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 July 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
DataMetrics Corporation
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(Exact name of registrant as specified in its charter)
Delaware 95-3545701
---------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1717 Diplomacy Row
Orlando, Florida 32809
- ---------------------------------------- ----------
(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 |_|
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 -- 29,640,262 shares as of June 15, 2005.
1
Index to Form 10-QSB
Page No.
Part I - Financial Information --------
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheet as of July 31, 2003 3
Consolidated Statements of Operations for the three Months
Ended July 31, 2003 and July 28, 2002 4
Consolidated Statements of Operations for the nine Months
Ended July 31, 2003 and July 28, 2002 4
Consolidated Statements of Cash Flows for the nine Months
Ended July 31, 2003 and July 28, 2002 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Results of Operations 9-10
Liquidity and Capital Resources 11-12
Controls and Procedures 12
Part II - Other Information
Item 1. Legal Proceedings 13
Item 2. Unregistered Sales of Equity Securities and uses of funds. 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of matters to a vote of security holders. 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Certifications 14-18
Signatures 19
2
DATAMETRICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(unaudited) (in thousands, except share data)
- -------------------------------------------------------------------------------------------------
July 31,
2003
ASSETS
Current Assets
Cash $ 15
Accounts receivable, net of allowance for doubtful accounts of $25 583
Inventory, net of allowance for obsolete inventory of $4,919 2,076
------------
Total current assets 2,674
Property and Equipment
Building and improvements 1,112
Furniture, Fixtures and computer equipment 1,195
Land 420
Machinery and equipment 547
------------
Total Property and Equipment 3,274
Less Accumulated Depreciation (1,889)
------------
Net Property and Equipment 1,385
Total Assets $ 4,059
============
LIABILITIES AND STOCKHOLDERS DEFICIT
Current Liabilities
Accounts Payable $ 923
Accrued Expenses 1,423
Deferred Revenue 420
Warranty Reserve 61
Current maturities of LT Debt 3,058
------------
Total Current Liabilities 5,885
Long-Term Liabilities
Loan Payable 824
Refinance Cost (488)
------------
Total Long Term Liabilities 336
------------
Total Liabilities 6,221
Stockholders deficit:
Common Stock, $.01 par value; 800,000,000 shares
authorized; 26,959,362 shares issued and 26,015,515 outstanding 270
Treasury Stock (943,847 shares at cost) (119)
Additional Paid In Capital 57,094
Accumulated Deficit (59,407)
------------
Total Stockholders Deficit (2,162)
Total Liabilities and Stockholders Deficit $ 4,059
============
The accompanying "Notes to Consolidated Financial
Statements"form an integral part of these statements.
3
DATAMETRICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION
(unaudited) (in thousands, except share data)
Three Months Ended Nine Months Ended
July 31, July 28 July 31, July 28
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales 935 829 2,669 3,864
Cost of Sales 662 591 1,821 1,727
------------ ------------ ------------ ------------
Gross Profit 273 238 848 2,137
Selling, general and administrative expenses 503 1,073 1,628 2,680
Write down of Inventory 603 -- 603
------------ ------------ ------------ ------------
Income (Loss) from Operations (230) (1,438) (780) (1,146)
Other income and expense 60 (117) (84) (785)
------------ ------------ ------------ ------------
Net Income (Loss) $ (170) $ (1,555) $ (864) $ (1,931)
============ ============ ============ ============
basic and diluted $ (0.007) $ (0.156) $ (0.044) $ (0.416)
============ ============ ============ ============
Weighted avg. no. of shares outstanding
basic and diluted 23,980 9,939 19,690 4,641
============ ============ ============ ============
The accompanying "Notes to Consolidated Financial
Statements" form an integral part of these
statements.
