SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Quarterly Report Pursuant To Section 13 Or 15(d) Of The
Securities Exchange Act Of 1934 For the quarterly period ended
November 1, 1997
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 number 1-7636
DATAPOINT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1605174
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
4 rue d'Aguesseau 75008, Paris, France
8410 Datapoint Drive
San Antonio, Texas 78229-8500
(Address of principal executive offices and zip code)
(331) 4007 3737
(210) 593-7000
(Registrant's telephone number, including area code)
Indicate by 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 such
filing requirements for the past 90 days. Yes X . No___.
As of November 1, 1997, 17,977,804 shares of Datapoint Corporation Common
Stock were outstanding, exclusive of 3,013,413 shares held in Treasury.
<PAGE>
DATAPOINT CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
November 1, 1997 and August 2, 1997 3
Consolidated Statements of Operations -
Three Months Ended November 1, 1997 and
October 26, 1996 4
Consolidated Statements of Cash Flows -
Three Months Ended November 1, 1997 and
October 26, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 7
Part II. Other Information
Item 1. Legal Proceedings 11
Signature 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Datapoint Corporation and Subsidiaries
(In thousands, except share data)
(Unaudited)
November 1, August 2,
1997 1997
----------- ---------
Assets
Current assets:
Cash and cash equivalents $13,611 $15,490
Restricted cash and cash equivalents 155 154
Accounts receivable, net of allowance for doubtful
accounts of $1,262 and $1,654, respectively 25,432 22,731
Inventories 4,779 3,962
Prepaid expenses and other current assets 3,798 3,003
- -------------------------------------------------------------------------------
Total current assets 47,775 45,340
Fixed assets, net 10,694 11,764
Other assets, net 5,550 5,284
- -------------------------------------------------------------------------------
$64,019 $62,388
===============================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Payables to banks $8,560 $7,346
Current maturities of long-term debt 1,068 1,271
Accounts payable 12,935 12,209
Accrued expenses 19,056 20,195
Deferred revenue 8,874 11,386
Income taxes payable 1,381 1,272
- -------------------------------------------------------------------------------
Total current liabilities 51,874 53,679
Long-term debt, exclusive of current maturities 59,908 60,875
Other liabilities 13,924 11,918
Stockholders' deficit:
Preferred stock of $1.00 par value. Shares authorized
10,000,000; shares issued and outstanding 721,976 in
1998 and 721,976, in 1997 (aggregate liquidation
preference, including dividend in arrears, $16,786
in 1998 and $16,605 in 1997). 722 722
Common stock of $0.25 par value. Shares authorized
40,000,000; shares issued 20,991,217, including
treasury shares of 3,013,413 in 1998 and 3,203,102
in 1997. 5,248 5,248
Other capital 212,039 212,655
Pension liability adjustment (4,488) (4,488)
Foreign currency translation adjustment 7,654 4,613
Retained deficit (277,797) (276,202)
Treasury stock, at cost (5,065) (6,632)
- -------------------------------------------------------------------------------
Total stockholders' deficit (61,687) (64,084)
- -------------------------------------------------------------------------------
$64,019 $62,388
===============================================================================
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Datapoint Corporation and Subsidiaries
(Unaudited)
(In thousands, except share data)
Three Months Ended
November 1, October 26,
1997 1996
Revenue:
Sales $19,503 $17,026
Service and other 15,570 15,954
- -------------------------------------------------------------------------------
Total revenue 35,073 32,980
Operating costs and expenses:
Cost of sales 15,429 12,772
Cost of service and other 9,897 10,828
Research and development 605 489
Selling, general and administrative 8,469 9,993
Restructuring costs -- 809
Total operating costs and expenses 34,400 34,891
Operating income (loss) 673 (1,911)
Non-operating income (expense):
Interest expense (1,576) (1,648)
Other, net 29 1,193
- -------------------------------------------------------------------------------
Loss before income taxes and extraordinary credit (874) (2,366)
Income taxes 113 53
- -------------------------------------------------------------------------------
Loss before extraordinary credit $(987) $(2,419)
- -------------------------------------------------------------------------------
Extraordinary credit-debt extinguishment 174 822
- -------------------------------------------------------------------------------
Net loss $(813) $(1,597)
===============================================================================
Net loss less preferred stock dividend accumulated $(994) $(2,064)
===============================================================================
Net loss per common share:
