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
October 30, 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)
7 rue d'Anjou 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 October 30, 1999, 18,348,229 shares of Datapoint Corporation Common
Stock were outstanding, exclusive of 2,642,988 shares held in Treasury.
<PAGE>
DATAPOINT CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
October 30, 1999 and July 31, 1999 3
Consolidated Statements of Operations -
Three Months Ended October 30, 1999
and October 31, 1998 4
Consolidated Statements of Cash Flows -
Three Months Ended October 30, 1999 and
October 31, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 16
Signature 17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Datapoint Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In thousands, except share data)
(Unaudited)
October 30, July 31,
1999 1999
---------- ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $843 $3,568
Restricted cash and cash equivalents 372 328
Accounts receivable, net of allowance for doubtful
accounts of $878 and $880, respectively 33,340 32,130
Inventories 1,731 2,632
Prepaid expenses and other current assets 1,519 2,272
- ---------------------------------------------------------------------------------------
Total current assets 37,805 40,930
Fixed assets, net 6,010 5,928
Other assets, net 2,385 2,475
- ---------------------------------------------------------------------------------------
$46,200 $49,333
=======================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Payables to banks $6,332 $6,676
Current maturities of long-term debt 4,960 4,960
Accounts payable 13,224 14,451
Accrued expenses 22,732 22,890
Deferred revenue 10,852 9,311
Income taxes payable 1,915 2,175
- ---------------------------------------------------------------------------------------
Total current liabilities 60,015 60,463
Long-term debt, exclusive of current maturities 50,000 50,000
Other liabilities 10,613 10,998
Stockholders' deficit:
Preferred stock of $1.00 par value. Shares authorized
10,000,000; shares issued and outstanding 661,967
in both fiscal 2000 and fiscal 1999 (aggregate
liquidation preference, including dividend in arrears,
$16,714 in fiscal 2000 and $16,549 in fiscal 1999). 662 662
Common stock of $0.25 par value. Shares authorized
40,000,000; shares issued 20,991,217, including
treasury shares of 2,642,988 in fiscal 2000 and
2,655,985 in fiscal 1999. 5,248 5,248
Paid in capital 212,733 212,733
Accumulated other comprehensive income (430) (354)
Retained deficit (290,623) (288,292)
Treasury stock, at cost (2,018) (2,125)
- ------------------------------------------------------------------------------------------------
Total stockholders' deficit (74,428) (72,128)
- ------------------------------------------------------------------------------------------------
$46,200 $49,333
===============================================================================================
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
- -----------------------------------------------------------------------------------------------------------------------------------
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
<S> <C> <C>
Revenue:
Sales $15,171 $17,974
Service and other 14,851 14,736
-----------------------------------------------------------------------------------------------------------------
Total revenue 30,022 32,710
Operating costs and expenses:
Cost of sales 11,767 13,642
Cost of service and other 10,099 10,562
Research and development 332 585
Selling, general and administrative 7,783 7,684
Reorganization/restructuring costs 624 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 30,605 32,473
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (583) 237
Non-operating income (expense):
Interest expense (1,361) (1,489)
Other, net 17 112
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes and
extraordinary credit (1,927) (1,140)
Income tax expense 305 57
- -----------------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary credit (2,232) (1,197)
- -----------------------------------------------------------------------------------------------------------------------------------
Extraordinary credit -- debt extinguishment -- 1,284
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(2,232) $87
===================================================================================================================================
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 shareholders: $(2,397) $(94)
===================================================================================================================
Basic and Diluted Loss Per Common Share:
Loss before extraordinary credit $(.13) $(.08)
Extraordinary credit -- .07
===================================================================================================================================
Net loss per common share $(.13) $(.01)
===================================================================================================================================
Average Common Shares Outstanding:
Basic and Diluted 18,342,047 18,101,316
