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 June 30, 2001 .
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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.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2512237
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9975 Toledo Way, Irvine, CA 92618-1819
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(Address of principal executive offices) (Zip code)
(949) 598-7500
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(Registrant's telephone number, including area code)
Not Applicable
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(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 6,163,309 shares of common stock outstanding as of August 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......13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............14
Item 6. Exhibits and Reports on Form 8-K................................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)
(Unaudited)
June 30, December 31,
A S S E T S 2001 2000
------- ------------
Current assets
Cash and cash equivalents $ 186 $ 1,017
Restricted cash 2,325 --
Accounts receivable, net 27,606 34,988
Inventories
Purchased parts 16,232 13,015
Work-in-process 7,162 7,873
Finished products 6,171 5,512
------- -------
29,565 26,400
Prepaid expenses 529 375
Deferred income taxes 4,613 4,613
Income tax refund receivable 2,317 161
------- -------
Total current assets 67,141 67,554
Plant and equipment
Land 2,040 2,040
Buildings 5,785 5,435
Equipment 24,909 23,509
Leasehold improvements 1,358 1,315
------- -------
34,092 32,299
Less accumulated depreciation and amortization 19,175 17,567
------- -------
14,917 14,732
------- -------
Goodwill, net 8,996 12,595
Other assets 2,176 395
------- -------
$93,230 $95,276
======= =======
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)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
-------- ------------
Current liabilities
Accounts payable $ 6,864 $ 8,777
Accrued salaries and wages 3,015 4,179
Accrued warranty 2,328 2,173
Other accrued expenses 1,700 1,376
Income taxes payable -- 1,705
Advances on line of credit 1,535 2,020
Current portion of long-term debt 3,000 3,000
-------- --------
Total current liabilities 18,442 23,230
-------- --------
Long-term debt 2,975 1,750
-------- --------
Postretirement benefits 1,337 1,188
-------- --------
Other long-term liabilities 566 584
-------- --------
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 - 6,150,580 shares in 2001
6,067,065 shares in 2000 1,538 1,517
Additional paid-in capital 52,899 51,441
Retained earnings 16,098 15,516
Unamortized stock compensation (424) (127)
Accumulated other comprehensive loss (1,186) (808)
-------- --------
Total stockholders' equity 68,925 67,539
-------- --------
$ 93,230 $ 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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net Sales $ 28,591 $ 33,567 $ 60,844 $ 62,511
Operating expenses:
Cost of sales 15,544 17,687 33,005 34,408
Selling 4,504 4,319 8,561 8,462
Product development 3,508 4,041 7,299 7,789
General and administrative 3,747 4,853 7,736 8,250
Impairment of long-lived asset 2,718 -- 2,718 --
-------- -------- -------- --------
Operating income (loss) (1,430) 2,667 1,525 3,602
-------- -------- -------- --------
Interest expense 101 902 220 1,344
Interest income (10) (66) (46) (139)
-------- -------- -------- --------
Income (loss) before income taxes (1,521) 1,831 1,351 2,397
Income tax provision (benefit) (350) 769 769 1,007
-------- -------- -------- --------
Net income (loss) $ (1,171) $ 1,062 $ 582 $ 1,390
======== ======== ======== ========
Net income (loss) per common share:
Basic $ (0.19) $ 0.18 $ 0.10 $ 0.24
======== ======== ======== ========
Diluted $ (0.19) $ 0.17 $ 0.09 $ 0.22
======== ======== ======== ========
Shares used in per share calculation:
Basic 6,135 5,888 6,110 5,881
======== ======== ======== ========
Diluted 6,135 6,180 6,340 6,180
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------
2001 2000
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Cash flows from operating activities:
Net income $ 582 $ 1,390
------- -------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,789 2,547
Amortization of goodwill 1,063 1,063
Write-down of impaired asset 2,718 --
Contribution of shares of common stock to
the Company's 401(k) plan 340 362
Stock based compensation 184 173
Income tax benefit from restricted stock issued
and stock options exercised 298 --
Changes in assets and liabilities:
Increase in restricted cash (2,325) --
(Increase) decrease in accounts receivable 7,382 (7,230)
Increase in inventories (3,165) (3,643)
Increase in income tax receivable (2,156) --
Increase in prepaid expenses (154) (303)
Increase in other assets (511) --
Increase (decrease) in accounts payable (1,913) 1,697
