1
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 September 30, 1996 .
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 95-2512237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
9975 TOLEDO WAY, IRVINE, CA 92618-1819
(Address of principal executive offices) (Zip code)
(714) 380-8880
(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 4,077,820 shares of common stock outstanding as of
September 30, 1996.
Total number of sequentially numbered pages contained herein are:
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations....... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 11
Signatures................................................................ 12
Exhibit Index............................................................. 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
ASSETS 1996 1995
------------- ------------
Current assets
Cash and short-term investments $ 1,687,000 $ 587,000
Accounts receivable 16,488,000 13,572,000
Accounts receivable, unbilled 443,000 66,000
Inventories
Purchased parts 6,626,000 7,801,000
Work-in-process 9,609,000 9,002,000
Finished products 1,568,000 3,358,000
----------- -----------
17,803,000 20,161,000
Prepaid expenses 422,000 200,000
Deferred income taxes 1,830,000 1,830,000
Income tax refund receivable 108,000 109,000
----------- -----------
Total current assets 38,781,000 36,525,000
Plant and equipment
Land 2,040,000 2,040,000
Buildings 4,499,000 4,474,000
Equipment 16,144,000 15,145,000
Leasehold improvements 1,399,000 1,150,000
----------- -----------
24,082,000 22,809,000
Less accumulated depreciation and amortization 9,293,000 7,155,000
----------- -----------
14,789,000 15,654,000
----------- -----------
Excess of purchase price over net assets acquired 13,243,000 13,914,000
Other assets 55,000 44,000
----------- -----------
$66,868,000 $66,137,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------- ------------
Current liabilities
Accounts payable $ 6,186,000 $ 5,155,000
Accrued salaries and wages 1,973,000 2,102,000
Accrued warranty 1,159,000 1,337,000
Other accrued expenses 976,000 1,822,000
Customer deposits -- 74,000
Income taxes payable 680,000 105,000
Notes payable to bank -- 10,442,000
Current portion of long-term debt 41,000 3,178,000
----------- -----------
Total current liabilities 11,015,000 24,215,000
----------- -----------
Long-term debt 20,400,000 7,938,000
----------- -----------
Postretirement benefits 407,000 290,000
----------- -----------
Other long-term liabilities 1,365,000 1,388,000
----------- -----------
Deferred income taxes 993,000 993,000
----------- -----------
Stockholders' equity
Preferred stock, par value $.25 per share
Authorized - 1,000,000 shares in 1996
- 0 shares in 1995
Issued - 0 shares -- --
Common stock, par value $.25 per share
Authorized - 10,000,000 shares in 1996
8,000,000 shares in 1995
Issued - 4,077,820 shares in 1996
4,018,968 shares in 1995 1,019,000 1,005,000
Additional paid-in capital 24,850,000 24,418,000
Retained earnings
Beginning of period 5,982,000 5,922,000
Net income 982,000 60,000
----------- -----------
End of period 6,964,000 5,982,000
Cumulative translation adjustment (145,000) (92,000)
----------- -----------
Total stockholders' equity 32,688,000 31,313,000
----------- -----------
$66,868,000 $66,137,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net product sales and
contract revenues $24,507,000 $18,607,000 $64,357,000 $45,292,000
----------- ----------- ----------- -----------
Costs and expenses
Cost of products sold and
contract revenues 15,203,000 11,215,000 39,182,000 26,048,000
Selling 2,944,000 2,709,000 8,590,000 6,828,000
Product development 1,895,000 1,963,000 5,810,000 5,193,000
General and administrative 2,843,000 2,010,000 7,463,000 5,217,000
Interest expense 530,000 477,000 1,662,000 1,126,000
Interest income (7,000) (4,000) (14,000) (10,000)
----------- ----------- ----------- -----------
23,408,000 18,370,000 62,693,000 44,402,000
----------- ----------- ----------- -----------
Income before income taxes 1,099,000 237,000 1,664,000 890,000
Income tax provision 450,000 97,000 682,000 365,000
----------- ----------- ----------- -----------
Net income $ 649,000 $ 140,000 $ 982,000 $ 525,000
=========== =========== =========== ===========
Earnings per common and
common equivalent share $ .15 $ .03 $ .23 $ .14
=========== =========== =========== ===========
Weighted average number
of common and common
equivalent shares outstanding 4,237,000 4,291,000 4,229,000 3,874,000
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
