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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For the fiscal year ended August 1, 1998
OR
[ ] Transition Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934 For the transition period from _________ to
---------
Commission file number 1-7636
DATAPOINT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1605174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4 rue d'Aguesseau 75008, Paris, France
8410 Datapoint Drive, San Antonio, Texas 78229-8500
(Address of principal executive offices and zip code)
(33-1) 40 07 37 37
(210) 593-7000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock, $.25 par value National Association of Securities Dealers'
Over-the-Counter Bulletin Board
$1.00 Exchangeable Preferred Stock,
$1.00 par value National Association of Securities Dealers'
Over-the-Counter Bulletin Board
8-7/8% Convertible Subordinated
Debentures Due 2006 Over-the-Counter
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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No .
As of October 13, 1998, 18,158,572 shares of Datapoint Corporation Common
Stock were outstanding (excluding 2,832,645 shares held in Treasury), and the
aggregate market value (based upon the last reported sale price of the Common
Stock on the National Association of Securities Dealers' Over-the-Counter
Bulletin Board -- Composite Tape on October 13, 1998) of the shares of Common
Stock held by non-affiliates was approximately $8.5 million. (For purposes of
calculating the preceding amount only, all directors and executive officers of
the registrant are assumed to be affiliates.)
PART I
ITEM 1. Business.
General
Datapoint Corporation, including its subsidiaries (hereinafter "Datapoint"
or "the Company"), 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, telecommunication and video conferencing network systems.
The Company is also actively engaged in the business of licensing its video
conferencing technology and its dual protocol local area network ("LAN")
technology.
Datapoint was reincorporated in Delaware in 1976 as the successor
corporation to a Texas corporation. They were originally incorporated in 1968 as
Computer Terminal Corporation and changed its name to Datapoint Corporation in
1972. Its principal executive offices are located at 4 rue d'Aguesseau 75008,
Paris, France (telephone number - (33-1) 40 07 37 37) and at 8410 Datapoint
Drive, San Antonio, Texas 78229-8500 (telephone number - (210)-593-7000).
Throughout the 1980's and the early 1990's, the Company's business was
characterized by a significant decline in total revenue, recurring significant
losses, and a reduction of the domestic workforce. This was primarily due to (1)
a mass entry of competitors in the networking marketplace compounded by (2) a
marketplace demand for "Open Systems" products and standard interfaces, both of
which had a negative impact on the traditional networking and data processing
components of the Datapoint business. The marketplace was forced into a sameness
of design that lead to highly competitive pricing being the only significant
product differentiator. These adverse effects were, in turn, worsened by the
increasing availability of low-cost, off-the-shelf software applications
packages written in a number of industry-standard programming languages. Between
1994 and 1996, the Company was able to maintain a consistent and slightly
increasing revenue level while, at the same time, restructuring its operations
mostly through significant workforce reductions worldwide. The aim was to reduce
its cost base to support such revenue levels. At the end of 1996, the Company
sold its European based Automotive Dealer Management Systems business ("EADS")
to Kalamazoo Computer Group, plc, a public limited company organized under the
laws of England ("Kalamazoo"), (as discussed more fully below). The decline in
revenue levels in 1997 reflects the result of this sale.
Since fiscal year 1996, the Company pursued, and is continuing to pursue,
actions to provide cash infusions, including the sale of surplus real estate
and/or selected assets of the Company in order to improve its financial
condition. In this regard, on May 28, 1996, the Company entered into an
agreement with Kalamazoo, providing for the sale by Datapoint to Kalamazoo of
Datapoint's EADS for a purchase price of $33.0 million.
In addition, on October 27, 1997, the Company sold the three buildings it
owned in San Antonio, Texas to a private unaffiliated group for approximately
$3.2 million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of one of the buildings (approximately
38,000 square feet) for an initial lease term of five years.
Subsequent to year-end, the Company signed a letter of intent to sell the
building it owns in Gouda, Netherlands to a private unaffiliated group for
approximately $2.2 million (net of mortgage obligations and closing costs). The
sales contract provides for the leaseback by the Company of approximately 18,000
square feet for an initial lease term of five years and approximately 12,000
square feet for an initial lease term of one year. The Company closed on the
sale of the building on October 26, 1998.
During the second quarter of 1997, the Company accepted 1,145,945 shares of
its $1.00 Exchangeable Preferred Stock, having a liquidation preference $20 per
share ("the $1.00 Preferred Stock"), which was tendered in its exchange offer
(the "Exchange Offer") described in the proxy statement/prospectus delivered to
the holders of the Company's common stock, par value $.25 per share (the "Common
Stock"), and to the holders of $1.00 Preferred Stock. Under the terms of the
exchange offer, each share of $1.00 Preferred Stock tendered was exchanged for
3.25 shares of Common Stock. The exchange offer expired December 10, 1996. The
tendered shares approximated 61.34% of the total outstanding shares of $1.00
Preferred Stock immediately prior to the expiration of the exchange offer. For
purposes of calculating net income applicable to common shareholders in 1997,
and related per share amounts, a gain of $3,810 on exchange and retirement of
preferred stock was added to net income. This gain includes the excess of the
carrying value of preferred stock accepted in the exchange over the fair value
of the common stock issued. In addition, the gain includes accumulated dividends
on the retired preferred stock.
Patents and Trademarks
Datapoint owns certain patents, copyrights, trademarks and trade secrets in
both network and video conferencing technologies, which it considers valuable
proprietary assets. The Company believes that in particular its video
conferencing patents and multi-speed network processing patents and the related
patents are important to its business as a whole.
Video Conferencing Patents
Datapoint, along with John Frassanito and David A. Monroe, owns United
States Patent Nos. 4,710,917 and 4,847,829 related to video teleconferencing
technology. Datapoint has filed infringement actions against several companies.
In 1995, the Company negotiated two settlements for such infringement for an
aggregate of $1.0 million, and, in 1996, the Company entered into an agreement
with NEC America, Inc. for the licensing of the `917 and `829 patents for an
undisclosed amount.
The status of the patent infringement litigation is as follows:
(1) Datapoint Corporation v. PictureTel Corporation, No. 3:93-CV-2381-D
(N.D. Texas). This case was tried in March and April of 1998 with an adverse
result. Notice of Appeal has been filed.
(2) Datapoint Corporation v. Compression Labs, Inc. No. 3:93-CV-2522-D
(N.D. Texas); Datapoint Corporation v. Teleos Communications, Inc. No.
95-4455-AET (D.N.J.); Datapoint Corporation v. Videolan Technologies, Inc.;
Videolan Technologies, Inc. v. Datapoint Corporation, No. 96 CV-604-H (W.D.
Kentucky) et al; Datapoint Corporation v. Intel Corp. No. 97-CV-2581 (N.D.
Texas). These cases have been dismissed subject to being reopened if the Company
is successful in its appeal of certain of the issues adversely determined in the
PictureTel litigation described above.
Multi-speed Networking Patents
Datapoint is also the owner of United States Patent Nos. 5,008,879 and
5,077,732 related to network technology. The Company believes these patents
cover most products introduced by various suppliers to the networking industry
and dominates certain types of dual-speed technology on networking recently
introduced by various industry leaders. Datapoint has asserted one or both of
these patents in the United States District Court for the Eastern District of
New York against a number of parties:
(1) Datapoint Corporation v. Standard Micro-Systems, Inc. and Intel
Corporation, No. C.V.-96-1685;
(2) Datapoint Corporation v. Cisco Systems, Plaintree Systems Corp., Accton
Technologies Corp., Cabletron Systems, Inc., Bay Networks, Inc., Crosscom Corp.
and Assante Technologies, Inc. No. CV 96 4534;
(3) Datapoint Corporation v. Dayna Communications, Inc., Sun Microsystems,
Inc., Adaptec, Inc. International Business Machines Corp., Lantronix, SVEC
America Computer Corporation, and Nbase Communications, No. CV 96 6334; and
(4) Datapoint Corporation v. Standard Microsystems Corp. and Intel Corp.,
individually, and as representatives of the class of all manufacturers, vendors
and users of Fast Ethernet-compliant, dual protocol local-area network products,
No. CV-96-03819.
These actions have been consolidated for discovery, and for purposes of
claim construction. On January 20, 1998, a hearing commenced in the United
States District Court that concluded on January 23, 1998 during which claim
construction was submitted to a Special Master. The Special Master's report was
issued April of 1998. The Company has filed two sets of objections to certain
portions of this report. A final hearing on such objections is expected to
scheduled for November of 1998. These objections ultimately may have to be
resolved at the Appellate Court level.
The above actions represent the Company's continuing efforts to license and
enforce its video conferencing and multi-speed networking patents through
negotiations and/or litigation. The Company believes that these patents provide
broad coverage in video conferencing and multi-speed networking technology and
present the opportunity for further royalty bearing licenses. While such royalty
bearing licenses and enforcement of its patents are important to the Company's
business to create long-term value for its stockholders, the ultimate outcome of
the above litigation, appeals with respect to the litigation, and /or
negotiations cannot be determined at this time.
Products
The Company provides communication solutions to the world through data,
voice, and video integration. A complete line of products for data processing,
video communications, and telecommunications is available.
