UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
{X} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended January 31, 2003
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 1-8690
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DataMetrics Corporation
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(Exact name of registrant as specified in its charter)
Delaware 95-3545701
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1717 Diplomacy Row
Orlando, Florida 32809
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(Address of principal executive offices) (Zip Code)
(407) 251-4577
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock. $.01 Par Value-- 21,953,392 shares as of October 20, 2003
Index to Form 10-QSB
Page No.
Part I - Financial Information --------
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheet as of January 31, 2003 3
Consolidated Statements of Operations for the three Months
Ended January 31, 2003 and January 27, 2002 4
Consolidated Statements of Cash Flows for the three Months
Ended January 31, 2003 and January 27, 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition 7
Results of Operations 8
Liquidity and Capital Resources 9
Part II - Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in securities and uses of funds. 11
Item 3. Defaults upon Note Payable 11
Item 4. Submission of matters to a vote of security holders. 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Page 2 of 13
DATAMETRICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(unaudited)
(in thousands, except per share data)
January 31,
2003
---------------
ASSETS
Current Assets
Cash $ 546
Accounts receivable, net of allowance for doubtful accounts of $150 (note 1) 113
Inventory, net of allowance for obsolete or slow moving inventory of $4,924 (note 1 and 4) 1,934
Other Current Assets 119
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Total current assets 2,712
Property and Equipment
Building and improvements (note 7) 1,112
Furniture, Fixtures and computer equipment 1,195
Land 420
Machinery and equipment 547
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Total Property and Equipment 3,274
Less Accumulated Depreciation (1,859)
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Net Property and Equipment 1,415
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Total Assets $ 4,127
===============
LIABILITIES AND STOCKHOLDERS DEFICIT
Current Liabilities
Accounts Payable $ 678
Accrued Expenses 1,366
Deferred Revenue 520
Warranty Reserve 61
Current Maturities of LT Debt 3,071
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Total Current Liabilities 5,696
Long-Term Liabilities
Loan Payable 832
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Total Long-Term Liabilities 832
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Total Liabilities 6,528
Stockholders deficit: (note 11)
Common Stock, $.01 par value; 800,000,000 shares
authorized; 17,009,619 shares issued and outstanding 170
Additional Paid In Capital 56,339
Accumulated Deficit (58,910)
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Total Stockholders Deficit (2,401)
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Total Liabilities and Stockholders Deficit $ 4,127
===============
The accompanying "Notes to Consolidated Financial Statements" form an integral
part of these statements.
Page 3 of 13
DATAMETRICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION
(unaudited)
(in thousands, except per share data)
For the three months ended
January 31 January 27
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2003 2002
Sales 597 1,494
Cost of Sales 373 726
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Gross Profit 224 768
Selling, general and administrative expenses 574 732
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Loss from Operations (350) 36
Other income and expense (17) (192)
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Net Loss $ (367) $ (156)
Loss per share of common stock;
basic and diluted $ (0.023) $ (0.004)
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Weighted average number of common shares outstanding
basic and diluted 15,983 36,837
The accompanying "Notes to Consolidated Financial Statements" form an integral
part of these statements.
Page 4 of 13
DATAMETRICS CORPORATION AND SUBSIDIARY
CONSOLIDATED CASH FLOWS STATEMENTS
(unaudited)
(in thousands, except per share data)
For the three months ended
January 31 January 27
2003 2002
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Cash Flows from Operating Activities:
Net Loss (367) (156)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation expense 16 197
Changes in assets and liabilities:
Accounts receivable 196 (711)
Inventories (135) 280
Prepaid expenses and other current assets -- 46
Other assets -- 107
Accounts payable (362) 348
Accrued expenses 466 1,330
Deferred Revenue 520 --
Warranty Reserve -- --
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Net cash provided by operating activities 334 1,441
Cash Flows from Investing Activities:
Capital expenditures for property and equipment -- (165)
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Net cash provided by (used in ) investing activities 0 (165)
Cash Flows from Financing Activities:
Conversion of Warrants to Common Stock 122
Payments on loan payable (net) (7) (91)
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Net cash provided by (used in) financing activities 115 (91)
Net (decrease) increase in cash 449 1,185
Cash at the beginning of the period 97 246
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Cash at the end of the period 546 1,431
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest paid, net 17 0
The accompanying "Notes to Consolidated Financial Statements" form an integral
part of these statements.
