<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 27, 1996
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)
<TABLE>
<S> <C>
DELAWARE 95-3545701
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21135 ERWIN STREET 91367
WOODLAND HILLS, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 598-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
<S> <C>
Common Stock, .01 par value American Stock Exchange
</TABLE>
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 thisForm 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 15, 1997 was approximately $12,224,000.
The number of shares outstanding of the Registrant's Common Stock, as of the
latest practicable date:
12,304,510 shares of Common Stock as of January 15, 1997.
----------------
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 27, 1996 are incorporated by reference
into Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Datametrics Corporation ("Datametrics" or "the Company") designs, develops
and sells high-speed color printers, high-resolution non-impact
printer/plotters and ruggedized computers, printers and workstations. The
Company is focused on its core product line of ruggedized printers and the
continuing development and manufacture of high-performance, high-reliability
communication workstations.
In October 1996, the Company idled the manufacture and marketing of its
CYMax series of high-speed color digital printers. This decision was made as a
result of the burdensome development and marketing expenses relative to the
CYMax printers which experienced an indifferent market reception. In
conjunction with this decision, the management of Datametrics undertook a
thorough marketing and operational feasibility study of the Company's
proprietary Concurrent Transfer Imaging ("CTI") technology and its potential
applications. The Company believes that a complete understanding and review of
competitive conditions relating to its proprietary CTI technology may offer
potential opportunities in the high-speed color digital printer market;
however, the Company's decision to proceed in this market will be based upon
the findings and recommendations of its marketing and operational feasibility
study expected to be completed by the end of the second quarter of fiscal
1997.
On October 8, 1996, a new Board of Directors was elected, effecting a change
in control of the Company. This change in control was brought about by a group
of stockholders who were dissatisfied with the strategic direction and
financial performance of the Company. On October 24, 1996, the Company
announced that it had accepted the resignations of four senior executives,
three members of the Board of Directors and had reduced its work force by
laying off 35 out of a total of 151 employees. These measures were undertaken
based upon the new Board of Directors' assessment of the Company's business
performance during the past several years, the then financial and operational
position of the Company and the perceived immediate need to implement new cost
control policies and procedures. As a result of these changes, the Company
recorded non-recurring charges of $5,518,000 in the fourth quarter 1996.
The new Board of Directors believes that the management changes and staff
reductions, in concert with broad, newly designed cost control policies begun
in October 1996, will permit the Company to strengthen its core government
business operations, to facilitate the expeditious completion of its marketing
and operational study of its high-speed color printer product line and align
the Company's workforce to efficient staffing levels.
In November 1996, the Board of Directors took steps to merge the Company's
two wholly-owned subsidiaries, Datametrics Technology Systems Corporation and
Datametrics Service Corporation, into the parent company, Datametrics
Corporation. This action is consistent with and supports the Company's
decision to eliminate the distinction of separate defense and commercial
business units within the Company.
The Company was incorporated in California in October 1962 and was
reincorporated in Delaware in April 1987. The Company's 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. Government (or the prime contractors
to the U.S. Government ) 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.
2
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Over the past several fiscal years, the Company has been significantly
impacted by market changes in the U.S. 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
industrial and international opportunities for its ruggedized printers and
electronic communications equipment, expand its core ruggedized product line
and to study strategic and operational issues relating to its high-speed
digital color printer technology. The Company believes that despite the DoD
budget forecast of overall funding decreases, revenues attributable to its
core product line will enjoy modest growth as a result of its competitive
position as a defense contractor and as a result of industrial and
international market opportunities.
DEFENSE PRODUCTS
The Company designs, develops, manufactures and sells mil-spec (military
specification) and ruggedized computers, workstations and printers for use in
DoD applications. Products sold by the Company into the DoD markets can be
categorized into three basic groups: mil-spec printers, ruggedized computers,
and ruggedized printers. For the fiscal year ended October 27, 1996,
approximately 61% of the Company's revenues were derived from DoD business,
which includes contractors with U.S. government contracts as well as the DoD
itself.
Mil-spec products are designed specifically to meet military requirements
and must meet the stringent requirements for operation in adverse
environments, including shock, vibration, extreme temperatures and, in some
cases, nuclear radiation. Being so designed, these products are more reliable
and significantly more expensive than ruggedized or industrial products
(products designed for benign environments as are experienced in commercial
applications). Industrial products can be used in selected military
environments and are significantly less expensive than the mil-spec products.
The broader intermediary category is the ruggedized products. These products
are generally configured to be operated in some adverse environments but do
not meet full mil-spec requirements.
Military Printers. The Company manufactures a wide range of printers which
are categorized as either mil-spec or ruggedized. These printers utilize
thermal printing, impact printing and laser printing technologies. These
printers are purchased and utilized by the DoD as well as by companies and
organizations which manufacture, sell or use data processing or data
communications systems that require "hard copy" printouts. The Company's
products are incorporated into these systems. The military printers have a
greater reliability than the conventional commercial printers and are designed
to work in severe environmental applications. The design and component
selection allow the Company's printers to withstand certain of the effects of
dirt and grime, corrosion, droppage, bullets, moisture, extremes in hot and
cold temperature, and in some cases, nuclear radiation. In connection with the
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
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 printers in this
standardization program influenced the purchase of its printers on 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 operate in adverse environments while providing
quiet and reliable printing operations. The Company has developed a low cost
impact printer as well as a ruggedized laser printer, which are targeted at
the low end of the severe environment market. These ruggedized products
utilize commercial components, some industrial (high-reliability, military
rated) components, and are encased in a rugged case to withstand moderately
severe environments.
The Company has experienced the highest sales volume of full mil-spec
printers with its DmC 1600 printer/plotter. These printers 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
3
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during crisis situations. The TFCC system is proposed for most of the Navy's
nuclear super aircraft carriers and cruisers. In addition, the DmC 1600's are
used for the U.S. Navy standard display consoles that are utilized on
virtually every fighting ship in the fleet. This printer is qualified for the
Navy's rigorous environmental standards. A special version of the DmC 1600
printer is being used 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 Communications Satellite Program, the DoD's global communications
system.
The Company's DmC 1900 Model, a high resolution color printer/plotter, is
used by 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 is used by U.S. Navy for utilization
within a number of Aegis subsystems. The military color printer market has
been slow to develop due to cost considerations, however, the Company has
developed a new lower cost ruggedized printer which it believes should enjoy
higher sales.
Ruggedized Computers. The Company's ruggedized products combine
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. The Company 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, (DEC), Hewlett-Packard Company, Silicon
Graphics Inc., Sun Microsystems Inc., and Cray Research. This process often
requires the Company to design and manufacture cases, controls, backplanes and
power supplies. These products require much shorter development and testing
periods than mil-spec products. As such, these products allow the military to
deploy state-of-the-art computer technology rapidly, at a price greatly
reduced from full mil-spec systems. These timing and price factors are
responsive to current U.S. Government trends.
A substantial portion of the Company's ruggedized products revenue is
derived from the sale of workstations into the international marketplace.
Workstations have been sold into the Japanese P-3 maritime patrol aircraft
program. Other sales have been to France, Italy and Israel. This marketplace
continues to be active for these products.
International Military. The Company believes that international markets
offer promising growth opportunities for the Company's high-end monochrome and
color printers and ruggedized printer, computers and workstations. As the U.S.
Government funding continues to decrease, other countries are increasing
theirs, specifically the Pacific Rim. These countries are assuming more of the
burden of their defense roles as the U.S. military reduces its presence. The
Company continues to be aggressive in the international marketplace, though
there is greater inherent risk.