The Company has enhanced its MINX video communications products, and its
Networked Video Systems, NVS, which provide the capacity for large video
networks and data conferencing features. A complete range of products is
available from a fully interactive, broadcast-quality, full-motion video network
which can accommodate over 3,000 local workstations to a single video station
for a remote office. All of the video products are interoperable and provide
functionality and picture quality that is unparalleled in the industry.
In 1994, consistent with the Company's patent licensing business, the
Company began patent infringement suits against several defendants related to
the Company's video conferencing patents and dual protocol local area network
patents. The Company's patent enforcement policy includes the identification of
video conferencing products and dual protocol local area network products and
applications which infringe the related patents and the execution of licensing
agreements through a) normal commercial negotiations or b) pursuant to
settlements of litigation brought against the patent infringers. The Company has
been successful in asserting its U.S. video conferencing patents resulting in
payments for licenses. On June 16, 1996, the Company entered into an agreement
with NEC America, Inc. for the licensing of Datapoint's video conferencing
patents. The Company is also taking steps through an industry-wide program to
license and enforce its multi-speed networking patents through negotiations
and/or litigation. Currently, four patent infringement suits are pending with
respect to Datapoint's patents on its dual protocol local area networking
technology. These patents cover certain ARCNET and Fast Ethernet products
recently introduced by various suppliers to the local area network industry and
dominates certain types of dual-speed LAN Adaptor Products recently introduced
by various industry leaders. Such royalty bearing licenses and enforcement of
its patents are a primary strategy of the Company's business to create long-term
value for its stockholders.
The Company's Networking products are industry-standard. The file servers
are based upon a scalable architecture using the Intel microprocessor. The
multi-processor functionality is provided for the Company's highly sophisticated
RMS network operating system. The same systems can be used for Windows NT, UNIX
and other operating systems. The Company offers high-performance, Pentium PRO
and Pentium II file servers. All systems support RAID disks and popular network
protocols such as TCP/IP and NetBios.
The Company's networking products focus on linking file servers,
workstations, terminals, printers, and other peripherals (such as modems) to the
network. High-performance networking software and hardware components comprise
the product offering and provide the ability to implement high-capacity, highly
efficient networks composed of client/server and data communications devices.
The networking solutions provide the capability of running MS-DOS, WINDOWS,
WINDOWS NT, UNIX, and RMS simultaneously along with flexible choices of adapters
such as ARCNET, ARCNETPLUS, Ethernet and FastEthernet. These capabilities
provide customers the flexibility to design network architectures to meet their
specific requirements.
Realizing that personal computers are the desktop workstation of choice,
the Company offers PC-based hardware and software. A Microsoft Windows compliant
terminal emulation package for the RMS environment which can be run on existing
PCs is also provided.
The Company resells a complete set of telecommunications products and
services to meet the requirements of large call centers, customer service
organizations, and telemarketing firms. Power dialers to increase call
efficiency for outbound communications applications, interactive voice response
systems which allow customers to interrogate an organization's database with a
simple telephone, and automatic call distribution systems that manage large
volumes of incoming calls comprise the portfolio of telecommunications products.
The Company has an agreement with Lucent to market their Definity line of
automatic call distributors through several of the Company's European
subsidiaries. The Company also has Intelligent Call Exchange ("ICE") from
Computer Talk Technology, Inc. ("CTT") in its product portfolio. This PC based
call center is the first of a new generation of technology products addressing a
much wider marketplace and takes advantage of the large base of skilled
engineers the Company has throughout Europe. In addition, the Company markets
the Electronic Data Gathering Expertise ("EDGE") telebusiness software from
International Management Associates, Ltd., ("IMA") to enhance its call center
capabilities and provide vertical market applications for industries throughout
Europe. Also, during the fiscal year, the Company entered into a Value Added
Reseller agreement with Nortel (Northern Telecom) Europe allowing Datapoint to
sell and support Nortel's Symposium portfolio of multimedia products. As part of
the agreement, the Company will create a unique Symposium competency center to
provide customers with solutions support and integration facilities. This
pan-European agreement is currently operational in Italy, but will be extended
to encompass other European countries. Telecommunications solutions are provided
with the combined expertise in networking, data processing, and
telecommunications products.
The supplier and value-added reseller relationships that the Company
continues to develop, allow its customers worldwide to enhance their
productivity with sensible, cost-effective computer-based networking, telephony
and video communication solutions.
Markets
Customers
Datapoint sells generally to business and government customers, including
the U.S. government, financial institutions, insurance companies, educational
institutions, and manufacturers. During fiscal years 1996 through 1998, no one
customer accounted for 10 percent or more of consolidated revenues.
Domestic
Datapoint markets its products in the United States through independent
sales representatives who, on a commission basis, solicit orders for Datapoint's
products; through value-added resellers, who purchase Datapoint's products for
resale; original equipment manufacturers, who integrate Datapoint's products
into their overall offerings; and through Datapoint's own end-user sales force.
Independent sales representatives, value-added resellers, and original equipment
manufacturers generally market Datapoint's products in conjunction with
application software and other products developed and marketed by such firms.
International
Datapoint's products are marketed to end-users in over forty countries
through a network of wholly-owned subsidiaries and independent distributors.
Datapoint distributes its products internationally through wholly-owned sales
and service operations in Belgium, France, Germany, Holland, Italy, Norway,
Spain, Sweden, Switzerland and the United Kingdom and through authorized
distributors worldwide. During fiscal years 1998, 1997 and 1996, approximately
99 percent, 99 percent and 96 percent, respectively, of Datapoint's
international revenue was derived from customers in Western Europe.
Customer Service
In the United States, Datapoint has entered into an agreement with Decision
Servcom, Inc. ("DSI"), whereby DSI would serve as the non-exclusive authorized
service agent for Datapoint's proprietary data processing products. Maintenance
of equipment outside the United States is provided by Datapoint's international
subsidiaries and distributors. The service operations of the Company's
international subsidiaries produced 41 percent of total company revenues and 52
percent of total company gross profit for the fiscal year ended August 1, 1998.
In fiscal year 1996, Datapoint entered into a subcontract with Kalamazoo to
provide hardware maintenance service to Kalamazoo's European Automotive Dealer
System network.
Manufacturing, Raw Materials, and Supplies
The majority of Datapoint's products are purchased from third parties. The
products are then resold badged/unbadged within Datapoint configurations upon
the completion of testing and packaging.
Datapoint seeks, and maintains where practical, multiple sources of supply
for the products, components, and raw materials which it uses. However, certain
products and components are purchased only from single sources, and Datapoint
could experience manufacturing delays if such suppliers should fail to meet
Datapoint's requirements. The delay of any components, whether for supply or
quality reasons, can become critical to product flows. The Company's general
experience has been good in terms of minimizing exposure; however, guarantees
regarding possible future situations and rectifying actions that could arise
cannot be made.
Research and Product Development
The technology involved in the design and operation of Datapoint's products
is complex and subject to constant change. Accordingly, Datapoint is committed
to a program of research and development which is oriented toward the
development of new hardware and software products and the improvement and
expansion of its existing products and services.
Datapoint incurred expense of $2.5 million, $2.1 million, and $2.7 million
in the fiscal years ended August 1, 1998, August 2, 1997, and July 27, 1996,
respectively, on research and development activities. Datapoint maintains its
principal research and development facility in San Antonio, Texas.
Competition
Datapoint operates in the intensely competitive computer data processing,
video conferencing and telephony industries. These industries are characterized
by the frequent introduction of new products based upon technological advances.
Datapoint competes, domestically and abroad, with a substantial number of
companies, many of which are larger and have greater resources than Datapoint.
Such companies, considered in the aggregate, compete in the entire line of
products manufactured and marketed by Datapoint. These competitors differ
somewhat depending on the market segment, customer and geographic area involved.
Competition in this market is based primarily on the relationship between
price and performance; the ability to offer a variety of products and unique
functional capabilities; the strength of sales, service and support
organizations; upgradability, flexibility, and ease of use of products. The
Company could be adversely affected if its competitors introduced
technologically superior products or substantial price reductions.
Backlog
The backlog of firm orders for the sale or lease of the Company's products
as of August 1, 1998 and August 2, 1997 was $8.5 million and $9.6 million,
respectively. Calculations were based on then existing end-user purchase prices
for products and gave effect to appropriate discounts for products to be sold.
The backlog amounts are not necessarily indicative of the Company's future
results, since an increasing amount of the Company's revenues are derived from
orders obtained in the period of shipment. Furthermore, a portion of the
Company's backlog may be cancelable at the customer's option, under certain
conditions, without financial penalty. All orders included in the backlog at
August 1, 1998, are currently scheduled for delivery during the subsequent 12
months. All orders are subject to the Company's ability to meet delivery
commitments. The Company records only firm orders as backlog, and generally such
orders are cancelable only by the Company. In the event that a new product is
released, a customer is allowed to upgrade (i.e., cancel) an existing order and
place a new order for the new product. This is done at the Company's discretion
with no financial penalty to the customer.
Backlog is also not a reliable indicator of future results, as changes in
product mix and costs may significantly impact reported results. Therefore, the
Company believes that the backlog data is not meaningful to an understanding of
the Company's business or future reported results.