Page 5 of 13
DATAMETRICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for per share data)
1. The consolidated financial statements include the accounts of DataMetrics
Corporation and its wholly owned subsidiaries (collectively, the "Company").
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission relating to interim financial
statements. These condensed financial statements do not include all disclosures
provided in the company's annual financial statements. The condensed financial
statements should be read in conjunction with the financial statements and notes
thereto for the year ended October 31, 2002 contained in the company's Form
10-KSB filed with the Securities and Exchange Commission. All adjustments of a
normal recurring nature, which, in the opinion of management, are necessary to
present a fair statement of results for the periods have been made. Results of
operations are not necessarily indicative of the results to be expected for the
full year.
2. INVENTORIES Stockroom inventories consist primarily of materials used by the
Company for existing and anticipated contracts and materials and finished
assemblies which are held to satisfy spare parts requirements of the Company's
customers. Those parts not expected to be sold within one year are classified as
a non-current asset and fully reserved. The Company evaluates all inventories
for obsolescence on a periodic basis and records estimated reserves accordingly.
Inventories as of January 31, 2003 consist of the following:
(in Thousands)
Inventories Parts and sub-assemblies 2,634
Work in Process 162
Obsolete Inventory 4,062
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Total Inventory 6,858
Reserve for Obsolete Inventory (4,924)
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Net Inventory 1,934
The Company has replaced its outdated and very maintenance intensive MRP system
with a more economical and user-friendly Made-2-Manage system that is scaled
appropriately for our business. It was fully implemented in May 2003. The
Company anticipates the new system to be instrumental in the inventory valuation
process, specifically in identifying obsolete materials on a more timely basis.
The Company has recorded significant losses in the past two years for obsolete
inventory and is currently maintaining an additional reserve of $862k for its
inventory valuation to offset any future losses on inventory write-downs.
3. DEBT STRUCTURE
On January 31, 2003, long-term debt of $2,900,000 plus accrued interest
matured. The Company was unable to pay this obligation and is in default on this
debt. During the quarter, various members of DMTR, LLC and the former senior
priority note-holders, exercised approximately 3.5 million warrants at $.0754
per share, which resulted in gross proceeds of $262,355. Of this amount,
$138,395 was used by the creditors to pay overdue interest and other related
fees associated with the Company's obligations to DMTR, LLC. A Standstill
Agreement with DMTR, LLC was agreed upon, which provides for the creditor to
forego any of its default rights as long as the parties continue to negotiate in
good faith to restructure this obligation. The creditor may terminate the
negotiations and the Standstill Agreement at any time after September 30, 2003
at its sole discretion. Negotiations for the restructure are ongoing at this
time. Detail of the Company's debt structure appears in the 10-KSB for fiscal
year ended 10/31/2002.
Page 6 of 13
4. Segment Data
The Company has no reportable segments. There is no segment data to be
reported.
Page 7 of 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Prospective
investors are cautioned that such statements are only predictions and those
actual events or results may differ materially.
MANAGEMENT FOCUS
The Company designs, develops, and manufactures computers and computer
peripheral equipment for military, industrial and commercial applications where
reliable operation of the equipment in challenging environments is imperative.
The systems provided are qualified for use in airborne, shipboard, and ground
based applications. The Company's product lines include a broad range of
computers, computer workstations, servers, printers, and plotters.
The Company offers military specified and ruggedized versions of flat
panel monitors and other peripheral equipment (including computers, printers,
keyboards and trackballs) encased in shock, vibration and temperature resistant
chassis. The chassis produced by the Company are used in conjunction with its
product by the military to house sensitive equipment. The Navy P3 Orion, Air
Force AWACS and Army Fire-Finder programs all require rugged rack enclosures to
protect the equipment from shock, vibration and other damage which may be
experienced in a harsh operating environment. DataMetrics continues to increase
its presence in the military arena including United States Air Force avionics
and ground-based systems as well as United States Army system diagnostics.
