10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002.

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 no. 0-6272

DATUM INC.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization) 95-2512237 (I.R.S. Employer Identification No.)

9975 Toledo Way, Irvine, CA (Address of principal executive offices) 92618-1819 (Zip code)

(949) 598-7500

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.  YES  x.   NO  ¨.

The registrant had 6,250,961 shares of common stock outstanding as of May 6, 2002.

INDEX

Part I.	Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	13
Part II.	Other Information
Item 6.	Exhibits and Reports on Form 8-K	14

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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

DATUM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

	March 31,		December 31,
	2002		2001
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	2,982	$	2,381
Restricted cash	$	1,072		1,828
Accounts receivable, less allowance for doubtful accounts of $671 and $574		20,096		25,479
Inventories
Purchased parts		12,025		14,247
Work-in-process		8,247		7,440
Finished products		6,969		6,786
		27,241		28,473
Prepaid expenses		762		468
Deferred income taxes		3,158		3,158
Income tax refund receivable		3,696		2,222
Total current assets		59,007		64,009
Plant and equipment
Land		2,040		2,040
Buildings		7,722		5,867
Equipment		25,064		25,997
Leasehold improvements		1,119		1,362
		35,945		35,266
Less accumulated depreciation and amortization		21,787		21,221
		14,158		14,045
Deferred income taxes		374		374
Excess of purchase price over net assets acquired, net of accumulated amortization of $11,459 and $11,459		8,549		8,549
Capitalized software development costs		2,733		2,379
Other assets		807		831
	$	85,628	$	90,187

See Notes to Condensed Consolidated Financial Statements

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DATUM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

	March 31, 2002			December 31, 2001
	(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	5,223		$	7,041
Accrued salaries and wages		2,901			3,047
Accrued warranty		1,481			1,577
Other accrued expenses		670			998
Deferred revenue		347			314
Current portion of long-term debt		1,060			1,810
Total current liabilities		11,682			14,787
Long-term debt		2,635			2,635
Postretirement benefits		1,208			1,239
Other long-term liabilities		716			674
Stockholders’ equity
Preferred stock, par value $.25 per share
Authorized—1,000,000 shares
Issued—none		—			—
Common stock, par value $.25 per share
Authorized—10,000,000 shares
Issued—6,243,518 shares in 2002
6,209,721 shares in 2001		1,561			1,552
Additional paid-in capital		53,984			53,619
Retained earnings		15,000			16,704
Unamortized stock compensation		(125	)		(224	)
Accumulated other comprehensive loss		(1,033	)		(799	)
Total stockholders’ equity		69,387			70,852
	$	85,628		$	90,187

See Notes to Condensed Consolidated Financial Statements

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DATUM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2002			2001
Net sales	$	15,795		$	32,252
Operating expenses:
Cost of sales		10,417			17,461
Selling		3,626			4,058
Product development		3,079			3,791
General and administrative		3,371			3,987
Operating income (loss)		(4,698	)		2,955
Interest expense		51			119
Interest income		(19	)		(36	)
Income (loss) before income taxes		(4,730	)		2,872
Income tax provision (benefit)		(3,028	)		1,119
Net income (loss)	$	(1,702	)	$	1,753
Net income (loss) per common share:
Basic	$	(0.27	)	$	0.29
Diluted	$	(0.27	)	$	0.28
Shares used in per share calculation:
Basic		6,221			6,084
Diluted		6,221			6,364

