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 March 31, 2001.
-------------------
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)
(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 6,103,819 shares of common stock outstanding as of May 7,
2001.
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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...........................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................13
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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)
(Unaudited)
MARCH 31, December 31,
2001 2000
--------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 1,590 $ 1,017
Accounts receivable, net 30,948 34,988
Inventories
Purchased parts 14,191 13,015
Work-in-process 8,347 7,873
Finished products 5,572 5,512
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28,110 26,400
Prepaid expenses 683 375
Deferred income taxes 4,613 4,613
Income tax refund receivable 160 161
------- -------
Total current assets 66,104 67,554
Plant and equipment
Land 2,040 2,040
Buildings 5,463 5,435
Equipment 24,537 23,509
Leasehold improvements 1,278 1,315
------- -------
33,318 32,299
Less accumulated depreciation and amortization 18,374 17,567
------- -------
14,944 14,732
------- -------
Excess of purchase price over net assets acquired, net 12,064 12,595
Other assets 758 395
------- -------
$93,870 $95,276
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See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
MARCH 31, December 31,
2001 2000
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 9,346 $ 8,777
Accrued salaries and wages 3,609 4,179
Accrued warranty 2,281 2,173
Other accrued expenses 1,280 1,376
Income taxes payable 742 1,705
Advances on line of credit 82 2,020
Current portion of long-term debt 3,000 3,000
-------- --------
Total current liabilities 20,340 23,230
-------- --------
Long-term debt 1,000 1,750
-------- --------
Postretirement benefits 1,262 1,188
-------- --------
Other long-term liabilities 512 584
-------- --------
Deferred income taxes 985 985
-------- --------
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 -6,093,856 shares in 2001
6,067,065 shares in 2000 1,526 1,517
Additional paid-in capital 52,021 51,441
Retained earnings 17,269 15,516
Unamortized stock compensation (112) (127)
Accumulated other comprehensive loss (933) (808)
-------- --------
Total stockholders' equity 69,771 67,539
-------- --------
$ 93,870 $ 95,276
======== ========
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,
-------------------------
2001 2000
-------- --------
Net Sales $ 32,252 $ 28,944
Operating expenses:
Cost of sales 17,461 16,722
Selling 4,058 4,143
Product development 3,791 3,748
General and administrative 3,987 3,398
-------- --------
Operating income 2,955 933
-------- --------
Interest expense 119 441
Interest income (36) (74)
-------- --------
Income before income taxes 2,872 566
Income tax provision 1,119 238
-------- --------
Net income $ 1,753 $ 328
======== ========
Net income per common share:
Basic $ 0.29 $ 0.06
======== ========
Diluted $ 0.28 $ 0.05
======== ========
Shares used in per share calculation:
Basic 6,084 5,874
======== ========
Diluted 6,364 6,192
======== ========
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,
---------------------
2001 2000
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Cash flows from operating activities:
Net income $ 1,751 $ 328
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 916 1,034
Amortization of goodwill 531 531
Contribution of shares of common stock to
the Company's 401(k) plan 322 178
Stock based compensation 15 15
Income tax benefit from stock options exercised 111 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 4,040 (3,523)
Increase in inventories (1,710) (2,899)
Increase in prepaid expenses (308) (266)
(Increase) decrease in other assets 39 (20)
Increase in accounts payable 569 2,798
Increase (decrease) in accrued expenses (556) 794
Increase (decrease) in income taxes payable (1,074) 80
Increase in postretirement benefits 74 39
Decrease in other long-term liabilities (72) (13)
------- -------
Total reconciling items 2,897 (1,252)
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Net cash provided (used) by operating activities 4,648 (924)
------- -------
Cash flows from investing activities:
Proceeds from equipment disposals -- 51
Capital expenditures (1,126) (983)
Software development costs (403) --
------- -------
Net cash used by investing activities (1,529) (932)
------- -------
Cash flows from financing activities:
Reduction of line of credit (1,938) --
Payments of long-term debt (750) (1,501)
Proceeds from exercise of stock options 169 276
Proceeds from ESP plan 98 68
------- -------
Net cash used for financing activities (2,421) (1,157)
------- -------
Effect of exchange rate changes on cash and cash equivalents (125) (109)
------- -------
Net increase (decrease) in cash and cash equivalents 573 (3,122)
Cash and cash equivalents at beginning of period 1,017 8,271
------- -------
Cash and cash equivalents at end of period $ 1,590 $ 5,149
======= =======
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
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, 2000 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, 2000. 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,
-------------------
2001 2000
----- -----
Basic shares outstanding (weighted average) 6,084 5,874
Effect of dilutive securities 280 318
----- -----
Diluted shares outstanding 6,364 6,192
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Options outstanding during the three months ended March 31, 2001 and 2000 to
purchase approximately 285,000 and 57,000 shares of common stock, respectively,
were not included in the computation of dilutive securities because the options'
exercise price was greater than the average market price of the common stock
during the period and, therefore, the effect would be anti-dilutive.