Increase (decrease) in accrued expenses (698) 1,622
Increase (decrease) in income taxes payable (1,705) 218
Increase in postretirement benefits 149 73
Increase (decrease) in other long-term liabilities (18) 186
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Total reconciling items 1,278 (3,235)
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Net cash provided (used) by operating activities 1,860 (1,845)
------- -------
Cash flows from investing activities:
Proceeds from equipment disposals -- 51
Capital expenditures (2,153) (2,502)
Capitized software development costs (1,273) --
------- -------
Net cash used by investing activities (3,426) (2,451)
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Cash flows from financing activities:
Reduction of line of credit (485) --
Proceeds of long-term debt 2,725 --
Payments of long-term debt (1,500) (1,501)
Proceeds from exercise of stock options 182 301
Proceeds from ESP plan 190 141
------- -------
Net cash provided by (used for) financing activities 1,112 (1,059)
------- -------
Effect of exchange rate changes on cash and cash equivalents (377) (108)
------- -------
Net decrease in cash and cash equivalents (831) (5,463)
Cash and cash equivalents at beginning of period 1,017 8,271
------- -------
Cash and cash equivalents at end of period $ 186 $ 2,808
======= =======
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 Six months ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
----- ----- ----- -----
Basic shares outstanding (weighted average) 6,135 5,888 6,110 5,881
Effect of dilutive securities -- 292 230 299
----- ----- ----- -----
Diluted shares outstanding 6,135 6,180 6,340 6,180
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Options outstanding during the three months ended June 30, 2001 and 2000 to
purchase approximately 412,000 and 160,000 shares of common stock, and options
outstanding during the six months ended June 30, 2001 and 2000 to purchase
approximately 361,000 and 160,000 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 $(1,423,000) and $1,063,000 for the three
months ended June 30, 2001 and 2000, respectively. For the six months ended June
30, 2001 and 2000, total comprehensive income was $206,000 and $1,282,000,
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 June 30 (amounts in thousands):
SEGMENT SALES
Wireless Wireline TT&M eBusiness Total
-------- -------- ------- --------- --------
2001
Total sales $ 10,148 $ 14,555 9,415 $ 273 $ 34,391
Intersegment sales (4,041) (23) (1,734) (1) (5,799)
-------- -------- ------- ------- --------
Outside sales $ 6,107 $ 14,532 $ 7,681 $ 272 $ 28,592
======== ======== ======= ======= ========
2000
Total sales $ 15,535 $ 13,629 $ 7,173 $ 55 $ 36,392
Intersegment sales (1,540) (220) (1,065) -- (2,825)
-------- -------- ------- ------- --------
Outside sales $ 13,995 $ 13,409 $ 6,108 $ 55 $ 33,567
======== ======== ======= ======= ========
SEGMENT OPERATING INCOME LOSS
Wireless Wireline TT&M eBusiness Total
-------- -------- ------- --------- --------
2001 $ 778 $ 1,672 $ 1,563 $ (851) $ 3,162
2000 $ 2,982 $ 2,655 $ 569 $(1,355) $ 4,851
A reconciliation of segment operating income to consolidated amounts as reported
for the quarters ended June 30:
2001 2000
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Segment operating income $ 3,162 $ 4,851
Corporate expenses (1,081) (1,725)
Amortization of goodwill (717) (717)
Write-down of impaired asset (2,718) --
Intercompany profit elimination (77) 258
------- -------
Consolidated operating income $(1,431) $ 2,667
======= =======
The table below presents identifiable segments assets as of June 30, 2001
compared to prior year end:
IDENTIFIABLE SEGMENT ASSETS
Wireless Wireline TT&M eBusiness Total
-------- -------- ------- --------- --------
June 30, 2001 $20,279 $27,508 $20,679 $1,847 $70,313
December 31, 2000 $23,927 $30,890 $17,627 $1,373 $73,817
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NOTE E - ACCOUNTING FOR CERTAIN LONG-LIVED ASSETS
The Company periodically reviews the recorded value of its long-lived assets to
determine if the future cash flows to be derived from these properties will be
sufficient to recover the remaining recorded asset values. In accordance with
Financial Accounting Standards No. 121, "Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", during the
quarter ended June 30, 2001, the Company recorded a non-cash charge of $2.7
million. The charge represented $2.5 million of acquisition costs from the July
1999 acquisition of Digital Delivery Inc. and $0.2 million of software
developments costs capitalized in 2000. During the quarter ended June 30, 2001,
the Company determined that the carrying value of the asset related to the
Digital Delivery acquisition exceeded its net realizable value as a result of a
reduced demand outlook caused by significant changes in business conditions.
