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 April 29, 2000
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)
(33-1) 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 April 29, 2000, 18,397,714 shares of Datapoint Corporation Common
Stock were outstanding, exclusive of 2,593,503 shares held in Treasury.
<PAGE>
DATAPOINT CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
April 29, 2000 and July 31, 1999 3
Consolidated Statements of Operations -
Three and Nine Months Ended April 29, 2000
and May 1, 1999 4
Consolidated Statements of Cash Flows -
Nine Months Ended April 29, 2000 and
May 1, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 15
Signature 16
---------
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Datapoint Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In thousands, except share data)
------------------------------------------------------------------------------------------------------------
(Unaudited)
April 29, 2000 July 31, 1999
-------------- -------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,500 $3,568
Restricted cash and cash equivalents 295 328
Accounts receivable, net of allowance for doubtful
accounts of $718 and $880, respectively 33,294 32,130
Inventories 3,534 2,632
Prepaid expenses and other current assets 2,249 2,272
----------------------------------------------------------------------------------------------------------
Total current assets 40,872 40,930
Fixed assets, net 5,542 5,928
Other assets, net 1,878 2,475
----------------------------------------------------------------------------------------------------------
$48,292 $49,333
==========================================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Payables to banks $5,879 $6,676
Current maturities of long-term debt 4,960 4,960
Accounts payable 20,654 14,451
Accrued expenses 25,891 22,890
Deferred revenue 7,674 9,311
Income taxes payable 1,289 2,175
----------------------------------------------------------------------------------------------------------
Total current liabilities 66,347 60,463
Long-term debt, exclusive of current maturities 50,000 50,000
Other liabilities 9,379 10,998
Stockholders' deficit:
Preferred stock of $1.00 par value. Shares authorized 10,000,000;
shares issued and outstanding 650,516 in fiscal 2000 and
661,967 in fiscal 1999 (aggregate liquidation preference,
including dividend in arrears, $16,751 in fiscal 2000 and
$16,549 in fiscal 1999). 651 662
Common stock of $0.25 par value. Shares authorized 40,000,000;
shares issued 20,991,217, including treasury shares of
2,593,503 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 (254) (354)
Retained deficit (294,202) (288,292)
Treasury stock, at cost (1,610) (2,125)
-----------------------------------------------------------------------------------------------------------
Total stockholders' deficit (77,434) (72,128)
-----------------------------------------------------------------------------------------------------------
$48,292 $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 Nine Months Ended
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
April 29, 2000 May 1, 1999 April 29, 2000 May 1, 1999
--------------- ----------- -------------- -----------
Revenue:
Sales $19,668 $17,756 $54,798 $58,698
Service and other 12,547 14,781 41,124 44,849
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 32,215 32,537 95,922 103,547
Operating costs and expenses:
Cost of sales 14,778 13,572 41,906 45,553
Cost of service and other 9,752 10,440 30,348 31,874
Research and development 238 409 830 1,547
Selling, general and administrative 7,460 7,828 24,047 24,050
Reorganization/restructuring costs -- 175 624 813
-----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 32,228 32,424 97,755 103,837
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (13) 113 (1,833) (290)
Non-operating income (expense):
Interest expense (1,408) (1,404) (4,163) (4,334)
Other, net 430 137 822 316
-----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes and
extraordinary credit (991) (1,154) (5,174) (4,308)
Income tax expense 18 237 251 500
-----------------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary credit (1,009) (1,391) (5,425) (4,808)
-----------------------------------------------------------------------------------------------------------------------------------
Extraordinary credit -- debt extinguishment -- 47 -- 1,707
-----------------------------------------------------------------------------------------------------------------------------------
Net loss $(1,009) $(1,344) $(5,425) $(3,101)
===================================================================================================================================
Net loss, adjusted for preferred stock dividends paid or accumulated plus gain
on exchange and retirement of
preferred stock - Net Loss applicable to common $(1,133) $(1,354) $(5,874) $(3,313)
============================================================================================================================
Basic and Diluted Earnings (Loss) Per Common Share:
Loss before extraordinary credit $(.06) $(.08) $(.32) $(.29)
Gain on exchange of preferred stock -- .01 -- .02
Extraordinary credit -- -- -- .09
-----------------------------------------------------------------------------------------------------------------------------------
Net loss per common share $(.06) $(.07) $(.32) $(.18)
===================================================================================================================================
Average Common Shares Outstanding:
Basic 18,383,028 18,276,977 18,359,438 18,190,461
Diluted 18,383,028 18,301,361 18,359,438 18,190,461
