<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended April 27, 1997
--------------
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period from ________to________
Commission File Number 0-8567
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Datametrics Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3545701
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification Number)
21135 Erwin St.
Woodland Hills, California 91367
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818)598-6200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock. $.01 Par Value--13,268,514 shares as of May 31, 1997
<PAGE>
DATAMETRICS CORPORATION
Index to Form 10-Q
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance
Sheets as of April 27,1997 and
October 27, 1996 3
Consolidated Condensed Statements
of Operations for the Three Months
Ended April 27, 1997 and
April 28, 1996 4
Consolidated Condensed Statements
of Cash Flows for the Three Months
Ended April 27,1997 and
April 28,1996 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
<PAGE>
CONSOLIDATED CONDENSED DATAMETRICS CORPORATION
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
April 27, October 27,
(In thousands, except for share data) 1997 1996
--------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 740 $ 386
Accounts receivable, net 3,749 5,735
Inventory, net 5,988 6,945
Prepaid expenses 61 16
--------------------------
Total current assets 10,538 13,082
Property and Equipment, at Cost:
Machinery and equipment 3,863 4,319
Furniture, fixtures & computer equipment 2,473 2,521
Leasehold improvements 392 475
--------------------------
6,728 7,315
Accumulated depreciation and amortization (5,048) (5,445)
--------------------------
Net property and equipment 1,680 1,870
Other Assets 1,022 988
--------------------------
$ 13,240 $ 15,940
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,101 $ 3,528
Note payable -- 2,550
Accrued commissions and payroll 410 995
Accrued warranty 130 180
Other accrued liabilities 534 975
Progress billing and advance payment liability 250 1,037
Redeemed Series B Preferred Stock Payable -- 87
Current portion of capital lease and loan obligations 432 543
--------------------------
Total current liabilities 3,857 9,895
CAPITAL LEASE OBLIGATIONS -- 7
LONG -TERM DEBT DUE AFTER ONE YEAR 2,395 697
OTHER LONG-TERM LIABILITIES 319 328
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value--20,000,000 shares
authorized; 13,233,514 shares issued and
outstanding in 1997 (12,264,408 in 1996) 132 123
Additional paid-in capital 34,111 32,577
Accumulated deficit (27,574) (27,687)
--------------------------
Total stockholders' equity 6,669 5,013
--------------------------
$ 13,240 $ 15,940
==========================
</TABLE>
See accompanying notes.
3
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CONSOLIDATED CONDENSED DATAMETRICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended Ended
April 27, April 28, April 27, April 28,
(In thousands, except per share data) 1997 1996 1997 1996
=================================================
<S> <C> <C> <C> <C>
SALES $6,226 $ 4,697 $10,183 $ 8,348
Cost of sales 4,650 3,975 7,357 6,760
Research & development 21 1,949 202 3,378
Selling, general & administrative 1,351 1,949 2,277 3,769
----------------------------------------------
Income (loss) from operations 204 (3,176) 347 (5,559)
Interest (income) expense, net 118 (16) 225 (63)
Amortization of excess of acquired net assets over cost -- (76) -- (152)
----------------------------------------------
Income (loss) before provision for income taxes 86 (3,084) 122 (5,344)
Provision for income taxes 7 2 9 7
----------------------------------------------
Net income (loss) $ 79 $(3,086) $ 113 $(5,351)
==============================================
Earnings (loss) per share of common stock: $ 0.01 $ (0.24) $ 0.01 $ (0.42)
Primary and fully diluted net income (loss)
==============================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary and fully diluted 13,223 12,755 12,712 12,749
</TABLE>
See accompanying notes.