Before extraordinary credit $(.06) $(.21)
Extraordinary credit - debt extinguishment .01 .06
- -------------------------------------------------------------------------------
Net loss $(.05) $(.15)
===============================================================================
Average common shares 18,894,051 13,767,313
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Datapoint Corporation and Subsidiaries
(Unaudited)
(In Thousands)
Three Months Ended
November 1, October 26,
1997 1996
Cash flows from operating activities:
Net loss $(813) $(1,597)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,204 1,483
Provision for losses (recoveries) on accounts receivable (154) 245
Gain on debt extinguishment (174) (822)
Deferred income taxes (29) 65
Realized gain on sale of property (1,205) --
Changes in assets and liabilities:
Decrease in receivables 1,207 3,870
Increase in inventory (537) (1,163)
Decrease in accounts payable and accrued expenses (1,772) (4,001)
Decrease in other liabilities and deferred credits (2,947) (900)
Other, net (118) (579)
- -------------------------------------------------------------------------------
Net cash used in operating activities (5,338) (3,399)
Cash flows from investing activities:
Payments for fixed assets (400) (529)
Proceeds from dispositions of fixed assets 3,200 --
Other, net 129 280
- -------------------------------------------------------------------------------
Net cash provided from (used in) investing activities 2,929 (249)
Cash flows from financing activities:
Proceeds from borrowings 18,961 3,677
Payments on borrowings (19,174) (4,744)
Restricted cash for letters of credit (1) 515
- -------------------------------------------------------------------------------
Net cash used in financing activities (214) (552)
Effect of foreign currency translation on cash 744 (364)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,879) (4,564)
Cash and cash equivalents at beginning of year 15,490 23,184
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $13,611 $18,620
======= =======
Cash payments for:
Interest $248 $290
Income taxes, net 42 78
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
DATAPOINT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(Unaudited)
1. Preparation of Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
by Datapoint Corporation (the "Company"), in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the information furnished reflects all adjustments which are
necessary for a fair statement of the results of the interim periods presented.
All adjustments made in the interim statements are of a normal recurring nature.
It is recommended that these statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
and Form 10-K for the year ended August 2, 1997.
The results of operations for the three months ended November 1, 1997, are not
necessarily indicative of the results to be expected for the full year.
2. Inventories
Inventories consist of:
November 1, August 2,
1997 1997
Raw materials $150 $143
Work in process 1,274 1,077
Finished and purchased products 3,355 2,742
----- -----
$4,779 $3,962
====== ======
3. Commitments and Contingencies
From time to time, the Company is a defendant in lawsuits generally incidental
to its business. The Company is not currently aware of any such suit which, if
decided adversely to the Company, would result in a material liability.
4. Net Income (Loss) per Common Share
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share". The Company will
adopt this new standard during the second quarter of fiscal year 1998 and will
not have a material impact on earnings per share.
5. Non-operating Income (Expense)
November 1, 1997 October 26, 1996
---------------- ----------------
Interest earned $119 $152
Foreign currency gains (losses) (1,172) 1,292
Realized gain on sale of property 1,205 --
Other (123) (251)
----- -----
$29 $1,193
=== ======
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Years Referred to are Fiscal Years)
Overview
For 1998, the Company's main objectives are as follows:
1. Product marketing to maintain stabilized revenue levels,
2. Continued review and reduction of operating costs; and
3. The vigorous pursuit of patent royalties due from the licensing and
enforcement of its video conferencing and multi- speed patents.
During the first quarter of 1998, the Company had a net loss of $813 thousand,
on revenue of $35.1 million, compared with a net loss of $1.6 million, on
revenue of $33.0 million for the same period of the previous year. Operating
income during the first quarter of 1998, was $673 thousand as compared with an
operating loss of $1.9 million during the first quarter of 1997. The increase in
revenue was primarily the result of strong sales in one of the Company's
Northern European subsidiaries. This increase in revenue was offset by
approximately $3.3 million resulting from a stronger U.S. dollar, on average,
during the first quarter of 1998 as compared to the average U.S. dollar during
the first quarter of 1997.
