UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
------------------
OR
--- TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 1-8533
- ------------------------------
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2632319
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Sylvan Way, Parsippany, New Jersey 07054
- -------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
201-898-1500
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
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 practicable date. The number of shares of
Class A Common Stock, $.01 par value, and Class B Common Stock, $.01 par value,
outstanding as of November 6, 1995 was 3,307,324 and 2,194,734, respectively
(exclusive of 432,639 shares of Class A Common Stock and 21,619 shares of Class
B Common Stock held in the treasury).
<PAGE>
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--September 30, 1995
and March 31, 1995 ......................................... 3
Condensed Consolidated Statements of Earnings--Three and
Six Months Ended September 30, 1995 and 1994 ............... 4
Condensed Consolidated Statements of Cash Flows--Six Months
Ended September 30, 1995 and 1994 .......................... 5
Notes to Condensed Consolidated Financial Statements ....... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 9-12
PART 2. OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders ........ 13
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K ........................... 13
SIGNATURES .............................................................. 14
2
<PAGE>
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, March 31,
1995 1995
------------- ---------
Assets
Current Assets:
Cash and cash equivalents ....................... $20,997,000 $11,197,000
Accounts receivable ............................. 18,923,000 17,432,000
Inventories, net of progress payments ........... 15,494,000 11,724,000
Other current assets ............................ 2,536,000 2,445,000
----------- -----------
Total current assets 57,950,000 42,798,000
Property, plant and equipment, less accumulated
depreciation and amortization of $24,661,000
and $23,812,000 at September 30, 1995 and
March 31, 1995, respectively .................... 13,292,000 9,849,000
Intangible assets, less accumulated amortization of
$3,740,000 and $3,457,000 at September 30, 1995
and March 31, 1995, respectively ................ 8,637,000 8,920,000
Other assets ...................................... 3,961,000 3,023,000
----------- -----------
$83,840,000 $64,590,000
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities ............................... $20,749,000 $22,481,000
Long-term debt, excluding current installments .... 30,690,000 11,732,000
Deferred income taxes ............................. 4,605,000 4,605,000
Other liabilities ................................. 3,544,000 3,263,000
----------- -----------
Total liabilities ............................ 59,588,000 42,081,000
Stockholders' equity:
Class A Common Stock, $.01 par value per share
Authorized 10,000,000 shares; issued 3,739,963
and 3,699,963 shares at September 30, 1995 and
March 31, 1995, respectively .................. 37,000 37,000
Class B Common Stock, $.01 par value per share
Authorized 20,000,000 shares; issued 2,216,353
and 2,163,253 shares at September 30, 1995 and
March 31, 1995, respectively .................. 22,000 22,000
Additional paid-in capital ........................ 13,579,000 13,435,000
Retained earnings ................................. 12,490,000 10,919,000
----------- -----------
26,128,000 24,413,000
Treasury Stock, at cost;
432,639 shares of Class A Common Stock and
21,619 shares of Class B Common Stock ......... (1,617,000) (1,617,000)
Unamortized restricted stock compensation ......... (259,000) (287,000)
----------- -----------
Net stockholders' equity ................... 24,252,000 22,509,000
----------- -----------
$83,840,000 $64,590,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
Three Months Ended September 30, Six Months Ended September 30,
------------------------------- ------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ........................................ $22,786,000 $15,650,000 $40,065,000 $31,662,000
Costs and expenses .............................. 20,942,000 14,470,000 36,907,000 29,406,000
----------- ----------- ----------- -----------
Operating income ......................... 1,844,000 1,180,000 3,158,000 2,256,000
Interest and related expenses ................... (372,000) (335,000) (697,000) (677,000)
Other income, net ............................... 27,000 60,000 114,000 216,000
----------- ----------- ----------- -----------
Earnings before income taxes ............. 1,499,000 905,000 2,575,000 1,795,000
Income taxes .................................... 584,000 335,000 1,004,000 717,000