4
<PAGE>
CONDENSED CONSOLIDATED DATAMETRICS CORPORATION
CASH FLOWS STATEMENT
(Unaudited)
<TABLE>
<CAPTION>
For The Six Month Period
Ended
April 27, April 28,
(In thousands)(Brackets denote cash outflows) 1997 1996
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 113 $(5,351)
Adjustments:
Amortization of excess of acquired net assets -- (153)
Depreciation and amortization 341 639
Changes in balance sheet items:
Accounts receivable 1,986 398
Inventory 957 (3,452)
Prepaid expenses (45) 222
Accounts payable (1,427) (742)
Accrued commissions and payroll (585) (99)
Advance and progress payments from customers (787) 57
Other accrued liabilities (441) (9)
Accrued warranty (50) --
Other (43) (390)
------- -------
Net cash provided by (used in) operating activities 19 (8,880)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (151) (950)
------- -------
Net cash used in investing activities (151) (950)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable to bank 4,826 1,000
Payments on notes payable to bank (7,376) --
Proceeds from the issuance of common stock 1,406 297
Issuance of warrants 137 --
Payment on Series B Preferred Stock (87) --
Borrowings of long-term debt 1,830 --
Payments on long-term debt (215) (203)
Payments on capital lease obligations (35) (58)
------- -------
Net cash provided by (used in) financing activities 486 1,036
------- -------
Net increase(decrease) in cash and cash equivalents 354 (8,794)
Cash and cash equivalents at the beginning of the period 386 9,601
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 740 $ 807
======= =======
Cash paid during the period for:
Interest $ 157 $ 83
Income Taxes 4 7
</TABLE>
See accompanying notes.
5
<PAGE>
DATAMETRICS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
April 27, 1997
(Unaudited)
1. The financial statements include the accounts of Datametrics Corporation
(the "Company").
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission for the requirements of Form 10-Q.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the statements and notes thereto included
in the Company's latest Annual Report on Form 10-K for the fiscal year ended
October 27, 1996 as filed with the Securities and Exchange Commission.
The information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary to present a
fair statement of the results of operations for the interim periods. Much of
the Company's business is longer term and involves varying development,
production, and delivery schedules. Accordingly, results of a particular quarter
or quarter-to-quarter comparisons of recorded sales and profits may not be
indicative of future operating results, including results for the fiscal year
ending October 26, 1997.
From our latest Annual Report on Form 10-K, the following notes have been
omitted in this Form 10-Q: note (1) pertains to summary of significant
accounting policies with respect to line of business, revenue recognition,
change in accounting principles, accounts receivable, inventories, major
customers, cash and cash equivalents, property and equipment, intangible assets,
credit risk, fair value of financial instruments, stock-based compensation and
net income per share; note (2) pertains to a change in control of the Company;
note (3) pertains to non-recurring charges; note (4) pertains to accounts
receivable; note (5) pertains to inventory; note (6) pertains to income taxes;
note (7) pertains to debt; note (8) pertains to leases; note (9) pertains to
preferred stock; note (10) pertains to stock option plans; note (11) pertains to
contingencies; and note (12) pertains to employee benefit plans; and note (13)
pertains to quarterly financial data.
6
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2. INVENTORY Stockroom inventory is stated at the lower of cost (first-in,
first-out) or market. The Company evaluates at least annually its stockroom
inventory for potential obsolescence or excessive levels based upon backlog and
forecasted usage. Contract inventory costs include purchased materials, direct
labor and manufacturing overhead. General and administrative costs are expensed
in the period incurred. Inventories as of April 27, 1997 are as follows:
<TABLE>
<S> <C>
Raw Material $5,536,000
Work-in Process 452,000
----------
Total $5,988,000
</TABLE>
3. CONTINGENCIES The Company is, from time to time, subject to legal proceedings
in the general course of its business.
The Company is subject to one pending lawsuit brought by four former officers of
the Company (the "Former Officers"), whose relationships with the Company
terminated in part as a result of the Company's restructuring. On January 13th,
1997, three of the Former Officers sued the Company in the Superior Court of the
State of California for Los Angeles County, in order to enforce payment of
severance benefits under certain agreements, each dated as of October 7, 1996,
between each of the Former Officers and the Company(collectively the "Severance
Agreement"). The fourth Former Officer has sued the Company in response to the
Company's cross-complaint described below. The Former Officers seek damages
from the Company based upon Severance Agreements and an alleged implied promise
not to terminate the employment of the Former Officers with the Company without
good cause. The Former Officers have demanded that the Company pay to each of
them (i) an amount equal to one year of their respective annual salaries in
effect as of the date of termination, payable in a lump sum, followed by (ii)
twelve monthly installments payable to the former officers, the total of such
installments would also equal their respective annual salaries. Total payments
under Severance Agreements would aggregate approximately $1,200,000 if due in
full to the Former Officers. The complaint does not state, however, any
specific amount of damages sought by the plaintiffs.