Distribution and Sales. Defense products are distributed both domestically
and internationally through the Company's sales force. The Company employs its
own direct sales force to sell within North America. This force is supported
in certain regions by independent, commission-only sales representatives.
SIGNIFICANT CUSTOMERS AND MATTERS CONCERNING DOD BUSINESS
Most of the customers for the Company's products are the DoD and prime
contractors under programs funded by the DoD. For the fiscal years ended
October 27, 1996, October 29, 1995, and October 30, 1994, direct and indirect
DoD business represented approximately 61%, 79% and 85%, 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.
4
<PAGE>
In the fiscal year ended October 27, 1996, the Company's five largest
customers in sales, Lockheed Martin (15.5%), Digital Equipment Corporation
(15.4%), GTE (11.3%), DoD (9.9%), Raytheon (9.9%), accounted for an aggregate
of 62.0% 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 29, 1995, the Company's five largest
customers in sales, U.S. Government (14.3%), Computing Devices Canada (11.5%),
Rockwell International (8.8%), Martin Marietta (8.7%), and E-Systems (8.4%),
accounted for an aggregate of 51.7% of total Company sales.
Companies which are engaged primarily in supplying equipment and services,
directly or indirectly, to the U.S. 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.
The Company's DoD-related contracts provide for the right to audit the
Company's cost records and are subject to defective pricing regulation.
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.
HIGH-SPEED COLOR DIGITAL PRINTER
In fiscal 1994, the Company began an intensive program to develop a high-
speed color digital printer for the short-run production printer market. After
significant development and marketing costs, coupled with limited market
success, the Company in October 1996 idled all manufacture and marketing of
its CYMax product line to permit a comprehensive strategic and operational
feasibility study of its overall CTI technology and its potential
applications. The conclusions and recommendations of this study are expected
to be presented to the Company's Board of Directors by the end of the second
quarter of fiscal 1997.
CERTAIN MARKET CONSIDERATIONS
The markets served by the Company 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 requires 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 developments could result in a loss of anticipated
future revenues and impair the Company's competitiveness.
SERVICE
Pursuant to maintenance agreements, repair orders or warranty provisions,
the Company generally services its printers with its own employees at its
facility. In-house, non-warranty repairs and maintenance service provided 8.1%
of the Company's sales in fiscal 1996. 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 11.6% of fiscal
1996 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 30, 1994, October 29, 1995, and October 27, 1996 was approximately
$10,400,000, $9,190,000 and $7,675,000, respectively.
5
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Approximately all of the October 27, 1996 backlog is expected to be delivered
during the fiscal year ending October 26, 1997.
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.
SOURCES OF SUPPLY
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
ruggedized 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 financial, technical, marketing,
distribution and other resources than the Company. The principal competitive
factors in the markets in which the Company participates are image quality,
product performance and price.
In domestic and international defense markets, the Company's principal
competitors are North Atlantic Industries, Inc., Miltope 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 a trademark registration covering
its "DmC"(R) logo. The Company has been granted two U.S. patents relating to
its high-speed color digital printer technology. The Company also has several
U.S. patent applications pending relating to its high-speed color digital
printer. There can be no assurance, however, that any patents will be granted
pursuant to these various applications in the U.S. and abroad.
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. There can be no assurance,
however, that the Company will be successful in protecting its trade secrets
and other proprietary information.
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.
6
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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 $2,297,000, $6,151,000 and $5,557,000 on
research and development during the fiscal years ended October 30, 1994,
October 29, 1995 and October 27, 1996, respectively. The research and
development expenses incurred in fiscal 1994 through 1996 related to product
development of a high-speed color digital printer and a low-cost ruggedized
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 27, 1996, the Company employed 112 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 good.
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.
ITEM 2. PROPERTIES.
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, was used for the assembly and final test of the Company's CYMax
printers. This facility was closed on December 15, 1996. Management believes
that its facility is suitable and adequate for the Company's current needs.
ITEM 3. LEGAL PROCEEDINGS.
While the Company is from time to time subject to ordinary routine
litigation incidental to its business, it is not presently a party to any
pending legal proceedings from its general operations.
The Company is, however, subject to one pending suit brought by three former
officers whose relationships with the Company terminated as a result of the
Company's restructuring. On January 13, 1997, the Company was served with a
summons and complaint in an action brought by three former officers against
the Company in
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the Superior Court of the State of California for Los Angeles County. The
action seeks damages from the Company based upon amounts allegedly due to the
former officers under separate severance agreements each dated October 7, 1996
(the "Severance Agreements") and an alleged implied promise not to terminate
the employment of the former officers without good cause. The complaint does
not state the specific amount of damages being sought by the plaintiffs. The
Company intends to vigorously defend the action, by, among other things,
asserting the invalidity of the Severance Agreements. The Company also intends
to bring counterclaims, alleging breaches of fiduciary duty on the part of the
plaintiffs relating to the entering into of the Severance Agreements as well
as to various other transactions and other claims arising out of the period of
time that the Company was being managed by the former officers.
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 January 19, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<C> <C> <S>
Daniel P. Ginns 46 Chairman of the Board of Directors since October 9,
1996 and Chief Executive Officer since October 24,
1996. Mr. Ginns is also the President of Belmont
Capital, Inc.
Adrien A. Maught, Jr. 47 President since January 3, 1997; Chief Operating
Officer and Interim Chief Financial Officer since
October 24, 1996; Director since October 9, 1996.
Mr. Maught is also the President of the Adrien A.
Maught Company.
Kenneth S. Polak 41 Assistant Secretary since November 4, 1996;
Controller since July 1, 1990; Director of Financial
Analysis since May 8, 1989
Martin E. Weisberg 46 Secretary since October 8, 1996; Partner at Parker
Chapin Flattau & Klimpl, LLP
</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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Datametrics Corporation's common stock has been listed on the American Stock
Exchange (Symbol DC) since July 26, 1988. The high and low sales prices for
the common stock as reported by the American Stock Exchange are set forth in
the following table.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED HIGH LOW
------------------------- -------- --------
<S> <C> <C>
January 28.............................................. $ 9 9/16 $6 5/8
April 28................................................ 9 3/8 5 3/4
July 28................................................. 8 7/8 2 5/16
October 27.............................................. 3 7/16 7/8
<CAPTION>
FISCAL 1995 QUARTER ENDED HIGH LOW
------------------------- -------- --------
<S> <C> <C>
January 29.............................................. $ 6 3/8 $3 3/4
April 30................................................ 9 1/4 5 1/8
July 30................................................. 10 5/8 7 13/16
October 29.............................................. 11 3/4 7 1/8
</TABLE>
There were approximately 780 stockholders of record as of October 27, 1996.
No cash dividends have been paid to common stockholders since the Company
was founded, and the Company does not intend to do so in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------
OCTOBER 27, OCTOBER 29, OCTOBER 30, OCTOBER 31, OCTOBER 25,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Sales................. $ 19,246 $18,956 $25,211 $23,984 $22,358
Net income (loss) be-
fore cumulative ef-
fect of change in ac-
counting principles.. $(17,386) $(9,213) $ 31 $ 545 $ 1,337
Net (loss) income..... $(17,386) $(9,213) $ 31 $ 1,483 $ 1,337
Net income (loss) per
share:
Primary............. $ (1.39) $ (0.84) $ -- $ 0.26 $ 0.30
Fully diluted....... $ (1.39) $ (0.84) $ -- $ 0.23 $ 0.22
Weighted average
number of shares
outstanding:
Primary............. 12,515 11,020 9,067 5,458 3,769
Fully diluted....... 12,515 11,020 9,067 6,404 5,946
Other data:
Total assets.......... $ 15,940 $27,471 $19,886 $16,460 $ 9,626
Long term obligations
due after one year... $ 1,032 $ 919 $ 1,134 $ 1,433 $ 457
Stockholders' equity.. $ 5,013 $21,939 $13,661 $ 8,470 $ 5,725
</TABLE>
The Company paid cash dividends to preferred stockholders in 1993 and 1992.