DataMetrics' equipment is designed and qualified for use as part of commercial
airlines cockpit systems.
For the quarter ended January 31, 2003, the Company experienced slower
than expected receipt of orders despite an increase in military / defense
spending by the United States government. Many of the military programs from
which the Company anticipates generating its revenue have been rescheduled and
military priorities have been reconsidered to account for short, medium, and
long-term needs. The Company expects to see an increase in order activity in the
following quarters and attributes the delay in orders due to a focus on budget
spending for troops and munitions in the war effort in Afghanistan and Iraq. The
following phases in this war and projected increase in overall military /
defense spending will likely entail more sophisticated surveillance techniques
and equipment, which will require data processing and peripheral equipment much
like we currently supply for the AWACS, P3 Orions aircraft and the armed forces.
The Company is optimistic about the future because of its streamlined
operations, an increase in military spending for the continued war effort and
homeland security and the additional products and programs acquired in the PEC
acquisition.
Page 8 of 13
RESULTS OF OPERATIONS
Three Month Period Ended January 31, 2003 Compared with the three Month
Period Ended January 28, 2002
Sales for the quarter ended January 31, 2003 were $597,000, a decrease of
$897,000 or 60%, compared with sales of $1,494,000 in the same period in the
prior fiscal year. The decrease in sales for the three months ended January 31,
2003 is attributable to a delay in order entry for government contracts as the
government focused on the war efforts and homeland security.
Cost of sales for the quarter ended January 31, 2003 was $373,000 (62% of
sales), a decrease of $354,000 or 49%, compared with $726,000 (49% of sales) for
the same period in the prior fiscal year. Cost of sales decreased compared to
the same period in the prior fiscal year because of the decrease in the cost of
materials directly related to the reduction in sales.
Selling, general and administrative ("SG&A") expenses for the quarter ended
January 31, 2003 were $574,000 (96% of sales) a decrease of $157,000, or 21%,
compared with $732,000 (49% of sales) for the same period in the prior fiscal
year. The decrease is due to lower administrative and support staff expenses
throughout the Company.
Net interest expense amounted to $17,000 for the quarter ended January 31,
2003 compared with net interest expense of $192,000 for the same period in the
prior year. This decrease is due to lower outstanding borrowings.
The net loss for the quarter ended January 31, 2003 amounted to $367,000 an
increased loss of $211,000 compared with a net loss of $156,000 for the same
period in the prior year. The loss for the current quarter is attributable to
low quarterly sales.
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 31, 2003. 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.
Page 9 of 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund working
capital, capital expenditures and the payment of long term debt. The Company has
relied primarily on internally generated funds, private placement proceeds,
subordinated debt and other bank debt to finance its operations. The Company's
liquidity and cash resources are significantly impaired by ongoing losses. The
opinion of the Company's auditors at the prior year end contains an explanatory
paragraph regarding the Company's ability to continue as a going concern.
Net cash provided by operations was $334,000 in the quarter ended
January 31, 2003 and $1,441,000 over the same period of the prior year. The
change from first quarter 2002 to 2003 was due slower than expected receipt of
orders from government contracts.
Net cash used in investing activities was zero and $165,000 in 2003 and
2002, respectively. The decrease was related to the acquisition of PEC in 2002
and no capital purchases in the first quarter of 2003.
Net cash provided by (used in) financing activities was $115,000 and
($91,000) in 2003 and 2002, respectively. The change from 2002 to 2003 was
related to the Company's conversion of warrants to stock.
The Company continues to have substantial debt that was due in 2002 and
2003. Although the Company is experiencing a reasonable cash flow in operations
to sustain current operations, the debt obligations of previous periods have not
been met. As a result, additional capital is required to meet its prior period
debt obligations. The Company's lack of liquidity has also adversely affected
its ability to expand its operations.
Effective January 31, 2001, DMTR LLC ("DMTR")(an entity whose managing
member is Bruce Galloway, the Company's Chairman) provided the Company with a
line of credit in the maximum amount $798,860 (the "Line of Credit").