Patents and Trademarks
Datapoint owns certain patents, copyrights, trademarks and trade secrets in
both network and video conferencing technologies, which it considers valuable
proprietary assets. The Company believes that in particular its video
conferencing patents and multi-speed network processing patents and the related
patents are important to its business as a whole.
Video Conferencing Patents
Datapoint, along with John Frassanito and David A. Monroe, owns United
States Patent Nos. 4,710,917 and 4,847,829 related to video teleconferencing
technology. Datapoint has filed infringement actions against several companies.
In 1995, the Company negotiated two settlements for such infringement for an
aggregate of $1.0 million, and, in 1996, the Company entered into an agreement
with NEC America, Inc. for the licensing of the `917 and `829 patents for an
undisclosed amount.
The status of the patent infringement litigation is as follows:
(1) Datapoint Corporation v. PictureTel Corporation, No. 3:93-CV-2381-D
(N.D. Texas). This case was tried in March and April of 1998 with an adverse
result. Notice of Appeal has been filed.
(2) Datapoint Corporation v. Compression Labs, Inc. No. 3:93-CV-2522-D
(N.D. Texas); Datapoint Corporation v. Teleos Communications, Inc. No.
95-4455-AET (D.N.J.); Datapoint Corporation v. Videolan Technologies, Inc.;
Videolan Technologies, Inc. v. Datapoint Corporation, No. 96 CV-604-H (W.D.
Kentucky) et al; Datapoint Corporation v. Intel Corp. No. 97-CV-2581 (N.D.
Texas). These cases have been dismissed subject to being reopened if the Company
is successful in its appeal of certain of the issues adversely determined in the
PictureTel litigation described above.
Multi-speed Networking Patents
Datapoint is also the owner of United States Patent Nos. 5,008,879 and
5,077,732 related to network technology. The Company believes these patents
cover most products introduced by various suppliers to the networking industry
and dominates certain types of dual-speed technology on networking recently
introduced by various industry leaders. Datapoint has asserted one or both of
these patents in the United States District Court for the Eastern District of
New York against a number of parties:
(1) Datapoint Corporation v. Standard Micro-Systems, Inc. and Intel
Corporation, No. C.V.-96-1685;
(2) Datapoint Corporation v. Cisco Systems, Plaintree Systems Corp., Accton
Technologies Corp., Cabletron Systems, Inc., Bay Networks, Inc., Crosscom Corp.
and Assante Technologies, Inc. No. CV 96 4534;
(3) Datapoint Corporation v. Dayna Communications, Inc., Sun Microsystems,
Inc., Adaptec, Inc. International Business Machines Corp., Lantronix, SVEC
America Computer Corporation, and Nbase Communications, No. CV 96 6334; and
(4) Datapoint Corporation v. Standard Microsystems Corp. and Intel Corp.,
individually, and as representatives of the class of all manufacturers, vendors
and users of Fast Ethernet-compliant, dual protocol local-area network products,
No. CV-96-03819.
These actions have been consolidated for discovery, and for purposes of
claim construction. On January 20, 1998, a hearing commenced in the United
States District Court that concluded on January 23, 1998 during which claim
construction was submitted to a Special Master. The Special Master's report was
issued April of 1998. The Company has filed two sets objections to certain
portions of this report. A final hearing on such objections is expected to be
scheduled for November of 1998. These objections ultimately may have to be
resolved at the Appellate Court level.
The above actions represent the Company's continuing efforts to license and
enforce its video conferencing and multi-speed networking patents through
negotiations and/or litigation. The Company believes that these patents provide
broad coverage in video conferencing and multi-speed networking technology and
present the opportunity for further royalty bearing licenses. While such royalty
bearing licenses and enforcement of its patents are a primary strategy of the
Company's business to create long-term value for its stockholders, the ultimate
outcome of the above litigation, appeals with respect to the litigation, and /or
negotiations cannot be determined at this time.
The Company utilizes a number of trademarks, most importantly "DATAPOINT",
"ARCNET" and "MINX". The Company registers or otherwise protects those
trademarks it deems valuable to its business and anticipates no significant
impairment of its ability to continue to use and protect its important
trademarks. Datapoint, the "D" logo, ARC, ARCNET, RMS, MINX, and Resource
Management System are trademarks of Datapoint Corporation registered in the U.S.
Patent and Trademark office. Attached Resource Computer, ARCNETPLUS, and DATALAN
are trademarks of the Company. (AT&T is a registered trademark of American
Telephone and Telegraph. Ethernet is a registered trademark of Xerox
Corporation. Intel is a registered trademark of Intel Corporation. Microsoft and
MS-DOS are registered trademarks of Microsoft Corporation. UNIX is a registered
trademark of UNIX System Laboratories, Inc.)
Employees
At August 1, 1998, the Company had 652 employees. The Company considers its
relations with its employees to be satisfactory.
Environmental Matters
Compliance with current federal, state, and local regulations relating to
the protection of the environment has not had, and is not expected to have, a
material effect upon the capital expenditures, earnings, or competitive position
of Datapoint.
ITEM 2. Properties.
Datapoint's principal executive offices are located in Paris, France and in
San Antonio, Texas. Datapoint believes that its facilities are generally well
maintained, in good operating condition and are adequately equipped for their
present use. Information regarding the principal plants and properties,
excluding leases assigned or subleased, as of August 1, 1998, is as follows:
Approximate
Facility
Location Use Sq. Footage Owned or Leased Land Area
San Antonio, Texas Office 38,000 Leased; expires October 1, 2002
Gouda, Netherlands Office 52,000 Owned; 1 acre (Subject to mortgage)*
Paris, France Office 7,000 Leased; expires June 30, 1999
Additionally, at August 1, 1998, excluding leases assigned or subleased, the
Company leased sales and service offices having an aggregate of 302,000 square
feet in metropolitan areas worldwide, pursuant to lease agreements which expire
between 1998 and 2009. The aggregate annual rental of all of these sales and
service offices is approximately $3.1 million and most of these leases are
subject to rental increases under certain escalation provisions and renewals on
similar terms.
*Subsequent to year end, the Company signed a letter of intent to sell the
building it owns in Gouda, Netherlands to a private unaffiliated group for
approximately $2.2 million (net of mortgage obligations and closing costs). The
sales contract provides for the leaseback by the Company of approximately 18,000
square feet for an initial lease term of five years and approximately 12,000
square feet for an initial lease term of one year. The Company closed on the
sale of the building on October 26, 1998.
ITEM 3. Legal Proceedings.
In John Frassanito and David A. Monroe v. Datapoint Corp., No. H-95-812
(S.D. Tex) plaintiffs alleged that the Company usurped various patentable
inventions and trade secrets in connection with the development of its MINX
systems. They also asserted a cause of action for patent infringement, and a
cause of action requiring Datapoint to assign certain MINX-related patents and
other intellectual property. On August 16, 1996, the Court dismissed with
prejudice plaintiffs' claims of patent infringement against Datapoint and
dismissed without prejudice plaintiff's pendent State law claims and Datapoint's
State law counter-claims for lack of subject matter jurisdiction. Plaintiffs in
this action moved to intervene in the Picturetel and CLI actions. In September
1997, the Company announced that it had received a court order approving a
confidential agreement between the parties resolving this matter without further
proceedings.
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.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Datapoint Corporation announced in early August that its securities would no
longer be listed on the New York Stock Exchange under the symbol "DPT",
effective at the end of business Friday, August 21, 1998. The New York Stock
Exchange's decision was an administrative event for Datapoint and did not
reflect any material change in the Company's financial health. As of August 24,
1998, the common stock is quoted on the National Association of Securities
Dealers' Over-the Counter Bulletin Board under the symbol "DTPT". As of October
13, 1998, there were approximately 2,958 holders of record and 18,158,572
outstanding shares of Common Stock. The prices below represent the high and low
prices for composite transactions for stock traded during the applicable period.
The Company has not paid cash dividends to date on its common stock and has no
present intention to pay cash dividends on its common stock in the near future.
As of October 13, 1998, the closing price of the stock was $0.63.
Fiscal
year High Low
1998 Q4 2.25 1.13
Q3 3.13 1.50
Q2 3.44 2.50
Q1 4.13 2.06
High Low
1997 Q4 3.13 .94
Q3 1.13 .88
Q2 1.50 1.00
Q1 1.63 .94
ITEM 6. Selected Financial Data.