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.
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Net income for fiscal 1996 include certain non-recurring charges of
$5,518,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Fiscal Year 1996 Compared With Fiscal Year 1995
Sales for the year ended October 27, 1996 were $19,246,000 an increase of
$290,000 or 1.5% compared with sales of $18,956,000 in the prior fiscal year.
Sales from military and ruggedized products increased $199,000 and sales of
commercial color products increased $91,000.
Cost of sales for fiscal 1996 was $21,168,000 (110% of sales) an increase of
$4,840,000 from cost of sales of $16,328,000 (86% of sales) for the prior
fiscal year. Cost of sales as a percent of sales was primarily impacted by
$5,102,000 of non-recurring charges for inventory reserves and tooling costs
relative to the Company's high-speed color digital printer product.
Research and development ("R & D") expenses were $5,557,000 in fiscal 1996,
a decrease of $594,000 or 10% compared with $6,151,000 for fiscal 1995.
Approximately 83% of the fiscal 1996 R & D expenses related to the development
of the Company's high-speed color digital printer product.
Selling, general and administrative ("SG&A") expenses for fiscal 1996 were
$9,754,000 (51% of sales) an increase of $3,686,000 from $6,068,000 (32% of
sales) from the prior fiscal year. The increase was due to heavy spending on
marketing for the Company's high-speed color digital printer product and
certain non-recurring charges of $416,000 primarily for severance and
accelerated depreciation.
Net interest expense amounted to $80,000 for the year ended October 27, 1996
compared to net interest income of $96,000 for fiscal 1995. The change was due
to decreased investment income on the remaining proceeds of the Company's
common stock offering and payment of interest on increased borrowings.
Amortization of excess of acquired net assets over cost was $229,000 for the
year ended October 27, 1996 compared to $304,000 for the prior fiscal year.
The decrease of $75,000 was due to the completion of amortization in the third
quarter of 1996. The amortization was a result of the acquisition of Rugged
Digital Systems, Inc. in August 1993.
The net loss for the year ended October 27, 1996 amounted to $17,386,000
compared with a net loss of $9,213,000 for the same period in the prior fiscal
year. The loss was primarily due to continued spending on the Company's high-
speed digital color printer. Cost of sales increased by $4,840,000, SG&A
expenses increased by $3,686,000, net interest expense increased by $176,000,
amortization decreased by $75,000, and taxes increased by $280,000. This loss
was partially offset by an increase in sales of $290,000 and by a decrease in
R & D expenses of $594,000.
In October 1996, the Company idled the manufacture and marketing of its
CYMax series of high-speed color digital printers. This decision was made as a
result of the burdensome development and selling expenses of the CYMax
printers which experienced an indifferent market reception.
On October 8, 1996, a new Board of Directors was elected, effecting a change
in control of the Company. This change in control was brought about by a group
of stockholders who were dissatisfied with the strategic direction and
financial performance of the Company. On October 24, 1996, the Company
announced that it had accepted the resignations of four senior executives,
three members of the Board of Directors and had reduced its work force by
laying off 35 out of a total of 151 employees. These measures were undertaken
based upon the new Board of Directors' assessment of the Company's business
performance during the past several years, the then financial and operational
position of the Company and the perceived immediate need to implement new cost
control policies and procedures.
10
<PAGE>
Primarily as a result of these changes, the Company recorded the following
non-recurring charges which totaled $5,518,000 in the fourth quarter of fiscal
1996: accelerated depreciation on property and equipment relative to the idled
production facilities for the former CYMax printer line $876,000; $304,000 in
severance payments and accruals relating to employee and senior executive
terminations; $3,323,000 related to the writedown to estimated net realizable
value for CYMax inventory purchased during fiscal 1996; $542,000 for CYMax
material vendor claims; and $473,000 for a write-down of other assets and
other liabilities. As of October 27, 1996, $865,000 of the non-recurring
charges were accrued as liabilities.
The new Board of Directors believes that the management changes and staff
reductions, in concert with broad, newly designed cost control policies begun
in October 1996, will permit the Company to strengthen its core defense
business operations, facilitate the expeditious completion of the Company's
marketing and operational study of its high-speed color printer product line
and align the Company's workforce to efficient staffing levels. Depending on
the Company's actual success in utilizing its inventory, additional reserves
may be required beyond those recorded at year end.
Management has determined that, based on the Company's historical earnings
from recurring operations, the Company will not recognize its net deferred tax
assets at October 27, 1996. 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 yet recognized as revenue at
October 27, 1996 was approximately $7,675,000. Approximately all of the
October 27, 1996 backlog is expected to be delivered during the fiscal year
ending October 26, 1997.
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.
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 25%, compared with sales of $25,211,000 in the prior fiscal
year. Sales from printer and workstation contracts relating to the MILSTAR
program, which were 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
declined $41,000.
Cost of sales for fiscal 1995 was $16,328,000 (86% of sales), a decrease of
$577,000, or 3%, compared with $16,905,000 (67% of sales) for the prior fiscal
year. Cost of sales as a percent of sales were 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.
R&D expenses were $6,151,000 for fiscal 1995, an increase of $3,854,000 or
168%, compared with $2,297,000 for fiscal 1994. Approximately 80% of the
fiscal 1995 R & D expenditures relate to the development of the Company's
high-speed color digital printer product.
SG&A expenses for fiscal 1995 were $6,068,000 (32% of sales) compared with
$6,254,000 (25% of sales) for the prior fiscal 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 color 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 common stock offering.
11
<PAGE>
Net loss for the year ended October 29, 1995 amounted to $9,213,000 compared
with net income of $31,000 for the prior fiscal year.
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 used 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, collateralized by substantially all the Company's
assets, which had allowed the Company to borrow up to $7,000,000 at the bank's
reference rate plus .25% (8.5% reference rate at October 27, 1996 and 8.75%
reference rate at October 29, 1995). 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 could not exceed the lesser of ten percent (10%) of eligible
receivables or $500,000. The facility expires on March 4, 1997. There was
$2,550,000 outstanding at October 27, 1996.
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 outside 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 not in compliance with all its
covenants. The bank, at this time, has agreed to forbear from taking any
action concerning the non-compliance with certain of its covenants based upon
the following terms and conditions: an infusion of a minimum of $1,500,000 in
the form of equity or subordinated debt by December 8, 1996; the reduction of
the commitment under the Credit Agreement from $7,000,000 to $3,000,000 until
the maturity, March 4, 1997; there will be no overadvances allowed; an
increase in the interest rate to the bank's prime rate plus 2% effective as of
December 1, 1996; no further capital expenditures without the bank's prior
approval; and all other terms and conditions contained in the original Credit
Agreement, and any amendments thereto, remain in full force and effect.
