UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2002.
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 no. 0-6272
DATUM INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) | 95-2512237 (I.R.S. Employer Identification No.) |
9975 Toledo Way, Irvine, CA (Address of principal executive offices) | 92618-1819 (Zip code) |
(949) 598-7500
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by a 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 the filing requirements for the past 90 days. YES x. NO ¨.
The registrant had 6,250,961 shares of common stock outstanding as of May 6, 2002.
Part I. | Financial Information | |||
Item 1. | 3 | |||
Item 2. | 10 | |||
Item 3. | 13 | |||
Part II. | Other Information | |||
Item 6. | 14 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
March 31, | December 31, | |||||
2002 | 2001 | |||||
(unaudited) | ||||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 2,982 | $ | 2,381 | ||
Restricted cash | $ | 1,072 | 1,828 | |||
Accounts receivable, less allowance for doubtful accounts of $671 and $574 | 20,096 | 25,479 | ||||
Inventories | ||||||
Purchased parts | 12,025 | 14,247 | ||||
Work-in-process | 8,247 | 7,440 | ||||
Finished products | 6,969 | 6,786 | ||||
27,241 | 28,473 | |||||
Prepaid expenses | 762 | 468 | ||||
Deferred income taxes | 3,158 | 3,158 | ||||
Income tax refund receivable | 3,696 | 2,222 | ||||
Total current assets | 59,007 | 64,009 | ||||
Plant and equipment | ||||||
Land | 2,040 | 2,040 | ||||
Buildings | 7,722 | 5,867 | ||||
Equipment | 25,064 | 25,997 | ||||
Leasehold improvements | 1,119 | 1,362 | ||||
35,945 | 35,266 | |||||
Less accumulated depreciation and amortization | 21,787 | 21,221 | ||||
14,158 | 14,045 | |||||
Deferred income taxes | 374 | 374 | ||||
Excess of purchase price over net assets acquired, net of accumulated amortization of $11,459 and $11,459 | 8,549 | 8,549 | ||||
Capitalized software development costs | 2,733 | 2,379 | ||||
Other assets | 807 | 831 | ||||
$ | 85,628 | $ | 90,187 | |||
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
March 31, 2002 | December 31, 2001 | |||||||
(unaudited) | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 5,223 | $ | 7,041 | ||||
Accrued salaries and wages | 2,901 | 3,047 | ||||||
Accrued warranty | 1,481 | 1,577 | ||||||
Other accrued expenses | 670 | 998 | ||||||
Deferred revenue | 347 | 314 | ||||||
Current portion of long-term debt | 1,060 | 1,810 | ||||||
Total current liabilities | 11,682 | 14,787 | ||||||
Long-term debt | 2,635 | 2,635 | ||||||
Postretirement benefits | 1,208 | 1,239 | ||||||
Other long-term liabilities | 716 | 674 | ||||||
Stockholders’ equity | ||||||||
Preferred stock, par value $.25 per share | ||||||||
Authorized—1,000,000 shares | ||||||||
Issued—none | — | — | ||||||
Common stock, par value $.25 per share | ||||||||
Authorized—10,000,000 shares | ||||||||
Issued—6,243,518 shares in 2002 | ||||||||
6,209,721 shares in 2001 | 1,561 | 1,552 | ||||||
Additional paid-in capital | 53,984 | 53,619 | ||||||
Retained earnings | 15,000 | 16,704 | ||||||
Unamortized stock compensation | (125 | ) | (224 | ) | ||||
Accumulated other comprehensive loss | (1,033 | ) | (799 | ) | ||||
Total stockholders’ equity | 69,387 | 70,852 | ||||||
$ | 85,628 | $ | 90,187 | |||||
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31, | ||||||||
2002 | 2001 | |||||||
Net sales | $ | 15,795 | $ | 32,252 | ||||
Operating expenses: | ||||||||
Cost of sales | 10,417 | 17,461 | ||||||
Selling | 3,626 | 4,058 | ||||||
Product development | 3,079 | 3,791 | ||||||
General and administrative | 3,371 | 3,987 | ||||||
Operating income (loss) | (4,698 | ) | 2,955 | |||||
Interest expense | 51 | 119 | ||||||
Interest income | (19 | ) | (36 | ) | ||||
Income (loss) before income taxes | (4,730 | ) | 2,872 | |||||
Income tax provision (benefit) | (3,028 | ) | 1,119 | |||||
Net income (loss) | $ | (1,702 | ) | $ | 1,753 | |||
Net income (loss) per common share: | ||||||||
Basic | $ | (0.27 | ) | $ | 0.29 | |||
Diluted | $ | (0.27 | ) | $ | 0.28 | |||
