<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 quarterly period ended January 25, 1998
----------------
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
------
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)
26604 Agoura Road
Calabasas, California 91302
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818)871-0300
- --------------------------------------------------------------------------------
(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-14,772,830 shares as of February 27, 1998
1
<PAGE>
DATAMETRICS CORPORATION
Index to Form 10-Q
Page No.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance
Sheets as of January 25, 1998 and
October 26, 1997 3
Consolidated Condensed Statements
of Operations for the Three Months
January 25, 1998 and
January 26, 1997 4
Consolidated Condensed Statements
of Cash Flows for the Three Months
Ended January 25, 1998 and
January 26, 1997 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 4. Submission of matters to a vote
of security holders. 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
DATAMETRICS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
January 25, October 26,
1998 1997
----------- -----------
(In thousands, except for
share data)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 1,035 $ 200
Accounts receivable, net 1,498 2,875
Inventories 6,788 5,996
Prepaid expenses and other current assets 171 173
----------- -----------
Total current assets 9,492 9,244
Property and Equipment, at Cost:
Machinery and equipment 3,717 3,717
Furniture, fixtures & computer equipment 2,133 2,132
Building 895 -
Leasehold improvements 26 -
----------- -----------
6,771 5,849
Accumulated depreciation and amortization (4,770) (4,618)
----------- -----------
Net property and equipment 2,001 1,231
Other Assets 1,055 1,071
----------- -----------
$ 12,548 $ 11,546
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving line of credit $ 1,219 $ 992
Current maturities of capitalized lease obligations - 6
Current maturities of long-term debt 1,905 1,974
Accounts payable 1,139 1,643
Accrued commissions and payroll 514 639
Accrued warranty 100 100
Other accrued expenses 975 1,018
Other current liabilites - 500
Advance payments and progress payments on contracts 70 133
----------- -----------
Total current liabilities 5,922 7,005
Long-Term Debt, less current maturities 883 -
Loan Payable 696 696
Other Long-Term Liabilities 335 323
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, $.01 par value; 5,000,000
shares authorized - -
Common stock, $.01 par value; 40,000,000 authorized;
14,722,829 and 13,283,168 shares issued and
outstanding in 1998 and 1997, respectively 147 133
Additional paid-in capital 36,665 34,177
Accumulated deficit (32,100) (30,788)
----------- -----------
Total stockholders' equity 4,712 3,522
----------- -----------
$ 12,548 $ 11,546
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
DATAMETRICS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended
--------------------------
January 25, January 26,
1998 1997
----------- -----------
(In thousands, except for
per share data)
<S> <C> <C>
Sales $ 1,525 $ 3,957
Cost of sales 1,588 2,707
Research & development 136 181
Selling, general & administration 1,026 926
----------- -----------
Loss from operations (1,225) 143
Interest income (expense), net (87) (107)
----------- -----------
Income (loss) before provision for income taxes (1,312) 36
Provision for income taxes - 2
----------- -----------
Net income (loss) $ (1,312) $ 34
=========== ===========
Earnings (loss) per share of common stock:
Primary and fully diluted net loss $ (0.09) $ -
=========== ===========
Weighted Average Number of Shares Outstanding
Primary and fully diluted 15,031 12,291
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
DATAMETRICS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended
----------- -----------
January 25, January 26,
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (1,312) $ 34
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 152 188
Bad debt expense 25 -
Changes in assets and liabilities
Accounts receivable 1,352 2,917
Inventories (792) 116
Prepaid expenses and other current assets 2 (26)
Other assets 16 (12)
Accounts payable (504) (1,638)
Accrued commissions and payroll (125) (469)
Accrued warranty - (50)
Other accrued expenses (43) (493)
Advance and progress payments from customers (63) (291)
Other long-term liabilites 12 -
----------- -----------
Net cash used in operating activities (1,280) 276
Cash Flows from Investing Activities
Capital expenditures for property and equipment (922) (9)
----------- -----------
Net cash used in investing activities (922) (9)
Cash Flows from Financing Activities
Borrowings on revolving line of credit 3,358 2,141
Payments on revolving line of credit (3,131) (4,141)
Redemption of Series B Preferred Stock - (87)
Payments on capitalized lease obligations (6) (17)
Borrowings on long-term debt 899 1,792
Payments on long-term debt (85) (103)
Proceeds from the issuance of common stock and warrants 2,002 210
----------- -----------
Net cash provided by financing activities 3,037 (205)
----------- -----------
Net increase (decrease) in cash and cash equivalents 835 62
Cash and cash equivalents at beginning of the year 200 386
----------- -----------
Cash and cash equivalents at end of the year $ 1,035 $ 448
=========== ===========
Supplemental disclosure of cash flow information:
Interest, net $ 132 $ 89
Income taxes (refund) - -
See accompanying notes.
</TABLE>
<PAGE>
DATAMETRICS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JANUARY 25, 1998
(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 the Quarterly
Report on 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 26, 1997 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 25, 1998.