During November 1996, the Company issued $1,850,000 of Senior Subordinated
Secured Debentures with a maturity date of May 25, 1998 and an annual interest
rate of 10%. The proceeds from the sale of the Senior Subordinated Secured
Debentures were used to reduce the line of credit and fund working capital
requirements. The Senior Subordinated Secured Debenture holders received
warrants to purchase a total of 616,679 shares of common stock at a price of
$1.50 for each share in connection with the financing. The warrants are
subject to call by the Company if the closing market price of the Company's
common stock is $3.00 or greater for twenty consecutive days. The warrants
expire November 25, 2001.
In addition to the above referenced subordinated debt, the Company has
received a commitment, subject to normal terms and conditions, from certain
stockholders and non-executive members of the Company's Board of Directors, to
raise approximately $3,000,000 of capital for Datametrics Corporation by March
4, 1997 through a private placement of equity securities, debt securities or a
combination thereof relative to this financing.
The Company intends to negotiate a new credit agreement with its present
bank or another financial institution and believes that the continuation of
the existing credit line in conjunction with the $1,850,000 additional capital
raised in November 1996 and the certain stockholders' and non-executive
members of the Board of Directors' commitment to raise up to $3,000,000 in new
capital will enable the Company to satisfy its working capital requirements.
The Company's working capital and current ratios at the end of fiscal years
1996, 1995 and 1994 were $3,187,000, $19,252,000 and $12,361,000 and 1.3, 5.4
and 3.7, respectively. The deterioration in financial position over these
periods is the result of the Company's losses during 1995 and 1996.
12
<PAGE>
Management believes that the Company must purchase approximately $250,000 of
capital equipment (including capitalized leases) during fiscal 1997. The
Company's other principal commitments for fiscal 1997 are lease obligations
for the Company's facility, payment of the Redeemed Series B Preferred Stock,
equipment lease and loan payments, and interest due on bank borrowings and
subordinated debt.
Management expects to finance the capital expenditure requirements and other
commitments from the bank line of credit, subordinated debt, capital leases,
capital loans and from other sources of working capital.
EFFECT OF RECENTLY-ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 allows companies to either continue
to account for stock option awards using existing standards, or they may adopt
a new, fair value based method of accounting as prescribed in SFAS No. 123.
The Company does not intend to change its method of accounting for stock
issued to employees. The pro forma disclosure requirements of SFAS No. 123
will be effective for the Company beginning next year.
FORWARD LOOKING STATEMENTS--CAUTIONARY FACTORS
Except for the historical information and statements contained in this
report, the matters set forth in this report are "forward looking statements"
that involve uncertainties and risks, some of which are discussed at
appropriate points in this report, including the fact that the Company is
engaged in supplying equipment and services to U.S. government defense
programs which are subject to special risks, including dependence on
government appropriations, contract termination without cause, contract
renegotiation and the intense competition for available defense business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item 8 is submitted as a separate section of this
report (see Item 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
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 27, 1996.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements
The Consolidated 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. Consolidated Financial Statement Schedules
The Financial Statement Schedule listed in the accompanying Index to
Financial Statements and Financial Statement Schedule on page F-1 hereof
are filed as part of this report.
3. Exhibits
The exhibits listed in the accompanying Exhibit Index on pages E-1 and E-
2 hereof are filed as part of this report.
(b) Reports on Form 8-K:
The Company filed two reports on Form 8-K during the last quarter of the
period covered by this report.
1. Report, dated (date of earliest event reported) August 6, 1996,
disclosing the Board's adoption of the First Amendment to the Company's
Restated By-Laws (Item 5); and
2. Report, dated (date of earliest event reported) October 8, 1996,
disclosing a change in control of the Company (Item 1).
14
<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 24th day of January, 1997.
Datametrics Corporation
(Registrant)
/s/ Daniel P. Ginns
_____________________________________
Daniel P. Ginns,
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/ Daniel P. Ginns Chairman of the Board, Chief January 24, 1997
____________________________________ Executive Officer and
Daniel P. Ginns Director (Principal
Executive Officer)
/s/ Adrien A. Maught, Jr. President, Chief Operating January 24, 1997
____________________________________ Officer, Interim Chief
Adrien A. Maught, Jr. Financial Officer and
Director (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Douglas S. Friedenberg Director January 24, 1997
____________________________________
Douglas S. Friedenberg
/s/ James Haber Director January 24, 1997
____________________________________
James Haber
</TABLE>
15
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
FORM 10-K
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................. F-2
Consolidated Balance Sheets as of October 27, 1996 and October 29,
1995.............................................................. F-3
Consolidated Statements of Operations for the years ended October
27, 1996,
October 29, 1995 and October 30, 1994............................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
October 27, 1996, October 29, 1995, and October 30, 1994.......... F-5
Consolidated Statements of Cash Flows for the years ended October
27, 1996,
October 29, 1995, and October 30, 1994............................ F-6
Notes to Consolidated Financial Statements......................... F-7-F-16
</TABLE>
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
II -- Valuation and Qualifying Accounts................................. F-17
</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 Consolidated 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 consolidated balance sheets of Datametrics
Corporation as of October 27, 1996 and October 29, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three fiscal years in the period ended October 27, 1996. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Datametrics Corporation at October 27, 1996 and October 29, 1995 and the
consolidated results of its operations and its cash flows for each of the
three fiscal years in the period ended October 27, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Woodland Hills, California
January 17, 1997
F-2
<PAGE>
DATAMETRICS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 29,
1996 1995
----------- -----------
(IN THOUSANDS, EXCEPT
FOR SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 386 $ 9,601
Accounts receivable, net............................. 5,735 6,578
Inventory, net....................................... 6,945 6,647
Income taxes receivable.............................. -- 145
Prepaid expenses..................................... 16 442
Deferred tax asset................................... -- 223
-------- --------
Total current assets............................... 13,082 23,636
Property and Equipment, at Cost:
Machinery and equipment.............................. 4,319 4,160
Furniture, fixtures & computer equipment............. 2,521 2,549
Leasehold improvements............................... 475 449
-------- --------
7,315 7,158
Accumulated depreciation and amortization............ (5,445) (4,205)
-------- --------
Net property and equipment......................... 1,870 2,953
Deferred Tax Asset..................................... -- 59
Other Assets........................................... 988 823
-------- --------
$ 15,940 $ 27,471
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 3,528 $ 2,111
Note payable to bank................................. 2,550 --
Accrued commissions and payroll...................... 995 817
Accrued warranty..................................... 180 125
Other accrued liabilities............................ 975 335
Advance payments and progress payments on contracts.. 1,037 14
Redeemed Series B Preferred Stock payable............ 87 470
Current portion of capital lease and loan
obligations......................................... 543 512
-------- --------
Total current liabilities.......................... 9,895 4,384
Capital Lease Obligations.............................. 7 79
Long-term Debt Due After One Year...................... 697 609
Other Long-term Liabilities............................ 328 231
Excess of Acquired Net Assets Over Cost................ -- 229
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value--20,000,000 shares
authorized, 12,264,408 shares issued and outstanding
in 1996 (12,031,582 in 1995)........................ 123 120
Additional paid-in capital........................... 32,577 32,120
Accumulated deficit.................................. (27,687) (10,301)
-------- --------
Total stockholders' equity......................... 5,013 21,939
-------- --------
$ 15,940 $ 27,471
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
DATAMETRICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------
OCTOBER 27, OCTOBER 29, OCTOBER 30,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Sales...................................... $ 19,246 $18,956 $25,211