Shares used in per share calculation: | ||||||||
Basic | 6,221 | 6,084 | ||||||
Diluted | 6,221 | 6,364 | ||||||
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2002 | 2001 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (1,702 | ) | $ | 1,751 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 887 | 916 | ||||||
Amortization of capitalized software development costs | 104 | — | ||||||
Amortization of goodwill | — | 531 | ||||||
Contribution of shares of common stock to the Company’s 401(k) plan | 188 | 211 | ||||||
Non-cash compensation | 100 | 15 | ||||||
Income tax benefit from stock options exercised | 14 | 111 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease in accounts receivable | 5,383 | 4,040 | ||||||
(Increase) decrease in inventories | 1,232 | (1,710 | ) | |||||
Increase in income tax receivable | (1,474 | ) | — | |||||
Increase in prepaid expenses | (294 | ) | (308 | ) | ||||
Increase in other assets | 24 | 39 | ||||||
Increase (decrease) in accounts payable | (1,818 | ) | 569 | |||||
Decrease in accrued expenses | (573 | ) | (556 | ) | ||||
Increase in deferred revenue | 33 | — | ||||||
Decrease in income taxes payable | — | (963 | ) | |||||
Increase (decrease) in postretirement benefits | (31 | ) | 74 | |||||
Increase (decrease) in other long-term liabilities | 42 | (72 | ) | |||||
Total reconciling items | 3,817 | 2,897 | ||||||
Net cash provided by operating activities | 2,115 | 4,648 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (1,019 | ) | (1,126 | ) | ||||
Capitalized software development costs | (457 | ) | (403 | ) | ||||
Net cash used by investing activities | (1,476 | ) | (1,529 | ) | ||||
Cash flows from financing activities: | ||||||||
Reduction of line of credit | — | (1,938 | ) | |||||
Payments of long-term debt | (750 | ) | (750 | ) | ||||
Decrease in restricted cash | 756 | — | ||||||
Proceeds from exercise of stock options | 91 | 169 | ||||||
Proceeds from ESP plan | 80 | 98 | ||||||
Net cash provided by (used for) financing activities | 177 | (2,421 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (215 | ) | (125 | ) | ||||
Net increase in cash and cash equivalents | 601 | 573 | ||||||
Cash and cash equivalents at beginning of period | 2,381 | 1,017 | ||||||
Cash and cash equivalents at end of period | $ | 2,982 | $ | 1,590 | ||||
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE A—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and, therefore, do not include all information and footnotes which would be presented were such financial statements prepared in accordance with generally accepted accounting principles. The condensed consolidated balance sheet at December 31, 2001 was derived from the audited consolidated balance sheet at that date which is not presented herein.
In the opinion of management, the accompanying financial statements reflect all adjustments, which are normal and recurring, necessary to provide a fair presentation of the results for the interim period presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. Operating results for interim periods are not necessarily indicative of operating results for an entire year.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
NOTE B—EARNINGS PER SHARE
Net income per share-basic excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Net income per share-diluted reflects the potential dilutive effect, calculated using the treasury stock method, of additional common shares that are issuable upon exercise of outstanding stock options and stock warrants as follows (in thousands):
Three months ended March 31, | ||||
2002 | 2001 | |||
Basic shares outstanding (weighted average) | 6,221 | 6,084 | ||
Effect of dilutive securities | — | 280 | ||
Diluted shares outstanding | 6,221 | 6,364 | ||
Options outstanding during the three months ended March 31, 2002 and 2001 to purchase approximately 695,000 and 285,000 shares of common stock, respectively, were not included in the computation of dilutive securities because inclusion would be anti-dilutive.