NOTE F - 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 the
balance of the term loan that funded July 7, 2000, which was $3.3 million at
June 30, 2001. The term loan is payable in monthly principal installments of
$250,000 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
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 beginning July 2, 2001 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 secured by a
letter of credit issued under the Company's credit facility with Wells Fargo
Bank. As of June 30, 2001, the Company was in violation of a covenant with Wells
Fargo Bank, due to the loss reported for the quarter ended June 30, 2001. The
Company has received a waiver for this covenant violation.
NOTE G - 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. The Company implemented FAS 133 in
the quarter ended March 31, 2001. The impact from implementing FAS 133 was not
material to the Company's financial position or results of operations.
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 is required to adopt the provisions of
these statements no later than the first quarter of its fiscal year 2002. The
implementation of FAS 142 will result in a reduction of goodwill amortization of
approximately $225 thousand per quarter beginning in 2002. The Company is
currently evaluating the impact of adopting FAS 141.
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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 decreased $5.0 million, or 14.8%, to $28.6 million for the
quarter ended June 30, 2001 from $33.6 million for the corresponding quarter in
2000. Net sales in the wireline synchronization business increased $1.1 million
or 8.4%, net sales in the wireless business decreased $7.9 million or 56.4% and
net sales in the timing, test and measurement business increased $1.6 million or
25.7% for the quarter ended June 30, 2001 compared to the corresponding quarter
of 2000. For the six months ended June 30, 2001, net sales decreased $1.7
million or 2.7% compared to the first six months of 2000. The continuing
decrease in net sales was caused by a continuing slowdown in telecommunications
infrastructure spending, offset by increased demand of the timing, test and
measurement products and shipments to a European customer that began in 2001
under a contract entered into in 1999.
Gross margin. Gross margin decreased to 45.6% for the quarter ended June 30,
2001 from 47.3% for the corresponding quarter in 2000. For the six months ended
June 30, 2001, gross margin increased to 45.8% from 45.0% in the first six
months of 2000. The decrease for the quarter was primarily due to increased
sales in Europe over the year ago quarter at a lower margin. Volume shipments
began in 2001 to a European customer under a contract entered into in 1999 with
pricing terms favorable to the customer. For the six months ended June 30, 2001,
the increase in gross margin is largely attributable to efficiencies created by
the closure of the Company's San Jose manufacturing plant in the fourth quarter
of 2000.
Selling expense. Selling expense increased by 4.3% to $4.5 million for the
quarter ended June 30, 2001, from $4.3 million for the corresponding quarter in
2000. As a percentage of net sales, selling expense increased to 15.8% for the
quarter ended June 30, 2001 from 12.9% for the corresponding quarter in 2000.
For the six months
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ended June 30, 2001, selling expense increased by 1.2% to $8.6 million, from
$8.5 million for the corresponding period in 2000. As a percentage of net sales,
selling expense increased to 14.1% for the six months ended June 30, 2001 from
13.5% for the corresponding period in 2000. The increase was primarily due to a
new OEM marketing group in the wireline segment for the Company's TimePieces(TM)
product line, combined with an increase in sales of products with higher outside
commissions.
Product development. Product development expense decreased 13.2% to $3.5 million
for the quarter ended June 30, 2001 from $4.0 million in 2000. As a percentage
of net sales, product development expense increased to 12.3% for the quarter
ended June 30, 2001 from 12.0% for the corresponding quarter of 2000. For the
six months ended June 30, 2001, product development expense decreased 6.3% to
$7.3 million from $7.8 million in the corresponding period in 2000. As a
percentage of net sales, product development expense decreased to 12.0% for the
six months ended June 30, 2001 from 12.5% for the corresponding period of 2000.