From our latest Annual Report on Form 10-K, the following notes have been
omitted in this Quarterly Report on Form 10-Q: note (1) pertains to summary of
significant accounting policies with respect to the business, basis or
presentation and consolidation; revenue recognition, concentrations of credit
risk and major customers; cash and cash equivalents, inventories, property and
equipment, intangible assets, use of estimates, net loss per share, fair value
of financial instruments, and impairment of long-lived assets; 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
inventories; note (6) pertains to other assets; note (7) pertains to income
taxes; note (8) pertains to revolving line of credit; note (9) pertains to long-
term debt; note (10) pertains to loan payable; note (11) pertains to leases; and
note (12) pertains preferred stock; note (13) pertains to stock option plans;
note (14) pertains to
6
<PAGE>
commitments and contingencies; note (15) pertains to employee benefit plans;
note (16) pertains to stockholders' equity; note (17) pertains to related party
transactions; note (18) pertains to subsequent events; and note (19) pertains to
quarterly financial data.
2. INVENTORIES Stockroom inventories are stated at the lower of cost (first-
in, first-out) or market. The Company evaluates at least annually its stockroom
inventories 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 January 25, 1998 consist of
the following:
<TABLE>
<S> <C>
Stockroom inventories $10,416,000
Contracts in process 1,118,000
-----------
11,534,000
Less reserve for obsolescence 4,746,000
-----------
$ 6,788,000
===========
</TABLE>
3. CONTINGENCIES The Company is, from time to time, the subject of litigation,
claims and assessments arising out of matters occurring during the normal
operation of the Company's business. In the opinion of management, the
liability, if any, under such current litigation, claims and assessments would
not materially affect the financial position or the results of the operations of
the Company except as disclosed herein.
Four former officers of the Company (the "Former Officers"), whose employment
relationships with the Company terminated in part as a result of the Company's
restructuring in October 1996, are seeking severance benefits from the Company.
On January 13, 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 Former Officer and the Company (collectively, the
"Severance Agreements"). The fourth Former Officer sued the Company in response
to the Company's cross-complaint described below. The Former Officers seek
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 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, (ii) twelve monthly installments
payable to the Former Officers, the total
7
<PAGE>
of which would also equal their respective annual salaries, and (iii) attorney's
fees. Total payments under the Severance Agreements excluding attorney's fees
would aggregate approximately $1,200,000 if due in full to the Former Officers.
The complaint did not state, however, any specific amount of damages sought by
the plaintiffs.
On February 12, 1997, the Company filed a cross-complaint against the Former
Officers 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 this action. Management believes, however,
that it has legitimate defenses and intends to defend vigorously this action.
In a separate matter regarding benefits under the Company's Supplemental
Executive Retirement Plan (the "SERP"), the Company entered into a settlement
agreement (the "Agreement") on February 10, 1998 with the Former Officers in the
total amount of $643,681. The settlement will be made in cash held in a Trust
Account since 1995 totaling $259,681 to be paid in accordance with the
percentages set forth in the Agreement and in common stock totaling 192,000
shares (the "Settlement Shares"). The Settlement Shares are to be sold over a
period of 12 months commencing on or about May 1, 1998. The Company intends to
register the Settlement Shares by May 1, 1998; however, it cannot guarantee when
or if the Securities and Exchange Commission will register the Settlement
Shares. As such, the Former Officers lodged a stipulated judgment in the amount
of $384,000. The judgment is in addition to the cash settlement. The Former
Officers have agreed to refrain from executing on the judgment until May 1,
1998.
Upon registration of the Settlement Shares, the Former Officers are entitled to
sell 16,000 Settlement Shares per month over a twelve month period. The
proceeds from the sale shall be distributed in accordance with the percentages
set forth in the Agreement. Full completion of these sales shall constitute a
satisfaction of the judgment and shall preclude the Former Officers from
executing on the judgment.
In the event that the Settlement Shares are not registered by May 1, 1998, the
Company is required to pay $32,000 each month that the Settlement Shares are not
registered beginning on May 1, 1998, but not past the twelfth month. For each
month the Company is required to pay $32,000, 16,000 Settlement Shares will be
returned to the Company.
The SERP shall be deemed terminated on the later of the date when the cash
settlement is distributed or the date when the Settlement Shares are delivered.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Month Period Ended January 25, 1998 Compared
- --------------------------------------------------
To The Three Month Period Ended January 26, 1997
- ------------------------------------------------
Sales for the three-month period ended January 25, 1998 were $1,525,000, a
decrease of $2,432,000 or 61%, compared with sales of $3,957,000 in the same
period in the prior fiscal year. Sales of defense and defense related products
decreased $2,432,000. The decrease in sales for the first quarter ended
January 25, 1998 is attributable to lower production levels during the Company's
preparation to close its Woodland Hills, California facility on January 31,
1998. During this transition period the Company experienced material shortages
and labor inefficiencies that resulted in lower production levels and shipments.
Cost of sales for the first quarter of fiscal 1998 was $1,588,000 (104% of
sales), a decrease of $1,119,000 or 41%, compared with $2,707,000 (68% of sales)
for the same period in the prior fiscal year. Although cost of sales is down
from the same period in the prior fiscal year, it has increased as a percentage
of sales. Material shortages resulted in inefficient use of direct labor as
well as the additional cost of overtime. The lower production and shipment
levels were not accompanied by a corresponding reduction of fixed costs as the
Company brought existing customer jobs to as high a level of completion as
possible prior to the closure of the Woodland Hills, CA facility.