See Notes to Condensed Consolidated Financial Statements

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DATUM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2002			2001
Cash flows from operating activities:
Net income (loss)	$	(1,702	)	$	1,751
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		887			916
Amortization of capitalized software development costs		104			—
Amortization of goodwill		—			531
Contribution of shares of common stock to the Company’s 401(k) plan		188			211
Non-cash compensation		100			15
Income tax benefit from stock options exercised		14			111
Changes in assets and liabilities:
Decrease in accounts receivable		5,383			4,040
(Increase) decrease in inventories		1,232			(1,710	)
Increase in income tax receivable		(1,474	)		—
Increase in prepaid expenses		(294	)		(308	)
Increase in other assets		24			39
Increase (decrease) in accounts payable		(1,818	)		569
Decrease in accrued expenses		(573	)		(556	)
Increase in deferred revenue		33			—
Decrease in income taxes payable		—			(963	)
Increase (decrease) in postretirement benefits		(31	)		74
Increase (decrease) in other long-term liabilities		42			(72	)
Total reconciling items		3,817			2,897
Net cash provided by operating activities		2,115			4,648
Cash flows from investing activities:
Capital expenditures		(1,019	)		(1,126	)
Capitalized software development costs		(457	)		(403	)
Net cash used by investing activities		(1,476	)		(1,529	)
Cash flows from financing activities:
Reduction of line of credit		—			(1,938	)
Payments of long-term debt		(750	)		(750	)
Decrease in restricted cash		756			—
Proceeds from exercise of stock options		91			169
Proceeds from ESP plan		80			98
Net cash provided by (used for) financing activities		177			(2,421	)
Effect of exchange rate changes on cash and cash equivalents		(215	)		(125	)
Net increase in cash and cash equivalents		601			573
Cash and cash equivalents at beginning of period		2,381			1,017
Cash and cash equivalents at end of period	$	2,982		$	1,590

See Notes to Condensed Consolidated Financial Statements

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DATUM INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2002 AND 2001

NOTE A—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and, therefore, do not include all information and footnotes which would be presented were such financial statements prepared in accordance with generally accepted accounting principles. The condensed consolidated balance sheet at December 31, 2001 was derived from the audited consolidated balance sheet at that date which is not presented herein.

In the opinion of management, the accompanying financial statements reflect all adjustments, which are normal and recurring, necessary to provide a fair presentation of the results for the interim period presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

NOTE B—EARNINGS PER SHARE

Net income per share-basic excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Net income per share-diluted reflects the potential dilutive effect, calculated using the treasury stock method, of additional common shares that are issuable upon exercise of outstanding stock options and stock warrants as follows (in thousands):

	Three months ended March 31,
	2002	2001
Basic shares outstanding (weighted average)	6,221	6,084
Effect of dilutive securities	—	280
Diluted shares outstanding	6,221	6,364

Options outstanding during the three months ended March 31, 2002 and 2001 to purchase approximately 695,000 and 285,000 shares of common stock, respectively, were not included in the computation of dilutive securities because inclusion would be anti-dilutive.

NOTE C—COMPREHENSIVE INCOME

Total comprehensive income (loss) was $(1.9) million and $1.6 million for the three months ended March 31, 2002 and 2001, respectively. The difference from net income as reported is the change in cumulative translation adjustment.

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NOTE D—SEGMENT AND RELATED INFORMATION

The Company has four reportable segments: Wireless; Wireline; Timing, Test and Measurement (TT&M); and Trusted Time. The Wireless segment, in Irvine, CA, produces equipment primarily for the wireless telecommunications market. The Wireline segment, in Austin, TX and Hofolding, Germany, manufactures products primarily for the wireline telecommunications market. In Beverly, MA, the TT&M segment, goods are produced for the enterprise computing, test and measurement, telecommunications and satellite markets. The Trusted Time segment, in Lexington, MA, produces products for the eBusiness market.

The Company evaluates performance of its segments and allocates resources to them based on segment operating income. Segment operating income does not include corporate expenses, amortization of goodwill and intersegment profit elimination. Identifiable assets include accounts receivable, inventories, and land, building and equipment and do not include cash, income tax refund receivable and deferred income taxes, prepaid expenses, goodwill and other long-term corporate assets.

