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 May
1, 1999
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 May 1, 1999, 18,316,084 shares of Datapoint Corporation Common Stock
were outstanding, exclusive of 2,675,133 shares held in Treasury.
<PAGE>
DATAPOINT CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
May 1, 1999 and August 1, 1998 3
Consolidated Statements of Operations -
Three and Nine Months Ended May 1, 1999
and May 2, 1998 4
Consolidated Statements of Cash Flows -
Nine Months Ended May 1, 1999 and
May 2, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information
Item 1. Legal Proceedings 14
Signature 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Datapoint Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In thousands, except share data)
(Unaudited)
May 1, August 1,
1999 1998
------------ ----------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,872 $12,101
Restricted cash and cash equivalents 343 352
Accounts receivable, net of allowance for doubtful
accounts of $1,093 and $1,305, respectively 28,303 32,138
Inventories 2,844 2,957
Prepaid expenses and other current assets 3,192 3,259
- ------------------------------------------------------------------------------------------
Total current assets 38,554 50,807
Fixed assets, net 5,704 9,468
Other assets, net 6,762 6,541
- ------------------------------------------------------------------------------------------
$51,020 $66,816
==========================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Payables to banks $4,302 $7,902
Accounts payable 13,545 17,341
Accrued expenses 20,712 22,592
Deferred revenue 10,756 11,643
Income taxes payable 1,661 1,898
- ------------------------------------------------------------------------------------------
Total current liabilities 50,976 61,376
Long-term debt, exclusive of current maturities 54,960 58,115
Other liabilities 12,311 11,762
Stockholders' deficit:
Preferred stock of $1.00 par value. Shares authorized
10,000,000; shares issued and outstanding 661,967 in
1999 and 721,976, in 1998 (aggregate liquidation
preference, including dividend in
arrears, $16,384 in 1999 and $17,327 in 1998). 662 722
Common stock of $0.25 par value. Shares authorized
40,000,000; shares issued 20,991,217, including
treasury shares of 2,675,133 in 1999 and
2,951,909 in 1998. 5,248 5,248
Other capital 212,655 212,655
Pension liability adjustment (6,084) (6,084)
Foreign currency translation adjustment 6,280 6,242
Retained deficit (283,705) (278,655)
Treasury stock, at cost (2,283) (4,565)
- -------------------------------------------------------------------------------------------
Total stockholders' deficit (67,227) (64,437)
- -------------------------------------------------------------------------------------------
$51,020 $66,816
==========================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Datapoint Corporation and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Nine Months Ended
- -----------------------------------------------------------------------------------------------------------------------------------
May 1, 1999 May 2, 1998 May 1, 1999 May 2, 1998
<S> <C> <C> <C> <C>
----------- ----------- ----------- -----------
Revenue:
Sales $17,756 $20,624 $58,698 $64,993
Service and other 14,781 15,480 44,849 46,628
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 32,537 36,104 103,547 111,621
Operating costs and expenses:
Cost of sales 13,572 15,934 45,553 51,166
Cost of service and other 10,440 9,967 31,874 29,805
Research and development 409 641 1,547 1,847
Selling, general and administrative 7,828 8,160 24,050 24,726
Reorganization/restructuring costs 175 -- 813 52
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 32,424 34,702 103,837 107,596
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 113 1,402 (290) 4,025
Non-operating income (expense):
Interest expense (1,404) (1,561) (4,334) (4,612)
Other, net 137 12 316 1,121
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary credit (1,154) (147) (4,308) 534
Income tax expense 237 328 500 1,016
- -----------------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary credit (1,391) (475) (4,808) (482)
- -----------------------------------------------------------------------------------------------------------------------------------
Extraordinary credit -- debt extinguishment 47 -- 1,707 555
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(1,344) $ (475) $(3,101) $73
===================================================================================================================================
Net income (loss), adjusted for preferred stock
dividends paid or accumulated plus gain on exchange
and retirement of preferred stock -
Net loss applicable to common $(1,354) $ (656) $(3,313) $(469)
==========================================================================================================================
Basic and Diluted Earnings (Loss) Per Common Share:
Loss before extraordinary credit $(.08) $ (.04) $ (.29) $(.03)
Gain on exchange of preferred stock .01 -- .02 --
Extraordinary credit -- -- .09 .03
===================================================================================================================================