------------------------------
SEPTEMBER 30, September 30,
1996 1995
------------- -------------
Cash flows from operating activities:
Net income $ 982,000 $ 525,000
----------- ------------
Adjustments to reconcile income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,029,000 2,109,000
Contribution of shares of common stock
to the Company's 401(K) plan 348,000 241,000
Changes in assets and liabilities, net of acquisition:
Increase in accounts receivable (2,917,000) (599,000)
(Increase) decrease in accounts receivable,
unbilled - current portion (378,000) 65,000
Decrease in income tax refund receivable 1,000 7,000
(Increase) decrease in inventories 2,358,000 (4,473,000
Increase in prepaid expenses (221,000) (453,000)
(Increase) decrease in other assets (11,000) 13,000
Increase in accounts payable 1,031,000 817,000
Increase (decrease) in accrued expenses (1,121,000) 464,000
Decrease in customer deposits (74,000) --
Increase (decrease) in income taxes payable 575,000 (319,000)
Increase in postretirement benefits 117,000 57,000
Decrease in other long-term liabilities (23,000) --
----------- ------------
Total reconciling items 2,714,000 (2,071,000)
----------- ------------
Net cash provided by (used in) operating activities 3,696,000 (1,546,000)
----------- ------------
Cash flows from investing activities:
Book value of equipment disposals 56,000 20,000
Capital expenditures (1,554,000) (1,779,000)
Payment for acquisition, net of cash -- (15,290,000)
Other (48,000) (14,000)
----------- ------------
Net cash used in investing activities (1,546,000) (17,063,000)
----------- ------------
Cash flows from financing activities:
Proceeds from line of credit 203,000 6,724,000
Proceeds from (reductions to) long-term debt (1,351,000) 11,535,000
Exercise of stock options 98,000 139,000
----------- ------------
Net cash provided by (used in) financing activities (1,050,000) 18,398,000
----------- ------------
Net increase (decrease) in cash and cash equivalents 1,100,000 (211,000)
Cash and cash equivalents at beginning of period 587,000 221,000
----------- ------------
Cash and cash equivalents at end of period $ 1,687,000 $ 10,000
=========== ============
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
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, and should be read in conjunction with the audited financial
statements presented in the Company's 1995 Annual Report to Stockholders. In the
opinion of management, the accompanying financial statements reflect all
adjustments which are necessary for a fair presentation of the results for the
interim period presented. The results of operations for such interim period are
not necessarily indicative of results to be expected for the full year.
NOTE B - EARNINGS PER SHARE
Earnings per share is calculated by dividing net earnings by the weighted
average number of common and common equivalent shares outstanding during each
period taking into consideration dilutive effects of common stock equivalents.
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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 1995 Annual Report to Stockholders.
INTRODUCTORY NOTE
This Report on Form 10-Q contains certain forward-looking statements, including
statements related to potential rescheduling, or elimination of orders for the
Company's products, and the necessary elements for the successful management of
growth. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. The
forward-looking statements are based on assumptions that the Company will not
lose a significant customer or customers or experience increased fluctuations of
demand or rescheduling of purchase orders, that the Company's markets will
continue to grow, that the Company's products will remain accepted within their
respective markets and will not be replaced by new technology, that competitive
conditions within the Company's markets will not change materially or adversely,
that the Company will retain key technical and management personnel, that the
Company's forecasts will accurately anticipate market demand, and that there
will be no material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company.
Overview
The Company designs, manufactures and markets a wide variety of high-quality,
high performance time and frequency products used to synchronize the flow of
information in telecommunications and enterprise computing networks. The Company
also is a leading supplier of high-performance timing products for a wide
variety of scientific and industrial test and measurement applications.