The tables below present information about reported segments for the quarters ended March 31 (amounts in thousands):

Segment Sales

	Wireless			Wireline			TT&M			Trusted Time			Total
2002
Total sales	$	5,993		$	7,066		$	4,940		$	409		$	18,408
Intersegment sales		(1,491	)		(105	)		(992	)		(25	)		(2,613	)
Outside sales	$	4,502		$	6,961		$	3,948		$	384		$	15,795
2001
Total sales	$	12,460		$	18,444		$	6,491		$	203		$	37,598
Intersegment sales		(2,348	)		(1,515	)		(1,474	)		(9	)		(5,346	)
Outside sales	$	10,112		$	16,929		$	5,017		$	194		$	32,252

Segment Operating Income (Loss)

	Wireless			Wireline			TT&M			Trusted Time			Total
2002	$	(584	)	$	(275	)	$	(1,947	)	$	(673	)	$	(3,479	)
2001	$	2,058		$	3,265		$	461		$	(907	)	$	4,877

A reconciliation of segment operating income to consolidated amounts as reported for the quarters ended March 31:

	2002			2001
Segment operating income	$	(3,479	)	$	4,877
Corporate expenses		(1,342	)		(1,454	)
Amortization of goodwill		—			(531	)
Intercompany profit elimination		123			63
Consolidated operating income	$	(4,698	)	$	2,955

The table below presents identifiable segments assets as of March 31, 2002 compared to prior year end:

Identifiable Segment Assets

	Wireless		Wireline		TT&M		Trusted Time		Total
March 31, 2002	$	16,722	$	20,821	$	20,523	$	3,491	$	61,558
December 31, 2001	$	18,989	$	22,262	$	22,560	$	3,791	$	67,602

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NOTE E—DEBT

On May 29, 2001, the Company renewed its credit facility with Wells Fargo Bank. The credit facility expires May 29, 2003. The credit facility with Wells Fargo Bank is not to exceed $16.0 million and includes a line of credit and a term loan that funded July 7, 2000, the balance of which was $1.0 million at March 31, 2002. The term loan is payable in monthly principal installments of $250 thousand plus interest, which began August 1, 2000. Interest on the term loan is fixed at 9.15%. Interest on the line of credit is payable monthly at prime or at LIBOR plus 2.0%. On June 1, 2001, the Massachusetts Development Finance Agency issued a $2.7 million industrial development bond on the Company’s behalf to finance the expansion of the Datum TT&M manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest as determined by the remarketing agent for each rate period to be the lowest rate which in its judgment would permit the sale of the bonds at par. The bond is collateralized by a letter of credit issued under the Company’s credit facility with Wells Fargo Bank. As of March 31, 2002, the Company was in violation of two debt covenants with Wells Fargo Bank. The Company is not allowed a loss in excess of $0.5 million in any fiscal quarter and must maintain an EBITDA coverage ratio of at least 2.0:1 at any measurement period. The Company has received a waiver for these covenant violations.

NOTE F—RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 141, “Business Combinations,” (FAS 141) and Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FAS 142). FAS 141 establishes new accounting and reporting standards for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 142 establishes new standards for goodwill acquired in a business combination, eliminates amortization of goodwill and sets forth methods for periodically evaluating goodwill for impairment. The Company adopted the provisions of these statements in the quarter ended March 31, 2002. The implementation of FAS 142 resulted in a reduction of goodwill amortization of approximately $225 thousand per quarter beginning in 2002. The impact from implementing FAS 141 was not material to the Company’s financial position or results of operations. The following unaudited pro forma summary presents the Company’s net income and per share information as if the Company had been accounting for its goodwill under SFAS No. 142 for all periods presented:

	Three Months Ended March 31,
	2002	2001
Reported net income	$ (1,702)	$ 1,753
Add back goodwill amortization, net of tax	—	445
Adjusted net income	$ (1,702)	$ 2,198
Adjusted basic earnings per share	$   (0.27)	$   0.36
Reported diluted earnings per share	$   (0.27)	$   0.28
Add back goodwill amorization, net of tax	—	0.07
Adjusted diluted earnings per share	$   (0.27)	$   0.35

In June 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” (FAS 143). FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt the provisions of FAS 143 no later than the first quarter of its fiscal year 2003. The Company is currently evaluating the impact of adopting FAS 143.

In August 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (FAS 144). FAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS 144 supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the account and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends ARB No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company adopted the provisions of FAS 144 in the quarter ended March 31, 2002. The impact from implementing FAS 144 was not material to the Company’s financial position or results of operations.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in the Company’s Annual Report to Stockholders on Form 10-K for the year ended December 31, 2001.