The Company believes that the Severance Agreements were entered into for the
benefit of the Former Officers without proper regard for the best interests of
the Company and its stockholders. On February 12, 1997, the Company filed a
cross-complaint against the Former Officers
7
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alleging breach of fiduciary duty, constructive fraud, civil conspiracy and
declaratory relief. At present, it is too early to evaluate fully the Company's
exposure, if any, under the above action. Management believes, however, that it
has legitimate defenses and intends to defend vigorously this action.
In addition, on or about November 6, 1996 the Company received a demand by the
Former Officers claiming benefits under the Company's Supplemental Executive
Retirement Plan (the "SERP"). The Company has notified the Former Officers that
their respective claims under the SERP were being denied in whole in accordance
with the terms of SERP. Three of the Former Officers have disputed this denial
and the Company believes that this dispute will be resolved in a court action.
An adverse determination could result in additional liability to the Company of
approximately $200,000.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Six Month Period Ended April 27, 1997 Compared
- ----------------------------------------------
To The Six Month Period Ended April 28, 1996
- --------------------------------------------
Sales for the six month period ended April 27, 1997 were $10,183,000, an
increase of $1,835,000 or 22% compared to $8,348,000 for the same period the
prior year. Sales of defense and defense related products increased by
$2,136,000 while other sales decreased by $301,000.
Cost of sales for the six month period ended April 27, 1997 was $7,357,000 (72%
of sales) an increase of $597,000 compared to $6,760,000(81% of sales) for the
same period the prior year. Cost of sales as a percentage of sales were
favorably impacted by lower overhead expenses and product mix.
Research and development expenses for the six month period ended April 27, 1997
were $202,000, a decrease of $3,176,000 or 94%, compared with $3,378,000 for the
same period the prior year. The decrease is primarily due to the substantial
reduction of expenses relating to the Company's commercial thermal printer
products, and the related development costs.
Selling, general, and administrative expenses for the six month period ended
April 27, 1997 were $2,277,000 (22% of sales), a decrease of $1,492,000 or 40%
compared with $3,769,000 (45% of sales) for the same period the prior year. This
decrease is attributable primarily to the substantial reduction of marketing and
administrative expenses of the commercial thermal printer products.
9
<PAGE>
Interest expense for the six month period ended April 27, 1997 was $225,000, a
net increase of $288,000 compared with $63,000 of net interest income for the
same period the prior year. This increase is due to decreased investment income,
borrowings on the Company's bank line of credit, borrowings on the cash
surrender value of the Company's key man life insurance policy and issuance of
subordinated debentures during the first quarter of fiscal 1997. Amortization of
excess of acquired net assets over cost was completed during the third quarter
of fiscal 1996. The amortization is a result of the acquisition of Rugged
Digital Systems Inc.("Rugged Digital") in August 1993. There was $152,000
amortization during the same period last year. Income taxes were $9,000 an
increase of $2,000 compared with $7,000 in income taxes for the same period the
prior year.
As a result of the foregoing factors, net income for the six months ended April
27, 1997 was $113,000, compared with a net loss of $5,351,000 for the same
period in the prior year.
The Company recorded non-recurring charges totaling $5,518,000 in the fourth
quarter of fiscal 1996. The components of the non-recurring charges were
$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 material claims and $473,000 for a write-down of
other assets and other liabilities related to CYMax. As of April 27,1997,
$369,000 of the non-recurring charges were accrued as liabilities. The new
Board of Directors believes that the management changes and staff reductions,
together with broad newly designed cost control policies begun in October 1996,
will permit the Company to focus better upon its core defense business
operations, facilitate the completion of the Company's marketing and operational
study of its high-speed color printer product line and align the Company's
workforce. Depending on the Company's actual success in utilizing its
inventory, additional reserves may be required beyond those recorded.
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 April
27, 1997 was approximately $4,668,000. Virtually all of the 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
10
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is entitled to receive reimbursement for its costs and any negotiated profit.
Three Month Period Ended April 27, 1997 Compared
- ------------------------------------------------
To The Three Month Period Ended April 28, 1996
- ----------------------------------------------
Sales for the three month period ended April 27, 1997 were $6,226,000, an
increase of $1,529,000 or 33% compared to $4,697,000 for the same period the
prior year. Sales of defense and defense related products increased by
$1,728,000 while other sales decreased by $199,000.
