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, 2004
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
--------------------------------------------------------
(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
----------------------------------------------------
(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 |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes |_| No |X|
Common Stock. $.01 Par Value -- 33,874,413 shares as of October 10, 2005.
Index to Form 10-QSB
Page No.
Part I - Financial Information --------
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheet as of January 31, 2004 3
Consolidated Statements of Operations for the three Months
Ended January 31, 2004 and January 31, 2003 4
Consolidated Statements of Cash Flows for the Three Months
Ended January 31, 2004 and January 31, 2003 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Results of Operations 10
Liquidity and Capital Resources 11-12
Item 3. Controls and Procedures 13
Part II - Other Information
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and uses of funds. 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of matters to a vote of security holders. 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Certifications 15-19
Signatures 20
2
DATAMETRICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except share data)
- --------------------------------------------------------------------------------
January 31,
2004
ASSETS
Current Assets
Cash $ 11
Accounts receivable, net of allowance for doubtful accounts of $0 325
Inventory, net of allowance for obsolete inventory of $6,063 900
Other Current Assets 35
------------
Total current assets 1,271
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 (1,917)
------------
Net Property and Equipment 1,357
Total Assets $ 2,628
============
LIABILITIES AND STOCKHOLDERS DEFICIT
Current Liabilities
Accounts Payable $ 769
Accrued Expenses 693
Deferred Revenue 292
Warranty Reserve 61
Current maturities of LT Debt 3,095
------------
Total Current Liabilities 4,910
Long-Term Liabilities
Loan Payable 760
Refinance Cost (309)
------------
Total Long Term Liabilities 451
------------
Total Liabilities $ 5,361
Stockholders deficit:
4% Cumulative Preferred Stock, $.01 par value ($940,485 aggregate liquidation
Preference); 40,000,000 Authorized; 626,990 issued and outstanding 6
Common Stock, $.01 par value; 800,000,000 shares
Authorized; 33,057,000 issued and 32,113,000 outstanding 330
Treasury Stock (943,847 shares at cost) (120)
Additional Paid In Capital 57,989
Accumulated Deficit (60,938)
------------
Total Stockholders Deficit (2,733)
Total Liabilities and Stockholders Deficit $ 2,628
============
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 per share data)
For the three months ended
January 31 January 31
------------ ------------
2004 2003
Sales $ 789 $ 597
Cost of Sales 615 373
------------ ------------
Gross Profit 174 224
Selling, General and Administrative
Personnel and Related Costs 389 404
Other 75 170
------------ ------------
Total Selling, General and Administrative 464 574
------------ ------------
Loss from Operations (290) (350)
Other income and expense (100) (17)
------------ ------------
Net Loss $ (390) $ (367)
============ ============
Loss per share of common stock;
basic and diluted $ (0.012) $ (0.023)
============ ============
Weighted average number of common shares outstanding
basic and diluted 33,057 15,983
============ ============
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, except per share data)
For the three months ended
January 31 January 31
----------------------------
2004 2003
Cash Flows from Operating Activities:
Net Loss (390) (367)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation expense 14 16
Amortization of Refinancing Costs 51 --
Expenses Paid from Preferred Stock Proceeds 20 --
Allowance for Bad Debt (25) --
Changes in assets and liabilities:
Accounts receivable (128) 197
Inventories (113) (135)
Prepaid expenses and other current assets (25) --
Accounts payable (37) (362)
Accrued expenses 20 467
Deferred Revenue (80) 520
------------ ------------
Net cash provided by operating activities (693) 336
Cash Flows from Investing Activities:
Capital expenditures for property and equipment -- --
------------ ------------
Net cash provided by (used in ) investing activities 0 0
Cash Flows from Financing Activities:
Conversion of Warrants to Common Stock -- 122
Proceeds from Issuance of Preferred Stocks 607
Payments on Long Term Debt (13) (8)
------------ ------------
Net cash provided by financing activities 594 114
Net (decrease) increase in cash (99) 450
Cash at the beginning of the period 110 97
------------ ------------
Cash at the end of the period 11 547
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest paid, net 15 18
Noncash Financing Activities
Expense paid by issuing Preferred Stock 20 --
The accompanying "Notes to Consolidated Financial Statements" form an integral
part of these statements.