Research and development expenses were $136,000 for the three-month period ended
January 25, 1998, a decrease of $45,000 or 25%, compared with $181,000 for the
same period in the prior year.
Selling, general and administrative ("SG&A") expenses for the three-month period
ended January 25, 1998 were $1,026,000 (67% of sales) an increase of $100,000,
or 11%, compared with $926,000 (23% of sales) for the same period in the prior
fiscal year. The increase is due to increased professional fees partially
offset by decreased selling expenses.
Net interest expense amounted to $87,000 for the three month period ended
January 25, 1998 compared with net interest expense of $107,000 for the same
period in the prior year. This decrease is due to lower bank borrowings.
9
<PAGE>
The net loss for the three-month period ended January 25, 1998 amounted to
$1,312,000 a decrease of $1,346,000, compared with net income of $34,000 for the
same period in the prior year.
Management has determined that, based on the Company's historical losses from
recurring operations, the Company will not recognize its net deferred tax assets
at January 25, 1998. 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 January
25, 1998 was approximately $3,142,000. Approximately all of the January 25,
1998 backlog is expected to be delivered during the fiscal year ending October
25, 1998.
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.
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 up to $3,000,000 at the bank's reference rate plus
2% (8.5% reference rate at January 25, 1998). 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, plus 15% of qualified inventory up to a maximum
sublimit of $300,000. There was $1,219,000 outstanding at January 25, 1998.
The Credit Agreement requires the Company to maintain profitable quarterly
results, 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
10
<PAGE>
not in compliance with certain of its covenants at January 25, 1998, including
profitability.
On March 3, 1998, the Company entered into a Forbearance Agreement with the bank
whereby the bank agreed to extend the maturity date and forbear from taking any
action on the revolving line of credit until April 3, 1998 on certain terms and
conditions, including the following: (1) interest to March 3, 1998 of
approximately $12,000 is paid no later than March 10, 1998 and (2) the bank will
grant an overadvance not to exceed $500,000 contingent on the Company raising
additional equity on a pari passu basis. On March 5, 1998, the Company paid
$12,192 of interest to the bank.
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% (effective interest is 10.8% based upon original issue discount).
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.
On October 27, 1997 the Company effected a private placement of 1,394,094 shares
at $1.75 per share for proceeds of approximately $2,440,000.
The Company has received a commitment, subject to normal terms and conditions,
from the members of the Company's Board of Directors, to arrange to raise up to
$2,500,000 of additional capital for the Company as needed during the 1998
fiscal year through a private placement of equity securities, debt securities or
a combination thereof. Although management believes that it can arrange up to
$2,500,000 of new capital, outside factors may impact the amount of capital
actually raised which may result in an adverse impact on the Company's financial
condition.
The Company's working capital and current ratios at January 25, 1998 and at the
end of fiscal years 1997, 1996 and 1995 were $3,570,000, $2,239,000, $3,187,000
and $19,252,000 and 1.6, 1.3, 1.3 and 5.4, respectively. The deterioration in
financial position in fiscal 1996 is the result of the Company's losses during
fiscal 1996.
Management believes that the Company must make approximately $700,000 of capital
expenditures (including capitalized leases) during fiscal 1998. The Company's
other principal commitments for fiscal year 1998 are lease obligations for the
Company's facilities, equipment lease,
11
<PAGE>
loan payments and subordinated debt, 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, issuance of stock, subordinated debt,
capital leases, capital loans and from other sources of working capital.
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 and the Company's other SEC filings, 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS:
Exhibit 27 - Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
On November 3, 1997, the Company changed its certifying
accountants from Ernst & Young LLP to Deloitte & Touche LLP as reported in its
Current Report on Form 8-K filed with the Securities Exchange Commission on
November 7, 1997.
12
<PAGE>
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: 3/11/98 /s/ DANIEL P. GINNS
-------------------------- -----------------------
Daniel P. Ginns
Chief Executive Officer
Dated: 3/11/98 /s/ KENNETH S. POLAK
-------------------------- -----------------------
Kenneth S. Polak
Chief Financial Officer
13
<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 THREE MONTH PERIOD ENDING JANUARY 25, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-25-1998
<PERIOD-END> JAN-25-1998
<CASH> 1,035
<SECURITIES> 0
<RECEIVABLES> 1,538
<ALLOWANCES> 40
<INVENTORY> 6,788
<CURRENT-ASSETS> 9,492
<PP&E> 6,771
<DEPRECIATION> 4,770
<TOTAL-ASSETS> 12,548
<CURRENT-LIABILITIES> 5,922
<BONDS> 0
0
0
<COMMON> 147
<OTHER-SE> 36,665
<TOTAL-LIABILITY-AND-EQUITY> 12,548
<SALES> 1,525
<TOTAL-REVENUES> 1,525
<CGS> 1,588
<TOTAL-COSTS> 1,588
<OTHER-EXPENSES> 1,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> (1,312)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,312)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,312)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
