<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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
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Commission file no. 0-6272
DATUM INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2512237
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9975 TOLEDO WAY, IRVINE, CA 92618-1819
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip code)
(949) 598-7500
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(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. YES X NO
--- ---
The registrant had 5,839,940 shares of common stock outstanding as of November
10, 1999.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 14
Signatures................................................... 15
Exhibit Index
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,605 $10,307
Accounts receivable, net 23,830 19,327
Inventories
Purchased parts 9,622 7,156
Work-in-process 5,474 10,524
Finished products 7,448 6,875
------- -------
22,544 24,555
Prepaid expenses 622 479
Deferred income taxes 3,056 3,056
Income tax refund receivable 858 1,190
------- -------
Total current assets 56,515 58,914
Plant and equipment
Land 2,040 2,040
Buildings 5,055 5,060
Equipment 22,091 20,450
Leasehold improvements 1,177 1,149
------- -------
30,363 28,699
Less accumulated depreciation and amortization 15,262 12,651
------- -------
15,101 16,048
------- -------
Excess of purchase price over net assets acquired, net 15,320 11,231
Other assets 575 727
------- -------
$87,511 $86,920
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,440 $ 4,241
Accrued salaries and wages 2,557 2,485
Accrued warranty 1,498 1,498
Other accrued expenses 1,513 1,287
Income taxes payable 319 289
Current portion of long-term debt 3,008 3,025
-------- --------
Total current liabilities 14,335 12,825
-------- --------
Long-term debt 11,636 14,533
-------- --------
Postretirement benefits 980 818
-------- --------
Other long-term liabilities 125 144
-------- --------
Deferred income taxes 1,622 1,622
-------- --------
Stockholders' equity
Preferred stock, par value $.25 per share
Authorized - 1,000,000 shares
Issued - none -- --
Common stock, par value $.25 per share
Authorized - 10,000,000 shares
Issued - 5,825,284 shares in 1999
5,505,843 shares in 1998 1,456 1,376
Additional paid-in capital 47,477 44,941
Retained earnings
Beginning of period 11,328 12,785
Net loss (589) (1,457)
-------- --------
End of period 10,739 11,328
Unamortized stock compensation (324) (368)
Accumulated other comprehensive income (535) (299)
-------- --------
Total stockholders' equity 58,813 56,978
-------- --------
$ 87,511 $ 86,920
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 25,017 $ 25,797 $ 74,334 $ 77,325
-------- -------- -------- --------
Costs and expenses
Cost of goods sold 14,908 17,149 44,356 50,574
Selling 3,696 3,600 10,678 11,611
Product development 4,298 3,249 11,691 9,091
General and administrative 2,607 2,657 7,367 7,334
Interest expense 473 512 1,475 1,548
Interest income (97) (121) (416) (313)
-------- -------- -------- --------
25,885 27,046 75,151 79,845
-------- -------- -------- --------
Loss before income taxes (868) (1,249) (817) (2,520)
Income tax benefit (248) (493) (228) (995)
-------- -------- -------- --------
Net loss $ (620) $ (756) $ (589) $ (1,525)
======== ======== ======== ========
Net loss per share:
Basic $ (.11) $ (.14) $ (.10) $ (.28)
======== ======== ======== ========
Diluted $ (.11) $ (.14) $ (.10) $ (.28)
======== ======== ======== ========
Shares used in per share calculation:
Basic 5,770 5,438 5,615 5,393
======== ======== ======== ========
Diluted 5,770 5,438 5,615 5,393
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, September 30,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (589) $ (1,525)
-------- --------
Adjustments to reconcile loss to net cash provided by
operating activities:
Depreciation and amortization 2,911 2,681
Amortization of goodwill 911 671
Contribution of shares of common stock to
the Company's 401(k) plan 455 553
Amortization of unvested restricted stock 44 29
Changes in assets and liabilities, net of
assets acquired:
Increase in accounts receivable (4,482) (2,352)
(Increase) decrease in income tax refund
receivable 332 (670)
Decrease in inventories 2,011 4,231
Increase in prepaid expenses (141) (258)
(Increase) decrease in other assets 137 (249)