Selected Financial Data
Five-Year Comparison
(Dollars in thousands, except per share data)
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Results for the Fiscal Year
Total revenue $151,445 $142,121 $179,541 $174,901 $172,936
Operating income (loss) 5,074 2,033 1,017 (18,232) (81,021)
Income (loss) before extraordinary credit
and effect of change in accounting principle (1,224) 1,173 19,015 (28,343) (94,765)
Net income (loss) (669) 2,383 19,342 (28,343) (93,425)
Basic earnings (loss) per common share:
Income (loss) before extraordinary credit (.11) .01 1.28 (2.29) (6.69)
Gain on the exchange and retirement of preferred stock -- .24 -- -- --
Extraordinary credit .03 .07 .02 -- .09
Net income (loss) per share (.08) .32 1.30 (2.29) (6.60)
Diluted earnings (loss) per common share:
Income (loss) before extraordinary credit (.11) .01 1.11 (2.29) (6.69)
Gain on the exchange and retirement of preferred stock -- .24 -- -- --
Extraordinary credit .03 .07 .02 -- .09
Net income (loss) per share (.08) .32 1.13 (2.29) (6.60)
Financial Position at End of Fiscal Year
Current assets $50,807 $45,340 $69,995 $67,506 $79,915
Fixed assets, net 9,468 11,764 14,625 18,877 29,088
Total assets 66,816 62,388 93,818 101,751 127,434
Current liabilities 61,376 53,679 76,965 100,256 98,202
Long-term debt 58,115 60,875 63,945 64,923 70,561
Stockholders' equity (deficit) (64,437) (64,084) (55,202) (74,116) (50,761)
Other Information
Average common shares outstanding 17,967,924 16,109,774 13,455,878 13,194,667 14,430,574
Number of common stockholders of record 2,966 3,070 3,142 3,274 3,378
Preferred shares outstanding 721,976 721,976 1,868,071 1,846,456 1,784,456
Dividends paid or accumulated on preferred stock $722 $1,009 $1,885 $1,815 $1,784
Number of employees 652 641 705 991 1,444
No cash dividends on common stock have been declared during the five-year
period.
Net income for 1996 includes a gain of $32.2 million resulting from a
divestiture.
See notes to Consolidated Financial Statements and Management
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Throughout 1998, the Company's main objectives to preserve and improve the
Company's cash liquidity and financial position and to allow the Company to meet
its future operating cash flow requirements were as follows:
1. Product marketing to maintain stabilized revenue levels,
2. Continued review and reduction of operating costs, and
3. The vigorous pursuit of patent royalties due from the licensing and
enforcement of its video conferencing and multi-speed networking patents.
During 1998, the Company had a net loss of $669 thousand compared with net
income of $2.4 million for the previous year. Included in the net income of
$19.3 million for 1996 is a $32.2 million non-operating gain related to the sale
of EADS in the fourth quarter of 1996.
During 1998, the Company had total revenue of $151.4 million, an increase of
$9.3 million from the previous year. The increase in revenue was primarily due
to the receipt of several new contracts awarded to the Company's Spanish,
Italian and British subsidiaries and continued strong hardware sales in the
Swedish subsidiary. This revenue increase reflects the offset of approximately
$8.7 million, resulting from a stronger U.S. dollar, on average, during fiscal
1998, as compared to the same period of 1997.
Operating expenses (research and development plus selling, general &
administrative) for 1998 were $35.8 million, a decrease of $1.7 million from the
$37.5 million recorded in 1997. Approximately $1.5 million of the decrease is
related to the effect of the strengthening U.S. dollar when compared with the
same period a year ago. The Company recorded restructuring charges of $96
thousand in 1998, compared with $2.4 million recorded in the prior year.
During 1998 and 1997, the Company repurchased approximately $2.7 million and
$2.9 million, in face value, of its 8 7/8% convertible subordinated debentures.
This resulted in an extraordinary gain of $555 thousand and $1.2 million,
respectively.
In previous fiscal years, included in non-operating income and expense were
transaction gains or losses resulting from the strengthening or weakening of the
U.S. dollar against foreign currencies. These exchange gains or losses related
to short term intercompany notes and international subsidiary U.S. dollar
denominated cash were offset by translation adjustment to Stockholders' Deficit
and therefore, had no impact on the Company's financial position.
During fiscal year 1998, management reassessed the characteristics of its
intercompany notes with international subsidiaries (payable by the U.S. parent)
and determined that a substantial portion were long-term in nature and not
payable in the foreseeable future. As a result, during fiscal year 1998,
transaction gains of $57 thousand relating to these loans are included as a
foreign currency adjustment to Stockholders' Deficit, which in prior years,
would have been included in non-operating income and expense, as described
above. During fiscal year 1997, a transaction gain of approximately $6.2 million
was included in non-operating income but was offset by translation adjustment to
Stockholders' Deficit.
In addition, on October 27, 1997, the Company sold the three buildings it owned
in San Antonio, Texas to a private unaffiliated group for approximately $3.2
million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of one of the buildings (approximately
38,000 square feet) for an initial lease term of five years.
During the second quarter of 1997, the Company accepted 1,145,945 shares of its
$1.00 Exchangeable Preferred Stock, having a liquidation preference $20 per
share ("the $1.00 Preferred Stock"), which was tendered in its exchange offer
(the "exchange offer") described in the proxy statement/prospectus delivered to
the holders of the Company's common stock, par value $.25 per share (the "Common
Stock"), and to the holders of $1.00 Preferred Stock. Under the terms of the
exchange offer, each share of $1.00 Preferred Stock tendered was exchanged for
3.25 shares of Common Stock. The exchange offer expired December 10, 1996. The
tendered shares approximated 61.34% of the total outstanding shares of $1.00
Preferred Stock immediately prior to the expiration of the exchange offer. For
purposes of calculating net income applicable to common shareholders in 1997,
and related per share amounts, a gain of $3,810 on exchange and retirement of
preferred stock was added to net income. This gain includes the excess of the
carrying value of preferred stock accepted in the exchange over the fair value
of the common stock issued. In addition, the gain includes accumulated dividends
on the retired preferred stock.
Subsequent to year-end, the Company signed a letter of intent to sell the
building it owns in Gouda, Netherlands to a private unaffiliated group for
approximately $2.2 million (net of mortgage obligations and closing costs). The
sales contract provides for the leaseback by the Company of approximately 18,000
square feet for an initial lease term of five years and approximately 12,000
square feet for an initial lease term of one year. The Company closed on the
sale of the building on October 26, 1998.
Financial Condition and Liquidity
During 1998, the Company's cash and cash equivalents decreased $3.4 million due
primarily to the usage of cash in operations.
During 1998, the Company's net cash provided from investing activities was
approximately $1.0 million. Included in this amount is $3.2 million from the
sale of the San Antonio, Texas office buildings offset by approximately $2.4
million of fixed asset purchases (primarily test equipment, spares, and
internally-used equipment).
Net cash used in financing activities was $2.5 million in 1998, primarily
related to the net paydown of the Company's borrowings. As of August 1, 1998,
the Company had restricted cash of $352 thousand as compared to $154 thousand in
the prior year. The 1998 and 1997 balances were restricted primarily to cover
various lines of credits, reflected as payables to banks.
As of August 1, 1998, the Company had cash and cash equivalents of $12.1
million. The Company believes its available cash, cash equivalents and funds
generated by operations will be sufficient to provide its working capital and
cash requirements for fiscal 1999. In addition, management believes the Company
will be able to discharge its obligations in the near term with cash generated
from operations and other sources such as sale of selected assets and/or capital
transactions.
As of August 1, 1998, the Company had included in payables to banks an amount of
$1,906 and $1,747, payable by the Dutch and U.K. subsidiaries, respectively, to
International Factors "De Factorij" B.V., a subsidiary of ABN-AMRO Bank of the
Netherlands. The Dutch loan was secured by the building that the Company's Dutch
subsidiary owned in the Netherlands, and by certain receivables of the Dutch
subsidiary. Subsequent to year-end, the Company sold the Dutch building (as
described above) and from the proceeds paid the $1,906 Dutch subsidiary
obligation. The U.K. loan is secured by certain receivables of the U.K.
subsidiary.
The Company has available lines of credit from foreign banks to its foreign
subsidiaries. The availability of the unused lines of credit is subject to
certain collateral restrictions. The unused lines of credit at August 1, 1998,
totaled $7.1 million after borrowings of $7.9 million.
As a result of the Company's capital deficiency which existed at the end of 1994
and throughout 1995, 1996, 1997, and 1998, the Company determined not to pay the
quarterly preferred dividend payments due to stockholders during the period of
October 15, 1994 through October 15, 1998. On January 16, 1996, the Company
announced that it was in arrears on its $1.00 preferred stock in an aggregate
amount equal to six full quarterly dividends. As a result, each holder of $1.00
preferred stock has the right to exchange each such share (inclusive of all
accrued and unpaid dividends) into two shares of the Company's common stock. As
a result of the dividend arrearages, the number of directors constituting the
Board of Directors of the Company was increased by two with the vote of the
holders of the $1.00 preferred stock (not including those who have exchanged
$1.00 preferred stock for the Company's common stock). These rights continue
until such time as the arrearages have been paid in full.
At August 1, 1998, the Company had available federal tax net operating losses
aggregating approximately $184,000, expiring in various amounts beginning in
2001. In the event that the Company's ability to utilize its net operating
losses to reduce its federal tax liability with respect to current and future
income becomes subject to limitation, the Company may be required to pay, sooner
than it otherwise might have to, any amounts owing with respect to such federal
tax liability, which would reduce the amount of cash otherwise available to the
Company (see note 4 to Consolidated Financial Statements).