----------- ----------- ----------- -----------
Net earnings ............................. $ 915,000 $ 570,000 $ 1,571,000 $ 1,078,000
============ =========== =========== ============
Earnings per share of Class A and
Class B Common Stock:
Primary ..................................... $ 0.16 $ 0.12 $ 0.28 $ 0.21
Fully Diluted ............................... $ 0.16 $ 0.12 $ 0.28 $ 0.21
Weighted average number of shares of
Class A and Class B Common Stock outstanding:
Primary ..................................... 5,658,000 4,856,000 5,632,000 5,094,000
Fully Diluted ............................... 5,721,000 4,856,000 5,672,000 5,094,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended September 30,
------------------------------
1995 1994
---- ----
Cash flows from operating activities
Net earnings ................................. $ 1,571,000 $ 1,078,000
Adjustments to reconcile net earnings to
cash flows from operating activities:
Depreciation and amortization ................ 1,289,000 1,252,000
Other, net ................................... 171,000 37,000
Changes in assets and liabilities, net
of effects from business acquired:
(Increase) decrease in accounts receivable ... (1,184,000) 3,516,000
Increase in inventories ...................... (992,000) (2,414,000)
Increase in other current assets ............. (17,000) (95,000)
Decrease in accounts payable and other ....... (4,356,000) (3,462,000)
Other, net ................................... 268,000 168,000
----------- ----------
Net cash provided by (used in)
operating activities ................ (3,250,000) 80,000
----------- ----------
Cash flows from investing activities
Capital expenditures ....................... (1,959,000) (823,000)
Sales of fixed assets ...................... 2,380,000 --
Purchase of business, net of cash acquired . (4,095,000) --
Other, net ................................. -- (6,000)
----------- ----------
Net cash used in investing activities .. (3,674,000) (829,000)
----------- ----------
Cash flows from financing activities
Net proceeds from short-term debt .......... 123,000 65,000
Payments on long-term debt ................. (114,000) (37,000)
Repurchases of convertible subordinated
debentures ............................... (2,225,000) (2,527,000)
Net proceeds from issuance of senior
subordinated convertible debentures ...... 18,900,000 --
Purchase of treasury stock ................. -- (2,900,000)
Other, net ................................. 40,000 --
----------- ----------
Net cash provided by (used in)
financing activities ................. 16,724,000 (5,399,000)
----------- ----------
Net increase (decrease) in cash ................ 9,800,000 (6,148,000)
Cash and cash equivalents, beginning of period . 11,197,000 15,465,000
----------- ----------
Cash and cash equivalents, end of period ....... $20,997,000 $ 9,317,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) In the opinion of Management, the accompanying unaudited condensed
consolidated financial statements of Diagnostic/Retrieval Systems, Inc. and
subsidiaries (the "Company") contain all adjustments (consisting of only
normal and recurring adjustments) necessary for the fair presentation of
the Company's consolidated financial position as of September 30, 1995, the
results of operations for the three and six months ended September 30, 1995
and 1994 and cash flows for the six months ended September 30, 1995 and
1994. The results of operations for the three and six months ended
September 30, 1995 are not necessarily indicative of the results to be
expected for the full year.
2) Earnings per share of common stock is computed by dividing net earnings by
the weighted average number of shares of Class A and Class B Common Stock
outstanding during each period. For the three and six month periods ended
September 30, 1995, the computation of primary earnings per share included
approximately 170,000 and 171,000 shares, respectively, from the assumed
exercise of dilutive stock options computed using the treasury stock
method. For the three and six month periods ended September 30, 1995, the
computation of fully diluted earnings per share included approximately
49,000 and 25,000 shares, respectively, from the assumed conversion of the
Company's 9% Senior Subordinated Convertible Debentures. Options
outstanding to purchase shares of common stock were excluded from the
computation of earnings per share for the three and six month periods ended
September 30, 1994, because their effect was not material. Furthermore,
additional shares assumed to be outstanding applicable to the Company's
8 1/2% Convertible Subordinated Debentures were also excluded from the
computations for all periods presented, as their effect on earnings per
share was antidilutive.