5
DATAMETRICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004
(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, 2003 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, 2004 consist of the following:
(in thousands)
------------
Inventories Parts and sub-assemblies 530
Work in Process 370
Obsolete Inventory 6,063
------------
Total Inventory 6,963
Reserve for Obsolete Inventory (6,063)
------------
Net Inventory 900
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 January 31, 2004, this debt is reported
net of unamortized refinancing costs of $309,000. These costs arose from
Warrants issued as part of the negotiations to restructure the debt.
In December 2003 through July 2004 various investors purchased an
aggregate of $892,656 of the Company's Preferred Series A Stock. This stock is
convertible into shares of the Company's common stock at $.06 per share.
Additional details of the Company's debt structure appear in the 10-KSB for
fiscal year ended 10/31/2003.
In July 2005, the company was presented with a proposal from SG DMTI, LLC
("SGD"), an affiliated entity of two members of DMTR, LLC., who are also
principal shareholders of the Company. The proposal was approved by the
Company's Board of Directors. If the transactions contemplated are consummated,
SGD will provide the Company with debt and equity capital and the Company's
balance sheet will be restructured.
In July 2005, an affiliate of SGD acquired the Company's outstanding
mortgage with SouthTrust (now Wachovia) Bank. In July and August 2005, SGD
loaned the Company an aggregate of $410,000, which the Company has used to repay
taxes owed on its real estate and for working capital.
[Pursuant to the proposal, SGD intends to acquire the Company's real
property in Orlando for a price that is still being negotiated. SGD and the
Company intend to enter into a five-year triple net lease with an annual rent
obligation of approximately $150,000. The parties intend that certain
indebtedness held by affiliates of the Company in the aggregate amount of
$500,000 as well as approximately $2.9 million owed to DMTR will be converted to
equity. Also, the $892,656 of currently outstanding Series A Preferred Stock
plus accrued dividends will convert into Common Shares of the Company.
In addition, the Company and SGD have proposed that SGD loan the Company
an additional $500,000 and purchase $500,000 in Preferred Stock. SGD would also
have the ability to obtain 50% of the outstanding equity of the Company through
the exercise of a warrant for nominal additional consideration. The proposal by
SGD is currently under negotiation and there is no assurance that it will be
consummated or it may be consummated on different terms.]
Segment Data
The Company has no reportable segments. There is no segment data to be
reported.
7
4. SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
The Company has authorized the issuance of up to 1,500,000 shares of
Series A preferred stock, $.01 par value, of which 626,990 were issued during
the quarter ended January 31, 2004. The stock has voting privileges and is
redeemable at any time, solely at the option of the holder, into common stock of
the Company at a price determined by the terms disclosed in the Certificates.
The stock provides the holders the right to receive dividends payable in cash or
common stock at an interest rate of 4% per annum. The dividend is cumulative and
has priority over any other class of stock of the Company. The holders also have
certain priorities over other stockholders in the event of a liquidation of the
Company. There were no dividends in arrears at January 31, 2004.
8
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 and equipment 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, plotters and monitors.
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 this sensitive ruggedized 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, 2004, 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.
9
RESULTS OF OPERATIONS
Three Month Period Ended January 31, 2004 Compared
To Three Month Period Ended January 31, 2003
Sales for the quarter ended January 31, 2004 were $789,000, an increase of
$192,000 or 32%, compared with sales of $597,000 in the same period in the prior
fiscal year. The increase in sales for the three months ended January 31, 2004
is attributable mainly to the Company refocusing its efforts on regaining market
share of its core business - Ruggedized Equipment for Military Applications.
Cost of sales for the quarter ended January 31, 2004 was $615,000 (78% of
sales), an increase of $242,000 or 65%, compared with $373,000 (62% of sales)
for the same period in the prior fiscal year. Cost of sales increased compared
to the same period in the prior fiscal year because of the increase in the cost
of materials, direct labor, and variable manufacturing overhead directly related
to the increase in sales.
Selling, general and administrative ("SG&A") expenses for the quarter
ended January 31, 2004 were $464,000 (59% of sales) a decrease of $110,000, or
19%, compared with $574,000 (96% of sales) for the same period in the prior
fiscal year. The decrease is due largely to effective cost cutting measures that
substantially lowered costs for insurance, professional fees, and legal fees.
