<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 June 30, 1999
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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.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2512237
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(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
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(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 5,839,147 shares of common stock outstanding as of August 10,
1999.
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INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 9
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.....................................................16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
A S S E T S
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $10,561 $10,307
Accounts receivable 21,181 19,327
Inventories
Purchased parts 9,216 7,156
Work-in-process 8,069 10,524
Finished products 5,850 6,875
------- -------
23,135 24,555
Prepaid expenses 904 479
Deferred income taxes 3,056 3,056
Income tax refund receivable 718 1,190
------- -------
Total current assets 59,555 58,914
Plant and equipment
Land 2,040 2,040
Buildings 5,046 5,060
Equipment 21,596 20,450
Leasehold improvements 1,177 1,149
------- -------
29,859 28,699
Less accumulated depreciation and amortization 14,293 12,651
------- -------
15,566 16,048
------- -------
Excess of purchase price over net assets
acquired, net 10,784 11,231
Other assets 941 727
------- -------
$86,846 $86,920
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Current liabilities
Accounts payable $ 5,840 $ 4,241
Accrued salaries and wages 2,232 2,485
Accrued warranty 1,468 1,498
Other accrued expenses 1,095 1,287
Income taxes payable 246 289
Current portion of long-term debt 3,014 3,025
-------- --------
Total current liabilities 13,895 12,825
-------- --------
Long-term debt 13,101 14,533
-------- --------
Postretirement benefits 926 818
-------- --------
Other long-term liabilities 132 144
-------- --------
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 - 5,587,884 shares in 1999
5,505,843 shares in 1998 1,397 1,376
Additional paid-in capital 45,452 44,941
Retained earnings
Beginning of period 11,328 12,785
Net loss 31 (1,457)
-------- --------
End of period 11,359 11,328
Unamortized stock compensation (339) (368)
Accumulated other comprehensive income (699) (299)
-------- --------
Total stockholders' equity 57,170 56,978
-------- --------
$ 86,846 $ 86,920
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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<PAGE> 5
DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 24,765 $ 26,150 $ 49,317 $ 51,528
-------- -------- -------- --------
Costs and expenses
Cost of goods sold 14,135 16,260 29,448 33,425
Selling 3,504 4,053 6,982 8,011
Product development 3,983 3,044 7,393 5,842
General and administrative 2,490 2,307 4,760 4,677
Interest expense 485 523 1,002 1,036
Interest income (199) (108) (319) (192)
-------- -------- -------- --------
24,398 26,079 49,266 52,799
-------- -------- -------- --------
Income (loss) before income taxes 367 71 51 (1,271)
Income tax provision (benefit) 145 28 20 (502)
-------- -------- -------- --------
Net income (loss) $ 222 $ 43 $ 31 $ (769)
======== ======== ======== ========
Net income (loss) per share:
Basic $ .04 $ .01 $ .01 $ (.14)
======== ======== ======== ========
Diluted $ .04 $ .01 $ .01 $ (.14)
======== ======== ======== ========
Shares used in per share calculation:
Basic 5,557 5,402 5,538 5,371
======== ======== ======== ========
Diluted 5,631 5,655 5,606 5,371
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
JUNE 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 31 $ (769)
-------- --------
Adjustments to reconcile income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,905 1,759
Amortization of goodwill 447 447
Contribution of shares of common stock to
the Company's 401(k) plan 342 367
Amortization of unvested restricted stock 29 15
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,854) 1,123
Decrease in income tax refund receivable 472 51
Decrease in inventories 1,420 264
Increase in prepaid expenses (425) (46)
Increase in other assets (251) --
Increase in accounts payable 1,599 1,336
Decrease in accrued expenses (475) (444)
Decrease in income taxes payable (43) --
Increase in postretirement benefits 108 108
Decrease in other long-term liabilities (11) (18)
-------- --------
Total reconciling items 3,263 4,962
-------- --------
Net cash provided by operating activities 3,294 4,193
-------- --------
Cash flows from investing activities:
Book value of equipment disposals 1 4
Capital expenditures (1,332) (1,107)
Other (387) (23)
-------- --------
Net cash used in investing activities (1,718) (1,126)
-------- --------
Cash flows from financing activities:
Reductions of long-term debt (1,512) (11)
Proceeds from exercise of stock options 86 158
Proceeds from ESP plan 104 149
-------- --------
Net cash provided by (used for) financing activities (1,322) 296
-------- --------
Net increase in cash and cash equivalents 254 3,363
Cash and cash equivalents at beginning of period 10,307 5,819
-------- --------
Cash and cash equivalents at end of period $ 10,561 $ 9,182
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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DATUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 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 six
months ended June 30, 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 income was $(95,000) and $(86,000) for the three months ended June
30, 1999 and 1998, respectively. For the six months ended June 30, 1999 and
1998, total comprehensive income was $(369,000) and $(793,000), 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.
