Datametrics to Get Cash Infusion of $2.75 Million
After years of struggling to stay afloat, Chatsworth-based Datametrics Monday announced an agreement with two venture capital firms that will give it $2.75 million in much-needed working capital in exchange for what eventually will be a controlling 39.5% stake in the company.
For Datametrics, one of two principal makers of computer printers for the military, the capital infusion will mean its assets exceed liabilities for the first time in five years. The company also announced that it caught up on its long-term debt payments, on which it defaulted Oct. 31.
The light at the end of the tunnel has been a long time in coming for Datametrics. Despite profits in fiscal 1983 and 1984, the red ink returned in fiscal 1985, when the company lost $1.3 million on sales of $13.3 million for the 12 months ended Oct. 31.
Little Working Capital
For the past five years, Datametrics has had little or no working capital, the funds a business uses in its day-to-day operations. Working capital is a measure of solvency, and companies that don’t have any don’t always survive.
Datametrics survived by generating cash flow with growing sales and persuading its lender, Security Pacific, to stay with it. But things haven’t been easy: “It was hairy enough,” chief financial officer Keet Johnson said.
The problems at cash-starved Datametrics were many. Six years ago, it made two ill-fated acquisitions from which it is only now recovering. Last year the company stumbled into production problems when operations were snarled by a recalcitrant computerized inventory system that led to parts shortages. Staff members were added to solve the problem, but that only inflated costs.
Besides, during 1982 the company’s stock was delisted from the over-the-counter trading system, and, in 1983, three Datametrics executives were accused by the Securities and Exchange Commission of securities violations that resulted in a consent agreement.
“It was touch and go for a long time,” said Thomas Berghage, research director at First Affiliated Securities in San Diego.
Monday’s announcement, however, was one of several signs that the company may be recovering. Garland S. White, Datametrics’ tenacious president and chief executive, said the company recently landed three major defense contracts. He said government rules bar further disclosures about the contracts.
Berghage said he expects the company to show net income of $300,000 for the quarter ended Jan. 31. Datametrics’ earlier failings left it with huge tax losses good for future tax breaks.
Money Tight
But Datametrics’ picture is hardly rosy: Money is so tight that it has had trouble completing an updated 1985 audit because it couldn’t pay its accounting firm.
Datametrics got into the military printer business in 1967, when investor Richard W. Muchmore brought fresh capital to the company and took over as chairman, a post he continues to hold.
Founded by White in 1962, the company had been designing advanced electronics systems for defense contractors, and computer printers were a natural extension.
White, 57, is a Berkeley-trained electrical engineer who specialized in computers. He designed some early airborne computers for jet planes.
Datametrics started selling its special printers in 1969. After several slow years, business took off. From 1975 through 1979, sales and profits grew an average of 40% a year, White said.
2 Firms Dominate
Now Datametrics and Miltope Corp. of Melville, N. Y., dominate the market for printers durable enough to be used on submarines, warships and airplanes.
Miltope President Richard Pandolfi, who reported that his company is the leader with more than $15 million in military printer sales in 1985, said the two companies have a combined 80% of the market, which is estimated to be about $35 million.
White believes the increasing use of computers by the military can only help Datametrics. He said the quality of the company’s work is reflected by Japan Air Lines’ purchase of its printers for use in cockpits, even though the Japanese dominate the commercial computer printer market.
Datametrics ran into problems in 1979, when it decided to diversify ever so slightly. It acquired Micro Business Applications, a fledgling microcomputer company, and Malibu Electronics, which made an advanced commercial printer.
Micro Business, however, never really got off the ground, and Malibu’s printer was stalled by production problems and a lack of capital. The two companies caused Datametrics to lose $6.2 million in fiscal 1981 and $1.9 million in the next 12 months. Datametrics was forced to close Micro Business and sell Malibu.
In the summer of 1982, White said, Datametrics was left with a negative net worth of $4.5 million.
SEC Accusations
The acquisitions have been a source of woe ever since. On Sept. 12, 1983, the SEC accused the company, White and two other Datametrics executives of violations, including failure to recognize losses promptly, failure to record returns of Malibu printers and recording as sales unsold Malibu printers that were shipped to dealers.
Without admitting or denying guilt, the company and its executives consented to an injunction barring future securities-law violations. White said that the company did nothing wrong and that it couldn’t afford the legal costs of fighting the case.
At one point, Datametrics tried to get a $500,000 government grant as an endangered company vital to the national defense. After nine months of paper work, Datametrics won the designation but, because White wouldn’t certify that the business would fail without the grant, he didn’t get the money.
Companies in Datametrics’ straits don’t always survive, but they can avoid collapse by juggling what assets they have, paying the most important bills first, getting their creditors to extend loans and generating cash, all of which Datametrics has done.
In the words of Larry Gray, who heads the Woodland Hills office of the accounting firm of Ernst & Whinney: “You can lose money and still survive.”
One way to survive is to increase sales, which produces cash, if not profits. Datametrics’ sales climbed from $5.8 million in 1982 to $11 million in 1983 and to $13.4 million in 1984.
Some Profits Recorded
Aided by tax benefits from earlier losses, Datametrics also made some profits: $1.4 million in 1984 and $1.1 million the year before. But the inventory and production problems hurt last year, reducing sales and causing another loss. The company also fell behind with some of its suppliers, Johnson said.
In September, the company laid off 60 workers after determining that the new hires weren’t solving its problems.
The 1985 loss was a blow, but the new venture capital investment disclosed Monday will more than make up for it. The money will come from Boston-based Investments Orange Nassau Inc. and New York-based Alan Patricof Associates.
The firms signed a letter of intent with Datametrics to buy $2.75 million in newly issued Datametrics bonds. These will be exchanged for convertible preferred stock amounting to a stake of 39.5% once the new shares are authorized at Datametrics’ annual meeting this spring.
W. R. Bottoms, a partner with Alan Patricof Associates, said each of the venture firms will take a seat on Datametrics’ board. He said the roles of Muchmore and White will remain unchanged.
“The objective is to provide the resources to give Datametrics a chance to expand in its market,” Bottoms said.
John Blackburn, a partner with Orange Nassau, said his firm chose Datametrics because its rugged-printer technology is superior and its customers are loyal. He also predicted that military electronics spending will grow despite federal budget deficits.