INTRODUCTORY NOTE

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it can give no assurance that such expectations will prove to have been correct. The Company makes no undertaking to correct or update any such statements in the future. Important factors that could cause actual results to differ materially from the expectations (“Cautionary Statements”) are set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as in, or incorporated by reference in, the Annual Report on Form 10-K for the year ended December 31, 2001. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.

Overview

We are a leading supplier of precise timing solutions for telecommunications and computing networks, satellite systems, electronic commerce, and test and measurement applications. We design, manufacture or contract for manufacture, and market a wide variety of high-performance time and frequency products for telecommunications systems, enterprise computing networks, time stamping for electronic commerce, satellites and a variety of other test and measurement applications. Our products are used to synchronize the flow of information in telecommunications networks and numerous other applications.

In 1971, we invented the rubidium oscillator. Since that time, we have manufactured time and frequency devices, such as cesium clocks, for satellites, including Global Positioning System (GPS) satellites—the orbiting network of satellites that provide pinpoint timing and navigation information to military, transportation industry and other government and commercial users worldwide.

In addition, we provide time and frequency products and systems for a wide range of scientific and industrial test and measurement applications, including missile guidance, geographic mapping and electric utility operations. Through the manipulation of cesium or rubidium atoms or quartz crystals, or by capturing cesium or rubidium-based signals transmitted from GPS satellites, our products generate highly precise timing and frequency information. Using this technology, our products can provide accurate time to within a fraction of one second over 100,000 years.

We also supply approximately 65% of the high-precision rubidium atomic clocks used in the network base stations that channel communications over cellular telephone and other personal communications services, such as pagers. The market for our communications network time and frequency products are currently expanding as a result of the conversion from analog to digital systems and as a result of the expansion of cellular and personal communications systems networks.

We are currently exploring market opportunities for new application for our timing technologies. One of these opportunities is encrypted trusted time. In order for businesses to be able to conduct an increasing variety of transactions over the Internet, businesses need to be able to verify that the electronic commerce transactions took place between the parties thereto and are legally enforceable. Encrypted trusted time is a new application for our precision timing technology for which we are developing hardware and software products that will provide irrefutable time stamps for electronic commerce transactions. This capability will provide legally admissible evidence that the transaction in question took place between the parties.

We were incorporated in California in 1959 and reincorporated in Delaware in 1987. Our principal executive

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offices are located at 9975 Toledo Way, Irvine, California 92618-1819, and our telephone number is (949) 598-7500. Our web site is located at http://www.datum.com.

A small number of customers account for a substantial portion of the Company’s net sales and the Company expects that a limited number of customers will continue to represent a substantial portion of net sales for the foreseeable future. There can be no assurance that a major customer will not reduce, delay or eliminate its purchases from the Company. Any such reduction, delay or loss in orders could have a material adverse effect on the Company’s business, financial condition and results of operations.

Results of Operations

Net sales.    Net sales decreased $16.5 million, or 51.0%, to $15.8 million for the quarter ended March 31, 2002 from $32.3 million for the corresponding quarter in 2001. Net sales in the wireline synchronization segment decreased $10.0 million or 58.9%, net sales in the wireless segment decreased $5.6 million or 55.5% and net sales in the timing, test and measurement segment decreased $1.1 million or 21.3% for the quarter ended March 31, 2002 compared to the corresponding quarter of 2001. The decline in the wireline synchronization business was concentrated in the domestic market as the service providers continued to lower their budgets for capital expenditures. Sales to the Company’s largest customer, Lucent Technologies, Inc., decreased to 17% of net sales in the quarter ended March 31, 2002 from 28% of net sales in the quarter ended March 31, 2001. This decrease of $6.3 million, or 70%, was primarily in the wireless segment. Net sales in the TT&M segment were negatively impacted by increases in cost to complete estimates in the quarter ended March 31, 2002 for the segment’s contract revenues, which are recognized on a percentage of completion basis. These increases in estimated costs to complete caused a reduction of net sales of $1.2 million.