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Datapoint Corporation and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended
October 30, October 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,232) $87
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 632 884
Provisions (recoveries) on accounts receivable 30 (196)
Gain on debt extinguishment -- (1,284)
Deferred income taxes 3 125
Realized gain on sale of property -- (273)
Changes in assets and liabilities:
(Increase) decrease in receivables (1,428) 3,852
(Increase) decrease in inventory 903 (740)
Decrease in accounts payable and accrued expenses (1,352) (6,409)
Increase (decrease) in other liabilities and deferred credits 1,301 (220)
Other, net 509 473
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,634) (3,701)
Cash flows from investing activities:
Payments for fixed assets (715) (609)
Proceeds from dispositions of fixed assets -- 2,111
Other, net (13) 218
- ----------------------------------------------------------------------------------------------------------
Net cash provided (used) from investing activities (728) 1,720
Cash flows from financing activities:
Proceeds from borrowings 16,039 22,186
Payments on borrowings (16,352) (23,381)
Restricted cash for letters of credit (44) (147)
- -----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (357) (1,342)
Effect of foreign currency translation on cash (6) 560
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,725) (2,763)
Cash and cash equivalents at beginning of period 3,568 12,101
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $843 $9,338
==== ======
Cash payments for:
Interest $142 $274
Income taxes, net 362 $570
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
DATAPOINT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(Unaudited)
1. Basis of Presentation and Sale of European Operations
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 July 31, 1999.
The results of operations for the three months ended October 30, 1999, are not
necessarily indicative of the results to be expected for the full year ended
July 29, 2000.
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue as a going concern. At July 31, 1999 and for the year
then ended, the Company experienced a net loss of $7,549 and it had a working
capital deficiency of $19,533 and a net capital deficiency of $72,128 which
raised substantial doubt about its ability to continue as a going concern. For
the three month period ended October 30, 1999, the Company experienced a net
loss of $2,232 and it has a working capital deficiency of $22,210 and a net
capital deficiency of $74,428. The Company's ability to continue operations will
depend on the availability of sufficient cash resources to meet the Company's
obligations in the near term. Without the successful consummation of the
announced sale of the European Operations, described below, and positive cash
flow, if any, from future operations, there can be no assurances that the
Company's operations will continue.
On May 17, 1999, the Company and its wholly-owned subsidiary, Datapoint
International, Inc., entered into a letter of intent for a proposed sale (the
"Asset Sale") of its European subsidiaries which comprise substantially all of
the Company's operations (the "European Operations"). The European Operations
represented 96% of the Company's total revenue during 1999 and 98% of the
Company's total revenue for the three months ended October 30, 1999. Excluding
the European Operations, the Company's consolidated revenue and operating loss
were $602 and $1,803, respectively, for the quarter ended October 30, 1999.
Under the terms of the proposed sale, the European Operations will be purchased
for $49,500 plus the assumption of certain liabilities, less fees and expenses,
by Reboot Systems, Inc., an investor group headed by Blake Thomas, the Company's
president, and which includes key management employees of the European
Operations (collectively, the "Buyer"). Subsequently, a Stock Purchase Agreement
for the proposed sale was signed on July 31, 1999, and subsequently amended on
November 1, 1999 ("Stock Purchase Agreement"). The Asset Sale is contingent upon
certain conditions, including, without limitation, the ability of the Buyer to
secure acquisition financing to finance the purchase price, majority approval of
the holders (the "Stockholders") of the common stock of the Company, par value
$.25 per share, with respect to the Asset Sale and the amendment of the
Company's Certificate of Incorporation to change the Company's corporate name,
and the consent of 66-2/3% (by principal amount) of the holders of the Company's
8-7/8% Convertible Subordinated Debentures due 2006 (the "Debentures" and the
holders thereof, the "Debentureholders") of certain actions (collectively, the
"Debentureholder Consent Solicitation") to amend and waive several provisions
set forth in the Company's Indenture dated June 1, 1981 (the "Indenture"),
pursuant to which such Debentures were issued. On November 1, 1999, the Company
and the Buyer entered into the First Amendment to the Stock Purchase Agreement
(the "First Amendment"). The First Amendment provided for a refundable deposit
of $750 (the "Deposit") which was paid by the Buyer on November 8, 1999, to the
Company.