Cost of sales............................ 21,168 16,328 16,905
Research & development................... 5,557 6,151 2,297
Selling, general & administrative........ 9,754 6,068 6,254
-------- ------- -------
Loss from operations....................... (17,233) (9,591) (245)
Interest income (expense), net............. (80) 96 2
Amortization of excess of acquired net as-
sets over cost............................ 229 304 293
-------- ------- -------
Income (loss) before provision for income
taxes..................................... (17,084) (9,191) 50
Provision for income taxes................. 302 22 19
-------- ------- -------
Net income (loss).......................... (17,386) (9,213) 31
Preferred stock accretion.................. -- (48) (60)
-------- ------- -------
Net loss applicable to common stockholders. $(17,386) $(9,261) $ (29)
======== ======= =======
Earnings per share of common stock:
Primary and fully diluted net income
(loss).................................. $ (1.39) $ (0.84) $ --
======== ======= =======
Weighted Average Number of Shares Outstand-
ing
Primary and fully diluted................ 12,515 11,020 9,067
======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
DATAMETRICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- ADDITIONAL TOTAL
NUMBER PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balances at October 31,
1993................... 6,896,922 $ 69 $ 9,412 $ (1,011) $ 8,470
Preferred stock accre-
tion................... -- -- -- (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 accre-
tion................... -- -- -- (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
Issuance of common
stock.................. 232,826 3 457 -- 460
Net loss................ -- -- -- (17,386) (17,386)
---------- ---- ------- -------- --------
Balances at October 27,
1996................... 12,264,408 $123 $32,577 $(27,687) $ 5,013
========== ==== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DATAMETRICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (PARENTHESES DENOTE CASH OUTFLOWS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------
OCTOBER 27, OCTOBER 29, OCTOBER 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)........................ $(17,386) $(9,213) $ 31
Adjustments to reconcile net income
(loss) to net cash provided
by (used in) operating activities:
Amortization of excess of acquired net
assets over cost...................... (229) (304) (293)
Depreciation and amortization.......... 2,132 970 552
Loss (gain) on disposal of assets...... 328 206 (6)
Changes in assets and liabilities:
Accounts receivable...................... 843 2,152 (239)
Inventory................................ (298) (609) (995)
Prepaid expenses......................... 426 (175) (214)
Accounts payable......................... 1,417 194 (751)
Accrued commissions and payroll.......... 178 (28) (234)
Advance and progress payments from cus-
tomers.................................. 1,023 (524) 527
Other accrued expenses................... 640 (33) 65
Income taxes............................. 427 457 (325)
Accrued warranty......................... 55 (57) (90)
Other.................................... (68) (98) 180
-------- ------- -------
Net cash used in operating activities...... (10,512) (7,062) (1,792)
Cash Flows from Investing Activities
Capital expenditures for property and (1,377) (1,655) (1,882)
equipment............................... -------- ------- -------
Net cash used in investing activities...... (1,377) (1,655) (1,882)
Cash Flows from Financing Activities
Borrowings on notes payable.............. 6,100 1,950 4,100
Payments on notes payable................ (3,550) (2,550) (4,650)
Proceeds from the issuance of common
stock................................... 460 17,539 5,220
Borrowings on long-term debt............. 565 1,841 --
Payments on long-term debt............... (420) (817) (85)
Payments on capital lease obligations.... (98) (163) (122)
Redemption of Series B Preferred Stock... (383) (470) --
-------- ------- -------
Net cash provided by financing activities.. 2,674 17,330 4,463
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... (9,215) 8,613 789
Cash and cash equivalents at beginning of 9,601 988 199
the year.................................. -------- ------- -------
Cash and cash equivalents at end of the $ 386 $ 9,601 $ 988
year...................................... ======== ======= =======
Cash paid (received) during the year for:
Interest, net............................ $ 50 $ 39 $ (1)
Income taxes (refund).................... (125) (435) (186)
Non-cash investing and financing activi-
ties:
Accretion on preferred stock............. -- 48 60
Issuance of capital lease obligations.... -- 199 --
Series B Preferred Stock escrow settle-
ment.................................... -- (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"), is engaged
primarily in the design, development, manufacture and sale of high-speed, non-
impact printers; high-resolution, non-impact printer/plotters; and ruggedized
computers and computer workstations.
Basis of Presentation and Consolidation
Certain prior year amounts have been reclassified to conform with the 1996
presentation. The accompanying consolidated financial statements include the
accounts of Datametrics Corporation and subsidiaries (collectively, the
Company). All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company's fiscal year end is the last Sunday
of each October.
Revenue Recognition
Revenues include both product sales and revenues applicable to long-term
design and production contracts. A majority of revenues and profits 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 on
these 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 61%, 79% and 85% of the Company's sales during fiscal years
1996, 1995 and 1994, respectively, were to various U.S. government agencies
under prime contracts or to prime contractors having sales to such agencies.
Export sales to foreign customers amounted to $5,808,000 ($983,000 to Canada,
$4,423,000 to Europe and the Middle East, and $402,000 to the Pacific Rim) or
30.2% of total sales in fiscal year 1996.
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. 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>
<C> <S>
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>
Intangible Assets
Intangible assets are stated at cost. Royalties and licenses are amortized
over the expected period of benefit, ranging from 3-5 years using the
straight-line method. The carrying value of intangible assets is adjusted if
the facts and circumstances suggest that such value may have been impaired.
The excess of the fair value of the net assets acquired over total purchase
price was amortized on a straight-line basis over three years, which
represented management's estimate of the period of benefit.
Beginning fiscal 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
Concentrations of Credit Risk/Use of Estimates
As is customary in the industry, the Company grants uncollateralized credit
to its clients, which include the federal government and large, multi-national
corporations operating in a broad range of industries. In order to mitigate
its credit risk, the Company continually evaluates the credit worthiness of
its major commercial clients, and maintains allowances for potential losses
within management expectations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that necessarily affect certain amounts reported in its financial
statements. The more significant estimates affecting amounts reported in the
financial statements relate to revenues and costs under long-term contracts
and stockroom inventory reserve accruals. Actual results could differ from
those estimates.
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.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial statements:
Cash and Cash Equivalents: The carrying amount reported on the balance
sheet for cash and cash equivalents approximates its fair value.
Capital Lease Obligations: The carrying amount reported on the balance
sheet for capital lease obligations approximates its fair value, as the
current rate approximates the fair market value interest rate.
Notes Payable: The carrying amounts of the Company's borrowings under
notes payable approximate its fair value as a result of the variable
interest rate that is adjusted periodically to market.
F-8
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees", and intends
to continue to do so. In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair value-
based method of accounting for compensation cost related to stock options and
other forms of stock-based compensation plans. However, SFAS 123 allows an
entity to continue to measure compensation costs using the principles of APB
25 if certain pro forma disclosures are made. SFAS 123 is effective for fiscal
years beginning after December 15, 1995. The Company intends to adopt the
provisions for pro forma disclosure requirements of SFAS 123 in fiscal 1997.
NOTE 2. RECENT DEVELOPMENTS--CHANGE IN CONTROL OF COMPANY
On October 8, 1996, a new Board of Directors was elected, effecting a change
in control of the Company. This change was brought about by a group of
stockholders who were dissatisfied with the strategic direction and financial
performance of the Company. On October 24, 1996 the Company announced that it
had accepted the resignations of four senior executives, three members of the
Board of Directors and had reduced its work force at all levels by laying off
35 out of a total of 151 employees. These measures were undertaken based upon
the new Board of Directors' assessment of the Company's business performance
during the past several years, the then financial and operational position of
the Company and the perceived immediate need to implement new cost control
policies and procedures. As a result of these changes, the Company recorded
non-recurring charges of $5,518,000 in the fourth quarter 1996.