Operating expenses for the first quarter of 1998 were $9.1 million, compared
with $10.5 million for the same period a year ago. The decrease was the result
of continued cost cutting actions undertaken by the Company and approximately
$0.6 million resulting from a stronger U.S. dollar, on average, during the first
quarter of 1998 as compared to the average U.S. dollar during the first quarter
of 1997. During the first quarter of 1997, the Company recorded $0.8 million in
restructuring charges.
In addition, during the first quarter of 1998, the Company repurchased in the
public market approximately $875 thousand face value of its 8-7/8% convertible
subordinated debentures resulting in an extraordinary gain of $174 thousand.
During the first quarter of 1998, the Company sold the three buildings it owns
in San Antonio, Texas to a private unaffiliated group for approximately $3.2
million (net of mortgage obligations and closing costs). The sales contract
provides for the leaseback by the Company of one of the buildings (approximately
40,000 square feet) for an initial lease term of five years. Of the total gain
of approximately $2.3 million related to the sale, the Company recorded in
non-operating income a gain of approximately $1.2 million during the first
quarter of 1998. The remainder of the gain ($1.1 million) was deferred and will
be amortized over the lease term.
Also included in non-operating income is approximately $1.2 million related to
transaction losses resulting from the weakening U.S. dollar against foreign
currencies during the last three months. This compares to a net gain of $1.3
million for the first quarter of 1997. These gains and losses on short term
intercompany notes and international subsidiary U.S. dollar denominated cash are
offset by translation adjustment to Stockholders' Equity and therefore have no
impact on the Company's consolidated financial position.
Patents and Trademarks
Datapoint owns certain patents, copyrights, trademarks and trade secrets in both
network and video conferencing technologies, which it considers valuable
proprietary assets. The Company believes that in particular its video
conferencing patents and multi-speed network processing patents and the related
patents are of material importance to its business as a whole.
Video Conferencing Patents
Datapoint, along with John Frassanito and David A. Monroe, owns United States
Patent Nos. 4,710,917 and 4,847,829 related to video teleconferencing
technology. Datapoint has filed infringement actions against several companies.
In 1995, the Company negotiated two settlements for such infringement for an
aggregate of $1.0 million, and, in 1996, the Company entered into an agreement
with NEC America, Inc. for the licensing of the `917 and `829 patents for an
undisclosed amount.
Several patent infringement suits are currently pending:
7
<PAGE>
(1) Datapoint Corporation v. Compression Labs, Inc. No. 3:93-CV-2522-D
(N.D. Texas); trial is scheduled for early calendar year 1998;
(2) Datapoint Corporation v. PictureTel Corporation, No. 3:93-CV-2381-D
(N.D. Texas); trial is scheduled for early calendar year 1998.
(3) Datapoint Corporation v. Teleos Communications, Inc. No. 95-4455-AET
(D.N.J.); this action is in the early stages of discovery; no trial date has
been scheduled;
(4) Datapoint Corporation v. Videolan Technologies, Inc.; Videolan
Technologies, Inc. v. Datapoint Corporation, No. 96 CV-604-H (W.D. Kentucky) et
al; in these actions, Datapoint has asserted that Videolan has infringed the
`917 and `829 patents. Videolan has asserted the following claims: antitrust,
patent misuse, unfair competition, and seeks a declaratory judgment that the
`917 and `829 patents and another Datapoint patent, No. 4,686,698, are not valid
and are not infringed. These actions are in the early stages; no trial date has
been set in either matter;
On November 25, 1997, Datapoint filed a brief in U.S. District Court requesting
that the court in Datapoint Corporation v. Intel Corp. No. 97-CV-2581 (N.D.
Texas), which was originally filed on October 21, 1997, amend and certify the
Company's video conferencing patent infringement suit against Intel Corporation
as a class action suit. Datapoint has identified more than 500 infringers of its
two video conferencing patents in three distinct classes, including
manufacturers, communication providers and resellers. The Company has proposed
that defendant class representatives include Intel Corporation, Teleos
Communications, Pacific Bell, Hayes Microcomputer and Dell Computer Corporation.
Through the class action, Datapoint is seeking royalty payments from the
defendants.
In addition, discussions and negotiations are taking place with certain
companies to enter into mutually agreeable licensing arrangements.
In John Frassanito and David A. Monroe v. Datapoint Corp., No. H-95-812 (S.D.