Gross margin.    Gross margin decreased to 34.0% for the quarter ended March 31, 2002 from 45.9% for the corresponding quarter in 2001. Gross margins in the quarter ended March 31, 2002 were negatively impacted by the aforementioned $1.2 million revenue adjustment. The balance of the decrease in gross margin was primarily caused by the decrease in manufacturing volumes, causing the manufacturing overhead to be absorbed over a lower unit volume.

Selling expense.    Selling expense decreased to $3.6 million for the quarter ended March 31, 2002 from $4.1 million for the corresponding quarter in 2001. As a percentage of net sales, selling expense increased to 23.0% for the quarter ended March 31, 2002 from 12.6% for the corresponding quarter in 2001. The increase was primarily due to the fixed component of sales costs becoming a higher percentage of a lower volume of net sales.

Product development.    Product development expense decreased 18.8% to $3.1 million for the quarter ended March 31, 2002 from $3.8 million in 2001. The decrease was primarily due to headcount reductions of employees and contract labor in the wireline segment. As a percentage of net sales, product development expense increased to 19.5% for the quarter ended March 31, 2002 from 11.8% for the corresponding quarter of 2001.

General and administrative.    General and administrative expense decreased 15.5% to $3.4 million for the quarter ended March 31, 2002, from $4.0 million for the corresponding quarter of 2001. The quarter ended March 31, 2002 included approximately $0.6 million of severance charges, offset by lower incentive accruals, $0.2 million of goodwill amortization eliminated due to the implementation of FAS 142 and an additional $0.3 reduction in goodwill amortization related to the July 1999 acquisition of Digital Delivery, the balance of which was written off in the quarter ended June 30, 2001. As a percentage of net sales, general and administrative expense increased to 21.3% for the quarter ended March 31, 2002, from 12.4% for the corresponding quarter of 2001.

Interest, net.    Net interest expense decreased by $51 thousand to $32 thousand for the quarter ended March 31, 2002 from $83 thousand for the corresponding quarter of 2001.

Income tax provision (benefit).    The income tax benefit was $3.0 million for the quarter ended March 31, 2002, a $4.1 million change from the $1.1 million income tax provision for the corresponding quarter of 2001. The benefit for the quarter ended March 31, 2002 was derived by considering the Company’s effective tax rate on the loss projected for 2002, plus the additional benefit of $0.7 million of additional prior year research and

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development tax credits as the result of the completion of a study in the quarter ended March 31, 2002. The Company also has recurring tax credits generated by research and development performed during 2002.

Shares outstanding.    Shares outstanding increased for the quarter ended March 31, 2002 as a result of shares issued through the Company’s 401(k), Employee Stock Purchase Plan and incentive stock option plans.

Liquidity and Capital Resources

On May 29, 2001, the Company renewed its credit facility with Wells Fargo Bank. The credit facility expires May 29, 2003. The credit facility with Wells Fargo Bank is not to exceed $16.0 million and includes a line of credit and a term loan that funded July 7, 2000, the balance of which was $1.0 million at March 31, 2002. The term loan is payable in monthly principal installments of $250 thousand plus interest, which began August 1, 2000. Interest on the term loan is fixed at 9.15%. Interest on the line of credit is payable monthly at prime or at LIBOR plus 2.0%. On June 1, 2001, the Massachusetts Development Finance Agency issued a $2.7 million industrial development bond on the Company’s behalf to finance the expansion of the Datum TT&M manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest as determined by the remarketing agent for each rate period to be the lowest rate which in its judgment would permit the sale of the bonds at par. The bond is collateralized by a letter of credit issued under the Company’s credit facility with Wells Fargo Bank. As of March 31, 2002, the Company was in violation of two debt covenants with Wells Fargo Bank. The Company is not allowed a loss in excess of $0.5 million in any fiscal quarter and must maintain an EBITDA coverage ratio of at least 2.0:1 at any measurement period. The Company has received a waiver for these covenant violations.