Cost of sales for the three month period ended April 27, 1997 was $4,650,000
(75% of sales) an increase of $675,000 compared to $3,975,000(85% of sales) for
the same period the prior year. Cost of sales as a percentage of sales were
favorably impacted by lower overhead expenses and product mix.
Research and development expenses for the three month period ended April 27,
1997 were $21,000, a decrease of $1,928,000 or 99%, compared with $1,949,000 for
the same period the prior year. The decrease is primarily due to the
substantial reduction of expenses relating to the Company's commercial thermal
printer products, and the related development costs.
Selling, general, and administrative expenses for the three month period ended
April 27, 1997 were $1,351,000 (22% of sales), a decrease of $598,000 or 31%
compared with $1,949,000 (42% of sales) for the same period the prior year. This
decrease is attributable primarily to the substantial reduction of marketing and
administrative expenses of the commercial thermal printer products.
Interest expense for the three month period ended April 27, 1997 was $118,000, a
net increase of $134,000 compared with $16,000 of net interest income for the
same period the prior year. This increase is due to decreased investment income,
borrowings on the Company's bank line of credit, borrowings on the cash
surrender value of the Company's key man life insurance policy and issuance of
subordinated debentures during the first quarter of fiscal 1997. Amortization of
excess of acquired net assets over cost was completed during the third quarter
of fiscal 1996. The amortization is a result of the acquisition of Rugged
Digital in August 1993. There was $76,000 amortization during the same period
last year. Income taxes for the three month period ended April 27, 1997 were
$7,000 an increase of $5,000 compared to $2,000 for the same period last year.
As a result of the foregoing factors, net income for the three months ended
April 27, 1997 was $79,000, compared with a net loss of $3,086,000 for the same
period in the prior year.
11
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LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has a revolving line of credit agreement (the "Credit Agreement")
with a bank, collateralized by substantially all the Company's assets, which
allows the Company to borrow eighty percent (80%) of eligible accounts
receivable, plus eighty percent (80%) of eligible progress billings receivable,
to a maximum progress billing receivables sublimit, which may not exceed the
lesser of ten percent (10%) of eligible receivables or $500,000, up to a maximum
of $3,000,000. Indebtedness under the Credit Agreement bears interest at the
bank's reference rate plus 2% (8.50% reference rate at April 27, 1997). During
February 1997, the Company renewed the Credit Agreement. The facility expires
on March 3, 1998. There was no outstanding balance at April 27, 1997.
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 in compliance with all its covenants.
The Company currently has $325,000 on deposit at its bank in an interest bearing
account as security for a letter of credit issued in favor of one of its
customers as a performance bond. It expires on August 18,1997. The Company
believes the possible exercise of this letter of credit is remote.
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 per 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. There can be no assurance, however, that the
12
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Company will receive any additional proceeds form the exercise of these
warrants.
On January 15, 1997 the Company received a commitment, subject to normal terms
and conditions, from certain stockholders and non-executive members of the
Company's Board of Directors, to arrange to raise up to $3,000,000 of capital
for Datametrics Corporation through a private placement of equity securities,
debt securities or a combination thereof relative to this financing. The
commitment was initially set to expire on June 4, 1997 and has been extended
until September 4, 1997. As part of the commitment $1,001,000 of equity was
raised through a private placement of 667,334 shares at $1.50 per share. In
connection with the commitment the Company granted 200,000 warrants exercisable
at $2.00 per share. In addition, $370,000 of equity was raised through the
unforced conversion of warrants from February 1997 through May 1997. As a result
of these financings, the commitment has been reduced to $1,629,000.
The Company believes that the existing credit line in conjunction with the
$3,221,000 additional capital raised from November 1996 to May 1997, and the
certain stockholder and non-executive members of the Board of Directors'
commitment to arrange to raise up to $1,629,000 in new capital will enable the
Company to satisfy its working capital requirements for the foreseeable future.
The Company's working capital and current ratios at April 27, 1997 and the end
of fiscal years 1996, 1995 and 1994 were $6,681,000 $3,187,000, $19,252,000 and
$12,361,000 and 2.7, 1.3, 5.4 and 3.7, respectively.
Management believes that the Company must purchase approximately $150,000 of
capital equipment (including capitalized leases) during the remainder fiscal
1997. The Company's other principal commitments for fiscal 1997 are lease
obligations for the Company's facility, 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.