<PAGE>
The Deposit will be used primarily to fund transaction costs associated with the
sale of the European Operations, the proxy statement, the Debentureholder
Solicitation and Consent, and the engagement of BNY Capital Markets, Inc.
("BNY"), a subsidiary of Bank of New York, to issue a fairness opinion in
connection with the transaction. Pursuant to the Stock Purchase Agreement on
December 1, 1999 the Buyer is obligated to loan to the Company approximately
$2.5 million (the "December 1 Funding") which represents the funds that the
Company intends to use to make its December 1999 interest payment on the
Debentures. In connection with such loan, the Company and Buyer are working to
finalize the process to grant a security interest to the Buyer in certain of the
European Subsidiaries and expect that this process shall be completed shortly
and upon completion of such process such loan shall be funded. While there can
be no assurances that the loan will be made, the Company expects that the
December 1 Funding will be received within the 30 day grace period provided for
in the Indenture for the interest payment.
If the Asset Sale is consummated, the Deposit and the December 1 Funding shall
be applied toward the purchase price. If the Asset Sale is not consummated as a
result of the inability of the Company to obtain the approval by the
Stockholders and the approval by the Debentureholders to the Debentureholder
Consent Solicitation, the Company would be required to immediately repay to the
Buyer (i) the December 1 Funding, (ii) the Deposit, (iii) fees of the Buyer in
connection with obtaining funding commitments which the Buyer may incur in
connection with the Asset Sale (the "Commitment Fees") and (iv) a fee of
$375,000 (the "$375,000 Fee") as reimbursement for certain expenses incurred by
the Buyer in connection with the Asset Sale. All amounts payable or repayable by
the Company to the Buyer are to be secured by certain European Subsidiaries. In
the event that the Buyer does not obtain the financing commitment necessary to
secure acquisition financing for the Purchase Price by February 1, 2000, the
Company is required to immediately reimburse the Buyer for the December 1
Funding, however, the Company retains the Deposit. In the event that the Company
is required to immediately repay the December 1 Funding and any other amounts
owed to Buyer it may very likely be unable to since it lacks the capital to do
so. Absent the ability to negotiate with the Buyer a scheduled repayment of
these amounts, if the Buyer exercises its security interest rights against
certain of the European Subsidiaries, such action would have a material adverse
effect on the ability of the Company to conduct its ongoing operations.
As previously mentioned, the closing under the Stock Purchase Agreement, as
amended, requires majority Stockholder approval and the consent of at least two
thirds of the Debentureholders of the Company. In connection with obtaining such
approvals, the Company has recently filed with the U.S. Securities and Exchange
Commission proxy materials and Debentureholder Consent Solicitation
documentation to solicit such approvals.
The Company's believes that, based on current trends in its business and
financial forecasts, absent the Asset Sale, there is a substantial doubt that
there will be sufficient funding, from either cash flow from operations or other
capital sources, to pay obligations relating to the scheduled December 1999
Debenture interest payment of approximately $2.4 million, the approximate $2.4
million June 2000 Debenture interest payment and the $5 million June 1, 2000
Debenture sinking fund payment, any interest and sinking fund payments on the
Debentures which become due thereafter, and certain accounts payable from US
trade creditors totalling approximately $1.2 million as of July 31, 1999 and
October 30, 1999. The Company believes that such U.S. trade creditors may assert
certain rights against the Company that they would otherwise not assert if the
Asset Sale is consummated. Furthermore, absent the Asset Sale, all or a portion
of such creditors may commence involuntary bankruptcy proceedings against the
Company.
If the proposed sale of the Company's European Operations is not consummated as
intended, management plans to continue restructuring efforts as necessary in the
future which may include the reduction of personnel, closure of facilities,
disposal of subsidiaries, or the discontinuance of product lines. The financial
statements do not include any adjustments that might result from the outcome of
the going concern uncertainty.