On March 17, 1995, the Company completed its acquisition of Efratom Time and
Frequency Products, Inc., a Colorado corporation, and Efratom Elektronik GmbH, a
corporation organized under the laws of the Republic of Germany (collectively,
"Efratom"), the inventor and leading supplier of high-stability, rubidium-based
oscillators widely used in cellular and PCS systems, from Ball Corporation. The
purchase price consisted of $15,000,000 cash and 1,277,778 shares of the
Company's Common Stock. The final purchase price is subject to a post-closing
adjustment. The transaction has been accounted for as a purchase and,
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair market values at the date of the acquisition. In connection with
the acquisition, the Company recorded $12,117,000 in goodwill, which amount will
be amortized (and charged against earnings) for 15 years from the date of the
acquisition. Included in goodwill is an amount that the Company expects to
settle with Ball Corporation upon final negotiations of the purchase price
adjustment.
As a result of the acquisition, the Company has experienced significant
increases (in absolute terms) in revenue, selling expenses, general and
administrative expenses, accounts receivable, inventory and accounts payable, in
the nine months ended September 30, 1996 from the corresponding period of 1995.
The Datum companies traditionally have operated on a relatively independent
basis. In the fourth quarter of 1995, the Company combined the operations of its
Bancomm Division and its Timing Division. Should the Company desire to integrate
its operations to a greater extent in the future, certain operational changes,
cost controls, systems integrations, marketing focus and the coordination of new
product development may be required. There can be no assurance that the Company
will be successful in completing any such efforts or that such efforts will
result in increased revenues or earnings. See "Introductory Note."
The Company's ability to manage its growth effectively will require it to
enhance its operational, financial and management systems; to expand its
facilities and equipment; and to successfully hire, train and motivate
additional employees. The failure of the Company to manage its growth on an
effective basis could have a material adverse effect on the Company's operating
results and financial conditions. The Company will be required to increase
staffing and other expenses as well as its expenditures on capital equipment and
leasehold improvements in order to meet the demands of its customers or to enter
new markets. Customers, however, may not commit to firm production schedules for
more than a short time in advance, and new products may have uncertain market
acceptance. The Company's profitability would be adversely affected if the
Company increases its expenditures
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in anticipation of future sales that do not materialize. See "Introductory
Note."
A small number of customers account for a substantial portion of the Company's
net sales. There can be no assurance that a major customer will not reduce,
delay or eliminate its purchases. Any such reduction, delay or loss in orders
could have a material adverse effect on the Company's business and results of
operations. See "Introductory Note."
Results of Operations
The following table sets forth, for the fiscal periods indicated, certain income
and expense items expressed as a percentage of the Company's total sales:
Percentage of Total Sales
-------------------------
Year Ended December 31, Three Months Ended September 30,
----------------------- --------------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Net product sales and contract revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses
Cost of products sold and
contract revenue .............. 59.6% 56.6% 59.5% 60.3% 62.0%
Selling ........................... 18.1% 16.8% 14.6% 14.6% 12.0%
Product development ............... 7.6% 8.1% 10.5% 10.5% 7.7%
General and administrative ........ 13.4% 12.7% 12.6% 10.8% 11.6%
Interest expense .................. 0.8% 0.8% 2.5% 2.6% 2.2%
Interest income ................... 0.0% 0.0% 0.0% 0.0% 0.0%
Income before income taxes ........... 0.4% 5.0% 0.3% 1.3% 4.5%
Income tax provision ................. 0.1% 2.0% 0.2% 0.5% 1.8%
Net income ........................... 0.3% 3.0% 0.1% 0.8% 2.7%
Consolidated net product sales and contract revenues increased 31.7% for the
quarter ended September 30, 1996, when compared to the corresponding quarter of
1995. For the nine month period of 1996, the sales increase was 42.1% when
compared to the same three quarters of 1995. The quarterly increase is
attributable to increased sales at all locations with the telecommunications
products at the Company's Austron and Efratom subsidiaries being the largest
portion of the increase. The nine month increase is also partially due to the
acquisition of Efratom on March 17, 1995. Contract revenues as a component of
total revenues are not significant.