Increase in accounts payable 868 1,096
Increase (decrease) in accrued expenses 205 (299)
Increase in income taxes payable 30 --
Increase in postretirement benefits 162 162
Decrease in other long-term liabilities (603) (23)
-------- --------
Total reconciling items 2,840 5,572
-------- --------
Net cash provided by operating activities 2,251 4,047
-------- --------
Cash flows from investing activities:
Book value of equipment disposals -- 4
Capital expenditures (1,744) (1,895)
Payment for acquisition, net of cash acquired (2,204) --
Other (226) 42
-------- --------
Net cash used in investing activities (4,174) (1,849)
-------- --------
Cash flows from financing activities:
Reductions of line of credit (7) --
Reductions of long-term debt (3,018) (16)
Proceeds from exercise of stock options 86 160
Proceeds from ESP plan 160 201
-------- --------
Net cash provided by (used in) financing activities (2,779) 345
-------- --------
Net increase (decrease) in cash and cash equivalents (4,702) 2,543
Cash and cash equivalents at beginning of period 10,307 5,819
-------- --------
Cash and cash equivalents at end of period $ 5,605 $ 8,362
======== ========
Supplement disclosure of noncash financing activities:
In connection with the acquisition of Digital Delivery,
the Company issued 214,277 shares of common stock
for $1,915
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE> 7
DATUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the requirements of Form 10-Q and, therefore, do not
include all information and footnotes which would be presented were such
financial statements prepared in accordance with generally accepted accounting
principles, and should be read in conjunction with the audited financial
statements presented in the Company's 1998 and 1999 Annual Report to
Stockholders. In the opinion of management, the accompanying financial
statements reflect all adjustments which are necessary for a fair presentation
of the results for the interim period presented. The results of operations for
such interim period are not necessarily indicative of results to be expected for
the full year.
NOTE B - EARNINGS PER SHARE
Net income per share-Basic excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during the
reporting period. Net income per share-Diluted reflects the potential dilution
that could occur if stock options and warrants were exercised. For the three
months and nine months ended September 30, 1999 and 1998, the Company did not
include the potential common stock in the calculation of net loss per
share-Diluted, as such inclusion would have a anti-dilutive effect.
NOTE C - COMPREHENSIVE INCOME
In 1998, the Company adopted Financial Accounting Standards No. 130 (FAS 130),
"Reporting Comprehensive Income." FAS 130 establishes standards for the
reporting and displaying of comprehensive income and its components in the
Company's consolidated financial statements. Comprehensive income is defined in
FAS 130 as a change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. Total
comprehensive loss was $(465,000) and $(690,000) for the three months ended
September 30, 1999 and 1998, respectively. For the nine months ended September
30, 1999 and 1998, total comprehensive loss was $(825,000) and $(1,483,000),
respectively. The primary difference from net income as reported is the tax
affected change in cumulative translation adjustment.
NOTE D - SEGMENT AND RELATED INFORMATION
In 1998, the Company adopted Financial Accounting Standards No. 131 (FAS 131),
"Disclosures about Segments of an Enterprise and Related Information." The
statement requires the Company to report about its operating segments.
The Company evaluates performance of its segments and allocates resources to
them based on segment operating income. Segment operating income does not
include corporate expenses, amortization of goodwill and intersegment profit
elimination. Identifiable assets include accounts receivable, inventories, and
land, building and equipment and does not include cash, income tax refund
receivable and deferred income taxes, prepaid expenses goodwill and other
long-term corporate assets.
7
<PAGE> 8
DATUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1999 AND 1998
In July 1999, the Company acquired Digital Delivery located in Lexington,
Massachusetts. This segment produces product for the e-business market.