2. Inventories
Inventories consist of:
October 30, July 31,
1999 1999
Raw materials $127 $93
Work in process 237 234
Finished and purchased products 1,367 2,305
----- -----
$1,731 $2,632
====== ======
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.
<PAGE>
4. Net Income (Loss) per Common Share
Basic and diluted net income (loss) per share is computed as follows:
Quarter Ended
10/30/99 10/31/98
----------------------
Loss before extraordinary credit $(2,232) $(1,197)
Preferred stock dividends accumulated (165) (181)
Extraordinary credit -- 1,284
- -------------------------------------------------------------------
Net loss applicable to common $(2,397) $(94)
======== =====
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, Reporting Comprehensive Income. Statement No. 130 established new rules
for the reporting and display of comprehensive income and its components.
Comprehensive income is net income, plus certain other items that are recorded
directly to stockholders' equity. The only such items currently applicable to
the Company are foreign currency translation 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 first quarter of 2000 and the
first quarter of 1999, totaled $(2.3) million and $2.2 million, respectively.
5. Non-operating Income (Expense)
Quarter Ended
(In thousands) 10/30/99 10/31/98
- -------------- -------- --------
Interest earned $16 $150
Foreign currency gains (losses) 53 (196)
Realized gain on sale of property -- 273
Other (52) (115)
---- -----
$17 $112
=== ====
6. Operating Segments
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Datapoint is principally engaged in the development, acquisition,
marketing, servicing, and system integration of computer and communication
products - both hardware and software. These products and services are for
integrated computer and telecommunication network systems. The Company's Chief
Operating Decision Maker (CODM) assesses performance and allocates resources
based on a geographic reporting structure. Substantially all of the Company's
operations consist of ten European subsidiaries and to a lesser extent domestic
operations. Reportable operating segments under SFAS No. 131 include the
Company's subsidiaries residing in Sweden, the United Kingdom, France, and
Belgium. Each of these subsidiaries function as value-added resellers.
Included in "Corporate and Other" are general corporate activities and related
expenses and activities from other foreign subsidiaries. Assets are those that
are used or generated exclusively by each operating segment. The eliminations
required to determine the consolidated amounts shown below consist principally
of the elimination of intercompany receivables for loans provided by the
operating segments to the parent entity.
<PAGE>
The following table presents certain information regarding the Company's
reportable operating segments for the quarters ended October 30, 1999 and
October 31, 1998:
October 30, October 31,
Revenue 1999 1998
- ------------------------------------------------------------------------
Sweden $8,251 $9,169
United Kingdom 8,719 9,280
France 3,833 3,963
Belgium 2,406 2,817
Corporate and Other 6,996 7,633
Eliminations (183) (152)
- ------------------------------------------------------------------------------
Total $30,022 $32,710
============================
October 30, October 31,
Segment Profit (Loss) 1999 1998
- -------------------------------------------------------------------------------
Sweden $662 $538
United Kingdom 1,053 654
France 180 79
Belgium 218 196
Corporate and Other (2,696) (1,230)
- -------------------------------------------------------------------------------
Operating Income (Loss) (583) 237
Interest Expense (1,361) (1,489)
Other Non-Operating Income, net 17 112
- -------------------------------------------------------------------------------
Loss Before Income Taxes and
Extraordinary Credit $(1,927) $(1,140)
=================================
October 30, July 31,
Assets: 1999 1999
- -----------------------------------------------------------------------
Sweden $10,705 $12,786
United Kingdom 19,845 18,838
France 12,054 13,870
Belgium 13,970 15,677
Corporate and Other 46,170 44,614
Eliminations (56,544) (56,452)
- -----------------------------------------------------------------------
Total $46,200 $49,333
=================================
7. Acquisitions
On July 27, 1999, the Company, through its newly formed subsidiary, Corebyte
Inc., conditionally acquired (the "Corebyte Acquisition") the Corebyte
communication and networking software product family (the "Corebyte Products").