The decrease in product development expense is primarily due to the
capitalization of the software development costs of the Company's Trusted Time
Initiative, which met technological feasibility as of January 1, 2001.
General and administrative. General and administrative expense decreased 22.8%
to $3.7 million for the quarter ended June 30, 2001, from $4.9 million for the
corresponding quarter of 2000. The quarter ended June 30, 2000 included $550
thousand of charges related to management changes and the remaining cost related
to the termination of an unsolicited offer for the Company in December 1999. The
balance of the decrease is primarily due to lower incentive accruals due to
decreased profits. As a percentage of net sales, general and administrative
expense decreased to 13.1% for the quarter ended June 30, 2001, from 14.5% for
the corresponding quarter of 2000. For the six months ended June 30, 2001,
general and administrative expense decreased 6.2% to $7.7 million, or 12.7% of
net sales, from $8.3 million, or 13.2% of net sales for the corresponding period
in 2000.
Impairment of long-lived asset. Impairment of long-lived asset for the quarter
and six months ended June 30, 2001 was $2.7 million. There was no such charge in
the comparable periods in 2000. The charge represented $2.5 million of
acquisition costs from the July 1999 acquisition of Digital Delivery Inc. and
$0.2 million of software developments costs capitalized in 2000. During the
quarter ended June 30, 2001, the Company determined that the carrying value of
the asset related to the Digital Delivery acquisition exceeded its net
realizable value as a result of a reduced demand outlook caused by significant
changes in business conditions.
Interest, net. Net interest expense decreased by $0.7 million to $0.1 million
for the quarter ended June 30, 2001 from $0.8 million for the corresponding
quarter of 2000. For the six months ended June 30, 2001, net interest expense
decreased $1.0 million to $0.2 million from $1.2 million for the corresponding
period in 2000. The decrease in year to date net interest expense is a result of
using excess cash to refinance the Company's debt and the related write-off of
unamortized debt expense, both in the quarter ended June 30, 2000.
Income tax provision. Income tax provision decreased by $1.1 million to $(0.4)
million for the quarter ended June 30, 2001 from $0.8 million for the
corresponding period in 2000. For the six months ended June 30, 2001, income tax
provision decreased $0.2 million to $0.8 million from $1.0 million in 2000.
Income tax provision as a percent of Income before income taxes increased to 57%
for the six months ended June 30, 2000 from 42% percent for the corresponding
period in 2000. Because $2.5 million of the long-lived asset charge is not
deductible for income tax purposes, the tax rate was derived based on earnings
before taxes excluding this charge, which caused the increase in the tax rate.
Excluding the $2.5 million charge, the tax rate for the six months ended June
30, 2001 would have been 38%.
Shares outstanding. Shares outstanding increased for the quarter ended June 30,
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 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 the
balance of the term loan that funded July 7, 2000, which was $3.3 million at
June 30, 2001. The term loan is payable in monthly principal installments of
$250,000 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
LIBOR
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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 beginning July 2, 2001 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 secured by a
letter of credit issued under the Company's credit facility with Wells Fargo
Bank. The line of credit had an outstanding balance of $1.5 million at June 30,
2001. As of June 30, 2001, the Company was in violation of a covenant with Wells
Fargo Bank, due to the loss reported for the quarter ended June 30, 2001. The
Company has received a waiver for this covenant violation.
The Company believes that its cash and credit facilities are adequate to fund
the Company's operations for the foreseeable future. Should there be a further
reduction in telecommunication network infrastructure spending which impacts the
Company's expected revenues or ability to collect its accounts receivable, the
Company could potentially be in violation of debt covenants with 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 $1.7 million for the six months
ended June 30, 2001 compared to cash used by operations of $1.8 million for the
corresponding period of 2000. Cash flows were positively affected in the first
half of 2001 by a decrease in accounts receivable, partially offset by decreases
in income taxes payable, accrued expense and accounts payable. Also offsetting
positive cash flows from operations were increases in inventory levels and
restricted cash, representing proceeds from the industrial development bond.