The tables below present information about reported segments for the quarters
ended September 30:
SEGMENT SALES
(in thousands)
<TABLE>
<CAPTION>
Irvine, Austin, San Jose, Beverly, Lexington, Munich,
CA TX CA MA MA Germany Total
------- -------- --------- -------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1999
- ----
Total sales $11,326 $ 7,963 $ 3,472 $ 3,818 $ 33 $ 1,541 $28,153
Intersegment sales (1,520) (157) (107) (1,336) -- (16) (3,136)
------- -------- -------- -------- ------ ------- -------
Net sales $ 9,806 $ 7,806 $ 3,365 $ 2,482 $ 33 $ 1,525 $25,017
======= ======== ======== ======== ====== ======= =======
1998
- ----
Total sales $11,587 $ 7,123 $ 3,824 $ 3,727 $ -- $1,640 $27,901
Intersegment sales (1,159) (16) (40) (833) -- (56) (2,104)
------- -------- -------- -------- ------ ------- -------
Net sales $10,428 $ 7,107 $ 3,784 $ 2,894 $ -- $ 1,584 $25,797
======= ======== ======== ======== ====== ======= =======
</TABLE>
SEGMENT OPERATING INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
Irvine, Austin, San Jose, Beverly, Lexington, Munich,
CA TX CA MA MA Germany Total
------- -------- --------- -------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $ (904) $ 1,277 $ 36 $ 422 $ (273) $ 157 $ 715
1998 (1,629) 1,706 208 325 -- 56 666
</TABLE>
A reconciliation of segment operating income to the consolidated operating loss
for the quarters ended September 30:
(in thousands) 1999 1998
------ -----
Segment operating income $ 715 $ 666
Corporate expenses (587) (854)
Amortization of goodwill (649) (408)
Intercompany profit elimination 29 (262)
------ -----
Consolidated operating loss $ (492) $(858)
====== =====
The table below presents identifiable segment assets as of September 30, 1999
compared to period year end:
IDENTIFIABLE SEGMENT ASSETS
(in thousands)
<TABLE>
<CAPTION>
Irvine, Austin, San Jose, Beverly, Lexington, Munich,
CA TX CA MA MA Germany Total
------- -------- --------- -------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1999 $19,949 $17,470 $6,463 $11,590 $ 141 $2,173 $57,786
December 31, 1998 22,722 14,765 6,027 9,867 -- 2,251 55,632
</TABLE>
NOTE E - RECENT CHANGES TO ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133 (FAS 133) "Accounting for Derivative Instruments
and Hedging Activities," which defines derivatives, requires all derivatives be
carried at fair value and provides for hedging accounting when certain
conditions are met. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2001. Although the Company has not fully
assessed the implications of this new statement, the Company does not believe
adoption of this statement will have a materiel impact on the Company's
financial position and results of operations.
8
<PAGE> 9
DATUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1999 AND 1998
NOTE F - ACQUISITION
On July 29, 1999, the Company acquired all of the outstanding capital stock of
Digital Delivery, Inc. (DDI), a Massachusetts corporation. The Company issued
214,277 shares of its Common Stock, and paid $1,500,000 in cash. The DDI
stockholders will also receive additional consideration based on certain
performance criteria through December 31, 2001. The acquisition has been
accounted for using the purchase method of accounting.
DDI is a leading provider of secure information and management software. DDI's
patented encryption models and leading-edge compression technologies enable
organizations to distribute data and conduct electronic commerce securely via
the Internet, intranet, Extranet, CD-ROM and digital versatile disk.
The unaudited pro forma combined results of operations of the Company and DDI
for the nine months ended September 30, 1999, and 1998, presuming the
acquisition had taken place on January 1, 1998, after giving effect to certain
pro forma adjustments, are as follows:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Nine Months Ended
September 30,
-------------------------
1999 1998
------- -------
<S> <C> <C>
Net sales $74,678 $77,419
======= =======
Net loss $(1,839) $(2,800)
======= =======
Net loss per share - basic and diluted $ (0.32) $ (0.50)
======= =======
</TABLE>
The condensed pro forma combined financial information is provided for
informational purposes only and does not purport to be indicative of the future
results of the Company or what the results of operations would have been had the
acquisition been effective on the date indicated.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" presented in the
Company's 1998 Annual Report to Stockholders on Form 10-K.