Reorganization/Restructuring Costs
(In thousands)
A rollforward of the restructuring accrual from July 29, 1995 through August 1,
1998 is as follows:
TOTAL
Restructuring accrual as of July 29, 1995 $4,168
Fiscal 1996 additions 263
Fiscal 1996 payments (3,776)
- -------------------------------------------------------------------
Restructuring accrual as of July 27, 1996 $655
Fiscal 1997 additions 2,425
Fiscal 1997 payments (2,572)
- -------------------------------------------------------------------
Restructuring accrual as of August 2, 1997 $508
Fiscal 1998 additions 96
Fiscal 1998 payments (422)
- -------------------------------------------------------------------
Restructuring accrual as of August 1, 1998 $182
The projected payout of the restructuring accrual balance as of August 1, 1998
which relates almost entirely to unpaid employee termination costs, is as
follows:
First quarter 1999 $ 42
Second quarter 1999 105
Third quarter 1999 10
Fourth quarter 1999 10
Beyond 15
- --------------------------------------------------------------------
Restructuring accrual as of August 1, 1998 $ 182
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.
Results of Operations
The following is a summary of the Company's sources of revenue for each of
fiscal 1998, 1997 and 1996:
(In thousands)
1998 1997 1996
---- ---- ----
Sales:
U.S. $3,182 $4,241 $3,185
Foreign 85,742 74,127 95,691
------ ------ ------
88,924 78,368 98,876
Service and other:
U.S. 1,123 1,185 906
Foreign 61,398 62,568 79,759
------ ------ ------
62,521 63,753 80,665
------ ------ ------
Total revenue $151,445 $142,121 $179,541
======== ======== ========
1998 Compared to 1997
During 1998, the Company had total revenue of $151.4 million, an increase of
$9.3 million from the previous year. The increase in revenue was primarily due
to the receipt of several new contracts awarded to the Company's Spanish,
Italian and British subsidiaries and continued strong hardware sales in the
Swedish subsidiary. This revenue increase reflects the offset of approximately
$8.7 million, resulting from a stronger U.S. dollar, on average, during fiscal
1998, as compared to the same period of 1997.
Gross profit margins during 1998 were 27.0% compared with 29.5% for 1997. The
decrease was primarily the result of a large volume of sales by a Northern
European subsidiary of lower margin product and competitive pricing pressures
worldwide partially offset by higher service margins due to continued cost
cutting actions.
On October 27, 1997, the Company sold the three buildings it owned in San
Antonio, Texas to a private unaffiliated group for approximately $3.2 million
(net of mortgage obligations and closing costs). The sales contract provided for
the leaseback by the Company of one of the buildings (approximately 38,000
square feet) for an initial lease term of five years.
In previous fiscal years, included in non-operating income and expense were
transaction gains or losses resulting from the strengthening or weakening of the
U.S. dollar against foreign currencies. These exchange gains or losses related
to short term intercompany notes and international subsidiary U.S. dollar
denominated cash were offset by translation adjustment to Stockholders' Deficit
and therefore, had no impact on the Company's financial position.
During fiscal year 1998, management reassessed the characteristics of its
intercompany notes with international subsidiaries (payable by the U.S. parent)
and determined that a substantial portion were long-term in nature and not
payable in the foreseeable future. As a result, during fiscal year 1998,
transaction gains of $57 thousand relating to these loans are included as a
foreign currency adjustment to Stockholders' Deficit, which in prior years,
would have been included in non-operating income and expense, as described
above. During fiscal year 1997, a transaction gain of approximately $6.2 million
was included in non-operating income but was offset by translation adjustment to
Stockholders' Deficit.
Operating expenses (research and development plus selling, general &
administrative) for 1998 were $35.8 million, a decrease of $1.7 million from the
$37.5 million recorded in 1997. Approximately $1.5 million of the decrease is
related to the effect of the strengthening U.S. dollar when compared with the
same period a year ago. The Company recorded restructuring charges of $96
thousand during 1998, compared with $2.4 million recorded in the prior year.
Research and development expenses increased from $2.1 million in 1997 to $2.5
million in 1998.
1997 Compared to 1996
During 1997, the Company had total revenue of $142.1 million, a decrease of
$37.4 million from the previous year. Approximately $17.5 million of the
decrease is attributable to the loss of business (mostly service) resulting from
the sale of EADS to Kalamazoo. Approximately $7.2 million was due to the
unfavorable impact related to the strengthening U.S. dollar when compared with
the same period in the prior year. The remainder was primarily due to a weaker
sales performance in two of the Company's western European subsidiaries when
compared to the previous year.
Gross profit margins during 1997 were 29.5% compared with 30.9% for 1996. The
decrease was primarily due to high sales volume of a low margin commodity
product in a Northern European subsidiary, a changing product mix toward lower
margin, non-company sourced product and competitive pricing pressures worldwide.
Included in non-operating income for 1997 is $6.2 million related to transaction
gains resulting from the strengthening U.S. dollar against foreign currencies,
as compared to a gain of $0.7 million for the prior year. These gains, caused by
the strengthening U.S. dollar against certain foreign currencies, relate to
intercompany notes and international subsidiary U.S. dollar
denominated cash.
Operating expenses (research and development plus selling, general &
administrative) during 1997 declined 30.9% or $16.8 million from 1996 to $37.5
million. Approximately $6.6 million of the decrease is attributable to the sale
of EADS. Approximately $1.1 million related to the effect of the strengthening
U.S. dollar when compared with the same period a year ago, and the remainder due
to cost cutting actions undertaken by the Company. The Company recorded
restructuring charges of $2.4 million in 1997, compared with $0.3 million
recorded in the prior year. Research and development expenses decreased from
$2.7 million in 1996 to $2.1 million in 1997.
Non-operating results for 1996 include a gain of $32.2 million from the sale of
the Company's European Automotive Dealer Management Systems business to
Kalamazoo Computer Group, plc. and a $0.7 million in foreign currency exchange
rate gains on certain of the Company's intercompany payables and receivables
offset by a $3.3 million legal settlement.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, generate invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be required to
modify or replace significant portions of hardware and software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications and replacement of existing hardware
and software, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed on a timely
basis, the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has substantially completed (90%) of its assessment of all Information
Technology ("IT") systems that could be significantly affected by the Year 2000.
The completed assessment indicated that most of the company's significant
information technology systems could be affected, particularly general ledger
and the remaining financial systems (Billing, Inventory, etc.).
The Company has also assessed its non "IT" operating systems to insure
compliance with Year 2000. Affected systems included those primarily related to
the office and facilities' environment (telephone systems, security systems,
etc.). While the Company has determined that some of these systems are not Year
2000 compliant, the Company intends to replace/modify these prior to July 31,
1999, and does not expect to have a material exposure with these systems.
The majority of the Company's products are purchased from third parties, who
furnish products meeting the Company's specifications. The Company has obtained
information about the Year 2000 compliance status of its significant suppliers
and subcontractors and continues to monitor their compliance. To date, the
Company is not aware of any supplier/subcontractor Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that their suppliers
will be Year 2000 ready. The inability of suppliers/sub-contractors to complete
their Year 2000 resolution process in a timely fashion could materially impact
the Company. The effect of non-compliance by suppliers is not determinable at
this time.
The Company also sells a variety of proprietary software products which the
Company developed. The Company is 90% complete with the assessment of Year 2000
compatibility of these software products and has made the results available on
the Company's Internet "web" page and have communicated these results to
customers on a demand basis.
For its information technology exposures, to date, the Company is approximately
10% complete on the remediation phase and expects to complete software
reprogramming and replacement no later than August 1, 1999. Once software is
reprogrammed and replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems. Completion
of the testing and implementation phases for all significant systems is expected
by August 1, 1999.
For operating equipment, the Company is beginning the remediation phases and
expects to complete its remediation efforts by August 1, 1999.
The Company will utilize both internal and external resources to reprogram, or
replace, test, and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $1.3
million and is being funded through operating cash flows. To date, the Company
has incurred approximately $0.1 million (all expensed) related to all phases of
the Year 2000 project. Of the total remaining project costs, approximately $1.0
million is attributable to the purchase of new software and operating equipment,
which will be capitalized. The remaining $0.2 million relates to the
repair/replacement of hardware and software and will be expensed as incurred.
The Company believes that it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
fully completed all necessary phases of the Year 2000 program. In the event that
the Company does not complete all phases, there could be circumstances in which
the Company would be unable to automatically accept customer orders, ship
products, invoice customers or collect payments. In these events, the Company
would resort to a previously identified list of problem solving priorities,
revert to some previous or manual operation and/or rely on previously identified
outsourcing or incremental staffing opportunities.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the Company. The Company could be
subject to litigation for computer system product failure, such as, equipment
shutdown, or failure to properly date business records. The amount of potential
liability or lost revenue cannot be reasonable estimated at this time.
The Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
NEW EUROPEAN CURRENCY
In January 1999, certain European countries are scheduled to introduce a new
currency unit called the `euro'. In conjunction with the preparation for the
year 2000, the Company is also modifying and/or adapting systems designed to
properly handle the euro. The Company's subsidiaries will formally begin
reporting in euro currency starting with the August 1999 results (FY 2000).