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The tables below presents information about reported segments for the quarters
ended June 30:
SEGMENT SALES
(in thousands)
<TABLE>
<CAPTION>
Irvine, Austin, San Jose, Beverly, Munich,
CA TX CA MA Germany Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1999
Total sales $ 10,264 $ 8,014 $ 4,090 $ 3,577 $ 1,383 $ 27,328
Intersegment sales (843) (305) 131 (1,164) (120) (2,563)
-------- -------- -------- -------- -------- --------
Net sales $ 9,421 $ 7,709 $ 3,959 $ 2,413 $ 1,263 $ 24,765
======== ======== ======== ======== ======== ========
1998
Total sales $ 14,162 $ 5,438 $ 3,043 $ 4,088 $ 1,286 $ 28,017
Intersegment sales (831) (11) (36) (912) (77) (1,867)
-------- -------- -------- -------- -------- --------
Net sales $ 13,331 $ 5,427 $ 3,007 $ 3,176 $ 1,209 $ 26,150
======== ======== ======== ======== ======== ========
</TABLE>
SEGMENT OPERATING INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
Irvine, Austin, San Jose, Beverly, Munich,
CA TX CA MA Germany Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1999 $(615) $1,551 $ 547 $315 $264 $2,062
1998 529 783 (308) 290 209 1,503
</TABLE>
A reconciliation of segment operating income (loss) to consolidated amounts for
the quarters ended ended June 30:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
------ ------
<S> <C> <C>
Segment operating income (loss) $2,062 $1,503
Corporate expenses (882) (742)
Amortization of goodwill (409) (409)
Intercompany profit elimination (118) 134
----- ------
Consolidated operating income $ 653 $ 486
===== ======
</TABLE>
The table below presents identifiable segments assets as of June 30, 1999
compared to prior year end:
IDENTIFIABLE SEGMENT ASSETS
(in thousands)
<TABLE>
<CAPTION>
Irvine, Austin, San Jose, Beverly, Munich,
CA TX CA MA Germany Total
-------- ------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1999 $20,710 $16,293 $5,603 $11,332 $2,073 $56,011
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
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 5.3% to $24.8 million for the
quarter ended June 30, 1999 from $26.2 million for the corresponding quarter in
1998. Net sales in the wireless business decreased $3.9 million or 29.3% for the
quarter ended June 30, 1999 compared to the corresponding quarter of 1998 due to
decreased product usage by the company's larger customers. This was offset by
net sales increases of $2.3 million or 42.0% in the wireline synchronization
business and $1.0 million or 31.6% at the enterprise timing products business
for the quarter ended June 30, 1999 compared to the corresponding quarter of
1998. For the six months ended June 30, 1999, net sales decreased 4.3% to $49.3
million from $51.5 million for the corresponding period of 1998.
Gross Margin. Gross margin increased to 42.9% for the quarter ended June 30,
1999 from 37.8% for the corresponding quarter in 1998. For the six months ended
June 30, 1999, gross margin increased to 40.3% from 35.1% for the corresponding
quarter of 1998. The increase is primarily a result of improved efficiency in
the manufacturing process, overhead reductions, material cost savings, and the
mix of products shipped. Although gross margins in the enterprise timing and
cesium businesses improved and gross margin in the wireline business remained
strong, gross margin in the wireless business declined due to reduced sales
levels. Beginning July 1, the Company will realize the second year contractual
price decrease with the Company's largest customer. Delays in completing
qualification testing of new cost-reduced replacement products will effect the
margins during the second half of the year.