13
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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.
14
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
----------------
Exhibit 27 - Financial Data Schedule.
Exhibit 10.11 - Renewal of Bank Line of Credit Agreement
(b) Reports on Form 8-K.
-------------------
None.
15
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by its duly
authorized representatives.
DATAMETRICS CORPORATION
-----------------------
(Registrant)
Dated: 06/05/97 /s/ DANIEL P. GINNS
-------------------------------- -----------------------------------
Daniel P. Ginns
Chief Executive Officer
Dated: 06/05/97 /s/ KENNETH S. POLAK
-------------------------------- -----------------------------------
Kenneth S. Polak
Chief Financial Officer
16
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Exhibit 10.11
ADDENDUM TO SECURITY AND LOAN AGREEMENT
("SECURITY AND LOAN AGREEMENT")
BETWEEN DATAMETRICS CORPORATION AND IMPERIAL BANK
DATED: MARCH 4, 1997
This Addendum is made and entered into as of MARCH 4, 1997, between DATAMETRICS
CORPORATION ("Borrower") and IMPERIAL BANK ("Bank"). This Addendum amends and
supplements the Security and Loan Agreement. In the event of any inconsistency
between the terms herein and the terms of the Security and Loan Agreement, the
terms herein shall in all cases govern and control. All capitalized terms
herein, unless otherwise defined herein, shall have the meaning set forth in the
Security and Loan Agreement.
1. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts shall expire on MARCH 3,
1998, subject to Bank's right to renew said commitment in its sole discretion.
Any such renewal of the commitment shall not be binding upon Bank unless it is
in writing and signed by an officer of the Bank.
2. Borrower represents and warrants that:
a. Litigation. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, except as previously disclosed in
writing by Borrower to Bank, and Borrower is not in default with respect to any
order, writ, injunction, decree or demand of any court or other governmental or
regulatory authority.
b. Financial Condition. The consolidated balance sheet of Borrower and
subsidiaries of JANUARY 26, 1997, and the related consolidated profit and loss
statement on that date, a copy of which has heretofore been delivered to Bank by
Borrower, and all other statements and data submitted in writing by Borrower to
Bank in connection with this request for credit are true and correct, and said
balance sheet and profit and loss statement truly present the consolidated
financial condition of Borrower and subsidiaries as of the date thereof and the
results of the consolidated operations of Borrower and subsidiaries for the
period covered thereby, and have been prepared in accordance with generally
accepted accounting principles on a basis consistently maintained. Since such
date, there have been no materially adverse changes. Borrower has no knowledge
of any liabilities, contingent or otherwise, at such date not reflected in said
balance sheet, and Borrower has not entered into any special commitments or
substantial contracts which are not reflected in said balance sheet, other than
in the ordinary and normal course of its business, which may have a materially
adverse effect upon its financial condition, operations or business as now
conducted.
<PAGE>
c. Trademarks, Patents. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with valid trademarks, trade names, copyrights, patents and license rights of
others.
d. Tax Status. Borrower has no liability for any delinquent state, local
or federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
3. Borrower agrees that so long as it is indebted to Bank, it will not,
without Bank's written consent, which will not be unreasonably withheld:
a. Type of Business; Management: Executives' Compensation. Make any
substantial change in the character of its business; or make any change in its
executive management, defined as consisting of Borrower's Chief Executive
Officer, Chief Financial Officer and Senior Vice President of Defense Business
Unit.
b. Outside Indebtedness. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from Bank except obligations
now existing as shown in financial statement dated JANUARY 26, 1997, except as
previously disclosed in writing by Borrower to Bank, excluding those being
refinanced by Bank; or sell or transfer, either with or without recourse, any
accounts or notes receivable or any moneys due to become due. Notwithstanding
the foregoing, Borrower may incur indebtedness for up to $650,000 collateralized
by cash surrender value of life insurance.
c. Liens and Encumbrances. Except as agreed in 3.b., create, incur,
assume any mortgage, pledge, encumbrance, lien or charge of any kind (including
the charge upon property at any time purchased or acquired under conditional
sale or other title retention agreement) upon any asset now owned or hereafter
acquired by it, other than liens for taxes not delinquent and liens in Bank's
favor.