INTRODUCTORY NOTE
All statements other than statements of historical fact included in this
Quarterly Report on Form 10-Q are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable at this time, it can
give no assurance that such expectations will prove to have been correct. The
Company makes no undertaking to correct or update any such statements in the
future. Important factors that could cause actual results to differ materially
from the Company's expectations ("Cautionary Statements") are set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as in, or incorporated by reference in, the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements.
Overview
Datum designs, manufactures and markets a wide variety of high performance time
and frequency products used to synchronize the flow of information in
telecommunications networks. The Company is also a leading supplier of precise
timing products for enterprise computing networks and a wide variety of space,
scientific and industrial test and measurement applications.
A small number of customers account for a substantial portion of the Company's
net sales and the Company expects that a limited number of customers will
continue to represent a substantial portion of the Company's net sales for the
foreseeable future. There can be no assurance that a major customer will not
reduce, delay or eliminate its purchases from the Company. Any such reduction,
delay or loss in orders could have a material adverse effect on the Company's
business, financial condition and results of operations.
Results of Operations
Net sales. The Company's net sales decreased 3.0% to $25.0 million for the
quarter ended September 30, 1999 from $25.8 million for the corresponding
quarter in 1998. Net sales in the wireline synchronization business increased
$699,000 or 9.8% for the quarter ended September 30, 1999 compared to the
corresponding quarter of 1998. This was offset by net sales decreases of
$622,000 or 6.0% in the wireless business, $419,000 or 11.1% in the enterprise
timing products business and $412,000 or 14.2% in the cesium standard business
for the quarter ended September 30, 1999 compared to the corresponding quarter
of 1998. For the nine months ended September 30, 1999, net sales decreased 3.9%
to $74.3 million from $77.3 million for the corresponding period of 1998. Sales
decreases in the wireless market are primarily the result of decreased product
usage by the Company's larger customers. Sales decreases in the enterprise
timing products are primary the result of decreased shipments into the
government subcontract test and measurement market.
Gross margin. Gross margin increased to 40.4% for the quarter ended September
30, 1999 from 33.5% for the corresponding quarter in 1998. For the nine months
ended September 30, 1999, gross margin increased to 40.3% from 34.6% for the
corresponding nine months of 1998. For the quarter ended September 30, 1999,
gross margins improved at all business locations. The increase is primarily a
result of improved efficiency in the manufacturing process, overhead reductions,
material cost savings, and the mix of products shipped. Beginning July 1, the
Company realized the second year contractual price decrease with the Company's
largest customer. Delays in completing qualification testing of new cost-reduced
replacement products will affect the margins during the remainder of the year.
10
<PAGE> 11
Selling expense. Selling expense increased by 2.7% to $3.7 million for the
quarter ended September 30, 1999, from $3.6 million for the corresponding
quarter in 1998. For the nine months ended September 30, 1999, selling expense
decreased 8.0% to $10.7 million from $11.6 million for the nine months ended
September 30, 1998. As a percentage of net sales, selling expense increased to
14.8% for the quarter ended September 30, 1999 from 14.0% for the corresponding
quarter in 1998. For the nine months ended September 30, 1999, selling expense
as a percentage of net sales decreased to 14.4% from 15.0% for the corresponding
period of 1998. The decrease was primarily due to the continued reduction in
outside commissions caused by the replacement of outside sales reps, where
appropriate, with a direct sales force. In addition, reduced sales levels as
well as a more cost-efficient sales mix contributed to the decrease.
Product Development. Product development expense increased by 32.3% to $4.3
million for the quarter ended September 30, 1999 from $3.2 million for the
corresponding quarter in 1998. For the nine months ended September 30, 1999,
product development expense increased by 28.6% to $11.7 million from $9.1
million for the corresponding nine months of 1998. The increase was primarily
due to increased development efforts to reduce the time to market on
high-growth-potential products. Opportunities have been identified in various
markets, especially in the wireless, wireline and E-business that will be
strongly influenced by the ability to get to market rapidly. To minimize the
time and dilution of resources to add new development talent, the Company has
relied extensively on outside resources, or engineering consultants. This is
expected to increase development expenses in the short term but will allow the
Company to reduce quickly to a more reasonable long term development spending
rate when theses programs are completed by the end of this fiscal year. Some of
these development programs are driven by specific customers while several are
more generic and driven by the rapid change from circuit switched to packet
switched transmission networks. These products are expected to contribute to the
bottom line performance in fiscal year 2000. As a percentage of net sales,
product development expense increased to 17.2% for the quarter ended September
30, 1999 from 12.6% for the corresponding quarter of 1998. For the nine months
ended September 30, 1999 product development expense, as a percentage of sales,
increased to 15.7% from 11.8% for the corresponding period of 1998.