The Company believes that its cash and credit facilities are adequate to fund the Company’s operations for the foreseeable future. Should there be no improvement in telecommunication network infrastructure spending, which impacts the Company’s expected revenues or ability to collect its accounts receivable, the Company could potentially continue to be in violation of debt covenants within its credit facility. There is no guarantee that the Company would receive a waiver if a debt covenant were violated.

Cash provided by operations was approximately $2.1 million for the three months ended March 31, 2002 compared to cash provided by operations of $4.6 million for the corresponding period of 2001. Cash flows were positively affected in the first three months of 2001 by decreases in accounts receivable and inventory, offset by decreases in accounts payable and accrued expense, as well as an increase in income tax refund receivable and the net loss for the quarter.

Cash used in investing activities was approximately $1.5 million for the three months ended March 31, 2002 compared to $1.5 million for the corresponding period of 2001. The expenditures for the 2002 quarter were primarily due to the ongoing building expansion of the TT&M segment’s manufacturing plant in Beverly, MA.

Cash provided by financing activities was approximately $0.2 million for the three months ended March 31, 2002, compared to cash used for financing activities of $2.4 million for the corresponding three months of 2001. Cash used for financing activities in the 2001 quarter included a $1.9 million paydown of advances on the line of credit.

Accounts receivable decreased $5.4 million to $20.0 million at March 31, 2002 from $25.5 million at December 31, 2001, primarily due to the decreased sales volume for the quarter ended March 31, 2002.

Inventories decreased $1.2 million to $27.2 million at March 31, 2002 from $28.5 million at December 31, 2001, due to the decrease in sales in the quarter ended March 31, 2002.

At March 31, 2002, the Company had working capital of $47.3 million and a current ratio of 5.1:1 compared to working capital of $49.2 million and a current ratio of 4.3:1 at December 31, 2001. The increase is primarily due to the positive cash flow provided by operating activities.

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Information Regarding Potential Fluctuations in Quarterly Operating Results

Given the nature of the markets in which we participate, we cannot reliably predict future revenue and profitability, and unexpected changes may cause us to adjust our operations. A high proportion of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, relatively small declines in revenue could disproportionately affect our operating results in a quarter. Other factors that could affect our quarterly operating results include:

• competitive pressures resulting in lower selling prices;

• changes in the relative portion of our revenue represented by our various products and customers;

• changes in the timing of product orders; and

• our inability to forecast revenue in a given quarter from large system sales

The economic downturn in the telecommunications industry may impair our customers’ ability to pay us.

The telecommunications manufacturing industry, from which we derive a significant amount of our revenue, has experienced a general economic downturn, and such downturn has significantly weakened the financial condition of some of our top customers. Our largest customer, Lucent Technologies, Inc., experienced a 26% decline in total revenues for the fiscal year ended September 30, 2001 as compared to the same period in 2000, and experienced a net loss of $16.2 billion in fiscal 2001 as compared to net income of $1.2 billion in fiscal 2000. For the six months ended March 31, 2002, Lucent experienced a 31% decline in revenue, to $7.1 billion, as compared to the comparable period in 2001. Lucent’s loss for the six months ended March 31, 2002 from continuing operations before accounting changes and extraordinary items was $1.0 billion as compared to $5.0 billion for the six months ended March 31, 2001. In addition, on August 1, 2001, Standard and Poor’s cut Lucent’s short-term corporate credit and debt ratings to “C” from “B” and Lucent’s long-term corporate credit, bank loan and senior unsecured debt ratings two notches each to “BB-minus,” its third-highest junk grade. If Lucent and our other major telecommunications manufacturing customers continue to experience losses, they may be unable to pay us money owed under existing agreements or may terminate or cut back on their purchase arrangements with us. In addition, the continued decline of the telecommunications industry could delay decisions among certain of our customers to renew their agreements or relationships with us or could delay decisions by prospective customers to make initial evaluations of our products. Reductions or delays in expenditures for our products or nonpayment for our products could have a material adverse effect on our business and results of operations.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

There has been no material change from the disclosure regarding market risk contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

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PART II.    OTHER INFORMATION

Items 1 through 5 have been omitted because the related information is either inapplicable or has been previously reported.