NOTE C—COMPREHENSIVE INCOME
Total comprehensive income (loss) was $(1.9) million and $1.6 million for the three months ended March 31, 2002 and 2001, respectively. The difference from net income as reported is the change in cumulative translation adjustment.
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NOTE D—SEGMENT AND RELATED INFORMATION
The Company has four reportable segments: Wireless; Wireline; Timing, Test and Measurement (TT&M); and Trusted Time. The Wireless segment, in Irvine, CA, produces equipment primarily for the wireless telecommunications market. The Wireline segment, in Austin, TX and Hofolding, Germany, manufactures products primarily for the wireline telecommunications market. In Beverly, MA, the TT&M segment, goods are produced for the enterprise computing, test and measurement, telecommunications and satellite markets. The Trusted Time segment, in Lexington, MA, produces products for the eBusiness market.
The Company evaluates performance of its segments and allocates resources to them based on segment operating income. Segment operating income does not include corporate expenses, amortization of goodwill and intersegment profit elimination. Identifiable assets include accounts receivable, inventories, and land, building and equipment and do not include cash, income tax refund receivable and deferred income taxes, prepaid expenses, goodwill and other long-term corporate assets.
The tables below present information about reported segments for the quarters ended March 31 (amounts in thousands):
Segment Sales
Wireless | Wireline | TT&M | Trusted Time | Total | ||||||||||||||||
2002 | ||||||||||||||||||||
Total sales | $ | 5,993 | $ | 7,066 | $ | 4,940 | $ | 409 | $ | 18,408 | ||||||||||
Intersegment sales | (1,491 | ) | (105 | ) | (992 | ) | (25 | ) | (2,613 | ) | ||||||||||
Outside sales | $ | 4,502 | $ | 6,961 | $ | 3,948 | $ | 384 | $ | 15,795 | ||||||||||
2001 | ||||||||||||||||||||
Total sales | $ | 12,460 | $ | 18,444 | $ | 6,491 | $ | 203 | $ | 37,598 | ||||||||||
Intersegment sales | (2,348 | ) | (1,515 | ) | (1,474 | ) | (9 | ) | (5,346 | ) | ||||||||||
Outside sales | $ | 10,112 | $ | 16,929 | $ | 5,017 | $ | 194 | $ | 32,252 | ||||||||||
Segment Operating Income (Loss)
Wireless | Wireline | TT&M | Trusted Time | Total | ||||||||||||||||
2002 | $ | (584 | ) | $ | (275 | ) | $ | (1,947 | ) | $ | (673 | ) | $ | (3,479 | ) | |||||
2001 | $ | 2,058 | $ | 3,265 | $ | 461 | $ | (907 | ) | $ | 4,877 |
A reconciliation of segment operating income to consolidated amounts as reported for the quarters ended March 31:
2002 | 2001 | |||||||
Segment operating income | $ | (3,479 | ) | $ | 4,877 | |||
Corporate expenses | (1,342 | ) | (1,454 | ) | ||||
Amortization of goodwill | — | (531 | ) | |||||
Intercompany profit elimination | 123 | 63 | ||||||
Consolidated operating income | $ | (4,698 | ) | $ | 2,955 | |||
The table below presents identifiable segments assets as of March 31, 2002 compared to prior year end:
Identifiable Segment Assets
Wireless | Wireline | TT&M | Trusted Time | Total | |||||||||||
March 31, 2002 | $ | 16,722 | $ | 20,821 | $ | 20,523 | $ | 3,491 | $ | 61,558 | |||||
December 31, 2001 | $ | 18,989 | $ | 22,262 | $ | 22,560 | $ | 3,791 | $ | 67,602 |
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NOTE E—DEBT
On May 29, 2001, the Company renewed its credit facility with Wells Fargo Bank. The credit facility expires May 29, 2003. The credit facility with Wells Fargo Bank is not to exceed $16.0 million and includes a line of credit and a term loan that funded July 7, 2000, the balance of which was $1.0 million at March 31, 2002. The term loan is payable in monthly principal installments of $250 thousand plus interest, which began August 1, 2000. Interest on the term loan is fixed at 9.15%. Interest on the line of credit is payable monthly at prime or at LIBOR plus 2.0%. On June 1, 2001, the Massachusetts Development Finance Agency issued a $2.7 million industrial development bond on the Company’s behalf to finance the expansion of the Datum TT&M manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest as determined by the remarketing agent for each rate period to be the lowest rate which in its judgment would permit the sale of the bonds at par. The bond is collateralized by a letter of credit issued under the Company’s credit facility with Wells Fargo Bank. As of March 31, 2002, the Company was in violation of two debt covenants with Wells Fargo Bank. The Company is not allowed a loss in excess of $0.5 million in any fiscal quarter and must maintain an EBITDA coverage ratio of at least 2.0:1 at any measurement period. The Company has received a waiver for these covenant violations.