Tex) plaintiffs alleged that the Company usurped various patentable inventions
and trade secrets in connection with the development of its MINX systems. They
also asserted a cause of action for patent infringement, and a cause of action
requiring Datapoint to assign certain MINX-related patents and other
intellectual property. On August 16, 1996, the Court dismissed with prejudice
plaintiffs' claims of patent infringement against Datapoint and dismissed
without prejudice plaintiff's pendent State law claims and Datapoint's State law
counter-claims for lack of subject matter jurisdiction. Plaintiffs in this
action moved to intervene in the Picturetel and CLI actions. In September 1997,
the Company announced that it had received a court order approving a
confidential agreement that divided ownership among the parties resolving this
matter without further proceedings.
Multi-speed Networking Patents
Datapoint is also the owner of United States Patent Nos. 5,008,879 and 5,077,732
related to Local Area Networks ("LAN"). The Company believes these patents cover
most products introduced by various suppliers to the local area network industry
and dominates certain types of dual-speed LAN Adaptor Products recently
introduced by various industry leaders. Datapoint has asserted one or both of
these patents in the United States District Court for the Eastern District of
New York against a number of parties:
(1) Datapoint Corporation v. Standard Micro-Systems, Inc. and Intel
Corporation, No. C.V.-96-1685;
(2) Datapoint Corporation v. Cisco Systems, Plaintree Systems Corp., Accton
Technologies Corp., Cabletron Systems, Inc., Bay Networks, Inc., Crosscom Corp.
and Assante Technologies, Inc. No. CV 96 4534;
(3) Datapoint Corporation v. Dayna Communications, Inc., Sun Microsystems,
Inc., Adaptec, Inc. International Business Machines Corp., Lantronix, SVEC
America Computer Corporation, and Nbase Communications, No. CV 96 6334; and
(4) Datapoint Corporation v. Standard Microsystems Corp. and Intel Corp.,
individually, and as representatives of the class of all manufacturers, vendors
and users of Fast Ethernet-compliant, dual protocol local-area network products,
No. CV-96-03819.
These actions have been consolidated for discovery. No trial date has been set.
In addition, discussions are taking place with certain companies which may
include one or more of the above companies in an attempt to reach agreement on
licensing arrangements.
8
<PAGE>
The above actions represent the Company's continuing efforts to license and
enforce its video conferencing and multi-speed networking patents through
negotiations and/or litigation. The Company believes that these patents provide
broad coverage in video conferencing and multi-speed networking technology and
present the opportunity for further royalty bearing licenses. While such royalty
bearing licenses and enforcement of its patents are a primary strategy of the
Company's business to create long-term value for its stockholders, the ultimate
outcome of the above litigation and /or negotiations cannot be determined at
this time.
Results of Operations
The Company had operating income of $673 thousand and a net loss of $813
thousand for the first quarter of 1998. This compares with an operating loss of
$1.9 million and a net loss of $1.6 million, for the first quarter of 1997. The
following is a summary of the Company's sources of revenue:
Three Months Ended
(In thousands) 11/01/97 10/26/96
Sales:
Foreign $18,387 $15,892
U.S. 1,116 1,134
----- -----
19,503 17,026
Service and other:
Foreign 15,310 15,663
U.S. 260 291
--------- -----------
15,570 15,954
--------- ---------
Total revenue $35,073 $32,980
======= =======
Revenue during the first quarter of 1998 increased $2.1 million, or 6.3%,
compared with the same period of the prior year. The increase in revenue was
primarily the result of strong sales in one of the Company's Northern European
subsidiaries. This increase in revenue was offset by approximately $3.3 million
resulting from a stronger U.S. dollar, on average, during the first quarter of
1998 as compared to the average U.S. dollar during the first quarter of 1997.
The gross profit margin for the first three months of 1998 was 27.8% compared
with 28.4% for the same period a year ago. The decrease was primarily the result
of a large volume of sales by a Northern European subsidiary of low margin
product and competitive pricing pressures worldwide.
Operating expenses during the first quarter of 1998 declined $1.4 million from
the same period a year ago. The decrease was the result of continued cost
cutting actions undertaken by the Company and approximately $0.6 million
resulting from a stronger U.S. dollar, on average, during the first quarter of
1998 as compared to the average U.S. dollar during the first quarter of 1997.