3) On July 5, 1995 (the "Closing Date"), Photronics Corp, a New York
corporation and a wholly-owned subsidiary of the Company ("Photronics"),
acquired (through OMI Acquisition Corp, a Delaware corporation and a
wholly-owned subsidiary of Photronics), substantially all of the assets of
Opto Mechanik, Inc. ("OMI"), a Delaware corporation, pursuant to an
Agreement for Acquisition of Assets dated May 24, 1995, as amended July 5,
1995, between Photronics and OMI (the "Agreement"), and approved by the
United States Bankruptcy Court for the Middle District of Florida on June
23, 1995. OMI, located in Melbourne, Florida, designs and manufactures
electro-optical sighting and targeting systems used primarily in military
fire control devices and in various weapons systems.
Pursuant to the Agreement, the Company paid a total of $5,450,000
consisting of i) $1,150,000 in cash to PNC Bank, Kentucky, Inc. ("PNC"),
ii) a note to PNC in the principal amount of $1,450,000 payable in forty
eight (48) equal monthly installments of principal and interest commencing
with the first day of the month subsequent to the Closing Date (the "PNC
Note"), iii) $2,550,000 in cash to MetLife Capital Corporation and iv) a
note in the principal amount of $300,000 to OMI payable in six (6) equal
monthly installments of principal and interest commencing on August 5, 1995
(the "OMI Note"). The PNC Note bears interest at a floating rate equal to
the lesser of i) PNC's stated prime interest rate plus 0.5% or ii) the
prime rate as reported by the Wall Street Journal plus 0.5%. The OMI Note
bears interest at a rate of 9.5% per annum. In addition, the Company
incurred approximately $585,000 in professional fees and other costs
associated with the acquisition. Total cash consideration paid in the
acquisition was obtained from the Company's working capital.
The acquisition of OMI has been accounted for under the purchase method.
The operating results of OMI Acquisition Corp., the acquiring corporation,
have been included in reported operating results since the date of
acquisition. The cost of the acquisition has been allocated on the basis of
the estimated fair market value of the assets acquired and the liabilities
assumed. The excess of the fair market value of net assets over total cost
of the acquisition has been
6
<PAGE>
recorded as a reduction of long term assets, principally as a reduction to
property, plant and equipment, at cost.
4) On September 29, 1995 (the "Debenture Closing Date"), the Company completed
a private placement of $20,000,000 in principal amount of 9.0% Senior
Subordinated Convertible Debentures (the "Debentures"). Net proceeds from
the private placement were approximately $19,000,000. On November 3, 1995,
the Company completed the placement of an additional $5,000,000 in
principal amount of Debentures, as provided for under the over-allotment
option provisions of the Purchase Agreement between the Company and Forum
Capital Markets L.P ("Forum") dated September 22, 1995. Net proceeds from
this secondary placement were approximately $4,750,000. Pursuant to the
related Registration Rights Agreement dated September 22, 1995 between the
Company and Forum, acting on behalf of holders of the Debentures (the
"Agreement"), the Company has agreed to file a shelf registration statement
relating to the Debentures and the shares of Class A Common Stock which are
issuable from time to time upon conversion of the Debentures, within ninety
(90) days after the Debenture Closing Date, and to cause the registration
statement to become effective within one hundred fifty (150) days after the
Debenture Closing Date. In addition, the Company has agreed to use its
reasonable best efforts to keep the registration statement effective until
at least the third anniversary of the issuance of the Debentures. The
Company expects to complete this registration within the timeframe
specified in the Agreement. In connection with these transactions, the
Company expects to incur approximately $500,000 of professional fees and
other costs. These costs, together with Forum's commissions, will be
amortized ratably through the maturity date of the Debentures.
Interest on the Debentures is payable semi-annually on April 1 and October
1, commencing April 1, 1996. The Debentures are convertible at any time
prior to maturity, unless previously redeemed or repurchased, into shares
of the Company's Class A Common Stock, $0.01 par value, at a conversion
price of $8.85 per share, subject to adjustment under certain
circumstances. The Debentures become due and payable in full on October 1,
2003; there are no sinking fund payments required prior to maturity. The
Company may redeem outstanding Debentures, in whole or in part, on or after
October 1, 1998, at redemption prices ranging from 100% to 105% of par
value, plus accrued interest.