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<PAGE> 10
Selling Expense. Selling expense decreased by 13.5% to $3.5 million for the
quarter ended June 30, 1999, from $4.1 million for the corresponding quarter in
1998. For the six months ended June 30, 1999, selling expense decreased 12.8% to
$7.0 million from $8.0 million for the six months ending June 30, 1998. As a
percentage of net sales, selling expense decreased to 14.1% for the quarter
ended June 30, 1999 from 15.5% for the corresponding quarter in 1998. For the
six months ended June 30, 1999, selling expense as a percentage of net sales
decreased to 14.2% from 15.5% 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 30.8% to $4.0
million for the quarter ended June 30, 1999 from $3.0 million for the
corresponding quarter in 1998. For the six months ended June 30, 1999, product
development expense increased by 26.5% to $7.4 million from $5.8 million for the
corresponding six 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 wireline and timing 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 these 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 expenses increased to 16.1% for the
quarter ended June 30, 1999 from 11.6% for the corresponding quarter of 1998.
For the six months ended June 30, 1999 product development expense, as a
percentage of sales, increased to 15.0% from 11.3% for the corresponding period
of 1998.
General and Administrative. General and administrative expense increased 7.9% to
$2.5 million for the quarter ended June 30, 1999, from $2.3 million for the
corresponding quarter of 1998. For the six months ended June 30, 1999, general
and administrative expense increased 1.8% to $4.8 million from $4.7 million for
the first six months of 1998. The increase was primarily the result of
additional corporate expenses related to acquisition endeavors. As a percentage
of net sales, general and administrative expense increased to 10.1% for the
quarter ended June 30, 1999, from 8.8% for the corresponding quarter of 1998.
For the six months ended June 30, 1999, general and administrative expense, as a
percentage of net sales, increased to 9.7% from 9.1% for the corresponding
period of 1998.
Interest, Net. Interest expense decreased by $129 thousand to $286 thousand for
the quarter ended June 30, 1999 from $415 thousand for the corresponding quarter
of 1998. For the six months ended June 30, 1999, interest expense decreased $161
thousand to $683 thousand from $844 thousand for the corresponding period of
1998. The decrease is the result of increased interest earned on the Company's
income tax receivables and the reduction of the Company's debt levels.
Shares Outstanding. Shares outstanding increased for the quarter and six months
ended June 30, 1999 as a result of shares issued through the Company's 401k,
ESP, and Incentive Stock plans.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was approximately $3.3 million for the six months
ended June 30, 1999 compared to $4.2 million for the corresponding period of
1998. Cash flows were positively affected in the first half of 1999 by decreased
inventory levels and increased accounts payable levels offset by increased
accounts receivable balances.
Cash used in investing activities was approximately $1.7 million for the six
months ended June 30, 1999 compared to $1.1 million for the corresponding period
of 1998. The Company currently anticipates that capital expenditures for fiscal
1999 will be less than $3 million.
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<PAGE> 11
Cash used for financing activities was approximately $1.3 million for the six
months ended June 30, 1999 compared to cash provided by financing activities of
$296 thousand for the corresponding six months of 1998. Cash used in the first
half of 1999 included the first payment of $1.5 million long-term Prudential
debt.
Accounts receivable increased $1.9 million to $21.2 million at June 30, 1999
from $19.3 million at December 31, 1998 due to increased shipments in the
wireline business during the latter half of the second quarter of 1999 compared
to the latter half of the fourth quarter of 1998.
Inventories decreased $1.4 million to $23.1 million at June 30, 1999 from $24.6
million at December 31, 1998. The Company continues efforts to manage
inventories to more appropriate levels.
Accounts payable increased $1.6 million to $5.8 million at June 30, 1999 from
$4.2 at December 31, 1998, a result of increased inventory purchases to support
increased sales volume during the quarter ended June 30, 1999 compared to the
quarter ended December 31, 1998.
At June 30, 1999, the Company had working capital of $45.7 million and a current
ratio of 4.3:1 compared to working capital of $46.1 and a current ratio of 4.6:1
at December 31, 1998. The decrease is primarily due to increased accounts
payable balances.