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
April 29, 2000 May 1, 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,425) $(3,101)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,754 2,476
Provisions (recoveries) on accounts receivable 34 (167)
Gain on debt extinguishment -- (1,707)
Deferred income taxes 30 122
Realized gain on sale of property -- (273)
Changes in assets and liabilities:
(Increase) decrease in receivables (6,047) 2,928
(Increase) decrease in inventory (1,149) 71
Increase (decrease) in accounts payable and accrued expenses 12,425 (5,056)
Increase (decrease) in other liabilities and deferred credits (1,565) (920)
Other, net (102) (37)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (45) (5,664)
Cash flows from investing activities:
Payments for fixed assets (1,674) (2,110)
Proceeds from dispositions of fixed assets -- 2,111
Other, net (157) 112
----------------------------------------------------------------------------------------------------------
Net cash provided (used) from investing activities (1,831) 113
Cash flows from financing activities:
Proceeds from borrowings 94,294 58,424
Payments on borrowings (94,323) (61,180)
Restricted cash for letters of credit 33 9
----------------------------------------------------------------------------------------------------------
Net cash provided (used) in financing activities 4 (2,747)
Effect of foreign currency translation on cash (196) 69
----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,068) (8,229)
Cash and cash equivalents at beginning of period 3,568 12,101
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,500 $3,872
====== ======
Cash payments for:
Interest $506 $3,159
Income taxes, net $445 $413
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 financial statements have been prepared on the basis of current ongoing
operations without regard to the sale of the Company's European Operations and
the effect of the bankruptcy proceedings, as more fully described below.
The Company has not sought to retain an independent auditor, which will require
court approval, subsequent to the filing of Petition for Reorganization under
Chapter 11 of the United States Bankruptcy Code, as discussed below, and
therefore, this Form 10-Q has been prepared without independent auditor
involvement or review.
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 and nine months ended April 29, 2000,
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 nine month period ended April 29, 2000, the Company experienced a net loss
of $5,425 and it has a working capital deficiency of $25,475 and a net capital
deficiency of $77,434. 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
cCompany's operations will continue.
Consistent with the determination of its Board of Directors to shift the
focus of the Company towards acquiring, developing and marketing products with
internet and e-commerce applications, the Company and several of its
subsidiaries entered into that certain Stock Purchase Agreement, dated as of
July 31, 1999 (the "Stock Purchase Agreement"), with Reboot Systems, Inc.
("Reboot") an investor group lead by Blake Thomas, the former President of the
Company, to sell the European subsidiaries of the Company which comprise
substantially all of the Company's operations (the "European Operations").
Subsequent to the termination of the Stock Purchase Agreement as a result of the
lack of performance by Reboot, the Company entered into a Letter of Intent,
dated January 26, 2000, with the European based CallCentric Ltd. ("CallCentric")
to sell the European Operations. Pursuant to an agreement dated as of April 19,
2000 (the "Stock Agreement"), the Company agreed to sell its European Operations
to Datapoint Newco I Limited ("Newco"), a limited company affiliated with
CallCentric, for $49,500 in cash, less certain adjustments, in the event that
the aggregate shareholder's deficit of the European Operations exceeds $10,000.
The Stock Purchase Agreement contemplated, among other things, that the Company
would file for reorganization pursuant to Chapter 11 of the United States
Bankruptcy Code and that the sale of the European Operations to Newco would be
subject to higher and better offers and the approval of the Bankruptcy Court.
The Company intends to file a reorganization plan pursuant to Chapter 11 of the
Bankruptcy Code and in that respect has commenced negotiations over the terms of
such plan with members of an Official Committee of Unsecured Creditors appointed
in the bankruptcy case.
The European Operations represented 97% of the Company's total revenue during
1999 and 98% of the Company's total revenue for the quarter and nine months
ended April 29, 2000. Excluding the European Operations, the Company's
consolidated revenue and operating loss were $610 thousand and $1.7 million
respectively, for the quarter ended April 29, 2000 and $1.6 million and $7.1
million, respectively, for the first nine months of fiscal 2000.
Since December 1, 1999 the Company has been in default of its interest
payment obligation on its Debentures due June 1, 2006 which were issued pursuant
to the Indenture of the Company, dated as of June 1, 1981 (the "Indenture"). The
Company has had informal discussions with certain of the large holders of
Debentures concerning such default. On May 2, 2000 the Company filed a petition
pursuant to Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. The case has been assigned docket
number 00-1853 (PJW). On May 12, 2000, the Bankruptcy Court scheduled a hearing
for June 15, 2000 to consider the Company's motion to approve the sale of the
European Operations.