The related Indenture Agreement between the Company and The Trust Company
of New Jersey dated September 29, 1995 (the "Indenture") contains certain
restrictions, covenants and agreements with respect to the operations and
financial reporting requirements of the Company, including, but not limited
to, the maintenance of consolidated net worth, limitations on the amount
and types of indebtedness incurred by Company, limitations on liens upon
the assets of the Company, limitations on investments, dividends and other
distributions, limitations on transactions with related persons and
limitations on the sale or transfer of corporate assets. As of September
30, 1995, the Company was in compliance with these covenants. Under the
terms of the Indenture, the Debentures are subject to partial mandatory
redemption should consolidated net worth (as defined in the Indenture) fall
below $18,000,000 for any two (2) consecutive fiscal quarters. The
Debentures are also subject to mandatory redemption upon a change in
control (as defined in the Indenture).
5) The Company's industrial revenue bonds, due 1998, are supported by an
irrevocable, direct-pay letter of credit in an amount equal to the
principal balance plus interest thereon for 45 days. At September 30, 1995,
the contingent liability of the Company as guarantor under the letter of
credit was approximately $1,930,000. The Company has collateralized the
letter of credit with accounts receivable and also has agreed to certain
financial covenants, including the maintenance of: (i) a certain minimum
ratio of consolidated tangible net worth to total debt (the "Debt Ratio"),
(ii) a certain minimum quarterly ratio of earnings before interest and
taxes to interest (the "Interest Ratio"), and (iii) a certain minimum
balance of billed and unbilled accounts receivable ("Eligible
Receivables"), all as defined in the related agreements. At September 30,
1995, the covenants required (i) a Debt Ratio of 0.6:1, (ii) an Interest
Ratio of 1.5:1, and (iii) Eligible Receivables of $2,500,000. As a result
of the issuance of the Debentures as described in Note 4 above, the Debt
Ratio at September 30, 1995 was 0.4:1. The Company has obtained a waiver,
renewable annually, from the bank of the required debt ratio and is in
compliance with all other covenants under the letter of credit.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth items in the Condensed Consolidated
Statements of Earnings as a percent of revenues and presents the percentage
increase or decrease of those items as compared to the prior period.
<TABLE>
<CAPTION>
Percent of Revenues Percent of Revenues
------------------- -------------------
Three Months Ended Percent Six Months Ended Percent
September 30, Changes September 30, Changes
------------------- ------------- ------------------- -------------
1995 1994 1995 vs. 1994 1995 1994 1995 vs. 1994
------ ------ ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues .......................... 100.0% 100.0% 45.6% 100.0% 100.0% 26.5%
Costs and expenses ................ 91.9% 92.5% 44.7% 92.1% 92.9% 25.5%
------ ------ ------ ------
Operating income ................ 8.1% 7.5% 56.3% 7.9% 7.1% 40.0%
Interest and related expenses ..... -1.6% -2.1% 11.0% -1.7% -2.1% 3.0%
Other income, net ................. 0.1% 0.4% -55.0% 0.2% 0.7% -47.2%
------ ------ ------ ------
Earnings before income taxes .... 6.6% 5.8% 65.6% 6.4% 5.7% 43.5%
Income taxes ...................... 2.6% 2.2% 74.3% 2.5% 2.3% 40.0%
------ ------ ------ ------
Net earnings .................... 4.0% 3.6% 60.5% 3.9% 3.4% 45.7%
====== ====== ====== ======
</TABLE>
8
<PAGE>
Revenues for the three-month period ended September 30, 1995 increased
45.6% to $22.8 million from $15.7 million for the same three-month period in
fiscal 1995. On a year-to-date basis, revenues increased 26.5% to $40.1 million
from $31.7 million for the same six-month period in fiscal 1995. The growth was
due primarily to increased shipments of display workstations coupled with
shipments, in the current fiscal year, of magnetic head products by Ahead
Technologies, Inc., whose net assets were acquired in November 1994, and
revenues from the acquisition of substantially all of the assets of Opto
Mechanik, Inc. on July 5, 1995 (the "OMI Acquisition"), which increased the
Company's electro-optical sighting systems business.