Net income (loss) per common share $(.07) $ (.04) $ (.18) $.00
===================================================================================================================================
Common Shares Outstanding:
Basic 18,276,977 18,026,258 18,190,461 17,945,046
Diluted 18,301,361 18,026,258 18,190,461 17,945,046
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Datapoint Corporation and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
(In Thousands)
Nine Months Ended
May 1, 1999 May 2, 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,101) $73
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 2,476 2,670
Recoveries on accounts receivable (167) (161)
Gain on debt extinguishment (1,707) (555)
Deferred income taxes 122 41
Realized gain on sale of property (273) (1,205)
Changes in assets and liabilities:
(Increase) decrease in receivables 2,928 (7,868)
(Increase) decrease in inventory 71 (787)
Increase (decrease) in accounts payable and accrued expenses (5,056) 3,187
Increase (decrease) in other liabilities and deferred credits (920) 69
Other, net (37) (453)
- -----------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,664) (4,989)
Cash flows from investing activities:
Payments for fixed assets (2,110) (1,580)
Proceeds from dispositions of fixed assets 2,111 3,200
Other, net 112 (583)
- ------------------------------------------------------------------------------------------------------
Net cash provided from investing activities 113 1,037
Cash flows from financing activities:
Proceeds from borrowings 58,424 45,709
Payments on borrowings (61,180) (49,199)
Restricted cash for letters of credit 9 154
- -----------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,747) (3,336)
Effect of foreign currency translation on cash 69 619
- -----------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (8,229) (6,669)
Cash and cash equivalents at beginning of period 12,101 15,490
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $3,872 $8,821
====== ======
Cash payments for:
Interest $3,159 $3,362
Income taxes, net $413 $280
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
It is recommended that these statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended August 1, 1998.
The results of operations for the three and nine months ended May 1, 1999, are
not necessarily indicative of the results to be expected for the full year.
2. Inventories
Inventories consist of:
May 1, August 1,
1999 1998
Raw materials $21 $74
Work in process 755 972
Finished and purchased products 2,068 1,911
----- -----
$2,844 $2,957
====== ======
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
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which became
effective for the Company's financial statements beginning with the period
ending January 31, 1998.
As a result of dividend arrearages, each holder of the $1.00 preferred stock has
the right to exchange each share (inclusive of all accrued and unpaid dividends)
into two shares of the Company's common stock. For purposes of calculating net
income applicable to common shareholders in 1999 and related per share amounts,
a gain of $155 thousand and $306 thousand on such exchanges of preferred stock
was added to net income, for the third quarter and nine months of 1999,
respectively. This gain is the excess of the carrying value of preferred stock
exchanged (including accumulated dividends) over the fair value of the common
stock issued. Net income (loss) applicable to common stock is computed as
follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
<S> <C> <C> <C> <C>
05/01/99 05/02/98 05/01/99 05/02/98
Loss before extraordinary credit $(1,391) $(475) $(4,808) $(482)
Preferred stock dividends accumulated (165) (181) (518) (542)
Gain on the exchange of preferred stock 155 -- 306 --
Extraordinary credit 47 -- 1,707 555
-- - ----- ---
Net loss applicable to common $(1,354) $(656) $(3,313) $(469)
======== ====== ======== ======
</TABLE>
<PAGE>
5. Non-operating Income (Expense)
Quarter Ended Nine Months Ended
(In thousands) 05/01/99 05/02/98 05/01/99 05/02/98
Interest earned $49 $99 $265 $341
Foreign currency gains (losses) 109 23 (8) (166)
Realized gain on sale of property -- -- 273 1,205
Other (21) (110) (214) (259)
---- ----- ----- -----
$137 $12 $316 $1,121
==== === ==== ======
6. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, Reporting Comprehensive Income. Statement No. 130 establishes new rules
for the reporting and display of comprehensive income and its components.
Comprehensive income is net income or loss, plus certain other nonowner changes
in stockholders' equity. The only such items currently applicable to the Company
are foreign currency translation adjustments and minimum pension liability
adjustments. The Company adopted this Statement in the first quarter of fiscal
1999. On this basis, these nonowner reductions (increases) to stockholders'
deficit, including net income or loss, for the third quarter of 1999 and the
first nine months of 1999, totaled $(1.7) million and $(3.1) million,
respectively. For the third quarter and the first nine months of 1998, these
nonowner reductions totaled, $(200) thousand and $2.0 million, respectively.