The Company's credit facility includes: (i) $6.0 million of Series A Senior
Secured Promissory Notes maturing September 27, 2000, bearing interest at the
rate of 9.07% on the unpaid principal, payable quarterly, with the principal
repaid in equal installments of $1.5 million on March 27 and September 27 of
each year, commencing March 27, 1999; and (ii) $12.0 million of Series B Senior
Secured Promissory Notes maturing September 27, 2003, bearing interest at the
rate of 10.25% on the unpaid principal, payable quarterly, with the principal
repaid in equal installments of $2.0 million on March 27 and September 27 of
each year, commencing March 27, 2001. In addition, in connection with the
issuance of these promissory notes, the Company issued to The Prudential
Insurance Company of America ("Prudential") common stock warrants for the
purchase of 175,000 shares of common stock at an exercise price per share of
$11.50.
The maturity date of the revolving component of the Company's line of credit
with Wells Fargo Bank has been extended to June 15, 2001. The line of credit is
in a principal amount not to exceed $10.0 million and bears interest at Wells
Fargo's prime rate or at LIBOR plus 2.75%. Under both the Wells Fargo credit
facility and the Prudential promissory notes, the Company is required to
maintain certain financial ratios, limit other indebtedness and may not pay
dividends. Other restrictions include limitations on the amounts of leases and
capital expenditures that may be incurred.
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 has 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 has identified two of its five
information systems locations as not Y2K compliant. While the Company could
upgrade these two locations without incurring material expense, the Company has
instead decided to implement a Company-wide enterprise information system, which
is scheduled for completion in October 1999. The new system is expected to
improve information systems operating performance and will 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.
-11-
<PAGE> 12
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 plans to survey 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.
READINESS FOR GPS WEEK ROLLOVER
All current Global Positioning system (GPS) satellites, which are operated by
the United States government, report time in the form of a GPS week number and a
time offset. The week number is accumulated in a 10 bit counter with a range of
0 to 1023. The counter began at 0 on January 6, 1980, and is scheduled to roll
from 1023 back to 0 on August 21, 1999. This rollover may cause equipment to
erroneously interpret dates causing satellite positions to be miscalculated
producing inaccurate data. The Company has identified its products that are
non-compliant. The Company's liability is limited to those products considered
under warranty. The Company does not expect to incur any material expense in
upgrading these products. For products not considered under warranty, the
Company expects to realize additional revenue, although not material, in
upgrading these older non-compliant products.
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
-12-
<PAGE> 13
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 3 and Item 5 have been omitted because the related information
is either inapplicable or has been previously reported.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on June 10, 1999
(b) (i) Set forth below is the name of each Class III director elected
at the meeting to serve until the 2002 Annual Meeting of
Stockholders and the number of votes cast for their election and
the number of votes withheld;
Number of Number of
Name Votes "For" Votes "Withheld"
---- ----------- ----------------
G. Tilton Gardner 4,927,730 59,767
Michael M. Mann 4,927,388 60,109
(ii) The terms of the following directors of the company continued
after the meeting: R. David Hoover, Louis B. Horwitz, Dan L.
McGurk, Edward A. Money, and Erik H. van der Kaay.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
---------- -----------
27.2 Financial Data Schedule
-14-
<PAGE> 15
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 August 12, 1999
- ------------------------------- ---------------
Erik H. van der Kaay, President
and Chief Executive Officer
/s/ David A. Young Date August 12, 1999
- ------------------------------- ---------------
David A. Young, Chief Financial
and Chief Accounting Officer
-15-
<PAGE> 16
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
- ------------ ----------- ----
27.2 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,561
<SECURITIES> 0
<RECEIVABLES> 21,181
<ALLOWANCES> 213
<INVENTORY> 23,135
<CURRENT-ASSETS> 59,555
<PP&E> 29,859
<DEPRECIATION> 14,293
<TOTAL-ASSETS> 86,846
<CURRENT-LIABILITIES> 13,895
<BONDS> 16,115
0
0
<COMMON> 1,397
<OTHER-SE> 55,773
<TOTAL-LIABILITY-AND-EQUITY> 86,846
<SALES> 49,317
<TOTAL-REVENUES> 49,317
<CGS> 29,448
<TOTAL-COSTS> 48,583
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 683
<INCOME-PRETAX> 51
<INCOME-TAX> 20
<INCOME-CONTINUING> 31
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