Operating income for the three-month period ended September 30, 1995
increased 56.3% to $1.8 million from $1.2 million for the same three-month
period in fiscal 1995. On a year-to-date basis, operating income increased 40.0%
to $3.2 million from $2.3 million for the same six-month period in fiscal 1995.
Operating income as a percentage of revenues was 8.1% and 7.9% for the
three-month and six-month periods ended September 30, 1995, respectively, as
compared with 7.5% and 7.1%, respectively, for the comparable prior year
periods. Higher operating income in both periods was due primarily to the
overall increase in revenues, together with higher margins earned on the
company's commercial products, display systems product line and manufacturing
services.
Interest and related expenses were $0.4 million and $0.7 million for the
second quarter and first half of fiscal 1996, respectively as compared to $0.3
million and $0.7 million for the comparable prior year periods. The increase for
the second quarter was primarily due to the increase in debt associated with the
OMI Acquisition at the beginning of the second quarter of fiscal 1996, offset in
part by a reduction in interest from repurchases of the Company's 8 1/2%
Convertible Subordinated Debentures (the "8 1/2% Debentures").
Other income, net was $27,000 and $0.1 million for the three-month and
six-month periods ended September 30, 1995, respectively, representing decreases
from comparable prior year periods, primarily due to the lower average cash
balances.
The Company's effective tax rate for the three-month and six-month periods
ended September 30, 1995 was 39%, as compared to 37.0% and 40.0% for the
comparable prior year periods. The Company records income tax expense based on
an estimated effective income tax rate for the full fiscal year. The effective
income tax rate and the components of income tax expense for the second quarter
and first half of fiscal 1996 did not significantly change from those of the
fiscal year ended March 31, 1995. The provision for income taxes includes all
estimated income taxes payable to federal and state governments as applicable.
Financial Condition and Liquidity
Cash and Cash Flow: Cash and cash equivalents at September 30, 1995 and
March 31, 1995 represented approximately 25% and 17%, respectively, of total
assets. During the six-month period ended September 30, 1995, cash increased
$9.8 million. This increase was primarily the result of the private placement of
$20,000,000 in principal amount of 9% Senior Subordinated Convertible Debentures
(the "Debentures") on September 29, 1995. In addition, approximately $2.4
million was generated from sales of certain fixed assets. These contributions to
cash were offset by uses of: i) approximately $4.1 million in the OMI
Acquisition; ii) approximately $2.2 million for repurchases of outstanding 8
1/2% Debentures in satisfaction of the August 1, 1995 sinking fund requirement
for such debt and iii) approximately $2.0 million for capital expenditures.
Additionally, approximately $3.3 million was used in support of operations,
primarily to settle accounts payable and other current obligations of the
Company.
9
<PAGE>
Capital expenditures during fiscal 1996 are expected to approximate $4.4
million. The majority of these expenditures will be for computer and
laboratory-related equipment, as well as for facilities improvements.
During the first quarter of fiscal 1996, the Company obtained a $5.0
million unsecured line of credit from NatWest Bank which may be used to
supplement its working capital needs. As of September 30, 1995, there were no
balances outstanding under this line of credit. The net proceeds from the
private placement will be used to repurchase $5.0 million in principal amount of
outstanding 8 1/2% Debentures, for working capital requirements and for future
acquisition-related transactions. The Company believes that its current working
capital position is sufficient to support operational needs as well as its
near-term business objectives.
Accounts Receivable and Inventories: Accounts receivable increased
approximately $1.5 million in the six-month period ended September 30, 1995,
primarily as a result of the OMI Acquisition, offset in part by decreases in
existing account balances. Generally, there are no contract provisions for
retainage, and all accounts receivable are expected to be collected within one
year. Inventories increased by approximately $3.8 million during the first half
of fiscal 1996, also reflecting the effect of the OMI Acquisition. The increase
in inventories was also due, in part, to increased material procurement related
to the production of certain display workstation programs.
September 30, 1995 March 31, 1995
------------------ --------------
Quick ratio ........................ 1.9 1.3
Current ratio ...................... 2.8 1.9
Liabilities-to-equity ratio ........ 2.5 1.9
Long-term debt, excluding current
installments, to capitalization .. 55.9% 34.3%
Backlog: At September 30, 1995, the Company's backlog of orders was
approximately $160 million as compared to $126 million at March 31, 1995. The
increase in backlog for the first half of the year was due to the net effect of
bookings, partially offset by revenues, and the addition of approximately $15.5
million of backlog from the OMI Acquisition. New contract awards of
approximately $58.7 million were booked during the six-month period ended
September 30, 1995.