General and Administrative. General and administrative expense decreased 1.9% to
$2.6 million for the quarter ended September 30, 1999, from $2.7 million for the
corresponding quarter of 1998. For the nine months ended September 30, 1999,
general and administrative expense increased 0.4% to $7.4 million from $7.3
million for the first nine months of 1998. As a percentage of net sales, general
and administrative expense increased to 10.4% for the quarter ended September
30, 1999, from 10.3% for the corresponding quarter of 1998. For the nine months
ended September 30, 1999, general and administrative expense, as a percentage of
net sales, increased to 9.9% from 9.5% for the corresponding period of 1998.
Interest, Net. Interest expense decreased by $15 thousand to $376 thousand for
the quarter ended September 30, 1999 from $391 thousand for the corresponding
quarter of 1998. For the nine months ended September 30, 1999, interest expense
decreased $176 thousand to $1.1 million from $1.2 million for the corresponding
period of 1998.
Shares Outstanding. Shares outstanding increased for the quarter and nine months
ended September 30, 1999 as a result of 214,277shares issued on July 29, 1999
for the acquisition of Digital Delivery and shares issued through the Company's
401k, ESP, and Incentive Stock plans.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was approximately $2.3 million for the nine months
ended September 30, 1999 compared to $4.0 million for the corresponding period
of 1998. Cash flows were positively affected in the first nine months of 1999 by
decreased inventory levels and increased accounts payable levels offset by
increased accounts receivable balances.
11
<PAGE> 12
Cash used in investing activities was approximately $4.2 million for the nine
months ended September 30, 1999 compared to $1.8 million for the corresponding
period of 1998. Cash used in the nine months ended September 30, 1999 included
$2.2 million for the acquisition of Digital Delivery, net of cash acquired. In
addition to cash, the Company issued 214,277 shares of common stock valued at
$1.9 million. The Company currently anticipates that capital expenditures for
fiscal 1999 will be less than $3 million.
Cash used in financing activities was approximately $2.8 million for the nine
months ended September 30, 1999 compared to cash provided by financing
activities of $345 thousand for the corresponding nine months of 1998. Cash used
in the nine months of 1999 included $3.0 million of scheduled long-term debt
payments.
Accounts receivable increased $4.5 million to $23.8 million at September 30,
1999 from $19.3 million at December 31, 1998 due to increased shipments in the
wireline business during the latter half of the third quarter of 1999 compared
to the latter half of the fourth quarter of 1998.
Inventories decreased $2.0 million to $22.5 million at September 30, 1999 from
$24.6 million at December 31, 1998. The Company continues efforts to manage
inventories to more appropriate levels.
Accounts payable increased $868 thousand to $5.4 million at September 30, 1999
from $4.2 million at December 31, 1998, a result of increased inventory
purchases to support increased sales volume during the quarter ended September
30, 1999 in the wireless business compared to the quarter ended December 31,
1998.
At September 30, 1999, the Company had working capital of $42.2 million and a
current ratio of 3.9:1 compared to working capital of $46.1 million and a
current ratio of 4.6:1 at December 31, 1998. The decrease is primarily due to
decreased cash balances.
READINESS FOR YEAR 2000
The Company is aware that some significant portion of existing electronic
equipment, including computers, software and embedded technology, was not
designed to correctly process dates after December 31, 1999. These systems store
dates as having two digit, rather than four digit years, which could potentially
cause erroneous data results for program failures in the year 2000. The Company
has assessed the impact of such Year 2000 (Y2K) issues on the Company's internal
computer systems, non-computer systems, and products as well as on the Company's
vendors, service providers, and significant customers.