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:
April 29, 2000 July 31, 1999
Raw materials $86 $93
Work in process 47 234
Finished and purchased products 3,401 2,305
----- -----
$3,534 $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.
4. Net Income (Loss) to Common Share
Net income (loss) applicable to common share is as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
04/29/00 05/01/99 04/29/00 05/01/99
<S> <C> <C> <C> <C>
Loss before extraordinary credit $(1,009) $(1,391) $(5,425) $(4,808)
Preferred stock dividends accumulated (163) (165) (488) (518)
Gain on the exchange of preferred stock 39 155 39 306
Extraordinary credit -- 47 -- 1,707
--------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common $(1,133) $(1,354) $(5,874) $(3,313)
======== ======== ======== ========
Average common shares outstanding:
Basic 18,383,028 18,276,977 18,359,438 18,190,461
Diluted 18,383,028 18,301,361 18,359,438 18,190,461
Net loss per common share $(.06) $(.07) $(.32) $(.18)
</TABLE>
5. 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 increases to stockholders' deficit,
including net income or loss, for the third quarter of 2000 and the first nine
months of 2000, totaled $0.7 million and $5.3 million, respectively. For the
third quarter of 1999 and the first nine months of 1999, these nonowner
increases totaled $1.7 million and $3.1 million, respectively.
6. Non-operating Income (Expense)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
(In thousands) 04/29/00 05/01/99 04/29/00 05/01//99
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Interest earned $33 $49 $83 $265
Foreign currency gains (losses) 322 109 706 (8)
Realized gain on sale of property -- -- -- 273
Other 75 (21) 33 (214)
-- ---- -- -----
$430 $137 $822 $316
==== ==== ==== ====
</TABLE>
7. 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.
The following table presents certain information regarding the Company's
reportable operating segments for the quarter and nine months ended April 29,
2000 and May 1, 1999:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
04/29/00 05/01/99 04/29/00 05/01/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue
Sweden $8,837 $9,997 $29,994 $31,333
United Kingdom 7,715 8,190 24,019 27,253
France 3,527 4,352 11,641 13,152
Belgium 1,536 3,159 5,780 10,587
Corporate and Other 10,684 7,078 24,974 21,771
Eliminations (84) (239) (486) (549)
------------------------------------------------------------------------------------------------------
Total $32,215 $32,537 $95,922 $103,547
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
04/29/00 05/01/99 04/29/00 05/01/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment Profit (Loss)
Sweden $683 $454 $2,912 $1,933
United Kingdom 924 1,139 3,079 2,625
France 120 410 360 543
Belgium 52 248 (2) 1,128
Corporate and Other (1,792) (2,138) (8,182) (6,519)
------------------------------------------------------------------------------------------------------
Operating Income (Loss) (13) 113 (1,833) (290)
Interest Expense (1,408) (1,404) (4,163) (4,334)
Other Non-Operating Income, net 430 137 822 316
-----------------------------------------------------------------------------------------------------
Loss Before Income Taxes and
Extraordinary Credit $(991) $(1,154) $(5,174) $(4,308)
==========================================================
</TABLE>
Assets: April 29, 2000 July 31, 1999
-------------------------------------------------------------------------
Sweden $11,693 $12,786
United Kingdom 18,795 18,838
France 13,483 13,870
Belgium 4,041 15,677
Corporate and Other 48,246 44,614
Eliminations (47,966) (56,452)
------------------------------------------------------------------------
Total $48,292 $49,333
=============================
8. 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 been completed. A motion has been filed by the Defendant to
move the case to the New York State Court system. The Court has not yet ruled on
such motion. 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.
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
The Company had an operating loss of $13 thousand and a net loss of $1.0 million
for the third quarter of 2000 and an operating loss of $1.8 million and a net
loss of $5.4 million for the first nine months of 2000. This compares with
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. Revenue during the third quarter of
2000 decreased $322 thousand, or 1%, compared with the same period of the prior
year. For the first nine months of 2000, total revenue decreased $7.6 million,
or 7.4%, when compared with the same period of the prior year. Approximately
$2.9 million and $8.5 million, respectively, of the decrease was due to the
impact of a stronger U.S. dollar, on average, during the third quarter of 2000
and the first nine months of 2000, as compared to the average U.S. dollar during
the same periods of 1999.
Operating expenses (excluding cost of revenue and restructuring) for the third
quarter of 2000 and for the first nine months of 2000, were $7.7 million and
$24.9 million, respectively, compared with $8.2 million and $25.6 million,
respectively, for the same periods 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 third quarter of 2000 and the first nine months of 2000, the Company
did not repurchase in the public market any of its 8 7/8% convertible
subordinated debentures. During the third quarter of 1999, the Company
repurchased approximately $81 thousand face value of its 8 7/8% convertible
subordinated debentures. This brought 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 of fiscal 1999 and
approximately $1.7 million for the first nine months of 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 had filed infringement actions against several companies.