The new Board of Directors believes that the management changes and staff
reductions, in concert with broad, newly designed cost control policies begun
in October 1996, will permit the Company to strengthen its core government
business operations, to facilitate the expeditious completion of a marketing
and operational study of its high-speed color printer product line and align
the Company's workforce to efficient staffing levels.
In November 1996, the Board of Directors took steps to merge the Company's
two wholly-owned subsidiaries, Datametrics Technology Systems Corporation and
Datametrics Service Corporation, into the parent company, Datametrics
Corporation. This action is consistent with and supports the Company's
decision to eliminate the distinction of separate defense and commercial
business units within the firm. Also, in November 1996, the Company raised an
additional $1,850,000 in senior subordinated secured debentures. The Board
believes that the $1,850,000 raised in November 1996 and an additional
stockholder and certain non-executive members of the Board of Directors'
commitment to raise up to $3,000,000 in new capital coupled with a renewed
bank credit agreement will enable the Company to satisfy its working capital
requirements.
NOTE 3. NON-RECURRING CHARGES
In connection with the change in control described in Note 2, the Company
incurred certain non-recurring charges totaling approximately $5,518,000
during the quarter ended October 27, 1996. The components of the non-recurring
charges are $304,000 in severance payments and accruals relating to employee
and senior executive terminations, $876,000 resulting from the accelerated
depreciation charges on CYMax property and equipment, $3,323,000 related to
the write-down to estimated net realizable value for CYMax inventory purchased
during fiscal 1996, $542,000 for CYMax customer and materials vendor claims
and $473,000 for a write-down of other assets and other liabilities related to
CYMax. As of October 27, 1996, $865,000 of the non-recurring charges were
accrued as liabilities. The reserve recorded for the Company's inventory and
the resulting net inventory balance in the accompanying consolidated financial
statements is based upon managements' estimate of the future usefulness of the
existing inventory relative to the Company's operating assumptions. Depending
on the Company's actual success in utilizing its inventory, additional
reserves may be required beyond those recorded at year end.
F-9
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
U.S. government or its prime contractors:
Amounts billed................................................ $2,964 $4,369
Recoverable costs and accrued profits on progress completed,
not billed................................................... 121 1,156
------ ------
3,085 5,525
Foreign, commercial and other................................... 2,650 1,075
------ ------
5,735 6,600
Less billed but uncollected progress payments................... -- (22)
------ ------
$5,735 $6,578
====== ======
</TABLE>
NOTE 5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Stockroom inventory............................................. $5,852 $5,628
Contracts in process............................................ 1,286 1,019
------ ------
7,138 6,647
Less progress payments received on contracts.................... (193) --
------ ------
$6,945 $6,647
====== ======
</TABLE>
NOTE 6. INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
SFAS 109, income taxes for financial reporting purposes are determined using
the liability method. Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting basis and tax
basis of assets and liabilities and are measured using the enacted tax rates
expected to apply to taxable income in the periods in which the deferred tax
asset or liability is expected to be realized or settled. 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>
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carry-forwards............................ $ 8,276 $ 4,287
General business credit carry-forwards....................... 777 724
Inventory accounting methods................................. 2,552 973
Deferred compensation accounting methods..................... 185 322
Product warranty accruals.................................... 67 54
Book over tax depreciation................................... 421 29
Other........................................................ 62 --
-------- -------
Total deferred tax assets.................................... 12,340 6,389
Other........................................................ (252) (123)
-------- -------
Total deferred tax liabilities............................... (252) (123)
-------- -------
12,088 6,266
Valuation allowance for deferred tax assets.................. (12,088) (5,984)
-------- -------
Net deferred tax assets...................................... $ -- $ 282
======== =======
</TABLE>
F-10
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net operating loss and tax credit carry-forwards of $22,015,000 and
$750,000, respectively, for federal income tax purposes will expire at various
times between 1998 and 2010. 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 carry-forward 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>
1996 1995 1994
------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ (145) $(469)
State................................................ 29 22 11
Deferred:
Federal.............................................. (4,436) (3,178) 369
State................................................ (1,395) (285) 108
Valuation allowance.................................. 6,104 3,608 --
------- ------- -----
$ 302 $ 22 $ 19
======= ======= =====
</TABLE>
Based upon managements' judgment and the continued losses incurred by the
Company, the deferred tax valuation allowance was increased in the current
year. 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 (loss) before income taxes:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense (benefit) computed at
statutory rate......................................... $(5,809) $(3,125) $17
State income tax expense (benefit), net of federal
benefits............................................... 19 (342) 3
Goodwill amortization................................... (78) (118) --
Change in valuation allowance........................... 6,104 3,608 --
Other, net.............................................. 66 (1) (1)
------- ------- ---
$ 302 $ 22 $19
======= ======= ===
</TABLE>
NOTE 7. DEBT
The Company has a revolving line of credit agreement (the "Credit
Agreement") with a bank, collateralized by substantially all the Company's
assets, which had allowed the Company to borrow up to $7,000,000 at the bank's
reference rate plus .25% (8.5% reference rate at October 27, 1996 and 8.75%
reference rate at October 29, 1995). 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 could not exceed the lesser of ten percent (10%) of eligible
receivables or $500,000. The facility expires on March 4, 1997. There was
$2,550,000 outstanding at October 27, 1996.
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 outside 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 not in compliance with all its
covenants. The bank, at this time, has agreed to forbear from taking any
action concerning the non-compliance with certain of its covenants based upon
the following terms and conditions: an infusion of a
F-11
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
minimum of $1,500,000 in the form of equity or subordinated debt by December
8, 1996; the reduction of the commitment under the Credit Agreement from
$7,000,000 to $3,000,000 until the maturity, March 4, 1997; there will be no
overadvances allowed; an increase in the interest rate to the bank's prime
rate plus 2% effective as of December 1, 1996; no further capital expenditures
without the bank's prior approval; and all other terms and conditions
contained in the original Credit Agreement and any amendments thereto, remain
in full force and effect.
During November 1996, the Company issued $1,850,000 of Senior Subordinated
Secured Debentures with a maturity date of May 25, 1998 and an annual interest
rate of 10%. The proceeds from the sale of the Senior Subordinated Secured
Debentures were used to reduce the line of credit and fund working capital
requirements. The Senior Subordinated Secured Debenture holders received
warrants to purchase a total of 616,679 shares of common stock at a price of
$1.50 for each share in connection with the financing. The warrants are
subject to call by the Company if the closing market price of the Company's
common stock is $3.00 or greater for twenty consecutive days. The warrants
expire November 25, 2001.
In addition to the above referenced subordinated debt, the Company has
received a commitment, subject to normal terms and conditions, from certain
stockholders and non-executive members of the Company's Board of Directors, to
raise approximately $3,000,000 of capital for Datametrics Corporation by March
4, 1997 through a private placement of equity securities, debt securities or a
combination thereof relative to this financing.
The Company intends to negotiate a new credit agreement with its present
bank or another financial institution and believes that the continuation of
the existing credit line in conjunction with certain stockholder and non-
executive members of the Board of Directors' commitment to raise up to
$3,000,000 in new capital will enable the Company to satisfy its working
capital requirements.