NOTE F—RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 141, “Business Combinations,” (FAS 141) and Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FAS 142). FAS 141 establishes new accounting and reporting standards for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 142 establishes new standards for goodwill acquired in a business combination, eliminates amortization of goodwill and sets forth methods for periodically evaluating goodwill for impairment. The Company adopted the provisions of these statements in the quarter ended March 31, 2002. The implementation of FAS 142 resulted in a reduction of goodwill amortization of approximately $225 thousand per quarter beginning in 2002. The impact from implementing FAS 141 was not material to the Company’s financial position or results of operations. The following unaudited pro forma summary presents the Company’s net income and per share information as if the Company had been accounting for its goodwill under SFAS No. 142 for all periods presented:
Three Months Ended March 31, | ||||
2002 | 2001 | |||
Reported net income | $ (1,702) | $ 1,753 | ||
Add back goodwill amortization, net of tax | — | 445 | ||
Adjusted net income | $ (1,702) | $ 2,198 | ||
Adjusted basic earnings per share | $ (0.27) | $ 0.36 | ||
Reported diluted earnings per share | $ (0.27) | $ 0.28 | ||
Add back goodwill amorization, net of tax | — | 0.07 | ||
Adjusted diluted earnings per share | $ (0.27) | $ 0.35 | ||
In June 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” (FAS 143). FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt the provisions of FAS 143 no later than the first quarter of its fiscal year 2003. The Company is currently evaluating the impact of adopting FAS 143.
In August 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (FAS 144). FAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS 144 supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the account and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends ARB No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company adopted the provisions of FAS 144 in the quarter ended March 31, 2002. The impact from implementing FAS 144 was not material to the Company’s financial position or results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in the Company’s Annual Report to Stockholders on Form 10-K for the year ended December 31, 2001.
INTRODUCTORY NOTE
All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it can give no assurance that such expectations will prove to have been correct. The Company makes no undertaking to correct or update any such statements in the future. Important factors that could cause actual results to differ materially from the expectations (“Cautionary Statements”) are set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as in, or incorporated by reference in, the Annual Report on Form 10-K for the year ended December 31, 2001. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.
Overview
We are a leading supplier of precise timing solutions for telecommunications and computing networks, satellite systems, electronic commerce, and test and measurement applications. We design, manufacture or contract for manufacture, and market a wide variety of high-performance time and frequency products for telecommunications systems, enterprise computing networks, time stamping for electronic commerce, satellites and a variety of other test and measurement applications. Our products are used to synchronize the flow of information in telecommunications networks and numerous other applications.
In 1971, we invented the rubidium oscillator. Since that time, we have manufactured time and frequency devices, such as cesium clocks, for satellites, including Global Positioning System (GPS) satellites—the orbiting network of satellites that provide pinpoint timing and navigation information to military, transportation industry and other government and commercial users worldwide.