7. Subsequent Event
During the second quarter of fiscal 1999, the Company retained the firm of Dain
Rauscher Wessels, financial advisors, to assist in exploring strategic
alternatives for the company, both of a financing and capital nature. In this
regard, the Company announced on May 17, 1999 that it and its wholly-owned
subsidiary, Datapoint International, Inc., had entered into a letter of intent
to sell its European operations for $49.5 million plus the assumption of certain
liabilities to an investor group headed by Blake Thomas, the Company's
President, and which includes key European Management employees and Aim High
Enterprises, of Braintree, Massachusetts. During fiscal year 1999, the
European operations have accounted for approximately ninety-six percent of the
Company's revenue. The acquisition is contingent upon certain conditions
including acquisition financing, the negotiation of definitive purchase
documentation, necessary governmental and third party consents, and the
completion of due diligence. The new company and Datapoint plan to contract
with each for support services. While there are no assurances that the sale
will be consummated, the sale is expected to close subsequent to July 31, 1999,
the Company's fiscal year-end.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Years Referred to are Fiscal Years)
Overview
The Company had operating income of $113 thousand and a net loss of $1.3 million
for the third quarter of 1999 and an operating loss of $290 thousand and a net
loss of $3.1 million for the first nine months of 1999. This compares with
operating income of $1.4 million and a net loss of $0.5 million for the third
quarter of 1998 and operating income of $4.0 million and net income of $73
thousand for the first nine months of 1998. Revenue during the third quarter of
1999 decreased $3.6 million, or 9.9%, compared with the same period of the prior
year. This decrease was primarily in sale revenue due to lower sales volume, and
for the third quarter of 1999, reflects approximately $800 thousand resulting
from a stronger U.S. dollar, on average, as compared to the average U.S. dollar
during the same period of 1998. For the first nine months of 1999, total revenue
decreased $8.1 million, or 7.2%, when compared with the same period of the prior
year. However, for the first nine months of 1999, the decrease in revenue also
primarily due to lower sales volume, was offset by approximately $330 thousand
resulting from a weaker U.S. dollar, on average, during the first nine months of
1999, as compared to the average U.S. dollar during the same period of 1998.
Operating expenses (excluding cost of revenue and restructuring) for the third
quarter of 1999 were $8.2 million, compared with $8.8 million for the same
period a year ago. For the first nine months of 1999, operating expenses were
$25.6 million compared with $26.6 million for the prior year. During the third
quarter of 1999, the Company incurred restructuring costs of $175 thousand,
related to severance actions in the United States. For the first nine months of
1999, the Company incurred restructuring costs of $813 thousand, primarily
related to severance in the United States and France for thirty employees.
<PAGE>
During the third quarter of 1999, the Company repurchased in the public market
$81 thousand face value of its 8 7/8% convertible subordinated debentures. This
brings the total of repurchased bonds to $3.2 million for the first nine months
of 1999. These purchases resulted in an extraordinary gain of $47 thousand for
the third quarter and approximately $1.7 million for the first nine months of
fiscal 1999. While the Company did not repurchase any of its 8 7/8% convertible
subordinated debentures during the third quarter of fiscal 1998, the Company did
repurchase in the public market approximately $2.7 million at face value of its
8 7/8% convertible subordinated debentures during the first nine months of 1998.
These purchases resulted in an extraordinary gain of $555 thousand for the first
nine months of fiscal 1998.
During the first quarter of 1999, the Company sold the building it owned in
Gouda, Netherlands to a private unaffiliated group for approximately $2.1
million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of approximately 18,000 square feet
for an initial term of five years and approximately 12,000 square feet for an
initial lease term of one year. The Company recorded in non-operating income a
gain of approximately $.3 million during the first quarter of 1999. The
remainder of the gain ($.9 million) was deferred and is being amortized over the
lease terms.
On April 14, 1999, the Company announced that it had entered into a letter of
intent to acquire S. F. Digital and the Corebyte(TM) product family, owned by
John Engstrom, a leader in the development of network services delivered via the
Internet. The acquisition is subject to approval by the Company's Board of
Directors of the definitive agreement.