The acquisition was accomplished pursuant to an Asset Purchase Agreement, by and
among the Company, SF Digital, LLC and John Engstrom ("Engstrom"), dated July
27, 1999. Consideration provided for the Corebyte assets comprised the
following: (i) options to purchase up to one million shares of common stock of
the Company at an exercise price of $1.00 per share, (ii) options to purchase an
additional one million shares of common stock of the Company at an exercise
price equal to 80% of the closing price per share of common stock of the Company
on July 27, 2000, the first anniversary of the acquisition, provided that Mr.
Engstrom is still employed by the Company on such date; (iii) up to twenty-five
percent of the common stock in Corebyte, Inc.; and (iv) $75,000 in cash as
reimbursement for certain research and development expenses. All such
consideration is to be held in escrow pending final resolution of Engstrom v.
Futureshare.com, LLC, a litigation which is pending in the United States
District Court for the Southern District of New York , Civil Action No. 99 Civ.
3824 (WHP), concerning the ownership status of the software, technology, and
intellectual property which is the subject of the acquisition (the "Corebyte
Intellectual Property"). The discovery process, including the taking of
depositions, has begun in connection with such litigation. In the event that a
court makes a final determination in the Engstrom v. Futureshare.com, LLC
litigation that an entity or individual other than Engstrom or the Company owns
the Corebyte Intellectual Property, Engstrom shall not be entitled to the
escrowed consideration for the Corebyte Acquisition and the Company may be
required to negotiate with Futureshare.com LLC or may abandon its efforts to
market the Corebyte products. In such event, the Company may be subject to
liability and may be forced to treat as a loss its investment and efforts
towards the development and marketing of the Corebyte products, and the Company
will seek to invest the funds and other consideration that would otherwise have
been used to purchase Corebyte in other internet and e-commerce related
businesses.
<PAGE>
Corebyte Inc. is led by John Engstrom, a pioneer of online and accomplished
enterprise groupware and e-mail service provider. Corebyte is an intelligent
browser-based enterprise-to-enterprise networking system. With a single
interface, and based upon beta testing of the system performed to date, the
end-user directly accesses every application necessary to manage their
enterprise from basic e-mail to advanced e-commerce. Users of Corebyte
seamlessly share and exchange valuable information, selectively and securely,
within their network community and across enterprises.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Years Referred to are Fiscal Years)
Overview
During the first quarter of 2000, the Company had a net loss of $2.2 million, on
revenue of $30.0 million, compared with net income of $87 thousand, on revenue
of $32.7 million for the same period of the prior year. The operating loss
during the first quarter of 2000 was $583 thousand compared with operating
income of $237 thousand during the first quarter of 1999.
Operating expenses (excluding cost of revenue and restructuring) for the first
quarter of 2000 were $8.1 million, compared with $8.3 million for the same
period a year ago. On October 8, 1999, the Company discontinued its domestic
video conferencing (MINX) operations thereby incurring restructuring costs of
$624 thousand, related to severance actions in the United States for 28
employees.
During the first quarter of 2000, the Company did not repurchase in the public
market any of its 8 7/8% convertible subordinated debentures. During the first
quarter of 1999, the Company repurchased approximately $2.4 million face value
of its 8 7/8% convertible subordinated debentures. These purchases resulted in
an extraordinary gain of $1.3 million for the first three months of fiscal 1999.
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.
Patents and Trademarks
Datapoint owns certain patents, copyrights, trademarks and trade secrets in
network 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. Notice of Appeal had been filed and the case has since been dismissed.
(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 and were subject to being reopened if
the Company was successful in its appeal of certain of the issues adversely
determined in the PictureTel litigation described above. Datapoint's appeal was
unsuccessful.
<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 April of 1998 adverse to Datapoint. The Company had filed two sets
objections to certain portions of this report. The objections were overruled.
These objections will now have to be resolved at the Appellate Court level. The
briefing is completed. The Company is awaiting a date to be scheduled for oral
arguments.