Non-operating expenses of $1.5 million during the first quarter of 1998
consisted primarily of interest expense of $1.6 million and foreign exchange
losses of $1.2 million offset by the recorded gain on the sale of excess real
estate of $1.2 million.
In addition, during the first quarter of 1998, the Company repurchased in the
public market approximately $875 thousand face value of its 8-7/8% convertible
subordinated debentures resulting in an extraordinary gain of $174 thousand.
Financial Condition
During the first three months of 1998, the Company's cash and cash equivalents
decreased $1.9 million due primarily to the usage of cash in operations. The
decrease in cash was chiefly a result of payments of vendor obligations and
other accrued liabilities, partially offset by continued strong collections of
accounts receivable. The Company used $701 thousand to repurchase 8-7/8%
subordinated debentures with a face value of $875 thousand.
During the first quarter of 1998, the Company's net cash provided from investing
activities was approximately $0.6 million. Approximately $1.2 million was
related to the proceeds received from the sale of the buildings, offset by
approximately $400 thousand which was used for the purchase of fixed assets
(primarily test equipment, spares and internally used equipment).
During the first quarter of 1998, the Company used $214 thousand in financing
activities, primarily consisting of paydowns of Company debt approximating $19.2
million offset by additional borrowings of $19.0 million.
9
<PAGE>
As of November 1, 1997, the Company had cash and cash equivalents of $13.6
million and restricted cash and cash equivalents of $155 thousand (restricted
primarily to cover various lines of credits which are reflected as payables to
banks). The Company believes its available cash and cash equivalents and funds
generated from operations will be sufficient to provide its working capital and
cash requirements for fiscal 1998.
Reorganization/Restructuring Costs
(In thousands)
A rollforward of the restructuring accrual from July 29, 1995, through November
1, 1997, is as follows:
TOTAL
Restructuring accrual as of July 29, 1995 $4,168
Fiscal 1996 additions 263
Fiscal 1996 payments (3,776)
- ----------------------------------------------------------
Restructuring accrual as of July 27, 1996 655
Fiscal 1997 additions 2,425
Fiscal 1997 payments (2,572)
- ----------------------------------------------------------
Restructuring accrual as of August 2, 1997 $508
Fiscal 1998 payments (159)
- ----------------------------------------------------------
Restructuring accrual as of November 1, 1997 $349
====
The projected payout of the restructuring accrual balance as of November 1,
1997, which related almost entirely to unpaid employee termination costs, is as
follows:
Second quarter 1998 $154
Third quarter 1998 55
Fourth quarter 1998 61
Beyond 79
- ---------------------------------------------------------------
Restructuring accrual as of November 1, 1997 $349
====
Restructuring charges are not recorded until specific employees are determined
(and notified of termination) by management in accordance with its overall
restructuring plan. Employee termination payments are generally paid out over a
period of time rather than as one lump sum. As the Company continues to pursue
its objective to review and reduce operating costs, it may incur additional
restructuring charges. However a reasonable estimate of the amount of future
restructuring costs cannot be made at this time.
Cautionary Statement Regarding Risks and Uncertainties That May Affect
Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements about the
business, financial condition and prospects of the Company. The actual results
of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including
without limitation changes in product demand, the availability of products,
changes in competition, economic conditions, new product development, various
inventory risks due to changes in market conditions, changes in tax and other
governmental rules and regulations applicable to the Company, and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and in many cases, the Company cannot predict the risks and uncertainties that
could cause its actual results to differ materially from those indicated by the
forward-looking statements. When used in this Quarterly Report on Form 10-Q, the
words "believes," "estimates," "plans," "expects," and "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Item 3 of Registrant's Report on Form 10-K for the fiscal year ended August
2, 1997, for a description of certain legal proceedings heretofore reported.
The Company is a Plaintiff in a number of actions related to its patents and
trademarks which are more fully described in the Management's Discussion and
Analysis overview section of this Form 10Q.
11
<PAGE>
SIGNATURE
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.
DATAPOINT CORPORATION
(Registrant)
DATE: December 12, 1997 /s/ Ronald G. Conn
Ronald G. Conn
Chief Financial Officer
(Chief Accounting Officer)
12
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