While Datapoint will more than likely be required to deal with euro transactions
prior to that time, the activity will primarily be done manually. The costs
required to be able to accommodate the euro are combined with costs of becoming
year 2000 compliant, and therefore not easily identifiable. However, they are
not considered to be so significant so as to have a material effect on the
Company's business. The projected costs and completion dates for the euro
project are based upon management's best estimates. Actual results could differ
materially from these estimates.
NEW ACCOUNTING STANDARDS
Comprehensive Income. In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 130, Reporting Comprehensive Income.
Statement No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. Comprehensive income is net income,
plus certain other items that are recorded directly to stockholders' equity. The
only such item currently applicable to the Company is foreign currency
translation adjustments and minimum pension liability adjustments. The
Statement, which is required to be adopted by the Company in fiscal 1999, is not
expected to materially change the Company's financial reporting or disclosures.
Segments. In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Statement changes the way
public companies report segment information in annual financial statements and
also requires companies to report selected segment information in interim
financial statements to shareholders. The Company will adopt this new Statement
in the first quarter of fiscal 1999; however, this new pronouncement will not
change reported net financial results.
Software Revenue Recognition. In October 1997, the Accounting Standards
Executive Committee issued Statement of Position 97-2 (SOP 97-2). SOP 97-2 sets
forth guidelines for recognition of revenue for software sales. This SOP which
is required to be adopted by the Company in fiscal 1999 is not expected to
materially change the Company's financial reporting.
Market Risk Sensitive Instruments
Management has determined that all of the Company's foreign subsidiaries
operate primarily in local currencies which represent the functional currencies
of the subsidiaries. All assets and liabilities of foreign subsidiaries are
translated into U.S. dollars using the exchange rate prevailing at the balance
sheet date, while income and expense accounts are translated at average exchange
rates during the year. As such, the Company's operating results are affected by
fluctuations in the value of the U.S. dollar as compared to currencies in
European countries, as a result of the sales of its products and services in
these foreign markets. A hypothetical, uniform 10% strengthening of the dollar
relative to the currencies in which the Company's sales were denominated would
have resulted in a decrease to gross profit of approximately $3.3 million for
the year ending August 2, 1998. This calculation assumes that each exchange rate
would have changed in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, which are a changed
dollar value of the resulting sales, changes in exchange rates also affect the
volume of sales or the foreign currency sales price as competitors' products
become more or less attractive. The Company's sensitivity analysis of the
effects in foreign currency exchange rates does not factor in a potential change
in sales levels or local currency prices.
In addition, the Company has cash and intercompany receivables and payables
which are denominated in various functional currencies of the subsidiaries and
parent. At August 1, 1998, the result of a uniform 10% strengthening of the
dollar relative to the currencies in which the Company's intercompany balances
are denominated would result in $ 3.7 million of foreign currency transaction
losses that would be reported as a translation adjustment to stockholders'
deficit.
The Company's long term debt consists entirely of 8 7/8% convertible
subordinated debentures. As of August 1, 1998, the carrying amount of these
debentures was $58,115, with a fair value of $32,980, after consideration of
repurchases through August 1, 1998. The following table presents the aggregate
maturities and carrying amount of the debt principal.
Principal Amount by Expected Maturity
Fixed Interest Rate (8 7/8%)
1999 2000 2001 2002 2003 Thereafter Total
Long Term Debt
Fixed Rate $3.1 $5.0 $5.0 $5.0 $5.0 $35.0 $58.1
Cautionary Statement Regarding Risks and Uncertainties That May Affect
Future Results
This Annual Report on Form 10-K contains forward-looking statements about the
business, financial condition and prospects of the Company. The actual results
of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including
without limitation changes in product demand, the availability of products,
changes in competition, economic conditions, new product development, various
inventory risks due to changes in market conditions, changes in tax and other
governmental rules and regulations applicable to the Company, and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and in many cases, the Company cannot predict the risks and uncertainties that
could cause its actual results to differ materially from those indicated by the
forward-looking statements. When used in this Annual Report on Form 10-K, 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 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Ernst & Young LLP
Independent Auditors 17
Consolidated Financial Statements
Consolidated Statements of Operations for the fiscal
years 1998, 1997 and 1996 18
Consolidated Balance Sheets as of August 1, 1998
and August 2, 1997 19
Consolidated Statements of Cash Flows for the fiscal
years 1998, 1997 and 1996 20
Consolidated Statements of Stockholders' Deficit for the fiscal
years 1998, 1997 and 1996 21
Notes to Consolidated Financial Statements 22
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
The Board of Directors
Datapoint Corporation
We have audited the accompanying consolidated balance sheets of Datapoint
Corporation and subsidiaries (the Company) as of August 1, 1998, and August 2,
1997 and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the three fiscal years in the period ended
August 1, 1998. Our audits also included the financial statement schedule listed
in the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at August 1, 1998, and August 2, 1997 and the consolidated results of
its operations and its cash flows for each of the three fiscal years in the
period ended August 1, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas
October 26, 1998
CONSOLIDATED STATEMENTS OF OPERATIONS
Datapoint Corporation and Subsidiaries Fiscal Years 1998, 1997 and 1996
(In thousands, except share and per share data)
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Sales $88,924 $78,368 $98,876
Service and other 62,521 63,753 80,665
- -------------------------------------------------------------------------------------------------------------------
Total revenue 151,445 142,121 179,541
Operating costs and expenses:
Cost of sales 70,029 58,060 72,483
Cost of service and other 40,480 42,120 51,524
Research and development 2,466 2,146 2,661
Selling, general and administrative 33,300 35,337 51,593
Reorganization/restructuring costs 96 2,425 263
- -------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 146,371 140,088 178,524
- -------------------------------------------------------------------------------------------------------------------
Operating income 5,074 2,033 1,017
Non-operating income (expense):
Interest expense (6,148) (6,776) (8,619)
Realized gain on sale of European based
Auto Dealer Systems -- -- 32,200
Other, net 1,195 5,924 (1,891)
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes
and extraordinary credit 121 1,181 22,707
Income taxes 1,345 8 3,692
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary credit (1,224) 1,173 19,015
Extraordinary credit-debt extinguishment 555 1,210 327
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $(669) $2,383 $19,342
===================================================================================================================
Net income (loss), adjusted for preferred stock dividends paid or
accumulated plus gain on exchange and retirement of preferred
stock - Net Income (loss) applicable to common $(1,391) $5,184 $17,457
===================================================================================================================
Basic earnings (loss) per common share:
Income (loss) before extraordinary credit $ (.11) $.01 $1.28
Gain on the exchange and retirement of preferred stock -- .24 --
Extraordinary credit-debt extinguishment .03 .07 .02
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.08) $.32 $1.30
===================================================================================================================
Diluted earnings (loss) per common share:
Income (loss) before extraordinary credit $ (.11) $.01 $1.11
Gain on the exchange and retirement of preferred stock -- .24 --
Extraordinary credit-debt extinguishment .03 .07 .02
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.08) $.32 $1.13
===================================================================================================================
Average common shares outstanding:
Basic 17,967,924 16,109,774 13,455,878
Diluted 17,967,924 16,337,163 17,193,091
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
Datapoint Corporation and Subsidiaries August 1, 1998 and August 2, 1997
(In thousands, except share data)
1998 1997
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $12,101 $15,490
Restricted cash and cash equivalents 352 154
Accounts receivable, net of allowance for doubtful
accounts of $1,305 and $1,654, respectively 32,138 22,731
Inventories 2,957 3,962
Prepaid expenses and other current assets 3,259 3,003
- ----------------------------------------------------------------------------------------------------------
Total current assets 50,807 45,340
Fixed assets, net 9,468 11,764
Other assets, net 6,541 5,284
- ----------------------------------------------------------------------------------------------------------
$66,816 $62,388
==========================================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Payables to banks $7,902 $7,346
Current maturities of long-term debt -- 601
Accounts payable 17,341 12,209
Accrued expenses 22,592 20,865
Deferred revenue 11,643 11,386
Income taxes payable 1,898 1,272
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 61,376 53,679
Long-term debt, exclusive of current maturities 58,115 60,875
Other liabilities 11,762 11,918
Commitments and contingencies
Stockholders' deficit:
Preferred stock of $1.00 par value. Shares authorized 10,000,000; shares
issued and outstanding 721,976 in 1998 and 721,976 in 1997 (aggregate
liquidation preference, including dividends in arrears,
$17,327 in 1998 and $16,605 in 1997). 722 722