Internally, the Company developed a plan to inventory critical systems at each
of its five operating locations and develop solutions, with further contingency
plans where possible. The Company identified two of its five information systems
locations as not being Y2K compliant. While the Company could have upgraded
these two locations without incurring material expense, the Company instead has
implemented a Company-wide enterprise information system, which was completed in
October, 1999. The new system will improve information systems operating
performance and be fully Y2K compliant. The Company has not identified any other
significant areas of non-compliance in internal computer systems or non-computer
systems, or products. The Company has reviewed its products and does not expect
to incur any material expense related to product non-compliance. The Company
believes additional, though immaterial, revenue may be realized if customers
decide to upgrade their older products.
12
<PAGE> 13
The Company believes the greatest risk of significant adverse effects on the
Company relates to third party failure to appropriately address their Y2K
non-compliance. Y2K failures in key suppliers' systems, or their respective
suppliers' or customers' systems, could affect their ability to supply material
or services to the Company, and therefore affect the Company's ability to
produce and ship products. Y2K failures at the Company's significant customers,
including the United States government, could affect such customers' ability to
order, accept and pay for the Company's products. External Y2K failures could
therefore have a material adverse effect on the Company's revenues and financial
condition. The Company is in the process of securing letters of compliance from
those vendors and service providers that are critical to the operations of the
Company. The Company plans to secure alternative suppliers for those who cannot
assure the Company of their Y2K readiness. The Company also has surveyed its
significant customers regarding their plans to identify and address Y2K issues.
The Company has already been assured by its two largest customers, Lucent and
Motorola, that they expect to be Y2K compliant. External Y2K risks will be
addressed as the survey of key customers and suppliers is completed. Although
the Company expects cooperation from the suppliers and customers it is
surveying, the Company also relies on services such as telephones and utilities,
whose Y2K compliance is outside of the Company's control. Therefore, the Company
may be unable to accurately assess the Y2K readiness of third parties, and the
impact of such third party non-compliance on the Company's operations.
The Company plans to continue to identify, assess and to resolve all material
Y2K issues by the end of 1999. The Company is developing contingency plans to
address significant internal and external Y2K issues as they are identified.
These contingency plans are expected to be complete by the end of 1999. The Y2K
problem involves pervasive complex interrelationships, both internal and
external to the Company. As a result, no assurance can be given that the Company
will identify and successfully resolve all Y2K issues.
The Company has not incurred any material expense to date in addressing Y2K
issues. Although the Company has not completed its assessment of Y2K readiness,
the Company believes no material expenses will be incurred in the future.
Information Regarding Potential Fluctuations in Quarterly Operating Results
The Company has experienced, and expects to continue to experience, fluctuations
in sales and operating results from quarter to quarter. As a result, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful, and that such comparisons cannot be relied upon as
indicators of future performance. A significant component of the fluctuations
results from rescheduling of orders by the Company's major customers, in some
cases due in part to the customers' attempts to minimize inventories. Other
factors that could cause the Company's sales and operating results to vary
significantly from period to period include: contractual price reductions on
products sold to certain major customers; the timing, availability and sale of
new products; changes in the mix of products with differing gross margins;
variations in manufacturing capacities, efficiencies and costs; the availability
and cost of components; warranty expenses; and variations in product development
and other operating expenses. In addition, the sales cycles for many of the
Company's products are often lengthy and unpredictable, and can take up to 36
months. Further, there can be no assurance that the Company will be successful
in closing large transactions on a timely basis or at all. The timing of these
transactions could cause additional variability in the Company's operating
results. The Company's quarterly results of operations are also influenced by
competitive factors, including pricing and availability of the Company's and
competing companies' time and frequency products. A large portion of the
Company's expenses are fixed and difficult to reduce in a short period of time.
If net sales do not meet the Company's expectations, the Company's fixed
expenses would exacerbate the effect of such net sales shortfall. Furthermore,
announcements by the Company or its competitors regarding new products and
technologies could cause customers to defer purchases of the Company's products.