d. Loans, Investments, Secondary Liabilities. Make any loans or advances
to any person or other entity other than in the ordinary and normal course of
its business as now conducted or make any investment in the securities of any
person or other entity having less than an A1P1 rating by Moody's Investors
Service; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of its business.
e. Acquisition or Sale of Business; Merger or Consolidation. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business or
fixed assets, or any property or other assets necessary for the continuance of
its business as now
2
<PAGE>
conducted, including without limitation the selling of any property or other
asset accompanied by the leasing back of the same.
f. Dividends, Stock Payments. Declare or pay any dividend (other than
dividends payable in common stock of Borrower) or make any other distribution on
any of its capital stock now outstanding (except for dividends required to be
paid on Series B Redeemable Preferred Stock) or hereafter issued or purchase,
redeem or retire any of such stock (except for Series B Redeemable Preferred
Stock).
g. Capital Expenditures. Make or incur consolidated obligations for
capital expenditures in excess of $1,900,000 in the period from the date hereof
to OCTOBER 31, 1997 or in excess of $1,900,000 in any one fiscal year
thereafter.
h. Lease Liability. Make or incur consolidated liability for payments of
rent under leases of real property in excess of $850,000 and personal property
in excess of $700,000 in any one fiscal year.
4. Should there be a default under the Security and Loan Agreement, the
General Security Agreement or under the Note, all obligations, loans and
liabilities of Borrower to Bank, due or to become due, whether now existing or
hereafter arising, shall, at the option of Bank, become immediately due and
payable without notice or demand, and Bank shall thereupon have the right to
exercise all of its default rights and remedies. Default shall include any
material adverse change in the financial condition or business of Borrower.
5. If any installment payment, interest payment, principal payment or
principal balance payment due hereunder is delinquent ten or more days, Obligor
agrees to pay Bank a late charge in the amount of 5% of the payment so due and
unpaid, in addition to the payment; but nothing in this paragraph to be
construed as any obligation on the part of the holder of this note to accept
payment of any payment past due or less than the total unpaid principal balance
after maturity.
All payments shall be applied first to any late charges owing, then to interest
and the remainder, if any to principal.
6. In addition to the provisions in the Security and Loan Agreement, Eligible
Accounts and Eligible Progress Billing Accounts shall only include such accounts
as Bank in its sole discretion shall determine are eligible from time to time
and shall include, in addition to Borrower's Accounts, Accounts of Datametrics
Technology Systems Corporation. "Eligible Accounts" and "Eligible Progress
Billing Accounts" shall also not include any of the following:
a. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of Borrower.
3
<PAGE>
b. Accounts with respect to which 25% or more of the account debtor's
total accounts or obligations outstanding to Borrower are more than 90 days from
invoice date are not eligible.
c. Accounts representing billings for service or maintenance contracts or
for inventory or equipment on rent to the account debtor.
d. For accounts representing more than 25% of total accounts receivable,
the balance in excess of the 25% is not eligible. However, the Bank may deem,
at its sole discretion, the entire amount, or any portion thereof, eligible.
e. Accounts with respect to international transactions unless insured to
the satisfaction of Bank, or covered by letters of credit issued by or confirmed
by a bank satisfactory to Bank.
f. Accounts receivable from creditors (contra accounts) to the extent of
the offsetting accounts payable.
g. Credit balances greater than 90 days.
h. Federal Government accounts unless Assignment of Claims is filed.
7. All financial covenants and financial information referenced herein shall
be interpreted and prepared in accordance with generally accepted accounting
principles applied on a basis consistent with previous years. Compliance with
financial covenants shall be calculated and monitored on a quarterly basis.
8. Borrower affirmatively covenants that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank, it will:
a. Maintain a minimum of consolidated tangible net worth (meaning the
excess of all consolidated assets, excluding any value for goodwill, trademarks,
patents, copyrights, organization expense, and other similar intangible items,
over its consolidated liabilities) of not less than $5,800,000 presently and
thereafter. All subordinated debt shall be considered equity for calculation of
financial covenants.
b. At all times maintain consolidated working capital (Borrower's
consolidated current assets minus consolidated current liabilities) of not less
than $5,000,000 presently and thereafter.
c. At all times maintain a consolidated current ratio of at least 1.50 to
1.0. "Current ratio" is the ratio of consolidated current assets to consolidated
current liabilities.
d. Maintain a maximum ratio of consolidated total debt to consolidated
tangible net worth not to exceed 1.50 TO 1.0.
