328
<TOTAL-COSTS> 16,328
<OTHER-EXPENSES> 11,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> (9,191)
<INCOME-TAX> 22
<INCOME-CONTINUING> (9,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,213)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