The Company had 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. Payments of $472,000 and
$132,000 will be made in fiscal 1997 and 1998, respectively. The balance at
October 27, 1996 and October 29, 1995 was $604,000 and $1,023,000,
respectively. The borrowings are collateralized by furniture, fixtures and
equipment with a net book value of $783,000 and $1,039,000 at October 27, 1996
and October 29, 1995, respectively.
During the year, the Company borrowed $565,000 against the cash surrender
value of its key-man life insurance policy. The entire amount was outstanding
at October 27, 1996, the interest rate is 7.1%.
NOTE 8. 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 27, 1996 are
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
1997.................................................... $ 631 $75
1998.................................................... 643 7
1999.................................................... 651 --
2000.................................................... 669 --
2001.................................................... 669 --
Thereafter.............................................. 1,777 --
------ ---
$5,040 82
======
Less imputed interest................................... (4)
---
Present value of minimum capital lease payments......... $78
===
</TABLE>
F-12
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment under capital leases have a cost of $251,000 and
$509,000 and an accumulated depreciation of $68,000 and $267,000 at October
27, 1996 and October 29, 1995, respectively.
Rental expenses charged to operations were $780,000, $716,000 and $653,000
for the fiscal years 1996, 1995 and 1994, respectively.
NOTE 9. PREFERRED STOCK
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 an indemnification claim to the Escrow Participants for
approximately $720,000. During fiscal 1996, the Escrow Claim was settled for
$187,000. The first payment of $100,000 was made August 30, 1996, and the
final payment of $87,000 was made November 14, 1996. There is no Series B
Redeemable Preferred Stock outstanding.
NOTE 10. STOCK OPTION PLANS AND WARRANTS
At October 27, 1996, the Company had reserved 1,624,691 shares of its common
stock for issuance pursuant to the exercise of options issued primarily under
its incentive stock option plans.
The Company has four 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.
1995 Plan--This plan was adopted by the Shareholders in 1996 and provides
for the issuance of 700,000 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 and 1995 plans differ from the earlier plans in that the options
expire five years from the date of grant. The Directors' Stock Option Plan is
similar to the 1993 and 1995 plans but provides for the issuance of options to
members of the Board of Directors.
F-13
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the options exercisable and available for
grant at October 27, 1996:
<TABLE>
<CAPTION>
EXERCISABLE
--------------------- AVAILABLE
NUMBER PRICE RANGE FOR GRANT
------- ------------- ---------
<S> <C> <C> <C>
1982 Plan....................................... -- --
1986 Plan....................................... 114,687 $ 1.25-5.75 --
1993 Plan....................................... 131,176 $2.6875-5.75 238,451
1995 Plan....................................... 27,651 $ 7.875 529,065
1993 Directors Plan............................. 73,870 $ 2.875-7.875 222,190
</TABLE>
Information on options under the Company's plans is as follows at October
27, 1996:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
UNDER OPTION RANGE
------------ ------------
<S> <C> <C>
Outstanding at October 29, 1995....................... 1,071,794 $ .75-8.25
Granted............................................... 657,000 1.25-8.375
Terminated............................................ (885,694) 1.25-8.375
Exercised............................................. (208,115) .75-5.75
--------- -----------
Outstanding at October 27, 1996....................... 634,985 $ .75-8.375
========= ===========
</TABLE>
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>
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>
Outstanding at October 30, 1994...................... 1,233,874 $ .25-4.3125
Granted.............................................. 166,300 5.75-8.25
Terminated........................................... ( 25,250) .25-2.6875
Exercised............................................ ( 303,130) .25-5.75
--------- ------------
Outstanding at October 29, 1995...................... 1,071,794 $ .75-8.25
========= ============
</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 11. CONTINGENCIES
The Company is, from time to time, subject to legal proceedings in the
general course of its business. The Company is not a party to any pending
legal proceedings from its general operations.
The Company is, however, subject to one pending suit and threatened lawsuits
brought by former officers and directors whose relationships with the Company
terminated as a result of the Company's restructuring. All of the claims arise
out of the Company's contesting its obligations under various agreements (some
of which the
F-14
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company believes are invalid) between such former officers and directors, on
the one hand, and the Company, on the other hand, which the Company believes
were entered into for the benefit of the former officers and directors without
proper regard for the best interests of the Company and its stockholders.
The Company was notified of a threatened collective action by four former
officers of the Company to enforce payment of severance benefits as set forth
in agreements between each of the individual officers and the Company, each
dated as of October 7, 1996 (the "Severance Agreements"). The former officers
have demanded that the Company pay to each of the officers an amount equal to
one year of such former officers' annual salary in effect as of the date of
termination, payable in a lump sum, followed by twelve monthly installments
payable to the former officers, the total of which installments would also
equal one year's annual salary. Total payments under the severance agreements
would aggregate approximately $1,200,000.
On January 13, 1997, the Company was served with a summons and complaint in
an action brought by three of those former officers against the Company in the
Superior Court of the State of California for Los Angeles County. The action
seeks damages from the Company based upon the Severance Agreements and an
alleged implied promise not to terminate the employment of the former officers
with the Company without good cause. The complaint does not state any specific
amount of damages that is being sought by the plaintiffs. The Company intends
to vigorously defend the action, by, among other things, asserting the
invalidity of the Severance Agreements as well as counterclaims alleging
breaches of fiduciary duty on the part of the plaintiffs relating to the
entering into of the Severance Agreements as well as to various other self-
dealing transactions and other claims arising out of the period of time that
the Company was being managed by the former officers. At present, it is too
early in this action to evaluate fully the Company's exposure. However, as of
this date, management and legal counsel believes the Company has very strong
defenses to the action as well as meritorious counterclaims and that any
future liability to the Company is remote.
A demand by certain former officers was received by the Company on or about
October 6, 1996, claiming benefits under the Supplemental Executive Retirement
Plan (the "SERP"). The Company has notified the former officers that their
respective claims under the Company's SERP were being denied in whole, based
on a determination made by the Board of Directors of the Company in accordance
with the terms of Section 2.4(b) of the SERP. Each of the former officers may
file a written request for a review of the claim denial, but the Company
believes based in part on the advise of counsel, that any review will support
the Company's determination to deny such claims under the broad discretion
given to the Company's Board under the terms of the SERP. An adverse
determination could result in an additional liability of approximately
$200,000.
A demand by certain former directors of the Company was received by the
Company on or about November 18, 1996, requesting payment under the Retainer
Agreements, dated August 6, 1996, between each of the former directors and the
Company. The Company is reviewing certain issues relating to the validity and
enforceability relating to the Retainer Agreements. The Company has not been
able to ascertain any valid business purpose for the Company to have entered
into the Retainer Agreements with the former directors. In addition, the
Company expressed concerns about the type of consulting services to be offered
by the former directors, the physical ability of the former directors to
perform any such services and irregularities relating to the untimely
execution of the Retainer Agreements. Among other things, management and legal
counsel believe the former directors were not capable of performing the
consulting services that were required to be performed under the Retainer
Agreements. As such, management believes, based in part on the advise of
counsel, the incurrance of any liability relative to the Retainer Agreements
is remote.
NOTE 12. 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
F-15
<PAGE>
DATAMETRICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
contributions are voluntary and at the discretion of the Board of Directors.
There were no Company contributions in fiscal years 1996, 1995 and 1994.
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 $101,000 and $176,000 at October 27, 1996 and October 29, 1995,
respectively, representing the net present value of the future benefits to be
paid, of which $53,000 and $125,000, 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 has accrued $276,000 and $106,000 at October 27, 1996 and October 29,
1995, respectively, for the SERP. The Company funds the liability through a
Rabbi Trust agreement at a bank on a yearly basis. The fund balance was
$276,000 and $0 at October 27, 1996 and October 29, 1995, respectively.