4
<PAGE>
e. Achieve profitability on a quarterly basis.
f. Except for payroll and income tax depository accounts, maintain all
significant bank accounts and banking relationship with Bank.
g. As of and within 15 working days from each month-end, deliver to Bank,
a borrowing certificate certified by an officer of Borrower, an accounts
receivable aging reconciled to the general ledger of Borrower, a detailed
accounts payable aging reconciled to the Borrower's general ledger and setting
forth the amount of any book overdraft or the amount of checks issued but not
sent. All the foregoing will be in a form and with such detail as Bank may
request from time to time. Provide Bank a customer listing with addresses on a
quarterly basis. Sales and cash receipts reporting will be made to the Bank on
a minimum of three times a week basis.
h. Within 45 days after the end of each quarter, deliver to Bank
Borrower's Form 10-Q, including a profit and loss statement and a balance sheet
in form satisfactory to Bank all certified by an officer of Borrower.
i. Within 90 days after the end of Borrower's fiscal year, deliver to
Bank Borrower's Form 10-K, including the same financial statements as otherwise
provided quarterly together with Changes in Financial Position Statement,
certified with a unqualified opinion by an independent certified public
accountant selected by Borrower but acceptable to Bank.
j. Within 5 days of filing, deliver to Bank copies of the income tax
returns of Borrower.
k. Rights and Facilities. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business or partnership, maintain and preserve its existence.
l. Insurance. Maintain public liability, property damage and workers
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to the Bank. Bank to be named as Loss
Payee.
m. Taxes and Other Liabilities. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties, and any of
its other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
5
<PAGE>
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
(b) It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by
it adequate with respect thereto.
n. Records and Reports. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles or a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine its properties, books and records at reasonable times, at least
two times a year.
9. The rate of interest applicable to the Loan Account shall be 2.00% per year
in excess of the rate of interest which Bank has announced as its prime lending
rate ("Prime Rate") which shall vary concurrently with any change in such Prime
Rate. Interest shall be computed at the above rate on the basis of the actual
number of days during which the principal balance of the loan account is
outstanding divided by 360, which shall for interest computation purposes be
considered one year.
10. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No failure
or delay on the part of your Bank or any holder or Notes Issued hereunder, in
the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof or of any other
right, power or privilege. All rights and remedies existing under this
agreement or any not issued in connection with a loan that your Bank may make
hereunder, are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
11. This addendum is executed by and on behalf of the parties as of the date
first above written.
12. Notwithstanding the provisions of the Security and Loan Agreement (Accounts
Receivable and/or Inventory), the following provision shall apply to all
obligations of the Borrower to the Bank: All sums received by Bank, whether
from Borrower or from Borrower's account debtors, shall be applied to the
outstanding loan balance on the 2nd (second) day following receipt thereof by
the Bank. Interest shall continue to accrue on all loans outstanding pursuant
to the Loan and Security Agreement until sums received are applied as herein
provided.
DATAMETRICS CORPORATION "BORROWER" IMPERIAL BANK "BANK"
BY: /s/Daniel Ginns BY: /s/Diana McDonald
------------------------------- --------------------------------
Daniel Ginns Diana McDonald
Chairman Senior Vice President
6
<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 SIX MONTH PERIOD ENDED APRIL 27, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-26-1997
<PERIOD-END> APR-27-1997
<CASH> 740
<SECURITIES> 0
<RECEIVABLES> 3,749
<ALLOWANCES> 12
<INVENTORY> 5,988
<CURRENT-ASSETS> 10,538
<PP&E> 6,728
<DEPRECIATION> 5,048
<TOTAL-ASSETS> 13,240
<CURRENT-LIABILITIES> 3,857
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 34,111
<TOTAL-LIABILITY-AND-EQUITY> 13,240
<SALES> 10,183
<TOTAL-REVENUES> 10,183
<CGS> 7,357
<TOTAL-COSTS> 7,357
<OTHER-EXPENSES> 2,479
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> 122
<INCOME-TAX> 9
<INCOME-CONTINUING> 113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113
<EPS-PRIMARY> $.01
<EPS-DILUTED> $.01
</TABLE>