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits

10.62 Amendment No. 3 to Second Amended and Restated Credit Agreement, dated February 1, 2002, by and between Datum Inc. and Wells Fargo Bank, National Association.

(b)  No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended March 31, 2002

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATUM INC.

/s/    ERIK H. VAN DER KAAY	Date    May 14, 2002
Erik H. van der Kaay, President and Chief Executive Officer
/s/    ROBERT J. KRIST	Date    May 14, 2002
Robert J. Krist, Vice President and Chief Financial Officer

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EXHIBIT INDEX

Sequentially Numbered Exhibit No.	Description
10.62	Amendment No. 3 to Second Amended and Restated Credit Agreement, dated February 1, 2002, by and between Datum Inc. and Wells Fargo Bank, National Association.

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EX-10.62

EXHIBIT 10.62

AMENDMENT NO. 3 TO

SECOND AMENDED AND RESTATED CREDIT AGREEMENT

THIS AMENDMENT NO. 3 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”) is entered into as of February 1, 2002, by and between DATUM INC., a Delaware corporation (“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).

RECITALS

This Amendment is made with reference to the following facts:

A.        Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Second Amended and Restated Credit Agreement between Borrower and Bank dated as of July 7, 2000, as amended from time to time (“Credit Agreement”).

B.        Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes.

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows:

1.        Section 2.1(d)(i) of the Credit Agreement is hereby amended by changing the reference to “Three Million Five Hundred Thousand Dollars ($3,500,000.00)” therein to “Six Million Dollars ($6,000,000.00).”

2.        Section 5.9(d) is hereby amended and restated in its entirety to read as follows:

(d)        Beginning with the fiscal quarter ended December 31, 2001; Net income of not less than $1 for each fiscal year, as of the end of such fiscal year; no losses during any fiscal quarter in excess of $500,000.00, as of the end of such fiscal quarter; no losses during any two consecutive fiscal quarters, as of the end of each such fiscal quarter.

3.        Section 6.2 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

              Section 6.2 CAPITAL EXPENDITURES.  Make, or permit any Guarantor to make, any additional investment in fixed assets during the period from June 1, 2001 through and including May 29, 2003 in excess of an aggregate of $13,000,000.00 for Borrower and all Guarantors combined.

4.        Conditions Precedent.  The effectiveness of this Amendment and Bank’s agreements set forth herein are subject to the satisfaction of each of the following conditions precedent:

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4.1        Documentation.  Borrower shall have delivered or caused to be delivered to Bank, at Borrower’s sole cost and expense, the following, each of which shall be in form and substance satisfactory to Bank:

(a)        the executed original of this Amendment;

(b)        written consent of Guarantors attached hereto as Annex 1; and

(c)        such authorization documents with respect to Guarantors as Bank shall reasonably require.

4.2        Representations and Warranties.  All of the representations and warranties of Borrower contained herein shall be true and correct on and as of the date of execution hereof and no Event of Default shall have occurred and be continuing under the Credit Agreement or any of the other Loan Documents, as modified hereby.

5.          Representations and Warranties.  Borrower makes the following representations and warranties to Bank as of the date hereof which representations and warranties shall survive the execution, termination or expiration of this Amendment and shall continue in full force and effect until the full and final satisfaction and discharge of all obligations of Borrower to Bank under the Credit Agreement and the other Loan documents:

5.1        Reaffirmation of Prior Representations and Warranties.  Borrower hereby reaffirms and restates as of the date hereof, all of the representations and warranties made by Borrower in the Credit Agreement and the other Loan Documents, except to the extent such representations and warranties specifically relate to an earlier date.

5.2        No Default.  No Event of Default or other default has occurred and remains continuing under any of the Loan Documents.

5.3        Due Execution.  The execution, delivery and performance of this Amendment and any instruments, documents or agreements executed in connection herewith are within the powers of Borrower and the other Loan Parties party thereto, have been duly authorized by all necessary action, and do not contravene any law, the articles of incorporation, bylaws, articles of organization, operating agreement, partnership agreement or other organizational documents of such parties, result in a breach of, or constitute a default under, any contractual restriction, indenture, trust agreement or other instrument or agreement binding upon any of such parties.