In addition, we provide time and frequency products and systems for a wide range of scientific and industrial test and measurement applications, including missile guidance, geographic mapping and electric utility operations. Through the manipulation of cesium or rubidium atoms or quartz crystals, or by capturing cesium or rubidium-based signals transmitted from GPS satellites, our products generate highly precise timing and frequency information. Using this technology, our products can provide accurate time to within a fraction of one second over 100,000 years.
We also supply approximately 65% of the high-precision rubidium atomic clocks used in the network base stations that channel communications over cellular telephone and other personal communications services, such as pagers. The market for our communications network time and frequency products are currently expanding as a result of the conversion from analog to digital systems and as a result of the expansion of cellular and personal communications systems networks.
We are currently exploring market opportunities for new application for our timing technologies. One of these opportunities is encrypted trusted time. In order for businesses to be able to conduct an increasing variety of transactions over the Internet, businesses need to be able to verify that the electronic commerce transactions took place between the parties thereto and are legally enforceable. Encrypted trusted time is a new application for our precision timing technology for which we are developing hardware and software products that will provide irrefutable time stamps for electronic commerce transactions. This capability will provide legally admissible evidence that the transaction in question took place between the parties.
We were incorporated in California in 1959 and reincorporated in Delaware in 1987. Our principal executive
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offices are located at 9975 Toledo Way, Irvine, California 92618-1819, and our telephone number is (949) 598-7500. Our web site is located at http://www.datum.com.
A small number of customers account for a substantial portion of the Company’s net sales and the Company expects that a limited number of customers will continue to represent a substantial portion of net sales for the foreseeable future. There can be no assurance that a major customer will not reduce, delay or eliminate its purchases from the Company. Any such reduction, delay or loss in orders could have a material adverse effect on the Company’s business, financial condition and results of operations.
Results of Operations
Net sales. Net sales decreased $16.5 million, or 51.0%, to $15.8 million for the quarter ended March 31, 2002 from $32.3 million for the corresponding quarter in 2001. Net sales in the wireline synchronization segment decreased $10.0 million or 58.9%, net sales in the wireless segment decreased $5.6 million or 55.5% and net sales in the timing, test and measurement segment decreased $1.1 million or 21.3% for the quarter ended March 31, 2002 compared to the corresponding quarter of 2001. The decline in the wireline synchronization business was concentrated in the domestic market as the service providers continued to lower their budgets for capital expenditures. Sales to the Company’s largest customer, Lucent Technologies, Inc., decreased to 17% of net sales in the quarter ended March 31, 2002 from 28% of net sales in the quarter ended March 31, 2001. This decrease of $6.3 million, or 70%, was primarily in the wireless segment. Net sales in the TT&M segment were negatively impacted by increases in cost to complete estimates in the quarter ended March 31, 2002 for the segment’s contract revenues, which are recognized on a percentage of completion basis. These increases in estimated costs to complete caused a reduction of net sales of $1.2 million.
Gross margin. Gross margin decreased to 34.0% for the quarter ended March 31, 2002 from 45.9% for the corresponding quarter in 2001. Gross margins in the quarter ended March 31, 2002 were negatively impacted by the aforementioned $1.2 million revenue adjustment. The balance of the decrease in gross margin was primarily caused by the decrease in manufacturing volumes, causing the manufacturing overhead to be absorbed over a lower unit volume.
Selling expense. Selling expense decreased to $3.6 million for the quarter ended March 31, 2002 from $4.1 million for the corresponding quarter in 2001. As a percentage of net sales, selling expense increased to 23.0% for the quarter ended March 31, 2002 from 12.6% for the corresponding quarter in 2001. The increase was primarily due to the fixed component of sales costs becoming a higher percentage of a lower volume of net sales.