Acquisition
On July 5, 1995 (the "Closing Date"), Photronics Corp, a New York
corporation and a wholly-owned subsidiary of the Company ("Photronics"),
acquired (through OMI Acquisition Corp, a Delaware corporation and a
wholly-owned subsidiary of Photronics), substantially all of the assets of Opto
Mechanik, Inc. ("OMI"), a Delaware corporation, pursuant to an Agreement for
Acquisition of Assets dated May 24, 1995, as amended July 5, 1995, between
Photronics and OMI (the "Agreement"), and approved by the United States
Bankruptcy Court for the Middle District of Florida on June 23, 1995. OMI,
located in Melbourne, Florida, designs and manufactures electro-optical sighting
and targeting systems used primarily in military fire control devices and in
various weapons systems.
Pursuant to the Agreement, the Company paid a total of $5,450,000
consisting of i) $1,150,000 in cash to PNC Bank, Kentucky, Inc. ("PNC"), ii) a
note to PNC in the principal amount of $1,450,000 payable in forty eight (48)
equal monthly installments of principal and interest commencing with the first
day of the month subsequent to the Closing Date (the "PNC Note"), iii)
$2,550,000 in cash to MetLife Capital Corporation and iv) a note in the
principal amount of
10
<PAGE>
$300,000 to OMI payable in six (6) equal monthly installments of principal and
interest commencing on August 5, 1995 (the "OMI Note"). The PNC Note bears
interest at a floating rate equal to the lesser of i) PNC's stated prime
interest rate plus 0.5% or ii) the prime rate as reported by the Wall Street
Journal plus 0.5%. The OMI Note bears interest at a rate of 9.5% per annum. In
addition, the Company incurred approximately $585,000 in professional fees and
other costs associated with the acquisition. Total cash consideration paid in
the acquisition was obtained from the Company's working capital.
The acquisition of OMI has been accounted for under the purchase method.
The operating results of OMI Acquisition Corp., the acquiring corporation, have
been included in reported operating results since the date of acquisition. The
cost of the acquisition has been allocated on the basis of the estimated fair
market value of the assets acquired and the liabilities assumed. The excess of
the fair market value of net assets over total cost of the acquisition has been
recorded as a reduction of long term assets, principally as a reduction to
property, plant and equipment, at cost.
Private Offering of Convertible Debentures
On September 29, 1995 (the "Debenture Closing Date"), the Company completed
a private placement of $20,000,000 in principal amount of Debentures. Net
proceeds from the private placement were approximately $19,000,000. On November
3, 1995, the Company completed the placement of an additional $5,000,000 in
principal amount of Debentures, as provided for under the over-allotment option
provisions of the Purchase Agreement between the Company and Forum Capital
Markets L.P ("Forum"). dated September 22, 1995. Net proceeds from this
secondary placement were approximately $4,750,000. Pursuant to the related
Registration Rights Agreement dated September 22, 1995 between the Company and
Forum, acting on behalf of holders of the Debentures (the "Agreement"), the
Company has agreed to file, within ninety (90) days after the Debenture Closing
Date, a shelf registration statement relating to the Debentures and the shares
of Class A Common Stock which are issuable from time to time upon conversion of
the Debentures, and to cause the registration statement to become effective
within one hundred fifty (150) days after the Debenture Closing Date. In
addition, the Company has agreed to use its reasonable best efforts to keep the
registration statement effective until at least the third anniversary of the
issuance of the Debentures. The Company expects to complete this registration
within the timeframe specified in the Agreement. In connection with these
transactions, the Company expects to incur approximately $500,000 of
professional fees and other costs. These costs, together with Forum's
commissions, will be amortized ratably through the maturity date of the
Debentures.