Common stock of $0.25 par value. Shares authorized 40,000,000; shares
issued 20,991,217, including treasury shares of
2,951,909 in 1998 and 3,203,102 in 1997. 5,248 5,248
Other capital 212,655 212,655
Pension liability adjustment (6,084) (4,488)
Foreign currency translation adjustment 6,242 4,613
Retained deficit (278,655) (276,202)
Treasury stock, at cost (4,565) (6,632)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' deficit (64,437) (64,084)
- -----------------------------------------------------------------------------------------------------------
$66,816 $62,388
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Datapoint Corporation and Subsidiaries Fiscal Years 1998, 1997 and 1996
(In thousands)
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(669) $2,383 $19,342
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation and amortization 3,785 5,861 6,969
Provision for losses (recoveries) on accounts receivable 33 (164) 170
Realized gain on sale of property (1,205) -- --
Realized gain on sale of EADS -- -- (32,200)
Gain on debt extinguishment (555) (1,210) (327)
Deferred income taxes 836 (546) 1,420
Changes in assets and liabilities:
(Increase) Decrease in receivables (7,515) 5,792 1,467
(Increase) decrease in inventory 1,139 (969) 5,436
Increase (Decrease) in accounts payable and accrued expenses 2,359 (14,472) (6,503)
Increase (Decrease) in other liabilities and deferred credits (470) 5,496 2,482
Use of restricted funds held in trust -- -- 3,018
Other, net (11) 449 21
--------------------------------------------------------------------------------------------------------
Net cash provided from (used in) operating activities (2,273) 2,620 1,295
Cash flows from investing activities:
Payments for fixed assets (2,354) (3,580) (3,725)
Proceeds from the sale of EADS -- -- 29,450
Proceeds from disposition of fixed assets 3,200 -- 278
Other, net 108 (612) (217)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided from (used in) investing activities 954 (4,192) 25,786
Cash flows from financing activities:
Payments on borrowings (84,939) (18,272) (44,963)
Proceeds from borrowings 82,637 13,799 31,383
Restricted cash for letters of credit (198) 710 1,685
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,500) (3,763) (11,895)
Effect of foreign currency translation on cash 430 (2,359) (495)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,389) (7,694) 14,691
Cash and cash equivalents at beginning of year 15,490 23,184 8,493
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $12,101 $15,490 $23,184
==============================================================================================================
Cash payments for:
Interest $6,188 $6,823 $8,625
Income taxes 807 891 514
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Datapoint Corporation and Subsidiaries Fiscal Years 1998, 1997, and 1996
(In thousands)
Foreign
$1.00 Currency
Common Preferred Paid In Translation Retained Treasury
Stock Stock Capital Adjustment Deficit Stock Other Total
--------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 29, 1995 $ 5,248 $ 1,846 $212,630 $13,004 $(261,742) $(45,102) $ -- $(74,116)
Net income -- -- -- -- 19,342 -- -- 19,342
Foreign currency translation
adjustment -- -- -- (1,437) -- -- -- (1,437)
Employment separation -- -- -- -- (2,082) 2,413 -- 331
Executive retirement contribution -- -- -- -- (1,031) 1,238 -- 207
Preferred Stock conversion -- (28) -- -- (439) 467 -- --
Common issued to 401(k) plan -- -- -- -- (1,181) 1,366 -- 185
Other -- 50 25 -- (1,093) 1,304 -- 286
Balance at July 27, 1996 $ 5,248 $ 1,868 $212,655 $11,567 $(248,226) $(38,314) $ -- $(55,202)
Net income -- -- -- -- 2,383 -- -- 2,383
Foreign currency translation
adjustment -- -- -- (6,954) -- -- -- (6,954)
Pension liability adjustment -- -- -- -- -- -- (4,488) (4,488)
Preferred Stock conversion -- (1,146) -- -- (29,582) 30,728 -- --
Common issued to 401(k) plan -- -- -- -- (213) 241 -- 28
Other -- -- -- -- (564) 713 -- 149
Balance at August 2, 1997 $ 5,248 $ 722 $212,655 $4,613 $(276,202) $ (6,632) $(4,488) $(64,084)
Net loss -- -- -- -- (669) -- -- (669)
Foreign currency translation
adjustment -- -- -- 1,629 -- -- -- 1,629
Pension liability adjustment -- -- -- -- -- -- (1,596) (1,596)
Stock options exercised (1,078) 1,312 234
Common issued to 401(k) plan -- -- -- -- (59) 84 -- 25
Executive retirement contribution -- -- (658) 658 --
Other -- -- -- -- 11 13 -- 24
Balance at August 1, 1998 $ 5,248 $ 722 $212,655 $6,242 $(278,655) $ (4,565) $(6,084) $(64,437)
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Datapoint Corporation and Subsidiaries August 1, 1998, August 2, 1997
and July 27, 1996
(Dollars in thousands, except share data)
1. Summary of Significant Accounting Policies
Liquidity
The Company believes its available cash, cash equivalents and funds generated by
operations will be sufficient to provide its working capital and cash
requirements for fiscal 1999. In addition, management believes the Company will
be able to discharge its obligations in the near term with cash generated from
operations and other sources such as sale of selected assets and capital
transactions.
Fiscal Year
The Company utilizes a 52-53 week fiscal year. References to 1998, 1997 and
1996 are for the fiscal years ended August 1, 1998, August 2, 1997 and July 27,
1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany accounts and transactions have been
eliminated upon consolidation.
Cash and Cash Equivalents
Cash equivalents include short-term, highly-liquid investments with maturities
of three months or less from date of acquisition and, as a result, the carrying
value approximates fair value because of the short maturity of those
instruments.
Inventories
Inventories are stated at the lower of standard cost (approximates first-in,
first-out) or market (replacement cost as to raw materials and net realizable
value as to work in process and finished products).
Fixed Assets
Fixed assets are carried at cost and depreciated for financial purposes using
straight-line and accelerated methods at rates based on the economic lives of
the assets, which are generally as follows:
Buildings and land improvements 5-30 years
Machinery, equipment, furniture and fixtures 3-10 years
Equipment leased to customers 4 years
Field support spares 3 years
Major improvements that add to the productive capacity or extend the life of an
asset are capitalized while repairs and maintenance are charged to expense as
incurred.
Risk Concentration
Financial instruments which potentially subject the Company to concentrations of
credit risk are accounts receivable. Concentrations of credit risk with respect
to the receivables are limited due to the large number of customers in the
Company's customer base and their dispersion across industries. The Company
primarily sells to customers in Europe within, but not limited to, the banking,
automotive, government, libraries, and telecommunications industries. The
Company maintains an allowance for losses based upon the expected collectibility
of accounts receivable.
Debt
The carrying amount and the fair value of the Company's debt at August 1, 1998
are:
Estimated
Carrying Amount Fair Value
8-7/8% convertible subordinated debentures $58,115 $32,980
The fair value of the Company's 8-7/8% convertible subordinated debentures is
based on a quoted market price at July 31, 1998.
Translation of Foreign Currencies
Management has determined that all of the Company's foreign subsidiaries operate
primarily in local currencies which represent the functional currencies of the
subsidiaries. All assets and liabilities of foreign subsidiaries are translated
into U.S. dollars using the exchange rate prevailing at the balance sheet date,
while income and expense accounts are translated at average exchange rates
during the year.
Reclassifications
Certain reclassifications to the financial statements for prior years have been
made to conform to the 1998 presentation.
Revenue Recognition
Revenue is recognized in accordance with the following criteria:
o Sales revenue is generally recognized at the time of shipment provided
that there are no significant vendor and post-contract support
obligations and that collections of the resulting receivable are
probable. If such obligations are present in the contract, revenue is
not recognized until such time as the contractual obligations are met.
o Software revenue is recognized when the program is shipped, or as the
monthly license fees accrue, or over the terms of the support
agreement.
o Service revenue is recognized ratably over a contractual period or as
services are provided.
o Lease revenue is recognized on the operating method ratably over the
term of the lease.
Income Taxes
The Company accounts for income taxes under the liability method in
accordance with FASB Statement No. 109.
No tax provision has been made for the undistributed earnings of foreign
subsidiaries as management expects these earnings to be reinvested indefinitely
or received substantially free of additional tax.
Net Income (Loss) per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which became
effective for the Company's financial statements beginning with the period
ending January 31, 1998. Statement 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements. The Company adopted this new standard during the second quarter of
fiscal year 1998. The 1998, 1997 and 1996 computations include the effect of
dividends paid or accumulated on preferred stock of $722, $1,009, and $1,885,
respectively.
1998 1997 1996
---- ---- ----
Income Shares EPS Income Shares EPS Income Shares EPS
- --------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary
credit $(1,224) $1,173 $19,015
Preferred stock dividends
accumulated (722) (1,009) (1,885)
Gain on the exchange and
retirement of preferred stock -- 3,810 --
Extraordinary credit 555 1,210 327 __
- ------------------------------------------------------------------------------------------------------------
Basic EPS $(1,391) 17,968 $(.08) $5,184 16,110 $.32 $17,457 13,456 $1.30
- -------------------------------------------------------------------------------------------------------------
Dilutives:
Stock Options -- -- -- 227 1
Convertible preferred stock -- -- -- -- 1,885 3,736 __
----------------------------------------------------------------------------------------------------------
Diluted EPS $(1,391) 17,968 $(.08) $5,184 16,337 $.32 $19,342 17,193 $1.13
- -------------------------------------------------------------------------------------------------------------
The EPS computations for fiscal years 1998, 1997 and 1996 exclude the
following shares for stock options and convertible debentures because their
effect would have been antidilutive:
1998 1997 1996
---- ---- ----
Stock options 3,711 1,183 1,762
Convertible preferred stock 1,444 1,444 --
Convertible debentures 3,210 3,357 3,516
Use of Estimates
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 those estimates.