Product development. Product development expense decreased 18.8% to $3.1 million for the quarter ended March 31, 2002 from $3.8 million in 2001. The decrease was primarily due to headcount reductions of employees and contract labor in the wireline segment. As a percentage of net sales, product development expense increased to 19.5% for the quarter ended March 31, 2002 from 11.8% for the corresponding quarter of 2001.
General and administrative. General and administrative expense decreased 15.5% to $3.4 million for the quarter ended March 31, 2002, from $4.0 million for the corresponding quarter of 2001. The quarter ended March 31, 2002 included approximately $0.6 million of severance charges, offset by lower incentive accruals, $0.2 million of goodwill amortization eliminated due to the implementation of FAS 142 and an additional $0.3 reduction in goodwill amortization related to the July 1999 acquisition of Digital Delivery, the balance of which was written off in the quarter ended June 30, 2001. As a percentage of net sales, general and administrative expense increased to 21.3% for the quarter ended March 31, 2002, from 12.4% for the corresponding quarter of 2001.
Interest, net. Net interest expense decreased by $51 thousand to $32 thousand for the quarter ended March 31, 2002 from $83 thousand for the corresponding quarter of 2001.
Income tax provision (benefit). The income tax benefit was $3.0 million for the quarter ended March 31, 2002, a $4.1 million change from the $1.1 million income tax provision for the corresponding quarter of 2001. The benefit for the quarter ended March 31, 2002 was derived by considering the Company’s effective tax rate on the loss projected for 2002, plus the additional benefit of $0.7 million of additional prior year research and
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development tax credits as the result of the completion of a study in the quarter ended March 31, 2002. The Company also has recurring tax credits generated by research and development performed during 2002.
Shares outstanding. Shares outstanding increased for the quarter ended March 31, 2002 as a result of shares issued through the Company’s 401(k), Employee Stock Purchase Plan and incentive stock option plans.
Liquidity and Capital Resources
On May 29, 2001, the Company renewed its credit facility with Wells Fargo Bank. The credit facility expires May 29, 2003. The credit facility with Wells Fargo Bank is not to exceed $16.0 million and includes a line of credit and a term loan that funded July 7, 2000, the balance of which was $1.0 million at March 31, 2002. The term loan is payable in monthly principal installments of $250 thousand plus interest, which began August 1, 2000. Interest on the term loan is fixed at 9.15%. Interest on the line of credit is payable monthly at prime or at LIBOR plus 2.0%. On June 1, 2001, the Massachusetts Development Finance Agency issued a $2.7 million industrial development bond on the Company’s behalf to finance the expansion of the Datum TT&M manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest as determined by the remarketing agent for each rate period to be the lowest rate which in its judgment would permit the sale of the bonds at par. The bond is collateralized by a letter of credit issued under the Company’s credit facility with Wells Fargo Bank. As of March 31, 2002, the Company was in violation of two debt covenants with Wells Fargo Bank. The Company is not allowed a loss in excess of $0.5 million in any fiscal quarter and must maintain an EBITDA coverage ratio of at least 2.0:1 at any measurement period. The Company has received a waiver for these covenant violations.
The Company believes that its cash and credit facilities are adequate to fund the Company’s operations for the foreseeable future. Should there be no improvement in telecommunication network infrastructure spending, which impacts the Company’s expected revenues or ability to collect its accounts receivable, the Company could potentially continue to be in violation of debt covenants within its credit facility. There is no guarantee that the Company would receive a waiver if a debt covenant were violated.
Cash provided by operations was approximately $2.1 million for the three months ended March 31, 2002 compared to cash provided by operations of $4.6 million for the corresponding period of 2001. Cash flows were positively affected in the first three months of 2001 by decreases in accounts receivable and inventory, offset by decreases in accounts payable and accrued expense, as well as an increase in income tax refund receivable and the net loss for the quarter.
Cash used in investing activities was approximately $1.5 million for the three months ended March 31, 2002 compared to $1.5 million for the corresponding period of 2001. The expenditures for the 2002 quarter were primarily due to the ongoing building expansion of the TT&M segment’s manufacturing plant in Beverly, MA.