5.4        No Further Consent.  The execution, delivery and performance of this Amendment and any documents or agreements executed in connection herewith do not require any consent or approval not previously obtained of any governmental agency, equity holder, beneficiary or creditor of Borrower.

5.5         Binding Agreement.  This Amendment, and each of the other instruments, documents and agreements executed in connection herewith constitute the legal, valid and binding obligation of Borrower or other Loan Parties party thereto and are enforceable against such parties in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws or equitable principles relating to or limiting creditors’ rights generally.

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6.        Miscellaneous

6.1    Recitals Incorporated.  The Recitals set forth above are incorporated into and are made a part of this Agreement.

6.2    Further Assurances.  Borrower, at its sole cost and expense, agrees to execute and deliver all documents and instruments and to take all other actions as may be specifically provided for herein and as may be required in order to consummate the purposes of this Amendment. Borrower shall diligently and in good faith pursue the satisfaction of any conditions or contingencies in this Amendment.

6.3    No Third Parties.  Except as specifically provided herein, no third party shall be benefitted by any of the provisions of this Amendment; nor shall any such third party have the right to rely in any manner upon any of the terms hereof, and none of the covenants, representations, warranties or agreements herein contained shall run in favor of any third party.

6.4    Time is of the Essence.  Time is of the essence for the performance of all obligations and the satisfaction of all conditions of this Amendment. The parties intend that all time periods specified in this Amendment shall be strictly applied, without any extension (whether or not material) unless specifically agreed to in writing by all parties hereto.

6.5    Costs and Expenses.  In addition to the obligations of Borrower under the Credit Agreement, Borrower agrees to pay all costs and expenses (including without limitation reasonable attorneys’ fees) expended or incurred by Bank in connection with the negotiation, documentation and preparation of this Amendment and any other documents executed in connection herewith, and in carrying out the terms of this Amendment, whether incurred before or after the effective date hereof.

6.6    Integration; Interpretation.  The Loan Documents, including this Amendment and the documents, instruments and agreements executed in connection herewith, contain or expressly incorporate by reference the entire agreement of the parties with respect to the matters contemplated herein and supersede all prior negotiations, discussions and correspondence. The Loan Documents shall not be modified except by written instrument executed by all parties thereto.

6.7    Counterparts and Execution.  This Amendment may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. However, this Amendment shall not be binding on Bank until all parties have executed it.

6.8    Governing Law.  This Amendment shall be governed by and construed in accordance with the laws of the State of California.

6.9    Non-Impairment of Loan Documents.  On the date all conditions precedent set forth herein are satisfied in full, this Amendment shall be a part of the Credit Agreement. Except as expressly provided in this Amendment or in any other document, instrument or agreement executed by Bank, all provisions of the Loan Documents shall remain in full force and effect, and Bank shall continue to have all its rights and remedies under the Loan Documents.

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6.10    No Waiver.  Nothing herein shall be deemed a waiver by Bank of any Event of Default, and nothing herein shall be deemed a waiver by Bank or any other default under the Loan Agreement or any document executed in connection with the Loan Agreement. No delay or omission of Bank to exercise any right, remedy or power under any of the Loan Documents shall impair such right, remedy or power or be construed OR be a waiver of any default or an acquiescence therein, and single or partial exercise of any such right, remedy or power shall not preclude other or further exercise thereof or the exercise of any other right, remedy or power. No waiver of any term, covenant, or condition shall be deemed to waive Bank’s right to enforce such term, covenant or condition at any other time.

6.11    Successors and Assigns.  The terms of this Amendment shall be binding upon and inure to the benefit of the successors and assigns of the parties to this Amendment.

IN WITNESS WHEREOF, this Amendment has been duly executed as of the date first set forth above.

DATUM INC., a Delaware corporation		WELLS FARGO BANK,     NATIONAL ASSOCIATION
By:	/s/    ROBERT J. KRIST	By:	/s/    STEPHEN M. AMENDT
Title:	Robert J. Krist VP Chief Financial Officer		Stephen M. Amendt Vice President

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