All actions were dismissed after an adverse result at trial and on appeal.
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 were 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. Both patents have been submitted to the Patent Office for
re-examination. An adverse action was rendered on one patent which the Company
is contesting. The appeal has been stayed pending the outcome of the
re-examination proceedings.
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
The Company had an operating loss of $13 thousand and a net loss of $1.0 million
for the third quarter of 2000 and an operating loss of $1.8 million and a net
loss of $5.4 million for the first nine months of 2000. This compares with
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. 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):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
(In thousands) 04/29/00 05/01/99 04/29/00 05/01/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales:
U.S. $55 $819 $442 $2,527
Foreign 19,613 16,937 54,356 56,171
------ ------ ------ ------
19,668 17,756 54,798 58,698
Service and other:
U.S. 177 258 678 815
Foreign 12,370 14,523 40,446 44,034
------ ------ ------ ------
12,547 14,781 41,124 44,849
------ ------ ------ ------
Total revenue $32,215 $32,537 $95,922 $103,547
======= ======= ======= ========
</TABLE>
Total revenue during the third quarter of 2000 decreased $322 thousand, or 1%,
compared with the same period of the prior year. For the first nine months of
2000, total revenue decreased $7.6 million, or 7.4%, when compared with the same
period of the prior year. Approximately $2.9 million and $8.5 million,
respectively, of the decrease was due to the impact of a stronger U.S. dollar,
on average, during the third quarter of 2000 and the first nine months of 2000,
as compared to the average U.S. dollar during the same periods of 1999. For the
third quarter of 2000 and for the first nine months of 2000, approximately $0.8
million and $2.2 million, respectively, of the decrease was due to lower sales
and service volumes in the U.S. due primarily to the discontinuance of its
domestic video conferencing (MINX) operations.
The gross profit margins for the third quarter of 2000 and for the first nine
months of 2000 were 23.9% and 24.7%, respectively, and were 26.2% and 25.2%,
respectively, for the same periods of the prior year.
Operating expenses (excluding cost of revenue and restructuring) for the third
quarter of 2000 and for the first nine months of 2000, were $7.7 million and
$24.9 million, respectively, compared with $8.2 million and $25.6 million,
respectively, for the same periods 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.
Non-operating expenses for the third quarter of 2000 and for the first nine
months of 2000, consisted primarily of interest expense of $1.4 million and $4.2
million, respectively and foreign currency gains of $322 thousand and 706
thousand, respectively. Non-operating income and expenses for the third quarter
and the first nine months of 1999, consisted primarily of interest expense of
$1.4 million and $4.3 million, respectively.
During the third quarter of 2000 and the first nine months of 2000, the Company
did not repurchase in the public market any of its 8 7/8% convertible
subordinated debentures. During the third quarter of 1999, the Company
repurchased approximately $81 thousand face value of its 8 7/8% convertible
subordinated debentures. This brought 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 of fiscal 1999 and
approximately $1.7 million for the first nine months of 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 nine month period ended April 29, 2000, the Company experienced a net loss
of $5,425 and it has a working capital deficiency of $25,475 and a net capital
deficiency of $77,434. 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.
Consistent with the determination of its Board of Directors to shift the
focus of the Company towards acquiring, developing and marketing products with
internet and e-commerce applications, the Company and several of its
subsidiaries entered into that certain Stock Purchase Agreement, dated as of
July 31, 1999 (the "Stock Purchase Agreement"), with Reboot Systems, Inc.
("Reboot") an investor group lead by Blake Thomas, the former President of the
Company, to sell the European subsidiaries of the Company which comprise
substantially all of the Company's operations (the "European Operations").
Subsequent to the termination of the Stock Purchase Agreement as a result of the
lack of performance by Reboot, the Company entered into a Letter of Intent,
dated January 26, 2000, with the European based CallCentric Ltd. ("CallCentric")
to sell the European Operations. Pursuant to an agreement dated as of April 19,
2000 (the "Stock Agreement"), the Company agreed to sell its European Operations
to Datapoint Newco I Limited ("Newco"), a limited company affiliated with
CallCentric, for $49,500 in cash, less certain adjustments, in the event that
the aggregate shareholder's deficit of the European Operations exceeds $10,000.