The above actions represent the Company's continuing efforts to license and
enforce its multi-speed networking patents through negotiations and/or
litigation. The Company believes that these patents provide broad coverage in
multi-speed networking technology and present the opportunity for further
royalty bearing licenses. While such royalty bearing licenses and enforcement of
its patents may create long-term value for its shareholders, 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 first quarter of fiscal year 2000, the Company had an operating loss of
$583 thousand and a net loss of $2.2 million. For the same period of the prior
year, the Company had operating income of $237 thousand and net income of $87
thousand. The following is a summary of the Company's sources of revenue
(approximately 99 percent of Datapoint's international revenue is derived from
customers in Western Europe):
Quarter Ended
(In thousands) 10/30/99 10/31/98
-------------------------------------------------
Sales:
U.S. $245 $884
Foreign 14,926 17,090
------ ------
15,171 17,974
Service and other:
U.S. 279 275
Foreign 14,572 14,461
------ ------
14,851 14,736
------ ------
Total revenue $30,022 $32,710
======= =======
<PAGE>
Total revenue during the first quarter of 2000 decreased $2.7 million, or 8.2%,
compared with the same period of the prior year. This decrease was primarily in
sale revenue and approximately $.9 million of the decrease was due to the impact
of a strengthening U.S. dollar, on average, during the first quarter of 2000 as
compared to the average U.S. dollar during the same period of 1999.
Approximately $.9 million was the result of a weaker sales performance in the
Company's Swedish subsidiary in the first quarter of 2000 and approximately $.7
million of the decrease was due to higher shipments in the first quarter of 1999
resulting from a stronger fiscal year 1999 beginning backlog, as compared to
fiscal year 2000 in the Company's United Kingdom subsidiary. Approximately $.6
million of the decrease was due to lower sales in the U.S. due primarily to the
discontinuance of its domestic video conferencing (MINX) operations.
The gross profit margin for the first quarter of 2000 was 27.2% compared with
26.0% for the same period of the prior year. The margin increase in the first
quarter of 2000 was primarily the result of higher service revenue as a result
of new service contracts received in the Company's Italian and United Kingdom
subsidiaries.
Operating expenses (excluding cost of revenue and restructuring) for the first
quarter of 2000 were $8.1 million, compared with $8.3 million for the same
period a year ago. The decrease is primarily related to the impact of a
strengthening U.S. dollar, on average, during the first quarter of 2000 as
compared to the average U.S. dollar during the same period of 1999. On October
8, 1999 the Company discontinued its domestic video conferencing (MINX)
operations and incurred restructuring costs of $624 thousand, related to
severance actions in the United States for 28 employees.
Non-operating expenses for the first quarter of 2000, consisted primarily of
interest expense of $1.4 million. Non-operating income and expenses for the
first three months of 1999, included interest expense of $1.5 million partially
offset by a recorded gain on the sale of excess real estate of $273 thousand.
During the first quarter of 2000, the Company did not repurchase in the public
market any of its 8 7/8% convertible subordinated debentures. During the first
quarter of 1999, the Company repurchased approximately $2.4 million face value
of its 8 7/8% convertible subordinated debentures. These purchases resulted in
an extraordinary gain of $1.3 million for the first three months of fiscal 1999.
Financial Condition
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue as a going concern. At July 31, 1999 and for the year
then ended, the Company experienced a net loss of $7,549 and it had a working
capital deficiency of $19,533 and a net capital deficiency of $72,128 which
raised substantial doubt about its ability to continue as a going concern. For
the three month period ended October 30, 1999, the Company experienced a net
loss of $2,232 and it has a working capital deficiency of $22,210 and a net
capital deficiency of $74,428. The Company's ability to continue operations will
depend on the availability of sufficient cash resources to meet the Company's
obligations in the near term. Without the successful consummation of the
announced sale of the European Operations, described below, and positive cash
flow, if any, from future operations, there can be no assurances that the
Company's operations will continue.