Interest on the Debentures is payable semi-annually on April 1 and October
1, commencing April 1, 1996. The Debentures are convertible at any time prior to
maturity, unless previously redeemed or repurchased, into shares of the
Company's Class A Common Stock, $0.01 par value, at a conversion price of $8.85
per share, subject to adjustment under certain circumstances. The Debentures
become due and payable in full on October 1, 2003; there are no sinking fund
payments required prior to maturity. The Company may redeem outstanding
Debentures, in whole or in part, on or after October 1, 1998, at redemption
prices ranging from 100% to 105% of par value, plus accrued interest.
The related Indenture Agreement between the Company and The Trust Company
of New Jersey dated September 29, 1995 (the "Indenture") contains certain
restrictions, covenants and agreements with respect to the operations and
financial reporting requirements of the Company, including, but not limited to,
the maintenance of consolidated net worth, limitations on the amount and types
of indebtedness incurred by Company, limitations on liens upon the assets of the
Company, limitations on investments, dividends and other distributions,
limitations on transactions with related persons and limitations on the sale or
transfer of corporate assets. As of September 30, 1995, the Company was in
compliance with these covenants. Under the terms of the Indenture, the
Debentures are subject to partial mandatory redemption should consolidated net
worth (as defined
11
<PAGE>
in the Indenture) fall below $18,000,000 for any two (2) consecutive fiscal
quarters. The Debentures are also subject to mandatory redemption upon a change
in control (as defined in the Indenture).
Letter of Credit
The Company's industrial revenue bonds, due 1998, are supported by an
irrevocable, direct-pay letter of credit in an amount equal to the principal
balance plus interest thereon for 45 days. At September 30, 1995, the contingent
liability of the Company as guarantor under the letter of credit was
approximately $1,930,000. The Company has collateralized the letter of credit
with accounts receivable and also has agreed to certain financial covenants,
including the maintenance of: (i) a certain minimum ratio of consolidated
tangible net worth to total debt (the "Debt Ratio"), (ii) a certain minimum
quarterly ratio of earnings before interest and taxes to interest (the "Interest
Ratio"), and (iii) a certain minimum balance of billed and unbilled accounts
receivable ("Eligible Receivables"), all as defined in the related agreements.
At September 30, 1995, the covenants required (i) a Debt Ratio of 0.6:1, (ii) an
Interest Ratio of 1.5:1, and (iii) Eligible Receivables of $2,500,000. As a
result of the issuance of the Debentures as described in Note 4 above, the Debt
Ratio at September 30, 1995 was 0.4:1. The Company has obtained a waiver,
renewable annually, from the bank of the required debt ratio and is in
compliance with all other covenants under the letter of credit.
12
<PAGE>
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) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The following report on Form 8-K and amendment thereto were
filed during the fiscal quarter ended September 30, 1995:
1. Form 8-K, Current Report, dated July 5, 1995, File No. 1-8533,
containing Item 2.
2. Form 8-K, Amendment No. 1, dated August 8, 1995, File No.
1-8533, containing Items 7(a), (b) and (c).
13
<PAGE>
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
----------------------------------
Registrant
Date: November 14, 1995 /s/ Nancy R. Pitek
----------------------------------
Nancy R. Pitek
Controller, Treasurer and Secretary
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1
<CURRENCY> U.S.-DOLLAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<PERIOD-TYPE> 3-MOS
<EXCHANGE-RATE> 1
<CASH> 20,997,000
<SECURITIES> 0
<RECEIVABLES> 18,923,000
<ALLOWANCES> 0
<INVENTORY> 15,494,000
<CURRENT-ASSETS> 57,950,000
<PP&E> 37,953,000
<DEPRECIATION> 24,661,000
<TOTAL-ASSETS> 83,840,000
<CURRENT-LIABILITIES> 20,749,000
<BONDS> 30,690,000
<COMMON> 59,000
0
0
<OTHER-SE> 24,193,000
<TOTAL-LIABILITY-AND-EQUITY> 83,840,000
<SALES> 22,786,000
<TOTAL-REVENUES> 22,786,000
<CGS> 20,942,000
<TOTAL-COSTS> 20,942,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372,000
<INCOME-PRETAX> 1,499,000
<INCOME-TAX> 584,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 915,000
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