2. Reorganization/Restructuring Costs
1998 1997 1996
- ------------------------------------------------------------------------
Employee termination costs $96 $2,425 $251
Asset write-offs -- -- 12
- ------------------------------------------------------------------------
$96 $2,425 $263
========================================================================
The Company's 1998, 1997, and 1996 restructuring charges primarily have been
driven by management's efforts to implement cost cutting measures in light of
its overall plan to return to profitability. At August 1, 1998, accrued but
unpaid restructuring costs were $182.
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.
3. Non-operating Income (Expense)
1998 1997 1996
- --------------------------------------------------------------------------
Interest earned $518 $526 $421
Foreign currency gains (losses) (104) 6,195 728
Litigation settlements -- -- (2,945)
Gain on the sale of buildings 1,205 -- --
Other (424) (797) (95)
- ---------------------------------------------------------------------------
$1,195 $5,924 $(1,891)
===========================================================================
During fiscal year 1998, management reassessed the characteristics of its
intercompany notes with international subsidiaries (payable by the U.S. parent)
and determined that a substantial portion were long-term in nature and not
payable in the foreseeable future. As a result, during fiscal year 1998,
transaction gains of $57 thousand relating to these loans are included as a
foreign currency adjustment to Stockholders' Deficit, which in prior years,
would have been included in non-operating income and expense. During fiscal year
1997, a transaction gain of approximately $6.2 million was included in
non-operating income but was offset by translation adjustment to Stockholders'
Deficit.
4. Income Taxes
The provision for taxes consisted of the following:
1998 1997 1996
- -------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary credit:
U.S. $(5,655) $(3,262) $(771)
Outside the U.S. 5,776 4,443 23,478
- -------------------------------------------------------------------------------
$121 $1,181 $22,707
===============================================================================
Provision for income taxes:
U.S. federal:
Current $-- $-- $6
Outside the U.S.:
Current 509 554 2,266
Deferred 836 (546) 1,420
- -------------------------------------------------------------------------------
1,345 8 3,686
- -------------------------------------------------------------------------------
Total provision $1,345 $8 $3,692
===============================================================================
The differences between the tax provision in the financial statements and
the tax benefit computed at the U.S. federal statutory rates are:
1998 1997 1996
- ---------------------------------------------------------------------------
Income taxes at statutory rate $42 $413 $7,947
Increase in taxes resulting from:
Benefit of U.S. tax loss not recognized 2,057 1,137 262
Foreign losses and other transactions on
which a tax benefit could not be recognized 33 14 573
Effect of foreign tax refunds and U.S. tax
associated with dividends paid -- -- 6
Effect of federal tax rate less than
(greater than) foreign tax rates 190 152 (539)
Benefit of operating loss carryforwards (979) (1,713) (4,566)
Other, net 2 5 9
- ---------------------------------------------------------------------------
Provision for income taxes $1,345 $8 $3,692
===========================================================================
The undistributed earnings, indefinitely reinvested in international business,
of the Company's foreign subsidiaries aggregated approximately $32,000 at August
1, 1998. Determination of the amount of unrecognized deferred tax liability on
these unremitted earnings is not practicable.
The primary components of deferred income tax assets and liabilities are as
follows:
1998 1997
Deferred income tax assets:
Property, plant and equipment $1,769 $3,848
Loss and credit carryforwards 74,641 72,035
Accrued restructuring costs 64 178
Other 4,071 6,328
- ---------------------------------------------------------------------------
80,545 82,389
Less: valuation allowance 76,854 78,971
- ---------------------------------------------------------------------------
3,691 3,418
Deferred income tax liabilities:
Accrued retirement costs (461) (441)
Foreign exchange gains (837) (578)
Other (716) (672)
- ---------------------------------------------------------------------------
(2,014) (1,691)
Net deferred income tax asset $1,677 $1,727
===========================================================================
At August 1, 1998, the net deferred income tax asset of $1,677 was presented in
the balance sheet, based on tax jurisdiction, as other assets of $3,691 and
other liabilities of $2,014. Realization of the Company's deferred tax assets is
dependent on generating sufficient taxable income in certain taxing
jurisdictions prior to the expiration of loss and credit carryforwards.
Management believes that more likely than not, certain deferred tax assets will
not be fully realized in the near future and has therefore provided a valuation
allowance to reserve for those deferred tax assets not considered realizable.
At August 1, 1998, the Company had tax operating loss carryforwards
approximating $184,000 and $17,000 for U.S.federal and foreign tax purposes,
respectively, expiring in various amounts beginning in 2001 and 1999,
respectively. U.S. Federal long-term capital loss carryforwards of $362 expire
in various amounts beginning in 2000. Utilization of the ordinary and capital
tax loss carryforwards is subject to limitation in the event of a more than 50%
change in ownership of the Company.
The Company had unused investment, research, and alternative minimum tax credits
for income tax purposes at August 1, 1998 of approximately $3,000 expiring at
various dates through 2001 which may be used to offset future tax liabilities of
the Company. Utilization of these credits is subject to limitation in the event
of a more than 50% change in ownership of the Company.
5. Inventories
1998 1997
Finished and purchased products $1,911 $2,742
Work in process 972 1,077
Raw materials 74 143
- ------------------------------------------------------------------
$2,957 $3,962
6. Fixed Assets
Accumulated
Cost Depreciation Net
August 1, 1998
Property, plant and equipment:
Buildings and land improvements $11,723 $7,433 $4,290
Machinery, equipment, furniture and fixtures 21,821 18,558 3,263
------------------------------------------------------------------------------------
33,544 25,991 7,553
Field support spares 12,360 10,463 1,897
Equipment leased to customers 383 365 18
- ----------------------------------------------------------------------------------------
$46,287 $36,819 $9,468
========================================================================================
August 2, 1997
Property, plant and equipment:
Buildings and land improvements $15,050 $10,799 $4,251
Machinery, equipment, furniture and fixtures 34,417 29,766 4,651
Land 1,237 -- 1,237
- ----------------------------------------------------------------------------------------
50,704 40,565 10,139
Field support spares 12,626 11,001 1,625
Equipment leased to customers 3,243 3,243 --
- ----------------------------------------------------------------------------------------
$66,573 $54,809 $11,764
========================================================================================
In addition, on October 27, 1997, the Company sold the three buildings it owned
in San Antonio, Texas to a private unaffiliated group for approximately $3.2
million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of one of the buildings (approximately
38,000 square feet) for an initial lease term of five years.
During fiscal year 1997, the Company disposed of fully depreciated and
non-utilized fixed assets with an approximate cost and accumulated depreciation
of $62.5 million.
Subsequent to year-end, the Company signed a letter of intent to sell the
building it owns in Gouda, Netherlands to a private unaffiliated group for
approximately $2.2 million (net of mortgage obligations and closing costs). The
sales contract provides for the leaseback by the Company of approximately 18,000
square feet for an initial lease term of five years and approximately 12,000
square feet for an initial lease term of one year. The Company closed on the
sale of the building on October 26, 1998.
7. Lease Commitments
The Company leases certain facilities and equipment under various leases.
Substantially all of the leases are classified as operating leases. Rental
expense for operating leases for 1998, 1997 and 1996 was $4,419, $5,933, and
$7,386, respectively. Most of the leases contain renewal options for various
periods and require the Company to maintain the property. Certain leases contain
provisions for periodic rate adjustments to reflect Consumer Price Index
changes.
At August 1, 1998, future minimum lease payments for all noncancelable
leases totaled $16,900 and are payable as follows: 1999-$3,822; 2000-$3,434;
2001-$2,532; 2002-$2,094; 2003-$1,824 and $3,194 thereafter.
8. Payables to Bank
As of August 1, 1998, the Company had included in payables to banks an amount of
$1,906 and $1,747, payable by the Dutch and U.K. subsidiaries, respectively, to
International Factors "De Factorij" B.V., a subsidiary of ABN-AMRO Bank of the
Netherlands. The Dutch loan was secured by the building that the Company's Dutch
subsidiary owned in the Netherlands, and by certain receivables of the Dutch
subsidiary. Subsequent to year-end, the Company sold the Dutch building (as
described above) and from the proceeds paid the $1,906 Dutch subsidiary
obligation. The U.K. loan is secured by certain receivables of the U.K.
subsidiary.
The Company has available lines of credit from foreign banks to its foreign
subsidiaries. The unused lines of credit at August 1, 1998, totaled $7.1 million
after borrowings of $7.9 million. The availability of the unused lines of
credit is subject to certain collateral restrictions.The weighted average
interest rate for these short term borrowings as of the fiscal year end
was 7.2% , 7.7%, 9.0% for 1998, 1997, and 1996, respectively.
9. Accrued Expenses
1998 1997
- ----------------------------------------------------------------------------
Salaries, commissions, bonuses and other benefits $11,955 $7,528
Taxes other than income taxes 4,147 4,612
Reorganization/restructuring costs 182 508
Other 6,308 8,217
- ----------------------------------------------------------------------------
$22,592 $20,865
10. Long-Term Debt
1998 1997
- ----------------------------------------------------------------------------
8-7/8% convertible subordinated debentures $58,115 $60,783
6.5% to 9.0% real estate notes -- 294
Other obligations -- 399
58,115 61,476
Less: current maturities of long-term debt -- 601
- ----------------------------------------------------------------------------