Order deferrals by the Company's customers, purchase policy changes, delays in
the Company's introduction of new products and longer than anticipated sales
cycles for the Company's products have in the past materially adversely affected
the Company's quarterly results of operations. Due to the foregoing factors, as
well as other unanticipated factors, it is likely that in some future quarter
the Company's operating results will be below the expectations of public market
analysts or investors. In such event, the price of the Company's common stock
would be materially adversely affected.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There has been no material change from the Company's disclosure regarding market
risk contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
13
<PAGE> 14
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted because the related information is either
inapplicable or has been previously reported.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
2 Agreement and Plan of Merger Agreement, dated July 29, 1999,
among the Registrant, DDI and the Merger Subsidiary. Exhibit A
(Form of Escrow Agreement), Exhibit B (Form of Investment
Letter), Exhibit C (DDI Disclosure Schedule), Exhibit D (Datum
Disclosure Schedule), Exhibit E (Form of Employment Agreement),
Exhibit F (Form of Opinion of Counsel of DDI), Exhibit G (Form
of Opinion of Counsel to Datum), Schedule I (Surviving
Corporation Board of Directors and Officers), and Schedule II
(DDI Stockholders) have been omitted pursuant to Rule 601(b)(2)
of Regulation S-K. A copy of any Exhibit or Schedule will be
submitted to the Commission supplementally upon request.
(Incorporated by reference to the like referenced exhibit to the
Registrant's Current Report on Form 8-K, filed August 6, 1999.)
27.3 Financial Data Schedule
(b) Reports on Form 8-K
In connection with its acquisition by merger of Digital
Delivery, Inc., the Company filed a Current Report on Form 8-K
on August 6, 1999, reporting the merger and filing as an exhibit
thereto the related merger agreement. The Company filed an
amended Current Report on Form 8-K/A on October 12, 1999,
containing the financial statements of Digital Delivery as and
for the year ended December 31, 1999, the unaudited pro forma
condensed consolidated balance sheet for the Company as of
December 31, 1998 and the unaudited pro forma condensed
consolidated statements of operations for the Company for the
year ended December 31, 1998, and for the six months ended June
30, 1999.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
DATUM INC.
/s/ Erik H. van der Kaay Date November 15, 1999
- ------------------------------------- ------------------
Erik H. van der Kaay,
President and Chief Executive Officer
/s/ David A. Young Date November 15, 1999
- ------------------------------------- ------------------
David A. Young, Chief Financial and
Chief Accounting Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ------------
<S> <C> <C>
2 Agreement and Plan of Merger Agreement, dated July 29, 1999,
among the Registrant, DDI and the Merger Subsidiary. Exhibit A
(Form of Escrow Agreement), Exhibit B (Form of Investment
Letter), Exhibit C (DDI Disclosure Schedule), Exhibit D (Datum
Disclosure Schedule), Exhibit E (Form of Employment
Agreement), Exhibit F (Form of Opinion of Counsel of DDI),
Exhibit G (Form of Opinion of Counsel to Datum), Schedule I
(Surviving Corporation Board of Directors and Officers), and
Schedule II (DDI Stockholders) have been omitted pursuant to
Rule 601(b)(2) of Regulation S-K. A copy of any Exhibit or
Schedule will be submitted to the Commission supplementally
upon request. (Incorporated by reference to the like
referenced exhibit to the Registrant's Current Report on Form
8-K, filed August 6, 1999.)
27.3 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,605
<SECURITIES> 0
<RECEIVABLES> 23,830
<ALLOWANCES> 224
<INVENTORY> 22,544
<CURRENT-ASSETS> 56,515
<PP&E> 30,363
<DEPRECIATION> 15,262
<TOTAL-ASSETS> 87,511
<CURRENT-LIABILITIES> 14,335
<BONDS> 14,644
0
0
<COMMON> 1,456
<OTHER-SE> 57,357
<TOTAL-LIABILITY-AND-EQUITY> 87,511
<SALES> 74,334
<TOTAL-REVENUES> 74,334
<CGS> 44,356
<TOTAL-COSTS> 74,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,059
<INCOME-PRETAX> (817)
<INCOME-TAX> (228)
<INCOME-CONTINUING> (589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (589)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