Cost of products sold and contract revenues as a percentage of product sales for
the quarter ended September 30, 1996, was 62.0%, compared with 60.3% for the
corresponding quarter of 1995. For the nine month period of 1996, cost of
products sold as a percentage of sales was 60.9% compared with 57.5% for the
corresponding period of 1995. Price changes and the mix of telecommunication
products sold in 1996 contributed to the increase in cost of products sold and
contract revenue compared to the three- and nine-month periods ended September
30, 1995.
Selling expense increased by $235,000 for the quarter ended September 30, 1996
over the similar period in 1995, due mainly to additional commissions on
increased sales volume. However, sales expense as a percentage of product sales
decreased to 12.0% for the quarter ended September 30, 1996 from 14.6% for the
corresponding quarter of 1995, due to a larger sales base. For the nine month
period ended September 30, 1996, the increase in selling expense of $1,762,000
over the corresponding period of 1995 is largely attributable to the acquisition
of Efratom on March 17, 1995.
Product development expense as a percentage of product sales decreased to 7.7%
for the quarter ended September 30, 1996, compared with 10.5% for the
corresponding quarter of 1995 due to an increased sales base and the
efficiencies gained by combining Company's Bancomm and Timing divisions at the
end of 1995. The nine month period ended September 30, 1996, was $617,000 over
the corresponding period of 1995 due mainly to the acquisition of Efratom on
March 17, 1995.
General and administrative expense increased by $833,000 for the quarter ended
September 30, 1996, over the corresponding period of 1995. This increase is
largely due to additional charges, resulting from the Company's acquisition of
Efratom, personnel, insurance, consulting, and post retirement benefits in the
current quarter period.
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For the nine month period ended September 30, 1996, the differential over the
corresponding period of 1995 is due largely to the acquisition of Efratom on
March 17, 1995.
Interest expense increased by $53,000 for the quarter ended September 30, 1996,
to $530,000 when compared to the corresponding quarter of 1995. The borrowing
level at September 30, 1996 was $20.4 million, while the corresponding borrowing
level at September 30, 1995 was $21.3 million.
Net income as a percentage of net sales increased to 2.7% in the current quarter
from 0.8% in the same quarter of 1995. The additional volume and control of
expenses accounted for the differential.
The common and common equivalent shares for the nine months ended September 30,
1996 were affected by the shares issued to Ball Corporation for the acquisition
of Efratom on March 17, 1995 and, to a lesser extent by the exercise of stock
options adding to outstanding shares.
Liquidity and Capital Resources
Accounts receivable, including accounts receivable unbilled, increased at
September 30, 1996 to $16,931,000 from $13,638,000 at December 31, 1995. The
increase is due to larger shipments in the September 30, 1996 quarter over the
December quarter of 1995.
Inventories decreased from $20,161,000 at December 31, 1995, to $17,803,000 at
September 30, 1996 as a result of larger September shipments and an effort to
reduce inventory.
Accounts payable increased from $5,155,000 at December 31, 1995, to $6,186,000
at September 30, 1996, in part, as a result of preparation for larger sales
volume.
At September 30, 1996, the Company had working capital of $27,766,000 and a
current ratio of 3.52:1. This compares to working capital of $12,310,000 and a
current ratio of 1.51:1 at December 31, 1995.
On September 27, 1996, Datum completed the restructuring of its debt and added a
new partner, the Prudential Insurance Company of America, to its current
relationship of over twenty years with Wells Fargo Bank.
The agreements provide for an aggregate credit availability of $30,000,000. The
Prudential portion of the credit facility is $18,000,000 and includes the
following: (i) $6,000,000 of Series A senior secured promissory notes to mature
September 27, 2000, bearing interest at the rate of 9.07% on the unpaid
principal, payable quarterly, with the principal re-paid in equal installments
of $1,500,000 on March 27 and September 27 of each year, commencing March 27,
1999, and (ii) $12,000,000 of Series B senior secured promissory notes to mature
September 27, 2003, bearing interest at the rate of 10.25% on the unpaid
principal, payable quarterly, with the principal re-paid in equal installments
of $2,000,000 on March 27 and September 27 of each year, commencing March 27,
2001. In addition, Datum issued to Prudential common stock purchase warrants for
the purchase of 175,000 shares of common stock at a purchase price per share of
$11.50.