These measures also effectively lowered administrative and support staff
expenses throughout the Company.
Net interest expense amounted to $117,000 for the quarter ended January
31, 2004 compared with net interest expense of $17,000 for the same period in
the prior year. Even though long-term debt is lower in 2004 than 2003, interest
expense increased. In 2003, the Company was negotiating debt relief with holders
of the debt. During that time, the debt holders agreed to forgive interest
expense earned during the period of negotiation. Interest charges resumed under
the stated terms of the debt later in 2003.
The net loss for the quarter ended January 31, 2004 amounted to $390,000
an increase of $23,000 compared with a net loss of $367,000 for the same period
in the prior year. Even though the Company's loss from operations improved,
higher interest costs resulted in a larger net loss compared to 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 31, 2004. 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 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.
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 through January 2005, 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 January 31, 2005, may terminate the Standstill Agreement if it
determines that the Company is no longer negotiating in good faith. The
standstill agreement has expired but the parties are continuing to negotiate to
restructure this obligation in conjunction with the proposed financing from SG
DMTI. 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 December, 2002, the Company has received proceeds,
either in the form of cash or in lieu of other obligations such as interest
payments, the total of said proceeds amounts to $727,000 from the exercising of
warrants at the exercise price of $.055 per share [and $.075 per share] from
various members of DMTR.
In December 2003 through July 2004 various investors purchased an
aggregate of $892,656 of the Company's Preferred Series A Stock. The stock has a
cumulative dividend of four percent per annum and is convertible into shares of
the Company's common stock at $.06 per share. The consideration for such stock
consisted of $862,656 in cash and $30,000 in services. The proceeds of the
offering were used for working capital.
In July 2005, the company was presented with a proposal from SG DMTI, LLC
("SGD"), an affiliated entity of two members of DMTR, LLC., who are also
principal shareholders of the Company. The proposal was approved by the
Company's Board of Directors. If the transactions contemplated are consummated,
SGD will provide the Company with debt and equity capital and the Company's
balance sheet will be restructured.
11
In July 2005, an affiliate of SGD acquired the Company's outstanding
mortgage with SouthTrust (now Wachovia) Bank. In July and August 2005, SGD
loaned the Company an aggregate of $410,000, which the Company has used to repay
taxes owed on its real estate and for working capital.
[Pursuant to the proposal, SGD intends to acquire the Company's real
property in Orlando for a price that is still being negotiated. SGD and the
Company intend to enter into a five-year triple net lease with an annual rent
obligation of approximately $150,000. The parties intend that certain
indebtedness held by affiliates of the Company in the aggregate amount of
$500,000 as well as approximately $2.9 million owed to DMTR will be converted to
equity. Also, the $892,656 of currently outstanding Series A Preferred Stock
plus accrued dividends will convert into Common Shares of the Company.
In addition, the Company and SGD have proposed that SGD loan the Company
an additional $500,000 and purchase $500,000 in Series B Preferred Stock. SGD
would also have the ability to obtain 50% of the outstanding equity of the
Company for a nominal additional amount. The proposal by SGD is currently under
negotiation and there is no assurance that it will be consummated or it may be
consummated on different terms.]
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.
12
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.
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.
Item 2. Unregistered Sales of Equity Securities and Uses of Proceeds.
In December 2003 through July 2004 various investors purchased an
aggregate of $892,656 of the Company's Preferred Series A Stock. The stock has a
cumulative dividend of four percent per annum and is convertible into shares of
the Company's common stock at $.06 per share. The consideration for such stock
consisted of $862,656 in cash and $30,000 in services. The proceeds of the
offering were used for working capital. The sale of these securities is exempt
from registration under Rule 506 of Regulation D of the Securities Act of 1933.
Item 3. Defaults upon Senior Securities
The Company is in default on its $2,900,000 obligation 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 has been
paying the interest on this debt while negotiations continue and owes $2,900,000
principal to DMTR as of the date of this filing.
The Company is in default on $140,960 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. At the date of this
filing, the Company owed $140,960 in principal and $79,000 of accrued interest
on this debt.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
(a) Exhibits: None.
14