<PAGE>
On May 17, 1999, the Company and its wholly-owned subsidiary, Datapoint
International, Inc., entered into a letter of intent for a proposed sale of its
European subsidiaries which comprise substantially all of the Company's
operations (the "European Operations"), The European Operations represented 96%
of the Company's total revenue during 1999 and 98% of the Company's total
revenue for the three month ended October 30, 1999. Excluding the European
Operations, the Company's consolidated revenue and operating loss were $602 and
$1,803, respectively, for the quarter ended October 30, 1999. Under the terms of
the proposed sale, the European Operations will be purchased for $49,500 plus
the assumption of certain liabilities, less fees and expenses, by Reboot
Systems, Inc., an investor group headed by Blake Thomas, the Company's
president, and which includes key management employees of the European
Operations (collectively, the "Buyer"). Subsequently, a Stock Purchase Agreement
for the proposed sale was signed on July 31, 1999, and subsequently amended on
November 1, 1999 ("Stock Purchase Agreement"). The Asset Sale is contingent upon
certain conditions, including, without limitation, the ability of the Buyer to
secure acquisition financing to finance the purchase price, majority approval of
the holders (the "Stockholders") of the common stock, of the Company, par value
$.25 per share, with respect to the Asset Sale and the amendment of the
Company's Certificate of Incorporation to change the Company's corporate name,
and the consent of 66-2/3% (by principal amount) of the holders of the Company's
8-7/8% Convertible Subordinated Debentures due 2006 (the "Debentures" and the
holders thereof, the "Debentureholders") of certain actions (collectively, the
"Debentureholder Consent Solicitation") to amend and waive several provisions
set forth in the Company's Indenture dated June 1, 1981 (the "Indenture"),
pursuant to which such Debentures were issued. On November 1, 1999, the Company
and the Buyer entered into the First Amendment to the Stock Purchase Agreement
(the "First Amendment"). The First Amendment provided for a refundable deposit
of $750 (the "Deposit") which was paid by the Buyer on November 8, 1999, to the
Company.
The Deposit will be used primarily to fund transaction costs associated with the
sale of the European Operations, the proxy statement, the Debentureholder
Solicitation and Consent, and the engagement of BNY Capital Markets, Inc.
("BNY"), a subsidiary of Bank of New York, to issue a fairness opinion in
connection with the transaction. Pursuant to the Stock Purchase Agreement on
December 1, 1999 the Buyer is obligated to loan to the Company approximately
$2.5 million (the "December 1 Funding") which represents the funds that the
Company intends to use to make its December 1999 interest payment on the
Debentures. In connection with such loan, the Company and Buyer are working to
finalize the process to grant a security interest to the Buyer in certain of the
European Subsidiaries and expect that this process shall be completed shortly
and upon completion of such process such loan shall be funded. While there can
be no assurances that the loan will be made, the Company expects that the
December 1 Funding will be received within the 30 day grace period provided for
in the Indenture for the interest payment.
If the Asset Sale is consummated, the Deposit and the December 1 Funding shall
be applied toward the purchase price. If the Asset Sale is not consummated as a
result of the inability of the Company to obtain the approval by the
Stockholders and the approval by the Debentureholders to the Debentureholder
Consent Solicitation, the Company would be required to immediately repay to the
Buyer (i) the December 1 Funding, (ii) the Deposit, (iii) fees of the Buyer in
connection with obtaining funding commitments which the Buyer may incur in
connection with the Asset Sale (the "Commitment Fees") and (iv) a fee of
$375,000 (the "$375,000 Fee") as reimbursement for certain expenses incurred by
the Buyer in connection with the Asset Sale. All amounts payable or repayable by
the Company to the Buyer are to be secured by certain of the European
Subsidiaries. In the event that the Buyer does not obtain the financing
commitment necessary to secure acquisition financing for the Purchase Price by
February 1, 2000, the Company is required to immediately reimburse the Buyer for
the December 1 Funding, however the Company retains the Deposit. In the event
that the Company is required to immediately repay the December 1 Funding and any
other amounts owed to Buyer it may very likely be unable to since it lacks the
capital to do so. Absent the ability to negotiate with the Buyer a scheduled
repayment of these amounts, if the Buyer exercises its security interest rights
against certain of the European Subsidiaries, such action would have a material
adverse effect on the ability of the Company to conduct its ongoing operations.