During January 1996, the Company established an Employee Qualified Stock
Purchase Plan (the Q.S.P. Plan) with an aggregate of 200,000 shares of
Datametrics common stock available for purchase. It allows an employee to
defer up to 10% of their salary to purchase Datametrics Common Stock at 85% of
the closing price at four semi-annual dates. The plan expires December 31,
1997 or when all 200,000 shares have been purchased. A total of 24,711 shares
were issued during fiscal 1996.
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
1996 (IN THOUSANDS, EXCEPT SHARE DATA) JANUARY 28 APRIL 28 JULY 28 OCTOBER 27
-------------------------------------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C>
Sales.................................. $ 3,651 $ 4,697 $ 5,931 $ 4,967
Net loss............................... (2,265) (3,086) (2,829) (9,206)
Loss per common share:
Primary and fully diluted............ (0.18) (0.24) (0.23) (0.75)
Weighted average number of common
shares outstanding:
Primary and fully diluted............ 12,743 12,755 12,491 12,333
</TABLE>
In the fourth quarter of fiscal 1996, the Company recorded non-recurring
charges of $5,518,000. See Note 3 for additional information.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
1995 (IN THOUSANDS, EXCEPT SHARE DATA) JANUARY 29 APRIL 30 JULY 30 OCTOBER 29
-------------------------------------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C>
Sales.................................. $ 3,451 $ 3,897 $ 4,790 $ 6,818
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>
Per share data may not always add to the total for the year because each
figure is independently calculated.
F-16
<PAGE>
DATAMETRICS CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE FISCAL YEARS IN THE
PERIOD ENDED OCTOBER 27, 1996
<TABLE>
<CAPTION>
CLASSIFICATION 1996 1995 1994
- -------------- ----------- ---------- ----------
<S> <C> <C> <C>
Reserve for doubtful accounts:
Balance at beginning of period............. $ 46,747 $ 6,030 $ 5,833
Add--provision charged to operations....... 21,065 41,769 2,872
Less--reserve applied during the year...... -- 1,052 2,675
----------- ---------- ----------
Balance at end of period................... $ 67,812 $ 46,747 $ 6,030
=========== ========== ==========
Reserve for Warranty:
Balance at beginning of period............. $ 124,500 $ 184,093 $ 374,775
Add--provision charged to operations....... 221,365 200,831 150,391
Less--reserve applied during the year...... 166,365 260,424 341,073
----------- ---------- ----------
Balance at end of period................... $ 179,500 $ 124,500 $ 184,093
=========== ========== ==========
Reserve for inventory obsolescence:
Balance at beginning of period............. $ 1,772,676 $1,477,534 $1,210,868
Add--provision charged to operations....... 3,802,437 295,142 295,613
Less--reserve applied during the year...... -- -- 28,947
----------- ---------- ----------
Balance at end of period................... $ 5,575,113 $1,772,676 $1,477,534
=========== ========== ==========
Reserve for prepaid royalties:
Balance at beginning of period............. $ 750,591 $ 750,591 $ 752,309
Add--provision charged to operations....... 69,881 -- --
Less--reserve applied during the year...... -- -- 1,718
----------- ---------- ----------
Balance at end of period................... $ 820,472 $ 750,591 $ 750,591
=========== ========== ==========
Valuation allowances for deferred tax assets:
Balance at beginning of period............. $ 5,984,000 $2,376,000 --
Allowance established with purchase of
Rugged Digital Systems, Inc............... -- -- $2,176,000
Add--provision charged to operations....... 6,104,000 3,608,000 200,000
----------- ---------- ----------
Balance at end of period................... $12,088,000 $5,984,000 $2,376,000
=========== ========== ==========
</TABLE>
F-17
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Form 10-K Statement or are
incorporated herein by reference.
DESCRIPTION OF EXHIBITS
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EXHIBIT
NO.
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<C> <S>
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).
3.4 First Amendment to the Restated By-Laws of the Registrant, dated
August 6, 1996 (incorporated by reference to Exhibit 3.0 to the
Registrant's Form 8-K dated August 6, 1996).
10.1 Line of Credit Agreement, Security Agreement, Addendum to Line of
Credit Agreement, and Loan Disbursement Instructions dated September
8, 1993 (incorporated by reference to Exhibit 10.1 to Registrant's
Form 10-K for the year ended October 31, 1993).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 Debt Exchange Agreement dated August 10, 1993 among Registrant and
debt holders of Rugged Digital (incorporated by reference to Exhibit
4.2 to Registrant's Form 8-K dated August 10, 1993).
10.9 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), and as amended March 4, 1996 (incorporated by
reference to Exhibit 10.1 to Registrant's Form 10-Q for the period
ended April 28, 1996).
10.10 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 *
23 Consent of Ernst & Young LLP, Independent Auditors.*
27 Financial Data Schedule *
99.1 The Datametrics Employee Savings Plan And The Trust Agreement Pursuant
To The Datametrics Employee Savings Plan (incorporated by reference to
Exhibit 28 to Registrant's Registration Statement on Form S-8 filed on
November 12, 1985 SEC File No. 33-01469).
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
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<C> <S>
99.2 The Amended and Restated 1993 Stock Option Plan of Datametrics
Corporation (incorporated 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 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 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 by reference to Exhibit 28.6 to
Registrant's Form 10-K for the year ended October 30, 1994).
99.7 The 1995 Stock Option Plan of Datametrics Corporation (incorporated by
reference to Exhibit 28.7 to Registrant's Form S-8 filed on May 30,
1996, S.E.C. File No. 333-04815).
99.8 The Datametrics Corporation Employee Qualified Stock Purchase plan
(incorporated by reference to Exhibit 28.8 to Registrant's Form S-8
filed on May 30, 1996, S.E.C. File No. 333-04815).
</TABLE>
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* Filed herewith.
E-2
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
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<S> <C>
1. Datametrics Technology Systems Corporation Delaware
2. Datametrics Service Corporation Delaware
3. Datametrics Limited Barbados
</TABLE>
<PAGE>
EXHIBIT 23
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 January 17, 1997, included
in the 1996 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. 33-14969) 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 incorporation
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in the Annual Report
(Form 10-K) of Datametrics Corporation.
/s/ Ernst & Young LLP
Woodland Hills, California
January 24, 1997
<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 NINE MONTH PERIOD ENDING OCTOBER 27, 1996 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-27-1996
<PERIOD-END> OCT-27-1996
<CASH> 386
<SECURITIES> 0
<RECEIVABLES> 5,735
<ALLOWANCES> 68
<INVENTORY> 6,945
<CURRENT-ASSETS> 13,082
<PP&E> 7,315
<DEPRECIATION> 5,445
<TOTAL-ASSETS> 15,940
<CURRENT-LIABILITIES> 9,895
<BONDS> 0
0
0
<COMMON> 123
<OTHER-SE> 32,577
<TOTAL-LIABILITY-AND-EQUITY> 15,940
<SALES> 19,246
<TOTAL-REVENUES> 19,246
<CGS> 21,168
<TOTAL-COSTS> 21,168
<OTHER-EXPENSES> 15,082
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> (17,084)
<INCOME-TAX> 302
<INCOME-CONTINUING> (17,386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,386)
<EPS-PRIMARY> ($1.39)
<EPS-DILUTED> ($1.39)
</TABLE>