4
DATAMETRICS CORPORATION
AND SUBSIDIARY
CONSOLIDATED CASH FLOWS STATEMENTS
(unaudited) (in thousands)
July 31 July 28
2003 2002
------------ ------------
Net cash provided by (used in) operating activities (247) 84
Net cash provided by (used in) financing activities 165 (20)
------------ ------------
Net increase (decrease) in cash (82) 64
Cash at the beginning of the period 97 246
------------ ------------
Cash at the end of the period 15 310
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for Interest, net: 91 219
Treasury stock obtained when associates surrendered stock certificates in
exchange for forgiveness of advances owed to the
Company 119 --
Cost of Refinancing paid by exercise of Warrants 513 --
Expenses paid by exercise of Warrants 270 --
Issuance of Warrants to acquire Peripheral Equipment Corporation -- 1,204
Conversion of 96% of the 10% Subordinated Notes and all of the 12% Senior
Convertible Notes and all related accrued interest
into Common Stock 7,180
The accompanying Notes to Consolidated Financial Statements" form
an integral part of these statements.
5
DATAMETRICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2003
(Unaudited)
1. The consolidated financial statements include the accounts of DataMetrics
Corporation and its wholly owned subsidiary (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 July 31, 2003 consist of the following:
(in thousands)
-------------------
Inventories Parts and sub-assemblies 1,822
Work in Process 254
Obsolete Inventory 4,919
-------------------
Total Inventory 6,995
Reserve for Obsolete Inventory (4,919)
-------------------
Net Inventory 2,076
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.
6
3. DEBT STRUCTURE / SUBSEQUENT EVENTS
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. As of February 25, 2005, various members of DMTR, LLC, former senior
priority note-holders, and several others exercised approximately 11,782,455
warrants. Proceeds from those exercised prior to July 31, 2003 were used to pay
overdue interest expense and other obligations of the Company of approximately
$784,000 and provided cash inflow of $193,000 to the Company. 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. Pursuant to a standstill agreement,
as amended, the creditor may terminate the negotiations and the Standstill
Agreement at any time after January 31, 2005 at its sole discretion if it
determines that the Company is no longer negotiating in good faith to
restructure the Company's obligations to the creditor. Negotiations for the
restructure are ongoing at this time. At July 31, 2003, this debt is reported
net of unamortized refinancing costs of $488,000. These costs arose from
Warrants issued as part of the negotiations to restructure the debt. Additional
details of the Company's debt structure appears in the 10-KSB for fiscal year
ended 10/31/2002.
4. Segment Data
The Company has no reportable segments. There is no segment data to be
reported.
7
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 nine months ended July 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.
8
RESULTS OF OPERATIONS
Three Month Period Ended July 31, 2003 Compared
To Three Month Period Ended July 27, 2002
Sales for the quarter ended July 31, 2003 were $935,000 an increase of
$106,000 or 13%, compared with sales of $829,000 in the same period in the prior
fiscal year.
Cost of sales for the quarter ended July 31, 2003 was $662,000 (71% of
sales), an increase of $71,000 or 12%, compared with $591,000 (71% of sales) for
the same period in the prior fiscal year. Gross profit percentage for 2003 was
29%, compared with a gross profit percentage of 29% for the same period in 2002.
Selling, general and administrative ("SG&A") expenses for the quarter
ended July 31, 2003 were $503,000 (54% of sales) a decrease of $570,000, or 53%,
compared with $1,073,000 (129% of sales) for the same period in the prior fiscal
year. The Company reevaluated its labor cost in 2003 and determined that certain
employee functions were more accurately reflected as cost of sales expense, as
opposed to selling, general and administrative expense as reported in 2002. The
decrease is due to lower administrative and support staff expenses throughout
the Company and labor reclassifications, as explained above, which caused SGA
expense to fluctuate significantly from 2002 to 2003.
Net interest expense amounted to $107,000 for the quarter ended July 31,
2003 compared with net interest expense of $117,000 for the same period in the
prior year. This decrease is due to lower outstanding borrowings, restructuring
of long term debt and conversion of debt to equity.
The loss for the quarter ended July 31, 2003 amounted to $170,000, a
decrease of 89% compared with a net loss of $1,555,000 for the same period in
the prior year. The decrease in loss for the current quarter is attributable to
significantly smaller inventory adjustments and reduction in SG&A expense as
stated above.