Cash used in investing activities was approximately $3.2 million for the six
months ended June 30, 2001 compared to $2.5 million for the corresponding period
of 2000, primarily due to the capitalization of software development costs of
the Company's Trusted Time Initiative.
Cash provided by financing activities was approximately $1.1 million for the six
months ended June 30, 2001 compared to $(1.1) million for the corresponding six
months of 2000. This was the result of scheduled principal payments on the term
loan, a reduction of the outstanding balance of the line of credit and the
funding of the state industrial development bond previously discussed.
Accounts receivable decreased $7.4 million to $27.6 million at June 30, 2001
from $35.0 million at December 31, 2000 due to increased collections and a
decrease in sales from the fourth quarter of 2000.
Inventories increased $3.2 million to $29.6 million at June 30, 2001 from $26.4
million at December 31, 2000, primarily as a result of the decrease in sales
from the first to the second quarter of 2001.
Other assets increased by $1.8 million to $2.2 million at June 30, 2001 from
$0.4 million at December 31, 2000. This increase was the result of $1.3 million
of capitalized software development costs and $0.4 million of non-current
restricted cash.
At June 30, 2001, the Company had working capital of $48.7 million and a current
ratio of 3.6:1 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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13
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.
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 28.3% decline in total revenues for the six month period ended March 31, 2001
as compared to the same period in 2000, and experienced a 74.5% decrease in net
income in the year 2000 as compared to the year 1999. 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, 2000.
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PART II. OTHER INFORMATION
Items 1 through 3 and item 5 have been omitted because the related information
is either inapplicable or has been previously reported.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on June 14, 2001
(b) (i) Set forth below is the name of each Class II director elected at
the meeting to serve until the 2004 Annual Meeting of
Stockholders and the number of votes cast for their election and
the number of votes withheld;
Number of Number of
Name Votes "For" Votes "Withheld"
---- ----------- ----------------
Erik H. van der Kaay 5,566,474 363,257
Louis B. Horwitz 5,904,240 25,491
Alfred F. Boschulte 5,206,565 723,166
(ii) The terms of the following directors of the company continued
after the meeting: Elizabeth A. Fetter, G.Tilton Gardner, R.
David Hoover and Michael M. Mann.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.57 Loan and Trust Agreement, dated May 1, 2001, among Massachusetts
Development Finance Agency and Frequency and Time Systems, Inc. and
Wells Fargo Brokerage Services, LLC.
10.58 Bond Purchase Agreement, dated May 30, 2001, by and among
Massachusetts Development Finance Agency and Frequency and Time
Systems, Inc. and Wells Fargo Bank Minnesota, National Association, as
trustee.
10.59 Remarketing Agreement, dated May 1, 2001, among Wells Fargo Brokerage
Services, LLC, Frequency and Time Systems, Inc. and Wells Fargo Bank
Minnesota, National Association, as trustee.
10.60 Amendment No. 2 to Second Amended and Restated Credit Agreement, dated
May 29, 2001, 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 June 30, 2001
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15
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 August 14, 2001
- ------------------------------------------
Erik H. van der Kaay,
President and Chief Executive Officer
/s/ Robert J. Krist Date August 14, 2001
- ------------------------------------------
Robert J. Krist,
Vice President and Chief Financial Officer
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16
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description
- ----------- -----------
10.57 Loan and Trust Agreement, dated May 1, 2001, among
Massachusetts Development Finance Agency and Frequency and
Time Systems, Inc. and Wells Fargo Brokerage Services, LLC.
10.58 Bond Purchase Agreement, dated May 30, 2001, by and among
Massachusetts Development Finance Agency and Frequency and
Time Systems, Inc. and Wells Fargo Bank Minnesota, National
Association, as trustee.
10.59 Remarketing Agreement, dated May 1, 2001, among Wells Fargo
Brokerage Services, LLC, Frequency and Time Systems, Inc.
and Wells Fargo Bank Minnesota, National Association, as
trustee.
10.60 Amendment No. 2 to Second Amended and Restated Credit
Agreement, dated May 29, 2001, by and between Datum Inc. and
Wells Fargo Bank, National Association.