During the second quarter of fiscal 1999, the Company retained the firm of Dain
Rauscher Wessels, financial advisors, to assist in exploring strategic
alternatives for the company, both of a financing and capital nature. In this
regard, the Company announced on May 17, 1999 that it and its wholly-owned
subsidiary, Datapoint International, Inc., had entered into a letter of intent
to sell its European operations for $49.5 million plus the assumption of certain
liabilities to an investor group headed by Blake Thomas, the Company's
President, and which includes key European Management employees and Aim High
Enterprises, of Braintree, Massachusetts. During fiscal year 1999, the
European operations have accounted for approximately ninety-six percent of the
Company's revenue. The acquisition is contingent upon certain conditions
including acquisition financing, the negotiation of definitive purchase
documentation, necessary governmental and third party consents, and the
completion of due diligence. The new company and Datapoint plan to contract
with each for support services. While there are no assurances that the sale
will be consummated, the sale is expected to close subsequent to July 31, 1999,
the Company's fiscal year-end.
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.
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.
The status of the patent infringement litigation is as follows:
(1) Datapoint Corporation v. PictureTel Corporation, No. 3:93-CV-2381-D
(N.D. Texas). This case was tried in March and April of 1998 with an adverse
result. An appeal has been filed, the case argued and the Company is awaiting a
decision.
(2) Datapoint Corporation v. Compression Labs, Inc. No. 3:93-CV-2522-D
(N.D. Texas); Datapoint Corporation v. Teleos Communications, Inc. No.
95-4455-AET (D.N.J.); Datapoint Corporation v. Videolan Technologies, Inc.;
Videolan Technologies, Inc. v. Datapoint Corporation, No. 96 CV-604-H (W.D.
Kentucky) et al; Datapoint Corporation v. Intel Corp. No. 97-CV-2581 (N.D.
Texas). These cases have been dismissed subject to being reopened if the Company
is successful in its appeal of certain of the issues adversely determined in the
PictureTel litigation described above.
<PAGE>
Multi-speed Networking Patents
Datapoint is also the owner of United States Patent Nos. 5,008,879 and
5,077,732 related to network technology. The Company believes these patents
cover most products introduced by various suppliers to the networking industry
and dominates certain types of dual-speed technology on networking 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, and for purposes of
claim construction. On January 20, 1998, a hearing commenced in the United
States District Court that concluded on January 23, 1998 during which claim
construction was submitted to a Special Master. The Special Master's report was
issued in April of 1998. The Company has filed two sets of objections to certain
portions of this report. The District Court overruled these objections and the
Company has appealed to the United States Court of Appeals for the Federal
Circuit.
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 royalty bearing licenses. While such royalty bearing
licenses and enforcement of its patents are important to the Company's business
to create long-term value for its stockholders, the ultimate outcome of the
above litigation, appeals with respect to the litigation, and /or negotiations
cannot be determined at this time.
Results of Operations
For the third quarter and for the first nine months of fiscal year 1999, the
Company had operating income of $113 thousand and an operating loss of $290
thousand, respectively, and net losses of $1.3 million and $3.1 million,
respectively. For the same periods of the prior year, the Company had operating
income of $1.4 million and $4.0 million, respectively, and a net loss of $475
thousand and net income of $73 thousand, respectively. The following is a
summary of the Company's sources of revenue (approximately ninety-nine percent
of Datapoint's international revenue is derived from customers in Western
Europe):
Quarter Ended Nine Months Ended
(In thousands) 05/01/99 05/02/98 05/01/99 05/02/98
Sales:
U.S. $819 $671 $2,527 $2,544
Foreign 16,937 19,953 56,171 62,449
------ ------ ------ ------
17,756 20,624 58,698 64,993
Service and other:
U.S. 258 276 815 840
Foreign 14,523 15,204 44,034 45,788
------ ------ ------ ------
14,781 15,480 44,849 46,628
------ ------ ------ ------
Total revenue $32,537 $36,104 $103,547 $111,621
======= ======= ======== ========
<PAGE>
Revenue during the third quarter of 1999 decreased $3.6 million, or 9.9%,
compared with the same period of the prior year. For the first nine months of
1999, total revenue decreased $8.1 million, or 7.2%, when compared with the same
period of the prior year. This decrease was primarily due to lower sales volume,
and for the third quarter of 1999, reflects approximately $800 thousand
resulting from a stronger U.S. dollar, on average, as compared to the average
U.S. dollar during the same period of 1998. However, for the first nine months
of 1999, the decrease in revenue, also primarily due to lower sales volume, was
offset by approximately $330 thousand resulting from a weaker U.S. dollar, on
average, during the first nine months of 1999, as compared to the average U.S.
dollar during the same period of 1998.