The Stock Purchase Agreement contemplated, among other things, that the Company
would file for reorganization pursuant to Chapter 11 of the United States
Bankruptcy Code and that the sale of the European Operations to Newco would be
subject to higher and better offers and the approval of the Bankruptcy Court.
The Company intends to file a reorganization plan pursuant to Chapter 11 of the
Bankruptcy Code and in that respect has commenced negotiations over the terms of
such plan with members of an Official Committee of Unsecured Creditors appointed
in the bankruptcy case.
The European Operations represented 97% of the Company's total revenue during
1999 and 98% of the Company's total revenue for the quarter and nine months
ended April 29, 2000. Excluding the European Operations, the Company's
consolidated revenue and operating loss were $610 thousand and $1.7 million
respectively, for the quarter ended April 29, 2000 and $1.6 million and $7.1
million, respectively, for the first nine months of fiscal 2000.
Since December 1, 1999 the Company has been in default of its interest
payment obligation on its Debentures due June 1, 2006 which were issued pursuant
to the Indenture of the Company, dated as of June 1, 1981 (the "Indenture"). The
Company has had informal discussions with certain of the large holders of
Debentures concerning such default. On May 2, 2000 the Company filed a petition
pursuant to Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. The case has been assigned docket
number 00-1853 (PJW). On May 12, 2000, the Bankruptcy Court scheduled a hearing
for June 15, 2000 to consider the Company's motion to approve the sale of the
European Operations.
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 the first nine months of 2000, the Company's cash and cash equivalents
decreased $2.1 million due primarily to the usage of cash in investing
activities.
During the first nine months of 2000, the Company's net cash used in investing
activities was approximately $1.8 million which included fixed asset purchases
(primarily test equipment, spares, and internally-used equipment).
Net cash provided by financing activities was $4 thousand during the first nine
months of 2000.
As of April 29, 2000, the Company had restricted cash of $295 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 April 29, 2000, accrued but unpaid restructuring costs were approximately
$61. Such costs are expected to be paid through the fourth quarter of fiscal
2000. For the third quarter of 1999 and the first nine months of 1999, the
Company incurred restructuring costs of $175 and $813, respectively, for
employee terminations.
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 was 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 had date-sensitive software or embedded chips
may have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted 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, the Company modified and/or
replaced significant portions of hardware and software so that those systems
would properly utilize dates beyond December 31, 1999.
The Company also assessed and modified and/or replaced its non Information
Technology ("IT") operating systems to insure compliance with Year 2000 which
included those primarily related to the office and facilities' environment
(telephone systems, security systems, etc.).
As a result of its efforts, Datapoint was prepared for the transition to the
Year 2000 and did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Datapoint
is not currently aware of any year 2000 problems that have materially affected
its customers or suppliers. Based on operations since January 1, 2000, the
Company does not anticipate any material disruption in its operations as a
result of any continuing Year 2000 issues. However it is possible that latent
problems may arise in the future. The Company believes that any such problems
are likely to be minor and correctable. Datapoint's aggregate costs for its Year
2000 actions were approximately $1.2 million.
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 also modified and/or adapted systems designed to properly handle the
euro. The costs required to be able to accommodate the euro were 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.
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, the ability of the Company to consummate the sale
of its European Operations, actions which may be taken by trade creditors of the
Company or holders of the Company's Debentures, 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
On May 2, 2000 the Company filed a petition pursuant to Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The case has been assigned docket number 00-1853 (PJW).
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.
On February 17, 2000, Blake Thomas, the former President of the Company, who was
terminated effective December 30, 1999, filed an action for $119 thousand of
severance and vacation pay with the Texas Work Force Commission at the Texas
Workman's Compensation Court. The Company plans to vigorously contest this
claim.
Item 3. Defaults Upon Senior Securities
Since December 1, 1999 the Company has been in default of its interest payment
obligation on its Debentures which were issued pursuant to the Indenture (See
Part I, note 1 to Financial Statements). The Company has had informal meetings
with certain of the large holders of Debentures concerning such default. As of
the date of this report the default and the total arrearages in interest total
approximately $2.4 million. In addition, as of the date hereof, the Company has
outstanding 650,516 shares of its preferred stock, par value $1.00 per share.
The aggregate liquidation preference and dividend arrearages on such shares is
approximately $16.8 million including dividend arrearages of $3.7 million.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: In a report filed on Form 8-K dated May 3, 2000, the
Company reported that it had filed a petition for reorganization under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware and that it had entered into the Stock Purchase
Agreement.
<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 13, 2000 /s/ Phillip P. Krumb
Phillip P. Krumb
Acting Chief Financial Officer
(Acting Chief Accounting Officer)