NOTE C - COMPREHENSIVE INCOME
Total comprehensive income was $1,628,000 and $219,000 for the three months
ended March 31, 2001 and 2000, 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 eBusiness. 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 eBusiness 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 eBusiness Total
-------- -------- -------- --------- --------
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
======== ======== ======== ======= ========
2000
Total sales $ 12,562 $ 11,674 $ 7,325 $ 122 $ 31,683
Intersegment sales (1,346) (99) (1,294) -- $ (2,739)
-------- -------- -------- ------- --------
Outside sales $ 11,216 $ 11,575 $ 6,031 $ 122 $ 28,944
======== ======== ======== ======= ========
SEGMENT OPERATING INCOME (LOSS)
Wireless Wireline TT&M eBusiness Total
-------- -------- -------- --------- --------
2001 $ 2,058 $ 3,265 $ 461 $ (907) $ 4,877
2000 $ 1,157 $ 1,931 $ 803 $(1,110) $ 2,781
A reconciliation of segment operating income to consolidated amounts as reported
for the quarters ended March 31:
2001 2000
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Segment operating income $ 4,877 $ 2,781
Corporate expenses (1,268) (961)
Amortization of goodwill (717) (717)
Intercompany profit elimination 63 (170)
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Consolidated operating income $ 2,955 $ 933
======= =======
The table below presents identifiable segments assets as of March 31, 2001
compared to prior year end:
IDENTIFIABLE SEGMENT ASSETS
Wireless Wireline TT&M eBusiness Total
-------- -------- -------- --------- --------
March 31, 2001 $ 20,518 $ 31,867 $ 17,856 $ 1,947 $ 72,188
December 31, 2000 $ 23,927 $ 30,890 $ 17,627 $ 1,373 $ 73,817
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NOTE E - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133 (FAS 133) "Accounting for Derivative Instruments
and Hedging Activities," which defines derivatives, requires all derivatives be
carried at fair value and provides for hedging accounting when certain
conditions are met. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Although the Company has not fully
assessed the implications of this new statement, the Company does not believe
adoption of this statement will have a material impact on its financial position
and 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, 2000.
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, 2000. 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
Datum designs, manufactures and markets a wide variety of high performance time
and frequency products used to synchronize the flow of information in
telecommunications networks. The Company is also a leading supplier of precise
timing products for enterprise computing networks and a wide variety of space,
scientific and industrial test and measurement applications.
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 increased $3.3 million, or 11.4%, to $32.3 million for the
quarter ended March 31, 2001 from $28.9 million for the corresponding quarter in
2000. Net sales in the wireline synchronization business increased $5.4 million
or 46.3%, while net sales in the wireless business decreased $1.1 million or
9.9% and net sales in the TT&M business decreased $1.0 million or 16.8% for the
quarter ended March 31, 2001 compared to the corresponding quarter of 2000.
Growth in the telecommunications network infrastructure, the Company's emphasis
on lower cost solutions and new products all contributed to the growth in net
sales.
Gross margin. Gross margin increased to 45.9% for the quarter ended March 31,
2001 from 42.2% for the corresponding quarter in 2000. The increase is primarily
a result of enhanced manufacturing and development efficiencies, improved supply
chain management and efficiencies gained from increases in sales.
Selling expense. Selling expense decreased by 2.1% to $4.1 million for the
quarter ended March 31, 2001, from $4.1 million for the corresponding quarter in
2000. As a percentage of net sales, selling expense decreased to 12.6% for the
quarter ended March 31, 2001 from 14.3% for the corresponding quarter in 2000.
The decrease was primarily due to the increase in sales and the continued
reduction in outside commissions caused by the replacement of outside sales
representatives, where appropriate, with a direct sales force.
Product development. Product development expense increased slightly to $3.8
million for the quarter ended March 31, 2001 from $3.7 million in 2000. As a
percentage of net sales, product development expense decreased to 11.8% for the
quarter ended March 31, 2001 from 12.9% for the corresponding quarter of 2000.
The spending reflects the continual emphasis on new product design and
enhancement of current products.
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General and administrative. General and administrative expense increased 17.3%
to $4.0 million for the quarter ended March 31, 2001, from $3.4 million for the
corresponding quarter of 2000. The increase was caused primarily by incentive
accruals attributed to higher profits in the first quarter of 2001 over 2000. As
a percentage of net sales, general and administrative expense increased to 12.4%
for the quarter ended March 31, 2001, from 11.7% for the corresponding quarter
of 2000.
Interest, net. Net interest expense decreased by $284,000 to $83,000 for the
quarter ended March 31, 2001 from $367,000 for the corresponding quarter of
2000. The decrease in net interest expense is due to the Company's refinancing
of its debt in July 2000, resulting in lower net debt and lower interest rates
on debt.