Cash provided by financing activities was approximately $0.2 million for the three months ended March 31, 2002, compared to cash used for financing activities of $2.4 million for the corresponding three months of 2001. Cash used for financing activities in the 2001 quarter included a $1.9 million paydown of advances on the line of credit.
Accounts receivable decreased $5.4 million to $20.0 million at March 31, 2002 from $25.5 million at December 31, 2001, primarily due to the decreased sales volume for the quarter ended March 31, 2002.
Inventories decreased $1.2 million to $27.2 million at March 31, 2002 from $28.5 million at December 31, 2001, due to the decrease in sales in the quarter ended March 31, 2002.
At March 31, 2002, the Company had working capital of $47.3 million and a current ratio of 5.1:1 compared to working capital of $49.2 million and a current ratio of 4.3:1 at December 31, 2001. The increase is primarily due to the positive cash flow provided by operating activities.
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Information Regarding Potential Fluctuations in Quarterly Operating Results
Given the nature of the markets in which we participate, we cannot reliably predict future revenue and profitability, and unexpected changes may cause us to adjust our operations. A high proportion of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, relatively small declines in revenue could disproportionately affect our operating results in a quarter. Other factors that could affect our quarterly operating results include:
• | competitive pressures resulting in lower selling prices; |
• | changes in the relative portion of our revenue represented by our various products and customers; |
• | changes in the timing of product orders; and |
• | our inability to forecast revenue in a given quarter from large system sales |
The economic downturn in the telecommunications industry may impair our customers’ ability to pay us.
The telecommunications manufacturing industry, from which we derive a significant amount of our revenue, has experienced a general economic downturn, and such downturn has significantly weakened the financial condition of some of our top customers. Our largest customer, Lucent Technologies, Inc., experienced a 26% decline in total revenues for the fiscal year ended September 30, 2001 as compared to the same period in 2000, and experienced a net loss of $16.2 billion in fiscal 2001 as compared to net income of $1.2 billion in fiscal 2000. For the six months ended March 31, 2002, Lucent experienced a 31% decline in revenue, to $7.1 billion, as compared to the comparable period in 2001. Lucent’s loss for the six months ended March 31, 2002 from continuing operations before accounting changes and extraordinary items was $1.0 billion as compared to $5.0 billion for the six months ended March 31, 2001. In addition, on August 1, 2001, Standard and Poor’s cut Lucent’s short-term corporate credit and debt ratings to “C” from “B” and Lucent’s long-term corporate credit, bank loan and senior unsecured debt ratings two notches each to “BB-minus,” its third-highest junk grade. If Lucent and our other major telecommunications manufacturing customers continue to experience losses, they may be unable to pay us money owed under existing agreements or may terminate or cut back on their purchase arrangements with us. In addition, the continued decline of the telecommunications industry could delay decisions among certain of our customers to renew their agreements or relationships with us or could delay decisions by prospective customers to make initial evaluations of our products. Reductions or delays in expenditures for our products or nonpayment for our products could have a material adverse effect on our business and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There has been no material change from the disclosure regarding market risk contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
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PART II. OTHER INFORMATION
Items 1 through 5 have been omitted because the related information is either inapplicable or has been previously reported.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.62 | Amendment No. 3 to Second Amended and Restated Credit Agreement, dated February 1, 2002, by and between Datum Inc. and Wells Fargo Bank, National Association. |
(b) No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended March 31, 2002
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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.
DATUM INC.
/s/ ERIK H. VAN DER KAAY | Date May 14, 2002 | |
Erik H. van der Kaay, President and Chief Executive Officer | ||
/s/ ROBERT J. KRIST | Date May 14, 2002 | |
Robert J. Krist, Vice President and Chief Financial Officer |
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EXHIBIT INDEX
Sequentially Numbered Exhibit No. | Description | |
10.62 | Amendment No. 3 to Second Amended and Restated Credit Agreement, dated February 1, 2002, by and between Datum Inc. and Wells Fargo Bank, National Association. |
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