Nine Month Period Ended July 31, 2003 Compared
To Nine Month Period Ended July 28, 2002
Sales for the nine months ended July 31, 2003 were $2,669,000 a decrease
of $1,195,000 or 31%, compared with sales of $3,864,000 in the same period in
the prior fiscal year. The decrease in sales for the nine months ended July 31,
2003 is primarily attributable to the 3M hardware and intellectual property sale
recognized in the first six months of 2002 that was in excess of one million
dollars.
Cost of sales for the nine months ended July 31, 2003 was $1,821,000 (68%
of sales), an increase of $94,000 or 5%, compared with $1,727,000 (45% of sales)
for the same period in the prior fiscal year. Gross profit percentage for 2003
was 32%, compared with gross profit percentage of 55% for the same period in
2002. The lower gross profit in 2003 is primarily attributable to the 3M
hardware and intellectual property sale recognized in the first six months of
2002 that was in excess of one million dollars and with relatively no costs
associated with the revenue.
Selling, general and administrative ("SG&A") expenses for the nine months
ended July 31, 2003 were $1,628,000 (61% of sales) a decrease of $1,052,000, or
39%, compared with $2,680,000 (69% 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. Another significant factor resulting in the
much higher SG&A expenses the same period during the prior fiscal year was the
assimilation of PEC and expenses associated with issuing stock and warrants.
Net interest expense amounted to $251,000 for the nine months ended July
31, 2003 compared with net interest expense of $616,000 for the same period in
the prior year. This decrease is due to lower outstanding borrowings and
restructuring of long term debt.
9
The net loss for the nine months ended July 31, 2003 amounted to $864,000 a
decrease in losses of $1,067,000 compared with a net loss of $1,931,000 for the
same period in the prior year. The reduced loss for the current period is
attributable to significantly smaller write-downs and lower costs of 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 July 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.
10
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.
The Company continues to have substantial debt that was due in 2002 and
2003. Although the Company has generated cash flow 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 $.075 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 $.075 per share.
In December 2003 through February 2004 various investors purchased an
aggregate of $862,653 of the Company's Preferred Series A Stock. This stock is
convertible into shares of the Company's common stock at $.06 per share.
DataMetrics has signed a letter of intent to sell the building located
at 1717 Diplomacy Row, Orlando, FL. 32809 to DMTR, LLC, and will lease back the
property for its continued operations. A portion of the proceeds of the sale
will reduce the obligations owed by the Company to DMTR, LLC, by the amount of
$1,200,000.
11
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.
Item 3. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Under the supervision and with
the participation of our management, including our principal executive and
financial officer, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined in
Rule 13a-15(e) or Rule 15d-15(e) under the U.S. Securities Exchange Act of 1934,
as amended) within 90 days of the filing date of this quarterly report and,
based on their evaluation, our principal executive and financial officer have
concluded that these controls and procedures are not effective and do not meet
the requirements thereof. This is a result of frequent turnovers experienced in
Accounting and Finance Personnel and difficulties encountered with the
implementation of the Company's new accounting software. We are, however,
working diligently on having these requirements met.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive and
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Control Over Financial Reporting. There were no
significant changes in our internal control over financial reporting identified
in connection with the evaluation required by Exchange Act Rule 13a-15(d) or
Rule 15d-15(d) that occurred during the period covered by this quarterly report,
or to our knowledge in other factors, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
12
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.
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 April 21, 2005, the shares have not been issued.
Item 2. Unregistered Sales of Equity Securities and Uses of Proceeds.
None.
Item 3. Defaults upon Senior Securities
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, unless DMTR determines, in its sole discretion, that the parties
are no longer negotiating in good faith 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.
The Company is in default on one of its 10% Notes that matured at the
end of 2001. The parties have had various negotiations in the past to settle.
There is no assurance that this can be settled.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
(a) Exhibits: None.
13