Shares outstanding. Shares outstanding increased for the quarter ended March 31,
2001 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 July 6, 2000, the Company refinanced its debt. The balance of the Series A
and Series B notes were paid off in full and replaced with a $6 million term
loan payable in monthly principal installments of $250,000 plus interest
beginning August 1, 2000. The interest rate on the $6 million term loan is fixed
at 9.15%. The Company has a secured credit facility at an amount not to exceed
$10 million, under which $0.08 million was outstanding at March 31, 2001. The
current facility expires in June 2001. Wells Fargo Bank has committed to an
increase in the credit facility to $16 million, including the term loan. The
interest rate on advances under the facility will be lowered to LIBOR plus 2.0%
from LIBOR plus 2.25%. The Company believes that its cash and credit facilities
are adequate to fund the Company's operations for the foreseeable future.
Cash provided by operations was approximately $4.6 million for the three months
ended March 31, 2001 compared to cash used by operations of $0.9 million for the
corresponding period of 2000. Cash flows were positively affected in the first
quarter of 2001 by an increase in net income and a decrease in accounts
receivable, partially offset by an increase in inventory levels, a decrease in
accrued expense and a decrease in income taxes payable.
Cash used in investing activities was approximately $1.5 million for the three
months ended March 31, 2001 compared to $0.9 million for the corresponding
period of 2000, primarily due to the capitalization of software development
costs of the Company's Trusted Time Initiative.
Cash used in financing activities was approximately $2.4 million for the three
months ended March 31, 2001 compared to $1.2 million for the corresponding three
months of 2000. This was the result of scheduled principal payments on the term
loan and a reduction of the outstanding balance of the line of credit.
Accounts receivable decreased $4.0 million to $30.9 million at March 31, 2001
from $35.0 million at December 31, 2000 due to increased collections in the
wireless segment during the first quarter of 2001 as compared to the fourth
quarter of 2000.
Inventories increased $1.7 million to $28.1 million at March 31, 2001 from $26.4
million at December 31, 2000, as a result of an increase in bookings in the TT&M
segment and a decrease in shipments in the wireless segment in the first quarter
of 2001 as compared to the fourth quarter of 2000.
At March 31, 2001, the Company had working capital of $45.8 million and a
current ratio of 3.2:1 compared to working capital of $44.3 million and a
current ratio of 2.9:1 at December 31, 2000. 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
The Company has experienced, and expects to continue to experience, fluctuations
in sales and operating results from quarter to quarter. As a result, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful, and that such comparisons cannot be relied upon as
indicators of future performance. A significant component of the fluctuations
results from rescheduling of orders by the Company's major customers, in some
cases due in part to the customers' attempts to minimize inventories. Other
factors that could cause the Company's sales and operating results to vary
significantly from period to period include: contractual price reductions on
products sold to certain major customers; the timing, availability and sale of
new products; changes in the mix of products with differing gross margins;
variations in manufacturing capacities, efficiencies and costs; the availability
and cost of components; warranty expenses; and variations in product development
and other operating expenses. In addition, the sales cycles for many of the
products are often lengthy and unpredictable, and can take up to 36 months.
Further, there can be no assurance that the Company will be successful in
closing large transactions on a timely basis or at all. The timing of these
transactions could cause additional variability in the Company's operating
results. The Company's quarterly results of operations are also influenced by
competitive factors, including pricing and availability of the Company's and
competing companies' time and frequency products. Large portions of the
Company's expenses are fixed and difficult to reduce in a short period of time.
If net sales do not meet the Company's expectations, the Company's fixed
expenses would exacerbate the effect of such net sales shortfall. Furthermore,
announcements by the Company or its competitors regarding new products and
technologies could cause customers to defer purchases of the Company's products.
Order deferrals by the Company's customers, purchase policy changes, delays in
the Company's introduction of new products and longer than anticipated sales
cycles for the Company's products have in the past materially adversely affected
the Company's quarterly results of operations. Due to the foregoing factors, as
well as other unanticipated factors, it is likely that in some future quarter
the Company's operating results will be below the expectations of public market
analysts or investors. In such event, the price of the Company's common stock
would be materially adversely affected.
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, 2000.
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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
10.56 Severance Compensation Agreement dated December 8, 2000, by and between
the Registrant and Robert J. Krist
(b) No reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended March 31, 2001
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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, 2001
- ---------------------------------------- ------------
Erik H. van der Kaay, President and
Chief Executive Officer
/s/ Robert J. Krist Date May 14, 2001
- ---------------------------------------- ------------
Robert J. Krist, Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description
- ------------ -----------
10.56 Severance Compensation Agreement dated December 8, 2000, by
and between the Registrant and Robert J. Krist
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