The gross profit margin for the third quarter of 1999 and the first nine months
of 1999 was 26.2% and 25.2%, respectively, compared with 28.3% and 27.5%,
respectively, for the same periods of the prior year. In comparing the third
quarter of fiscal 1999 with the third quarter of 1998, sales margin increased
0.9% and service margin decreased 6.2%. For the first nine months of 1999, the
sales gross profit margin increased 1.1%, and service margin decreased 7.2% when
compared to the same period of the prior year. The service margin decreases are
due to a declining revenue base and increased cost associated with a large
service contract within a division of the Company's United Kingdom subsidiary.
Operating expenses (excluding cost of revenue and restructuring) for the third
quarter of 1999 were $8.2 million, compared with $8.8 million for the same
period a year ago. For the first nine months of 1999, operating expenses were
$25.6 million compared with $26.6 million for the prior year. During the third
quarter of 1999, the Company incurred restructuring costs of $175 thousand,
related to severance actions in the United States for ten employees. This brings
the total to $813 thousand for restructuring costs incurred during the first the
nine months of 1999. The thirty employees affected were in the United States and
France.
Non-operating expenses for the third quarter of 1999 and for the first nine
months of 1999, consisted primarily of interest expense of $1.4 million and $4.3
million, respectively. Non-operating income and expenses for the first nine
months of 1998, included interest expense of $4.6 million offset by a recorded
gain on the sale of excess real estate of $1.2 million.
During the third quarter of 1999, the Company repurchased in the public market
$81 thousand face value of its 8 7/8% convertible subordinated debentures. This
brings the total of repurchased bonds to $3.2 million for the first nine months
of 1999. These purchases resulted in an extraordinary gain of $47 thousand for
the third quarter and approximately $1.7 million for the first nine months of
fiscal 1999. While the Company did not repurchase any of its 8 7/8% convertible
subordinated debentures during the third quarter of fiscal 1998, the Company did
repurchase in the public market approximately $2.7 million at face value of its
8 7/8% convertible subordinated debentures during the first nine months of 1998.
These purchases resulted in an extraordinary gain of $555 thousand for the first
nine months of fiscal 1998.
Financial Condition
During the first nine months of 1999, the Company's cash and cash equivalents
decreased $8.2 million due primarily to the usage of cash in operations. The
decrease in cash was a result of payments of vendor obligations and other
accrued liabilities and the semi-annual bond interest payment.
During the first nine months of 1999, the Company's net cash provided from
investing activities was approximately $113 thousand. Approximately $2.1 million
was related to the proceeds received from the sale of the building, offset by
approximately $2.1 million which was used for the purchase of fixed assets
(primarily test equipment, spares and internally used equipment).
During the first nine months of 1999, the Company used $2.7 million in financing
activities, primarily consisting of paydowns of Company debt approximating $61.2
million offset by additional borrowings of $58.4 million. The Company used
approximately $1.4 million to repurchase 8-7/8% subordinated debentures with a
face value of $3.2 million.
As of May 1, 1999, the Company had cash and cash equivalents of $3.9 million and
restricted cash and cash equivalents of $343 thousand (restricted primarily to
cover various lines of credits, which are reflected as payables to banks).
Subsequent to quarter end, the Company did not make the June 1, 1999 semi-annual
interest payment on its 8 7/8% convertible subordinated debentures. The Company
does expect to make the payment from internal funding sources within the thirty
day grace period allowable under the terms of the Indenture dated as of June 1,
198l. The Company does believe its available cash and cash equivalents and funds
generated from operations will be sufficient to provide its working capital and
cash requirements for the remainder of fiscal 1999.
<PAGE>
Reorganization/Restructuring Costs
(In thousands)
A rollforward of the restructuring accrual from July 27, 1996, through May 1,
1999, is as follows:
TOTAL
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 additions 96
Fiscal 1998 payments (422)
- ---------------------------------------------------------------------------
Restructuring accrual as of August 1, 1998 $182
Fiscal 1999 additions 813
Fiscal 1999 payments (572)
- ---------------------------------------------------------------------------
Restructuring accrual as of May 1, 1999 $423
====
The projected payout of the restructuring accrual balance as of May 1, 1999,
which related almost entirely to unpaid employee termination costs, is as
follows:
Fourth quarter 1999 $299
First quarter 2000 89
Second quarter 2000 35
Beyond --
- ---------------------------------------------------------------------------
Restructuring accrual as of May 1, 1999 $423
====
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.