Under the Wells Fargo Bank agreement effective September 27, 1996, the Company
was extended a two-year revolving line of credit not to exceed the principal
amount of $12,000,000 bearing interest at the Bank's prime rate or at LIBOR plus
2.75%.
Under both agreements, the Company is required to maintain certain financial
ratios, limit other indebtedness and may not pay dividends. Other restrictions
include limitations on the amounts of leases and capital expenditures that may
be incurred.
The Company believes that its existing cash balances, funds expected to be
generated from operations and borrowings under its loan agreements with
Prudential and Wells Fargo, will provide the Company with sufficient funds to
finance its operations for at least the next 12 months. However, the Company may
require, or may otherwise seek, additional funds to support its working capital
requirements or for other purposes and may seek to raise such additional funds
through public or private equity and/or debit financings or from other sources.
No assurance can be given that additional financing will be available or that,
if available, such financing will be obtainable on terms favorable to the
Company.
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PART II. OTHER INFORMATION
Item 1 and Items 3 through 5 have been omitted because the related information
is either inapplicable or has been previously reported.
Item 2. Changes in Securities
(c) On September 27, 1996, the Company issued Notes to The Prudential
Insurance Company of America ("Prudential"). The Notes require the Company to
pay interest at a rate of 9.07% on Series A Notes and 10.25% on Series B Notes
and require the Company to repay the principal of the Notes on or before
September 27, 2000 on Series A Notes and September 27, 2003 on Series B Notes.
As part of the same transaction, the Company also issued warrants to purchase
Common Stock of the Company, exercisable at $11.50 per share. As consideration
for the issuance of the Notes and warrants, the Company received $17.50 from
Prudential. The foregoing transaction was completed without registration under
the Securities Act of 1933 in reliance upon Section 4(2) of said Act for
transactions not involving a public offering, among others, on the basis that
such transaction did not involve any public offering and the purchasers were
sophisticated and had access to the kind of information registration would
provide. Broker commissions, in the form of a finders fee, in the amount of
$180,000 were paid in connection with the foregoing transaction.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
10.21.1 First Amendment to Consulting Agreement, dated as
of March 1, 1996, between Louis B. Horwitz and
the Registrant.
10.30.5 Amended and Restated Credit Agreement, dated as
of September 27, 1996, by and between the
Registrant and Wells Fargo Bank, National
Association.
10.36 Note and Warrant Purchase Agreement, dated as of
September 27, 1996, by and between The Prudential
Insurance Company of America and the Registrant.
10.37 Common Stock Purchase Warrant, dated September
27, 1996.
10.38 Series A Note, dated September 27, 1996, in favor
of The Prudential Insurance Company of America.
10.39 Series B Note, dated September 27, 1996, in favor
of The Prudential Insurance Company of America.
27.3 Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter
covered by this report.
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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/ Louis B. Horwitz Date November 12, 1996
- --------------------------------------------- -------------------------
Louis B. Horwitz, President
/s/ David A. Young Date November 12, 1996
- --------------------------------------------- -------------------------
David A. Young, Chief Financial Officer
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EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ----
10.21.1 First Amendment to Consulting Agreement, dated as of March 1,
1996, between Louis B. Horwitz and the Registrant.
10.30.5 Amended and Restated Credit Agreement, dated as of September 27,
1996, by and between the Registrant and Wells Fargo Bank,
National Association.
10.36 Note and Warrant Purchase Agreement, dated as of September 27,
1996, by and between The Prudential Insurance Company of America
and the Registrant.
10.37 Common Stock Purchase Warrant, dated September 27, 1996.
10.38 Series A Note, dated September 27, 1996, in favor of The
Prudential Insurance Company of America.
10.39 Series B Note, dated September 27, 1996, in favor of The
Prudential Insurance Company of America.
27.3 Financial Data Schedule
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