As previously mentioned, the closing under the Stock Purchase Agreement, as
amended, requires holder majority Stockholder approval and the consent of at
least two thirds of the debentureholders of the Company. In connection with
obtaining such approvals, the Company has recently filed with the U.S.
Securities and Exchange Commission proxy materials and Debentureholder Consent
Solicitation documentation to solicit such approvals.
The Company's believes that, based on current trends in its business and
financial forecasts, absent the Asset Sale, there is a substantial doubt that
there will be sufficient funding, from either cash flow from operations or other
capital sources, to pay obligations relating to the scheduled December 1999
Debenture interest payment of approximately $2.4 million, the June 2000
Debenture interest payment and the $5 million June 1, 2000 Debenture sinking
fund payment, any interest and sinking fund payments on the Debentures which
become due thereafter, and certain accounts payable from US trade creditors
totalling approximately $1.2 million as of July 31, 1999 and October 30, 1999.
The Company believes that such U.S. trade creditors may assert certain rights
against the Company that they would otherwise not assert if the Asset Sale is
consummated. Furthermore, absent the Asset Sale, all or a portion of such
creditors may commence involuntary bankruptcy proceedings against the Company.
<PAGE>
If the proposed sale of the Company's European Operations is not consummated as
intended, management plans to continue restructuring efforts as necessary in the
future which may include the reduction of personnel, closure of facilities,
disposal of subsidiaries, or the discontinuance of product lines. The financial
statements do not include any adjustments that might result from the outcome of
the going concern uncertainty.
During first three months of 2000, the Company's cash and cash equivalents
decreased $2.7 million due primarily to the usage of cash in operations.
During the first quarter of 2000, the Company's net cash used in investing
activities was approximately $728 thousand. Included in this amount is $715
thousand of fixed asset purchases (primarily test equipment, spares, and
internally-used equipment).
Net cash used in financing activities was $357 thousand in during the first
quarter of 2000, primarily related to the net paydown of the Company's
borrowings.
As of October 30, 1999, the Company had restricted cash of $372 thousand as
compared to $328 thousand in the prior year. The 2000 and 1999 balances were
restricted primarily to cover various lines of credits, reflected as payables to
banks. Reorganization/Restructuring Costs
(In thousands)
During the first quarter of 2000, the Company incurred restructuring costs of
$624 for employee termination costs. These costs related to the termination of
28 employees at the Company's San Antonio headquarters in connection with the
Company's discontinuance of its domestic video conferencing (MINX) operations.
At October 30, 1999, accrued but unpaid restructuring costs were $617. Such
costs are expected to be paid through the third quarter of fiscal 2000.
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 Compliance
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 the Company's assessments, it determined that it was 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 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 December
31, 1999, and does not expect to have a material exposure with these systems.
<PAGE>
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 substantially completed 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 substantially
complete on the remediation phase and expects to complete most software
reprogramming by December 31, 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 most significant systems is also expected by December 31, 1999.
For operating equipment, the Company is beginning the remediation phases and
expects to complete its remediation efforts by December 31, 1999.
The Company will continue to 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 $1.2 million and is being funded through operating cash flows. To
date, the Company has incurred approximately $.8 million ($.7 million
capitalized and $.1 million expensed) related to all phases of the Year 2000
project. Of the total remaining project costs, approximately $.4 million is
attributable to the purchase of new software and operating equipment, which will
be capitalized.
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.
<PAGE>
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 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 18 of the
Registrant's 1999 annual report and is incorporated by reference to such annual
report.
<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 July
31, 1999, 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: December 14, 1999 /s/ Phillip P. Krumb
Phillip P. Krumb
Acting Chief Financial Officer
(Acting Chief Accounting Officer)
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