Year 2000 Information and Readiness Disclosure Act of 1998:
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, generate invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be required to
modify or replace significant portions of hardware and software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications and replacement of existing hardware
and software, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed on a timely
basis, the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has substantially completed (90%) of its assessment of all Information
Technology ("IT") systems that could be significantly affected by the Year 2000.
The completed assessment indicated that most of the company's significant
information technology systems could be affected, particularly general ledger
and the remaining financial systems (Billing, Inventory, etc.).
The Company has also assessed its non "IT" operating systems to insure
compliance with Year 2000. Affected systems included those primarily related to
the office and facilities' environment (telephone systems, security systems,
etc.). While the Company has determined that some of these systems are not Year
2000 compliant, the Company intends to replace/modify these prior to July 31,
1999, and does not expect to have a material exposure with these systems.
The majority of the Company's products are purchased from third parties, who
furnish products meeting the Company's specifications. The Company has obtained
information about the Year 2000 compliance status of its significant suppliers
and subcontractors and continues to monitor their compliance. To date, the
Company is not aware of any supplier/subcontractor Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that their suppliers
will be Year 2000 ready. The inability of suppliers/sub-contractors to complete
their Year 2000 resolution process in a timely fashion could materially impact
the Company. The effect of non-compliance by suppliers is not determinable at
this time.
The Company also sells a variety of proprietary software products which the
Company developed. The Company is 90% complete with the assessment of Year 2000
compatibility of these software products and has made the results available on
the Company's Internet "web" page and have communicated these results to
customers on a demand basis.
For its information technology exposures, to date, the Company is approximately
20% complete on the remediation phase and expects to complete software
reprogramming and replacement no later than August 1, 1999. Once software is
reprogrammed and replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems. Completion
of the testing and implementation phases for all significant systems is expected
by August 1, 1999.
For operating equipment, the Company is beginning the remediation phases and
expects to complete its remediation efforts by August 1, 1999.
The Company will utilize both internal and external resources to reprogram, or
replace, test, and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $1.3
million and is being funded through operating cash flows. To date, the Company
has incurred approximately $0.1 million (all expensed) related to all phases of
the Year 2000 project. Of the total remaining project costs, approximately $1.0
million is attributable to the purchase of new software and operating equipment,
which will be capitalized. The remaining $0.2 million relates to the
repair/replacement of hardware and software and will be expensed as incurred.
<PAGE>
The Company believes that it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
fully completed all necessary phases of the Year 2000 program. In the event that
the Company does not complete all phases, there could be circumstances in which
the Company would be unable to automatically accept customer orders, ship
products, invoice customers or collect payments. In these events, the Company
would resort to a previously identified list of problem solving priorities,
revert to some previous or manual operation and/or rely on previously identified
outsourcing or incremental staffing opportunities.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the Company. The Company could be
subject to litigation for computer system product failure, such as, equipment
shutdown, or failure to properly date business records. The amount of potential
liability or lost revenue cannot be reasonable estimated at this time.
The Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
New European Currency
In January 1999, certain European countries introduced a new currency unit
called the `euro'. In conjunction with the preparation for the year 2000, the
Company is also modifying and/or adapting systems designed to properly handle
the euro. The Company's subsidiaries will formally begin reporting in euro
currency starting with the August 1999 results (FY 2000). While Datapoint will
more than likely be required to deal with euro transactions prior to that time,
the activity will primarily be done manually. The costs required to be able to
accommodate the euro are combined with costs of becoming year 2000 compliant,
and therefore not easily identifiable. However, they are not considered to be so
significant so as to have a material effect on the Company's business. The
projected costs and completion dates for the euro project are based upon
management's best estimates. Actual results could differ materially from these
estimates.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information concerning market risk is contained on page 15 of the
Registrant's 1998 annual report and is incorporated by reference to such annual
report.
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
1, 1998, 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.
<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: June 15, 1999 /s/ Phillip P. Krumb
Phillip P. Krumb
Acting Chief Financial Officer
(Acting Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Datapoint Corporation Consolidated Statements of Operation and Consolidated
Balance Sheet and the related notes and schedules as of May 1, 1999 and for the
nine months then ended, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000205239
<NAME> Datapoint Corporation
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<FISCAL-YEAR-END> JUL-31-1999
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