Accordingly, the Company was initially obligated to DMTR in the aggregate amount
of $3,600,000 (comprised of $1,496,140 on the senior bank loan assigned from
Branch Banking and Trust Company (the "Senior Bank Loan"), $1,305,000 on certain
bridge financing assigned to DMTR and $798,860 on the Line of Credit). These
obligations are secured by all of the assets of the Company. In April 2001, DMTR
agreed to forgive $700,000 of principal obligations in exchange for the issuance
of 14,000,000 shares of common stock or 700,000 shares on a post reverse stock
split. On January 31, 2003, the obligations in the principal amount of $2.9
million plus accrued interest matured. As additional consideration for the
financing provided by DMTR, the Company issued a Warrant to DMTR to acquire up
to 7,000,000 shares of the common stock on a fully diluted basis with an
exercise price of $1.00 per share, to be exercised through January 31, 2007. The
exercise price was subsequently lowered to $.055 per share.
The Company was unable to repay its obligations due on January 31, 2003
and is in default on its obligations to DMTR. The Company and DMTR entered into
a Standstill Agreement, which provides for DMTR not to exercise any of its
default rights, so long as the parties negotiate in good faith to restructure
this obligation. There can be no assurance that DMTR will not seek to enforce
its remedies with respect to the obligations owed by the Company. The agreement
further provides that DMTR, in its sole discretion and at any time after
September 30, 2003, may terminate the Standstill Agreement if it determines that
the Company is no longer negotiating in good faith. The Company is also in
negotiations to receive additional financing from the members of DMTR and their
respective affiliates. There is no assurance such restructuring or additional
financing will be consummated or that it will be sufficient to ensure that the
Company can satisfy its operating expenses. Since August 1, 2003, the Company
has received proceeds of $233,403 from the exercising of warrants at the
exercise price of $.055 per share.
Page 10 of 13
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 are discussed at appropriate points
in this report and the Company's other SEC filings. Others are included in the
fact that the Company has been engaged in supplying equipment and services to
the U.S. government defense programs which are subject to special risks,
including dependence on government appropriations, contract termination without
cause, contract re-negotiations and the intense competition for available
defense business.
Page 11 of 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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 that are material have
been properly accrued for and would not materially affect the financial position
or the results of the operations of the Company except as disclosed herein.
In April 1998, the owner of the Woodland Hills, CA, premises formerly
occupied by the Company sued for the balance of all rent due through the end of
the then existing lease agreement plus damages. In March 1999, the Company
entered into a Mutual Release and Settlement Agreement wherein the Company paid
a total of $850,000 in cash and issued 150,000 shares of Common Stock,
concurrent with the release, to the owner. The Company has agreed to register
the shares of Common Stock, and under certain circumstances, the Company will
issue additional shares of Common Stock to the extent that the market price of
the Common Stock falls below certain levels. The Common Stock has been valued at
$2.50 per share. The minimum amount in guaranteed common stock of $375,000
exceeded the Market Value of the Common Stock issued by the Company under the
terms of the Agreement, so approximately 2.7 million of additional shares are
required to be issued, or 135,000 shares on a post reverse stock split basis. As
of September 30, 2003, the shares have not been issued.
Item 2. Changes in Securities and Uses of Proceeds.
None.
Item 3. Defaults upon Loan Agreements.
The Company is in default on its obligations to DMTR and has entered
into a Standstill Agreement, which provides for DMTR not to exercise any of its
default rights, while the parties negotiate to restructure this obligation. The
Company is also in negotiations to receive additional financing from the members
of DMTR and their respective affiliates. There is no such assurance the
restructuring or additional financing will be consummated.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on form 8-K: None.
Page 12 of 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Form 10-QSB to be signed on its behalf by its
duly authorized representatives.
DATAMETRICS CORPORATION
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/s/ Daniel Bertram
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name Title Date
- ------------------- ------------------------ ---------------
/s/ Daniel Bertram Chief Executive Officer October 23, 2003
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Daniel Bertram
/s/ Kenneth E. Doyle Chief Financial Officer October 23, 2003
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Kenneth E. Doyle
Page 13 of 13